Socialism: Recent Episodes
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Search Socialism for political and economic theory of social organization that advocates that the means of production, distribution, and exchange should be owned or regulated by the community as a whole.
Despite what many elites believe, AI can do many things, but it cannot successfully plan an economy. It lacks the intelligence of an entrepreneur.
Original Article: "AI Lacks the Entrepreneurial Intelligence to Plan an Economy"
The possible bankruptcy of Thames Water Company in Great Britain brings to mind the heady days 40 years ago when Margaret Thatcher's government was privatizing state-owned enterprises, including TW. Not all privatization stories have happy endings.
Original Article: "Thatcher's New Style of Government"
The Austrian(TA): What is the global currency plot, and who benefits most from the success of this effort?
Thorsten Polleit (TP): The global currency plot denotes a rather inconvenient truth: the existence of states (as we know them today) sets into motion a dynamic process toward creating a single world fiat money controlled by a world central bank, and most likely a central world government. The beneficiaries will be the very few—the “elite”—in charge of running the state and those few privileged by the state, such as big business, big banking, Big Pharma, and Big Tech. However, the great majority of the people will suffer a very great disadvantage. In fact, a single world fiat currency would most likely entail tyranny.
TA: The first half of the book is largely focused on economic theory and method. Why is economics so important to understanding the global fiat currency threat?
TP: I would argue that thinking about the method of economic science is actually the most important part of all of this. You know, economics is not an empirical science but must be conceptualized as a science of the logic of human action—or “praxeology,” as Ludwig von Mises called it. The logic of human action allows us to understand that there are regularities in human reality to which we must adapt our actions to succeed. It also makes us understand what will happen if— under certain conditions—actions that are contrary to the logic of human action are taken. For instance, we can know in advance (without having to resort to any kind of testing) that a state—defined as a coercive territorial monopoly—will (other things being equal) continue to expand no matter what; that it will seek control of money, replacing commodity money with its own fiat currency; and that states will form a cartel and strive to eventually establish a world government with its own world fiat currency. The logic of human action reveals these dynamics that many people are most likely unaware of.
TA: What role do central banks such as the Federal Reserve play?
TP: It may be hard to swallow, but central banks were not created for the greater good but to support the state and special interest groups. After World War II, the US became the dominant economic and military power in the world, and the Federal Reserve (the Fed), founded in 1913, became the world’s most powerful central bank, issuing the US dollar, the world’s leading reserve currency. It is fair to say that the Fed does indeed call the shots in the international financial and economic system. The Fed acts as the unofficial world central bank. Central banks play a crucial role in making a fiat currency system possible, and if they form a cartel, they can basically create a single world fiat currency.
TA: The dollar has played a central role in the global economy for decades. Does the dollar’s global hegemony help or hinder efforts to create a single global currency?
TP: The dominance of the US dollar is certainly helping to push the world toward a single fiat currency. Just imagine a major crisis that will eventually hit us. When the worldwide fiat currency regime starts to unravel, the US dollar will likely be the last man standing. In such a situation, it is also very likely that many countries will try to peg their currency to the US dollar (i.e., effectively adopt the US dollar as base money). It may not sound realistic right now, but imagine a scenario in which the United States and China join forces and endorse exchange rate fixing through the International Monetary Fund’s special drawing rights, later declaring the exchange rates irrevocably fixed. The world would be closer to a single world fiat currency than ever.
TA: What would it look like if the dollar were replaced by some sort of new international currency?
TP: Most recently, the BRICS countries (Brazil, Russia, India, China, and South Africa) have openly challenged the hegemony of the US dollar and considered introducing their own currency. What could it look like? It could be a basket consisting of various national fiat currencies or a new gold-backed unit of account. I believe the only challenge to the dominance of the US dollar might come from a gold-backed BRICS money. But even then, the US could also link the US dollar to the Federal Reserve’s theoretical gold holdings (which are actually owned by the Treasury). As you can see, dethroning the US dollar will not be easy under the current conditions. Whatever comes from states pursuing their own monetary interests, we should not get our hopes up that the states will provide sound money to the people. If states monopolize money production, they will use it predominantly to serve their own needs.
TA: You note that the world needs free market money, and you say it could be anything the market accepts—from gold to cryptocurrencies. Why is market-based money better?
TP: There are only two ways human beings can interact: voluntarily or coerced/violently. Voluntary cooperation is economically and ethically acceptable; coercion and violence are not. The free market is voluntary. In a free market in money, people are free to choose the type of money that best suits their needs and people are free to offer a good people may want to use as money. The outcome will be sound money—simply because no one (in their right mind) will demand bad money. For instance, people could decide to use gold as a base money and implement digital gold payment systems. If people want prosperity and freedom, nationally and internationally, they must abandon fiat monies, end the government’s control of money, and embrace a free market in money. The alternative is tyrannical government money, with the unpleasant prospect of eventually ending up with a tyrannical fiat world currency. I hope my book will inform and stimulate discussion on these extremely important issues.
Economic calculation is not an either-or proposition. Even in so-called market economies like that of the USA, there is plenty of government intervention that distorts market processes.
Original Article: "Economic Calculation Is Nonbinary"
Progressives have distinguished themselves in the past half century by being against progress. That trend is unlikely to change.
Original Article: "Real Progress versus the Progressives"
In 1990, socialism seemed to be done once and for all, but the times have changed. In the last twenty years, socialism has again become fashionable beyond the academic fringes. The covid-19 crisis demonstrated how quickly and thoroughly the traditionally free societies of the West may be transformed by small groups of determined and well-coordinated decisionmakers. Top-down central planning of all aspects of human life is today not merely a theoretical possibility. It seems to be right around the corner.
Now, the renaissance of central planning is an intellectual and practical dead end, for the reasons that Ludwig von Mises explained one hundred years ago. But if Mises was right, then how can we explain the renaissance of socialism as a political ideal? To some extent, this might be explained by the fact that new generations are likely to forget the lessons that were learned, often the hard way, by their ancestors. However, there are also other issues at stake. In what follows, I shall highlight two institutional factors that have played a major role: state apparatuses and ownerless private foundations.
- State Apparatuses An important driving force of the socialist renaissance has been the constant growth of state organizations. This includes all organizations that are largely financed by the state or thanks to state violence. For example, the so-called public service media are state organizations in this sense. In contrast, the so-called social media networks are mixed forms. It is true that they have received significant state support (for their establishment and for the expansion of the internet infrastructure). But they are also financed through advertising.
Socialism is growing out of the already existing state organizations. The crucial importance of this connection has been emphasized again and again by liberal and conservative theorists. A ministry, an authority, or a state-subsidized television station do not fully belong to the competitive life of ordinary society. Special rules apply. They are funded by taxes and other compulsory contributions. They are literally living at the expense of others. This has two important consequences for the renaissance of socialism.
On the one hand, state organizations are constantly forced to justify their privileged existence and therefore have a special need for intellectual services. Good cobblers and good bakers do not need to convince their customers with verbose theories. Their services speak for themselves. But creating and maintaining a government monetary system or a government pension system requires a constant torrent of words to pacify taxpayers, retirees, and the whole gamut of money users.
On the other hand, these intellectual suppliers typically have a personal agenda. State organizations are irresistibly attractive to ideological do-gooders of all stripes. This becomes clear as soon as we realize what doing good things really means.
Every day private companies and private nonprofit organizations create new products and new services—thousands of attempts at improvements. But their achievements fit into the existing social network. They are contributions that take into account the objectives and individual sensitivities of all other people. Private organizations thrive in competition. By contrast, the ideological do-gooder does not want to care about the sensitivities of other people. But that is only possible if his own income does not depend on those others, and if his plans can also be carried out against the will of the others. And that is exactly what the state, especially the republican state, enables him to do.
From the classical liberal point of view, the republican state should not pursue its own agenda. It should not be private, but public, should only provide the framework for free social interaction. But this theory hurts itself with the horror vacui it provokes. Ownerless goods will sooner or later be homesteaded by someone. Even an abandoned “public” state will sooner or later be taken into possession. History over the past two hundred years has shown that this privatization of the public state does not necessarily have to occur by coup or conquest. It can also grow out of the bosom of the state itself. The domestic staff, the servants of the state, can make themselves its masters.
Abandoned goods hold a magical attraction for people. An abandoned state magically attracts ideological do-gooders into the civil service. They are trying to privatize public space, to transform it into an instrument for their agenda. At first there may not be a consensus among them, but at some point the best-organized and best-connected groups gain the upper hand. The sociologist Robert Michels called this process the iron law of oligarchy.
The bureaucratic oligarchy can influence personnel decisions in terms of its ideology. Their ministry becomes “their” ministry (or their school, their university, their broadcasting service, etc.). It becomes an ideological state apparatus as defined by the French Marxist philosopher Louis Althusser. Through commands and prohibitions, an ideological state apparatus can convey its ideology to the outside world.
Notice that the bureaucratic oligarchy is only a small minority. This explains why the oligarchic ideology is typically a socialist ideology. Only where there is private property is it possible for a minority to undertake anything that might displease other people. But the oligarchs of a republican state cannot assert property rights. The state does not belong to them—they just control it. In order to be able to direct it inexpensively, they must avoid inciting the majority to resist them. The easiest way to do this is through a socialist ideology. Slogans like “We govern ourselves” cover up the real power relations.
A classic case is the French ministry of education, which was appropriated by a coalition of Communists and Christian democrats after the Second World War. In those years, Professors Paul Langevin and Henri Wallon (both members of the French Communist Party) pursued a strategy of centralizing and homogenizing all secondary schools, along with a dumbing down of the entry requirements. With the help of their allies, Langevin and Wallon slowly but steadily filled all the key positions of the ministry with their people while greatly expanding it. Thus, they made “their” ministry resistant to reform. No bourgeois minister has ever dared to make it a “public” institution again. So it has remained in the Communist inheritance to this day. The supposed servants of the commonwealth have become the real rulers, against whom the elected representatives can only grind their teeth.
This tendency toward privatization is at work in all public institutions in all countries. President Donald Trump had not understood this before his 2016 election. He is probably wiser now, but the problem remains.
A state apparatus is often the first place where socialist reforms are implemented. In the past, state organizations have served as laboratories for expensive socialist labor-law reforms (quotas for civil servants, vacation regulations, etc.), for the typically socialist control of language (political correctness), and for harmonizing thought and action.
Over the past thirty years, international bureaucracies have played a growing role in making the world a better place for socialism. Intergovernmental organizations such as the European Union, the United Nations, the World Health Organization, and the International Monetary Fund have always served as reservoirs for intelligent radicals who found no place in national politics. But the influence of these people has grown considerably in recent years as they have played a key role in covering up interventionist failures.
This can be explained as follows: The state, which rules over the media and education, can gloss over and explain away its failures. But talk does not help when people see with their own eyes how things are abroad. The competition of political alternatives is ruthless, and the comparisons show time and time again that socialism and interventionism do not work. Hence the urge of all socialists to rule out alternatives as much as possible from the outset. So-called international cooperation and the abolition of the nation-state in favor of international organizations serve the same purpose. By proceeding as uniformly as possible, states aim to prevent the population from realizing that there are political alternatives and perhaps even better alternatives.
Another weapon in the socialists’ arsenal is the use of secret services to further their aims. The importance of these services cannot be overstated. This cloak of secrecy, often funded by substantial off-the-books resources, is particularly favorable for socialist agitation as long as the socialists are in a minority. Secrecy is a weapon often used successfully upon the unwitting citizenry.
It should never be overlooked that the socialists will use any and all areas of society and control of the state to further their aims and agenda.
- Ownerless Foundations The same iron law of oligarchy also applies to the large private law foundations (the Rockefeller Foundation, the Ford Foundation, the Bertelsmann Foundation, the Bill and Melinda Gates Foundation, etc.). Although these organizations are usually not themselves financed by taxpayers’ money, they—and the US foundations in particular—have made decisive contributions to the renaissance of socialism, for three main reasons.
First, the executives of such institutions are in constant search of self-affirmation and self-justification, and are therefore prone to activism.
Self-justification is particularly necessary if the organization does not provide a clear statement of purpose. The large US foundations serve general goals such as “progress” or “humanity.” Words of this kind must of course be backed by concrete content, and this is where the ideological suppliers come into play, just as in the case of the state bureaucracies.
Ideological do-gooders find an ideal playground in the large private foundations, especially when the founders let the supposed “experts” run free and entrust them with the management of the organization’s assets without any strings attached. The executives of such ownerless foundations are then subject to even fewer restrictions than their colleagues in government offices. While the high bureaucratic officials are still responsible to the elected political leadership (even if this responsibility is small for the reasons mentioned above), the directors and supervisory boards of the private foundations are among themselves. Nobody gets in their way—nobody they have not themselves accepted into their illustrious circle. Ownerless private foundations will therefore sooner or later serve those ideologies that are highly valued by the leading experts. As in state institutions, there may be temporary rivalries among the leading forces. In the end, however, the best-organized and best-connected groups prevail with regularity. From then on, their ideas determine the foundation’s direction.
These ideas are often diametrically opposed to those of the founders, as Niall Ferguson explains in “I’m Helping to Start a New College Because Higher Ed Is Broken.” In my opinion, the most important reason for this contrast is to be seen in the fact that the founders no longer have to prove themselves and also reject excessive activism on the part of their foundation for other reasons. They know the importance of free competition. They know that excessive donations from foundation money can seduce the recipients into laziness and frivolity. They want to help others. But above all they want these others to know how to help themselves.
Things are completely different in the case of the supposed experts who run the foundations. In contrast to the donors, many of them have not yet been able to show that they can achieve great things themselves. The decision-making power over the foundation gives them the opportunity to put their stamp on the world. This temptation is just too great for most. Those who have large resources at their disposal can make it their business to improve the world according to their taste.
The history of the US foundation system provides numerous cases of this tendency, well documented by Waldemar Nielsen. The largest American foundations of the twentieth century (Ford and Rockefeller) in particular committed themselves to changing American society in the 1950s and 1960s. Such activism is more or less inevitable if ideological do-gooders have free rein and well-filled treasure chests.
Second, the cooperation between private foundations and state organizations has a very similar effect. Such cooperation concretely means the joint pursuit of goals; the pooling of private and state funds; and the exchange of personnel. The private foundations thus come into the ideological orbit of the state institutions, as Ludwig von Mises explained in Human Action; and state institutions are captured by the “managerial” spirit of private foundations, to use Paul Gottfried’s phrase.
The private foundations like the partnership of the state for reasons of prestige and use it to “leverage” their own activities. One example among many: The Ford Foundation had already developed the basic principles of what would become the American welfare state in the 1950s and financed them on a small scale. But the means were lacking for large-scale application. Things changed when US president Lyndon Johnson adopted the Ford model and used taxpayer money to spread it across the country.
This partnership is also very welcome to the state because its bureaucrats also feel confirmed by the friendly response and the active support from the Potemkin-style world of “civil society” financed by foundation funds.
Third, the combination of grandiose objectives and enormous financial resources entails the tendency to pursue large and highly visible projects. (The tendency also exists for cost reasons. For a private foundation it is usually cheaper to finance a few large projects than thousands of small initiatives.) These large projects must be planned for the long term and centrally managed. The management of large foundations is therefore typically associated with a perspective on the economy and society that is very similar to that of a central planning committee. The case of other large companies is very similar.
Because of this perspective, the executives of large organizations can succumb to a special kind of delusion, which we propose to call the Rathenau delusion in honor of the great German industrialist who flirted with the socialist planned economy at the beginning of the twentieth century. The Rathenau delusion consists in seeing only a difference in scope between the private planning of very large companies and the centrally planned economies of entire nations. In fact, there is a categorical difference here. Rational economic planning always takes place within an order based on private property and monetary exchange. It is this order that orientates the numerous individual plans and coordinates them. Mises taught us that the rationality of economic activity is always and everywhere rooted in a microeconomic perspective and presupposes a social order under private law. By contrast, the basic socialist idea consists precisely in abolishing this superordinate order and replacing it with top-down planning. But whoever does this saws off the branch on which he is sitting. Instead of making rational economic activity easier, he makes it impossible. This is exactly what Mises proved a hundred years ago.
For the past seventy years, the major US foundations have been the main drivers of socialism, even more so than the state bureaucracies. Something similar can be said about the Bertelsmann Foundation and other German foundations. They also apply a saw with great relish to the capitalist branch that carries us all.
The seventy-fifth-anniversary celebration of the British National Health Service masked the real failures of this system, one that only can become worse over time.
Original Article: "The British NHS More Resembles a Statist Cult Than Advanced Healthcare"
Following the collapse of the USSR, many socialists pinned their hopes upon the development of a "market socialism" that would be economically efficient and create equality. Marxist philosopher G.A. Cohen wisely dissented.
Original Article: "What Marxists Say about "Market Socialism""
The East German secret police, the Stasi, developed the art of mass surveillance using pre-digital methods. Modern tech now makes the job a lot easier.
Original Article: "How East Germany's Stasi Perfected Mass Surveillance"
Professor Quinn Slobodian believes that free markets must lead to tyrannical worker exploitation, and socialism is the only solution. In truth, market competition is the answer.
Original Article: "Cracked-Up Slobodian"
President Biden announced recently to much fanfare that his administration will transform the US economy through central planning. This does not end well.
Original Article: "Bidenomics Is Yet Another Version of Failed Industrial Policy"
Socialists and communists claim to support the rights of "indigenous" peoples. However, that support rings hollow given how the USSR abused the native peoples of Siberia, all while American socialists and communists uncritically supported the Soviet Union.
Original Article: "The Soviet Abuse of Indigenous Peoples"
Modern socialism is based upon state interference in normal human relationships, economic and otherwise. It is as disastrous as the older state-planning model.
Original Article: "Modern Socialism Is Forced Socialization"
“Our civilization is inseparably linked with our methods of economic calculation. It would perish if we were to abandon this most precious intellectual tool of acting.”
Download lecture slides at Mises.org/MU23_PPT_28.
Recorded at the Mises Institute in Auburn, Alabama, on 27 July 2023.
Whether political elites promote outright socialism or interventionism, thanks to the reality of economic calculation, they are advocating a failed economy.
Original Article: "Why Mises’s Theory of Economic Calculation Still Is Relevant Today"
Rent control is all the rage with progressives, with several states and localities trying to impose it. However, when people have their property effectively—and legally—stolen, there are long-term consequences.
Original Article: "Call Rent Control What It Really Is: Theft"
Socialists like Bernie Sanders and the editors of Jacobin have decried the possible US government debt default. Marx and Lenin would have vociferously disagreed.
Original Article: "Current Socialists Should Support Government Default: Their Forebears Certainly Did"
Einstein might have been one of history's most brilliant men, but even his great mind could not have made socialism work. Unfortunately, he wasn't smart enough to see that.
Original Article: "A Great Man Cannot Salvage a Bad Idea"
What many people call government generosity Leonard Read called avarice.
Original Article: "To Avarice No Sanction"
While George Orwell wrote magnificently against totalitarianism, his attempt to defend socialism in The Road to Wigan Pier stumbled badly.
Original Article: "Review: Orwell's The Road to Wigan Pier"
Modern culture is biased against those that are rich even while depending upon the wealth that successful entrepreneurs have created.
Original Article: "Progressives Want to Eliminate Wealthy Entrepreneurs but Need the Wealth They Create"
People from socially and economically marginized groups in the USA tend to support socialism. Yet socialists have a long and bloody history of suppressing these very groups.
Original Article: "Socialism, Minority Groups, and Personal Liberties"
Jonathan Newman joins Bob to critique a recent Twitter argument where some were claiming that supercomputers solved the socialist calculation problem.
The Twitter thread on AI and Socialism: Mises.org/HAP394a
Bob on Socialism and calculation vs knowledge: Mises.org/HAP394b
Karras Lambert and Tate Fegley on economic calculation and AI: Mises.org/HAP394c
What if the world’s states were to come together and create a single world currency? From a purely economic point of view, there would be significant advantages if every nation didn’t operate with its own money but with the same currency. Not only for an individual economy, but for the world economy as a whole, the optimal number of currencies is one. Let’s take a look.
The decisive factor is how this single world currency comes about, and who issues it. In a free market for money—in a natural process—a single world currency would emerge from the voluntary agreements of the market participants: the money demanders would decide which commodity they want to use as money. It is impossible to predict with certainty what the outcome of the free choice of currency would be; after all, it resembles a discovery procedure whose outcome is not known in advance. However, it can be assumed that a commodity currency would be created, that gold or possibly a cryptounit would be chosen as the money base.
However, if states monopolize money production, a single world currency cannot develop through voluntary decision-making. In 2023, several national fiat currencies coexist. But this is not a stable equilibrium. Rather, here too, there is a tendency to create a single world currency—because it is optimal for everyone in the world to trade and calculate with the same currency. This is what democratic socialism takes advantage of.
Creating a single world currency is a means to an end for democratic socialism. Its adherents recognize that a single world state cannot be established directly. The national resistance that would have to be overcome is too great. The detour, the indirect way, by which democratic socialism can achieve its goal is by creating a single world currency under state control. The eurozone can serve as a “model” for this process. We’ve seen nations voluntarily give up their monetary sovereignty and accept a single fiat currency that is issued by a supranational central bank. Within the eurozone, money is no longer controlled by individual national parliaments.
The shared euro currency creates major problems in and between the participating countries. But the forced euro marriage has not yet been through the “divorce courts” because of the high costs of a euro exit and also because the democratic socialists fight any attempts to withdraw from the euro with all political means available to them. The problems created by the single currency are increasingly forcing participating countries into communization. As part of the eurozone, some nations must pay for the national debts of others, and the cost of saving ailing banks from collapse is borne by all taxpayers and money users.
All of the problems of imposing one fiat money across many nation-states only became apparent after the euro community was locked into place—the potential problems received little or no attention beforehand. From the outset, it was not economic rationality that inspired the euro, but political endeavors that can be traced back, unsurprisingly, to politics, namely the ideology of democratic socialism. The end of national monetary sovereignty and the adoption of the euro were promoted in public by emphasizing the peace and prosperity effects of a single currency.
In light of the experience gained with the “euro experiment,” the question arises: What are the consequences of creating a single fiat world currency? A state-controlled world currency would bring with it all the negative characteristics and problems of national fiat currencies, and it would cause economic, political, and cultural damage that would eclipse that from national fiat currencies.
What every single state that has fallen victim to democratic socialism wants is also what a community of states wants: to control the production of money and to expand the money supply at will in order to secure and expand its rule. It is a logical step for the states to merge their own fiat currencies into a fiat world currency—especially for small and medium-sized states, whose financial leeway is considerably increased as a result.
The fact that a fiat currency and not a commodity money has been chosen is virtually self-explanatory: the national currencies are already fiat money, and fiat money is the type of money that states prefer because it can be multiplied at any time and in any quantity at the lowest cost.
If the national states agree to accept a single fiat currency issued by a world central bank, then the money users will no longer have any choice or escape options. They will be at the mercy of a fiat world money. The world central bank will not have to fear that dissatisfied users of its money will “migrate” to other currencies because there will be no other currencies anymore. And because the single fiat world currency will have no competition, it will also become a plaything of political interests. Above all, the states will encourage the world central bank to pursue a monetary policy through which they can finance themselves as cheaply as possible with credit.
After all, debt financing is particularly attractive to every state: the possibility of easy borrowing is a very important motive for states to adopt a fiat world currency. Unlike with taxation, savers usually give their money voluntarily to the state, because they expect it to be repaid to them plus interest. A world central bank has a free hand to set the market interest rate as it sees fit. It does not have to fear that capital will migrate away from an extremely low market interest rate—after all, the interest rate that it determines will prevail all over the world.
A world central bank, which has a monopoly on the fiat world money, facilitates the worldwide debt economy to an extent probably still unknown. The relatively bad state debtors—i.e., those who have so far only been able to finance themselves at relatively high interest rates—particularly benefit from a single fiat world currency. If there is only one currency left in the world, there will be a single large, transparent, and liquid capital market in which there will be no exchange rate fluctuations, which helps to reduce credit costs. The improved debt opportunities in such a market favor the expansion of state influence and thus promote the nationalization of the economy and society.
A single currency will put governments in a favorable position to buy votes. The states will lure voters with money, and more and more citizens and entrepreneurs will become transfer recipients and beneficiaries of the state. They will benefit from state-financed jobs, social benefits, and contracts. States’ involvement in economic and social life will increase. The culture of collectivism will be promoted, and individualism will be repressed. What is left of the free market economy will inevitably give way to a command economy in which states play a decisive role in determining who produces what, when, and where. Although this transformation is already progressing under national fiat currencies, it will be uninhibited under a global fiat currency.
With a single fiat world currency, it will be possible for a world central bank to set an artificial boom in motion worldwide and to protect itself from a bust for a long time. Thanks to the global currency, the boom will affect all the world’s economies: the prices in all labor and factor markets will be distorted—after all, there will no longer be any exchange rate movements between the economies that could shield a region from the monetary policies in other regions; all economies will thus be “monetarily aligned.”
Companies and investors will continue to favor some regions of the world over others, just as investors in the eurozone see the “northern countries” as less risky than the “southern countries” and the “northern countries” continue to be the most attractive region for investors within the eurozone. If, however, the economic developments of the participating nation-states vary too much, the world central bank can be expected to take political countermeasures: it will support weaker countries. For example, it will buy up weak countries’ government and bank bonds; the eurozone’s many “rescue policies” are an example of this eventuality.
In this way, the world central bank will weaken or eliminate the market’s remaining corrective forces, which could put an end to the boom. The boom set in motion by the world bank will therefore be able to last a long time. However, the longer the boom lasts, the greater the damage (overconsumption and bad investments) will be. And the longer the boom progresses, the greater the costs of the corrective crisis will be, which will intensify the political incentives to keep the boom going by any means—after all, states shy away from recession and unemployment and the associated social and political consequences.
In order to avert the corrective crisis, the states will continue to intervene in the market with bans and prohibitions, laws, price controls, subsidies, and labor and expenditure programs. Above all, however, they will make use of the world central bank. If it is politically desired, the world bank will keep any stumbling debtor afloat with newly created money and delay the arrival of the crash. This leads to the question: Will a single fiat world currency be more inflationary than national fiat currencies? The answer is yes.
States’ primary goal with a single fiat world currency is to be able to pursue a controlled inflationary policy with as little punishment as possible. Controlled inflation benefits states and politically connected groups.
However, even under a uniform fiat world currency, there are limits to inflationary policy. The world central bank does not have to reckon with the fact that money users will switch from its fiat money to other currencies when inflation is high, as there will be no other currencies left. But if the inflation of the fiat world currency is too high, its users will lose confidence in it. In an extreme case (hyperinflation) people will start to escape from the fiat world money by taking desperate measures. They will no longer want to use the money at all, and this could seal the fate of the fiat world money.
Of crucial importance for the inflation of the fiat world currency is which forces gain the upper hand in the decision-making body of the world central bank. There are two possible scenarios. In the first case, the governments of the states have a direct influence on the world central bank. In democracies, rulers are known to have short-term goals: their power is only temporary. Therefore, they are anxious to maximize their income during their term of office. Those in power do not participate in the long-term prosperity of the community and consequently have no great interest in making decisions that maintain or increase its net present value beyond their term. In other words, the cow is not milked but slaughtered. Inflation will be comparatively high in this case.
In the second case, the decision-makers on the council of the world central bank are closely connected to those in the financial sector and big business. Such a world central bank council’s interest is that its “product,” its currency, remains permanently marketable. It will not frivolously jeopardize the world currency by implementing an exaggerated inflation policy. The world central bank council would therefore not want to slaughter the cow but milk it for as long as possible. In this case, an oligarchic democracy will prevail in the world central bank council.
In this scenario there is a high probability that the world central bank will above all serve the special interests to which the council oligarchs are closely linked (these are, of course, big banks and big businesses). The interests of the general public take a back seat and are only taken into account if they do not jeopardize the continuation of the world central bank’s special-interest monetary policy. The world central bank will therefore endeavor to keep inflation from becoming too high so that the population does not become dissatisfied and rebel.
Under a self-referential oligarchic democracy, in which councilmen recruit their own successors, the fiat world money is even granted a particularly long stay. The oligarchs will make every effort to ensure that the fiat world money system can continue to exist for as long as possible, that crises, when they occur, are tackled in such a way that the fiat world currency does not suffer and a “flight from money” is avoided.
In view of the overindebtedness problem that fiat money necessarily creates, we cannot exclude the possibility of negative interest rates. Under a policy of negative interest rates, the central bank might set the interest rate at, say, −4 percent per year. This means that a bank balance of €100.00 is reduced to €96.00 one year later and after ten years is only €66.48. What harms the saver benefits the debtor, who makes a profit by taking out a loan! Savers and investors will not tolerate this. Wishing to avoid the losses, they will go to the bank and demand that their assets be paid out in cash and coins. Therefore, as long as there is cash, the effectiveness of a negative interest rate policy is limited.
However, a world central bank can easily enforce the abolition of cash by shutting down cash production. Without cash, the money is “trapped” in bank accounts and can no longer be withdrawn from the banking sector. The negative interest rate policy can then be implemented unchecked. Money holders no longer have the opportunity to evade the devaluation of money and savings. Individual states welcome the abolition of cash for another reason: they will be able to track the financial dispositions of citizens and companies, who will only be able to make payments electronically: banks will be required to provide full information on the payments and financial assets of bank customers at all times. As a result, the taxation possibilities of states will be increased immensely.
As long as there is still cash, there are limits to taxation: if market participants feel that the tax burden is too high, they can carry out their transactions anonymously with cash. This in turn encourages states not to tax citizens and businesses too heavily. But when the taxpayers no longer have this alternative because there is no more cash, the political reluctance which still stands in the way of increased taxation in a world with cash decreases. And if the financial privacy of citizens and businesses is lost, states can easily subject citizens and businesses to full monitoring.
A global central bank will undertake the supervision of the banking and financial sector. It will want to prescribe how commercial banks operate; for example, what liquidity and capital requirements they must meet and how they must assess their credit risks. The world central bank will also want to decide whether and under what circumstances failing banks will be aided or allowed to close. The right of national governments to have their say will increasingly dwindle in favor of the supranational world central bank and supranational supervisory authorities and bodies. The consequences will be far reaching.
The pressure for a body of regulation to which all banking and financial enterprises are subject will increase—and will come from the large and powerful interest groups. National or regional peculiarities will not be taken into account if the large and powerful interest groups have asserted themselves in the political negotiation of the regulatory provisions. For many small countries, this will force far-reaching adjustments—not only in their banking and financial economies but also in their production structures. There will be winners and losers in this process: adjustment costs will be higher for some regions and lower for others. This will create conflicts of interest between the nation-states.
A fiat currency used by people in many countries will fuel further conflicts. It is well known that the expansion of the money supply means that a few are made better off at the expense of many others: the first recipients are the beneficiaries, the late recipients, the disadvantaged. This is already resulting in disputes in nation-states that are relatively homogeneous in terms of culture, language, and tradition. The conflicts over redistribution will become even more acute when the effects of redistribution are felt across borders, when people in one country realize that they are being bled in favor of people in another country.
A world central bank has a free hand to set the world interest rate at will. Not only can it keep it artificially low to set a boom in motion and keep it going for a long time, but it can also bring about a negative world interest rate, a political “solution” to the overindebtedness problem caused by a fiat world money. Another motive for forcing world interest rates into negative territory is the democratic socialists’ desire to better steer and control the economy and society, or to shatter what is left of the free market economy.
The fact that this is possible with a negative interest rate policy becomes apparent when one considers the consequences of a negative interest rate for the credit market. Commercial banks receive credit from the world central bank at, say, −2 percent, on the condition that they lend the money to consumers and companies. If they borrow €100 at −2 percent and lend the money at −1 percent, their profit is €1. Under these circumstances the demand for credit grows enormously: after all, everyone wants to profit from the negative interest rate loans.
The world central bank must ration the loans so that the creation of credit and money does not get out of hand. It is no longer the market interest rate that balances supply and demand, but the world central bank, which gives a certain amount of credit and allocates it. But what criteria should be used to allocate the loans? Should all those who ask for loans get them too? Or should labor-intensive economic sectors be preferred? Or should the loans go only to sunrise industries? Or should weakening branches of industry be supported with additional loans? Or should the south get more than the north?
The world central bank has a decisive influence on who can finance and produce what, when, and where. Like a central planning authority, it—or the interest groups who control it— determines the fate of the economies in all the regions of the world: which industries are promoted or pushed back; which economies grow stronger and which weaker; which banks are allowed to survive in which countries and which are not. Welcome to the centrally planned economy! However, a negative interest rate policy would not be possible in the long term; it would lead to the end of the division of labor in the economy.
First, lowering the interest rate inflates the prices of existing assets: stocks, houses, and land— everything becomes more expensive. The lower the interest rate, the higher the present value of future payments and thus also the market prices of the assets. The speculative bubble, which is inflated, initially provides investors with high returns. At the same time, the outlook for future returns deteriorates. The reason? Zero and negative interest rates cause the prices of stocks, houses, etc., to rise until the expected yield that these asset classes promise has approached the low or negative interest rate set by the central bank. In extreme cases, the expected market returns will fall to or even below the zero line.
But once the world central bank has pushed all returns to or below the zero line, the free market economy (or what is left of it) is on the verge of collapse. Without a positive market interest rate, without the prospect of a positive return, saving and investing cease: after all, every consumer and entrepreneur has a positive originary interest rate. And when there is no more return to earn, there is no more saving and investment, only consumption. The economy based on the division of labor comes to a standstill. Replacement and expansion investments fail to materialize, capital consumption begins, and the modern economy falls back into a primitive subsistence economy. An extreme example. Or is it?
The very process by which the world central bank lowers the world market interest rate to or below zero (something it can do as a monopolist of money production) is extremely problematic. It artificially pushes people’s time preferences up. As Friedrich Nietzsche put it, there is a “revaluation of all values,” a devaluation of the future. The here and now is made even more important than tomorrow. The consequences are far reaching. Life on credit is promoted. The virtue of thrift goes out of fashion. “Permanent debt” becomes morally acceptable. Achieving short-term goals becomes more important to people than achieving longer-term goals. The willingness to achieve decreases, because, compared to the disutility of labor, leisure time rises even higher in value. Divorce also becomes more attractive as a “solution” to marital problems; efforts to overcome relationship difficulties are increasingly shunned. The quality of education suffers: if the here and now is so important, then we will also spend less time cultivating and maturing for the future. Morals decay: consideration and manners are costly activities in interpersonal relationships and often only pay off in the long term. Aesthetics degenerate: it is easy for passing fads to find buyers; breaking away from “proven classics” is made easier. A world central bank that issues fiat money has decivilizing consequences worldwide.
The idea that states could remain sovereign and independent once they participate in the fiat world money system is illusory. If the same money is used in different countries, this will help to make the best possible use of the efficiency potential offered by the international division of labor. The commodity and factor financial markets of the national economies will increasingly dovetail. And the closer the ties between those markets, the stronger will be the incentive of the nation-states to surrender sovereignty to supranational authorities. This applies both to economically good times—then the willingness to share, to make compromises, is relatively high—and to economically bad times— then a way out of the economic problems is seen in moving closer together, in jointly pursued “emergency policies.”
A fiat world currency promotes political centralization. The “urge” to establish a unified government, a world state, is strengthened, especially under the ideological leadership of democratic socialism. If economic and financial ties become ever tighter, why not create a single world state that can more effectively implement the desired policies—such as policies for prevention of economic and financial crises as well as tax fraud, environmental protection, counterterrorism, etc.? The world central bank, which issues the fiat world currency, becomes a particularly sought-after political power and control center in this concentration process.
Drawing on Robert Michel’s iron law of oligarchy, it is to be expected that a relatively small, assertive group of people which originates from the party and government structures of the participating states will try to put the world central bank under its control and make it serviceable for its own purposes. Against this background, it would be unrealistic for something to emerge that could be described as a “democratic world central bank.”
The representatives of the participating states may initially endeavor to “chain” the world central bank—i.e., to design the rules and regulations to which the world central bank is subject in such a way as to prevent abuse of power. However, what happens in the hierarchy of parties also happens in the hierarchy of a community of states: the most determined, tireless, ruthless, and relentless advocates of democratic socialism prevail. The aim of the oligarchy will be to make the world central bank serviceable and, above all, to enable the creation of a world government, a world state, which democratic socialism must necessarily strive for.
A world state, equipped with its own global fiat money monopoly, would open a dark chapter in the history of humankind and lead to a civilizational catastrophe. The world state would have no competitors to fear. No one could escape from it. Emigration would be impossible; the world state would be everywhere. The hope that the expansion of the power of the world state could be effectively curbed by democratic electoral acts would prove to be illusory as soon as oligarchization set in—and this is to be expected, of course, as already impressively illustrated by the expansionist drive of the nation-states in recent decades.
It is downright absurd to think that a world state with its own fiat world currency would not sooner or later mutate into a totalitarian tyrant.
But are there perhaps good forces that could challenge the money monopoly and thereby effectively prevent the ideas of world money and a world state from being put into practice? One possible good force is technological disruption, which could revolutionize the global monetary system or show people that better money than that offered by states is both necessary and possible. There is no doubt that cryptocurrencies hold such potential for disruption.
Technological Disruption: CryptocurrenciesThe cryptounit bitcoin holds out the prospect of something revolutionary: money created in the free market, money the production and use of which the state has no access to. The transactions carried out with it are anonymous; outsiders do not know who paid or who received the payment. It is money that cannot be multiplied at will, whose quantity is finite, that knows no national borders, and that can be used unhindered worldwide. This is possible because bitcoin is based on a special form of electronic data processing and storage: blockchain technology (distributed ledger technology), which can also be described as a decentralized account book.
Think through the consequences if such a “denationalized” form of money should actually prevail in practice. The state could no longer tax its citizens as before. It would lack information on the labor and capital incomes of citizens and enterprises and their total wealth. The only option left to the state would be to tax the assets in the “real world”—such as houses, land, works of art, etc. It could try to levy a “poll tax”: a tax in which everyone pays the same absolute tax amount— regardless of the personal circumstances of the taxpayers, such as income, wealth, ability to achieve, and so on. But would that be practicable? Could it be enforced? This is doubtful.
The state could also no longer simply borrow money. In a cryptocurrency world, who would give credit to the state? The state would have to justify the expectation that it would use the borrowed money productively to service its debt. But as we know, the state is not in a position to do this and is in a much worse position than private companies. So even if the state could obtain credit, it would have to pay a comparatively high interest rate, severely restricting its scope for credit financing.
In view of cryptocurrency’s financial disempowerment of the state, the question arises: Could the state as we know it today still exist at all, could it still mobilize enough supporters and gather them behind it? After all, the fantasies of redistribution and enrichment that today drive many voters into the arms of political parties and ideologies would disappear into thin air. The state would no longer function as a redistribution machine; it basically would have little or no money to finance political promises. Cryptocurrencies, therefore, have the potential to herald the end of the state as we know it today.
The transition from the national fiat currencies to a cryptocurrency created in the free market would have consequences for the existing fiat monetary system and the production and employment structure it has created.
However, bitcoin has not yet developed to the point where it could be a perfect substitute for fiat currencies. For example, the performance of the bitcoin network is not yet high enough. Another problem with bitcoin transactions is finality. In modern fiat cash payment systems, there is a clearly identifiable point in time at which a payment is legally and de facto completed, and from that point on, the money transferred can be used immediately. However, distributed ledger technology consensus techniques (such as proof of work) only allow relative finality, and this is undoubtedly detrimental to the money user (because blocks added to the blockchain can subsequently become invalid by resolving forks).
The transaction costs are also of great importance regarding whether bitcoin can assert itself as a universally used means of payment. In the recent past, there have been major fluctuations in this area. In addition, the time taken to process a transaction has also fluctuated considerably at times, which may be disadvantageous in view of the emergence of instant payment options for fiat money.
Another important aspect is the question of the “intermediary.” Bitcoin is designed to enable intermediary-free transactions between participants. But do the market participants really want intermediary-free money? What if there are problems? If someone made a mistake and transferred one hundred bitcoins instead of one, he cannot reverse the transaction. And nobody can help him! The fact that many hold their bitcoins in trading venues and not in their private digital wallets suggests that even in a world of cryptocurrencies there is a demand for intermediaries offering services such as storage and security of private keys.
As soon as intermediaries come into play, the transaction chain is no longer limited to the digital world, but reaches the real world. At the interface between the digital and the real world, a trustworthy entity is required. Just think of credit transactions. They cannot be performed unseen and anonymously. Payment defaults can happen here, and therefore the lender wants to know who the borrower is, what credit quality he has, and what collateral he provides. But if the bridge is built from the digital to the real world, the cryptomoney inevitably finds itself in the crosshairs of the state. However, this bridge will ultimately be necessary, because in modern economies with a division of labor, money must have the capacity for intermediation.
It is safe to assume that technology will continue to make progress, and that it will remove many remaining obstacles. However, it can also be expected that the state will make every effort to discourage a free market for money by reducing the competitiveness of alternative money media such as precious metals and cryptounits vis-à-vis fiat money through tax measures (such as turnover and capital gains taxes). As long as this is the case, it will be difficult even for money that is better in all other respects to assert itself.
Therefore, technical superiority alone will not be sufficient to help free market money—whether in the form of gold, silver, or cryptounits—achieve a breakthrough. In addition, and above all, it will be necessary for people to demand their right to self-determination in the choice of money or to recognize the need to make use of it. Ludwig von Mises has cited the “sound-money principle” in this context: “The sound-money principle has two aspects. It is affirmative in approving the market’s choice of a commonly used medium of exchange. It is negative in obstructing the government’s propensity to meddle with the currency system.” And he continues: “It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights.”
These words make it clear that in order for a free market for money to become possible, quite a substantial change must take place in people’s minds. We must turn away from democratic socialism, from all socialist-collectivist false doctrines, from their state glorifying delusion, and no longer listen to socialist appeals to envy and resentment. This can only be achieved through better insight, acceptance of better ideas, and logical thinking. Admittedly, this is a difficult undertaking, but it is not hopeless. Especially since there is a logical alternative to democratic socialism: the private law society with a free market for money.
A Free Market for MoneyA free market for money means two things. On the one hand, those demanding money can freely choose what they want to use as money—for transaction and saving purposes. On the other hand, every market participant has the freedom to try to offer his fellow human beings a good to demand voluntarily as money. But wouldn’t that lead straight to “money chaos”? Wouldn’t hundreds, maybe even thousands of types of money circulate and thus make financial calculation impossible in the economy? And wouldn’t that undermine the efficiency of the economy? This concern is unfounded.
The money demander plays the decisive role. In a free market for money, anyone who asks for money will, out of self-interest, ask for a good that has the greatest possible marketability, a good that is recognized by its trading partners as the generally accepted medium of exchange. What do you offer the baker? It is best to offer something that the baker can use to buy shoes from a cobbler or shirts from a tailor. In a free market for money, people will demand as money a good that finds the widest acceptance, which is regarded by the largest number of people as a medium of exchange. The choice of the good that serves as money is based on the wishes of the trading partners.
But what if Mrs. A offers colorfully printed paper slips and says that these are “good money”? The answer is that no one would accept her paper slips as money. Why not? Quite simple: you wouldn’t know what these colorful notes are worth, or what you could get for them in exchange. That’s why no one would demand them as money. This is exactly what Mises has shown with his regression theorem: money must arise from a good that already has a nonmonetary market value before it is used as money. This is not the case for colorful and arbitrarily printed paper slips. They would not be able to compete against other goods such as gold and silver.
In a free market for money, people will demand a good that possesses the physical qualities that “good money” must have: be scarce, storable, transportable, divisible, malleable, and transferable and be regarded as valuable. If we take into account currency history, it seems quite probable that money would still be chosen in the form of precious metals—notably gold and silver—today. But cryptounits could also possibly assert themselves as money in the future. The choice people will ultimately make in a free market for money cannot be predicted with certainty.
Precious metals as money is an improvement compared to unbacked fiat money. No one has to carry jangling coins around in their pockets. The use of gold and silver can be digitalized. All kinds of payments that are common today could be carried out easily and problem-free with gold and silver. If cash is desired, precious metal coins can circulate or banknotes can be used that can be exchanged 100 percent for physical gold at the storage facility that issued the banknotes. Cashless payment transactions are also possible in the usual way when using gold money: bank transfer, direct debit, crossed check, payments by credit and debit card, mobile payment, bills of exchange, etc.
In a free market for money, in which a good that cannot be multiplied at will (by granting credit) is chosen as money, the credit market can exercise its intended function undisturbed: the supply of and demand for savings create a market interest rate that ensures that sufficient savings are available to make investments. This puts an end to the chronic economic disruptions of boom and bust caused by the issuance of fiat money. Because the banking business is not inflationary, the nonmarket (antisocial) redistributive effects of fiat money cease.
In a free market for money, there is no central bank and no state supervisory or regulatory authorities. All that is necessary for the functioning of a free market for money is a functioning legal order, which ensures that the contracting parties fulfill their obligations and that infringements of contractual agreements are effectively sanctioned: for example, that the stored commodity money is not embezzled, that banknotes can be exchanged for the money base at face value at any time. In order to guarantee that contractual obligations are fulfilled, there is no need for state monopolies of law. Jurisprudence and law enforcement can also be organized in the free market.
A free market money system—with free choice of money and bank freedom—is not a national but an international concept. If trade takes place internationally, across national borders, the market participants select the good to use as money with the same calculation as is used at the national level. Every user of money has an economic incentive to demand as money that good which he thinks is the most attractive means of exchange from his trading partner’s point of view. The idea of a free market for money is thus global in the truest sense of the word: just as free trade knows no national borders, a free market for money extends globally.
A free market for money is incompatible with the state as we know it today; namely, as a territorial compulsory monopolist with ultimate power of decision over all conflicts in its territory. There is no question that a free market for money requires far-reaching changes in people’s thinking. This insight was formulated by Mises in 1923:
The belief that a sound monetary system can once again be attained without making substantial changes in economic policy is a serious error. What is needed first and foremost is to renounce all inflationist fallacies. This renunciation cannot last, however, if it is not firmly grounded on a full and complete divorce of ideology from all imperialist, militarist, protectionist, statist, and socialist ideas.
The Private Law SocietyThe alternative to the state, in its present form, is the private law society. It is characterized by the fact that the same rules apply to all people always and everywhere: that everyone has self-ownership and that everyone has ownership of external goods acquired lawfully—i.e., nonaggressively. And since the same law applies to everyone, there is no public law apart from private law. A private law society is by no means synonymous with anarchy. Far from it! Rather, the private law society is characterized by a very clear distinction between mine and yours, and violations of property are punishable and sanctioned.
In a private legal system, security is offered in the free market. On the supply side, there are insurance companies that offer security services (insurance against theft, personal protection, etc.) in competition with other companies. In insurance contracts, the security service is specified precisely and the mutual rights and obligations are contractually laid down (such as the exclusion of negligence by the insured from compensation in the event of damage). The insurance contracts specify independent conciliation bodies—which also compete with each other for customers who pay voluntarily—to be called upon in the event of a dispute between the policyholder and the insurer.
Under competitive conditions, it is to be expected that prices for insurance coverage and dispute resolution will fall (while they will rise chronically in today’s state-monopolized security and legal apparatus). And it is not only that the insurance services in the free market for security are more geared to the customer’s wishes (in terms of scope and pricing); peaceableness and conflict avoidance are also promoted. Those who demonstrably behave well and are friendly toward their fellow human beings represent a smaller risk and are rewarded with comparatively low insurance premiums.
Since an insurance company is contractually obliged to indemnify the policyholder in the event of a loss (e.g., burglary), it will make a great deal of effort to prevent the occurrence of a loss. And if the damage has nevertheless occurred, the insurance company will do everything in its power to track down the perpetrator and make him liable; otherwise, it will have to pay the compensation, which in turn will reduce its profit. The free market for security discourages crime because potential perpetrators face highly efficient private insurance providers and police agencies. Such insurance and legal contracts can be established not only nationally, but of course also internationally, for private households as well as companies.
In a private law society, a free market for money is a natural phenomenon in the truest sense of the word: a free market for money is people’s right to self-determination when choosing money. The voluntary agreement of the people involved in the global division of labor would result in a single world currency. A freely chosen world currency differs categorically from a single fiat world currency, which is the passion of democratic socialists. A world currency chosen in a free market for money would literally be economically and ethically good money, which best serves humankind and best promotes the peaceful and cooperative coexistence of people in this world.
The ChallengeUnderstanding and practicing economics is the key to destroying the foundations of the driving force of democratic socialism, which for decades has been working toward establishing a world state with a world currency and has already made considerable progress along this path. Bad experiences, undesirable developments, and crises will not be able to deprive democratic socialism of its power and overcome it. This can only be achieved by insight into better ideas, and by the struggle of arguments of reason. The Global Currency Plot is meant as a contribution to help the better ideas prevail.
As governments create a housing crisis, Marxists call for policies that will make the crisis worse.
Original Article: "Marxists Have a Plan for Housing: Make Sure There Is Less Available"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Violent crime is on the rise in Canada, and its progressive democracy is helpless to stop it. Further empowerment of the state makes things worse.
Original Article: "Canada's Impotent Justice System Is the Product of Dysfunctional Canadian Democracy"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Philosopher Susan Neiman may be a leftist, but she recognizes the dangers of woke progressivism.
Original Article: "Wisdom from a Yenta"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Karl Marx may have been a philosopher or just someone with an opinion. He was not, however, an economist.
Original Article: "Karl Marx Was Not an Economist"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Most socialists are not misguided about how to have a prosperous economy, for that is not their goal.
Original Article: "Socialism Isn't about Creating Economies. It Is about Amassing Political Power"
This Audio Mises Wire is generously sponsored by Christopher Condon.
If we have learned anything from hundreds of years of government oppression and atrocities, one thing is certain: government isn't our friend.
Original Article: "Government Is as Government Does"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Progressivism is collectivist, anti-individual, and ultimately destroys civilization itself. Austrian economics stands against this force.
Original Article: "Austrian Economics Stands against the Collectivism of Progressive Thought"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Neo-Calvinist economic thought claims that prices and private property cause scarcity. However, they provide no methodology for their claims.
Original Article: "Making Nonsense from Sense: Debunking Neo-Calvinist Economic Thought"
This Audio Mises Wire is generously sponsored by Christopher Condon.
In 1991, India's political leaders moved away from socialism, embracing markets and improving the economy. But Indian elites continue to push socialism to the detriment of the people.
Original Article: "Capitalism Has Improved Life in India, but the Spirit of Collectivism Still Dominates"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Anticapitalist politicians claim intervention can "level the playing field," but when we look closely, we realize that government itself creates the imbalances.
Original Article: "Does Government Create a "Level Playing Field" or Does It Make the Field More Uneven?"
This Audio Mises Wire is generously sponsored by Christopher Condon.
—from the Summary ...
Democratic socialism—the ideology that dominates the world today—aspires to become a world state. The route toward it requires a single world currency to be created. That would undoubtedly create a dystopia. Might this become a reality? And if so, how can it be averted? This book aims to find answers to these questions.
Part 11. Concerning Right Thinking: LogicThe arguments in this book claim to be strictly logical. For a better understanding, a few basics of logic—the doctrine of correct thinking—are presented. These show the possibility of making use of the incorruptible power of judgment.
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What We Know for a Fact: Humans ActThe phrase “humans act” is logically undeniably true; it applies a priori. From it further true statements can be derived—so-called action categories—which help to think through the political-economic questions raised in this book with impartiality.
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What is Indispensable for Human Action: Private PropertyPrivate property is not an arbitrary variable, as many believe. It is a category of human action and cannot be denied without contradiction; unconditional respect for property also proves to be an ethically convincing norm of action.
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Interpreting History: The Role of TheoryTo understand history, one must necessarily resort to theories; without theory, there is no grasp of reality. The insights provided by a priori theory are an indispensable ingredient in the unbiased interpretation of historical events.
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Driving Force of Civilization: InequalityThe prerequisite for peaceful and productive cooperation, and economic and cultural human progression, is humans’ inequality with regard to their abilities and goals. This is also a logical insight regarding action, and it explains the process of civilizing humanity.
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The Perfection of Exchange: MoneyThe modern economy and society based on the division of labor are particularly fostered when people use money. Money developed spontaneously in the free market without the intervention of a state, and having a currency for the whole world would be economically optimal.
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The Decivilizing Force: The StateThe state is a territorial monopolist with ultimate decision-making power over all conflicts in its territory. It doesn’t solve interpersonal conflicts; rather, it is the cause of many and increasing numbers of social disputes.
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The State and the Deterioration of Money: From Commodity to Fiat MoneyOut of self-interest, the state obtains the monopoly over the production of money, and by force it replaces commodity money with its own fiat money. As a result, its power expands enormously, thereby becoming basically uncontrollably large.
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Anatomy of Disruption: What Fiat Money CausesState fiat money suffers from economic and ethical defects: it hampers economic progress and is socially unjust. Fiat money leads to a “transvaluation of all values.” It is not compatible with a liberal and prosperous economy and society.
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A Destructive Ideology: Democratic SocialismDemocratic socialism has become the dominant ideology worldwide. It relativizes and undermines property in many ways, making the state increasingly powerful, thus destroying the conditions for free and prosperous social and economic life.
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Impact Assessment: A Case for the A Priori TheoryThe a priori theory can be used to reliably estimate the consequences of human actions: it can be used to derive conditional statements about the future that are valid under specific conditions, and it can also be used to trace action—logical path dependencies.
Part 212. The Progression Theorem: Toward a World GovernmentStates want to expand their power internally and externally. This applies above all to states that follow democratic socialism: they are working toward creating a worldwide uniform democratic socialism, a uniform world state with a uniform fiat world currency.
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The Nation: Community of Language and ValuesThe nations—the language and value communities—are an impediment to democratic socialism’s aspiration of establishing a unified world state. Therefore, democratic socialists try to vanquish the nations, and especially the principle of nationality.
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Migration: Natural and UnnaturalThe proponents of democratic socialism use migration as a means to abolish nations and the nation-state and to pave the way for a worldwide democratic socialism under a unified leadership. But this will not be achieved by a politicized migration.
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The Illusion of Democracy: The “Iron Law of Oligarchy”As in every democracy, an oligarchic elite rule is also formed in democratic socialism. It has a particularly strong incentive to create a uniform fiat world currency in order to come closer to the goal of creating a uniform world government, a world state.
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US Dollar Imperialism: The Bretton Woods SystemThe Bretton Woods system was the first attempt to establish a single politicized world currency. It was doomed to fail because the nations had sufficient room for maneuver to escape the abuse made possible by the Bretton Woods system.
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The Campaign against Currency Choice: The EuroIn Europe, states have succeeded in abolishing the last remnants of monetary competition and introducing a single currency. This example shows how a political world currency can be created: with the irrevocable fixing of exchange rates between national currencies.
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The Secret and Sinister Power: The World Central Bank CartelThe national central banks form an international cartel in line with the democratic socialists’ ideas. Their monetary policy is making the global financial and economic system increasingly dependent on a globally unified monetary policy, the logical end of which is a unified world currency.
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Blueprints for a Single World Currency:Bancor, Unitas, US Dollar, INTOR, and the LibraThere are many specific proposals to create a single world currency—brought about by a political decision, not by free market forces, for the democratic socialists want a monopolized single fiat world currency.
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The Dystopia: A Single Fiat World CurrencyA single fiat world currency would threaten freedom and prosperity on this planet to an extent that many probably cannot even imagine: with a single fiat world currency, the path would be open to a totalitarian world state.
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Technological Disruption: CryptocurrenciesThe emergence of cryptocurrencies could prove to be the crucial disruption and achieve what economic and ethical insight has not yet been able to achieve: the opening of a free market for money, and making it impossible to establish a world state.
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A Ray of Hope: Free Market for Money and Private Law SocietyA free market for money provides people with the best possible money. It would also effectively put an end to the freedom-destroying program of democratic socialism and make possible a private law society, in which the same law applies to all.
EPILOGUE: A Better World Is PossibleWe have been walking the ominous path toward a world state with a fiat world currency for decades. It is not an inevitable result, but to prevent it, essential things have to change. These will include rejecting false doctrines in modern social and economic theory and firmly reestablishing the a priori theory.
As life expectancy has risen, so have runaway costs. Raising the age won't make Social Security just, prudent, or wise. But cutting federal spending is always the right thing to do.
Original Article: "Raise the Social Security Age to (at Least) 75"
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Socialists don't just want to take your property; they also are demanding control of your children and loved ones.
Original Article: "Family Destruction and Its Socialist Cheerleaders"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Forty years ago, American politicians claimed that Japanese economic success was due to government economic planning. Unfortunately, the myth of industrial policy never seems to die, no matter how many times it is discredited.
Original Article: "Industrial Policy Did Not Bring Prosperity to Asia"
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While socialists posit socialism as a humane and ethical system, it is anything but that. Mises understood its brutality long before socialism gripped the world.
Original Article: "How Marxism Abuses Ethics and Science to Deceive Its Followers"
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The Pilgrims tried socialism at Plymouth. After two years, they returned to private enterprise. Likewise, Israel was founded as a socialist state but has back turned toward free markets.
Original Article: "A (True) Thanksgiving Tale of Socialism in America and Israel"
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It has been a hundred years since Mises published Socialism. It is more relevant than ever.
Original Article: "Reflections upon the Centennial of Mises's Socialism"
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High time preferences also mean high times in a party atmosphere. When Jamaica embraced socialism many decades ago, it wasn't supposed to come to this.
Original Article: "In Jamaica, the Tourists Party On behind High Walls and Locked Gates"
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The so-called green energy strategy is no strategy at all. Instead, it is an attempt to cripple the energy industries in vain hopes that renewables will magically cover the energy shortfall.
Original Article: "Renewables and EVs in the Grip of Lesseps Syndrome"
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Lutheran theologian Reinhold Niebuhr attracted numerous followers in postwar America in part because of his attacks on the free market. Perhaps he should have read Mises.
Original Article: "Niebuhr, My God, to Thee"
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After praising Mises for his work on socialism, Tyler Cowen goes on to claim Human Action is "cranky and dogmatic." "Brilliant and insightful" would have been more truthful.
Original Article: "Misunderstanding Mises, Again"
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The Soviet regime relentlessly expanded the money supply. To prevent inflation, the regime then created shortages through price controls and economic stagnation.
Original Article: "How the Soviets "Fixed" Inflation, but Ruined the Economy"
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Among Mises's contributions was his doctrine of consumer sovereignty in a free market.
Original Article: "Consumers, Workers, and Monopolies: Free Markets Serve All"
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As we watch the once proud edifice of higher education in the USA crumble, we realize that we are looking at institutional failure itself.
Original Article: "The Perils of Higher Education: Institutional Failure"
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An enduring progressive myth is that thanks to Western technologies and compassionate NGOs, American agricultural scientists saved the developing world via the Green Revolution. Not surprisingly, the truth is found elsewhere.
Original Article: "The "Stunning Success" of the Green Revolution Is Yet Another Progressive Myth"
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Jordan Peterson has linked identity politics to socialism. Instead, socialism is about empowering the state.
Original Article: "Socialism Is Not Groupthink, but Statethink: A Brief Comment on Jordan Peterson"
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The reality of socialism is that it politicizes life entirely. How that is supposed to improve quality of life remains a mystery.
Original Article: "How Do We Define Socialism? By What It Does—and Does Not—Do"
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Original Article: "Everything You Love You Owe to Capitalism"
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In June 2004, Professor Hoppe visited the Mises Institute in Auburn to deliver an ambitious series of lectures titled Economy, Society, and History.
This project brings together the core of Hoppe’s lifetime of theoretical work in one vital and cohesive source. Here we find provocative themes developed by Hoppe in the 1980s and 90s, particularly in his essays found in A Theory of Socialism and Capitalism and The Economics and Ethics of Private Property. We also find his devastating critique of democracy, made famous in his seminal book Democracy—The God That Failed.
This audiobook is narrated by Paul Strikwerda.
Download the complete audiobook (12 MP3 files) here. This audiobook is also available on Soundcloud and via RSS.
We are regularly being told that we are in a "climate crisis." But what if that isn't true? What if CO2 actually is good for the greening of the planet?
Original Article: "Rethinking Climate Change: Are the Apocalyptic Models Wrong?"
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Development economists often confuse natural resources with wealth and then are puzzled when countries rich in resources experience widespread poverty. Free markets lead to creation of wealth, period.
Original Article: "Money Is Not Wealth, Nor Is Wealth Natural Resources"
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Advocates of the New Green Deal emphasize new "green jobs" and other benefits, but the NGD is basically a Keynesian scheme in which government allegedly spends us into prosperity.
Original Article: "The New Green Economy Is Little More than a Keynesian Spending Scheme"
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Elites are attacking the government of Mauritius for having lower tax rates than other African countries. The real issue is the levels of taxation in other African countries.
Original Article: "If Mauritius Is a Tax H(e)aven, Other African Countries Must Be Tax Hells"
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The New York Times recently interviewed economist Herman Daly, who insists that economic growth is ecologically destructive. There is much more to the story.
Original Article: "Is Economic Growth Synonymous with Ecological Destruction? The NYT Gets It Wrong (Again)"
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On top of Congress passing the "Climate Relief Bill," environmentalists also demand that President Joe Biden declare a "climate emergency" in order to seize new powers ostensibly to combat dreaded climate change. However, climate alarmism is not based on reality.
Original Article: "The Agenda behind Climate Change Catastrophism"
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While renewable energy and organic farming are considered sustainable, they're anything but. The collapse of Sri Lanka's green agricultural sector is a warning to the rest of the world.
Original Article: "Green Myths and Hard Realities: Sri Lanka as a Warning"
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(This speech was given at Wabash College at a conference on the humane economy by Professor Ralph Raico, August 1964. It was found in the Raico Papers in the Mises Institute archives and has never been published before.)
I
In recent years the concept of “alienation” and the arguments surrounding it have assumed an increasing importance as part of the case against an economic order based on private property in the means of production.It should not, of course, be thought that it is only Marxists, or even socialists, who are aware of and concerned with this problem. The sociologist Robert A. Nisbet has also devoted a great deal of study to the problem, and he concludes that the primary source of alienation has been the growth of the powers and duties of the central government, to the point where smaller groups have ceased to perform their functions in the acculturation of the individual. Cf., Community and Power (New York: Oxford University, 1962.) As the more strictly economic criticisms of capitalism prove, to a greater or lesser degree, to be unfounded or inconclusive, the attention of its opponents has tended to shift to complaints of a more “psychological” nature. Concomitantly, as part of another movement (perhaps of the general eclipse of broad philosophies of history), interest in what have traditionally been regarded as the essential elements of Marxism—the materialist interpretation of history, the class struggle, the inevitability of socialism, etc.—has waned. The two movements—one away from economic criticisms of capitalism, and the other towards a de-emphasis of the elements more traditionally accepted as characteristic of Marxism—have found a common meeting point in the thought of the young Marx: his Economic and Philosophical Manuscripts (1844), published for the first time in 1932, and only recently available in English, have become the starting point for a vigorous assault on capitalism as the economic system based on and promoting alienation in its essence. Interest in this question is quite wide-spread in the Western countries. If, for instance, it is true, as one writer has said,I. Fetscher, “Der Marxismus im Spiegel der französischen Philosophie,” in I. Fetscher, ed., Marxismusstudien (Tübingen: Mohr, 1954, p. 173. that there is today scarcely a philosophy in France that does not involve itself at least to some degree with Marxism, it is above all Marx’s theory of alienation that interests the French philosophers. Interest in his ideas on the subject is strong also in other countries, especially West Germany, where, as on much of the Continent, Marx’s great concern for the problem leads to his often being looked on as fundamentally a sort of “humanist existentialist.”
In the English-speaking world, the elaboration and dissemination of this aspect of Marx’s thought has so far fallen principally to writers in the field of social science. It appears that, because of his great renown, Erich Fromm is destined to exert the greatest influence in this direction in the near future. It is with Fromm’s neo-Marxism, and specifically with some of his ideas on what he terms the “central issue of the effects of Capitalism on personality: alienation,”The Sane Society (New York: Rinehart, 1955), p. 12. I propose to deal in this paper.
A precise delimitation of the concept of alienation is hard to come by, but there is wide agreement on the core meaning of the term. The social psychologist Karen Horney, for instance, speaks of the alienated individual as feeling “depersonalized, removed from himself,” as performing all of his activities with the feeling that, “I am driven instead of being the driver … He has the feeling of not being a moving force in his own life.”Cited in Robert Tucker, Philosophy and Myth in Karl Marx (Cambridge, England: Cambridge University, 1964), p. 145. According to Fromm, the alienated person “does not feel strong, he is frightened and inhibited because he does not experience himself as the subject and originator of his own acts and experiences.”Beyond the Chains of Illusion (New York, Simon and Schuster, 1962), p. 52. Commentators are agreed, moreover, that alienation has become a social malaise of alarming proportions in modern society, to the point where it is often taken as characteristic of twentieth century man.
In our discussion of Fromm’s Marxist-oriented theory of alienation, we will not examine the Hegelian underpinnings of Marx’s theory, or his own concrete development of it. The same reasons that make it attractive to existentialist thinkers render it unfamiliar and strange-sounding to persons accustomed to more empirically-based philosophical discourse; and, moreover, it is not certain that a lengthy examination would even be rewarding.
Nor will our chief concern be the general assertion that alienation is a product of a regime of private property in the means of production, (a thesis which would require a much more detailed treatment than is possible here). What I want to deal with instead is the claim that alienation will be greatly diminished, or even eliminated (Marx’s own view) by socialism; to do this, I shall investigate a few of the major ways in which capitalism is alleged to promote alienation, in order to see whether socialism is likely to do away with them.
Before the merits of the Marxist claim can be evaluated, it is necessary of course to have a good idea of how it is imagined that a socialist society would function. This is not as easy to determine as might be thought. It seems to me clear that a critic of a social arrangement is obligated not only to bring evidence that the arrangement has had unfortunate results, but to prove the possibility (where there might be a question of it) of an alternative arrangement which will avoid the undesirable consequences of the first. For otherwise his criticism would amount not to a condemnation of the social institution, but to an assertion that certain social arrangements which are indispensable have, regrettably, undesirable consequences. But when we come to the economic order based on private property, and to its most influential critics—Marx, Engels, and their followers—this rule is largely forgotten. It has been thought that virtually any flaw in capitalism was a good argument against the system, which amounts to the position that capitalism is to be compared, not with other practicable systems of economic organization, but with an ideally perfect standard. A learned and impartial historian of socialist thought has remarked on the curious circumstance that
in the extensive literature on Marxism there is lacking a systematic investigation of the notions that Marx and Engels had of the future social order, after the carrying out of the victorious proletarian revolution. To the unbiased observer it appears that any serious political evaluation of a theory that has made world history must begin with the question of what it was that its founders actually wanted to put in place of the liberal order they so violently attacked.Thilo Ramm, “Die künftige Gesellschaftsordnung narch der Theorie von Marx und Engels,” in I. Fetscher, ed., op. cit, II, pp. 78-79.
It is interesting to note that after a fairly comprehensive examination of the sparse indications given by Marx and Engels themselves as to the structure of the future socialist society, and after indicating various reasons, tactical and otherwise, for their reluctance to discuss the organization of the future society, he concludes:
Not least of all, however, the renunciation of any detailed presentation of their own conception of the [future] social order gave them the advantage of protecting their position against controversies with the defenders of the existing order. Such controversies would have weakened the revolutionary spirit of their [own] supporters, either by casting doubt on the realizability of these [Marxist] proposals, or by indicating what they had in common with the existing order.Ibid., p. 108.
Fromm, too, is rather vague at crucial places as to just how his socialist society would work, and we shall find that we will have to fill out his theory of the future organization of society, in order to be able to come to a conclusion as to the ability of socialism to overcome alienation.
II
Marx, in his Economic and Philosophical Manuscripts, distinguishes four aspects of alienation, all inter-related: (1) alienation of the worker from the product of his labor; (2) alienation of the worker from the process of his labor; (3) alienation of the worker from his species nature; (4) alienation of the worker from his fellow man.New York: International Publishers, 1964. Pp. 107–15. Fromm, it ought to be pointed out, has abandoned the narrow class basis of this analysis, and sees alienation as a disease of all classes, with the middle class possibly being more prone to contract it.Marx’s Concept of Man (New York: Ungar, 1962), p. 50. Moreover, he lays little stress on the alienation of the worker from the product of his labor, and the alienation of the worker from the process of his labor; the first is, of course, a corollary of the Marxist labor theory of value, while the second, in Marx’s thinking, follows immediately from the first.Economic and Philosophical Manuscripts, p. 110. The reason why these two aspects of the problem do not loom large in Fromm’s thought appears to be that they would throw no light at all on the problem Fromm must give an account of—the increase in the incidence and intensity of alienation in the twentieth century.The Dogma of Christ and Other Essays (New York: Holt, Rinehart, Winston, 1963), p. 101. It is this increase that has drawn attention to the issue, and that must be explained. But it is not the case that the worker’s share of his product has diminished; Fromm, in fact, concedes that it has increased.The Sane Society, p. 101. Thus, the roots of the problem are to be sought elsewhere.
Much more helpful, it has been thought, is Marx’s notion of the alienation of man from his species nature. He states: “The whole character of a species—its species character [Gattungswesen]—is contained in the character of its life activity; and free conscious activity is man’s species character.”Economic and Philosophical Manuscripts, p. 101. Under capitalism, however, “life itself appears as a means to life.”Ibid. What Marx seems to mean by this, and the sense in which Fromm strongly supports the position, is that man’s essential nature—that in virtue of which he is human—consists in freely chosen, rational productive activity. It is likely, as has been suggested, that Marx had in mind here, as a paradigm case of such activity, the life of an artist, which is not (in the best or natural case) dictated by external necessity:
Their [i.e., the artists’] activity is not subordinated to ends outside of the activity. In so far as their motives are artistic, they are not working for reward, or fame, or any other non-artistic end. They are working for the sake of the activity itself. They create, or seek to create, according to the laws of art, not according to laws dictated from outside the activity by non-artistic or anti-artistic motives and ends.Eugene Kamenka, The Ethical Foundations of Marxism (London: Routledge and Kegan Paul, 1962), p. 110.
While this is the form of life activity dictated by man’s nature, Marx contends, in a capitalist system labor is performed under the necessity of survival, is thus a means to a physical end, and is not the free expression of the individual’s creative powers. The most shocking example of the alienation of man from his nature in this regard is the division of labor, which has now made man an appendage of the machine, and turns him, as Marx remarks in Das Kapital, into a “crippled monstrosity.”
And finally the division of labor offers us the first example of how, as long as man remains in natural [i.e., unplanned] society, that is as long as a cleavage exists between the particular and the common interest, as long, therefore, as activity is not voluntarily but naturally divided, man’s own deed becomes an alien power opposed to him, which enslaves him instead of being controlled by him. For as soon as labor is distributed [i.e., divided], each man has a particular exclusive sphere of activity, which is forced upon him and from which he cannot escape. He is a hunter, a fisherman, a shepherd, or a critical critic, and must remain so if the does not want to lose his means of livelihood …The German Ideology (New York: International Publishers, 1947), p. 22.
In communist society, on the other hand:
where nobody has one exclusive sphere of activity, but each can become accomplished in any branch he wishes, society regulates the general production and thus makes it possible for me to do one thing today and another tomorrow, to hunt in the morning, fish in the afternoon, rear cattle in the evening, criticize after dinner, just as I have a mind to, without ever becoming hunter, fisherman, shepherd, or critic.Ibid.
Fromm accepts Marx’s fundamental view of the nature of man, and repeats his criticism of the division of labor. He is particularly indignant at its great refinement in recent decades. We shall postpone the examination of the means Fromm proposes to alleviate this problem, until we come to the general discussion of his guild socialist ideas. What I want to emphasize here is that while Marx had a theory which held out the promise of the elimination of this principal aspect of alienation, Fromm does not.
In Marx’s theory, it is true that the alienation of a man’s nature implied in the division of labor will not be cured immediately upon the abolition of private property in the means of production, in the first phase of socialism (where, for instance, as we shall see, the alienation involved in the lack of control by man of his social environment will come to an end). Its remedy, however, comes with the higher phase of socialism which can “only flourish upon that realm of necessity as its base.” This seems to mean that only after social productivity shall have reached a very high level will it be possible to abolish the division of labor and enter into the realm of true freedom. We need not enter into a discussion of whether Marx provides us with reasonable grounds for supposing that productivity under socialism is likely to reach this level, or likely to do so sooner than under capitalism; no one, I think, would question the fact that he does not. What I want to point out is that Marx, at least, operated in a legitimate fashion. While criticizing the division of labor as a denial of true freedom, as the alienation of man from his nature, he indicated a conceivable way in which (in the distant future, to be sure) the division of labor could be done away with, viz., by the creation of productive forces so efficient that the material basis of life could easily be provided without it. Fromm, on the other hand, cuts the ground from under the Marxist position. While accepting the proposition that “the lifelong submersion of a man in one occupation” is “crippling” and a denial of the “total, universal man,” he provides no long run cure for it.Marx’s Concept of Man, p. 42. On the contrary, he criticizes modern society (capitalistic as well as “authoritarian Communist”) for having as its “goal … ever-increasing economic efficiency and wealth.”The Sane Society, pp. 358–59. Thus, within the framework of the Marxist theory, and simply given what seem to be his own views on the subject, Fromm implicitly concedes that the aim of humanistic socialism—the overcoming of alienation—will not be achieved, but that, as it regards the division of labor, will at most be alleviated.
Another basic facet of the alienation of man from his nature under capitalism is “the process of consumption,” which “is as alienated as the process of production.”Ibid., p. 131. The reason for this is to be found in the use of money, and in this way Fromm associates himself with the famous critique of money by Marx in his Economic and Philosophical Manuscripts. Here the essential artificiality and sham of capitalist society, produced by the use of money, is contrasted with the warm genuineness of the environment appropriate to the nature of man:
Assume man to be man and his relationship to the world to be a human one; then you can exchange love only for love, trust for trust, etc. If you want to enjoy art, you must be an artistically cultivated person; if you want to exercise influence over other people, you must be a person with a stimulating and encouraging effect on other people. Every one of your relations to man and to nature must be a specific expression, corresponding to the object of your will, of your real-individual life.Economic and Philosophical Manuscripts, p. 169.
Under a regime of private property, on the other hand, the abstract, dead symbol of labor—money—enters between the human reality—the real desire, capacity, vocation, or whatever—and its fulfillment. Money, moreover, creates a false reality, buying love for the ugly man (and thus, Marx says, making him beautiful), giving the lame man twenty-four feet (by buying him a coach), etc. Fromm does not agree with Marx, evidently, on this latter point, but nevertheless emphasizes the gulf which exists under capitalism between the human reality of the individual and his needs and desires, and the “reality” which money can purchase for him:
Provided I am in the possession of money, no effort or interest of mine is necessary to acquire something. If I have the money, I can acquire an exquisite painting, even though I may not have any appreciation of art …The Sane Society, p. 131.
and so on.
The first thing to recognize on this issue, I think, is that money is not really the center of the discussion—that it is not money that is responsible for the undesirable conditions which Fromm, following Marx, describes. Money, after all, simply plays the part of a medium of exchange. The same essential conditions which Fromm and Marx here hold responsible for alienation of acquisition and consumption would obtain in the absence of money, provided exchange were present, e.g., in a barter system. A person with four goats could obtain eight bracelets or six drums for them, even if he had no appreciation at all of bracelets or drums, provided only that bracelets, drums and goats were exchanging at the appropriate ratios in his society. Conversely, in such a situation, a person with nothing to exchange would not obtain the desired goods, no matter how worthy of them he was. So the attack on money is a misdirected one.
But even assuming that money is a great source of alienation, in the manner described, the question arises, With what will money be replaced in a socialist society? Here, I think it is fair to say that Fromm is nothing short of irresponsible. He states:
The human way of acquiring would be to make an effort qualitatively commensurate with what I acquire … the acquisition of books and paintings [would depend] on my effort to understand them and my ability to use them. How this principle would be applied practically is not the point to be discussed here. What matters is that the way we acquire things is separated from the way in which we use them.Ibid., pp. 131–32
But, in fact, nothing could be more evident [than] that the practicability of the “human” way of acquiring must be established before capitalism can be censured for not applying it. For if it turned out that there was no practicable method of implementing the “human” way, then our conclusions would have to be, not that capitalism is responsible for an alienating method of acquiring things, but that an alienating way of acquiring things is a necessary part of the human condition.
Marx, on the other hand, appears to have felt the responsibility of showing how the future socialist society (in its first, or “economic” phase) would be able to avoid the use of money. In Capital he states:
The producers may receive, for my part, paper certificates, for which they withdraw from the societal supplies [gesellschaftlichen Konsumptionsvorräten] a quantity [of goods] corresponding to their work-time. These certificates are not money. They do not circulate.Das Kapital (Hamburg: Meissner, 1893), II, p. 331.
In his earlier work, however, Marx had not maintained that the undesirable aspects of money—the modern money-worship and the unnaturalness of the method of acquisition of goods—followed from the fact that money circulated, but from the fact that it could be exchanged against any other good:
By possessing the property of buying everything, by possessing the property of appropriating all objects, money is thus the object of eminent possession. The universality of its property is the omnipotence of its being,
and from the fact that it “is the pimp between man’s need and the object.”Economic and Philosophical Manuscripts, p. 165. But in the first stage of socialism, both of these qualities will be possessed by the “paper certificates,” which will be given in against desired goods. Thus, the characteristics of money which are held to produce alienation will be preserved in the future socialist society, up until the leap into the realm of freedom. Until that point then in Marx’s theory, and evidently ad infinitum in Fromm’s, the use of money will continue to be a potent source of alienation.
According to Marx and Fromm, there are a number of causes of the alienation of man from man which we witness under capitalism. We shall deal, however, with only one of them, what Fromm refers to as: “the principle that is to be found in all class societies: the use of man by man.” In a system of private property
the owner of capital uses other men for the purpose of his own profit. The basic concept of use has nothing to do with cruel, or not cruel, ways of human treatment, but with the fundamental fact that one man serves another for purposes which are not his own but those of the employer. The concept of use of man by man has nothing to do even with the question of whether one man uses another, or uses himself. The fact remains the same, that a man, a living human being, ceases to be an end in himself, and becomes the means for the economic interests of another man, or of an impersonal giant, the economic machine.The Sane Society, p. 93.
It seems to me that even within the framework of Fromm’s ideas as expressed in this passage, he is not consistent: it is not true that the worker “serves another [the employer] for ends which are not his own, but those of the employer.” It seems just as reasonable, moreover, to interpret the situation as one in which the worker is “exploiting” the employer, in the sense that he is treating him simply as a means for his own livelihood, and not as an end in himself. Nevertheless, such a criticism is merely peripheral: the main point, I think, is that Fromm has given us no coherent idea of what might be meant by “the use of man by man.” Is, for instance, the fact that I “use” my barber to obtain haircuts morally reprehensible in Fromm’s view? How could any exchange of goods possibly take place if we take the concept of “use” of another person in so strict a sense? In an exchange, I am obviously not regarding the other person as an end in himself, but at least partially as a means.
Fromm, who is at pains to prove that Marxism is a humanistic philosophy, with one of its main sources being the German Enlightenment, links the idea of the essentially exploitative nature of capitalism with the categorical imperative of Immanuel Kant: “Marx’s concept here touches the Kantian principle that man must always be an end in himself, and never a means to an end.”Marx’s Concept of Man, pp. 53–54. The reference, however, is inexact, and the error illustrates what is fundamentally wrong with Fromm’s complaint against capitalism here. The formulation of the categorical imperative that Fromm had in mind is put as follows by Kant: “So act as to use humanity, both in your own person and in the person of every other, always at the same time as an end, never simply as a means.” One of the most authoritative commentators on Kantian ethics notes:
The words “at the same time” and “simply” must not be overlooked: they are absolutely necessary to Kant’s statement. Every time we post a letter, we use post-office officials as a means, but we do not use them simply as a means. What we expect of them we believe to be in accordance with their own will, and indeed to be in accordance with their duty. Considerations of this kind do not arise in regard to the stamp which we stick on our letter or the post-box to which we entrust it: they arise only in regard to persons and not to things. So far as we limit our actions by such considerations, we are treating persons “at the same time” as an end, though we may also be using them as means.H. J. Paton, The Categorical Imperative (London: Hutchinson, 1958), p. 165.
If we suppose, with Fromm, that using a person as a means at any time is exploitative, and signifies the alienation of man from man, we must assume that this form of alienation will not disappear with capitalism, but only with organized society, for it is of the essence of social cooperation.
III
It is a common assertion of Marxism that under capitalism man is not the master of his fate, but is rather at the mercy of and under the control of blind forces, which, while fundamentally of human origin, face man as an enemy. Indeed, it seems probable that the essential idea behind the Marxist theory of alienation is that man has lost control over his own activity; as Marx stated, in The German Ideology: “man’s own deed becomes an alien power opposed to him.”P. 22. This refers to the fact that, while society is the product of human actions, these actions produce results which are unintended, which in fact run contrary to human desires and intentions; depressions, for instance, which no one desires, occur as the unintended consequence of human actions aiming at altogether different ends:
This crystallization of social activity, this consolidation of what we ourselves produce into an objective power above us, growing out of our control, thwarting our expectations, bringing to nought our calculations, is one of the chief factors in historical development up until now.Ibid.
One of the chief advantages of socialism, for the point of view of human freedom, it is contended, is that it represents a system in which man would become a conscious, rational agent in human history, rather than the victim of unplanned forces resulting from his actions. The matter is put bluntly by Engels:
With the seizure of the means of production by society, production of commodities is done away with, and with it the domination of the product over the producers. Anarchy in social production is replaced by conscious organization according to plan. The whole sphere of the conditions of life which surround man, which ruled men up until now, now comes under the dominion and control of men, who become for the first time the real, conscious lords of nature, because and in that they become the masters of their own social organization. The laws of their own social activity, which confronted them until this point as alien laws of nature, controlling them, then are applied by men with full understanding, and so mastered by them. Men’s own social organization, which confronted them until now as a necessity imposed by nature and history, now becomes their free act. The objective, alien powers, which until now ruled history, come under the control of men themselves. Only from then on will men make their history themselves, with full consciousness; only from then on will the social causes they set in motion have in the main and in constantly increasing proportion, also the results intended by them. It is the leap of mankind from the realm of necessity to the realm of freedom.Friedrich Engels, Die Entwicklung des Sozialismus von der Utopie zur Wissenschaft (Berlin: Dietz, 1923), p. 51.
Fromm associates himself with these views:
the very fact that we are governed by [economic] laws which we do not control, and do not even want to control, is one of the most outstanding manifestations of alienation … Our own actions are embodied in the laws which govern us, but these laws are above us, and we are their slaves. The giant state and economic system are not any more controlled by man. They run wild …The Sane Society, pp. 138–39.
We ought to remark, as a preliminary step, that Fromm is speaking in a logically odd manner when he deplores the fact that, under capitalism, man is the slave of economic laws, and asserts that this is a condition that ought to be changed. Laws, whether social or natural, whether describing the behavior of social phenomena or of the phenomena of nature, can in no sense be “masters,” nor can we legitimately be said to be their “slaves.” To say that there exist economic laws, is simply to say that certain economic actions will bring about certain economic consequences. It may be that an assertion which one claims to be an economic law is not in fact a law at all; but if it is a law, then it states an actual relationship between a cause and an effect. It may be that this relationship is one which is found to be unfortunate—e.g., the laws implied in the principle Prof. Friedman takes to be basic to economic science, “There’s no such thing as a free lunch,”—but as long as they are in actuality laws, they cannot be said to tyrannize over us—they simply exist. In the same way, the physiological law that under certain conditions a given bacterium will produce a disease is not a law which is our master—it is simply an unfortunate law of nature.
What Fromm probably has in mind is not that the laws of a capitalist economic system tyrannize over individuals, but that the forces operating under capitalism (operating, presumably, in accordance with certain social and economic laws) do so. Under capitalism there are “social forces which determine our society and the life of everybody living in it,“ he writes; and these social forces manifest an “anonymity … inherent in the structure of the capitalistic mode of production.”Ibid., pp. 137–38. Thus, on the largest possible social scale, capitalism shows the characteristics of an alienated system: forces independent of human will are the drivers, and men are simply being driven. Capitalism is a “system which has no purpose or goal transcending it, and which makes man its appendix.”Ibid., p. 86. Socialism, on the other hand, will give man the possibility of controlling his own fate. It is thus analogous to the coming of age of the human being, when reason replaces dependence on irrational influences outside of himself.
It is possible that the preceding has been the central idea in the antagonism towards capitalism and the open society. The notion, for instance, that freedom, to be genuine, must include freedom not only from interpersonal constraint, but also from tradition and custom—the things which condition an individual independent of his own reasoning mind—is traceable to Rousseau and the men who launched the first systematic attack on the open society in the later stages of the French Revolution. Its corollary was the idea that true freedom implied a sort of self-creation,Fromm quotes Marx with approval: “For Marx independence and freedom are rooted in the act of self-creation. ‘A being,’ Marx wrote, ‘does not regard himself as independent unless he is his own master, and he is only his own master when he owes his existence to himself. A man who lives by the favor of another considers himself a dependent being. But I live completely by another person’s favor when I owe him not only the continuance of my life but also its creation, when he is its source.’” Beyond Chains of Illusion, p. 65. the control by man of his social environment, so that he would not irrationally and blindly follow in the tracks of those who came before him, but with truly human deliberateness and consciousness fashion his own social world. It seems to me that there are a number of interesting and important fallacies involved in this conception of freedom, but we shall deal with only one here.
It is, I am afraid, a rather elementary fallacy. It is called in logic the “fallacy of division,” and it occurs when a property of a whole is taken to be a property of each of its parts. Just as it does not follow from the fact that the American Indian is vanishing that this misfortune is befalling all individual Indians, so it is not true that if “man” assumes control of his own economic destiny, individual men will assume control of their own particular economic destinies. A centrally planned economy, for instance, might be said to be one in which man has come to control the economic life of his society. But it would be a mistake to conclude from [this] that each of the particular persons under such a regime was in control of his own economic life. It is, of course, particular persons, and not “man” who suffer from alienation. (It could be said that man suffers from alienation only in the sense that most people did, or that it was an ineluctable fact of human existence that all people did.) If, say, Josef K. suffers from alienation, proceeding from the fact that his economic existence is under the control of forces outside of himself, in what way is his situation improved if control over the economic circumstances that condition his life passes from the impersonal market to the economic planner? It is true that the economic forces are, to some extent, no longer impersonal (although, of course, there will still be economic laws independent of the will of whoever is in charge of the economy). But it was not in the first instance from the impersonality of the economic determinants, but from the absence of control over them by a given individual that produced alienation. Thus, alienation from this cause can only be done away with if control over each man’s economic circumstances passes in the main to him personally.
The question of the extent to which society will be governed by conscious, rational planning brings up the issue of the character of the future socialist state. Here Marx and Fromm differ fundamentally. Marx’s basic view of the organization of production under socialism appears to have been a statist one—i.e., the control of the means of production was to lie with the central authority, which would direct production according to a rational over-all plan.Ramm, loc. cit., p. 88. Such an arrangement possesses the advantage of providing (at least verbally) a solution to the major aspect of alienation, lack of control by man of his socio-economic environment. It also allows, always under the assumption of the superior efficiency of central planning, the prospect of the eventual abolition of money and the division of labor, two important particular manifestations of alienation.
Fromm, however, is no friend of central planning. On the other hand, he recognizes that it entails wide-spread bureaucratic management and control, a proposition that Marx (also a vigorous opponent of bureaucracy) was able to ignore only because he vastly underestimated the effort and organization required by central planning. Bureaucracy, however, is itself a manifestation of alienation: “… the bureaucrat’s relationship to the people is one of complete alienation.”The Sane Society, p. 126. On the other hand, Fromm acknowledges that central planning presents serious problems for the maintenance of liberty:
It is true that the capitalistic mode of production is conducive to political freedom, while any centrally planned social order is in danger of leading to political regimentation and eventually to dictatorship.Ibid., p. 138.
Fromm therefore proposes a form of guild socialism as the answer to the problems he raises:
The worker can become an active, interested and responsible participant only if he can have influence on the decisions which bear upon his individual work situation and the whole enterprise. His alienation from work can be overcome only if he is not employed by capital, if he is not subject of command, but if he becomes a responsible subject who employs capital.Ibid., pp. 322–23.
He recognizes that so far no answer has been provided for the problem of lack of general over-all control, and so adds:
the problem here is to avoid the danger of an anarchic state of affairs in which central planning and leadership would be lacking; but the alternative between centralized authoritarian management and planless, uncoordinated workers’ management is not a necessary one. The answer lies in a blending of centralization and decentralization, in a synthesis between decision making from above to below, and from below to above.Ibid., p. 323.
But it is doubtful whether Fromm has considered the implications of his position in regard to the problem of central control and consequent bureaucracy. The workers’ councils, after all, would be, to the extent they really had power, in charge of the social means of production. A method would surely have to be found to prevent them from exploiting their position vis-à-vis the consumers. Marx saw this problem clearly, and it may have been one of the reasons for his preference for central ownership and control of the means of production. In his posthumously published article, “On the Nationalization of Land,” he stated:
To give over the land to the associated farm workers would mean to deliver over all of society to a special class of producers.Ramm, loc. cit., p. 88.
And Fromm admits, in an oblique way, the existence of these dangers:
If the workers and employees in an enterprise were exclusively concerned with their enterprise, the alienation between man and his social forces would remain unchanged. The egotistical, alienated attitude would only have been extended from one individual to the “team.” It is therefore not an incidental but an essential part of workers’ participation that they look beyond their own enterprise, that they be interested in and connected with consumers as well as with other workers in the same industry, and with the working population as a whole … there is only one truly social orientation, namely the one of solidarity with mankind.The Sane Society, pp. 325–26.
Fromm does not indicate, however, how a more consciously “social” attitude might be produced. We are justified, therefore, in assuming that the councils elected by the workers in various industries will be largely motivated by a desire to better the conditions of those workers. Depending on the size of the jurisdiction of these councils, a more or less monopolistic situation will be created, the probability of which will be increased by the operation of Fromm’s principle that “cooperation will replace competition.” This placing of the consumers at the mercy of workers’ councils is obviously intolerable from the point of view of society as a whole, and von Mises’s analysis of the probable resulting state of affairs seems well-founded:
The State alone sets the aim of production and determines what must be done in order to achieve this aim. Directly or indirectly through its taxation policy, it determines the conditions of labor, moves capital and labor from one branch of industry to another, makes adjustments and acts as intermediary between the guilds themselves and between producers and consumers. These tasks falling to the State are the only important ones, and they constitute the essence of economic control … Society cannot leave it to the workers themselves in individual branches of production to determine the amount and the quality of the labor they perform and how the material means thereby involved shall be applied.Socialism (New Haven: Yale, 1951), pp. 258–59.
It may be that some worker control will still be exercised in the form of selection of foremen, etc., but this too is likely to be quite limited. Here it cannot be argued that discipline will be unnecessary in the factories, because the workers, being in control, will work enthusiastically, that work will henceforth be enjoyable. So far, we have not established that there will be any substantial amount of control on the part of the workers, but that, instead, the important economic decisions will—to protect the interests of the consumers—come from “above to below.” Von Mises seems to be right, therefore, when he suggests that worker-elected foremen and plant managers who do not impose sufficient discipline on the workers will have to be replaced by the central authority.Ibid., p. 259.
Thus, it is probable that Fromm’s guild socialism will evolve into some form of bureaucratic central planning. But if it does not, then most of the chief sources of alienation with which he taxes capitalism will remain. Since Fromm makes no claims for the greater economic efficiency of his system, the material base necessary, in Marxist theory, for the elimination of money and the division of labor is, as we have seen, lacking. Moreover, and most important of all, to the degree that decentralization is a reality, there will be no conscious, over-all control of economic life—the workers’ councils face each other as independent economic units, and they lack any authority to instill into them a transcendent purpose, the situation in these respects resembling that of capitalism.
IV
The need for the creation of a “truly social orientation,” which is to insure that the workers in various industries conduct themselves in appropriate ways in regard to the rest of society, is one example of the fact that, as we have seen, and as Fromm admits, a simple transformation of the organization of industry is insufficient to produce the sort of human, sane society he desires: his proposals for making work more meaningful for the worker
only make sense in a totally different social structure, in which economic activity is part—and a subordinate part—of social life. One cannot separate work activity from political activity, from the use of leisure time and from personal life. If work were to become interesting without the other spheres of life becoming human no real change would occur …The Sane Society, p. 325.
But unless Fromm’s vision of “a fundamental change of the human condition,”Beyond the Chains of Illusion, p. 144. is to remain completely sterile, there must be more effective ways of proselytizing than mere personal communication. But a designed transvaluation of values is a difficult task within the framework of an open society. For reasons which we shall elaborate shortly, it is not surprising then that totalitarian elements appear in the thought of even this most humanistic of democratic socialists: he speaks of the “general problem” of
to what extent the interests of profitable capital investment may be permitted to manipulate the public needs in a detrimental and unhealthy way. The most obvious examples are our movie industry, the comic-book industry and the crime pages of our newspapers. In order to make the highest profit, the lowest instincts are artificially stimulated and the mind of the public is poisoned. Th Food and Drug Act has regulated the unrestricted production and advertising of harmful food and drugs; the same can be done with regard to all other vital necessities. If such laws should prove to be ineffective, certain industries, such as the film industry, must be socialized, or at least competing industries must be created, financed with public funds.The Sane Society, p. 334.
In this passage, Fromm appears to leave room for the milder recourse of a government film industry, say, competing with a sensation-mongering private one. This violates, however, the logic of the analogy with the Pure Food and Drug Act (which, with its implication that there exists an exact chemistry of good and bad values, is the customary analogy of authoritarian advocates of censorship); it would not be a sufficient protection for the consumer if the government simply set up a drug industry competing with private purveyors of harmful medicines. Moreover, the problem is not to offer alternatives to bad movies—such alternatives obviously exist, in the form of the numerous good movies which are produced (by a number of fine Italian producers, say), and the American public by and large has not taken to them. There is little reason to suppose that the mere offering of good movies would solve the problem; and furthermore, Fromm suggests the strong possibility that the government will have to socialize the film industry. Let us examine then what situation would be likely to result.
We may assume that it will be granted that, since people who produce films exert powerful influence in molding the minds and character of the public, it is desirable that the public be able to control the film makers as much as possible. One possible way in which this could be done, would be, for instance, after socializing the film industry, to make the Secretary of Films an elected public official. But let us remember that we cannot assume that the values of the public have become humanist ones: it is, after all, precisely the absence of such a happy situation that we have set about to remedy, and one of the means of making the public humanist, it has seemed to us, is by ceasing to make sensationalistic and brutal films, and making instead films reflecting humanist values. But if the public is still base-minded, it will presumably elect a Secretary of Films who will give it the sort of base movies it desires. (While we can assume that there will be a certain solemnity and civic-mindedness about the voting for this official which is lacking in the individual’s selection of a film to go see, there does not seem to be any reason to think that this will be powerful enough to restrain the desire for vulgar and stupid films.) This is, it should be clear, only a particular case of the basic problem confronting a socialist who would be a radical reformer of the values of society—the problem Marx foresaw:
What we have to deal with here is a communist society, not as it has developed on its own foundations, but, on the contrary, as it emerges from capitalist society; which is thus in every respect, economically, morally, and intellectually, still stamped with the birthmarks of the old society from whose womb it emerges.Critique of the Gotha Programme (New York: International Publishers, 1938), p. 8.
It was this problem that the traditional left-Marxists, especially Lenin, attempted to solve by the doctrine of the dictatorship of the proletariat, and in particular, of the vanguard of the proletariat, the Communist Party. The latter is charged in Lenin’s view with the task of
leading the whole people to socialism, of directing and organizing the new order, of being the teacher, guide and leader of all the toiling and exploited in the task of building up their social life.State and Revolution (New York: International Publishers, 1943), p. 24.
And, I think, Lenin had reasoned consistently from Marxist premises. One cannot on the one hand maintain that capitalism is to be overthrown because it has dehumanized the working class, corrupted it, filled it with values unworthy of human beings, and then immediately pass control of society to this brutish element. Precisely because capitalism has victimized the worker, by sinning the sin against his human essence, democracy would be an inappropriate procedure at the beginning of socialist society.
Now, to return to our example of the film industry. If the point of doing away with private property in the film industry is to make good, to some extent, the harm caused to human values by the capitalist search for profit, then it is clear that it cannot be the profit motive which determines what movies are to be produced. Neither can it be democratic selection of a Secretary of Films, as we have shown. There must therefore exist a group of men, more or less sheltered against mass popular control, who attempt to elevate the public’s tastes and aesthetic standards. Now, it may be that this group will be composed of competent and benevolent men, but so far no reason has been given to suppose this. It is likely, in fact, that the problem has not even occurred to Fromm.
It might appear that in this discussion we have been dealing at rather great length with what may have been an off-handed suggestion of Fromm’s concerning the film industry. But it seems to me that much more significant issues are at stake at this point. It is no accident that movements which have set out to create a “new man,” to affect a “fundamental change in the human condition,” by manipulating social institutions, have ended in a dictatorship of the true believers (e.g., Jacobinism, Bolshevism). For the basic aim of such movements is essentially incompatible with freedom: if one wishes to change the values of individuals in a radical way, then this cannot be done by leaving ultimate control over their own lives to these individuals;Unless, that is, we are prepared to assume, with raw Marxism, that the culture of a society is the product of the technological substructure, so that changes in the latter can be depended on to affect changes in the former without the need to act upon the culture independently. nor can it be done by leaving political control to those individuals collectively. Freedom and democracy would be compatible with such large-scale social engineering only if we assume that once exposed to the values one wished to inculcate in them, people would give up their old values voluntarily. Experience has not borne out such an assumption. Typically the appeal of the new values for the people is vastly over-estimated by the radical reformers, who maintain that these values have not been realized up until now because the existing system has distorted and shackled genuine human nature. Once in power, the fact that little response is elicited among the people by the new values (e.g., “virtue” among the Jacobins, solidarity instead of the acquisitive spirit among the Bolsheviks) is laid to the lack of civic-mindedness of certain elements, or to counter-revolutionary activities. What is forgotten is that the values of the old society are after all the values of the people who compose it; there is no reason to suppose that, because these values are, according to our speculation, superficial and not implied in the “nature of man,” people will identify with them any the less, or will cling to them with little insistence. Even a satisfaction founded on an illusion is, after all, a satisfaction; even a way of life diverging from one we want to call “natural” and “fitting human dignity” will ordinarily call forth loyalties. For it represents what a person is, regardless of what he might become. It is not certain that radical social engineering, aiming at remaking the historically conditioned character of man can even be successful. What is quite probable, however, is that it cannot be combined with any substantial respect for human freedom. If, therefore, Fromm wants to maintain his position as a democratic socialist, then it appears to me that the promise he holds out of a new society, where people will have the right values and act as genuine human beings, must fall away.
Finally, I want to discuss a point which has, I think, important implications for the issue we have been examining: it is the fairly common notion, shared by Fromm, that there is something about the market system which suggests the non-human, which reminds one not of the product of human desire and striving so much as that of a machine, or of nature. At first glance, such an impression is hard to account for: the phenomena that arise on the market are obviously the result of human action, and are in this sense distinguishable from natural phenomena. It appears to me that this abiding sense of the essentially inhuman nature of the capitalist system, the feeling that capitalism resembles a natural force, stems to a large extent from the belief that it does not take account of any of the characteristically human qualities of the people who enter into it. The aspect of capitalism which produces this feeling is the “automatic” response to one given element in a person: the marketability of what he has to sell. Fromm expresses his indignation at this:
Man has transformed himself into a commodity [under capitalism] … His “value” lies in his salability, not in his human qualities of love and reason nor in his artistic capacities.The Dogma of Christ, p. 97.
Basically, then, the complaint is that in a capitalistic system, important areas of a person’s life (viz., his economic well-being and what follows from that) are determined by a method which takes no account of the things which, in encountering people in a more human way—say, in friendship, or in a lover-relationship—we lay most stress upon. In this sense, capitalism is similar to some inhuman, natural force.
There seems to me to be a good deal of truth in this conception of capitalism. But it appears to me that Fromm is mistaken in supposing that this is altogether, or for the most part, a disadvantage.
Consider what an alternative system of economic rewards would entail. If A is in charge of distributing incomes, he would have it in his power to increase—or decrease—the economically appropriate income of B in accordance with his (A’s) appreciation of the human qualities he (B) possesses: his compassion, wit, capacity for creativity, ability to show nuances of personality, and so on. It is just because the human qualities of a person are relatively ineffable things, because no valid response to them can be automatic, that it would be difficult and dangerous to put anyone in a position of authority over them (and whoever is in charge of determining a person’s income is surely in a position of authority over that person). For it is impossible to say what rules could be used to determine an income appropriate to the human qualities by any individual, and, moreover, it is quite unlikely that any consensus could be arrived at among intelligent people concerning this matter—obviously a follower of Nietzsche would judge such things differently from a follower of St. Francis of Assisi. With no rules available for checking on the judgement of the official, and with little likelihood that he could be checked up on by other officials (since lack of agreement among officials could not be used to prove the original official “mistaken”), it seems clear that the worker would be at the mercy of the arbitrary discretion of the official for his income. If there ever was a case which could reasonably be called one of economic tyranny, this would surely be it. Under capitalism, it is fortunate that, as it were, the factors governing the realm of necessity—the area in which persons might be said, by analogy, to be “compelled” by their need to survive—are controlled in an “automatic” way, and that marketability will summon forth an “automatic” response: it is a fortunate circumstance, that is to say, that the appreciation and rewarding of a person’s human qualities are reserved for the “freer” area of social intercourse, while the area in which the material conditions of a person’s life are determined is given over to an “automatic” mechanism. This provides an area of freedom to the person who enters the market which is unavailable in cases where he must wait upon the appreciation of his human qualities by some authority or other. I take this to be a somewhat more general statement of the advantages of separating economic and political power as set forth by Prof. Friedman:
… an impersonal market separates economic activities from political views and protects men from being discriminated against for reasons that are irrelevant to their productivity …Milton Friedman, Capitalism and Freedom (Chicago: University of Chicago Press, 1963), p. 21.
If our analysis has been correct, then it suggests that not only would the problem of alienation not be solved by socialism, but the substitution of socialism for a regime of private property in the means of production would shake the foundation of all the humanist values, and they are not few, which are linked to political and cultural freedom.
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More than sixty years after being "liberated" by Fidel Castro and communism, Cuba has become a large slave state where people enjoy little freedom.
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On this episode of Radio Rothbard, Ryan McMaken and Tho Bishop look at the fallout from Elon Musk's purchase of Twitter. While the move reportedly has authoritarian corporate lawyers openly weeping on intra-company calls, what will be the real impact on political discourse? How did a once-favored Obama Administration ally become a supervillain for the progressive elite?
Recommended Reading "Elon Musk Bought Twitter, and the Pundits Sure Are Mad" by Ryan McMaken: Mises.org/RR_79_A
"Elon Musk's Twitter Gambit and What It Means to the Clique in Power" by Michael Rectenwald: Mises.org/RR_79_B
"Elon Musk, Crony Capitalist" by Lee Enochs: Mises.org/RR_79_C
"A Mixed Hero: A Libertarian Reassessment of Elon Musk" by Konrad Graf: Mises.org/RR_79_D
Be sure to follow Radio Rothbard at Mises.org/RadioRothbard.
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Original Article: "Do Conspiracies Really Exist? Murray Rothbard Thought So"
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Original Article: "No, Hitler Was Not a Closet Capitalist"
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In this episode of Radio Rothbard, Ryan McMaken and Tho Bishop look at the controversy surrounding recent Florida education reforms. Why does it benefit the state to erode the family structure, and what can be done to combat it?
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"Don't Blame Capitalism for the Decline of the Extended Family" by Ryan McMaken: Mises.org/RR_78_B
"How Wage Work Liberated Women (and Men)" by Ryan McMaken: Mises.org/RR_78_C
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The Power of Capitalism: A Journey through Recent History across Five ContinentsBy Rainer ZitelmannLID Publishing, 2018xiv + 233 pages
Dr. Rainer Zitelmann is best known to the scholarly world for his outstanding study of Adolf Hitler’s economic ideology, now available in English translation as Hitler’s National Socialism. Originally written as a doctoral dissertation in 1986, it still retains its position as the definitive work on its subject and a remarkable academic achievement. In his study, Zitelmann shows that Hitler believed in a centrally planned economy, and by doing so, Zitelmann confirms the insight of Ludwig von Mises and Friedrich Hayek that National Socialism is a type of socialism; though the form of private property was to a large extent retained, control lay in the hands of the central planners. The fundamental antithesis between the market economy and central planning has remained a constant theme in Zitelmann’s work since writing his dissertation. Zitelmann maintains that the market economy is by far the superior of the two systems, and in The Power of Capitalism, he applies this insight to a study of the economic policies of a number of countries: China, various nations of Africa, West and East Germany, North and South Korea, Britain and the United States, Venezuela and Chile, and Sweden.
He tells us: “The biggest error that unites socialists of various stripes with the men and women running the central banks is the belief that a few designated master planners are better able to determine what the people need than the millions of entrepreneurs, investors and consumers whose individual decisions, when added together, are in fact far superior to those of any governmental planning agency, central bank or other organ of state control.”
One of the most striking illustrations of the superiority of capitalism is the progress of China’s economy following the adoption of market reforms in the 1980s. Conditions in China before then were horrendous. Under the dictatorship of Mao Zedong, foremost among history’s mass murderers, “the most ambitious socialist experiment in history started with tens of millions of farmers being forced into working on massive irrigation projects without sufficient food or rest…. The experiment resulted in what was probably the worst famine—and definitely the worst man-made famine—in human history … [According to one estimate] around 45 million people across China … died prematurely between 1958 and 1962. The majority died of starvation, while another 2.5 million were tortured or beaten to death.” The disastrous failure of the Great Leap Forward did not dissuade Mao from another foray into torture and murder, the Cultural Revolution of 1966 and the ensuing decade.
These disasters make all the more remarkable China’s economic progress since that time. China is now a vast and thriving market economy, albeit with considerable government involvement. “While terms such as ‘socialism,’ ‘economic planning,’ ‘Marxism’ and ‘Mao Zedong thought’ remain in use, they are either rendered meaningless by contemporary misinterpretations or assigned a new meaning in diametric opposition to their original content. This probably contributed greatly to the smooth transition from a socialist planned economy to free-market capitalism.”
One of Zitelmann’s most important contributions in the book is his response to an argument that one frequently hears. China today by no means adheres strictly to the free market, a fact of which Zitelmann is not only well aware but on which he insists, and the same holds true of countries such as South Korea. Why, then, should we say that the Chinese reforms demonstrate the benefits of the free market rather than those of a mixed system with considerable state involvement? Branko Milanovic raises precisely this question in Capitalism Alone, which I reviewed in the May/June 2020 issue of The Austrian.
Zitelmann’s apt answer is that you cannot view the economy statically but must instead probe to see what changes when the economy progresses. If you do so, it will be evident that the economy has done better to the extent that the free market has prevailed. The leading authority on the Chinese reforms, Professor Zhang Weiying, “told [Zitelmann] that the biggest misconception in China today is that some politicians and economists believe that the country’s impressive growth is the result of a special ‘Chinese way’ with a high degree of state influence. Professor Zhang stressed to me that it is important to understand that the Chinese economic miracle did not happen ‘because of, but in spite of’ the sustained influence of the state.”
American “progressives” in the style of Bernie Sanders often point to Sweden as an example of the sort of socialism they favor; do we not find there, Sanders and his ilk aver, a model economy in which the poor and middle class do far better than the bulk of the American people? Zitelmann’s answer is forthright. Sweden isn’t a socialist country at all; by many measures, though not all, it has a freer economy than America. Further, to the extent socialist measures have been instituted, as under the leadership of the unlamented Olaf Palme, the economy has faltered. “Sweden stopped being a socialist country several decades ago—if it ever was one. According to the Heritage Foundation’s 2018 Index of Economic Freedom ranking, Sweden is among the most market-oriented economies worldwide…. The foundations for Sweden’s burgeoning economic strength were laid prior to the social democratic era, between 1870 and 1936. During this period, when Sweden still had a free-market economy and low taxes, its economic growth significantly exceeded that of other European countries such as Germany, Italy or France, with annual growth rates that were twice as high as in the UK.”
Given the manifest superiority of the free market, why do so many intellectuals reject it? In an insightful chapter devoted to this question, Zitelmann mentions Robert Nozick’s theory that intellectuals do well in school because of their exceptional verbal abilities but then in adult life lag behind businessmen who as students finished below them. Entrepreneurial ability far exceeds verbal facility in economic value, and, Nozick argues, intellectuals resent this. Zitelmann isn’t convinced and, like Hayek, instead stresses the affinity of intellectuals for planning: “The failure of many intellectuals to understand the nature of capitalism as an economic order that emerges and grows spontaneously is one key factor [in accounting for their dislike of capitalism]. Unlike socialism, capitalism isn’t a school of thought imposed on reality…. As the example of China … shows, free-market capitalism largely evolves spontaneously, growing from the bottom up rather than decreed from above. Capitalism has grown historically in much the same way as languages have developed over time as the result of spontaneous and uncontrolled processes … Socialism shares some of the characteristics of a planned language, a system devised by intellectuals. Having devised the system, the proponents of socialism then attempt to gain the political power required to put their ideas into action.
The operation of the free market results in vast disparities of income and wealth, and this is not at all to the liking of many leftist intellectuals, who prefer a regime of equality. One of their number, Thomas Piketty, takes the battle between equality and inequality to be the key theme of history. Zitelmann, who has made a special study of billionaires, dissents. What is wrong with these immense fortunes? “A look at the wealthiest people in the world shows that none of them became rich by taking something away from others. Rather, their entrepreneurial activities created value for the whole of society.” He replies to Piketty that “whether capitalism tends to raise or lower the overall standard of living strikes me as far more important than any putative increase in the inequality of wealth.”
It is unlikely that the intellectuals will be swayed by Zitelmann’s cogent arguments. One further indictment they bring against the free market is that it leads to economic crises. Zitelmann, examining the financial crisis in the United States in 2007–08, puts the blame not on the free market but on the Fed, which artificially lowered interest rates in a way that led to reckless lending. “Artificially low interest rates always have undesirable side effects. Prices—including interest rates which represent the price of money lent—usually provide valuable information for market participants and encourage capital to flow where it is needed. If interest rates are kept artificially low or even abolished (i.e, … set to zero), this mechanism can no longer take effect.”
Zitelmann’s incisive presentation of the case for the free market is exemplary, and I hope that readers of The Austrian will devote to it the attention it merits
Recorded at the 2022 Austrian Economics Research Conference hosted at the Mises Institute in Auburn, Alabama, March 18–19, 2022.
The Ludwig von Mises Memorial Lecture, sponsored by Dr. Don Printz. Includes audience question and answer period.
The Austrian Economics Research Conference is the international, interdisciplinary meeting of the Austrian School, bringing together leading scholars doing research in this vibrant and influential intellectual tradition. The conference is hosted by the Mises Institute at its campus in Auburn, Alabama, and is directed by Joseph Salerno, professor of economics at Pace University and academic vice president of the Mises Institute.
It has been more than fifty years since Egyptian strongman Gamal Abdel Nasser died, but his unfortunate legacy of imposing socialism on Egypt still harms the nation and its economy.
Original Article: "Egypt Is Still Haunted By Its Ghosts of Socialism"
This Audio Mises Wire is generously sponsored by Christopher Condon.
The Dawn of Everything: A New History of HumanityBy David Graeber and David WengrowFarrar, Straus and Giroux, 2021Xii + 692 pages
The Dawn of Everything, which has already attracted much scholarly attention and is a best seller as well, should be a warning to all academics: do not write about economics or the history of modern Europe if you are ignorant of these subjects. David Graeber, who died shortly after this book was finished, was an anthropologist, and David Wengrow is an archaeologist. Both have written extensively in their areas of specialty, and, so far as I can determine, they are well regarded by some of their fellow specialists. Much of this overly long book is an often tedious description of various archaeological sites around the world, based on extensive citation of fieldwork, but it nevertheless contains valuable suggestions and merits careful study. Even here, though, one ought to be cautious. It does not encourage confidence when they tell us “Teotihuacan’s growth to urban dimensions began around the year 0.” You might have expected that even children in elementary school would know that there is no year zero in our calendar.
Unfortunately, they put their knowledge in the service of a political agenda for the modern world, which they defend with poor arguments disfigured further by gross errors. They are left anarchists and regard capitalism as an evil, “hierarchical” system that ought to be replaced, though by what we are never clearly told. In their account, contact with Indian tribes in the seventeenth and eighteenth centuries posed a challenge to European intellectuals. Society, they thought, necessarily rested on hierarchy. The lot of a poor peasant was far worse than that of a nobleman, and this might be regrettable, but a society of near equals in power could not exist. Contact with the Indians suggested, on the contrary, that it could and did exist, and this led intellectuals to question the legitimacy of hierarchy in their own societies. “Just about every major French Enlightenment figure tried their hand at a ... critique of their own society, from the perspective of some imagined outsider.”
Given this criticism, the defenders of hierarchy tried to strike back. Graeber and Wengrow take the great French economist Anne Robert Jacques Turgot to be among these defenders, and they direct much of the argument in the book against a model he developed. According to them, Turgot believed that societies advance through a series of inevitable stages, from savagery to barbarism to civilization. Equality is suitable only for very small societies, and we cannot go back to it. “Turgot would elaborate these same ideas in a series of lectures on world history. He had already been arguing—for some years—for the primacy of technological progress as a driver for overall social improvement. In these lectures, he developed this argument into an explicit theory of stages of economic development; social evolution, he reasoned, always begins with hunters, then moves on to a stage of pastoralism, then farming, and only then finally passes to the contemporary stage of urban commercial civilization. Those who still remain hunters, shepherds or simple farmers are best understood as vestiges of our own previous stages of social development. ... In this way, theories of social evolution ... first came to be articulated in Europe: as a direct response to the power of indigenous critique.”I discuss other aspects of Graeber and Wengrow’s criticism of Turgot in my article“In Defense of Turgot,” Mises Wire, December 10, 2021, https://mises.org/wire/defense-turgot.
The authors give two main arguments against this model. First, the stages aren’t inevitable: rather, societies at the “lower” levels sometimes consciously choose the sort of economic, social, and political system they wish, and their choices often fail to follow the order Turgot set forward. Second, Turgot is wrong to view our own stage of civilization as better than its noncivilized predecessors. I’ll discuss the latter criticism first, as dealing with it is easier.
Graeber and Wengrow say that the higher value ascribed to civilization rests on the false assumption that economic productivity is the highest social good. “By framing the stages of human development largely around the ways people went about acquiring food, men like Adam Smith and Turgot inevitably put work—previously considered a somewhat plebeian concern—centre stage. There was a simple reason for this. It allowed them to claim that their own societies were self-evidently superior, a claim that—at the time—would have been much harder to defend had they used any criterion other than productive labour.”
In putting things this way, they have wrongly framed what is at stake. The issue is not whether one society is “superior” to another judged from some external standpoint. Rather it is that if a society has a very large population, only a market economy will enable most people to survive and prosper. Further, even if Graeber and Wengrow think they shouldn’t, most people nowadays want a high standard of material goods, and it is of little consequence if there have been past societies in which they didn’t. As Ludwig von Mises points out in Human Action: “The immense majority strives after a greater and better supply of food, clothes, homes, and other material amenities. In calling a rise in the masses’ standard of living progress and improvement, economists do not espouse a mean materialism. They simply establish the fact that people are motivated by the urge to improve the material conditions of their existence. They judge policies from the point of view of the aims men want to attain. He who disdains the fall in infant mortality and the gradual disappearance of famines and plagues may cast the first stone upon the materialism of the economists. There is but one yardstick for the appraisal of human action; whether or not it is fit to attain the ends aimed at by acting men.”
We can now address the first criticism given of Turgot’s theory of stages, and I hope it will soon become clear why I started with their second criticism. Once you realize that if Graeber and Wengrow wish to end capitalism as it now exists, they need to consider whether present conditions make this possible, you can see that their first point against Turgot is irrelevant to their political concerns. That said, their first point is a good one. Unless their presentation of the archaeological data is a total misreading, they do successfully show that it isn’t fixed that foragers who have been exposed to an agricultural society will forthwith abandon their former ways for the new dispensation. To the contrary, they often consciously reject agriculture or adopt it only in part. Further, in a process Graeber and Wengrow, following Gregory Bateson, call “schismogenesis,” societies sometimes adopt practices in conscious opposition to neighboring societies. They write: “Schismogenesis ... describes how societies in contact with each other end up joined within a common system of differences, even as they attempt to distinguish themselves from one another.... Each society performs a mirror image of the other. In doing so, it becomes an indispensable alter ego, the necessary and ever-present example of what one should never wish to be.” But if what is at issue is whether a market economy can now be successfully changed to something else, all of this is irrelevant.
Perhaps, though, it is better that Graeber and Wengrow devoted the bulk of their efforts in this book to prehistory, as their forays into the modern leave much to be desired. We learn from them that, “it was only ... in the late nineteenth century, when men like Tom Paine came up with the concept of ‘representative democracy’ that the right to weigh in on spectacular competitions among the political elite came to be seen as the essence of political freedom, rather than its antithesis.” Paine died in 1809, and the term “representative democracy” was in use in England in the 1790s. Contrary to what they say, Louis XIV was not one of “the ‘absolutist’ monarchs of the Renaissance”; he reigned after it. Nor are their mistakes confined to chronology. In his On the Demonmania of Witches (1581), Jean Bodin says that women are fifty times more likely to be witches than men, but it is news to me that “he is further remembered today for his profound hatred of women.” The primary reason that Christian Wolff was expelled from Prussia was not his lectures on Chinese customs, although this was a factor, but Pietist opposition to Gottfried Wilhelm Leibniz’s philosophy, of which Wolff was considered an exponent. It is also misleading to say that “a warrant was issued for his arrest and he was forced to flee for his life.” He was given two days to leave Prussia, on penalty of hanging, but he did not try to run from an arrest warrant, and King Friedrich Wilhelm I a number of years later tried to get Wolff to return to his university position.
Graeber and Wengrow are right to question stage theories of history, but they pass by in silence the laws of economics that show the necessity of the free market for a complex modern society.
Last week I wrote about Ludwig von Mises’s important letter to the New York Times in June 1942 about the Nazi economy. In the letter, Mises says that foreign trade poses a difficult problem for a socialist economy. Unlike the citizens of a country controlled by central planning, those in foreign countries don’t have to accept goods offered to them, and bureaucrats, who operate by fixed rules, cannot cope with this situation. Elsewhere in his work, Mises has much more to say about this topic, and in this week’s column, I will discuss some of his insights, stressing the connection between socialist planning and war.
One theme that again and again occurs in Mises’s work is that in a capitalist market with complete free trade, national boundaries do not matter. The buyers and sellers of goods will always buy in the cheapest market and sell in the dearest, regardless of the country in which the goods are located. He says in Socialism:
Under Capitalism, as Free Traders would have it, frontiers would be without significance. Trade would flow over them unhindered. They would prohibit neither the movement of the most suitable producers towards immobile means of production, nor the investment of mobile means of production in the most suitable places. Ownership of the means of production would be independent of citizenship. Foreign investment would be as easy as investment at home. (p. 235)
This isn’t the case in a socialist economy. The planners want to have everything under their control, and thus, to the greatest extent feasible, they want economic autarky, in which all production is internal rather than external. Mises points out in his 1942 letter that Stalinist Russia came much closer to this goal than Nazi Germany. Mises explains this tendency to autarky in Omnipotent Government:
Interventionism aims at state control of market conditions. As the sovereignty of the national state is limited to the territory subject to its supremacy and has no jurisdiction outside its boundaries, it considers all kinds of international economic relations as serious obstacles to its policy. The ultimate goal of its foreign trade policy is economic self-sufficiency. The avowed tendency of this policy is, of course, only to reduce imports as far as possible; but as exports have no purpose but to pay for imports, they drop concomitantly. The striving after economic self-sufficiency is even more violent in the case of socialist governments. In a socialist community production for domestic consumption is no longer directed by the tastes and wishes of the consumers. The central board of production management provides for the domestic consumer according to its own ideas of what serves him best; it takes care of the people but it no longer serves the consumer. But it is different with production for export. Foreign buyers are not subject to the authorities of the socialist state; they have to be served; their whims and fancies have to be taken into account. The socialist government is sovereign in purveying to the domestic consumers, but in its foreign-trade relations it encounters the sovereignty of the foreign consumer. On foreign markets it has to compete with other producers producing better commodities at lower cost. (pp. 72–73)
If a country does not have sufficient natural resources to make autarky practicable, what can it do? Mises’s answer is that the socialist planners will try to seize these resources from other countries, which of course means war. Writing in 1944, he said:
German aggressive nationalism is animated by these considerations. For more than sixty years German nationalists have been depicting the consequences which the protectionist policies of other nations must eventually have for Germany. Germany, they pointed out, cannot live without importing food and raw materials. How will it pay for these imports when one day the nations producing these materials have succeeded in the development of their domestic manufactures and bar access to German exports? There is, they told themselves, only one redress: We must conquer more dwelling space, more Lebensraum. The German nationalists are fully aware that many other nations— for example, Belgium—are in the same unfavorable position. But, they say, there is a very important difference. These are small nations. They are therefore helpless. Germany is strong enough to conquer more space. And, happily for Germany, they say today, there are two other powerful nations, which are in the same position as Germany, namely, Italy and Japan. They are the natural allies of Germany in these wars of the have-nots against the haves. Germany does not aim at autarky because it is eager to wage war. It aims at war because it wants autarky—because it wants to live in economic self-sufficiency. (p. 74)
His analysis is of course not limited to the concrete situation of Europe in the 1930s and 1940s. He says that if a number of socialist nations exist at the same time, constant wars are likely to result:
There are two possibilities for world-embracing socialism: the coexistence of independent socialist states on the one hand, or the establishment of a unitary world-embracing socialist government on the other. The first system would stabilize existing inequalities. There would be richer nations and poorer ones, countries both underpopulated and overpopulated. If mankind had introduced this system a hundred years ago, it would have been impossible to exploit the oil fields of Mexico or Venezuela, to establish the rubber plantations in Malaya, or to develop the banana production of Central America. The nations concerned lacked both the capital and trained men to utilize their own natural resources. A socialist scheme is not compatible with foreign investment, international loans, payments of dividends and interest, and all such capitalist institutions…. Inevitably war and conquest result. The workers of the comparatively overpopulated areas invade the comparatively underpopulated areas, conquer these countries, and annex them. And then follow wars between the conquerors for the distribution of the booty. Every nation is prepared to believe that it has not obtained its fair share, that other nations have got too much and should be forced to abandon a part of their plunder. Socialism in independent nations would result in endless wars. (pp. 108–09)
Mises offers us an acute structural account of the drive for aggressive war, as useful today as it was when he wrote it over seventy-five years ago.
Across so many fields, from money to nutrition, I’ve found that the corollary to the government-heavy approach is a desire not to make choices for oneself.
Original Article: "Who Needs Personal Responsibility When We Can Just Trust Our Overlords?"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Flawed as we are and with limited knowledge about the world and ourselves, we might not know what is objectively “best for us long term.” Government planners know even less.
Original Article: "Central Planners Don't Know What's Best for You"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
There are many reasons why activists and intellectuals oppose inequality. Envy is one of them.
Original Article: "Equality and Envy"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Daniel McAdams is executive director of the Ron Paul Institute for Peace and Prosperity and coproducer/cohost of the Ron Paul Liberty Report. Daniel served as the foreign affairs, civil liberties, and defense/intel policy advisor to US congressman Ron Paul from 2001 until Dr. Paul’s retirement at the end of 2012. From 1993 to 1999 he worked as a journalist based in Budapest, Hungary, and traveled through the former Communist bloc as a human rights monitor and election observer. He has a BA in English from the University of California, Berkeley, and worked on an MA in international relations from San Francisco State University.
Jeff Deist: For any readers who are unfamiliar, tell us what the Ron Paul Institute is and what it does.
Daniel McAdams: We do three main things, Jeff. We publish every day three or four articles and they’re highly curated. We want to show people three or four things to think about. And we do the daily Ron Paul Liberty Report with Dr. Paul, Monday through Thursday with me as a cohost and Friday with Chris Rossini as the cohost. The other important part of what we do is conferences. We met this year to discuss the anniversary of Nixon’s closing the gold window. We had our normal Washington, DC, conference, which was our biggest conference ever. We also had the Ron Paul Scholars Seminar for upper-division undergrads and graduate students, essentially a foreign policy bootcamp. We had Thomas Massie, Phil Girardi, Jim Bovard, and Jacob Hornberger. The lineup was terrific, so it was a great event. We focus on foreign policy, but increasingly, these past two years, we’ve absolutely focused on civil liberties, given everything happening with covid.
JD: I had the opportunity to attend your Washington, DC, conference a month or so back and it definitely was eclectic. RFK Jr. [Robert F. Kennedy Jr.] talking about health freedom was really fascinating to me. Kudos to you and to Ron Paul because I think dollar for dollar the Ron Paul Institute punches well above its weight in terms of influence. The Ron Paul Liberty Report, of course, is a daily go-to for a lot of people.
DM: We’re encouraged that so many people tune in.
JD: Let’s touch briefly on your past. When I met you, you had been living in Europe for several years, in Hungary. I’m told you even had some neoconish tendencies at one point. Tell us about your background.
DM: Well, I don’t know that it was neoconish tendencies, really. When the Cold War ended, I had just finished up at UC Berkeley with a degree in English literature, which is, of course, as we all know, the most useful degree on earth, right? We’re in a recession in ’88 and I had an English degree. I had always wanted to do foreign affairs and politics but was not able to do it. So I decided to go back to grad school and study international relations, which in some ways was a dumb move, but in some ways it was a very fortuitous move, but not necessarily neocon.
When I went to Europe I watched the Clinton administration supporting the so-called Reform Communists, I was pretty naïve back then, I’ll admit it. I thought, These guys, they must not know what’s going on. They must not know the good guys and the bad guys. We have to support the good guys, not the guys that have been exploiting people for decades. A lot of it’s philosophical, Jeff, because there are two ways of looking at the Communist era. One is that it’s an aberration in history. It’s something that became unique, in a nonorganic, nonevolutionary way. If you look at it like the cancer that a lot of us believe it was, if you cut out that cancer, then you have two threads of history that are separated by several decades—in the Soviet Union’s case, many decades. The question is do you rejoin those threads of history and move on in sort of a social evolutionary manner or do you view the Communist era as a part of a normal evolution process, and not an aberration of history, but just another part of history? I had fallen clearly on the side of it being an aberration, of it being a cancer. I and a lot of the people, certainly in Hungary, that I worked with, people in the Hungarian Democratic Forum (which was the first party to win the elections after communism), they looked at the traditions of precommunism and wanted to revive a lot of those traditions. For the US embassy that was anathema. It suggested the dark days of anti-Semitism, which of course it wasn’t at all. It was a thousand years of Hungarian history. That’s the philosophical breaking point of how you view this sort of storyography of twentieth-century central and eastern Europe.
JD: While you lived in eastern Europe you worked with the British Helsinki Human Rights group. Talk about that—why are they controversial? The interventionist regime change types don’t seem to like them.
DM: No, they don’t and, of course, those regime change, democracy-for-all people are now firmly ensconced on our shores. This is something we called thirty years ago, twenty-five years ago. We saw this machine taking on a life of its own and eventually coming over to the West. I was exposed to the British Helsinki Human Rights group in a pretty simple way. I was at the time writing off and on for a newspaper called the Budapest Sun, which was the largest English-language paper in central and eastern Europe. I eventually became the editorial page editor. Early on I’d noticed there was a good conservative writer, Jonathan Sunley, a brilliant British scholar who had studied under Professor Norman Stone. We became friends. It turns out that Jonathan was involved with a group that was doing a lot of work in Hungary and who were skeptics of the received conventional wisdom there. A lot of it has to do with the last answer I gave, the view of history and the view of whether or not, if you or your family were involved in the implementation of communism, you have a right to remain in the vanguard of the change away from communism. And that’s of course, exactly what they all believed that they had the right to do. That’s why they’re the ones, to a large degree, who managed the transition. In Hungary it’s called the Rendszerváltás: the transition was managed by the same people who brought communism in.
I spent a brief period in the State Department in intelligence, and by pure happenstance I was handed the Albania account in the State Department’s Intelligence and Research division because the person who was doing it was following Czechoslovakia’s breakup very closely and didn’t have time for Albania. It just fell in my lap. I wrote several items for the Secretary of State’s Morning Summary briefing book just because nobody else wanted to do it. Then I was asked in 1996, Do you want to go to Vienna and testify at the OSCE [Organization for Security and Co-operation in Europe] and take a trip to Albania and see the coup that was beginning? I was invited to Vienna by like-minded people of the British Helsinki Group, and then it was off to the races.
JD: You returned to the US a year or so before 9/11 or thereabouts. What did you know about Ron Paul at the time, and how did you come to work for him as his foreign policy staffer?
DM: I mentioned in a speech I gave a couple of weeks ago my gateway drug was Justin Raimondo. It was through finding Justin and, I’m somewhat reluctant to say it now, but I was on a website back then (kiddies may not remember that there weren’t really websites as we know them now) called Free Republic. It was basically a right-wing site, wingnut site, which hated Clinton. I was not necessarily a right-winger, but I hated Clinton for a lot of reasons. There was this guy that kept putting his articles up on Free Republic and being absolutely pummeled by these right-wing wingnuts, but it never deterred him, and that was Justin Raimondo. He responded and responded and responded, and so I started reading Justin and I started realizing, of course, in the late ’90s, how right he was about what was happening in the Balkans because I was literally next door. It was through Justin, thank God, that I discovered Lew Rockwell and Ron Paul and so many of the other people who were saying the same thing. Indeed, it was thanks to Justin Raimondo that I started really questioning my idea that we’ve got to help the good guys because the bad guys are winning. And I started realizing that we should not be helping any guys, and that was my big revelation.
JD: At that point could you have imagined the Ron Paul revolutions of 2008 and 2012?
DM: No, not at all. In fact, at the time, it was a shock to me because I wasn’t awfully interested in politics. I was involved in Republicans Abroad and it was mostly a social club because I was trying to find a way to get some connections and make some dough. We did have the Gingrich Revolution when I was over there so I foolishly thought, Oh, the good guys are going to start doing really good things and, of course, I was wrong.
Then here’s this obscure Texas congressman who didn’t seem like a right-winger. I couldn’t peg him because I didn’t understand libertarianism at the time. I remember my father-in-law used to always say that he was libertarian and I didn’t know what it meant, except that he thought we shouldn’t be put in jail for drugs, which I disagreed with at the time. So no, I never could have foreseen it, even having worked for him for six or so years before the Ron Paul revolution took off. We were fighting rearguard actions, we were throwing metaphorical bombs into the machine to try to slow things up and to try to at least make some points. The idea that all of this would coalesce into a worldwide historic movement that will be written about and is written about in history books, it never would have really occurred to me at the time.
JD: During your years working for Dr. Paul he had a seat on the House Foreign Affairs Committee. Henry Hyde was chairman of that committee during some of those years. What was Ron’s impact on that committee? Why did they (the GOP leadership) let him have a spot on a committee dealing with foreign affairs?
DM: He was on the committee before I was hired. I had been writing for Lew Rockwell and Antiwar, and I think that’s what helped me. Our good friend Joe Becker, who’s now with you guys at Mises, he wanted to move on and they needed someone that could handle Ron’s foreign affairs stuff. So it was dumb luck. I just fit the bill. It was not easy for Ron to get on the Foreign Relations Committee. He had tried before and he was told that he wasn’t sufficiently loyal to a different state, which is Israel, to be considered acceptable to be on the committee, but eventually he was offered a position there. I think they probably regretted it, particularly as we faced the run-up to the Iraq War, the years of the Iraq War, the PATRIOT Act, etc., etc. They probably regretted letting him on the committee.
JD: But it did provide him several excellent opportunities over the years to make his case.
DM: Yes, every time it came to his turn, the eyes were rolling. This is not going to be easy; here he goes again. But over and over again, he just made such crisp points, such perfect points. He never let anything slip by him, and as everyone knows, he did it in his calm manner. He wasn’t pounding the table. He wasn’t acting like a buffoon, like so many other members. He just simply assailed them with facts and with analysis, and that’s why they hated him the most, especially Tom Lantos, who was the chairman for a brief period of time.
JD: Ron Paul was motivated by two things in deciding to run for Congress: foreign policy and monetary policy. He was able to dovetail those two things. He understood that interventionism abroad is a cousin of interventionism at home in the economy.
DM: This is something that the neocons and most conservatives never understand. Those same people believe that six thousand miles away, all of a sudden the government becomes omniscient and omnipotent, there’s a huge disconnect and the reason is very simple. They never have to live with the consequences of the policies that they promote overseas. They never have to live in a Ukraine that’s been destroyed by the Maidan. They never have to go back and live in Libya, which has been a nightmare since we “liberated” it. They never have to face the consequences of the policies that they support and promote, therefore they continue to promote them until the whole thing comes down, which, who knows, may be imminent.
JD: If you look at the Constitution, there’s no distinction made between foreign policy and domestic policy. Yet up until recently there was a gentleman’s agreement in Congress that politics stops at the water’s edge. This allowed for a lot of interventionism to go unremarked, with bipartisan support.
DM: You’re absolutely right. It was a very convenient tool for the interventionists because, after all, those were our boys over there and anything you say that might put them in danger questions your patriotism, so that was used a lot to solidify support for intervention overseas. There’s no question about that.
JD: In your mind, is there a Ron Paul doctrine for economics and foreign policy? I recently reread Mises’s Liberalism, and his prescription for a liberal society or even a liberal nationalism was very much in keeping with Dr. Paul’s longtime message. Mises advocated laissez-faire at home, along with self-determination for political minorities up to and including secession. Liberal foreign policy means free trade, which prevents the problems of autarky, and a strictly noninterventionist military approach. These four elements give us Mises’s prescription for a liberal society. Those same four elements are a good description of what we might call a Ron Paul doctrine.
DM: That’s a very good point. I think at its core a Ron Paul doctrine would be resisting the temptation of authoritarian impulses, because they’re there, they’re everywhere. The thing about Ron (and I work with him now a lot more closely than I did on the Hill; as you know, we only went in there when we had an issue. Normally we left him alone.), and it’s evident in every aspect of his life, including his interpersonal relationships, is resisting the impulse to authoritarianism or to any kind of intervention. And sometimes that’s been a little difficult. Sometimes there were staffers who needed a little more intervention. But Ron would always hope that they would straighten up and fly right, and he always hoped that people would do the right thing, but he would always want to tell people what that right thing was. I think it could be encapsulated in bumper sticker simplicity: Well, what should I do? Well, do what you want to do. What should I do to promote liberty? Well, do what you want to do. Do what you’re good at. I think that is at its core. I don’t know if it’s a kind of Protestant work ethic or if it’s the way he was raised, in circumstances where hard work paid off to a successful career, to a successful life, one that started in very difficult circumstances. If you know about his past and about how his ancestors came over from Germany with literally nothing in their pockets and hard work provided them the American dream, I think that’s really kind of who Ron Paul is because he understands what that’s like.
JD: Some of his critics should deliver four thousand babies before they opine.
DM: Or ride in a horse-drawn carriage delivering milk at seven years old! (laughs)
JD: There has always been a split between what we might call DC libertarians and Ron Paul libertarians favorable to the Mises Institute. A tougher name would be regime libertarians. Some people in those circles say, Oh, Ron Paul ends up making apologies for foreign dictators because his noninterventionism is so reflexive. You have also been on the receiving end of these criticisms.
DM: Well, it’s the issue of staying out of other people’s business at home and abroad. You know, there is sort of a Trotskyist faction of libertarians who believe that a libertarian government overseas imposed by force in a permanent revolution is the only way we can have freedom in the world. There are these type of liberal messianic interventionists who do want to have libertarianism here first but who do also ultimately want to export that overseas. And then there are what I call the live and- let-live libertarians, which understand that people in a country, for example, Iran, may want to live under a theocracy and it’s just none of our business if they do. I say, just as a sort of pressure relief system, you might let some more immigrate who don’t want to live in a theocracy but otherwise people should be free to live as they wish, even in Venezuela, if they want to have a socialist system. There are always evolutionary changes, of course, and unfortunately, our evolutionary changes are not going in the right direction, but when you subject that external pressure, you move from evolutionary changes to revolutionary changes, which there’s no example in history where us being a vanguard of democratic revolutionary change overseas has ever produced positive results. All of this comes from understanding the Ron Paul doctrine, as you say, and how Ron Paul views the world. Anyone who follows him knows that he’s not bashful about criticizing Venezuela’s economic policy, but it’s just he doesn’t take it to the next step of calling for us to liberate the people there.
JD: Justin Raimondo received a lot of grief for this over the years too.
DM: Oh yes.
JD: It strikes me, Daniel, how much economic ignorance resides in the neoconservative worldview. We don’t have the money for wars and nation building. It’s all debt financed. If people really understood economics they would know a grandiose foreign policy is flat-out incompatible with so-called limited government—supposedly a conservative shibboleth.
DM: That’s absolutely true, and the more I understand how things work, the more I also understand that it’s not necessarily ideological. You know, people like Bill Kristol live very good lives because they do the bidding of the defense contractors in the military-industrial complex. And we’re seeing so much of that now. We’re looking at now the medical-industrial complex, the pharma-industrial complex. These are special interests that literally have Congress in a chokehold. They probably produced the Cold War itself, if we want to be revisionist, but certainly the post–Cold War era and the maintenance and expansion of the US empire has all been driven by the weapons manufacturers. So, it’s partially ideological, but that ideology is awfully convenient when it leads you to live a better life than normally you would live as a humble scribbler, like Kristol would have been.
JD: Here’s something to consider. There is obviously crossover between a Liz Cheney and a Joe Biden on foreign policy. The Mitt Romney types agree with the Hillary Clintons and the Terry McAuliffes, who fortunately just lost the race for governor in Virginia. But we have interesting left and right crossovers on our side too. In other words, there are voices out there like Dennis Kucinich and Jimmy Dore and Caitlin Johnstone down in Australia aligning with people like you and the aforementioned Raimondo and Dr. Paul. I do think there’s an opportunity there. These endless foreign wars have no natural constituency and are not popular outside the Beltway.
DM: Yes, foreign policy during this entire year and a half or two years of covid tyranny has exposed a lot of the people that I was worried might come down on the other side, because they were progressives. I have been reassured with people like Glen Greenwald, slightly a latecomer to the whole thing, but Matt Taibbi, as you say, Jimmy Dore, who’s so terrific on this issue, some of the people that I’ve known on foreign policy, Vanessa Beeley and her group, Whitney Webb. These are great writers and they’ve all come down as antiauthoritarians where most of their allies or once allies on the left have firmly come down in the camp of the CIA, of the PATRIOT Act, of don’t question … you are in a resistance, but don’t you dare resist the authorities. Thankfully, these ties, these cross-aisle, as you would say, ties, have not only managed to survive the covid tyranny, but they’ve been fertilized by it. So, there is a little bit of optimism for me at least in this point.
JD: I think the covid regime has to be viewed like our interventionist regime overseas. They are part and parcel of the same beast. One thing you’ve mentioned in speeches is the Rockwell Rule, named after Lew Rockwell. We discussed regime libertarians who want to browbeat every tinpot dictator. They may technically oppose actual military interventions, and maybe even oppose economic sanctions, but they demand everyone join the chorus of browbeaters. So what exactly is the Rockwell Rule?
DM: It’s very simply, never, ever, ever in any regime that the CIA wants to overthrow, never ever repeat their talking points. Never criticize any regime that the CIA wants to overthrow, full stop. That is the Rockwell Rule, the Rockwell Doctrine and it deprives the interventionists of the ability to say, see? Even the libertarians agree that Qaddafi is passing out Viagra or that Saddam is eating babies. They can say, Oh yeah, the libertarians, they don’t want to invade, but see? Even they agree. So, deprive them of that ability. Caitlyn Johnstone has a good way of saying it, “Don’t be a CIA mouthpiece.” I think that is very, very important and it’s so funny because you do see these things at exactly the right moment that the CIA and the regime change machine wants you to say them. When they’re ramping up the heat on Iran, for example, all of a sudden, you’ll have some young libertarian gal come out and say, Iran is horrible, a despotism, they’re socialist in their economy. It always comes at the exact right moment. If you’re a libertarian and you participate in this, you’re a dupe or worse.
JD: There is a tremendous amount of hubris in the West today. The whole world has to share our principles and our form of governance, essentially social democracy. And this should be maintained through international governance in the form of the United Nations or the World Bank or whatever. From my perspective this is just the twenty-first-century version of imperialism and colonialism. It is ideological colonialism.
DM: Yes, and worse because we can kill a lot more people a lot quicker. The people that jump on the bandwagon, We’ve got to do this, we’ve got to overthrow X, you are living in a country whose foreign policy and military leadership are responsible for the deaths of millions. You have a president who just droned a family and then lied about it, started wars, who’s now holding nearly a hundred people in a gulag in DC because they happened to set foot in the Capitol building on January 6. This is one of the most repressive regimes in the world, and if you doubt that, step out of line. Yet nevertheless, if there’s a bad guy overseas, we’re going to jump in and join the chorus and join the two minutes of hate against him, to keep this evil regime up and running, to keep the dollars flowing to the overt and covert regime change mechanism here at home. The thing is, just don’t buy into it. Bite your tongue. OK, the guy’s a jerk overseas, probably true, but we have bigger jerks running the State Department, running the military, running the military-industrial complex, right here at home.
JD: Give us your take on some current issues in foreign affairs. Let’s start with China and Taiwan. I’m interested in Biden’s saber rattling. His administration’s talking to the Japanese about potential joint naval exercises. I wonder what millions of Chinese Americans would think if Biden joins forces with the Japanese over Taiwan.
DM: That’s an interesting point and it’s a variable I don’t think has been considered much. Now I may be wrong, but from my experience, I think the Chinese Americans in the US tend to be rather apolitical. They’re not as involved in politics as other immigrant groups, at least to this point they have not. This is a sweeping generalization, but they tend to keep their heads down and become very successful in business and academia, but there might be some triggers for that. You have a lot of Chinese in the US, and they have ties to their homeland and they retain those ties, so I think you could see some pushback. It would be something that would be very new, but it might be something that does eventually come about.
JD: But given our recent problems in Afghanistan, for example, is the United States military really equipped at all to take on China?
DM: No, and a lot of Americans on the Right are falling out of love with the military and that’s a very good thing. They’re stopping this military worship and it’s because of the wokeness that’s gone on within the armed forces, but that is a good question. Are we really going to provoke a war with China when we can’t beat a bunch of barefooted people after twenty years of war? Well I think that’s all by design too. They didn’t want the Afghanistan war to end because it’s the gravy train, whereas I think a war with China would be pretty quick and decisive. So, are they equipped? No, but they weren’t equipped for Iraq, they weren’t equipped for Afghanistan, they’ve not been equipped for any war, frankly. You could go back to World War I and II. We came in at the end of World War I, when things were pretty settled, so the whole thing is a complete scam, Jeff. It’s a huge ripoff, it’s a huge psyop against the American people.
JD: But even among libertarian audiences there are people who say China is a real threat to the United States. China is biding its time and hoping we suffer an economic fall here. Those people at the Mises Institute who talk about secession would simply open the door for a weakened America to let the Chinese lion in.
DM: What would they do? Take California? I had lunch with my good friend Colonel Douglas McGregor and he said, our military is still fighting the idea of territorial warfare. The rest of the world has given up on this idea. You don’t go and fight and take over. Right now, we’ve taken over 30 percent of Syria. What are we doing there? Nobody knows. We’re the only country in the world that goes around looking to put in bases and get territory overseas. What does it give us? It seems to me the last thing that the Chinese would ever want would be to “own” most of the US. You know, first of all, it’s a basket case. They’ve got their own basket case because of the economic problems they have. Why would they want to inherit something worse? It would be a disaster. The real Chinese threat is that the Chinese do capitalism better than we do. We go overseas and we overthrow governments, we take over media, we push people around, we push gay rights. The Chinese go overseas and make business deals in foreign countries and they get the stuff they want. They get the rare earths. They build factories. And that’s the real reason that the Chinese will certainly outpace us in the future. But instead of addressing that aspect and returning to a noninterventionist foreign policy at home and abroad, domestic policy and foreign policy, we actually are doing things that make it more likely that they will overtake us in the one area that they’re outperforming us. So, scratch your heads on that one really.
JD: Talk about Turkey and Recep Tayyip Erdoğan. Just ten or fifteen years ago, he was the darling of the West and Turkey was going to join the eurozone. Now he’s a devil.
DM: He is a devil now and he’s pretty wily. He knows how to do business with Putin. He’s not chewing on the sound bites that NATO wants to give him. He purchased the S-400s now and that makes him unqualified to participate in the F-35 project, although we’re still holding a billion of his dollars. We’re dangling some F-16s in front of him. Probably best to take the F-16s over the F-35s, actually. He’s a populist. His support comes from the countryside. He comes from the religious countryside. I’m not particularly a huge fan of his, but I find it difficult to avoid cheering for him when he told those ten Western ambassadors including the US ambassador last week, Hey, you signed a letter dealing with something that we’re dealing with in our internal judicial system. You’re persona non grata. Get out of the country. And it wasn’t until countries backed down, that he said, OK, you guys can stay. But he’s not having it. Russia got it, Putin got it. But a country like Belarus, who’s been on the receiving end of US regime change efforts for so long, still allows Western NGOs in the country? I think Erdogan has woken up to that. He’s woken up to what’s happening. Regardless of how you feel about his policies or his authoritarianism, if you don’t like the US empire because it hurts us or hurts people overseas, you have to have a positive view of what’s going on in Turkey.
JD: How about Iran? Are they actually developing nuclear weapons or just nuclear energy? Or neither?
DM: They’ve been about twenty minutes away from the nuclear bomb for the past thirty years, so either they’re taking a long coffee break or it’s, once again, Israel having a conniption fit as they always do, with the US following suit. Again, it’s the same people driving it, the military-industrial complex. And the Israelis, because we subsidized their military so much, they don’t have an incentive to make peace with their neighbors because they believe that the US has their back no matter what they do. This is not a healthy policy for Israel in any sense of the word and certainly not a healthy policy for us. We subsidize a policy in Israel that’s very dangerous to Israel, and if we didn’t do that, they would have to find a way to deal with their neighbors and find peace. The Iran policy was a disaster under Trump, is a disaster under Biden. The Biden administration is trying to have it both ways. They promised to go back to the Joint Comprehensive Agreement, the JCPOA, but they can’t do it because they’re having a lot of pressure from the pro-Israel faction to get additional concessions and Iran is saying, What are you talking about? We already went through this. We made an agreement. Why would we give up more than what we initially signed on to? The whole irony of it, the humor of it, is that we’re pushing Iran more firmly into the camp of Russia and China. They’re saying, Hey, if you don’t want to deal with us, we’re going to go ahead and sell some oil to China, and China says, OK, we’ll take it. Sounds good. We’re actually the authors of our own demise with our stupid foreign policy.
JD: Finally, give us your take on Russia and Putin.
DM: It was an interesting talk that Putin gave to the Valdai Discussion Club this past week. He talked about the wokeism in the US and he talked about how we seem to be devouring ourselves. He remembers from his own history what happened when the Soviets came and tried to suppress speech and tried to suppress normal life as the wokeists in America are doing now. He’s saying that Russia is probably the last conservative, for better or worse, whatever the word means, conservative country on earth. I know that makes a lot of antiwokeists feel like Russia is the answer, is the paradise. One of the things we’ve seen from covid is that there’s still a lot of authoritarian impulses in Russia that we might not necessarily like. It was a three-hour speech. Imagine Joe Biden giving a very detailed three-hour talk on anything! But, it’s very, very, very interesting and I really highly recommend that the listeners take a look at what he had to say.
JD: In 1959, a long time ago, Murray Rothbard wrote a letter to Ken Templeton at the Volker Fund. He said, “I’ve decided that the war-peace question is key to this whole libertarian business.” What a great quote. Are you familiar with it?
DM: Absolutely. It is the key quote.
Time for Socialism: Dispatches from a World on Fire, 2016–2020By Thomas PikettyYale University Press, 2021352 pages
Thomas Piketty has written a useful book. Readers need no longer plough their way through his vast Capital in the Twenty-First Century, not to mention his even vaster Capital and Ideology, to understand his message. This fairly short book, which consists of his columns for the French newspaper Le Monde written between 2016 and 2020, along with an introductory essay, “Long Live Socialism!,” conveys the essence of his ideas. Not that reading this book is fun: Piketty clogs the book with charts and statistics and repeats his main ideas well beyond the point of utter boredom.
Before addressing this message, though, we need to look at his method. Austrian economists proceed by deduction from the concept of action and by doing so arrive at the laws of economics. Not so Piketty: for him there are no laws of economics. “There is no universal law of economics: There is only a multiplicity of historical experiences and imperfect data, which we have to examine patiently to endeavor to draw some provisional and uncertain lessons.” Piketty is a historicist or institutionalist, what Mises calls an “antieconomist.”
It’s bad to be an antieconomist, but if you are one you should get your facts and statistical data right. Suffice it to say that Piketty’s grasp of history does not inspire confidence. He says, “In the United States, it was not until the mid-1960s that the former slaves finally obtained the right to sit on the same buses as whites, to go to the same schools, and, at the same time, gained the right to vote.” Can he really be unaware that, after the 1870s, legal segregation and franchise restrictions were largely confined to the South? We also learn from him that “as far back as the 1870s, the Democratic Party had begun to reconstruct itself on the basis of an ideology which could be described as social-differentialist: it was violently inegalitarian and segregationist toward Black Americans but more egalitarian than the Republicans toward the white population (in particular the new immigrants from Italy and Ireland).” The influential Bourbon Democrats of that period were classical liberals, and serious debate about immigration restrictions got started after 1900. But who’s counting?
We haven’t yet reached the strangest of Piketty’s historical interpretations. “[B]etween 1929 and 1935,” he tells us, “the central banks were shaped by a liberal orthodoxy based on nonintervention and had allowed a wave of bank failures to take place. This precipitated the collapse of the economy, the explosion of unemployment, the rise of Nazism, and the road toward war.” Bank failures caused World War II—who knew?
I won’t discuss Piketty’s use of statistical data, but his blunders and bias have aroused widespread condemnation. One notable essay by Phillip Magness and Robert Murphy comes close to charging him with fraud and deception. (See my discussion of Jean- Philippe Delsol, Nicholas Lacaussin, and Emmanuel Martin’s Anti-Piketty: Capital for the 21st Century, in the Quarterly Journal of Austrian Economics 20, no. 4 [2017].) Piketty has responded to some of his critics, though not to Magness and Murphy, but a statement in this book suggests that he is less than surefooted with numbers. He says that there has been in the past decades some progress toward reducing global inequality, but much remains to be done: “The poorest 50% of the population is still the poorest 50% of the population.” I’ll leave this question as an exercise for the reader: Why is this vacuous remark not a tautology?
Piketty’s central idea is that inequality is the supreme social sin and must be radically curtailed. He doesn’t deny that capitalism results in economic growth and an enhanced standard of living, but the income and wealth of the rich have grown far faster than that of the poor. You might ask why this matters, even granting his dubious statistics: Don’t people care about how well they are doing, much more than they resent the rich, if in fact they resent them at all?
To ask a question like this is, for Piketty, to look at society from the wrong perspective. For him, equality trumps prosperity. If another of his proposals, “greening” the economy in order to reduce carbon emissions, is adopted, most people will need to live with a lower amount of material goods. But, projecting his own egalitarian commitments onto others, he thinks people will be willing to make the sacrifice so long as the rich have to pay their “fair” share of the costs. “[T]he considerable adjustment in lifestyles to deal with global warming will only be acceptable if a fair distribution of the effort is guaranteed. If the rich continue to pollute the planet with their SUVs and their yachts registered in Malta . . . then why should the poor accept the carbon tax, which is likely to be inevitable?”
Piketty often talks about democracy, but it would not occur to him to ask people whether they want to green the economy. Freedom of individual choice needs to be kept within strict limits, on this issue and on another vital issue as well. As even he cannot escape noticing, people around the world favor secession and decentralization. Local autonomy, Piketty thinks, has its place; but it must never be allowed to interfere with the power of the nation to impose income and wealth taxes. Otherwise, local regions might compete to attract investment by lowering tax rates, and we can’t have that, can we? Discussing a Spanish law that lets regions set the income tax rates for half the total tax base, he says that the system “challenges the very idea of solidarity within the country and comes down to playing the regions against one another, which is particularly problematic when the issue is one of income tax, as this is supposed to enable the reduction of inequalities between the richest and the poorest, over and above regional or professional identities.”
People should not be free to organize a business as they wish, even if they are starting it with their own money. The state should require them to share control of their company with workers, and they must install women and minority groups on their board of directors. “In addition to the fact that employee representatives should have 50% of the vote in all companies (including the smallest) it is conceivable that within the 50% of voting rights going to shareholders, the share held by an individual shareholder may not exceed a certain threshold in sufficiently large companies. . . . In order to . . . truly move against patriarchy, it is essential to put into place binding, verifiable, and sanctioned measures, both for positions of responsibilities in companies, administrations, and universities and in political assemblies. . . . The issue of gender discrimination must also be considered in relation to the fight against ethno-racial discrimination, particularly in terms of access to employment.”
Something Piketty says himself enables us to see a problem with these policies. He points out that donors to major universities do not get to control policy and suggests that investors in business can be treated the same way. “[T]he fact remains that this generous donor is in a more precarious position than a shareholder. There is no guarantee that the board of directors will renew him [in his seat on the board] indefinitely, and, above all, he can in no way threaten to pull out and withdraw his donation. His gift has been definitively incorporated into the endowment of the university; however, this has not prevented him from giving it.” If this is true, isn’t it also true that those who want to establish worker-controlled firms are free to do so and to invite investors to give them gifts? Why do we need the state to force all businesses to conform to this pattern? To Piketty, though, individual freedom would interfere with democratic solidarity, and to invoke the “sacrosanct mantra of the market and private property” is repellent.
Ludwig von Mises long ago pointed out the harmful effects of confiscatory taxation in the name of “equality.” As he says in Human Action: “A law that prohibits any individual from accumulating more than ten millions or from making more than one million a year restricts the activities of precisely those entrepreneurs who are most successful in filling the wants of consumers. If such a law had been enacted in the United States fifty years ago, many who are multimillionaires today would live in more modest circumstances. But all those new branches of industry which supply the masses with articles unheard of before would operate, if at all, on a much smaller scale, and their products would be beyond the reach of the common man. It is manifestly contrary to the interest of the consumers to prevent the most efficient entrepreneurs from expanding the sphere of their activities up to the limit to which the public approves of their conduct of business by buying their products.”
As Mises also notes, workers’ wages depend on their marginal productivity, and the best way to increase marginal productivity is to increase the amount of capital invested per worker. Confiscatory taxation, pursued in the name of what Mises calls a “spurious metaphysical doctrine,” interferes with capital accumulation and thus hurts workers. “The greater part of that portion of the higher incomes which is taxed away would have been used for the accumulation of additional capital. If the treasury employs the proceeds for current expenditure, the result is a drop in the amount of capital accumulation. . . . Thus the accumulation of new capital is slowed down. The realization of technological improvement is impaired; the quota of capital invested per worker employed is reduced; a check is placed upon the rise in the marginal productivity of labor and upon the concomitant rise in real wage rates.”
If you compare what Mises says with the remarks by Piketty I have quoted, you will see very clearly the difference between an economist and an antieconomist.
Samuelson Friedman: The Battle over the Free MarketBy Nicholas WapshottNorton, 2021367 pages
Nicholas Wapshott is a British journalist and biographer with a strong interest in economic theory. He says that the Nobel laureate Edmund Phelps is his mentor. One theme in twentieth-century economics dominates his work: the clash between economists who favor the free market and those who support a “mixed economy,” in which the government plays a large role. Wapshott’s earlier book Keynes Hayek shows the way he works. He uses the personal relations between Keynes and Hayek to arouse the reader’s interest in the theoretical controversies at issue, and he follows the same approach in Samuelson Friedman. Keynes and Hayek make frequent appearances in this book as well. Here, though, Wapshott has an advantage over his earlier book. Although Keynes and Hayek knew each other, they were not especially close, but Samuelson and Friedman were friends and rivals for over seventy years. Wapshott thus had available much more source material for his new book.
He is a diligent researcher, as his forty-three pages of notes attest. We learn, for example, that the remark “you cannot push on a string,” comes not from Keynes but from Congressman T. Alan Goldsborough in 1933. The remark is a criticism of the government’s increasing the quantity of money in order to get out of a depression; the point of the phrase is that giving people more money may not be enough to get them to spend it.
Wapshott clearly prefers Samuelson to Friedman. For him, Samuelson was the great theorist of post–World War II economics. Friedman, by contrast, though he had a powerful intelligence and formidable skill as a debater, was in essence a crank who preached the discredited doctrine of monetarism. Wapshott says of Samuelson, “His myriad technical papers, which flowed from him with such facility, would have been a towering achievement for any academic economist. His application of mathematics to economics transformed the discipline from something akin to a branch of philosophy to a true social science.” He rates Friedman much lower. “His many achievements are more evident in politics than in economics. . . . Some of Friedman’s theoretical economics, such as his work on the consumption function, continues to be admired. But few have continued to hanker after Friedman’s flagship idea, doctrinaire monetarism, which is remembered, if remembered at all, as an arcane, otiose footnote in the history of economic thought.”
The text of the book fails to support Wapshott’s portrayal of Samuelson as a towering genius. The author devotes considerable attention to the columns that Samuelson and Friedman wrote for Newsweek, and in them, the towering genius often comes across as a purveyor of banalities. He holds the bizarre belief that if you don’t want to associate with someone, you are coercing him. Also, people who can’t afford things they want to buy are being coerced by the sellers of these products. Thus, it’s wrong to claim, as Friedman does, that government regulation of property is coercive. It’s always a question of balancing one freedom against another, and shouldn’t we prefer the freedom of the poor person able to buy food to the freedom of the seller to refuse to sell? Besides, human rights are more important than property rights.
“‘The rights of property shrink as the rights of man expand,’ he wrote. While some suffered because the government intervened in the market, an unfettered market had winners and losers, too, he argued. While the free market suggested that everyone was free to buy what they wanted, there was such a thing as rationing by price, which put many items well beyond the reach of those without the means. The children of those who could not afford good education, for instance, were deprived by the market setting too high a price. The ‘freedom’ of individuals provided by the market was therefore only notional.” Samuelson in this area thinks in clichés of the Left.
Samuelson was throughout his long life a Keynesian, and he took over from Keynes a bad argument against Hayek’s The Road to Serfdom. According to this argument, Hayek claims in the book that comprehensive economic planning destroys freedom. But Hayek himself does not favor a complete free market but allows some scope for government intervention. Given this admission, there is no principled division between Hayek and his opponents. All are supporters of a mixed economy, though people differ on the components of the mixture.
It does not follow from Hayek’s failure to draw a principled line between permissible and impermissible intervention that “we are all in the same boat.” It remains the case that planning on a vast scale destroys freedom. You cannot tell exactly how many hairs a person can have on his head and still count as bald, but there are bald people and people who aren’t bald. In like fashion, if we have “too much” planning, freedom will end. The objection of Keynes and Samuelson thus leaves Hayek’s argument unscathed. We can see today without difficulty what Hayek is talking about, as the government is destroying our freedom through covid-19 lockdowns, mask mandates, and vaccination mandates. Wapshott mentions the covid-19 situation, but rather than take it as evidence that government interference with the market is dangerous, he instead takes it to show that in emergencies, government must supplant the market.
It is true, though, that Hayek made unnecessary compromises about government intervention, and this leads to the funniest passage in the book: “To [Ayn] Rand, even Hayek was a treacherous compromiser and—Rand’s behavior was as extreme as her politics—she once spat at Hayek at a party to show her disdain for his treachery.”
In his duels in Newsweek with Samuelson, Friedman often defends freedom with able arguments, but his economic theory is lacking. His “monetarism” is really a form of Keynesianism, but it is the Keynes of the 1920s rather than the 1930s whom he follows. “The summer of 1923 saw Keynes give talks that when collected became A Tract on Monetary Reform. . . . A Tract became an inspiration for counter-Keynesian revolutionaries like Friedman: ‘I am one of a small minority of professional economists who regard [A Tract] not the General Theory, as [Keynes’s] best book on economics,’ wrote Friedman in 1989. ‘Even after sixty-five years, it is not only well worth reading but continues to have a major influence on economic policy.’ Friedman’s often-quoted one-liner that ‘Inflation is taxation without legislation’ derives from the Tract chapter heading, ‘Inflation as a Method of Taxation.’”
In brief, Friedman supports government control of the money supply to prevent inflation and deflation. Hayek expertly identifies the fundamental problem with Friedman’s approach. “Austrian economists like Hayek believed such an approach would fail, as no one could know enough about the workings of the economy to manage it with any accuracy. . . . He always complained that Friedman was closer to Keynes than Hayek was to either of them. ‘In one respect, Milton Friedman is still a Keynesian, not on monetary theory but on methodology,’ Hayek explained. By accepting the premises of macroeconomics—a branch of economics that Keynes had invented, ‘very much against his own intentions,’ according to Hayek—Friedman had made a serious intellectual error. . . . It was not just that Friedman had signed up to Keynes’s macroeconomics rather than join the Austrian School, which relied solely on microeconomic activity, that caused Hayek offense. Friedman’s belief that the money supply should be controlled by the central bank to keep prices in check put him firmly on the Keynesian side of the argument over whether government should manage the economy.” Hayek also said in the 1990s, “‘One of the things I most regret is not having returned to a criticism of Keynes’s [General Theory]’ . . . ‘but it is as much true of not having criticized Milton’s [Essays in] Positive Economics, which in a way is quite as dangerous a book.’”
In turn, Friedman had no use for Austrian economics. Though he admired Hayek for his defense of freedom, he thought that Hayek’s Prices and Production was a confused book and opposed giving him a position in the University of Chicago’s department of economics. “The Chicago School ‘didn’t want him,’ recalled Friedman. ‘They didn’t agree with his economics. . . . If they had been looking around the world for an economist to add to their staff, their prescription would not have been . . . the author of Prices and Production.’” He thought that Mises was dogmatic and intolerant, and “[a]sked which was the greater economist, Keynes or von Mises, Friedman did not hesitate to answer, ‘Keynes.’” By the way, Samuelson, though of course a strong critic of Hayek, was pleased that he won the Nobel Prize. ‘In my judgment his was a worthy choice,’ said Samuelson.”
Readers who are aware of the way in which Arthur Burns tried to prevent Murray Rothbard from getting his doctorate at Columbia will find this anecdote of interest, and it is a suitable note on which to close. Samuelson in commenting on Alan Greenspan, says, “At bottom Greenspan was an okay character. That’s different from Rand and Burns—both despicable human beings.”
Yuri Nicholas Maltsev is an Austrian school economist and economic historian from Tatarstan. He earned his BA and MA degrees from Moscow State University and PhD in labor economics at the Institute of Labor Research in Moscow. Before defecting to the United States in 1989, he was a member of a senior Soviet economics team that worked on President Gorbachev’s reforms package of perestroika. He is currently professor of economics at Carthage College in Kenosha, Wisconsin. He has appeared on CNN, PBS NewsHour, Fox News, CBC, and Financial Network News across American, Canadian, and European television. He is the editor of Requiem for Marx (1993) and coauthor of The Tea Party and the American Counter-revolution (2012) and The Tea Party Explained: From Crisis to Crusade (2013). He is a Senior Fellow of the Mises Institute.
Jeff Deist: We’re speaking in mid-September, and President Biden just announced executive orders mandating vaccines for many employers. As a former Soviet citizen, what do you make of this?
Yuri Maltsev: That’s awful. In the United States, fascism comes in the very strange form of an elderly dementia patient. Usually fascists are charismatic leaders, look at Hitler or Mussolini, but this one, what he’s doing is just unbelievable. He is a socialist, definitely, that he is mandating the private sector what they should do, what they shouldn’t do. Karl Marx in the manifesto of the communist party, he defined socialism and communism as abolition of private property and that private property can be abolished overnight, like what happened during the Bolshevik Revolution in Russia. But it can also take a gradual kind of process and that’s what is happening right now in the United States. Private property is becoming like having a title to wetlands. You have private property, but you cannot do anything with it.
D: Biden brings to mind another kindly old man, Mikhail Gorbachev, with whom you worked in the late eighties as a Soviet labor economist. In your introduction to the Requiem for Marx book, you go in depth about how Gorbachev managed to absolutely snow the Western media and snow George Bush senior.
M: Yes, he absolutely did. He was portrayed as a great liberator, however, he was a Communist. From another hand, we should give him some credit because he was talking about socialism and giving it a human face, which nobody understood at the time.
There is this joke that James Bond was sent to Moscow to find out what’s happening there under Gorbachev and he goes to the bakery and there is no bread, and he writes in a little notebook “No bread”; he goes to the butcher shop, no meat, and writes “No meat.” There is a KGB officer following him and the officer looked over his shoulder and said, “A year ago, you would be shot for doing that.” And Bond then writes “No bullets anymore.” When there were no bullets, people stopped working, because under socialism, the only way to work is under a threat to your life or to the life of your loved ones, because there is absolutely no incentive to do anything. And that’s what Mr. Gorbachev did not understand.
In the beginning of his reign, Gorbachev sounded confused. For example, he was saying that central planning actually works, the problem is we never had a good plan, and so on. That definitely didn’t show him as he knew what he was doing. But definitely, he played some positive role in destroying that evil empire.
Today, we have Mr. Biden, who is building a new evil empire. I think that his vaccine mandates speech is just telling us that he is right now on a warpath. He is desperately looking for enemies and who those enemies can be. So, he picked up unvaccinated people as his enemies, because he lost the war in Afghanistan so dramatically. He completely screwed up the evacuation and now he needs to attract the attention of the masses to something else. That’s what I’m thinking is going on.
And they are also, I think, trying the water, to see if they can get away with this mandated vaccination, with forced vaccination, with dragging people into vaccination centers, which reminds me of forced abortions in China, then that will be the ultimate goal: your loss of freedom. If you remember John Locke, his major question was who owns you. Do you own yourself? If you do, you are a free man, and if somebody else owns you, you’re a slave. If you don’t own your body, then who does? The government acts as if it owns your body and knows better what to put in it. And now, if they will forcibly vaccinate us that would be the end of whatever we think we are living in and would be the beginning of slavery.
D: Let’s continue this Biden versus Gorbachev comparison, because I like it. You write about glasnost and perestroika being basically fraudulent cronyist schemes in practice, not at all what the Western media reported. You quote Gorbachev saying, “What we want is a planned, regulated socialist market.” That’s essentially what the World Bank types advocate today.
M: Absolutely. We must have this economy which is run by the government, not by the private sector. Everything Mr. Biden has been doing since his inauguration is heading in that direction, more regulations for everything, for industry. People don’t like his predecessor, Mr. Trump, but under him regulations were being removed, 20 percent of them, but Biden has restored everything that was removed. His vice president, she’s just not only a socialist, but kind of a Stalinist. Look at her speeches, most recently in California. This is a very sad time that we are living through, but the people inflicted it on themselves. I don’t know if elections were fair or not, but I think it’s very simple if you are voting for a socialist or you are voting for a capitalist.
D: You mentioned that your time working with Gorbachev convinces you he didn’t know any economics at all. He was completely illiterate on the subject. I suspect that’s equally true of Biden.
M: Yes, yes. In his fifty years in government his working record is just atrocious. When he was the chairman of the Judicial Committee of the Senate, it was unbelievable to listen to him. I don’t know, however, whether he is stupid or he is evil, and I think both. He’s a power-hungry kind of person as well as the people around him.
D: You left the Soviet Union and came to the United States in 1989. A lot of Soviet expatriates in the US became neocons or cold warriors, but you managed to avoid that.
M: Yes, because neoconservatism is just another side of Trotskyism. That we should impose our will on other people against their will. You see what is happening, how we trap people in Vietnam or in Afghanistan or in Iraq or in Syria, trying to start wars which we do not intend to win. It’s to make some people happy and richer and impose all kinds of left-wing social theories on them. It’s like imposing democracy—these kinds of things cannot be done from above or from the outside of the country.
D: In the eighties and nineties, especially, Conservatism Inc. loved nothing more than a Soviet defector willing to denounce the USSR. The Buckleyite right purged the Old Right on the grounds we had to defeat the Soviets above all, so the Cold War justified accepting bigger government at home.
M: It definitely was a threat. I would agree with that part, but from another hand, how did we oppose the Soviets? The CIA provoked the revolution in Hungary, we didn’t support those people as we had promised, so many of them were murdered including the very reformist prime minister, Mr. Nagy, and about three hundred thousand Hungarians fled. We did the same with Czechoslovakia and the war in Vietnam was the same thing. So that’s a problem that we have, that we are engaging in wars, which are designed only to feed some people, to feed the military-industrial complex of which President Eisenhower was telling us back in 1961.
D: As a new arrival in the early 1990s, did you think America was generally capitalist and free at the time or did you already sense there were deep problems here?
M: I worked, if you can call it work, for the federal government in Washington, DC, at the United States Institute of Peace, which is still there. It’s a congressional think tank. It’s huge right now. I could see there were deep problems.
D: They have an enormous building by the Lincoln Memorial. I wonder what their budget is relative to the Mises Institute?
M: Oh, probably several hundred times more if not thousands. And they also built, just maybe four or five years ago, a huge campus in southeastern Washington, DC, just unbelievable.
D: Apparently there’s no more peace than when they started.
M: No, they’ll never be shut down. And for me, what was amazing was that I was awarded this very prestigious position. I became a fellow of the United States . . . the full title was even more feudal, something like Senator Jennings Fellow of the United States Congress in Peace. I thought that maybe they will study peace. My neighbor with an office on the right was Eugene Rostow. Eugene Rostow was possibly the most prominent warmonger in United States history and he almost single-handedly started the Vietnam War. The chairwoman of the board was Elspeth Rostow, who was his wife. This formed kind of a Rostow dictatorship. There were generals and the like, rather a nursing home for the neoconservatives. The worst thing was not that they were funding these people who didn’t need the stipends because they were already rich, but they were dispensing tens of millions of dollars. Now they are dispensing hundreds of millions of dollars, to poison our academia, to provide so-called grants to study conflict resolution. And how you can resolve conflicts, by accusing everybody of racism or paying the left-wing academia to develop critical race theory and other stuff like this?
D: At this point, in the early nineties, you had already discovered Austrian economics.
M: Well, I was leaning toward Austrian economics since my days in the Soviet Union. When I was a third-year student at Moscow State University I was given a book by Hayek, The Road to Serfdom, and at that time I could be punished anywhere from eight to ten years of imprisonment, just for having the book.
D: Just for possessing it?
M: Just for possessing it. And the person who gave it to me would get fifty years, because he would be accused of disseminating anti-Soviet slander. That was the so-called Article 57 of the Penal Code of the USSR. This is even an innocent book. But it was on the KGB forbidden list, as well as Solzhenitsyn and Orwell.
Because of Hayek’s influence, I changed my major. Instead of studying history and social science, I began to study economic history and history of economic thought. It was at this point that I received a letter through the Lenin’s Library, now the Russian State Library, that since I was engaged in a critique of the vulgar bourgeois political economy, I should be given access to the contents of the library. How can you criticize something without knowing what it is? So I got real access. While there I read a lot of other stuff, as well. You go to a marked room and you sign a pledge that you’ll never tell anyone about what you read there. The unfortunate thing is at that time I didn’t know about Murray Rothbard or Ludwig von Mises and so I was insatiably reading Hayek.
When I came to the United States I was invited to the Shevchenko Jamestown Foundation, which is a very interesting think tank, kind of like the world defectors’ club. They would not pay me anything, but they were very nice in providing me with a computer and office space and a telephone, and while there I wrote an article on perestroika for The Freeman. I was invited to the Mises Institute, to teach at Mises University, at that time at Stanford University, and then I met Murray Rothbard and we became very good friends. He became my real mentor. I met a lot of great people like Tom DiLorenzo, Walter Block, Bob Higgs, and many, many others. It was not a conversion moment, because I was already converted, but I remember Murray, he took my interview from me and he titled that interview “Mises from Moscow.” He was very enthusiastic about the future of Eastern Europe and the former Soviet Union in finding the path to freedom.
I think it was 1990, the Mises Institute organized a conference in Washington, DC, to honor Gottfried Haberler. Haberler was a great Austrian economist, but then he turned more mainstream. He began to teach at Harvard and he was not associated with the Institute at all and the Institute also didn’t like him for his mainstream leaning. I knew him rather well because I had lunch with him every Wednesday in Washington. I advised Murray to lure him back where he belonged, and so the Mises Institute put on a wonderful conference in Washington, DC, and Haberler addressed this conference.
Attending the Washington conference was a delegation of twelve Lithuanian businesspeople and politicians who came to the United States right after Lithuania became an independent country. They were all enthralled, and today we have a very strong Austrian economics kind of school in Lithuania. The Lithuanian Free Market Institute is doing a great job in promoting Austrian ideas and some are very visible in the Seimas, which is the Lithuanian parliament. It was an interesting time because nobody knew what was happening. Murray, he wrote quite a lot on the economics of transition and he had this wonderful slogan: land to the peasants, and factories to the workers, and bureaus to bureaucrats, that was his approach. That was his major message to them. And he praised the Baltic states because they were ahead of the other former Soviet Republics and they are ahead today in promoting freedom.
D: We have the whole history of the twentieth century to see the failure of the Soviet Union. You lived it. But as you’ve pointed out, Mises predicted all of this in 1920, without the benefit of hindsight, in his essay “Economic Calculation in the Socialist Commonwealth.” What an achievement.
M: True, absolutely. I read Ludwig Mises’s “Economic Calculation in the Socialist Commonwealth” and his book Socialism only when I came to the United States, and I was honored to write an introduction to “Economic Calculation” published by the Mises Institute. A lot of things just became really clear.
When you live in the Soviet Union, especially if you are an economist, you understand that the system does not work. You understand that the prices are all phony, that the prices are made up, that they’re being ignored. But after reading Socialism by Mises, then it all becomes crystal clear. It’s like processing film when the image is already there, it is only after developing the film that the image becomes clear. That was the role of Hayek for me with The Road to Serfdom. And so it was an interesting time.
In the Soviet Union at this time, they came up with the idea of the 500 Days Program. This is how long it would take to make the transition from a socialist slavery to economic freedom. My point was why five hundred days? In five hundred days, you cannot do anything. If you make a transition like this, you should do it immediately in one fell swoop. And sure enough, while I was writing this, Margaret Thatcher made an interesting comment. She said something like, if we in the United Kingdom would decide to move from left-hand driving to right-hand driving and do it in five hundred days, that would be havoc on the road.” So, it is with all economic reforms. I believe strongly, and Murray Rothbard was very supportive in this, that a gradual transition is transition to the third world only. You can either make a transition right away or don’t even try to do it.
D: David Gordon and Gary North also wrote about Marx the man, in your collection of essays. Marx was not necessarily that bright. He wasn’t that accomplished. Gary North tells us Friedrich Engels was a lot smarter and ambitious. Marx lived a fairly pampered and subsidized life, and had far more money than the average Soviet worker. And yet this apparent mediocrity seems to have enduring influence. Why?
M: Because he provides a very good argument for so-called intellectuals to grab the power. Because the whole idea of Marxism is that the proletariat, the great masses, are oppressed. But what should they do? They should follow the people with the vision, the professional revolutionaries. And who would be better for that than the intellectuals. So, that’s the point. Hayek is also saying it in his wonderful essay “Why Intellectuals Love Socialism.” Marx, he was a very power-hungry individual. He never had real power, but from another hand, his writing is about power, how to get power. And today he is popular for what reason?
There is another side of Marxism. It’s not only proletariat and bourgeoisie, workers and capitalists, but it is also oppressors and oppressed. Because if you read Marx, especially Das Kapital, the twenty-third, twenty-fourth chapters, I still remember all this stuff, he’s writing that the whole of human history was a fight between oppressors and oppressed, an influence that would be like slaves and slave owners and feudal lords and peasants and now we have workers and whatnot. That’s easy for the so-called intellectuals of today to put whomever they want, to put any kind of group they believe is a victimized group, and to present them as oppressed. This victimization agenda will be taken up by the intellectuals of the Left. It is important for them to have something to point at, take the so-called environmental crisis, that’s another invented crisis that we have, and also race issues. And these two issues, they believe, can destroy capitalism, destroy the United States, destroy the society that we live in, and provide them with unlimited power, because that’s what it is: if you control energy, for example, you control culture, then you are in charge of everything. Education, today, I’m sorry to say, but I think we are losing this cultural war to these people because they control the mass media, control Hollywood, control the production of culture.
D: Let’s continue with that thought. There’s this concept of cultural Marxism, where the focus on economic class shifted to identity politics because the economic arguments weren’t working. The US middle class, the union workers, weren’t buying it. So the Left shifted its focus. Today we have a lot of loose terms like “woke” and “SJW” and “PC” to describe this phenomenon. As someone who teaches young people on campus, how much have things changed since you arrived in the US?
M: It’s so sad because when I began to teach, and I began to teach almost immediately when I came to the United States, I was teaching first as an adjunct professor at George Mason University on the Arlington campus and then I moved to Wisconsin. I am now in academia for thirty-two years. And at that time, students were very curious, they were way to the right of the faculty. The faculty always was, at least the faculty that I dealt with, very much to the left of center. They had an agenda to reproduce themselves, because that means that left-wing faculty will only hire left-wing faculty, and now they are a majority. We have very few really free market academics, but a lot of socialists and radical socialists and communists and democratic socialists, so-called, which is an oxymoron. Mr. Bernie Sanders visited my college, Carthage College, and many faculty were sitting there from three in the morning because they were afraid that they will not get in to meet the great leader.
D: Were students camping out overnight as well?
M: Some, yes, those that are already brainwashed.
D: And presumably very few kids at Carthage College are in any way oppressed.
M: [Laughs] True. Except when they are looking for parking in the morning.
D: I want to clarify: Do you think the students in some of this country’s liberal arts schools are actually to the left of their faculty?
M: I would say not very many, but there are some. There are some activists who are just fanatics, who became fanatics because they were screwed up in high school and then they came to Carthage. We have faculty who reinforce their views. I’m not saying all faculty. We have some mild socialists also. We have even on our campus some people who are still on the side of freedom, but not many, the majority is not. What is going on today with this masquerade, if you will look at what the faculty says in their blogs, for instance, “Yesterday I saw a student who was sipping coffee without a mask and he was sipping coffee very slowly, because he enjoyed not wearing a mask.” I can’t imagine that a professor is writing that.
D: One thing that’s changed a lot in the US since you arrived is secularization. There is far less religious observance in the United States today than thirty years ago. Rothbard’s essay in your Requiem for Marx collection compares Marxist theory to the return of the messiah in Christian theology, Marxism will put an end to history and establish a new heaven and a new earth. The establishment of communism marks an end point to human history, a final perfected state of mankind. So the secularization of America is a necessary Marxist goal.
M: True, yes. Murray wrote “The Religious Eschatology of Marx.” Eschatology, that’s the end of history. Marx hated religion, he called it opium of the people, and in the Soviet Union alone they murdered over a million clerics of all religions. I was just reading a gruesome historical article. In Odessa, for example, they were putting boiling lead into the Christians, saying that this is a communion for you. And they were hanging monks and nuns and priests from belfries. Why such atrocities? Because it’s obvious that if you are a believer, you believe in God, no matter what denomination or religion you are, then you don’t have space in your mind for Marx and Lenin and Stalin to be gods. That would be a very unchristian or very non-Islamic or very non-Jewish thing, to believe that there is a god, in the Kremlin or in the White House or somewhere else. That’s why they needed to clean out the place and why religion was prohibited until 1942.
In 1942, the Soviet Union legalized the Russian Orthodox Church. For what reason? Because there were about 3 million defections from the Soviet Army over to the Germans. Stalin was afraid that the whole thing would fall apart without that. And most would believe that Stalin and others were kind of the antichrist. That’s one thing, to destroy religion, then next is the family. When families are destroyed then civil society is destroyed and then you’re naked before them. Then you don’t have any support mechanisms. I’m not a religious person myself, but religion is a very important social institution, because it provides a lot of social support for people.
D: Did the Soviets view religion as a competitor with the state for people’s loyalty?
M: Yes and no because some, for example, the Russian Orthodox Church were just a state institution under Stalin and his successors run mostly by the KGB.
D: So the state co-opts the church like it co-opts other institutions.
M: Yes. Under Gorbachev, when the Union of Soviet Socialist Republics fell apart on the glorious Christmas Eve of 1991, the state collapsed as we know it. If you look at the Russian Orthodox Church today, they are blessing the Russian aggression against the Ukrainians, against others, they’re holding masses to support the Russian troops. They’re blessing tanks and rockets. There are some denominations that are not really statist denominations. There are some Protestant denominations in Russia which believe that you don’t need any intermediaries between you and the God. And that brought the idea even to John Locke that we are all equal before the Lord.
D: Let’s talk about academic freedom. A well-known philosophy professor at Portland State University, Peter Boghossian, resigned yesterday over harassment he’s endured from faculty and the students. Do you worry about your own academic freedom?
M: The only thing I like from Marx’s quotes is that we don’t have anything to lose except chains on our feet. And so, I’m not worried, because I just fight back. I am fighting. Fortunately for me, I was tenured twenty-five years ago and that’s why I’m saying that if you give up on something, then they will take over everything. And that was the greatest message from Solzhenitsyn in the gulag, don’t give up. They survived and they were even respected by their jailers, by the prison guards. Besides that, I would say all my classes are full and I have waitlists! I would say that the great change came with Ron Paul. Especially when Ron Paul was very active, many students were his followers and he was the best ambassador of ideas of liberty on campuses. We definitely need leaders like him for students, to be seen as role models.
D: Dr. Maltsev, I think that’s a perfect place to stop. Thank you.
This special virtual seminar for donors to our fall campaign was livestreamed on October 8th, 2021.
Jeff Deist and Bob Murphy discuss Mises's views on interventionism and their continued relevance today, particularly after the last year and a half of economic intervention resulting from covid tyranny.
"[Interventionism] preserves some of the labels and the outward appearance of capitalism. It maintains, seemingly and nominally, private ownership of the means of production, prices, wages, interest rates, and profits. In fact, however, nothing counts but the government’s unrestricted autocracy... This is socialism in the outward guise of capitalism. It is the Zwangswirtschaft of Hitler’s German Reich" —Ludwig von Mises, The Middle of the Road Leads to Socialism
Read the full text from Mises here.
[Audio and epub editions forthcoming.]
In June 2004, Professor Hoppe visited the Mises Institute in Auburn to deliver an ambitious series of lectures titled Economy, Society, and History.
Over ten lectures, one each morning and afternoon for a week, Dr. Hoppe presented nothing short of a sweeping historical narrative and vision for a society rooted in markets and property. Delivered only from notes, to an audience of academics and intellectuals, the lectures showed astonishing depth and breadth.Even the most jaded scholars in the room were blown away by the erudition and scholarship of Hoppe’s presentation.
This project brings together the core of Hoppe’s lifetime of theoretical work in one vital and cohesive source. Here we find provocative themes developed by Hoppe in the 1980s and 90s, particularly in his essays found in A Theory of Socialism and Capitalism and The Economics and Ethics of Private Property. We also find his devastating critique of democracy, made famous in his seminal book Democracy—The God That Failed.
We’ve taken the recordings, edited them, and put them into a printed book. As always, Hoppe is equipped—and unafraid— to tackle history, anthropology, philosophy, sociology, ethics, politics, and economics, melding them into one coherent thesis:
Chapter 1: The Nature of Man and the Human Condition: Language, Property, and Production Property developed naturally, not artificially, as a consequence of human action. What is the philosophical justification for private property, and what does property mean for economics and justice?
Chapter 2: The Spread of Humans Around the World: The Extension and Intensification of the Division of LaborHow did man evolve to develop trade and specialization? What did that mean for the development of society?
Chapter 3: Money and Monetary Integration: The Growth of Cities and the Globalization of TradeMoney solves problems of barter and trade; good money makes global economics possible. But money is always and forever subject to corrupting monopolization by states and central banks. How do we separate money from the state, and separate trade from politics?
Chapter 4: Time Preference, Capital, Technology, and Economic GrowthTime, and our preference for present goods over future goods, informs everything we do. Low time preference, demonstrated by capital accumulation, is the key to advancing civilization. How do we encourage capital accumulation when the forces of statism work against us?
Chapter 5: The Wealth of Nations: Ideology, Religion, Biology, and EnvironmentHow did the West get rich? What intellectual movements threaten progress, or advance it?
Chapter 6: The Production of Law and Order: Natural Order, Feudalism, and FederalismMust law be positive rather than evolved? Who creates it, and who enforces it?
Chapter 7: Parasitism and the Origin of the StateHow did we get here? How does the ruling class derive its putative legitimacy, and what can the distant origins of governance teach us about the vast managerial social welfare states we endure today?
Chapter 8: From Monarchy to DemocracyIs democracy really the great advancement in human liberty we have been taught to believe? What is the role of natural and artificial elites?
Chapter 9: State, War, and ImperialismStates are necessarily expansionist and bellicose. How do we tame their warring and intervening nature?
Chapter 10: Strategy: Secession, Privatization, and the Prospects of LibertyCan private covenant communities replace the state? Why is a private property order morally urgent? Is secession viable? How do we move forward strategically?
As you can see, this book is a tremendous addition to Hoppe’s body of work, and a hugely important contribution to the “big picture” outlook for the West. Hoppe’s work is more important today than ever, given the penchant of modern bureaucratic states to war, intervene, tax, regulate, debase, and generally plunder the engines of peace and civilization.
Economy, Society, and History is a blueprint for understanding the world, rethinking it, and creating a better one.
The question whether or not our economic development is already "ripe" for socialism originates in the Marxian idea of the development of the productive forces. Socialism can be realized only when its time has come. A form of society cannot perish before it has developed all the productive forces that it is capable of developing; only then is it replaced by another, higher, form. Before capitalism has lived out its course, socialism cannot take over its inheritance.
Marxism likes to compare the social revolution with birth. Premature births are failures; they lead to the death of the new creature.Cf. Kautsky, Die Soziale Revolution, loc. cit., I, pp. 13 ff. From this point of view Marxists inquire whether the attempts of the Bolsheviks in Russia to establish a socialist commonwealth are not premature. It must be difficult indeed for the Marxist, who regards a definite degree of development of the capitalistic mode of production and of heavy industry as a necessary condition for the appearance of socialism, to understand why socialism has achieved victory precisely in the Russia of small peasants and not in highly industrialized Western Europe or in the United States.
It is different when the question is raised whether or not this or that branch of production is ripe for socialization. This question is as a rule posed in such a way that the very posing of the question basically admits that socialized enterprises in general yield smaller outputs than those operating under private ownership and that, therefore, only particular branches of production should be socialized in which no excessive disadvantages are to be expected from this lesser productivity. Thus it is explained that mines, above all coal mines, are already ripe for socialization. Obviously people thus proceed from the view that it is easier to operate a mine than, say, a factory producing for the fashion market; people evidently believe that mining only involves exploiting the gifts of nature, which even the ponderous socialist enterprise can manage. And, again, when others regard the large industrial enterprise as above all ripe for socialization, they are proceeding from the idea that in the large enterprise, which already is working with a certain bureaucratic apparatus anyway, the organizational preconditions for socialization are given. Such ideas involve a serious fallacy. To prove the necessity of the socialization of particular enterprises, it is not enough to show that socialization does little harm in them because they still would not fail then even if they did work more poorly than would be the case under the administration of private enterprise. Whoever does not believe that socialization brings a rise of productivity would, to be consistent, have to consider any socialization as mistaken.
We can also find a hidden admission of the lesser productivity of the economy in a socialist social order in the idea on which many writers base the proposition that the war has set us back in development and has, therefore, further postponed the time of ripeness for socialism. Thus, Kautsky says: "Socialism, that is, general welfare within modern civilization, becomes possible only through the great development of productive forces that capitalism brings, through the enormous riches that it creates and that are concentrated in the hands of the capitalist class. A state that has squandered these riches through a senseless policy, perhaps an unsuccessful war, offers from the outset no favorable point of departure for the quickest diffusion of welfare in all classes."Cf. Kautsky, Die Diktatur des Proletariats, second edition, (Vienna: 1918), p. 40. Whoever—like Kautsky—expects a multiplication of productivity from socialistic production would, however, really have to see one more reason for hastening socialization precisely in the fact that we have become poorer because of the war.
The liberals are much more consistent in this. They are not waiting for another mode of production, perhaps the socialist one, to make the world ripe for liberalism; they see the time for liberalism as always and everywhere given, since, in general and without exception, they assert the superiority of the mode of production resting on private ownership of the means of production and on the free competition of producers.
The way that the socialization of enterprises would have to take place is clearly and distinctly indicated by the public ownership measures of the states and municipalities. One could even say that the administrative art of German states and cities is no more familiar than this practice, which has been followed for many years. With regard to administrative technique, socialization is nothing new, and the socialist governments that are now at work everywhere would have to do nothing beyond continuing what their predecessors in state and communal socialism have already done before.
Of course, neither the new power-holders nor their constituents want to hear anything about that. The masses, which today stormily demand the most rapid accomplishment of socialism, imagine it as something quite different from the extension of state and municipal enterprise. Indeed, they have heard from their leaders again and again that these public enterprises have nothing in common with socialism. What socialization should be, however, if not state and municipal ownership, no one can say.According to Engels (Herrn Eugen Dührings Umwälzung der Wissenschaft, seventh edition [Stuttgart: 11910], p. 299 n.), referring to "the case in which the means of production or of transport and communications have really outgrown the control by corporations and in which state ownership has thus become economically imperative," state ownership means economic progress and "the attainment of a new stage in the taking possession of all productive forces by society itself, even when the state of today carries it out." What Social Democracy previously cultivated is now bitterly taking revenge on it, namely, its always engaging for decades only in demagogic everyday politics and not in principled politics for the final triumph. In fact, Social Democracy has long since given up centralist socialism; in daily politics it has ever more and more become union- oriented, syndicalistic, and, in the Marxian sense, "petty bourgeois." Now syndicalism raises its demands, which stand in irreconcilable contradiction to the program of centralist socialism.
Both orientations have one point in common: they want to make the worker the owner of the means of production again. Centralist socialism wants to achieve this by making the whole working class of the entire world or at least of an entire country the owner of the means of production; syndicalism wants to make the work forces of individual enterprises or individual branches of production the owners of the means of production that they use. The ideal of centralist socialism is at least discussible; that of syndicalism is so absurd that one need waste few words on it.
One of the great ideas of liberalism is that it lets the consumer interest count alone and disregards the producer interest. No production is worth maintaining if it is not suited to bring about the cheapest and best supply. No producer is recognized as having a right to oppose any change in the conditions of production because it runs counter to his interest as a producer. The highest goal of all economic activity is the achievement of the best and most abundant satisfaction of wants at the smallest cost.
This position follows with compelling logic from the consideration that all production is carried on only for the sake of consumption, that it is never a goal but always only a means. The reproach made against liberalism that it thereby takes account only of the consumer viewpoint and disdains labor is so stupid that it scarcely needs refutation. Preferring the producer interest over the consumer interest, which is characteristic of antiliberalism, means nothing other than striving artificially to maintain conditions of production that have been rendered inefficient by continuing progress. Such a system may seem discussible when the special interests of small groups are protected against the great mass of others, since the privileged party then gains more from his privilege as a producer than he loses on the other hand as a consumer; it becomes absurd when it is raised to a general principle, since then every individual loses infinitely more as a consumer than he may be able to gain as a producer. The victory of the producer interest over the consumer interest means turning away from rational economic organization and impeding all economic progress.
Centralist socialism knows this very well. It joins liberalism in fighting all traditional producer privileges. It proceeds from the view that there would he no producer interest at all in the socialist commonwealth, since each one would recognize there that the consumer interest alone is worth considering. Whether or not this assumption is justified will not be discussed here; it is immediately evident that if it should not hold true, socialism could not be what it pretends to be.
Syndicalism deliberately places the producer interest of the workers in the foreground. In making worker groups owners of the means of production (not in so many words but in substance), it does not abolish private property. It also does not assure equality. It does remove the existing inequality of distribution but introduces a new one, for the value of the capital invested in individual enterprises or sectors of production does not correspond at all to the number of workers employed in them. The income of each single worker will be all the greater, the smaller the number of fellow workers employed in his enterprise or sector of production and the greater the value of the material means of production employed in it. The syndicalistically organized state would be no socialist state but a state of worker capitalism, since the individual worker groups would be owners of the capital. Syndicalism would make all repatterning of production impossible; it leaves no room free for economic progress. In its entire intellectual character it suits the age of peasants and craftsmen, in which economic relations are rather stationary.
The centralist socialism of Karl Marx, which once had triumphed over Proudhon and Lassalle, has, in the course of development of recent decades, been pushed back step by step by syndicalism. The struggle between the two views, which outwardly occurred in the form of a struggle between the political-party organization and the labor-union organization and behind the scenes took on the shape of a struggle of leaders risen from the working class against intellectual leaders, has ended with a complete victory of syndicalism. The theories and writings of the party chiefs still outwardly wear the garment of centralist socialism, but the practice of the party has gradually become syndicalist, and in the consciousness of the masses the syndicalist ideology lives exclusively. The theoreticians of centralist socialism have not had the courage—out of tactical concerns, because they wanted to avoid an open breach between the two positions, as in France—to take a decisive stand against the syndicalist policy; if they had mustered the courage for that, they would doubtless have been defeated in this struggle. In many respects they have directly furthered the development of the syndicalist line of thinking, since they fought the development toward centralist socialism that was taking place under the leadership of statist socialism. They had to do this, on the one hand to mark a sharp distinction between their position and that of the authoritarian state, and on the other hand because the economic failures being caused by state and municipal ownership were, after all, becoming so broadly and generally visible that they could become dangerous to the ardent enthusiasm with which the masses were following the obscure ideal of socialism. If one kept pointing out again and again that state railroads and city lighting works were in no way a first step toward realizing the state of the future, one could not educate the population in favor of centralist socialism.
As workers had become unemployed through introduction of improved methods of work, it was syndicalism that sought to destroy the new machines. Sabotage is syndicalistic; in the final analysis, however, every strike is also syndicalistic; the demand for introduction of the social protective tariff is syndicalistic. In a word, all those means of the class struggle that the Social Democratic Party did not want to give up because it feared losing influence on the working masses only stimulated the syndicalistic—Marx would have said "petty-bourgeois"—instincts of the masses. If centralist socialism has any adherents at all today, this is not the accomplishment of Social Democratic agitation but of statism. State and municipal socialism provided publicity for centralist socialism by putting socialism into practice; academic socialism provided literary propaganda for it.
What is going on before our eyes today is of course neither centralist socialism nor syndicalism; it is not organization of production at all and also not organization of distribution, but rather distribution and consumption of consumer goods already on hand and annihilation and destruction of means of production already on hand. Whatever is still being produced is being produced by the remnants of the free economy that are still allowed to exist; wherever this socialism of today has already penetrated, there is no longer any question of production. The forms in which this process is occurring are manifold. Strikes shut enterprises down, and where work is still being done, the ca' canny system itself sees to it that the output is only slight. By high taxes and by compulsion to pay high wages to the workers even when there is no work for them, the entrepreneur is forced to consume his capital. Working in the same direction is inflationism, which, as has been shown, conceals and thereby fosters capital consumption. Acts of sabotage by the workers and inept interventions by the authorities destroy the material apparatus of production and complete the work that war and revolutionary struggles began.
In the midst of all this destruction only agriculture remains, above all small farms. It too has suffered severely under the circumstances, and here too much of the working capital has already been consumed, and ever more of it is being consumed. The large units will probably be socialized or even broken up into small farms. In any case, their productive power will thereby suffer, even apart from the impairment of their capital. Still, the devastation of agriculture remains relatively slight in comparison with the ever-worsening dissolution of the apparatus of industrial production.
The dying out of the spirit of social cooperation, which constitutes the essence of the social revolutionary process that is occurring before our eyes, must entail different consequences in industry, in transport, and in trade—in short, in the city—than in agriculture. A railroad, a factory, a mine simply cannot be operated without that spirit, on which the division of labor and the coordination of labor rest. It is otherwise in agriculture. If the peasant withdraws from exchange and shifts his production back to the autarky of the self-sufficient household economy, he does live worse than he once lived, but he can keep on living anyway. Thus we see the peasantry becoming ever more and more self-sufficient. The peasant is again beginning to produce everything that he wishes to consume in his household and, on the other hand, to cut back his production for the needs of the city-dweller.That holds true of German-Austria especially. In the Reich the conditions are still different for the time being.
What that means for the future of the city population is clear. The industry of Germany and German-Austria has largely lost its foreign market; now it is losing the domestic market also. When work in the workshops is again resumed, the peasants will face the question whether it is not more advantageous for them to obtain industrial products cheaper and better from abroad. The German peasant will again be a free-trader, as he had been up to 40 years ago.
It is scarcely thinkable that this process should go on in Germany without the greatest disruptions. For it does signify no less than the decay of German urban civilization, the slow starvation of millions of German city-dwellers.
If revolutionary syndicalism and destructionism should not remain limited to Germany but instead should spread over all Europe and even to America also, then we would face a catastrophe comparable only with the collapse of the ancient world. Ancient civilization also was built on a far-reaching division of labor and coordination of labor; in it too the—even if limitedWe too have never really had "free competition."—operation of the liberal principle had brought about a great flourishing of material and intellectual culture. All that disappeared as the immaterial bond that held this whole system together, the spirit of social cooperation, disappeared. In the dying Roman Empire also the cities were depopulated; the man who owned no land sank into misery; whoever could somehow do so moved to the countryside to escape starvation.Numerous documents in late Roman legal sources. Cf., e.g., 1. un. C. Si curialis relicta civitate rus habitare maluerit, X, 37. Then, too, there occurred, accompanied outwardly by the most severe disturbances of the monetary system, the process of reversion of the monetary economy to a barter economy, the exchange economy to the economy without exchange. The modern process would differ from the decline of ancient civilization only in that what once occurred over centuries would now complete itself in an incomparably more rapid tempo.
Rationalist utilitarianism rules out neither socialism nor imperialism on principle. Accepting it provides only a standpoint from which one can compare and evaluate the advantages and disadvantages of the various possibilities of social order; one could conceivably become a socialist or even an imperialist from the utilitarian standpoint. But whoever has once adopted this standpoint is compelled to present his program rationally. All resentment, every policy prompted by sentiment, and all mysticism is thereby rejected, regardless of whether it appears in the garb of racial belief or of any other gospel of salvation. The fundamentals of policy can be disputed, pro and con, on rational grounds. If agreement cannot be reached both over the ultimate goals and also, although more seldom, over the choice of means by which they shall be pursued, since their evaluation depends on subjective feelings, one must still succeed in this manner in sharply narrowing the scope of the dispute. The hopes of many rationalists go still further, of course. They think that every dispute can be resolved by intellectual means, since all disagreements arise only from errors and from inadequacy of knowledge. Yet in assuming this they already presuppose the thesis of the harmony of the rightly understood interests of individuals, and this is indeed disputed precisely by imperialists and socialists.
The entire nineteenth century is characterized by the struggle against rationalism, whose dominion seemed undisputed at its beginning. Even its assumption of a fundamental similarity in the way of thinking of all people is attacked. The German must think otherwise than the Briton, the dolichocephalic person otherwise than the brachycephalic; "proletarian" logic is contrasted with "bourgeois" logic. Reason is denied the property of being able to decide all political questions; feeling and instinct must show men the path that they have to tread.
Rational policy and rational economic management have outwardly enriched beyond measure the lives of the individual and of nations. That could be overlooked, since attention was always paid only to the poverty of those still living outside the boundaries of the territories already won by the free economy and because the lot of the modern worker was always compared with that of the rich man of today, instead of the lots of both being compared with those of their ancestors. It is true that modern man is never content with his economic position, that he would like to have things still better. Yet precisely this incessant striving for more wealth is the driving force of our development; one cannot eliminate it without destroying the basis of our economic civilization. The contentment of the serf, who was happy when he did not suffer actual hunger and when his lord did not thrash him too badly, is no ideal state of affairs whose passing one could lament.
It is also true, however, that the rise of outward welfare corresponds to no increase of inner riches. The modern city dweller is richer than the citizen of Periclean Athens and than the knightly troubadour of Provence, but his inner life exhausts itself in mechanical functions at work and in superficial dissipations of his leisure hours. From the pine torch to the incandescent lamp is a great step forward, from the folk song to the popular song a sad step backward. Nothing is more comforting than that people are beginning to become conscious of this lack. In that alone lies hope for a culture of the future that will put everything earlier in the shade.
Yet the reaction against inner impoverishment should not impugn the rationalization of outward life. The romantic longing for wild adventures, for quarreling and freedom from external restraint, is itself only a sign of inner emptiness; it clings to the superficial and does not strive for depth. Relief is not to be hoped for from a farrago of external experience. The individual must seek by himself the way to find within himself the satisfaction that he expects in vain from outside. If we chose to deliver up politics and the economy to imperialism, to resentment, and to mystical feelings, then we would indeed become outwardly poorer but not inwardly richer.
Warlike activity assures a man of that deep satisfaction aroused by the highest straining of all forces in resistance to external dangers. That is no mere atavistic reawakening of impulses and instincts that have become pointless in changed circumstances. The inner feeling of happiness aroused not by victory and revenge but rather by struggle and danger originates in the vivid perception that exigency compels the person to the highest deployment of forces of which he is capable and that it makes everything that lies within him become effective. . . .der Krieg lässtt die Kraft erscheinen, Alles erhebt er zum Ungemeinen, Selber dem Feigen erzeugt er den Mut. (Die Braut von Messina) [. . . war makes strength appear, It raises everything to the extraordinary, Even in the coward it creates courage. (The Bride of Messina)] It is characteristic of very great persons to move forward to highest accomplishment out of an inner drive; others require an external impulse to overcome deep-rooted inertia and to develop their own selves. The common man will never share the happiness that the creative person feels in devotion to his work unless extraordinary circumstances confront him, too, with tasks that demand and reward the commitment of the whole person. Here lies the source of all heroism. Not because the individual feels death and wounds as sweet but rather because, in the enrapturing experience of the deed, he puts them out of his mind does he assail the enemy. Bravery is an emanation of health and strength and is the rearing up of human nature against external adversity. Attack is the most primary initiative. In his feelings man is always an imperialists.This does not refer to the glorification of war by weak-willed esthetes who admire in warlike activity the strength that they lack. This writing-table and coffeehouse imperialism has no significance. With its paper effusions, it is only a fellow-traveler. Games and sport represent an attempt to react from natural, emotional imperialism. It is no accident that England, the home of modern utilitarianism, is also the fatherland of modern sport and that precisely the German—and among them, again, the strata most averse to the utilitarian philosophy, university youth—have shut themselves off the longest from the spread of sports activity.
But reason forbids giving free rein to feelings. To want to beat the world to ruins to let a romantic longing exhaust itself contradicts the simplest deliberation so much that no word need be wasted on it.
The rational policy that is commonly called the ideas of 1789 has been reproached for being unpatriotic—in Germany, un-German. It takes no regard of the special interests of the fatherland; beyond mankind and the individual, it forgets the nation. This reproach is understandable only if one accepts the view that there is an unbridgeable cleavage between the interest of the people as a whole on the one side and that of individuals and of all mankind on the other side. If one starts with the harmony of rightly understood interests, then one cannot comprehend this objection at all. The individualist will never be able to grasp how a nation can become great and rich and powerful at the expense of its members and how the welfare of mankind can obstruct that of individual peoples. In the hour of Germany's deepest degradation, may one raise the question whether the German nation would not have fared better by holding firm to the peaceful policy of much-reviled liberalism rather than to the war policy of the Hohenzollerns?
The utilitarian policy has further been reproached for aiming only at the satisfaction of material interests and neglecting the higher goals of human striving. The utilitarian supposedly thinks of coffee and cotton and on that account forgets the true values of life. Under the reign of such a policy all would have to be caught up in precipitous striving for the lower earthly pleasures, and the world would sink into crass materialism. Nothing is more absurd than this criticism. It is true that utilitarianism and liberalism postulate the attainment of the greatest possible productivity of labor as the first and most important goal of policy. But they in no way do this out of misunderstanding of the fact that human existence does not exhaust itself in material pleasures. They strive for welfare and for wealth not because they see the highest value in them but because they know that all higher and inner culture presupposes outward welfare. If they deny to the state the mission of furthering the realization of the values of life, they do so not out of want of esteem for true values but rather in the recognition that these values, as the most characteristic expression of inner life, are inaccessible to every influence by external forces. Not out of irreligiosity do they demand religious freedom but out of deepest intimacy of religious feeling, which wants to make inner experience free from every raw influence of outward power. They demand freedom of thought because they rank thought much too high to hand it over to the domination of magistrates and councils. They demand freedom of speech and of the press because they expect the triumph of truth only from the struggle of opposing opinions. They reject every authority because they believe in man.
Utilitarian policy is indeed policy for this earth. But that is inherent in all policy. The person who has a low opinion of the mind is not the one who wants to make it free from all external regulation but rather the one who wants to control it by penal laws and machine guns. The reproach of a materialistic way of thinking applies not to individualistic utilitarianism but to collectivistic imperialism.
With the World War mankind got into a crisis with which nothing that happened before in history can be compared. There were great wars before; flourishing states were annihilated, whole peoples exterminated. All that can in no way be compared with what is now occurring before our eyes. In the world crisis whose beginning we are experiencing, all peoples of the world are involved. None can stand aside; none can say that its cause too will not be decided along with the others. If in ancient times the destructive will of the more powerful met its limits in the inadequacy of the means of destruction and in the possibility available to the conquered of escaping persecution by moving away, then progress in the techniques of war and transportation and communication makes it impossible today for the defeated to evade the execution of the victor's sentence of annihilation.
War has become more fearful and destructive than ever before because it is now waged with all the means of the highly developed technique that the free economy has created. Bourgeois civilization has built railroads and electric power plants, has invented explosives and airplanes, in order to create wealth. Imperialism has placed the tools of peace in the service of destruction. With modern means it would be easy to wipe out humanity at one blow. In horrible madness Caligula wished that the entire Roman people had one head so that he could strike it off. The civilization of the twentieth century has made it possible for the raving madness of the modern imperialists to realize similar bloody dreams. By pressing a button one can expose thousands to destruction. It was the fate of civilization that it was unable to keep the external means that it had created out of the hands of those who had remained estranged from its spirit. Modern tyrants have things much easier than their predecessors. He who rules the means of exchange of ideas and of goods in the economy based on the division of labor has his rule more firmly grounded than ever an imperator before. The rotary press is easy to put into fetters, and whoever controls it need not fear the competition of the merely spoken or written word. Things were much more difficult for the Inquisition. No Phillip II could paralyze freedom of thought more severely than a modern censor. How much more efficient than the guillotine of Robespierre are the machine guns of Trotsky! Never was the individual more tyrannized, than since the outbreak of the World War and especially of the world revolution. One cannot escape the police and administrative technique of the present day.
Only one external limit is posed to this rage for destruction. In destroying the free cooperation of men, imperialism undercuts the material basis of its power. Economic civilization has forged the weapons for it. In using the weapons to blow up the forge and kill the smith, it makes itself defenseless in the future. The apparatus of the economy based on division of labor cannot be reproduced, let alone extended, if freedom and property have disappeared. It will die out, and the economy will sink back into primitive forms. Only then will mankind be able to breathe more freely. If the spirit of reflectiveness does not return sooner, imperialism and Bolshevism will be overcome at the latest when the means of power that they have wrested from liberalism will have been used up.
The unfortunate outcome of the war brings hundreds of thousands, even millions, of Germans under foreign rule and imposes tribute payments of unheard-of size on the rest of Germany. A legal order is being established in the world that permanently excludes the German people from possession of those parts of the earth that have the more favorable conditions of production. In the future, no German will be allowed to acquire ownership of land resources and means of production abroad; and millions of Germans, narrowly pushed together, will have to feed themselves badly on the niggardly soil of Germany, while, overseas, millions of square kilometers of the best land lie idle. Need and misery for the German people will emerge from this peace. The population will decline; and the German people, which before the war counted among the most numerous peoples of the earth, will in the future have to be numerically less significant than they once were.
All thinking and effort of the German people must be directed to getting out of this position. This goal can be reached in two ways. One is that of imperialistic policy. To grow strong militarily and to resume the war as soon as the opportunity for attack presents itself—that is the only means thought of today. Whether this way will be practicable at all is questionable. The nations that today have robbed and enslaved Germany are very many. The amount of power that they have exercised is so great that they will watch anxiously to prevent any strengthening of Germany again. A new war that Germany might wage could easily become a Third Punic War and end with the complete annihilation of the German people. But even if it should lead to victory, it would bring so much economic misery upon Germany that the success would not be worth the stakes; moreover, the danger would exist that the German people, in the ecstasy of victory, would fall again into that limitless and boundless madness of victory that has already repeatedly turned to misfortune for it, since it can finally lead again only to a great debacle.
The second course that the German people can take is that of completely turning away from imperialism. To strive for reconstruction only through productive labor, to make possible the development of all powers of the individual and of the nation as a whole by full freedom at home—that is the way that leads back to life. To set nothing against the efforts of imperialistic neighbor states to oppress and de-Germanize us other than productive labor, which makes one wealthy and thereby free, is a way that leads more quickly and surely to the goal than the policy of struggle and war. The Germans who have been subjugated to the Czechoslovak, Polish, Danish, French, Belgian, Italian, Rumanian, and Yugoslav states will better preserve their national character if they strive for democracy and self-government, which finally do lead to full national independence, than if they pin their hopes on a victory of weapons.
The policy that strived for the greatness of the German nation through outward means of force has broken down. It has not only diminished the German people as a whole but also brought the individual German into misery and need. Never has the German people sunk so low as today. If it is now to rise again, then it can no longer strive to make the whole great at the expense of individuals but rather must strive for a durable foundation of the well-being of the whole on the basis of the well-being of individuals. It must switch from the collectivistic policy that it has followed so far to an individualistic one.
Whether such a policy will be at all possible in the future, in view of the imperialism that is now asserting itself everywhere in the world, is another question. But if this should not be the case, then precisely all modern civilization faces downfall.
"The most virtuous person cannot live in peace if that does not please his evil neighbor." Imperialism presses weapons into the hands of all who do not want to be subjugated. To fight imperialism, the peaceful must employ all its means. If they then triumph in the struggle, they may indeed have crushed their opponent, yet themselves have been conquered by his methods and his way of thinking. They then do not lay down their weapons again; they themselves remain imperialists.
Englishmen, Frenchmen, and Americans had already shed all cravings for conquest in the nineteenth century and had made liberalism their first principle. To be sure, even in their liberal period their policy was not entirely free of imperialist deviations, and one cannot immediately chalk up every success of the imperialistic idea among them to the account of defense. But no doubt their imperialism drew its greatest strength from the necessity of warding off German and Russian imperialism. Now they stand as victors and are not willing to content themselves with what they indicated before their victory as their war aim. They have long since forgotten the fine programs with which they went to war. Now they have power and are not willing to let it get away. Perhaps they think that they will exercise power for the general good, but that is what all those with power have believed. Power is evil in itself, regardless of who exercises it.Cf. J. Burckhardt, Weltgeschichtliche Betrachtungen (Berlin, 1905), p. 96.
But if they now do want to adopt that policy with which we have suffered shipwreck, so much the worse for them; for us that can still be no reason for abstaining from what benefits us. We demand the policy of calm, peaceful development not indeed for their sake but for our own sake. It was the greatest error of German imperialists that they accused those who had advised a policy of moderation of having unpatriotic sympathy for foreigners; the course of history has shown how much they thereby deluded themselves. Today we know best where imperialism leads.
It would be the most terrible misfortune for Germany and for all humanity if the idea of revenge should dominate the German policy of the future. To become free of the fetters that have been forced upon German development by the peace of Versailles, to free our fellow nationals from servitude and need, that alone should be the goal of the new German policy. To retaliate for wrong suffered, to take revenge and to punish, does satisfy lower instincts, but in politics the avenger harms himself no less than the enemy. The world community of labor is based on the reciprocal advantage of all participants. Whoever wants to maintain and extend it must renounce all resentment in advance. What would he gain from quenching his thirst for revenge at the cost of his own welfare?
In the League of Nations of Versailles the ideas of 1914 are in truth triumphing over those of 1789; that it is not we who have helped them to victory, but rather our enemies, and that the oppression turns back against us is important for us but less decisive from the standpoint of world history. The chief point remains that nations are being "punished" and that the forfeiture theory comes to life again. If one admits exceptions to the right of self-determination of nations to the disadvantage of "evil" nations, one has overturned the first principle of the free community of nations. That Englishmen, North Americans, French, and Belgians, those chief exporters of capital, thereby help gain recognition for the principle that owning capital abroad represents a form of rule and that its expropriation is the natural consequence of political changes shows how blind rage and the desire for momentary enrichment repress rational considerations among them today. Cool reflection would be bound to lead precisely these peoples to quite other behavior in questions of international capital movements.
The way that leads us and all humanity out of the danger that world imperialism signifies for the productive and cultural community of nations and so for the fate of civilization is rejection of the policy of feeling and instinct and return to political rationalism. If we wanted to throw ourselves into the arms of Bolshevism merely for the purpose of annoying our enemies, the robbers of our freedom and our property, or to set their house on fire too, that would not help us in the least. It should not be the goal of our policy to drag our enemies into our destruction with us. We should try not to be destroyed ourselves and try to rise again out of servitude and misery. That, however, we can attain neither by warlike actions nor by revenge and the policy of despair. For us and for humanity there is only one salvation: return to the rationalistic liberalism of the ideas of 1789.
It may be that socialism represents a better form of organization of human labor. Let whoever asserts this try to prove it rationally. If the proof should succeed, then the world, democratically united by liberalism, will not hesitate to implement the communist community. In a democratic state, who could oppose a reform that would be bound to bring the greatest gain to by far the overwhelming majority? Political rationalism does not reject socialism on principle. But it does reject in advance the socialism that hinges not on cool understanding but rather on unclear feelings, that works not with logic but rather with the mysticism of a gospel of salvation, the socialism that does not proceed from the free will of the majority of the people but rather from the terrorism of wild fanatics.
- Liberal or Pacifistic NationalismThat politics should be national is a modern postulate.
In most countries of Europe the princely state had replaced the estate system of the Middle Ages from the beginning of modern times. The political conception of the princely state is the interest of the ruler. The famous maxim of Louis XIV, L'état c'est moi, expresses most briefly the conception that was still alive at the three European imperial courts until the recent upheavals. It is no less clear when Quesnay, whose doctrines nevertheless already lead into the new conception of the state, precedes his work with the motto Pauvre paysan, Pauvre royaume; pauvre royaume, pauvre roi. It is not enough for him to show that on the well-being of the peasant that of the state also depends; he still considers it necessary to show that the king also can be rich only when the peasant is. Only then does the necessity appear proved of taking measures to raise the well-being of the peasants. For the object of the state is precisely the prince.
Against the princely state there then arises in the eighteenth and nineteenth centuries the idea of freedom. It revives the political thought of the republics of antiquity and of the free cities of the Middle Ages; it links up with the monarchomachs' hostility to princes; it patterns itself on the example of England, where the crown had already suffered a decisive defeat in the seventeenth century; it fights with the entire armament of philosophy, of rationalism, of natural law, and of history; it wins over the great masses through literature, which puts itself entirely at its service. Absolute kingship succumbs to the attack of the movement for freedom. In its place appears here parliamentary monarchy, there a republic.
The princely state has no natural boundaries. To be an increaser of his family estate is the ideal of the prince; he strives to leave to his successor more land than he inherited from his father. To keep on acquiring new possessions until one encounters an equally strong or stronger adversary—that is the striving of kings. For fundamentally, their greed for lands knows no boundaries; the behavior of individual princes and the views of the literary champions of the princely idea agree on that. This principle threatens, above all, the existence of all smaller and weaker states. That they are nevertheless able to maintain themselves is attributable only to the jealousy of the big ones, which anxiously watch that none should become too strong. That is the conception of European equilibrium, which forms coalitions and breaks them up again. Where it is possible without endangering the equilibrium, smaller states are destroyed; an example: the partition of Poland. Princes regard countries no differently from the way an estate owner regards his forests, meadows, and fields. They sell them, they exchange them (e.g., for "rounding off" boundaries); and each time rule over the inhabitants is transferred also. On this interpretation, republics appear as unowned property that anyone may appropriate if he can. This policy did not reach its high point, by the way, until the nineteenth century, in the Enactment of the Delegates of the Holy Roman Empire of 1803, in Napoleon's establishments of states, and in the decisions of the Congress of Vienna.
Lands and peoples are, in the eyes of princes, nothing but objects of princely ownership; the former form the basis of sovereignty, the latter the appurtenances of landownership. From the people who live in "his" land the prince demands obedience and loyalty; he regards them almost as his property. This bond that binds him with each one of his subjects should, however, also be the only one that joins the individual persons into a unit. The absolute ruler not only regards every other community between his subjects as dangerous, so that he tries to dissolve all traditional comradely relations between them that do not derive their origin from state laws enacted by him and is hostile to every new formation of community, perhaps through clubs; he also will not allow the subjects of his different territories to begin to feel themselves comrades in their role as subjects. But, of course, in seeking to tear apart all class ties to make subjects out of nobles, the bourgeoisie, and peasants, the prince atomizes the social body and thereby creates the precondition for the rise of a new political sentiment. The subject who has grown unaccustomed to feel himself a member of a narrow circle begins to feel himself a person, a member of his nation, and a citizen of the state and of the world. The way opens up for the new outlook on the world.
The liberal theory of the state, hostile to princes, rejects the princes' greed for lands and chaffering in lands. First of all, it finds it a matter of course that state and nation coincide. For so it is in Great Britain, the model country of freedom, so in France, the classical land of the struggle for freedom. That seems such a matter of course that no further word is wasted on it. Since state and nation coincide and there is no need to change this, there is no problem here.
The problem of state boundaries first appeared when the power of the idea of freedom gripped Germany and Italy. Here and in Poland there stands behind the despicable despots of the present day the great shadow of a vanished unified state. All Germans, Poles, and Italians have a great political goal in common: the liberation of their peoples from the rule of princes. That gives them first unity of political thinking and then unity of action. Across state boundaries, guarded by customs guards and gardeess, the peoples stretch their hands in unity. The alliance of the princes against freedom is confronted by the union of peoples fighting for their freedom.
To the princely principle of subjecting just as much land as obtainable to one's own rule, the doctrine of freedom opposes the principle of the right of self-determination of peoples, which follows necessarily from the principle of the rights of man.Cf. Sorel, Nouveaux essais d'histoire et de critique (Paris: 1898), pp. 99 ff. No people and no part of a people shall be held against its will in a political association that it does not want. The totality of freedom-minded persons who are intent on forming a state appears as the political nation; patrie, Vaterland becomes the designation of the country they inhabit; patriot becomes a synonym of freedom-minded.Cf. Michels, "Zur historischen Analyse des Patriotismus," Archiv für Sozialwissenschaft und Sozialpolitik, vol. 36, 1913, pp. 38 ff., 402 f.; Pressensé, "L'idée de Patrie," Revue mensuelle de l'École Anthropologie de Paris, vol. 9, 1899, pp. 91 ff. In this sense the French begin to feel themselves a nation when they break the despotism of the Bourbons and when they take up the struggle against the coalition of monarchs who threaten their just won freedom. The Germans, the Italians become nationally minded because foreign princes, joined in the Holy Alliance, hinder them from the establishing a free state. This nationalism directs itself not against foreign peoples but against the despot who subjugates foreign peoples also. The Italian hates above all not the Germans but the Bourbons and Habsburgs; the Pole hates not the Germans or Russians but the Czar, the King of Prussia, and the Emperor of Austria. And only because the troops on which the rule of the tyrants rests are foreign does the struggle also adopt a slogan against foreigners. But even in battle the Garibaldians shouted to the Austrian soldiers: Passate l'Alpi e tornerem fratelli.Cf. Robert Michels, "Elemente zur Entstehungsgeschichte des Imperialismus in Italien," Archiv für Sozialwissenschaft, vol. 34, 1912, p. 57. ["Go back across the Alps, and we'll become brothers again."] Among themselves the individual nations fighting for freedom get along marvelously. All peoples hail the struggle for freedom of the Greeks, the Serbs, and the Poles. In "Young Europe" the freedom fighters are united without distinction of nationality.
The nationality principle above all bears no sword against members of other nations. It is directed in tyrannos.
Therefore, above all, there is also no opposition between national and citizen-of-the-world attitudes. Cf. Seipel, Nation und Staat (Vienna: 1916), pp. 11 f. footnote; Meinecke, loc. cit., pp. 19 f. The idea of freedom is both national and cosmopolitan. It is revolutionary, for it wants to abolish all rule incompatible with its principles, but it is also pacifistic.Cf. Michels, "Patriotismus," loc. cit., p. 403. What basis for war could there still be, once all peoples had been set free? Political liberalism concurs on that point with economic liberalism, which proclaims the solidarity of interests among peoples.
One must also keep that in mind if one wants to understand the original internationalism of the socialist parties since Marx. Liberalism, too, is cosmopolitan in its struggle against the absolutism of the princely state. Just as the princes stand together to defend themselves against the advance of the new spirit, so the peoples also hold together against the princes. If the Communist Manifesto calls on the proletarians of all countries to unite in the struggle against capitalism, then that slogan is consistently derived from the asserted fact of the identity of capitalistic exploitation in all countries. It is no antithesis, however, to the liberal demand for the national state. It is no antithesis to the program of the bourgeoisie, for the bourgeoisie, too, is in this sense international. The emphasis lies not on the words "all countries" but on the word "proletarians." That like-thinking classes in the same position in all countries must combine is presupposed as a matter of course. If any point at all can be perceived in this exhortation, it is only the point made against pseudo-national strivings that fight every change in traditional arrangements as an infringement on warranted national individuality.
The new political ideas of freedom and equality triumphed first in the West. England and France thus became the political model countries for the rest of Europe. If, however, the liberals called for adoption of foreign institutions, then it was only natural that the resistance mounted by the old forces also made use of the age-old device of xenophobia. German and Russian conservatives also fought against the ideas of freedom with the argument that they were foreign things not suitable for their peoples. Here national values are misused for political purposes.Cf. Schultze-Gaevernitz, Volkswirtschaftliche Studien aus Russland (Leipzig: 1899), pp. 173 ff.; Bauer, Nationalitätenfrage, loc. cit., pp. 138 ff. But there is no question of opposition to the foreign nation as a whole or to its individual members.
So far as relations among peoples are concerned, therefore, the national principle is above all thoroughly peaceful. As a political ideal it is just as compatible with the peaceful coexistence of peoples as Herder's nationalism as a cultural ideal was compatible with his cosmopolitanism. Only in the course of time does peaceful nationalism, which is hostile only to princes but not to peoples also, change into a militaristic nationalism. This change takes place, however, only at the moment when the modern principles of the state, in their triumphant march from West to East, reach the territories of mixed population.
The significance of the nationality principle in its older peaceful form becomes especially clear to us when we observe the development of its second postulate. First of all, the nationality principle includes only the rejection of every overlordship and so also of every foreign overlordship; it demands self-determination, autonomy. Then, however, its content expands; not only freedom but also unity is the watchword. But the desire for national unity, too, is above all thoroughly peaceful.
One of its sources, as already mentioned, is historical remembrance. From the dismal present the glance turns back toward a better past. And this past shows a unified state, not in such splendid pictures for every people as for the Germans and the Italians, but, for most, attractive enough.
But the idea of unity is not merely romanticism; it is also important for political reality. In unity strength is sought to overcome the alliance of the oppressors. Unity in a unified state offers the peoples the highest assurance of maintaining their freedom. And there, too, nationalism does not clash with cosmopolitanism, for the unified nation does not want discord with neighboring peoples, but peace and friendship.
So we also see, then, that the idea of unity cannot exert its state-destroying and state-creating power where freedom and self-government already prevail and seem assured without it. To this day Switzerland has scarcely been tempted by that idea. The least inclination to secession is shown by the German-Swiss, and very understandably: they could only have exchanged freedom for subjugation in the German authoritarian state. But the French also, and on the whole also the Italians, have felt themselves so free in Switzerland that they felt no desire for political unification with their fellows in nationality.
For the national unified state, however, yet a third consideration is at work. Without doubt the stage of development of the international division of labor already reached today required an extensive unification of law and of communication and transportation facilities in general, and this demand will become all the more pressing the more the economy is further reshaped into a world economy. When economic contacts were still in their earliest stages, on the whole scarcely extending beyond the boundaries of a village, the splitting of the earth's surface into innumerable small legal and administrative districts was the natural form of political organization. Apart from military and foreign-policy interests, which, after all, did not press everywhere for union and for formation of great empires—and even where they were at work in this direction in the age of feudalism and still more in the age of absolutism, they did not always lead to formation of national states—there were no circumstances that demanded unification of law and administration. That became a necessity only to the extent that economic relations began to reach out more and more beyond the boundaries of provinces, of countries, and finally of continents.
Liberalism, which demands full freedom of the economy, seeks to dissolve the difficulties that the diversity of political arrangements pits against the development of trade by separating the economy from the state. It strives for the greatest possible unification of law, in the last analysis for world unity of law. But it does not believe that to reach this goal, great empires or even a world empire must be created. It persists in the position that it adopts for the problem of state boundaries. The peoples themselves may decide how far they want to harmonize their laws; every violation of their will is rejected on principle. Thus a deep chasm separates liberalism from all those views that want forcibly to create a great state for the sake of the economy.
Yet political realism must first still reckon with the existence of states and with the difficulties that they pit against the creation of supranational law and freedom of international transactions. It is with envy, therefore, that the patriots of nations fragmented into many states regard the nationally unified peoples. They want to follow their example. They view things with different eyes than do liberal doctrinaires. In the Germany of the German Confederation, the necessity of unification of law and the administration of justice, of communication and transportation facilities, and of the entire administration was recognized as urgent. A free Germany could also have been created through revolutions within the individual states; for that, unification would not have first been necessary. In favor of the unified state, however, there speaks in the eyes of political realists not only the necessity of setting an alliance of the oppressed against the alliance of the oppressors in order to achieve freedom at allThink of Schleswig-Holstein, the left bank of the Rhine, etc. but also the further necessity of holding together in order to find in unity the strength to preserve freedom. Even apart from that, the necessity of trade is pressing for unity. It will no longer do to permit the fragmentation in law, in monetary systems, in communications and transportation, and in many other fields, to continue. In all these fields the times require unification, even beyond national boundaries. Already the peoples are beginning to make preliminary preparations for world unity in all these matters. Does it not seem obvious to achieve in Germany, to begin with, what the other peoples have already achieved—to create a German civil law as precursor of the coming world law, a German penal law as a preliminary stage for world penal law, a German railroad union, a German monetary system, a German postal system? All that, however, the German unified state is to assure. The program of the men of freedom, therefore, cannot limit itself to the "auction of thirty princes' crowns" (Freiligrath); even if only because of the stage of economic development, it must call for the unified state.
Thus the striving for the unified state already contains the kernel of the new interpretation of the nationality principle, which leads from the peaceful liberal nationality principle to militant power-policy nationalism, to imperialism.
- Militant or Imperialistic NationalismA. The Nationality Question in Territories with Mixed PopulationsThe princely state strives restlessly for expansion of its territory and for increase in the number of its subjects. On the one hand it aims at the acquisition of land and fosters immigration; on the other hand it sets the strictest penalties against emigration. The more land and the more subjects, the more revenues and the more soldiers. Only in the size of the state does assurance of its preservation lie. Smaller states are always in danger of being swallowed up by larger ones.
For the free national state, all these arguments do not hold true. Liberalism knows no conquests, no annexations; just as it is indifferent towards the state itself, so the problem of the size of the state is unimportant to it. It forces no one against his will into the structure of the state. Whoever wants to emigrate is not held back. When a part of the people of the state wants to drop out of the union, liberalism does not hinder it from doing so. Colonies that want to become independent need only do so. The nation as an organic entity can be neither increased nor reduced by changes in states; the world as a whole can neither win nor lose from them.
Liberalism has been able to endure only in Western Europe and in America. In Central and Eastern Europe, after flourishing briefly, it was displaced again; its democratic program still lives on there only in the programs and more rarely in the deeds of the socialist parties. State practice has gradually perverted the pacifistic nationality principle of liberalism into its opposite, into the militant, imperialistic nationality principle of oppression. It has set up a new ideal that claims a value of its own, that of the sheer numerical size of the nation.
From the cosmopolitan standpoint, one must describe the splitting of mankind into different peoples as a circumstance that causes much trouble and costs. Much labor is spent on learning foreign languages and is wasted on translations. All cultural progress would make its way more easily, every contact between peoples would proceed better, if there were only one language. Even one who appreciates the immeasurable cultural value of diversity of material and intellectual arrangements and of the development of particular individual and national characters must admit this and must not deny that the progress of mankind would be made quite extraordinarily more difficult if there did not exist, besides the small nations numbering only a few hundred thousand or a few million souls, larger nations also.
But even the individual can experience the inconvenience of the multiplicity of languages. He notes it when he travels abroad, when he reads foreign writings, or when he wants to speak with his fellow men or write for them. The ordinary man may not care whether his nation is numerically larger or smaller, but for the intellectual worker this is of the greatest significance. For "for him language is more than a mere means of understanding in social contacts; it is for him one of his chief tools, indeed often his only tool, and one that he can scarcely change."Cf. Kautsky, Nationalität und Internationalität (Stuttgart: 1908), p. 19; also Paul Rohrbach, Der deutsche Gedanke in der Welt (Dusseldorf and Leipzig: Karl Robert Langewiesche Verlag, 1912), copies 108 to 112 thousand, p. 13. It is decisive for the success of literary work whether the author can make himself directly understood by a larger or a smaller number of persons. No one, therefore, desires a large size for his own nation more ardently than the poet and the scholarly writer, the intellectual leaders of nations. It is easy to understand why they may be enthusiastic about size. But that alone is far from explaining the popularity of this ideal.
For these leaders cannot in the long run even recommend any goals to the nation that the nation has not chosen itself. And there are still other ways to broaden the public for writers; the education of the people can be broadened, creating as many more readers and hearers as through diffusion of the national language abroad. The Scandinavian nations have trod this path. They seek national conquests not abroad but at home.
That the national state could become imperialistic, that, neglecting older principles, it could see a goal of its policy first in maintaining and then in increasing the number of members of the nation, even at the cost of the right of self-determination of individuals and of entire peoples and parts of peoples—for that development, circumstances were decisive that were foreign to the liberalism that had originated in the West and foreign to its pacifistic nationality principle. What was decisive was the fact that the peoples in the East do not have fully distinct areas of settlement but rather live locally mingled in broad territories, as well as the further fact that such mixing of peoples keeps occurring afresh through the migration of peoples. These two problems have brought militant or imperialistic nationalism to maturity. It is of German origin, for the problems out of which it arose first came onto the historical scene when liberalism reached German soil. But it has by no means remained limited to Germany; all peoples in a position to know that these circumstances are subjecting some of their fellow nationals to national alienation have followed the German people on the same path or will do so if history does not first find another solution to the problem.
Every observation of the problems to which we now turn must start from the fact that the conditions under which people live on particular parts of the earth's surface are different. We would best recognize the significance of this fact by trying to disregard it. If the conditions of life were the same everywhere on the earth's surface, then on the whole there would be no incentive for individuals and for peoples to change the places where they live.One could object that even if the conditions of life were everywhere the same, there would have to be migrations when one people grew in size more rapidly than others, for then migrations would have to take place out of the more densely settled territories into the more thinly settled ones. The Malthusian law entitles us to assume, however, that growth of population also depends on the natural conditions of life, so that merely from the assumption of the same external conditions of life there follows equality of increase in population.
That the conditions of life are unequal, however, brings it about that—to use Ségur's formulation—the history of mankind is the striving of peoples to progress from living in worse territories to better ones. World history is the history of national migrations.
National migrations take place either in forcible military form or in peaceful forms. The military form used to be the predominant one. The Goths, Vandals, Lombards, Normans, Huns, Avars, and Tartars seized their new homes with force and exterminated, drove away, or subjugated the local populations. Then there were two classes of different nationality in the country, the masters and the subjugated, which not only confronted each other as political and social classes but also were foreign to each other in ancestry, culture, and language. In the course of time these national contrasts disappeared, either because the conquerors were ethnically absorbed into the conquered or because the subjugated groups became assimilated to the victors. It has been centuries since this process took place in Spain and Italy, in Gaul, and in England.
In Eastern Europe there are still broad territories where this assimilation process has not begun at all or is only just beginning. Between the Baltic barons and their Estonian and Latvian tenants, between the Magyar or Magyarized nobles of Hungary and the Slavic or Rumanian peasants and farm workers, between the German townspeople of the Moravian cities and the Czech proletarians, between the Italian landlords of Dalmatia and the Slavic peasants and farm hands, the deep gap of national differences yawns even today.
The doctrine of the modern state and modern freedom that was developed in Western Europe knows nothing of these conditions. The problem of nationally mixed populations does not exist for it. For it, the formation of nations is a completed historical process. Frenchmen and Englishman today no longer take any foreign components into their European homelands; they live in compact territories of settlement. If individual foreigners do come to them, then they are easily and painlessly assimilated. No frictions between nationalities could arise from applying the nationality principle on English and French soil in Europe (but things are different in the colonies and in the United States). And so the opinion could also arise that the full application of the nationality principle could assure eternal peace. For since, according to the liberal view, wars of course arise only through kings' lust for conquest, there can be no more war once every people is constituted as a separate state. The older nationality principle is peaceful; it wants no war between peoples and believes that no reason for one exists.
Then it is suddenly discovered that the world does not show the same face everywhere as on the Thames and on the Seine. The movements of the year 1848 first lifted the veil that despotism had spread over the mixture of peoples in the empire of the Habsburgs; the revolutionary movements that later broke out in Russia, in Macedonia and Albania, in Persia and China, revealed the same problems there also. As long as the absolutism of the princely state had oppressed all in the same way, these problems could not be recognized. Now, however, scarcely as the struggle for freedom is beginning, they loom menacingly.Cf. Bernatzik, Die Ausgestaltung des Nationalgefühls im 19. Jahrhundert (Hanover: 1912), p. 24.
It seemed obvious to work for their solution with the traditional means of the Western doctrine of freedom. The majority principle, whether applied in the form of a referendum or in some other way, was considered suitable for solving all difficulties. That is democracy's answer. But here, was such a solution thinkable and possible at all? Could it have established peace here?
The basic idea of liberalism and of democracy is the harmony of interests of all sections of a nation and then the harmony of interests of all nations. Since the rightly understood interest of all strata of the population leads to the same political goals and demands, the decision on political questions can be left to the vote of the entire people. It may be that the majority errs. But only through errors that it itself has committed and whose consequences it itself suffers can a people achieve insight and can it become politically mature. Errors once committed will not be repeated; people will recognize where the best in truth is to be found. Liberal theory denies that there are special interests of particular classes or groups opposing the common good. It can therefore see only justice in the decisions of the majority; for the errors that were committed revenge themselves on all, both on those who had supported them and on the outvoted minority, which also must pay for not having understood how to win the majority over to its side.
As soon, however, as one admits the possibility and even the necessity of genuinely opposed interests, the democratic principle also has lost its validity as a "Just" principle. If Marxism and Social Democracy see an irreconcilable opposition of conflicting class interests everywhere, then they must, consistently, also reject the democratic principle. This has long been overlooked, since Marxism, precisely among those two nations among whom it had been able to gain the largest number of adherents, the Germans and Russians, has pursued not only socialist but also democratic goals. But that is only a matter of historical accident, the consequence of quite particular circumstances coming together. The Marxists fought for the right to vote, freedom of the press, and the right to form associations and assemblies as long as they were not the ruling party; where they came to power they did nothing more quickly than set these freedoms aside.Cf. Bucharin, Das Programm der Kommunisten (Bolschewiki) (Vienna: 1919), pp. 23 ff. That quite coincides with the behavior of the Church, which behaves democratically wherever others rule but, where it itself rules, wants nothing of democracy. A majority decision can never be "Just" for the Marxists as it is for liberalism; for them it is always only the expression of the will of a particular class. Even seen from this angle alone, therefore, socialism and democracy are irreconcilable contraries; the term Social Democrat contains a contradictio in adjecto. For the Marxists, only the triumph of the proletariat, the provisional goal and the end of historical evolution, is good; everything else is bad.
Like the Marxists, the nationalists also deny the doctrine of the harmony of all interests. Between peoples irreconcilable oppositions are said to exist; here one can never let things depend on the decision of the majority if one has the power to oppose it.
Democracy seeks first to solve the political difficulties that impede the establishment of a national state in territories with nationally mixed populations by those means that have proved themselves in nationally unified countries. The majority should decide; the minority should yield to the majority. That shows, however, that it does not see the problem at all, that it does not have any inkling of where the difficulty lies. Yet belief in the correctness and the all-healing power of the majority principle was so strong that people for a long time would not recognize that nothing could be accomplished with it here. The obvious failure was always attributed to other causes. There were writers and politicians who traced the national disorders in Austria to the fact that there still was no democracy in its territory; if the country should become democratically governed, then all friction between its peoples would disappear. Precisely the opposite is true. National struggles can arise only on the soil of freedom; where all peoples are subjugated—as in Austria before March 1848—then there can be no dissension among them.For that reason antidemocratic and churchly writers also recommend the return to the absolutism of the princes and of the Pope as a means of avoiding national struggles. The violence of the struggles between the nationalities grew to the extent that the old Austria approached democracy. They were not ended at all by the dissolution of the state; they are carried on only more bitterly in the new states, where ruling majorities confront national minorities without the mediation of the authoritarian state, which softens much harshness.
To recognize the deeper grounds for the failure of democracy in the nationality struggles of our time, one must first of all strive for clarity about the essence of democratic government.
Democracy is self-determination, self-government, self-rule. In democracy, too, the citizen submits to laws and obeys state authorities and civil servants. But the laws were enacted with his concurrence; the bearers of official power got into office with his indirect or direct concurrence. The laws can be repealed or amended, officeholders can be removed, if the majority of the citizens so wishes. That is the essence of democracy; that is why the citizens in a democracy feel free.
He who is compelled to obey laws on whose enactment he has no influence, he who must endure a government ruling over him in whose formation he can take no part, is, in the political sense, unfree and is politically without rights, even though his personal rights may be protected by law.Frequently, of course, civil rights can also be lost because of political powerlessness. That does not mean that every minority is politically unfree in the democratic state. Minorities can become the majority, and this possibility influences their position and the way that the majority must behave towards them. The majority parties must always take care that their actions do not strengthen the minority and do not offer it the opportunity to come to power. For the thoughts and programs of the minority affect the entire people as a political entity, whether or not they are able to prevail. The minority is the defeated party, but in the struggle of parties it has had the possibility of winning and, as a rule, despite the defeat, it maintains the hope of winning some time later and becoming the majority.
The members of national minorities that do not hold a ruling position by special privilege, are, however, politically unfree. Their political activity can never lead to success, for the means of political influence on their fellow men, the spoken and written word, are bound up with nationality. In the great national political discussions from which political decisions follow, the citizens of foreign nationality stand aside as mute spectators. They are negotiated about along with others, but they do not join in the negotiations. The German in Prague must pay municipal assessments; he too is affected by every decree of the municipality, but he must stand aside when the political struggle rages over control of the municipality. What he wishes and demands in the municipality is a matter of indifference to his Czech fellow citizens. For he has no means of influencing them unless he gives up the special ways of his people, accommodates himself to the Czechs, learns their language, and adopts their way of thinking and feeling. So long, however, as he does not do this, so long as he remains within his circle of inherited speech and culture, he is excluded from all political effectiveness. Although he also may formally, according to the letter of the law, be a citizen with full rights, although he may, because of his social position, even belong to the politically privileged classes, in truth he is politically without rights, a second-class citizen, a pariah. For he is ruled by others without himself having a share in ruling.
The political ideas that cause parties to come and go and states to be created and destroyed are bound up with nationality today just as little as any other cultural phenomenon. Like artistic and scientific ideas, they are the common property of all nations; no single nation can escape their influence. Yet every nation develops currents of ideas in its own special way and assimilates them differently. In every people they encounter another national character and another constellation of conditions. The idea of Romanticism was international, but every nation developed it differently, filled it with a particular content, and made something else out of it. We speak rightly, therefore, of German Romanticism as a particular trend in art that we can contrast with the Romanticism of the French or the Russians. And it is no different with political ideas. Socialism had to become something different in Germany, something different in France, something different in Russia. Everywhere, indeed, it met with a particular way of political thinking and feeling, with another social and historical development—in short, with other people and other conditions.
We now recognize the reason why national minorities that hold political power because of special privileges hang on to these privileges and to the ruling position bound up with them incomparably more tenaciously than do other privileged groups. A ruling class not of different nationality from the ruled still retains, even when overthrown, a greater political influence than would accrue to it according to the number of its members among the new rulers. It retains at least the possibility, under the new conditions, of fighting for power anew as the opposition party, of defending its political ideas, and of leading to new victories. The English Tories, as often as they were deprived of their privileges by a reform, have still celebrated a political resurrection every time. The French dynasties have not lost through dethronement all prospect of regaining the crown. They were able to form mighty parties that worked for a restoration; and if their efforts did not lead to success during the Third Republic, this was due to the intransigence and personal wretchedness of the pretender at the time and not to any fact that such efforts were quite hopeless. Rulers of foreign nationality, however, once they have left the scene, can never get power back unless they have the help of foreign arms; and, what is much more important, as soon as they no longer hold power, they not only are deprived of their privileges but are completely powerless politically. Not only are they unable to maintain influence corresponding to their numbers, but, as members of a foreign nationality, they no longer have any possibility at all of even being politically active or of having influence on others. For the political thoughts that now become dominant belong to a cultural circle that is foreign to them and are thought, spoken, and written in a language that they do not understand; they themselves, however, are not in a position to make their political views felt in this environment. From being rulers they become not citizens with equal rights but powerless pariahs who have no say when matters concerning them are being debated. If—without regard to theoretical and antiquarian misgivings that might be raised against it—we want to see a principle of modern democracy in the old postulate of the estates, nil de nobis sine nobis [nothing concerning us without us], we also see that it cannot be implemented for national minorities. They are governed; they do not have a hand in governing; they are politically subjugated. Their "treatment" by the national majority may be quite a good one; they may also remain in possession of numerous nonpolitical and even a few political privileges; yet they retain the feeling of being oppressed just because they are "treated" after all and may not take part.
The large German landowners in those Austrian crown lands that had a Slavic majority in the legislature felt themselves—despite their electoral privileges, which assured them a special representation in the provincial chamber and in the provincial committee—nevertheless oppressed, since they were faced by a majority whose political thinking they could not influence. For the same reason, German officeholders and house owners who possessed an electoral privilege that assured them a third of the seats on the municipal council in a municipality with a Slavic council majority still felt oppressed.
No less politically powerless are national minorities that never have possessed political dominance. This needs to be especially mentioned just as little of members of historyless nations who have lived as political inferiors for centuries under foreign rulers as of immigrants into colonial settlement areas overseas. Accidental circumstances may temporarily give them the possibility of political influence; in the long run this is out of the question. If they do not want to remain politically without influence, then they must adapt their political thinking to that of their environment; they must give up their special national characteristics and their language.
In polyglot territories, therefore, the introduction of a democratic constitution does not mean the same thing at all as introduction of democratic autonomy. Majority rule signifies something quite different here than in nationally uniform territories; here, for a part of the people, it is not popular rule but foreign rule.On the point that the majority principle appears applicable only where it is a question of settlement of differences within a homogeneous mass, cf. Simmel, Soziologie (Leipzig: 1908), pp. 192 ff. If national minorities oppose democratic arrangements, if, according to circumstances, they prefer princely absolutism, an authoritarian regime, or an oligarchic constitution, they do so because they well know that democracy means the same thing for them as subjugation under the rule of others. That holds true everywhere and also, so far, for all times. The often cited example of Switzerland is not relevant here. Swiss democratic local administration is possible without friction under the nationality circumstances of Switzerland only because internal migrations between the individual nationalities have long since had no significance there. If, say, migrations of French Swiss to the east should lead to stronger foreign national minorities in the German cantons, then the national peace of Switzerland would already have vanished long ago.
For all friends of democracy, for all those who see the political remedy only in the self-administration and self-government of a people, this must cause severe distress. The German democrats of Austria were in this position, above all, as well as the few honorable democrats that the Hungarian people counted in their midst. It was they who were looking for new forms of democracy to make democracy possible even in polyglot countries.
Furthermore, people tend to recommend proportional representation as a remedy for the defects of the majority system. For nationally mixed territories, however, proportional representation is no way out of these difficulties. A system of proportional representation is applicable only to elections but not also to decisions about acts of legislation, administration, and jurisprudence. Proportional representation makes it impossible, on the one hand, that one party, through gerrymandering, be represented less in the representative body than corresponds to its strength; on the other hand it assures the minority of representation in the bodies of elected representatives and so offers it the possibility of exercising a check on the majority and of making its own voice heard. All that does not operate for a national minority. Being an actual minority in the people, it can never hope to obtain a majority in the representative body through proportional representation. There remains to it, therefore, only the second significance of proportional representation. But the mere possibility of having some seats in the representative body is of little value for the national minority. Even when its representatives can sit in the representative body and take a part in deliberations, speeches, and decisions, the national minority still remains excluded from collaboration in political life. A minority is politically collaborating in the true sense of the word only if its voice is heard because it has prospects of coming to the helm some time. For a national minority, however, that is ruled out. Thus the activity of its deputies remains limited from the beginning to fruitless criticism. The words that they speak have no significance because they can lead to no political goal. In voting, their votes can be decisive only when nationally unimportant questions are on the agenda; in all other questions—and these are most of them—the national majority stands against it united like a phalanx. To realize this, one need only think of the roles that the Danes, Poles, and Alsatians played in the German Reichstag and the Croats in the Hungarian parliament or of the position that the Germans had in the Bohemian provincial legislature. If things were different in the Austrian Chamber of Deputies, if here, because no nation had an absolute majority, it was possible for the "delegation" of every single nation to become part of the majority, well, this proves nothing to the contrary because, after all, Austria was an authoritarian state in which not parliament but the government held all the cards. Precisely the Austrian Chamber of Deputies, in which the formation of parties was conditioned above all by tensions among nationalities, has shown how slightly a parliamentary collaboration of different peoples is possible.
It is therefore understandable why the principle of proportional representation also cannot be regarded as a usable means of overcoming the difficulties that arise from different nations living together. Where it has been introduced, experience has shown that it is admittedly quite usable for certain purposes, that it overcomes many frictions, but that it is far from being the remedy for national controversies that well-meaning utopians have considered it.
In Austria, the classical land of the nationality struggle, the proposal emerged in the first decade of the twentieth century for overcoming national difficulties by introducing national autonomy on the basis of the personality principle. These proposals, which came from the Social Democrats Karl RennerCf. Renner, Das Selbstbestimmungsrecht der Nationen in seiner Anwendung auf Österreich (Vienna: 1918), and numerous older writings of the same author. and Otto Bauer,Cf. Bauer, Nationalitätenfrage, loc. cit., pp. 324 ff. envisaged transformation of the Austrian authoritarian state into a democratic people's state. Legislation and administration of the entire state and the local administration of the autonomous areas should not extend to nationally disputed affairs; these should be administered in the local administrations by the members of the nations themselves, organized according to the personality principle, over whom, then, there should stand national councils as highest authorities of the individual nations. The educational system and the promotion of art and science, above all, were to be regarded as national issues.
Here we are not speaking of the significance that the program of national autonomy had in the historical development of the nationality program of the German-Austrians or of the basic presuppositions from which it proceeded. Here we must face only the question whether this program could have provided a satisfying solution to the fundamental difficulty that arises when different peoples live together. We can only reply "no" to this question. As before, those facts would still remain that exclude a national minority from participation in power and that, despite the letter of the law, which calls on them to join in governing, allow them to be not co-rulers but only the ruled. It is quite unthinkable from the start to split up all matters by nationality. It is impossible in a nationality mixed city to create two police forces, perhaps a German and a Czech, each of which could take action only against members of its own nationality. It is impossible to create a double railroad administration in a bilingual country, one under the control only of Germans, a second only of Czechs. If that is not done, however, then the above-mentioned difficulties remain. The situation is not as though handling political problems directly connected with language was all that caused national difficulties; rather, these difficulties permeate all of public life.
National autonomy would have offered national minorities the possibility of administering and arranging their school systems independently. They had this possibility to a certain degree, however, even without the implementation of this program, though at their own cost. National autonomy would have allowed them a special right of taxation for these purposes and, on the other hand, relieved them from contributing to the schools of other nationalities. That alone, however, is not worth as much as the authors of the program of national autonomy thought.
The position that the national minority would have obtained from the grant of national autonomy would have approximated the position of those privileged colonies of foreigners that the estate system established and that the princely state then established on models bequeathed by the estate system, perhaps like the position of the Saxons in Transylvania. This would not have been satisfactory in modern democracy. Generally speaking, the whole line of thought about national autonomy looks back more to the medieval conditions of the estate system than to the conditions of modern democracy. Given the impossibility of creating modern democracy in a multinational state, its champions, when as democrats they rejected the princely state, necessarily had to turn back to the ideals of the estate system.
If one looks for a model of national autonomy in certain problems of organization of minority churches, then this is only quite superficially a correct comparison. It is overlooked that since the force of faith no longer can, as it once could, determine the entire life style of the individual, there no longer exists between members of different churches today that impossibility of political understanding that does indeed exist between different peoples because of differences of language and the resulting differences in styles of thinking and of outlook.
The personality principle can bring no solution to the difficulties of our problem because it indulges in extreme self-deception about the scope of the questions at issue. If only language questions, so called in the narrower sense, were the object of the national struggle, then one could think of paving the way for peace between peoples by special treatment of those questions. But the national struggle is not at all limited to schools and educational institutions and to the official language of the courts and authorities. It embraces all of political life, even all that which, as Renner and many others with him believe, ties a unifying bond around the nations, the so-called economic aspect. It is astonishing that this could be misunderstood precisely by Austrians, who, after all, were bound to see every day how everything became a national bone of contention—road construction and tax reforms, bank charters and public purveyances, customs tariffs and expositions, factories and hospitals. And purely political questions above all. Every foreign-policy question is the object of national struggle in the multinational state, and never did this show up more clearly in Austria-Hungary than during the World War. Every report from the battlefield was received differently by the different nationalities: some celebrated when others grieved; some felt downcast when others were happy. All these questions are controversial by nationality; and if they are not included in the solution of the nationality question, then the solution just is not complete.
The problem that the national question poses is precisely that the state and administration are inevitably constructed on a territorial basis in the present stage of economic development and so inevitably must embrace the members of different nationalities in territories of mixed language.
The great multinational states, Russia, Austria, Hungary, and Turkey, have now fallen apart. But that too is no solution to the constitutional problem in polyglot territories. The dissolution of the multinational state gets rid of many superfluous complications because it separates territories from each other that are compactly inhabited by the members of one people.The abuse of the compactly settled territories of the Germans in Bohemia is disregarded here; the national question would he soluble there, only people do not want to solve it. The dissolution of Austria solves the national question for the interior of Bohemia, for Western Galicia, and for the greater part of Carniola. But, as before, it remains a problem in the isolated German cities and villages that are sprinkled in the Czech-language territory of Bohemia, in Moravia, in Eastern Galicia, in the Gottschee [Kocevje] district, etc.
In polyglot territories the application of the majority principle leads not to the freedom of all but to the rule of the majority over the minority. The situation is made no better by the fact that the majority, in inner recognition of its injustice, shows itself anxious to assimilate the minorities nationally by compulsion. That attitude of course also implies—as a keen writer has noted—an expression of the nationality principle, an acknowledgment of the demand that state boundaries should not stretch beyond the boundaries of peoples.Cf. Kjellén, loc. cit., p. 131. Still the tormented peoples wait for the Theseus who shall overcome this modern Procrustes.
A way must be found out of these difficulties, however. It is not a question only of small minorities (for example, remnants of migrations that have long since come to a standstill), as one would tend to think if one assessed this situation only from the point of view of a few German cities in Moravia or Hungary or of the Italian colonies on the east coast of the Adriatic. The great present-day migrations of peoples have given all these questions a heightened importance. Every day new migrations create new polyglot territories; and the problem that a few decades ago was visible only in Austria has long since become a world problem, although in another form.
The catastrophe of the World War has shown to what abyss that problem has led mankind. And all the streams of blood that have flowed in this war have not brought it a hairsbreadth closer to solution. In polyglot territories, democracy seems like oppression to the minority. Where only the choice is open either oneself to suppress or to be suppressed, one easily decides for the former. Liberal nationalism gives way to militant antidemocratic imperialism.
B. The Migration Problem and NationalismThe variety of conditions of life in the individual parts of the earth's surface touches off migrations of individual persons and entire peoples. If the world economy were managed by the decree of an authority that surveyed everything and ordered what was most appropriate, then only the absolutely most favorable conditions of production would be utilized. Nowhere would a less productive mine or a less productive field be in use if more productive mines or fields lay unused elsewhere. Before a less productive condition of production is put to use, one must always first consider whether there do not exist more productive ones. Less productive conditions of production that might be in use would be discarded at once if others should be found whose yield would be so much greater than an increased yield would be attained from discarding the old and introducing the new sources of production, even despite the loss to be expected because the immovably invested capital would become useless. Since the workers have to settle in places of production or in their immediate neighborhood, the consequences for the conditions of settlement follow automatically.
The natural conditions of production are by no means unchangeable. In the course of history they have undergone great changes. Changes can take place in nature itself, for example, through changes of climate, volcanic catastrophes, and other elemental events. Then there are the changes that occur from human activity, for example, exhaustion of mines and of the fertility of the soil. More important, however, are changes in human knowledge, which overturn traditional views about the productivity of the factors of production. New needs are awakened, either from the development of the human character or because the discovery of new materials or forces has stimulated them. Previously unknown production possibilities are discovered, either through the discovery of hitherto unknown natural forces and putting them to use or through the progress of productive techniques, which makes it possible to tap natural forces that had been unusable or less usable before. It follows that it would not be enough for the director of the world economy to determine the locations of production once and for all; he would continually have to make changes in them according to changing circumstances, and every change would have to go hand in hand with a resettlement of workers.
What would happen under ideal world socialism by order of the general director of the world economy is achieved in the ideal of the free world economy by the reign of competition. The less productive enterprises succumb to the competition of the more productive. Primary production and industry migrate from places of lower-yielding conditions of production to places of higher-yielding ones; and with them migrate capital, so far as it is mobile, and workers. The result for the movement of peoples is thus the same in either case: the stream of population goes from the less fruitful territories to the more fruitful.
That is the basic law of migrations of persons and peoples. It holds true in the same degree for the socialist and the free world economy; it is identical with the law under whose operation the distribution of population takes place in every smaller territory cut off from the outside world. It always holds true, even though its effectiveness may be disturbed in greater or lesser degree by extra-economic factors also, perhaps by ignorance of conditions, by sentiments that we are accustomed to calling love of home, or by intervention of an external power that hinders migration.
The law of migration and location makes it possible for us to form an exact concept of relative overpopulation. The world, or an isolated country from which emigration is impossible, is to be regarded as overpopulated in the absolute sense when the optimum of population—that point beyond which an increase in the number of people would mean not an increase but a decrease of welfare—is exceeded.Compare Wicksell, Vorlesungen über Nationalökonomie auf Grundlage des Marginalprinzipes (Jena: 1913), vol. 1, p. 50. A country is relatively overpopulated where, because of the large size of the population, work must go on under less favorable conditions of production than in other countries, so that, ceteris paribus, the same application of capital and labor yields a smaller output there. With complete mobility of persons and goods, relatively overpopulated territories would give up their population surplus to other territories until this disproportion had disappeared.
The principles of freedom, which have gradually been gaining ground everywhere since the eighteenth century, gave people freedom of movement. The growing security of law facilitates capital movements, improvement of transportation facilities, and the location of production away from the points of consumption. That coincides—not by chance—with a great revolution in the entire technique of production and with drawing the entire earth's surface into world trade, The world is gradually approaching a condition of free movement of persons and capital goods. A great migration movement sets in. Many millions left Europe in the nineteenth century to find new homes in the New World, and sometimes in the Old World also. No less important is the migration of the means of production: capital export. Capital and labor move from territories of less favorable conditions of production to territories of more favorable conditions of production.
Now, however—as a result of a historical process of the past—the earth is divided up among nations. Each nation possesses definite territories that are inhabited exclusively or predominantly by its own members. Only a part of these territories has just that population which, in conformity with the conditions of production, it would also have under complete freedom of movement, so that neither an inflow or an outflow of people would take place. The remaining territories are settled in such a way that under complete freedom of movement they would have either to give up or to gain population.
Migrations thus bring members of some nations into the territories of other nations. That gives rise to particularly characteristic conflicts between peoples.
In that connection we are not thinking of conflicts arising out of the purely economic side effects of migrations. In territories of emigration, emigration drives up the wage rate; in territories of immigration, immigration depresses the wage rate. That is a necessary side effect of migration of workers and not, say, as Social Democratic doctrine wants to have believed, an accidental consequence of the fact that the emigrants stem from territories of low culture and low wages. The motive of the emigrant is precisely the fact that in his old homeland, because of its relative overpopulation, he can get no higher wage. If this reason were absent, if there were no difference in the productivity of labor between Galicia and Massachusetts, then no Galician would emigrate. If one wants to raise the European territories of emigration to the level of development of the eastern states of the Union, then there is just nothing else to do than let the emigration proceed to the point that the relative overpopulation of the former and the relative underpopulation of the latter have disappeared. Clearly, American workers view this immigration just as unhappily as European employers view the emigration. Indeed, the Junker east of the Elbe thinks no differently about the flight of workers from the land when his tenant goes to West Germany than when he goes to America; the unionized worker of the Rhineland is disturbed by immigration from the lands east of the Elbe no less than members of a Pennsylvania trade union. But that in the one case the possibility exists of forbidding the emigration and immigration, or at least of impeding it, while in the other case such measures could be thought of by at most a few eccentrics born a couple of centuries too late, is only to be attributed to the fact that, besides damage to the interests of individuals in the case of international migration, other interests also are damaged.
Emigrants who settle in previously uninhabited territories can preserve and further cultivate their national character in the new home also. Spatial separation can lead over time to the emigrants' developing a new independent nationality. Such development of independence was in any case easier in times when transport and communication still had to struggle with great difficulties and when the written transmission of the national culture was greatly impeded by the slight diffusion of literacy. With the present-day development of the means of transportation and communication, with the relatively high degree of popular education and the wide dissemination of the monuments of national literature, such national splitting off and the formation of new national cultures is far more difficult. The trend of the times works rather toward convergence of the cultures of peoples living far apart, if not even toward a blending of nations. The bond of common language and culture that links England with its far-away dominions and with the United States of America, which now will soon have been politically independent for one and a half centuries, has become not looser but closer. A people that today sends out colonists into an uninhabited territory can count on the emigrants' keeping their national character.
If, however, the emigration is directed to already inhabited territories, then various possibilities are conceivable. It may be that the immigrants come in such masses or possess such superiority through their physical, moral, or intellectual constitution that they either entirely displace the original inhabitants, as the Indians of the prairies were displaced by the palefaces and were driven to destruction, or that they at least achieve domination in their new home, as would perhaps have been the case with the Chinese in the western states of the Union if legislation had not restricted their immigration in time or as could be the case in the future with the European immigrants into North America and Australia. Things are different if immigration takes place into a country whose inhabitants, because of their numbers and their cultural and political organization, are superior to the immigrants. Then it is the immigrants who sooner or later must take on the nationality of the majority.The assimilation is furthered if the immigrants come not all at once but little by little, so that the assimilation process among the early immigrants is already completed or at least already under way when the newcomers arrive.
The great discoveries had made the whole surface of the earth known to Europeans since the end of the Middle Ages. Now all traditional views about the inhabitability of the earth gradually had to change; the New World, with its excellent conditions of production, was bound to attract settlers from old and now relatively overpopulated Europe. At first, of course, it was only adventurers and political malcontents who moved far away to find a new home. Reports of their successes then drew others after them, at first only a few, then ever more and more, until finally in the nineteenth century, after improvement of the means of ocean transportation and the removal of limitations on freedom of movement in Europe, millions went migrating.
Here is not the place to investigate how it happened that all colonial land suitable for settlement by white Europeans was colonized by the English, Spanish, and Portuguese. Here it is enough for us to recognize the outcome that the best parts of the earth's surface inhabitable by whites thereby became English national property and that, in addition, the Spaniards and Portuguese in America, and scarcely also the Dutch in South Africa and the French in Canada, came onto the scene. And this outcome is extremely important. It made the Anglo-Saxons the most numerous nation among the white civilized peoples. This, coupled with the circumstance that the English possess the largest merchant fleet in the world and that they administer the best territories of the tropics as political rulers, had led to the fact that the world today wears an English face. The English language and English culture have impressed their stamp on our times.
For England this means above all that Englishmen who leave the island of Great Britain because of its relative overpopulation can almost always settle in territories where the English language and English culture prevail. When a Briton goes abroad, whether to Canada or to the United States or to South Africa or to Australia, he does cease to be a Briton, but he does not cease to be an Anglo Saxon. It is true that the English until quite recently, did not appreciate this circumstance, that they paid no special attention to emigration, that they faced the dominions and the United States indifferently, coldly, and sometimes even with hostility, and that only under the influence of Germany's efforts directed against them did they begin to seek closer economic and political relations first with the dominions and then with the United States. It is just as true that the other nations, which had been less successful in acquiring overseas possessions, also long paid just as little attention to this development of affairs as the English themselves and that they envied the English more for their rich tropical colonies, for their trade and seaport colonies, and for shipping, industry, and trade than for possession of territories of settlement, which were less appreciated.
Only as the stream of emigrants, flowing abundantly at first only from England, also came to be fed more from other European territories did people begin to concern themselves with the national fate of the emigrants. People noticed that while the English emigrants could maintain their mother tongue and national culture, home customs, and usage's of their fathers in their new homes, the other European emigrants overseas gradually ceased to be Dutchmen, Swedes, Norwegians, etc. and adapted themselves to the nationality of their environment. People saw that this alienation was unavoidable, that it occurred quicker here, slower there, but that it never failed to occur and that the emigrants—at the latest in the third generation, most already in the second, and not seldom even in the first—became members of Anglo-Saxon culture. The nationalists who dreamed about the size of their nation viewed this with sorrow, but it seemed to them that nothing could be done about it. They founded associations that endowed schools, libraries, and newspapers for the colonists to check the emigrants' national alienation; but what they achieved thereby was not much. People had no illusions about the fact that the reasons for emigration were of compelling economic nature and that the emigration as such could not be impeded. Only a poet like Freiligrath could ask the emigrants:
Oh sprecht! warum zogt ihr von dannen?Das Neckartal hat Wein und Korn.[Oh speak! Why are you moving away?The Neckar Valley has wine and grain.]The statesman and the economist well knew that there were more wine and more grain overseas than at home.
As late as the beginning of the nineteenth century people could scarcely suspect the significance of this problem. Ricardo's theory of foreign trade still started with the assumption that the free mobility of capital and labor exists only within the boundaries of a country. In the home country all local differences in the profit rate and the wage rate are evened out by movements of capital and workers. Not so for differences between several countries. Lacking there was that free mobility which would ultimately be bound to cause capital and labor to flow from the country offering less favorable conditions of production to the country of more favorable conditions. A range of emotional factors ("which I should be sorry to see weakened," the patriot and politician Ricardo interjects here into the exposition of the theorist) resists that. Capital and workers remain in the country, even though they thereby suffer a loss of income, and turn to those branches of production having, while not absolutely, still relatively more favorable conditions.Cf. Ricardo, Principles of Political Economy and Taxation in The Works of D. Ricardo, edited by McCulloch, second edition (London: 1852), pp. 76 ff. The basis of the free-trade theory is thus the fact that noneconomic reasons keep capital and labor from moving across national boundaries, even if this seems advantageous for economic motives. This may have been true on the whole in the days of Ricardo, but for a long time it has no longer been true.
But if the basic assumption of Ricardo's doctrine of the effects of free trade falls, then this doctrine must also fall along with it. There is no basis for seeking a fundamental difference between the effects of freedom in domestic trade and in foreign trade. If the mobility of capital and labor internally differs only in degree from their mobility between countries, then economic theory can also make no fundamental distinction between the two. Rather, it must necessarily reach the conclusion that the tendency inheres in free trade to draw labor forces and capital to the locations of the most favorable natural conditions of production without regard to political and national boundaries. In the last analysis, therefore, unrestricted free trade must lead to a change in the conditions of settlement on the entire surface of the earth; from the countries with less favorable conditions of production capital and labor flow to the countries with more favorable conditions of production.
The free-trade theory modified in this way, just like the doctrine of Ricardo, also reaches the conclusion that from the purely economic point of view nothing speaks against free trade and everything against protectionism. But since it leads to quite different results regarding the effect of free trade on locational shifts of capital and labor, it presents a quite changed point of departure for testing the extraeconomic reasons for and against the protective system.
If one sticks with the Ricardian assumption that capital and labor are not impelled to move abroad even by more favorable conditions of production, then it turns out that the same applications of capital and labor lead to different results in the individual countries. There are richer and poorer nations. Trade-policy interventions can change nothing about that. They cannot make the poorer nations richer. The protectionism of the richer nations, however, appears completely senseless. If one drops that Ricardian assumption, then one sees a tendency prevail over the entire earth toward equalization of the rate of return on capital and of the wage of labor. Then, finally, there no longer are poorer and richer nations but only more densely and less densely settled and cultivated countries.
There can be no doubt that, even then, Ricardo and his school would have advocated nothing other than the policy of free trade, since they could not have avoided recognizing that protective tariffs are not the way out of these difficulties. For England, however, this problem never existed. Its rich holdings of territories for settlement lets emigration appear a matter of national indifference to it. The British emigrants can maintain their national character even far away; they cease to be Englishmen and Scots, but they remain Anglo-Saxons, and the war showed anew what that means politically.
For the German people, though, things are different. For reasons that go far back, the German nation has no territories for settlement at its disposal where emigrants can maintain their German character. Germany is relatively overpopulated; it must sooner or later yield up its surplus population, and if for some reason or other it could not or would not do this, then the standard of living of the Germans would have to sink to a lower level. If, however, Germans do emigrate, then they lose their national character, if not in the first generation, then in the second, third, or at the latest the fourth.
That was the problem that German policy saw posed for it after the establishment of the empire of the Hohenzollerns. The German people faced one of those great decisions that a nation does not have to make every century. It was fateful that the solution to this great problem became urgent before another, no less great, problem was solved, that of the establishment of the German national state. Even only to comprehend a question of this significance and of this historical gravity in its full scope would have required a generation that could decide its fate fearlessly and freely. That, however, was not allowed to the German people of the Great Prussian Reich, the subjects of the twenty-two federated princes. In these questions, also, it did not take its fate into its own hands; it left the most important decision to the generals and diplomats; it followed its leaders blindly without noticing that it was being led to the precipice. The end was defeat.
As early as the beginning of the thirties of the nineteenth century, people in Germany had begun to concern themselves with the problem of emigration. Now it was the emigrants themselves who made the unsuccessful attempt to establish a German state in North America; now again it was the Germans at home who sought to take the organization of emigration into their hands. That these efforts could lead to no success is not surprising. How ever could the attempt to establish a new state succeed for the Germans, who in their own country were not even able to transform the pitiable multiplicity of several dozen patrimonial principalities, with their enclaves, their hereditary affiliations, and their family laws, into a national state? How could German men have found the strength to assert themselves out there in the wide world among Yankees and Creoles when at home they were not even able to put an end to the farcical rule of the miniature thrones of the Reuss and Schwarzburg princes? Where was the German subject to get the political insight that politics on the grand scale requires when at home it was forbidden to him "to judge the actions of the supreme state authority by the measure of his limited intellect?"Cf. the decree of 15 January 1838 of the Prussian Minister of the Interior, v. Rochow, reprinted in Prince-Smith's Gesammelte Schriften (Berlin: 1880), vol. 3, p. 230.
In the middle of the seventies of the last century the problem of emigration had acquired such significance that its solution could no longer be dragged out. The decisive thing was not that emigration was steadily growing. According to data of the United States, the immigration of Germans there (not counting Austrians) had risen from 6,761 in the decade 1821 to 1830 to 822,007 in the decade 1861 to 1870; then, right after 1874, an—although at first only temporary—drop-off in the German emigration to the United States occurred. Far more important was that it was becoming ever clearer that the conditions of production in Germany for agriculture and for the most important branches of industry were so unfavorable that competition with foreign countries was no longer possible. The extension of the railroad net in the countries of Eastern Europe and the development of ocean and river shipping made it possible to import agricultural products into Germany in such quantity and at such low prices that the continued existence of the bulk of German agricultural units was most seriously threatened. Already from the fifties Germany was a rye-importing country; since 1875 it has also been a wheat-importing country. A number of branches of industry, particularly the iron industry, also had to struggle with growing difficulties.
It is clear where the causes lay, even though people of the time may have felt it only vaguely. The superiority of the natural conditions of production of foreign countries made itself all the more strongly evident as the continuing development of means of transportation cheapened freight rates. People did try to explain the lesser competitive capacity of German production in another way; and in that connection, as indeed is generally characteristic of the discussion of problems of economic policy in Germany during the last few decades, people concerned themselves predominantly with nonessential side issues and so quite overlooked the great significance of the principles of the problem.
If people had recognized the fundamental significance of these problems and had grasped the deeper interconnection of things, then they would have had to say that Germany was relatively overpopulated and that to restore a distribution of population over the entire surface of the earth corresponding to the conditions of production, part of the Germans had to emigrate. Whoever did not share misgivings of national policy about a decline in the size of population or even about an end to the growth of population in Germany would have been content with this judgment. In any case he would have consoled himself with the fact that individual branches of production would move abroad partially in such a way that German entrepreneurs would establish enterprises abroad so that the consumption of the entrepreneurs' incomes would take place in the German Reich and would thereby expand the food-supply margin of the German people.
The patriot who sees his ideal in a large number of people would have had to recognize that his goal could not be reached without reduction of the standard of living of the nation unless the possibility were created, through acquiring colonies for settlement, of retaining part of the surplus population within the nation despite its emigration from the mother country. He would then have had to turn all his strength to acquisition of land for settlement. In the middle of the seventies of the nineteenth century, and even a decade longer, conditions were not at all yet such that it would not have been possible to reach this goal. In any case it could have been reached only in association with England. England was at that time and for long afterwards still troubled by a great concern, by anxiety that its Indian possession could be seriously threatened by Russia, For that reason it needed an ally that would have been in a position to hold Russia in check. Only the German Reich might have done that. Germany was strong enough to guarantee England the possession of India; Russia could never have thought of attacking India as long as it was not sure of Germany on its western border.To rule out any misunderstanding, let it be expressly noted that there is no intention here of taking a position on the question that was much discussed in Germany whether the "western" or "eastern" orientation for German policy was to be preferred. Both orientations were imperialist-minded, i.e., the question ran whether Germany should attack Russia or England. Germany should have allied itself with England to stand by it in a defensive war against Russia. There is no doubt, however, that then this war would never have occurred. England could have given a great compensation for this guarantee, and surely would have given it. Perhaps it would have let Germany have its extensive South African possession, which at that time had only a very thin Anglo-Saxon settlement; perhaps it also would have helped Germany obtain a large territory for settlement in Brazil or Argentina or in western Canada. Whether this was attainable may be doubted after all.But let it be noted that England, until the outbreak of the World War, repeatedly made attempts to have peaceful negotiations with Germany and was ready to buy peace even at the price of giving up some land. But it is certain that if Germany could have attained anything along this line at that time, it could have done so only in association with England. The great Prussian Reich of the Junkers east of the Elbe, however, wanted no alliance with liberal England. For reasons of domestic politics, the Three Emperors' League, the continuation of the Holy Alliance, seemed to it to be the sole suitable association that it could enter into. When this alliance finally showed itself untenable and the German Reich, faced with the choice either of siding with Russia against Austria-Hungary or with Austria-Hungary against Russia, decided for the alliance with Austria, then Bismarck still repeatedly sought to maintain a friendly relationship with Russia. So, then, this opportunity of acquiring a great territory for settlement for Germany remained unused.
Instead of seeking, in association with England, to acquire a colony for settlement, the German Reich made the transition to protective tariffs from 1879 on. As ever at great turning points of policy, here, too, people saw neither the deeper significance of the problem nor the meaning of the new policy being adopted. To the liberals the protective tariff seemed a temporary backsliding into a superseded system. The practitioners of political realism, that hodgepodge of cynicism, lack of conscience, and unvarnished selfishness, evaluated the policy merely from the standpoint of their own interests as an increase in the incomes of landowners and entrepreneurs. The Social Democrats trotted out their faded recollections of Ricardo; as for a deeper knowledge of things, which surely would not have been difficult with the help of this guide, they were hindered by their doctrinaire clinging to Marxist theory. Only much later, and even then only hesitantly, was the great significance grasped that that policy shift had not only for the German people but for all peoples.When Lensch (Drei Jahre Weltrevolution (Berlin: 1917], pp. 28 ff.) designates the shift in trade policy of 1879 as one of the deepest grounds of today's world revolution, then he is certainly to be agreed with, but for quite other reasons than those he adduces. In view of the events that have taken place in the meanwhile, it is no longer worth while to refute his further discussions.
The most remarkable thing about the protective tariff policy of the German Empire is that it lacked any deeper foundation. For the political realist it was sufficiently justified by its finding a majority in the German Reichstag. Any theoretical foundation for the protective tariff theory, however, looked very bad. The appeal to List's theory of an infant-industry tariff just did not hold water. It is no refutation of the free-trade argument to assert that the protective system puts idle productive forces to use. That they do not come into use without protection proves that their use is less productive than that of the productive forces used in their place. The infant industry tariff also cannot be economically justified. Old industries have an advantage over young ones in many respects. But the rise of new industries is to be deemed productive from the overall point of view only when their lesser productivity at the start is at least made up for by greater productivity later. Then, however, the new enterprises are not only productive from the point of view of the whole economy but also privately profitable; they would be brought into existence even without special encouragement. Every newly established firm reckons with such initial costs that should be recovered later. It is untenable to cite, in opposition, the fact that almost all states have supported the rise of industry by protective tariffs and other protectionistic measures. The question remains open whether the development of viable industries would have proceeded even without such encouragement. Within the territories of states, changes of location occur without any external help. In territories that lacked industry before, we see industries arise that not only maintain themselves successfully alongside those of older industrial territories but not seldom drive those quite out of the market.
None of the German tariff rates, moreover, could be called an infant-industry tariff; neither the grain tariffs nor the iron tariffs nor any one of the several hundred other protective tariffs may be given this name. And tariffs other than infant industry tariffs were never advocated by List; he was fundamentally a free-trader.
Moreover, the presentation of a protective-tariff theory in Germany has never once been attempted at all.Schuller, in Schutzzoll und Freihandel (Vienna: 1905), gives a theory of the setting of tariff rates; on his arguments for the protective tariff, cf. Mises, "Vom Ziel der Handelspolitik," Archiv für Sozialwissenschaft und Sozialpolitik, vol. 42, 1916/1917, p. 562, and Philippovich, Grundriss der politischen Ökonomie, vol. 2, 1 st part, seventh ed.(Tübingen: 1914), pp. 359 f. The longwinded and self-contradictory discussions about the necessity of protection for all national labor and of a gap-free tariff cannot lay claim to this name. They do indicate the direction in which reasons for the protective tariff policy had to be sought; they could not be suitable, however—and precisely because they renounced any economic line of thinking in advance and were oriented purely by power politics—for examining the question whether the goals being sought could also really be attained by this means.
Of the arguments of the protective-tariff advocates, we must at first leave aside the military one—or, as people now commonly say, the "war-economy" one—regarding autarky in case of war; that one will be discussed later. All other arguments start from the fact that the natural conditions for great and important branches of production are more unfavorable in Germany than in other territories and that the natural disadvantages must be compensated for by protective tariffs if production is to take place in Germany at all. For agriculture it could only be a question of thereby maintaining the internal market, for industry only of maintaining foreign markets, a goal that could be reached only by dumping by branches of production cartelized under the protection of the tariff. Germany, as a relatively overpopulated country working under more unfavorable conditions than foreign countries in a number of branches of production, had to export either goods or people. It decided for the former. It overlooked the fact, however, that export of goods is possible only if one competes with countries of more favorable conditions of production, that is, if, despite higher costs of production, one delivers just as cheaply as the countries producing at lower costs. That means, however, pressing down workers' wages and the standard of living of the whole people.
For years people in Germany could indulge in extreme illusions about that. To understand this interconnection of things, it would have been necessary to think economically and not in terms of statism and power politics. But some day it was nevertheless bound to impress itself on everyone with irrefutable logic that the protective tariff system was bound to fail in the end. One could deceive oneself about the fact that it was damaging the relative well-being of the German people as long as an absolute growth of national wealth could still be observed. But attentive observers of world economic development could not help but express misgivings about the future development of German foreign trade. What would happen to German commodity exports once an independent industry had become developed in the countries that still formed the market for German industry and had been in a position to produce under more favorable conditions?Cf., out of a large literature, Wagner, Agrar- und Industriestaat, second ed.
From this situation the desire finally arose among the German people for great colonies for settlement and for tropical territories that could supply Germany with raw materials. Because England stood in the way of the realization of these intentions, because England had broad territories at its disposal in which Germans could have settled, and because England possessed great tropical colonies, the desire arose to attack England and defeat it in war. That was the idea that led to construction of the German battle fleet.
England recognized the danger in time. First it strived for a peaceful settlement with Germany; it was ready to pay a high price for that. When this intention was wrecked on the resistance of German policy, England prepared itself accordingly. It was firmly resolved not to wait until Germany had a fleet superior to the English; it was resolved to wage war earlier, and it enlisted allies against Germany. When Germany got into war with Russia and France in 1914 over Balkan affairs, England fought also because it knew that in case of a German victory it would have to wage war alone with Germany in a few years. The construction of the German battle fleet had to lead to war with England before the German fleet had achieved superiority over the English. For the English knew that the German ships could be used in no other way than to attack England's fleet and its coast. The pretext with which Germany sought to conceal the ultimate intentions that it was pursuing by constructing the fleet was that it needed a mighty fleet to protect its expanded ocean trade. The English knew what to make of that. Once, when there still were pirates, merchant ships did need protection by cruisers on endangered seas. Since the establishment of security on the sea (approximately since 1860) that had no longer been necessary. It was quite impossible to explain the construction of a battle fleet usable only in European waters by a desire to protect trade.
It is also immediately understandable why, from the beginning, almost all states of the world sympathized with England against Germany. Most had to fear Germany's hunger for colonies. Only a few nations of Europe are in a situation similar to the German in being able to feed their populations within their own borders only under more unfavorable conditions than are found in the rest of the world. To these belong the Italians in the first place, and also the Czechs. That these two nations also were on the side of our adversaries was Austria's doing.That Japan and China were also against us is to be ascribed to the disastrous Chiao-chou policy.
Now the war has been fought, and we have lost it. The German economy has been quite shattered by the long "war economy"; in addition, it will have to bear heavy reparations burdens. But far worse than these direct consequences of the war must appear the repercussion on Germany's world economic position. Germany has paid for the raw-material supplies on which it depends partly by export of manufactures, partly from the yield of its foreign enterprises and capital investments. That will no longer be possible in the future. During the war the foreign investments of the Germans were expropriated or used up in payment for the import of various goods. The export of manufactures, however, will encounter extreme difficulties. Many markets have been lost during the war and will not be easy to win back. Here, too, the war has created no new situation but only has hastened a development that would have occurred without it. The impediment to trade caused by the war has brought new industries to life in Germany's former markets. They would have arisen even without the war, but later. Now, once they are there and are operating under more favorable conditions of production than German enterprises, they will pose severe competition to German exports. The German people will be compelled to shrink their consumption. They will have to work more cheaply, that is, live worse, than other peoples. The entire level of German culture will thereby be depressed. After all, culture is wealth. Without well-being, without wealth, there never has been culture.
True, emigration might still remain open. But the inhabitants of the territories that might be considered do not want to admit any German immigrants. They fear being outnumbered by the German elements; they fear the pressure that immigration would be bound to exert on wages. Long before the war, Wagner could already refer to the fact that, except for the Jews, there is no other people than the German "that is scattered in so many national fragments and individuals among other civilized peoples and other nations almost over the entire earth's surface, that often forms a quite capable element here, often also only a sort of cultural fertilizer, seldom in the leading positions in life, more frequently in the middle ones and down to the lower ones, little men and little women." And he added that "this German diaspora" is not much more liked, even though more respected, than Jews and Armenians and is not seldom subject to just as strong an aversion on the part of the native population.Cf. Wagner, loc. cit., p. 81. How will things become now, after the war?
Only now can one fully survey the damage that the departure from the principles of liberal policy has caused for the German people. How very different a position Germany and Austria would be in today if they had not undertaken the fateful return to the protective tariff! Of course, the size of the population would not be as large as it is today. But the smaller population could be living and working under conditions just as favorable as those of the other countries of the world. The German people would be richer and happier than it is today; it would have no enemies and no enviers. Hunger and anarchy—that is the result of the protectionist policy.
The outcome of German imperialism, which cast the German people into bitter misery and made it into a pariah people, shows that those whose leadership it followed in the last generation were not on the right path. Neither fame nor honor nor wealth nor happiness was to be found on this path. The ideas of 1789 would not have brought the German people to its position today. Did not the men of the Enlightenment, who today are reproached for lack of state feeling,Cf. Sprengel, Das Staatsbewusstein in der Deutschen Dichtung seit Heinrich von Kleist (Leipzig: 1918), pp. 8 ff. better understand what is good for the German people and the entire world? More clearly than all theories could do, the course of history shows that properly understood patriotism leads to cosmopolitanism, that the welfare of a people lies not in casting other peoples down but in peaceful collaboration. Everything that the German people possessed, its intellectual and material culture, it has uselessly sacrificed to a phantom, to no one's benefit and to its own harm.
A nation that believes in itself and its future, a nation that means to stress the sure feeling that its members are bound to one another not merely by accident of birth but also by the common possession of a culture that is valuable above all to each of them, would necessarily be able to remain unperturbed when it saw individual persons shift to other nations. A people conscious of its own worth would refrain from forcibly detaining those who wanted to move away and from forcibly incorporating into the national community those who were not joining it of their own free will. To let the attractive force of its own culture prove itself in free competition with other peoples—that alone is worthy of a proud nation, that alone would be true national and cultural policy. The means of power and of political rule were in no way necessary for that.
That nations favored by fate possess wide territories of settlement could provide no cogent grounds for adopting another policy. It is true that those colonies were not taken with smooth talk, and one can think only with shudders and anger of the fearful mass murders that prepared the basis for many of the colonial settlements flourishing today. But all other pages of world history were also written in blood, and nothing is more stupid than efforts to justify today's imperialism, with all of its brutalities, by reference to atrocities of generations long since gone. It must be recognized that the time for expeditions of conquest is past, that today it is at least no longer acceptable to use force on peoples of the white race. Whoever wanted to contradict this principle of modern political world law, an expression of the liberal ideas of the time of the Enlightenment, would have to set himself against all other nations of the world. It was a fateful error to want to undertake a new partition of the earth with cannons and armored ships.
The nations suffering from relative overpopulation in their homelands can no longer use those means of relief today that were usual at the time of national migrations. Full freedom of emigration and immigration and unlimited free mobility of capital must be their demand. Only in this way can they attain the most favorable economic conditions for their fellow nationals.
Of course, the struggle of nationalities over the state and government cannot disappear completely from polyglot territories. But it will lose sharpness to the extent that the functions of the state are restricted and the freedom of the individual is extended. Whoever wishes peace among peoples must fight statism.
C. The Roots of ImperialismIt is usual to seek the roots of modern imperialism in the desire for territories to settle and colonies to exploit. This interpretation represents imperialism as an economic necessity. We best recognize that this interpretation is inadequate if we consider how liberalism stands on the same problem. Its watchword is freedom of movement; at the same time, it is averse to all colonial undertakings. The proof that the liberal school has provided is irrefutable: that free trade and only free trade appears justified from the purely economic point of view, that only it guarantees the best provisioning of all persons, the greatest yield of labor with the smallest expenditure of costs.
This liberal dogma cannot be shaken, either, by the assertion—on whose correctness we offer no opinion—that there are peoples who are not ready for self-government and never will be ready. These lower races supposedly must be politically governed by the higher races, without economic freedom being in any way limited thereby. Thus have the English long interpreted their rule in India, thus was the Congo Free State conceived: the open door for economic activity of all nations in free competition both with the members of the ruling nation and with the natives. That the practice of colonial policy deviates from this ideal, that it again, as formerly, regards the natives only as a means, not as an end in their own right, that it—above all the French, with their trade-policy assimilation system—excludes from the colonial territories all who do not belong to the ruling nation, is only a consequence of imperialistic lines of thinking. But where do these come from?
An individualistic justification for imperialism can also be found. That is the one based on the conditions of territories with mixed population. There the consequences of the application of the democratic principle were bound by themselves alone to lead to militant aggressive nationalism. Things are no different in those territories to which the stream of immigration is directed today. There the problem of mixed languages arises ever anew, there imperialistic nationalism must also arise ever anew. Thus we see efforts growing in America and in Australia for limitation of undesired—foreign-nationality—immigration, efforts that were bound to arise out of the fear of being outnumbered by foreigners in one's own country at the same time that the fear arose that the immigrants of foreign national origin could no longer be fully assimilated.
Doubtless this was the point from which the rebirth of imperialistic thinking proceeded. From here the spirit of imperialism gradually undermined the entire thought structure of liberalism, until finally it could also replace the individualistic basis from which it had originated with a collectivistic one. The idea of liberalism starts with the freedom of the individual; it rejects all rule of some persons over others; it knows no master peoples and no subject peoples, just as within the nation itself it distinguishes between no masters and no serfs. For fully developed imperialism, the individual no longer has value. He is valuable to it only as a member of the whole, as a soldier of an army. For the liberal, the number of fellow members of his nationality is no unduly important matter. It is otherwise for imperialism. It strives for the numerical greatness of the nation. To make conquests and hold them, one must have the upper hand militarily, and military importance always depends on the number of combatants at one's disposal. Attaining and maintaining a large population thus becomes a special goal of policy. The democrat strives for the unified national state because he believes that this is the will of the nation. The imperialist wants a state as large as possible; he does not care whether that corresponds to the desire of the peoples.We have seen how the striving for the unified national state originates from the desire of the peoples. Imperialism interprets the matter otherwise. For it, the idea of the unified state is a legal title for annexations. Thus the Pan-Germans wanted to annex the German cantons of Switzerland and even the Netherlands against their will.
The imperialistic people's state scarcely differs from the old princely state in its interpretation of sovereignty and its boundaries. Like the latter, it knows no other limits to the expansion of its rule than those drawn by the opposition of an equally strong power. Even its lust for conquest is unlimited. It wants to hear nothing of the right of peoples. If it "needs" a territory, then it simply takes it and, where possible, demands further from the subjugated peoples that they find this just and reasonable. Foreign peoples are in its eyes not subjects but objects of policy. They are—quite as the princely state once thought—appurtenances of the country where they live. Expressions also recur in the modern imperialistic manner of speaking, therefore, that were believed to be already forgotten. People speak again of geographic boundaries,The answer of the nationality principle to the theory of natural geographic boundaries was given by Arndt when he explained that "the single most valid natural boundary is made by language" (Der Rhein. Deutschlands Strom aber nicht Deutschlands Grenze, 1813, p. 7) and then was aptly formulated by J. Grimm when he speaks of the "natural law . . . that not rivers and not mountains form the boundary lines of peoples and that for a people that has moved over mountains and rivers, its own language alone can set the boundary" (loc. cit., p. 557). How one can manage to derive from the nationality principle the demand for annexation of the territories "of the small, unviable peoples, specifically, those incapable of having their own state" may be seen in Hasse, Deutsche Politik, vol. 1, third part (Munich: 1906), pp. 12 f. of the necessity of using a piece of land as a "buffer zone"; territories are again rounded off; they are exchanged and sold for money.
These imperialistic doctrines are common to all peoples today. Englishmen, Frenchmen, and Americans who marched off to fight imperialism are no less imperialistic than the Germans. Of course, their imperialism differed from the German variety before November 1918 in one important point. While the other nations brought their imperialistic efforts to bear only against the peoples of the tropics and subtropics and treated the peoples of the white race in conformity with the principles of modern democracy, the Germans, precisely because of their position in the polyglot territories in Europe, directed their imperialistic policy against European peoples also.Only in impeding immigration does imperialism on the part of the Anglo-Saxons operate against the whites also. The great colonial powers have held fast to the democratic-pacifistic nationality principle in Europe and America and have practiced imperialism only against the African and Asiatic peoples. They have therefore not come into conflict with the nationality principle of the white peoples, as has the German people, which even in Europe has sought to practice imperialism everywhere.
To justify the application of imperialistic principles in Europe, the German theory saw itself compelled to fight the nationality principle and replace it with the doctrine of the unified state. Small states are said no longer to have any justification for their existence nowadays. They are said to be too small and too weak to form an independent economic territory. They supposedly must therefore necessarily seek links with larger states in order to form an "economic and trench community" with them.Cf. Naumann, Mitteleuropa (Berlin: Georg Reimer, 1915), pp. 164 ff. (Central Europe, trans. by Christabel M. Meredith, New York: Knopf, 1917, pp. 179 ff.); Mitscherlich, Nationalstaat und Nationalwirtschaft und ihre Zukunft (Leipzig: 1916), pp. 26 ff; on other writers of the same orientation, cf. Zurlinden, Der Weltkrieg. Vorläufige Orientierung von einem schweizerischen Standpunkt aus, vol. 1 (Zurich: 1917), pp. 393 ff.
If this means no more than that small states are scarcely able to mount sufficient resistance to the lust for conquest of their more powerful neighbors, well, one cannot contradict that. Small states cannot in fact compete with large ones on the battlefield; if it comes to war between them and a great power, then they must succumb unless help comes to them from outside. This help seldom is lacking. It is provided by large and small states, not from sympathy or on principle but in their own interest. In fact, we see that small states have maintained themselves for centuries just as well as the great powers. The course of the World War shows that even nowadays small states do not always prove weakest in the end. If one seeks to prod the small states by threats into association with a larger state or if one compels them into subjugation through force of arms, well, this is no proof of the assertion that "time is working against small state sovereignties."Cf. Renner, Österreichs Erneuerung, vol. 3 (Vienna: 1916), p. 65. This proposition is no less correct or false today than in the days of Alexander the Great, Tamerlane, or Napoleon. The political ideas of modern times allow the continued existence of a small state to appear rather more secure today than in earlier centuries. That the Central Powers won military victories over a number of small states during the World War in no way justifies our declaring that "running a state on a small scale" is just as out of date today as so running an ironworks. When Renner, with reference to military victories that German and Austrian troops won over the Serbs, thinks he can dispose of the nationality principle with the Marxist expression: "the material conditions of being a state rebel against its immaterial ones—a contradiction of concepts that in practice becomes a tragic fate for people and state,"Renner, Österreichs Erneuerung, vol. 3 (Vienna: 1916), p. 66. he is thereby overlooking the fact that military weakness could be fatal for small states thousands of years ago also.
The assertion that all small states have had their day is further supported by Naumann, Renner, and their followers by the remark that a state must at least possess enough territory for a self-sufficient economy. That this is not true is already clear from what was said earlier. There can be no question of a test of economic self-sufficiency in the formation of states at a time when the division of labor embraces broad stretches of land, whole continents, indeed the whole world. It does not matter whether the inhabitants of a state meet their needs directly or indirectly by production at home; what is important is only that they can meet them at all. When Renner confronted the individual Austrian nations striving for political independence with the question of where they then would obtain this or that article once they had been detached from the whole of the Austro-Hungarian state, well, that was absurd. Even at the time when the state structure was unified, they did not obtain these goods for nothing but only for value supplied in return, and this value in return does not become greater when the political community has fallen apart. This objection would have had some sense only if we were living at a time when trade between states was impossible.
The size of a state's territory therefore does not matter. It is another question whether a state is viable when its population is small. Now, it is to be noted that the costs of many state activities are greater in small states than in large ones. The dwarf states, of which we still have a number in Europe, like Liechtenstein, Andorra, and Monaco, can organize their court systems by levels of jurisdiction, for example, only if they link up with a neighboring state. It is clear that it would be financially quite impossible for such a state to set up as comprehensive a court system as that which a larger state makes available to its citizens, for example, by establishing courts of appeal. One can say that, seen from this point of view, states encompassing a smaller number of people than the administrative units of the larger states are viable only in exceptional cases, namely, only when they have especially rich populations. The smaller states for which this precondition does not hold will, for reasons of state finance, have to link their administrations with a larger neighboring state.Cf. also the speech of Bismarck in the session of the Prussian House of Deputies of 11 December 1867 on Prussia's treaty of accession with the principality of Waldeck-Pyrmont. (Fürst Bismarcks Reden, edited by Stein, vol. 3, pp. 235 ff.) Nations so small in number of people that they do not satisfy these conditions do not exist at all and cannot exist at all, since the development of an independent standard language presupposes, after all, the existence of several hundred thousand speakers.
When Naumann, Renner, and their numerous disciples recommended to the small peoples of Europe an association with a Central Europe under German leadership, they completely misunderstood the essence of the protective-tariff policy. On political or military grounds, an alliance with the German nation assuring independence to all participants could be desirable for the small nations of Eastern and Southeastern Europe. In no case, however, could an alliance that would be serviceable exclusively to German interests appear welcome to them. That was the only kind, however, that the advocates of Central Europe had in view. They wanted an alliance that would enable Germany to compete militarily with the world's great powers for colonial possessions, possessions whose advantages could have benefited the German nation alone. They conceived of the Central European world empire, furthermore, as a protective-tariff community. Just that, however, is what all these smaller nations do not want. They do not want to be mere markets for German industrial products; they do not want to forgo developing at home those branches of industry that have their natural locations there and importing from outside Germany the goods produced more cheaply there. It was thought that the rise in prices of agricultural products that was infallibly bound to occur in consequence of incorporation into the Central European tariff territory would, even by itself alone, be attractive to the predominantly agrarian states whose incorporation into the Central European empire was being sought. It was overlooked, however, that this argument could make an impression only on economically untrained persons. It is not to be denied that Rumania, say, on joining a German-Austrian-Hungarian customs community, would have experienced a rise in the prices of agricultural products. It is overlooked, however, that industrial products would have risen in price, on the other hand, since then Rumania would have had to pay the higher German domestic prices, while if it is not joined in a customs community with Germany, it pays the lower world-market prices. What it would have lost from joining the German customs community would have been greater than what it would have gained thereby. At present Rumania is a relatively underpopulated or at least a not overpopulated country; that means that the bulk of its export goods can at present and in the foreseeable future be exported without any dumping. Rumania has no enterprises in primary production and only a few in industry whose location would not be natural. Things are different for Germany, which, precisely in the most important branches of production, works under more unfavorable conditions than foreign countries.
The imperialistic way of thinking, which comes forward with the claim to be helping modern economic development to its rightful condition, is in truth gripped by barter-economy and feudal preconceptions. In the age of the world economy it is downright nonsensical to represent the demand for creation of large autarkic economic territories as an economic demand. In peacetime it is a matter of indifference whether one produces foodstuffs and raw materials at home oneself or, if it seems more economic, obtains them from abroad in exchange for other products that one has produced. When a medieval prince acquired a piece of land where ore was mined, then he had a right to call this mine his own. But if a modern state annexes a mining property, these mines still have not thereby become those of its citizens. They must buy their products by transferring products of their own labor just as they did before, and that changes have occurred in the political order remains without significance for ownership of them. If the prince is happy about the annexation of a new province, if he is proud about the size of his realm, that is immediately understandable. If, however, the common man is happy that "our" realm has become larger, that "we" have acquired a new province, well, that is a joy that does not arise from the satisfaction of economic needs.
In economic policy, imperialism in no way suits the stage of world economic development reached in 1914. When the Huns slashed through Europe killing and burning, they harmed their enemies by the destruction that they left behind, but not themselves also. But when German troops destroyed coal mines and factories, then they also worsened the provisioning of the German consumer. That coal and various manufactured products can be produced in the future only in smaller quantities or only with higher costs will be felt by everyone involved in world economic transactions.
Once that has been recognized, however, then only the military argument can still be adduced in favor of the policy of national expansion. The nation must be populous to field many soldiers. Soldiers are needed, however, to acquire land on which soldiers can be raised. That is the circle that the imperialistic way of thinking does not escape.
D. PacifismDreamers and humanitarians have long campaigned for the idea of general and eternal peace. Out of the misery and distress that wars have brought to individuals and peoples, the deep longing arose for peace that should never again be disturbed. Utopians paint the advantages of freedom from war in the most splendid colors and call on states to unite in an enduring alliance for peace embracing the entire world. They appeal to the highmindedness of emperors and kings; they refer to divine commands and promise whoever would realize their ideals undying fame far exceeding even that of the great war heroes.
History has omitted these peace proposals from its agenda. They have never been anything more than literary curiosities that no one took seriously. The powerful have never thought of renouncing their power; it has never occurred to them to subordinate their interests to the interests of humanity, as the naive dreamers demanded.
To be judged quite differently from this older pacifism, which was carried along by general considerations of humanitarianism and horror of bloodshed, is the pacifism of the Enlightenment philosophy of natural law, of economic liberalism, and of political democracy, which has been cultivated since the eighteenth century. It does not arise from a sentiment that calls on the individual and the state to renounce the pursuit of their earthly interests out of thirst for fame or in hope of reward in the beyond; nor does it stand as a separate postulate without organic connection with other moral demands. Rather, pacifism here follows with logical necessity from the entire system of social life. He who, from the utilitarian standpoint, rejects the rule of some over others and demands the full right of self-determination for individuals and peoples has thereby rejected war also. He who has made the harmony of the rightly understood interests of all strata within a nation and of all nations among each other the basis of his world view can no longer find any rational basis for warfare. He to whom even protective tariffs and occupational prohibitions appear as measures harmful to everyone can still less understand how one could regard war as anything other than a destroyer and annihilator, in short, as an evil that strikes all, victor as well as vanquished. Liberal pacifism demands peace because it considers war useless. That is a view understandable only from the standpoint of the free-trade doctrine as developed in the classical theory of Hume, Smith, and Ricardo. He who wants to prepare a lasting peace must, like Bentham, be a free-trader and a democrat and work with decisiveness for the removal of all political rule over colonies by a mother country and fight for the full freedom of movement of persons and goods.Cf Bentham, Grundsätze für ein zukünftiges Völkerrecht und für einen dauernden Frieden, translated by Klatscher (Halle: 1915), pp. 100 ff. Those and no others are the preconditions of eternal peace. If one wants to make peace, then one must get rid of the possibility of conflicts between peoples. Only the ideas of liberalism and democracy have the power to do that.Today people have managed to hold liberalism responsible for the outbreak of the World War. Compare, on the other hand, Bernstein, Sozialdemokratsche Völkerpolitik (Leipzig: 1917), pp. 170 ff., where the close connection of free trade with the peace movement is mentioned. Spann, an opponent of pacifism, expressly emphasizes the "dislike and dread of war which today characterizes the capitalist community" (loc. cit., p. 137).
Once one has abandoned this standpoint, however, one can make no sound argument against war and conflict. If one holds the view that there are irreconcilable class antagonisms between the individual strata of society that cannot be resolved except by the forcible victory of one class over others, if one believes that no contacts between individual nations are possible except those whereby one wins what the other loses, then, of course, one must admit that revolutions at home and wars abroad cannot be avoided. The Marxian socialist rejects war abroad because he sees the enemy not in foreign nations but in the possessing classes of his own nation. The nationalistic imperialist rejects revolution because he is convinced of the solidarity of interests of all strata of his nation in the fight against the foreign enemy. Neither is a principled opponent of armed intervention, neither a principled opponent of bloodshed, as the liberals are, who sanction only defensive war. Nothing, therefore, is in such bad taste for Marxian socialists as to fume over war, nothing in such bad taste for chauvinists as to fume over revolution, out of philanthropic concern for the innocent blood thereby shed. Quis tulerit Gracchos de seditione querentes? [Who could endure the Gracchi complaining of sedition?]
Liberalism rejects aggressive war not on philanthropic grounds but from the standpoint of utility. It rejects aggressive war because it regards victory as harmful, and it wants no conquests because it sees them as an unsuitable means for reaching the ultimate goals for which it strives. Not through war and victory but only through work can a nation create the preconditions for the well-being of its members. Conquering nations finally perish, either because they are annihilated by strong ones or because the ruling class is culturally overwhelmed by the subjugated. Once already the Germanic peoples conquered the world, yet were finally defeated. East Goths and Vandals went down fighting; West Goths, Franks and Lombards, Normans and Varangians remained victors in battle, but they were culturally defeated by the subjugated; they, the victors, adopted the language of the defeated and were absorbed into them. One or the other is the fate of all ruling peoples. The landlords pass away, the peasants remain; as the chorus in the Bride of Messina expresses it: "The foreign conquerors come and go, and we obey but we remain." The sword proves in the long run not to be the most suitable means of gaining broad diffusion for a people. That is the "impotence of victory" of which Hegel speaks.Compare Hegel, Werke, third edition, vol. 9 (Berlin: 1848), p. 540.,One could raise the question of what, then, the distinction between pacifism and militarism really consists, since the pacifist, too, is fundamentally not for maintaining peace at any price; rather, under certain conditions he prefers war to an unbearable state of peace; and conversely, the militarist, too, does not want to wage perpetual war but only to restore a definite condition that he regards as desirable. Both supposedly stand, therefore, in fundamental opposition to the absolute life renouncing passivity that the Gospel proclaims and that many Christian sects practice; between the two themselves, however, there exists only a difference of degree. In fact, however, the contrast is so great that it becomes a fundamental one. It lies, on the one hand, in assessment of the size and difficulty of the impediment barring us from peace and, on the other hand, in assessment of the disadvantages connected with conflict. Pacifism believes that we are barred from eternal peace only by a thin partition whose removal must lead at once to the state of peace, while militarism sets such remote goals for itself that their attainment in the foreseable future cannot be expected, so that a long era of war still lies ahead. Liberalism believed that eternal peace could be lastingly established merely by the abolition of princely absolutism, German militarism, however, was clear about the fact that achieving and maintaining the German supremacy being sought would continually entail wars for a long time yet. Furthermore, pacifism always has an eye open to the damages and disadvantages of war, while militarism considers them slight. From that there then follows in pacifism its outspoken preference for the state of peace and in militarism its constant glorification of war and, in its socialist form, of revolution. A further fundamental distinction between pacifism and militarism is possible according to their positions on the theory of power. Militarism sees the basis of rule in material power (Lassalle, Lasson), liberalism in the power of the mind (Hume).
Philanthropic pacifism wants to abolish war without getting at the causes of war.
It has been proposed to have disputes between nations settled by courts of arbitration. Just as in relations between individuals self-help is no longer permitted and, apart from special exceptional cases, the harmed person has only the right to call on the courts, so must things also become in relations between nations. Here also force would have to give way to law. It is supposedly no harder to settle disputes between nations peacefully than those among individual members of a nation. The opponents of arbitration in disputes between nations were to be judged no differently than the medieval feudal lords and brawlers, who also resisted the jurisdiction of the state as far as they could. Such resistance's must simply be abolished. If this had already been done years ago, then the World War, with all of its sad consequences, could have been avoided. Other advocates of arbitration between states go less far with their demands. They desire the obligatory introduction of arbitration, at least for the near future, not for all disputes but only for those touching on neither the honor nor the conditions of existence of nations, that is, only for the lesser cases, while for the others the old method of decision on the field of battle could still be retained.
It is a delusion to assume that the number of wars can thereby be reduced. For many decades already, wars have still been possible only for weighty reasons. That requires neither confirmation by citing historical examples nor even a long explanation. The princely states waged war as often as required by the interests of princes aiming at extending their power. In the calculation of the prince and his counselors, war was a means just like any other; free from any sentimental regard for the human lives that were thereby put at stake, they coolly weighed the advantages and disadvantages of military intervention as a chess player considers his moves. The path of kings led literally over corpses. Wars were not perhaps begun, as people are accustomed to saying, for "trivial reasons." The cause of war was always the same: the princes' greed for power. What superficially looked like the cause of war was only a pretext. (Remember, say, the Silesian wars of Frederick the Great.) The age of democracy knows no more cabinet wars. Even the three European imperial powers, which were the last representatives of the old absolutist idea of the state, had for a long time already no longer possessed the power to instigate such wars. The democratic opposition at home was already much too strong for that. From the moment when the triumph of the liberal idea of the state had brought the nationality principle to the fore, wars were possible only for national reasons. That could be changed neither by the fact that liberalism soon was seriously endangered by the advance of socialism nor by the fact that the old military powers still remained at the helm in Central and Eastern Europe. That is a success of liberal thinking that can no longer be undone, and that should not be forgotten by anyone who undertakes to revile liberalism and the Enlightenment.
Whether the arbitration procedure should now be chosen for less important disputes arising in relations among nations or whether their settlement should be left to negotiations between the parties is a question that interests us less here, however important it may otherwise be. It must be noted only that all arbitration treaties discussed in recent years seem suitable only for settlement of such less important matters of dispute and that up to now all attempts further to extend the range of international arbitration have failed.
If it is asserted that utterly all disputes between peoples can be settled through courts of arbitration, so that decision by war can be quite eliminated, then the fact must be noted that every administration of justice first presupposes the existence of a generally recognized law and then the possibility of applying the legal maxims to the individual case. Neither applies to those disputes between nations of which we speak. All attempts to create a substantive international law through whose application disputes among nations could be decided have miscarried. A hundred years ago the Holy Alliance sought to elevate the principle of legitimacy to the basis of international law. The possessions of the princes at that time were to be protected and guaranteed both against other princes and also, in line with the political thinking of the time, against the demands of revolutionary subjects. The causes of the failure of this attempt need not be investigated at length; they are obvious. And yet today people seem inclined to renew the same attempt again and to create a new Holy Alliance in Wilson's League of Nations. That it is not princes but nations that are guaranteeing their possessions today is a distinction that does not affect the essence of things. The decisive thing is that possessions are ensured at all. It is again, as a hundred years ago, a division of the world that presumes to be an eternal and final one. It will be no more enduring than the earlier one, however, and will, no less than that one, bring blood and misery to mankind.
As the legitimacy principle as understood by the Holy Alliance was already shaken, liberalism proclaimed a new principle for regulating relations among nations. The nationality principle seemed to signify the end of all disputes between nations; it was to be the norm by which all conflict should be peacefully solved. The League of Nations of Versailles adopts this principle also, though, to be sure, only for the nations of Europe. Yet in doing so it overlooks the fact that applying this principle wherever the members of different peoples live mingled together only ignites conflict among peoples all the more. It is still more serious that the League of Nations does not recognize the freedom of movement of the person, that the United States and Australia are still allowed to block themselves off from unwanted immigrants. Such a League of Nations endures so long as it has the power to hold down its adversaries; its authority and the effectiveness of its principles are built on force, to which the disadvantaged must yield but which they will never recognize as right. Never can Germans, Italians, Czechs, Japanese, Chinese, and others regard it as just that the immeasurable landed wealth of North America, Australia, and East India should remain the exclusive property of the Anglo-Saxon nation and that the French be allowed to hedge in millions of square kilometers of the best land like a private park.
Socialist doctrine hopes for establishment of eternal peace through the realization of socialism. "Those migrations of individuals," says Otto Bauer, "that are dominated by the blindly prevailing laws of capitalist competition and are almost fully exempt from the application of deliberate rules then cease. Into their place steps the deliberate regulation of migrations by the socialist community. They will draw immigrants to where a larger number of people at work increases the productivity of labor; where the land bestows a declining yield to a growing number of persons, they will induce part of the population to emigrate. With emigration and immigration thus being consciously regulated by society, the power over its language boundaries falls for the first time into the hands of each nation. Thus, no longer can social migrations against the will of the nation repeatedly violate the nationality principle."Cf. Bauer, loc. cit., p. 515.
We can imagine the realization of socialism in two ways. First, in its highest fulfillment as a socialist world state, as unified world socialism. In such a state the office responsible for the overall control of production will determine the location of each unit of production and thereby also regulate migrations of workers and thus perform the same tasks that fall to the competition of producers in the—so far not even approximately implemented—free economy. This office will resettle workers from the territories with more unfavorable conditions of production into those with more favorable conditions. Then, however, nationality problems will still turn up in the socialist world community. If spinning and iron production are to be cut back in Germany and expanded in the United States, then German workers will have to be resettled in Anglo-Saxon territory. It is precisely such resettlements that, as Bauer says, repeatedly violate the nationality principle against the will of the nation; but they violate it not only in the capitalist economic order, as he thinks, but in the socialist order just the same. That they are governed in the liberal economic order by the "blindly ruling" laws of capitalist competition but in the socialist community are "deliberately" regulated by society is incidental. If the deliberate regulation of the migrations of workers is guided by the rational point of view of pure economic efficiency—which of course Bauer too, and with him every Marxist, takes for granted—then it must lead to the same result that free competition also leads to, namely, that workers, without regard to historically inherited national conditions of settlement, are resettled where they are needed for exploitation of the most favorable conditions of production. Therein, however, lies the root of all national frictions. To assume that migrations of workers transcending the boundaries of national territories of settlement would not lead to the same conflicts in the socialist community as in the free community would of course be a downright utopian way of thinking. If, though, one wants to conceive of the socialist community as a nondemocratic one, then such an assumption is permissible; for, as we have seen, all national frictions first arise under democracy. World socialism, conceived of as a world empire of general servitude of peoples, would admittedly bring national peace also.
The realization of socialism is also possible, however, otherwise than through a world state. We can imagine a series of independent socialist political systems—perhaps nationally unified state—existing side by side without there being a common management of world production. The individual communities, which then are owners of the natural and produced means of production located in their territories, are connected with each other only in the exchange of goods. In a socialism of that kind, national antagonisms will not only not be made milder in comparison with the situation in the liberal economic order but will be considerably sharpened. The migration problem would lose nothing of its capacity to create conflicts between peoples. The individual states would perhaps not completely shut themselves off from immigration, but they would not allow immigrants to acquire resident status and to acquire a full share of the fruits of national production. A kind of international migrant-worker system would arise. Since each one of these socialist communities would have the product of the natural resources found in its territory at its disposal, so that the income of the residents of the individual territories would be different in size—larger for some nations, smaller for others—people would resist the inflow of elements of foreign nationality even for this reason alone. In the liberal economic order it is possible for members of all nations to acquire private ownership of the means of production of the entire world so that, e.g., Germans also can assure themselves a part of the land resources of India and, on the other hand, again, German capital can move to India to help exploit the more favorable conditions of production there. In a socialist order of society, that sort of thing would not be possible, since political sovereignty and economic exploitation must coincide in it. The European peoples would be excluded from ownership in foreign continents. They would have to endure calmly the fact that the immeasurable riches of overseas territories redound to the advantage of the local inhabitants only and would have to observe how a part of this landed wealth remains unexploited because capital for its use cannot be obtained.
All pacifism not based on a liberal economic order built on private ownership of the means of production always remains utopian. Whoever wants peace among nations must seek to limit the state and its influence most strictly.
It is no accident that the basic ideas of modern imperialism can already be found in the writings of two fathers of German socialism and of modern socialism in general, namely, in the works of Engels and Rodbertus. From the statist outlook of a socialist it seems obvious, because of geographic and commercial necessities, that a state must not let itself be shut off from the sea.Cf. Rodbertus, Schriften, edited by Wirth, new edition, vol. 4 (Berlin: 1899), p. 282. The question of access to the sea, which has always directed the Russian policy of conquest in Europe and in Asia and has dominated the behavior of the German and Austrian states regarding Trieste and of the Hungarian state regarding the South Slavs and which has led to the infamous "corridor" theories to which people want to sacrifice the German city of Danzig, does not exist at all for the liberal. He cannot understand how persons may be used as a "corridor," since he takes the position from the first that persons and peoples never may serve as means but always are ends and because he never regards persons as appurtenances of the land on which they dwell, The free-trader, who advocates complete freedom of movement, cannot understand what sort of advantage it offers to a people if it can send its export goods to the coast over its own state territory. If the old Russia of Czarism had acquired a Norwegian seaport and in addition a corridor across Scandinavia to this seaport, it could not thereby have shortened the distance of the individual parts of the Russian interior from the sea. What the Russian economy feels as disadvantageous is that the Russian production sites are located far from the sea and therefore lack those advantages in the transport system that ease of ocean freight transport assures. But none of that would be changed by acquisition of a Scandinavian seaport; if free trade prevails, it is quite a matter of indifference whether the nearest seaports are administered by Russian or other officials. Imperialism needs seaports because it needs naval stations and because it wants to wage economic wars. It needs them not to use them but to exclude others from them. The nonstatist economy of trade free of the state does not recognize this argumentation.
Rodbertus and Engels both oppose the political demands of the non-German peoples of Austria. That the Germans and Magyars, at the time when the great monarchies really became a historical necessity in Europe, "put all these small, stunted, impotent nationlets together into a great empire and thereby made them capable of taking part in a historical development to which they, left to themselves, would have remained quite foreign"—for not having understood that, Engels reproaches the Pan-Slavists. He admits that such an empire cannot prevail "without forcibly crushing many a tender flowerlet of a nation. But without force and without iron ruthlessness, nothing is accomplished in history; and if Alexander, Caesar, and Napoleon had possessed the same capacity for compassion to which Pan-Slavism now appeals for the sake of its decayed clients, what then would have become of history! And are the Persians, Celts, and Christian Germans not worth the Czechs and the people of Ogulin and Sereth?"Cf. Mehring, Aus dem literarischen Nachlass von Marx, Engels und Lassalle, vol 3(Stuttgart: 1902), pp. 255 f. These sentences could have come quite well from a Pan-German writer or mutatis mutandis from a Czech or Polish chauvinist, Engels then continues: "Now, however, in consequence of the great progress of industry, trade, and communications, political centralization has become a much more pressing need than back in the fifteenth and sixteenth centuries. What still must be centralized becomes centralized. And now the Pan-Slavists come and demand that we should 'set free' these half-Germanized Slavs, we should undo a centralization that is imposed on these Slavs by all their material interests?" That is in essence nothing but Renner's doctrine of the tendency toward concentration in political life and of the economic necessity of the multinational state. We see that the orthodox Marxists did Renner an injustice in accusing him of heresy as a "revisionist."
The way to eternal peace does not lead through strengthening state and central power, as socialism strives for. The greater the scope the state claims in the life of the individual and the more important politics becomes for him, the more areas of friction are thereby created in territories with mixed population. Limiting state power to a minimum, as liberalism sought, would considerably soften the antagonisms between different nations that live side by side in the same territory. The only true national autonomy is the freedom of the individual against the state and society. The "statification" of life and of the economy leads with necessity to the struggle of nations.
Full freedom of movement of persons and goods, the most comprehensive protection of the property and freedom of each individual, removal of all state compulsion in the school system, in short, the most exact and complete application of the ideas of 1789, are the prerequisites of peaceful conditions. If wars then cease, "then peace has proceeded from the inner forces of things, then people and indeed free people have become peaceful."Cf. W. Humboldt, Ideen zu einem Versuch, die Grenzen der Wirksamkeit des Staats zu bestimmen, edition of the "Deutsche Bibliothek," (Berlin), p. 66.
Never have we been further from this ideal than today.
- On the History of German DemocracyA. PrussiaAmong the most notable phenomena of the history of the last hundred years is the fact that the modern political ideas of freedom and self-government could not prevail among the German people, while elsewhere they could make themselves influential almost everywhere on earth. Everywhere democracy has been able to overcome the old princely state; everywhere the revolutionary forces have triumphed. Only precisely in Germany and in Austria—and besides there only in Russia—has the democratic revolution been defeated again and again. While every nation of Europe and America has experienced an age of liberalism in constitutional and economic policy, in Germany and Austria only slight successes have been accorded to liberalism. In the political sector, the old princely state, as represented at its purest in the constitution of Prussia under Frederick the Great, did indeed have to grant some concessions, but it was far from transforming itself into a parliamentary monarchy of, say, the English or Italian sort; as a result of the great political movements of the nineteenth century the authoritarian state appears here.
The democratic state, as we see it realized almost everywhere at the beginning of the twentieth century, rests on the identity of the rulers and the ruled, of the state and of the people. In it no government is possible against the will of the majority of the people. In it government and the governed, state and people, are one. Not so in the authoritarian state. Here on the one side stand the state-preserving elements, which regard themselves and themselves alone as the state; the government proceeds from them and identifies itself with them. On the other side stands the people, which appears only as object, not as subject, of government actions, which addresses the state sometimes pleadingly, sometimes demandingly, but which never identifies itself with it. This antithesis found its most eloquent expression in former Austrian parliamentary language in the contrast of "state necessities" with "people's necessities." The former were understood to include what the state and the latter what the people sought from the financial expenditures of the budget, and the deputies were at pains to be compensated for the granting of state necessities by the granting of people's necessities—which sometimes were necessities of the individual political parties or even of individual deputies. These contraries could never have been made understandable to an English or French politician; he would not have been able to understand how something could be necessary for the state without at the same time being necessary for the people, and conversely.
The contrast between authorities and people which characterizes the authoritarian state is not quite identical with the one between prince and people that characterizes the princely state; still less is it identical with the contrast between the prince and the estates in the old estate system. In their contrast with the modern democratic state, with its fundamental unity of government and people, however, all these dualistic state forms do share a common characteristic.
Attempts have not been lacking to explain the origin and basis of this peculiarity of German history. Those writers made it easiest for themselves who believed they understood the authoritarian state as the emanation of a special type of German spirit and sought to portray the democratic national state as "un-German," as not suitable for the soul of the German.Max Weber provided a destructive critique of these theories in Parlament und Regierung im neugeordneten Deutschland (Munich: 1918). Then, again, the attempt has been made to draw the special political position of Germany into an explanation. A state that seems endangered by external enemies in such a way as the German state was supposedly cannot tolerate a freedom-oriented constitution at home. "The measure of political freedom that can be permitted in governmental institutions must rationally be inversely proportional to the military-political pressure bearing on the borders of the state."Cf. Hintze in the collective work Deutschland und der Weltkrieg (Leipzig: 1915), p. 6. A penetrating critique of these views, which rest on a proposition of the English historian Seeley, appears in Preuss, Obrigkeitsstaat und grossdeutscher Gedanke (Jena: 1916), pp. 7 ff. That an intimate connection must exist between the political position and the constitution of a people will be conceded without further ado. But it is striking that efforts were made to bring only the foreign political position, but not the domestic political position, into explaining constitutional conditions. In what follows the converse procedure will be followed. An attempt will be made to explain that much-discussed peculiarity of German constitutional life by domestic political conditions, namely, by the position of the Germans of Prussia and Austria in the polyglot territories.
When the subjects of the German princes began to awake from their centuries-long political slumber, they found their fatherland torn to shreds, divided as patrimonial estates among a number of families whose external impotence was but poorly cloaked by their ruthless internal tyranny. Only two territorial princes were strong enough to stand on their own feet; their means of power rested, however, not on their German position but on their possessions outside Germany. For Austria this assertion needs no further justification; the fact was never disputed. It was otherwise for Prussia. It is common to overlook the fact that the position Of Prussia in Germany and in Europe always remained insecure until the Hohenzollerns succeeded in building a rather large contiguous state territory, first by the annexation of Silesia, which at the time was half Slavic, and then by the acquisition of Posnania and West Prussia. Precisely those deeds of Prussia on which its power rested—its participation in the victory over the Napoleonic system, the crushing of the revolution of 1848, and the war of 1866—could not have been accomplished without the non-German subjects of its eastern provinces. Even the acquisition of German land accomplished by the struggles waged from 1813 to 1866 with the help of its non-German subjects in no way shifted the center of gravity of the Prussian state from the east to the west. Still, as before, the undiminished maintenance of its possessions east of the Elbe remained a condition of existence for Prussia.
The political thinking of the German mind, which was slowly maturing for public life, could be modeled on none of the states existing on German soil. What the patriotic German saw before him was only the ruins of the old imperial magnificence and the disgraceful and slovenly administration of the German petty princes. The way to the German state would have to involve the overthrow of these small despots. All agreed on that. What, however, should happen to the two German powers?
The difficulty inherent in the problem may best be recognized from a comparison with Italy. Conditions in Italy were similar to those in Germany. Blocking the modern national state were a number of petty princes and the great power Austria. The Italians would have gotten rid of the former quickly, but of the latter—by themselves—never. And Austria not only held fast to a large part of Italy directly, it also protected the sovereignty of the individual princes in the remaining territories. Without Austria's intervention, Joachim Murat or General Pepe would long since probably have established an Italian national state. But the Italians had to wait until Austria's relations with the other powers offered them the opportunity to reach their goal. Italy owes its freedom and unity to French and Prussian help, and in a certain sense to English help also; to unite Trentino, too, with the kingdom of Italy required the help of the entire world. The Italians themselves lost all the battles they fought against Austria.
In Germany conditions were different. How were the German people to succeed in overcoming Austria and Prussia, the two mighty military monarchies? Foreign help, as given in Italy, could not be counted on. The most natural course would probably have been for the German national idea to acquire so much power over the Germans in Prussia and Austria that they strove for a united Germany. If the Germans, who were the majority by far in the Prussian army and represented the most important element in the Austrian army, had proved true as Germans the way the Magyars did in 1849 as Magyars, then there would have arisen out of the confusions of the revolution of 1848 a German Reich free and united from the Belt to the Etsch. The non-German elements in the armies of Austria and Prussia would hardly have been in a position to mount successful resistance to the assault of the entire German people.
The Germans in Austria and Prussia, however, were also opponents or at least only limited adherents of the German strivings for unity—and that is what was decisive. The efforts of the men of St. Paul's Church suffered shipwreck, not, as legends have it, because of doctrinairism, idealism, and professorial ignorance of the ways of the world but rather because of the fact that the majority of Germans supported the cause of the German nation only half-heartedly. What they desired was not the German state alone but rather the Austrian or the Prussian state as well at the same time—and this is not to mention those who actually considered themselves only Austrians or Prussians and not at all Germans.
We who today are accustomed to seeing the pure Prussian and the pure Austrian only in the conservative east of the Elbe and the Alpine clerical, we who in the appeal to Prussia or Austria can always see only the pretexts of enemies of the national state—we can only with difficulty concede even mere good faith to the black-and-yellow and black-and-white patriots of that time. This not only does a serious injustice to men about whose honorable striving there should be no doubt; this lack of historical perspective also blocks our path to knowledge of the most important events of German history.
Every German knows the passage in Goethe's Dichtung und Wahrheit in which the aging poet portrays the deep impression that the figure of Frederick the Great made on his contemporaries.The criticism that Mehring makes (Die Lessing-Legende, third edition [Stuttgart: 1909] pp. 12 ff.) does not weaken the force of this passage as evidence for the views of the old Goethe. It is true that the state of the Hohenzollerns, too, which Prussian court historiography lauded as the implementation of all utopias, was not a whit better than the other German states; and Frederick William I or Frederick II were no less hateful despots than any Württemberg or Hessian lord. But one thing distinguished Brandenburg-Prussia from the other German territories: the state was not ridiculous; its policy was purposeful, steady, and power-seeking. This state could be hated, it might be feared, but it could not be overlooked.
If, thus, the political thoughts of even the non-Prussian Germans secretly strayed toward Prussia out of the narrowness of their political existence, if even foreigners judged this state not totally unfavorably, was it any wonder that the beginnings of political thought in the Prussian provinces clung more often to the Prussian state, which, with all its faults, still had the advantage of actual existence, than to the dream of a German state, which was unmasked every day by the wretchedness of the Holy Roman Empire? Thus a Prussian state-consciousness was formed in Prussia. And these feelings were shared not only by the salaried champions of the Prussian state apparatus and its beneficiaries but also by men of undoubtedly democratic sentiments like WaldeckCf. Oppenheim, Benedikt Franz Leo Waldek (Berlin: 1880), pp. 41 ff. and hundreds of thousands like him.
It is common to describe the German question much too narrowly as the opposition of great-German and small-German. In truth the problem was larger and broader. It was first of all the gap that yawned between German national sentiment on the one side and Austrian and Prussian state-consciousness on the other.
The German unified state could have been built only on the ruins of the German states; whoever wanted to construct it therefore first had to root out those sentiments that were striving to maintain the Prussian and Austrian states. In March 1848 that seemed easy to do. At that time it could be expected that the Prussian and Austrian democrats, faced with the need to decide, would, even if perhaps after inner struggles, join the side of a great and unified Germany. Yet in both great German states, democracy was defeated sooner than one would have thought possible. Its sway lasted scarcely a few weeks in Vienna and Berlin; then the authoritarian state embarked on the plan that pulled the reins tight. What was the cause? The turnaround did come extraordinarily quickly. Right after the complete victory of democracy in March, the power of the new spirit began to crumble; and after a short time the Prussian army, led by the Prince of Prussia, who had fled the country only shortly before, could already take the offensive against the revolution.
There should be general agreement that the position of the eastern provinces of Prussia was decisive here.Cf. Bismarck, Gedanken und Erinnerungen (Stuttgart: 1898), vol. 1, p. 56. If this is remembered, it will not be too hard to understand clearly the causes of the turnaround. There in the East the Germans were in the minority amidst a numerically superior population of foreign language; there they had to fear that the lmplementation and application of democratic principles would cost them the ruling position that they had so far possessed. They would have become a minority that could never have expected to acquire power; they would have had to taste that lack of political rights that is the fate of minorities of foreign nationality.
The Germans of the provinces of Prussia, Posnania, and Silesia could hope for nothing good from democracy. That, however, determined the positions of the Germans of Prussia on the whole, for the Germans of the polyglot territories had much greater political importance than corresponded to their numbers. These Germans included, after all, almost all members of the higher strata of the population of those provinces—the officials, teachers, merchants, estate owners, and larger industrialists. In the upper strata of the Germans of Prussia, the members of the threatened borderlands therefore formed a numerically far larger part than the German borderland inhabitants formed on the whole in the total German population of Prussia. The solid mass of inhabitants of the borderlands joined with the parties supporting the state and thereby gave them preponderance. The idea of the German state could win no power over the non-German subjects of Prussia, and its German subjects feared German democracy. That was the tragedy of the democratic idea in Germany.
Here lie the roots of the peculiar political-intellectual constitution of the German people. It was the threatened position of the Germans in the borderlands that caused the ideal of democracy in Germany to fade quickly away and the subjects of Prussia, after a short honeymoon of revolution, to return penitently to the military state. They knew now what lay ahead for them in democracy. However much they might despise Potsdam's despotism, they had to bow to it if they did not want to fall under the rule of Poles and Lithuanians. From then on they were the faithful guard of the authoritarian state. With their help the Prussian military state triumphed over the men of freedom. All Prussia's political questions were now judged exclusively according to the position in the East. It was what determined the feeble position of the Prussian liberals in the constitutional conflict. It was what caused Prussia to seek Russian friendship, so long as that could be done at all, and thereby thwarted the natural alliance with England.
It now occurred to the Prussian authoritarian state to apply its methods of gaining and maintaining its position in Germany to the solution of the greater German national problem also. The weapons of the Junkers had triumphed in Germany. They had crushed the German bourgeoisie; they had excluded the Habsburg influence and elevated the Hohenzollerns high above the smaller and middle princes. Prussian military power suppressed the non-German elements in the Slavic eastern provinces of Prussia, in North Schleswig, and in Alsace-Lorraine. The bright splendor of the victories won in three wars shone on Prussian militarism. As it had crushed with power everything trying to hinder it on its way, so it believed it should also use armed force to solve all newly arising problems. By the power of weapons the hard-pressed position of the Habsburgs and the Germans in the Danube monarchy should be sustained and conquests made in the East and West and overseas.
The liberal theory of the state had long since exposed the error in this reasoning. The theorists and practitioners of power politics should have remembered Hume's famous arguments that all rule rests on power over minds; the government is always only a minority and can govern the majority only because the latter either is convinced of the legitimacy of the rulers or considers their rule desirable in its own interests.Cf. Hume, Of the First Principles of Government (Essays, edited by Frowde), pp. 29 if. Then they could not have overlooked the fact that the German authoritarian state, even in Germany, rested in the last analysis not on the power of bayonets but precisely on a particular disposition of the German mind, which was caused by the national conditions of settlement of the Germans in the East. They should not have deceived themselves over the fact that the defeat of German liberalism was attributable solely to the conditions of settlement in the German East: the rule of democracy there would have led to driving the Germans out and depriving them of rights; hence a predisposition toward antidemocratic currents had been created in wide circles of the German people. They would have had to recognize that even the German authoritarian state, like any other state, rested not on victories of weapons but on victories of the spirit, on victories won by dynastic-authoritarian sentiment over liberal sentiment. These relationships could not be misinterpreted worse than they were by that German school of political realists that denied the influence of every intellectual current in the life of nations and wanted to trace everything back to "real power relations." When Bismarck said that his successes rested only on the power of the Prussian army and had only derision and scorn for the ideals of St. Paul's Church, then he overlooked the fact that the power of the Prussian state was grounded on ideals also, although on the opposite ideals, and that it would have had to collapse immediately if liberal thought had penetrated the Prussian army further than it actually did. Those circles that were anxiously striving to keep the "modern spirit of demoralization" away from the army were better informed in this respect.
The Prussian authoritarian state could not defeat the world. Such a victory could have been achieved by a nation hopelessly in the minority only through ideas, through public opinion, but never with weapons. But the German authoritarian state, filled with a boundless contempt for the press and for all "literature," scorned ideas as a means of struggle. For its adversaries, however, the democratic idea made propaganda. Not until the middle of the war, when it was already too late, was it recognized in Germany what power lay in this propaganda and how vain it is to fight with the sword against the spirit.
If the German people found the allotment of territories of settlement on the earth unjust, then they should have sought to convert the public opinion of the world, which did not see the injustice of this allotment. Whether this would have been possible is another question. It is not wholly improbable that allies for this struggle could have been found, united with whom much, perhaps even everything, could have been attained. It is certain, however, that the undertaking of a nation of eighty million to fight against the whole remaining world was hopeless if it was not pursued with intellectual means. Not with weapons but only with the spirit can a minority overcome the majority. True practical politics is the only kind that knows how to enlist ideas in its service.
- On the History of German DemocracyB. AustriaThe teleological interpretation of history, by which all historical events appear as realization of definite goals set for human development, has assigned many kinds of task to the Danube state of the Habsburgs, which for four hundred years has maintained its position among the European powers. Now it should be the shield of the West against the threat from Islam, now the stronghold and refuge of Catholicism against the heretics; others wanted to see it as the support of the conservative element in general, still others as the state summoned by its nationally polychromatic character to promote peace among peoples by way of example.A compendium of the various tasks that people have sought to assign to Austria is given by Seipel, loc. cit., pp. 18 ff. One sees that the tasks were multifarious; according to the shape of political affairs, people favored now the one and now the other interpretation. History goes its course, however, without regard to such chimeras. Princes and peoples bother themselves very little over what missions the philosophy of history assigns to them.
Causal historiography does not look for the "mission" or the "idea" that nations and states have to realize; it seeks the political concept that forms states out of nations and parts of nations. The political concept at the basis of almost all state structures of the last centuries of the Middle Ages and the first centuries of modern times was princely dominion. The state existed for the sake of the king and his house. That holds true of the state of the Austrian Habsburgs, from the Ferdinand who as German emperor was called the First to the Ferdinand who as Austrian emperor was the only one of that name, just as it holds true of all other states of that time. In that respect the Austrian state was no different from the other states of its time. The hereditary lands of Leopold I were fundamentally no different from the state of Louis XIV or Peter the Great. But then came other times. The princely state succumbed to the attack of the freedom movement; in its place appeared the free national state. The nationality principle became the bearer of state coherence and the concept of the state. Not all states could take part in this development without change in their geographical extent; many had to submit to changes in their territory. For the Danube monarchy, however, the nationality principle actually signified the negation of its justification for existence.
Far-seeing Italian patriots passed the death sentence on the state of the House of Habsburg-Lorraine as early as 1815; no later than 1848 there already were men among all peoples forming the Empire who agreed with this opinion, and for more than a generation one could easily say that the entire thinking youth of the Monarchy—perhaps aside from part of the Alpine Germans educated in Catholic schools—were hostile to the state. All non-Germans in the country longingly awaited the day that would bring them freedom and their own national state. They strove to get out of the "married-together" state. Many of them made compromises. They saw with open eyes how things stood in Europe and in the world; they had no illusions about the impediments that initially still stood in the way of realization of their ideals, and they were therefore ready to moderate their claims in the meanwhile. They came to terms with the provisional continuation of the Austrian and Hungarian states; indeed, even more, they used the Dual Monarchy as a counter in their own game. The Poles, the South Slavs, the Ukrainians, and in a certain sense the Czechs also, sought to make the weight of this great state, which despite everything was still powerful, serviceable for their own purposes. Superficial critics have sought to conclude from that fact that these peoples had reconciled themselves to the existence of the state, that they even desired it. Nothing was more wrong than this view. Never did irredentism seriously disappear from the program of any of the non-German parties. It was tolerated that official circles did not openly show the ultimate goals of their national strivings in Vienna; at home, however, people thought and spoke, with formal attention to the limits drawn by the paragraphs on high treason of the penal law, of nothing other than liberation and shaking off the yoke of the foreign dynasty. The Czech and Polish ministers, and even the numerous South Slav generals, never forgot that they were sons of subjugated peoples; never did they feel themselves in their court positions as other than pacemakers of the freedom movement that wanted to get out of this state.
Only the Germans took a different position toward the state of the Habsburgs. It is true that there was also a German irredentism in Austria, even if one may not interpret in this sense every hurrah for the Hohenzollerns or for Bismarck shouted at solstice festivals, student assemblages, and gatherings of voters. But although the Austrian government in the last forty years of the existence of the Empire was, with a few transitory exceptions, more or less anti-German and often draconically persecuted relatively harmless utterances of German national sentiments, while far sharper speeches and deeds of the other nationalities enjoyed benevolent toleration, the state-supporting parties among the Germans always kept the upper hand. Up to the last days of the Empire the Germans felt themselves the real champions of the state idea, citizens of a German state. Was that a delusion, was it political immaturity?
To be sure, a large part, even the largest part, of the German people in Austria was and today still is politically backward. But this explanation cannot satisfy us. We just are not satisfied with the assumption of an innate political inferiority of the German; we seek precisely the causes that made the Germans march politically behind the Ruthenians and Serbs. We ask ourselves how it then happened that all other peoples inhabiting the imperial state readily adopted the modern ideas of freedom and national independence but that the German-Austrians so much identified themselves with the state of the Habsburgs that, for the sake of its continuation, they finally readily incurred the immense sacrifices of goods and blood that a war of more than four years imposed on them.
It was German writers who expounded the theory that the Austro-Hungarian dual state was no artificial construction, as the doctrine misled by the nationality principle announced, but rather a natural geographic unit. The arbitrariness of such interpretations of course needed no special refutation. With this method one can just as well prove that Hungary and Bohemia had to form one state as the opposite. What is a geographic unit, what are "natural" boundaries? No one can say. With this method Napoleon I once argued France's claim to Holland, for the Netherlands are an alluvial deposit of French rivers; with the same method Austrian writers sought, before the fulfillment of Italian strivings for unity, to support the right of Austria to the lowlands of upper Italy.Cf. p. 79 above; further, the criticism in Justus, "Sozialismus und Geographie, "Der Kampf, vol. 11, pp. 469 ff. Today the czechs apply this theory to justify the annexation of German Bohemia.
Another interpretation is of the state as an economic territory, which was urged above all by Renner, who, besides that, also considered the geographic interpretation of the state valid. For Renner the state is an economic community," an "organized economic territory." Unified economic territories should not be torn apart; thus it was foolish to want to destroy the continued territorial existence of the Austro-Hungarian Monarchy.Cf. Renner, ?sterreichs Erneuerung Marximus, Krieg und Internationale (Stuttgart: 1917); on the other hand, Mises, :Vom Ziel der Handelspolitik," loc. cit., pp. 579 ff. (during the writing of this essay only the first volume of ?sterreichs Erneuerung was available to me), further, Justus, loc.cit.,; Emil Lederer, "Zeitgem?sse Wandlungen der sozialistischen Idee und Theorie," Archiv f?r Sozialwissenschaft, vol. 45, 1918/1919, pp. 261 ff. But this unified economic territory is just what the non-German people of Austria did not want; they did not let themselves be influenced by Renner's arguments either. Why did the Germans, precisely the Germans of Austria, create such doctrines, which were supposed to prove the necessity of this state, and sometimes even consider them right?
That the Germans always cared somewhat for the Austrian state, although this state was not at all a German state and, when it suited it, oppressed the Germans just the same as or even more than its other peoples—we must try to understand that fact by the same principle that explains the development of the Prussian-German political spirit of conservatism and militarism.
The political thinking of the Germans in Austria suffered from a double orientation toward the German and toward the Austrian state. After they had awakened from the centuries long sleep into which the Counter-Reformation had sunk them and when they began, in the second half of the eighteenth century, timidly to concern themselves with public questions, the Germans in Austria turned their thoughts to the Reich also; many a bold person dreamed, even before March 1848, of a unified German state. But never did they make it clear to themselves that they had to choose between being German and being Austrian and that they could not desire the German and the Austrian state at the same time. They did not or would not see that a free Germany was possible only if Austria was destroyed first and that Austria could endure only if it withdrew part of its best sons from the German Reich. They did not see that the goals they sought were incompatible and that what they wanted was an absurdity. They were not at all conscious of their halfheartedness, that halfheartedness that caused the whole pitiable irresoluteness of their policy, that halfheartedness that brought failure to all and everything they undertook.
Since Königgrätz it has become the fashion in North Germany to doubt the German sentiment of the German-Austrians. Since people equated German and Reichs-German without further ado and, moreover, true to the generally prevailing statist way of thinking, also identified all Austrians with the policy of the Vienna court, it was not hard to find a basis for this interpretation. It was nevertheless thoroughly wrong. Never did the Germans of Austria forget their national character; never, not even in the first years following the defeat in the Bohemian campaign, did they lose for even a minute the feeling of belonging together with the Germans on the other side of the black-and-yellow border-posts. They were German and also wanted to remain so; least of all should they be blamed for also wanting to be Austrians at the same time by those who subordinated the German idea to the Prussian.
No less wrong, however, is the opinion that was widespread in Austrian court circles that the German-Austrians were not serious about their Austrianism. Catholic-oriented historians sadly lamented the decline of the old Austria, that Austrian princely state which, from Ferdinand II until the outbreak of the revolution Of March 1848, had been the protector of Catholicism and of the legitimist idea of the state in Europe. Their complete lack of understanding of everything that had been thought and written since Rousseau, their aversion to all political changes that had taken place in the world since the French Revolution, caused them to believe that that esteemed old state of the Habsburgs could have endured if the "Jews and Freemasons" had not brought on its downfall. Their entire grudge was directed against the Germans in Austria and among them above all against the German Liberal Party, to which they attributed responsibility for the decline of the old empire. They saw how the Austrian state was more and more falling apart internally; and they dumped the guilt precisely onto those who alone were the champions of the Austrian state idea, who alone affirmed the state, who alone desired it.
From the moment when the modern ideas of freedom also crossed the boundaries of Austria, which had been anxiously guarded by Metternich and Sedlnitzky, the old Habsburg family state was done for. That it did not fall apart as early as 1848, that it could maintain itself for seventy years more—that was solely the work of the Austrian state idea of the German Austrians, that was solely the service of the German freedom parties, of precisely those who were more hated and persecuted by the court than all others, more hated even than those who openly threatened and fought the continuation of the state.
The material basis of the Austrian political thought of the German-Austrians was the fact of German settlements strewn over the entire extent of the Habsburg lands. As a result of centuries-long colonization, the urban bourgeoisie and the urban intelligentsia were German everywhere in Austria and Hungary, large landownership was in great part Germanized, and everywhere, even in the middle of foreign-language territory, there were German peasant settlements. All Austria outwardly bore a German stamp; everywhere German education and German literature were to be found. Everywhere in the Empire the Germans were also represented among the petty bourgeoisie, among the workers, and among the peasants, even though in many districts, especially in Galicia, in many parts of Hungary, and in the coastal territories, the German minority among the members of the lower strata of the people was quite small. But in the entire Empire (upper Italy excepted) the percentage of Germans among the educated and among the members of the higher strata was quite considerable, and all those educated persons and prosperous bourgeois who were not themselves German and did not want to acknowledge belonging to the German nation were German by their education, spoke German, read German, and appeared at least outwardly to be German. That part of the Austrian population that most strongly felt the intolerableness of the tyranny of the Vienna government and alone seemed capable of replacing the court circles in governing were the upper middle class and the members of the free professions and educated persons—just those strata that are commonly called the bourgeoisie and the intellectuals. But they were German in the entire Empire, at least in lands belonging to the German Federation. Thus Austria no doubt was not German, but politically it wore a German face. Every Austrian who wanted to take any interest at all in public affairs had to master the German language. For the members of the Czech and of the Slovene peoples, however, education and social ascent could be achieved only through Germanness. They still had no literature of their own that would have made it possible for them to do without the treasures of German culture. Whoever rose became German because precisely the members of the higher strata were German.
The Germans saw that and believed that it had to be so. They were far from wanting to Germanize all non-Germans compulsorily, but they thought that this would take place on its own. They believed that every Czech and South Slav would try, even in his own interest, to adopt German culture. They believed that it would remain so forever, that for the Slav the way to culture was Germanness, and that social ascent was bound up with Germanization. That these peoples also could develop independent cultures and independent literatures, that from their midst they could also bring forth independent national characters—they did not think of that at all. Thus the naive belief could arise among them that all Austria felt and thought politically as they did, that all had to share their ideal of the great, mighty, unified state of Austria, which could bear only a German stamp.
Those were the political ideas with which the German-Austrians went into the revolution. The disappointment that they experienced was abrupt and painful.
Today, as we look back in review over the development of the last seven decades, it is easy to say what position the Germans should have taken in view of the new state of affairs; it is easy to show how they could and should have done better. Today one can clearly show how much better the German nation in Austria would have fared if it had adopted in 1848 that program that it in 1918 then perforce made its own. The share that would have fallen to the German people in a splitting up of Austria into independent national states in the year 1848 was bound to have been far larger than the one that it acquired in 1918 after the terrible defeat in the World War. What held the Germans back at that time from undertaking a clean separation between German and non-German? Why did they not make the proposal themselves; why did they reject it when the Slavs brought it forth?
It has already been mentioned that the Germans then held the widespread opinion that the Germanization of the Slavs was only a question of time, that it would take place without external compulsion by the necessity of development. Even this interpretation alone was bound to influence the entire choice of positions on the problem of nationalities. The decisive factor, however, was different. It was that the Germans could not and did want to give up the national minorities sprinkled in the contiguous territories of settlement of the other peoples. They had blood brothers living everywhere in Slavic territory; all cities there were either entirely or at least in large part German. Of course, it was only a fraction of the whole German people in Austria that they would have given up in this way. But the numerical significance of this enclaved population in relation to all the rest of the German people in Austria hardly expresses the significance of the loss that they would thereby have suffered. These enclaved people belonged in greatest part to the higher strata of the nation. To give them up signified, therefore, a far heavier loss than the mere numbers indicated. To give them up meant to give up the best parts of the German people in Austria; it meant to sacrifice the University of Prague and the merchants and factory owners of Prague, Brünn [Brno], Pilsen [Plzen], Budweis [Ceske Budejovice], 0lmütz [Olomouc], of Trieste, Laibach [Ljubljana], of Lemberg [Lwów, Lvov], Czernowitz [Cernauti, Chernovtsy], of Pest, Pressburg [Bratislava], Temesvar [Timisoara], etc., who were very significant for Austrian conditions. To give them up meant to wipe out the colonizing work of centuries; it meant to deliver up German peasants in all parts of the broad empire, German officers and officials, to being deprived of rights.
One now understands the tragic position of the Germans in Austria. With a bold, defiant spirit of rebellion the Germans had risen up to break the despotism and take the government of the state into their own hands; they wanted to create a free, great Austria out of the hereditary estate of the dynasty. Then they had to recognize all at once that the great majority of the people did not at all desire their free German Austria, that they even preferred to remain subjects of the Habsburgs rather than be citizens of an Austria bearing a German stamp. Then they discovered to their dismay that the application of democratic principles was bound to lead to the dissolution of this empire, in which, after all, they had been the leading elements intellectually and wished to remain the leading elements. Then they had to recognize that democracy was bound to deprive German citizens of territories inhabited predominantly by Slavs of their political rights. They had to recognize that the Germans of Prague and Brünn [Brno] were indeed in a position to take the scepter away from the Habsburgs and establish a parliamentary form of government but that they not only had nothing to win thereby but much to lose. Under the despotism of the sovereign's officials, they could still live as Germans; although they might also be subjects, they were still subjects enjoying the same rights as other subjects. But in a free state they would have become second-class citizens; for others, foreigners, whose language they did not understand, whose train of thought was foreign to them, on whose politics they could have had no influence, would have harvested the fruits of their struggle for freedom. They recognized that they were without power against the crown, for the crown could always call up peoples against them to whom their voice could not penetrate; they recognized and had to feel it as painful, when Slavic regiments subdued the uprising of German citizens and students, that they had no prospect of shaking off the yoke that oppressed them. At the same time, however, they recognized that the victory of the old reactionary Austria still had to be more welcome to them than victory of the new freedom-oriented state; for under the scepter of the Habsburgs they still could live as Germans; under the dominion of the Slavs, however, there was for them only political death.
Scarcely a people has ever found itself in a more difficult political position than the German-Austrians after the first heady days of the March 1848 revolution. Their dream of a free German Austria had suddenly come to naught. In view of their national comrades scattered about in foreign territories of settlement, they could not desire the dissolution of Austria into national states; they had to desire the continued existence of the state, and then there remained nothing else for them than to support the authoritarian state. The Habsburgs and their adherents, however, did not desire an alliance with the anticlerical liberals. They would rather have seen the state collapse than share it with the German freedom party. They recognized only too soon that the Germans in Austria were bound to be a pillar of the state whether they wanted to be or not, that one could rule without danger in Austria without the Germans and even against them, because the Germans were not in a position to form a serious opposition; and they oriented their policy accordingly.
Thus every straightforward policy was made impossible for the Germans of Austria. They could not work seriously for democracy, for that would have been national suicide; they could not renounce the Austrian state because, despite everything, it still offered protection against the most extreme oppression. From this division the divided German policy developed.
The essence of the policy was maintaining the national patrimony, as it was called, that is, the effort to hold back the gradually occurring annihilation of the German minorities strewn about in territory of foreign settlement. From the beginning that was a hopeless undertaking, for these minorities were fated to disappear.
Only the peasant settlements had the possibility, where the German settlers were living together in self-contained villages, of still preserving their German character. Of course, even here the process of de-Germanization goes on uninterruptedly. Even mere economic contact with neighbors of foreign nationality, which becomes all the more active as economic development proceeds, wears away at their special character and makes it difficult for a small colony far removed from the main stem of its people to preserve its mother tongue. The effect of the school is added; even the German school in foreign land must include the language of the country in the curriculum if it is not to make the later advancement of the children all too difficult. Once the youth learns the language of the country, however, there begins that process of adaptation to the environment that finally leads to complete assimilation. What is decisive, however, is that a locality in the modern economic organism in which constant migrations must take place cannot long exist without immigration from the outside or without loss of population to the outside. In the first case the locality is exposed to being inundated by members of foreign nationalities and, in further consequence, to the native population's also losing its original national character; in the second case, the leftover part of the population remaining behind may well preserve its original nationality, but the emigrants become nationally alienated. Of the numerous peasant settlements that had arisen, strewn about and isolated, in the Habsburg lands, only those where modern industry or mining developed did become alienated from German character. In the remaining ones immigration from outside was lacking. But the better, more energetic elements are gradually moving away; they may gain economically thereby, but they lose their nationality. The ones remaining behind can preserve their national character but often suffer from inbreeding.
In short, the German minorities in cities strewn about in Slavic land were hopelessly fated to decline. With the abolition of the pre-1848 labor-rent system, the migration movement set in in Austria also. Internal migrations took place on a large scale. Thousands moved from the countryside into the cities and industrial centers, and the immigrants were Slavs, who quickly pushed the Germans into the numerical minority.On the causes of the faster population growth of the Slavs, to which is to be ascribed the fact that the movement into the cities in Austria had a predominantly Slavic character, cf. Hainisch, Die Zukunft der Deutsch?sterreicher (Vienna: 1892), pp. 68 ff.
Thus the Germans of the cities saw the Slavic tide rising all around them. Around the old center of the city, where German townspeople had dwelt for centuries, a garland of suburbs developed where no German sound was heard. Within the old city everything still bore a German stamp: the schools were German, German was the language of the city administration, and the Germans still held all municipal offices. But day by day their number dwindled. First the German petty bourgeoisie disappeared. Bad times had come for the crafts and trades, on whose golden base the German colonization of these lands had once grown up; they declined uninterruptedly, for they were not capable of competing with factory industry, just that industry that was attracting the Slavic workers. The German master craftsman sank into the proletariat; and his children, who went into the factory along with the Slavic immigrants, became Slavs through contact with their new comrades. But the German patrician families also became ever smaller in number. They became poor because they could not adapt to the new conditions, or they died out. Replacements did not come. Earlier, those who had risen from below became German. This was now no longer true. Slavs who had become rich were no longer ashamed of their national character. If the old German families shut themselves off from the upstarts, they formed a new Slavic society of the upper strata.
The German policy in Austria, which was based on maintaining the political power position of these minorities, became in this way a conservative, a reactionary, policy. Every conservative policy, however, is fated from the start to fail; after all, its essence is to stop something unstoppable, to resist a development that cannot be impeded. What it can gain at best is time, but it is questionable whether this success is worth the cost. Every reactionary lacks intellectual independence. If one wanted to apply here metaphors taken over from military thinking, as is usual for all lines of political thought in Germany, then one could say that conservatism is defense and, like every defense, lets the terms be dictated to it by its adversary, while the attacker dictates the terms of action to the defender.
The essence of German policy in Austria had become that of holding lost positions as long as possible. Here one struggled over the seats in the administration of a municipality, there over a chamber of commerce, there again over savings bank or even over only a government job. Little questions were puffed up to great significance. It was bad enough that the Germans thereby put themselves repeatedly in the wrong when, for example, they denied the Slavs the establishment of schools or when they sought with the means of power available to them to make forming clubs or holding meetings more difficult. But it was still worse that in these struggles they a]ways suffered and were bound to suffer defeats and that they thereby became accustomed to being always in retreat and being always defeated. The history of the German policy in Austria is a chain of uninterrupted failures.
These conditions had a devastating effect on the German spirit. People gradually grew accustomed to looking at every measure, every political matter, exclusively from the viewpoint of its local significance. Every reform in public life, every economic measure, every construction of a road, every establishment of a factory, became a question of national patrimony. To be sure, the Slavs also looked at everything from this point of view, but the effect on the political character of the nation was different with them. For through these ways of thinking the Germans became reactionaries, enemies of every innovation, opponents of every democratic arrangement. They left to the Slavs the cheap fame of being fighters for the modern European spirit in Austria and took it upon themselves again and again to support and defend what was out of date. All economic and cultural progress and especially every democratic reform that was carried through in Austria was bound to work against the German minorities in the polyglot territories. It was therefore resisted by the Germans; and if it finally triumphed, then this victory was a defeat for the Germans.
This policy also deprived the Germans of every freedom against the Crown. In the revolution of 1848 the Germans of Austria had risen against the Habsburgs and their absolutism. But the German Liberal Party, which had written the principles of 1848 on its banner, was not in a position to lead the struggle against the Dynasty and against the Court with vigor. It had no firm ground under its feet in the polyglot lands; it was dependent on the favor and disfavor of the government there. If the Court wanted, it could annihilate it; and it did so too.
The empire of the Habsburgs was erected by Ferdinand II on the ruins of the freedoms of the estates and the ruins of Protestantism. It was not only the Bohemian estates that he had to fight against, but also the Styrian and Austrian. The Bohemian rebels fought against the Emperor in alliance with those of Lower and Upper Austria; and the Battle on the White Mountain established the absolute rule of the Habsburgs not only over Bohemia, Moravia, and Silesia but also over the Austrian lands. From the beginning the Habsburg Empire was neither German nor Czech; and when in 1848 it had to fight for its existence anew, Czech and German freedom movements alike were against it. After the establishment of sham constitutionalism in the sixties, the Court would much rather have relied on the Slavs than on the Germans. For years the government was carried on with the Slavs against the Germans; for nothing was more hateful to the Court than the German element, which could not be forgiven for the loss of political position in the German Reich. But all the concessions of the Court could not hold the Czechs and South Slavs firm to the authoritarian state. Among all other peoples of Austria the democratic idea triumphed over the authoritarian idea; it was not possible for the authoritarian state to work with them in the long run. Only with the Germans was it otherwise. Against their will they could not get loose from the Austrian state. When the state called them, they were always at its service. In the Empire's death hour the Germans stood loyal to the Habsburgs.
A turning point in the history of the German-Austrians was the Peace of Prague, which drove Austria out of the political structure of Germany. Now the naive belief was done for that Germanness and Austrianness could be reconciled. Now it seemed that one had to choose between being German and being Austrian. But the Germans in Austria did not want to see the necessity of this decision; they wanted, as long as they could, to remain both Germans and Austrians at the same time.
The pain that the German-Austrians felt in 1866 over the turn of events went deep; they never were able to recover from the blow. So quickly had the decision broken over them, so quickly had the events played themselves out on the battlefield, that they had scarcely become conscious of what was going on. Only slowly did they grasp the meaning of what had happened. The German fatherland had expelled them. Were they then not also Germans? Did they not remain Germans, even if there was no place for them in the new political structure being erected on the ruins of the German Confederation?
No one has given better expression to this pain than the aged Grillparzer. He who put into the mouth of Ottokar von Horneck the praise of the "rosy-cheeked youth" Austria and made Libussa proclaim a great future to the Slavs in obscure words,"You who have long served will finally rule" (Libussa, fifth act). he, who was totally an Austrian and totally a German, finds his equilibrium again in the proud verses:
Als Deutscher ward ich geboren,Bin ich noch einer?Nur was ich deutsch geschrieben,Das nimmt mir keiner.[As a German I was born,Am I one still?Only what I have written in GermanNo one takes away from me.]But the German-Austrians had to come to terms with the fact that no Germany still existed, only a Great Prussia. From then on they no longer existed for the Germans in the Reich; they no longer bothered themselves about them, and every day the facts belied the pretty words spoken at gymnastic and shooting festivals. The Great Prussian policy prepared to travel those paths on which it finally wound up at the Marne. It no longer cared about the Germans in Austria. The treaties that bound the Austro-Hungarian Monarchy with the German Reich from 1879 on were concluded by the Great Prussian authoritarian government with the Emperor of Austria and the Magyar oligarchy in Hungary. Precisely they took away from the Germans in Austria the hope of being able to count on the help of the Germans in the Reich with regard to irredentist strivings.
The defeat that the Great German idea had suffered at Königgrätz was at first papered over by the fact that precisely because of the unfortunate outcome of the war the German liberal Party for a short time acquired a certain, if limited, influence on state affairs. For a dozen years it could furnish ministers to the government; during this time it repeatedly furnished ministers, even the Prime Minister, and pushed through many important reforms against the will of the Crown, the feudal nobility, and the Church. With extreme exaggeration, that has been called the rule of the Liberal Party in Austria. In truth, the Liberal Party never ruled in Austria; it could not rule. The majority of the people never followed its banners. How could non-Germans also have joined this German party? Among the Germans it always, even when it was flourishing, met strong opposition from the Alpine peasants blindly following the clergy. Its position in the House of Deputies rested not on having the majority of the people behind it but on the electoral system, which in a subtle manner favored the upper middle class and the intelligentsia but withheld the right to vote from the masses. Every extension of the right to vote, every change in the arrangement of electoral districts or of the manner of voting, had to be and was damaging to it. It was a democratic party, but it had to fear the consistent application of democratic principles. That was the inner contradiction from which it suffered and from which it was finally bound to be ruined; it resulted with compelling necessity from that proton pseudos [basic fallacy] of its program, which sought to reconcile Germanness with Austrianness.
The German Liberal Party could exert a certain influence on the government as long as this was allowed to it from above. The military and political defeats that the old Austrian princely state had repeatedly suffered compelled the Court to yield temporarily. The Liberals were needed; they were summoned into the ministries not, as it were, because they could no longer be resisted but rather because only they could be expected to put state finances in order and carry through the defense reform. Since no one knew where else to turn, they were entrusted with the reconstruction as the only party that affirmed Austria. They were dismissed in disfavor when they were thought to be no longer needed. When they tried to resist, they were annihilated.
Then Austria gave up on itself. After all, the German Liberal Party had been the only one that had affirmed this state, that sincerely desired it and acted accordingly. The parties that the later governments depended on did not desire Austria. The Poles and Czechs who held ministerial portfolios were not seldom competent as specialists and even sometimes pursued a policy that benefited the Austrian state and its peoples. But all their thinking and efforts always concerned only the national plans for the future of their own peoples. Their relation to Austria was always guided only by regard to their peoples' strivings for independence. To their own consciences and to the fellow members of their nationality, their administration of office seemed valuable only for the successes that they obtained in the national emancipation struggle. Not because they had administered their offices well were they given credit by their fellow countrymen, on whose opinion alone they as parliamentarians laid weight, but because they had done much for national separatism.
Besides being filled by Czechs, Poles, and occasional South Slavs and clerical Germans, the highest positions of the Austrian authoritarian government were almost always filled by officials whose only political goal was the maintenance of the authoritarian government and whose only political means was divide et impera. Here and there an old Liberal still turns up in between, usually a professor seeking in vain to swim against the current, only finally, after many disappointments, to disappear again from the political scene.
The point at which the interests of the Dynasty and of the Germans seemed to meet was their aversion to democracy. The Germans of Austria had to fear every step on the way to democratization because they were thereby being driven into the minority and delivered up to a ruthless arbitrary rule of majorities of foreign nationality. The German Liberal Party recognized that fact and turned energetically against all efforts for democratization. The contradiction with its liberal program into which it thereby fell caused its ruin. Faced with a historic decision in which it had to choose between the wretched muddling along of the Austrian state for a few decades at the price of giving up the freedom-oriented principles of its program and the immediate annihilation of this state with sacrifice of the German minorities in the territories of foreign language, it undoubtedly made the wrong choice. It may be blamed for that. Yet nothing is more certain than that in the position it found itself in, it could not choose freely. It simply could not sacrifice the minorities any more than the German parties that succeeded it in Austria could do so.
No reproach is less justified, therefore, than that the German liberals had been poor politicians. This judgment is usually based on their position on the question of the occupation of Bosnia and Herzegovina. That the German Liberal Party had spoken out against the imperialist tendencies of Habsburg militarism was much held against it, especially by Bismarck. Today one will judge otherwise about that. What was previously a matter of reproach against the German Liberal Party—that it had sought to resist militarism and that it went into opposition right at the beginning of the expansion policy that finally led to the Empire's downfall—will in the future redound to its praise and not to its blame.
The German Liberal Party had in any case a much deeper insight into the conditions of existence of the Austrian state than all other powers and parties operating in this country. The Dynasty, especially, had done its utmost to hasten the destruction of the Empire. Its policy was guided less by rational considerations than by resentment. It persecuted the German liberal Party in blind rage with its hate, even beyond the grave. Since the German Liberals had become antidemocratic, the Dynasty, which always wanted only to restore the old princely state and to which even the authoritarian state seemed too modern a form of state constitution, thought it could indulge in democratic antics from time to time. Thus it repeatedly pushed through the extension of the right to vote against the will of the Germans, each time with the result that the German elements in the House of Deputies lost ground and the radical-national elements of the non-Germans won ever greater influence. Austrian parliamentarianism was thereby finally blown apart. With Badeni's electoral reform of the year 1896 the Empire entered a state of open crisis. The House of Deputies became a place in which the deputies no longer pursued any goal other than to demonstrate the impossibility of the continued existence of this state. Everyone who observed party relations in the Austrian House of Deputies was bound to recognize immediately that this state could still drag out its existence only because European diplomacy was at pains to postpone the danger of war as long as possible. Already twenty years before the end of the war, the domestic political conditions of Austria were more than ripe for collapse.
The German parties that succeeded the German Liberals showed much less insight into political conditions than the much-reviled German Liberals. The German Nationalist factions, which energetically fought the German Liberals, behaved like democrats at the beginnings of their party activity, when they were still concerned with overcoming the German Liberals. Very soon, however, they had to recognize that democratization in Austria was identical with de-Germanization, and from this recognition they then became just as antidemocratic as the German Liberals had once become. If one disregards the resonant words with which they sought in vain to conceal the paltriness of their program, as well as their anti-Semitic tendencies, which from the standpoint of maintenance of German character in Austria had to be called downright suicidal, then the German Nationalists really differed from the German Liberals only on one single point. In the Linz Program they gave up German claims to Galicia and Dalmatia and contented themselves with claiming for Germanism the lands of the former German Confederation. In raising this claim, however, they clung to the same error that the German Liberals had committed, namely, underrating the capacity for development and the prospects for the future of Slavs of western Austria. They had decided just as little as the German Liberals to sacrifice the German minorities scattered in foreign-language lands, so that their policy incorporated the same irresolution as that of the old German Liberals. They did indeed play with Irredentist thoughts more often than the Liberals, but they never had anything seriously in mind other than maintaining the Austrian state under German leadership and German predominance. Faced with the same choice that the German Liberals had been faced with, they trod the same path that the Liberals had already embarked on before them. They decided for the maintenance of the Empire and against democracy. Thus their fate also became the same as that of the old German Liberals. They were used by the Dynasty in the same way as the Liberals. The Dynasty could treat them as badly as possible and yet knew that it could always count on them.
The greatest error that the German Liberals committed in judging their fellow citizens of foreign language was that they saw in all non-Germans nothing but enemies of progress and allies of the Court, of the Church, and of the feudal nobility. Nothing is easier to understand than that this interpretation could arise. The non-German peoples of Austria were equally averse to Great-Austrian and Great-German aspirations; they had recognized earlier than all others, earlier even than the German Liberal party, that Austria's support was to be sought only in the party association of the German liberals. To annihilate the German Liberal Party therefore became the most important and at first the only goal of their policy, and in so doing they sought and found as allies all those who, like them, were fighting this party to the death. Thus the serious error for which they paid dearly could arise among the liberals. They misunderstood the democratic element in the fight of the Slavic nations against the Empire. They saw in the Czechs nothing other than the allies and willing servants of the Schwarzenbergs and Clam-Martinics. The Slavic movement was compromised in their eyes by its alliance with the Church and the Court. How, also, could those men who had fought on the barricades in 1848 forget that the uprising of the German bourgeoisie had been put down by Slavic soldiers?
The mistaken position of the German Liberal Party on national problems resulted from this misunderstanding of the democratic content of the nationality movements. Just as they did not doubt the final victory of light over darkness, of the Enlightenment over clericalism, so they also did not doubt the final victory of progressive Germanism over the reactionary Slavic masses. In every concession to Slavic demands it saw nothing other than concessions to clericalism and militarism.Note that Marx and Engels had also fallen into the same error; quite like the Austrian-German Liberals, they too saw reactionary doings in the national movements of the nations without history and were convinced that with the unavoidable victory of democracy, Germanism would triumph over these dying nationalities. Cf. Marx, Revolution und Kontrerevolution in Deutschland, German translation by Kautsky, third edition (Stuttgart: 1913), pp. 61 ff.; Engels (Mehring, loc. cit.), pp. 246 ff. Cf. in addition Bauer, "Nationalit?tenfrage," loc. cit., pp. 271 f.
That the position of the Germans on the political problems of Austria was determined by the force of the conditions into which history had placed them is best shown by the development of the nationality program of German Social Democracy in Austria. Social Democracy had first won ground in Austria among the Germans, and for long years if was and remained no more than a German party, with a few fellow travelers among the intellectuals of the other nationalities. At this time when, because of the electoral system, it was scarcely possible for it to play a role in Parliament, it could regard itself as uninvolved in the national struggles. It could take the position that all national quarrels were nothing more than an internal concern of the bourgeoisie. On the vital questions of Germanism in Austria, it took no position other than that of its brother party in the German Empire toward the foreign policy of the Junkers, of the National Liberals, or even of the Pan-Germans. If those German parties that were waging the national struggle reproached it, like the German clericals and the Christian Socialists, for harming its own people by its behavior, well, this was thoroughly justified at the time, even though the extent of this damage was only slight precisely because of the also slight political significance of Social Democracy at the time. The more, however, the significance of Social Democracy in Austria grew—and it grew above all because in Austrian conditions Social Democracy was the only democratic party among the Germans of Austria—it was all the more bound to acquire the responsibility that was incumbent on every German party in Austria in national questions. It began to become German-nationalist; then, no more than the two older German parties of Austria, could it get around the conditions that had brought Germanism and democracy into contradiction in Austria. Just as the German Liberal Party finally had to drop its democratic principles because following them was bound to lead to harming Germanism in Austria, just as the German Nationalist Party had done the same, so Social Democracy too would have had to do this if history had not forestalled it and shattered the Austrian state before this turn of events was fully completed.
After a series of programmatic declarations of merely academic value had been overtaken by the facts, Social Democracy at first made a try with the program of national autonomy.Cf. Marx, Revolution und Kontrerevolution in Deutschland, pp. 52 ff.
There is no doubt that this program rests on a deeper grasp of nationality problems than the Linz Program, on which, though, the flower of German Austria at the time had also collaborated. In the decades between these two programs, much had taken place that was bound to open the eyes of the Germans of Austria also. But there, too, they could not escape the constraint that historical necessity had placed on them. The program of national autonomy, even if it spoke of democracy and self-government, was also basically nothing but what the nationality programs of the German Liberals and the German Nationalists had really been in essence: namely, a program for saving the Austrian state of Habsburg-Lorraine dominion over the Imperial and Royal hereditary lands. It claimed to be much more modern that the older programs, but it was in essence nothing else. One cannot even say that it was more democratic than the earlier ones, for democracy is an absolute concept, not a concept of degree.
The most important difference between the program of national autonomy and the older German nationality programs is that it feels the necessity of justifying the existence and demonstrating the necessity of the existence of the Austrian state not only from the standpoint of the Dynasty and from the standpoint of the Germans but also from that of the other nationalities. And it does not content itself, moreover, with those showy phrases that were usual among the so-called black-and-yellow writers, as, for example, with a reference to the maxim of Palacky that one would have had to invent Austria if it had not already existed. But this argument, which was worked out particularly by Renner, is totally untenable. It starts with the idea that maintaining the Austro-Hungarian customs territory as a distinct economic territory is in the interest of all the peoples of Austria and that each one, therefore, has an interest in creating an order that maintains the viability of the state. That this argument is not correct has already been shown; when one has recognized the faultiness of the program of national autonomy, then one sees immediately that it contains nothing but an attempt to find a way out of the nationality struggles without destroying the Habsburg state. Not quite unjustifiably, therefore, the Social Democrats have occasionally been called Imperial and Royal Social Democrats; they did appear as the only pro-state party in Austria, especially at those moments of the kaleidoscopically changing party constellation in Austria when the German Nationalists temporarily set aside their Austrian sentiment and behaved irredentistically.
The collapse of Austria saved Social Democracy from going too far in this direction. In the first years of the World War, Renner, in particular, did everything in this respect that was at all possible with his doctrines that opponents called social imperialism. That the majority of his party did not unconditionally follow him on this path was not a merit of its own but rather the consequence of growing dissatisfaction with a policy that was imposing the most extreme bloody sacrifices on the population and condemning it to hunger and misery.
The German and German-Austrian Social Democrats could represent themselves as democratic because they were opposition parties without responsibility as long as the German people could not fully accept democratic principles, fearing that their application would harm the Germans in the polyglot territories of the East. When, with the outbreak of the World War, a part, perhaps the largest part, of the responsibility for the fate of the German people fell to them too, they also took the path taken before them by the other democratic parties in Germany and Austria. With Scheidemann in the Reich and with Renner in Austria they made the change that was bound to take them away from democracy. That Social Democracy did not proceed further on this path, that it did not become a new guard of the authoritarian state which, with regard to democracy, would scarcely have been different from the National Liberals in the Reich and the German Nationalists in Austria—that was due to the sudden change in conditions.
Now, with defeat in the World War and its consequences for the German position in the territories with mixed population, the circumstances have been removed that previously forced all German parties away from democracy. The German people can today seek salvation only in democracy, in the right of self-determination both of individuals and of nations.The same causes that held the German people back from democracy were at work in Russia, Poland, and Hungary also. One will have to draw them into the explanation if one wants to understand the development of the Russian Constitutional Democrats or of the Polish club in the Austrian Imperial Council or of the Hungarian party of 1848.
Only from lack of historical sense could one raise the question whether and how the World War could have been avoided. The very fact that the war took place shows that the forces working to cause it were stronger than those working to prevent it. It is easy to show, after the fact, how affairs could or should have been better managed. It is clear that the German people underwent experiences during the war that would have restrained them from war if they had already undergone those experiences. But nations, like individuals, become wise only through experience, and only through experience of their own. Now, to be sure, it is easy to see that the German people would be in a quite different position today if they had shaken off the yoke of princely rule in that fateful year 1848, if Weimar had triumphed over Potsdam and not Potsdam over Weimar. But every person must take his life and every nation must take its history as it comes; nothing is more useless than complaining over errors that can no longer be rectified, nothing more vain than regret. Neither as judges allotting praise and blame nor as avengers seeking out the guilty should we face the past. We seek truth, not guilt; we want to know how things came about to understand them, not to issue condemnations. Whoever approaches history the way a prosecutor approaches the documents of a criminal case—to find material for indictments—had better stay away from it. It is not the task of history to gratify the need of the masses for heroes and scapegoats.
That is the position a nation should take toward its history. It is not the task of history to project the hatred and disagreements of the present back into the past and to draw from battles fought long ago weapons for the disputes of one's own time. History should teach us to recognize causes and to understand driving forces; and when we understand everything, we will forgive everything. That is how the English and French approach their history. The Englishman, regardless of his political affiliation, can consider the history of the religious and constitutional struggles of the seventeenth century, the history of the loss of the New England states in the eighteenth century, objectively; there is no Englishman who could see in Cromwell or Washington only the embodiment of national misfortune. And no Frenchman would want to strike Louis XIV, Robespierre, or Napoleon out of the history of his people, be he Bonapartist, royalist, or republican. And for the Catholic Czech, also, it is not hard to understand Hussites and Moravian Brethren in terms of their own time. Such a conception of history leads without difficulty to understanding and appreciation of what is foreign.
Only the German is still far from a conception of history that does not see the past with the eyes of the present. Even today Martin Luther is, for some Germans, the great liberator of minds, and, for others, the embodiment of the anti-Christ. This holds above all for recent history. For the modern period, which begins with the Peace of Westphalia, Germany has two approaches to history, the Prussian-Protestant and the Austrian-Catholic, which reach a common interpretation on scarcely a single point. From 1815 on, a still broader clash of views develops, the clash between the liberal and the authoritarian ideas of the state;On this compare Hugo Preuss, Das deutsche Volk und die Politik (Jena: Eugen Diederichs, 1915), pp. 97 ff. and finally, the attempt has recently been made to oppose a "proletarian" to a "capitalist" historiography. All that shows not only a striking lack of scientific sense and historical critical faculty but also a grievous immaturity of political judgment.
Where it was not possible to achieve consensus in interpreting long-past struggles, it is much less to be expected that agreement can be reached in evaluating the most recent past. Already, here also, we see two sharply contradictory myths arising. On the one hand it is asserted that the German people, misled by defeatist propaganda, had lost the will to power; and thus, through "collapse of the home front," the inevitable final victory, which would have made the earth subject to it, was transformed into disastrous defeat. It is forgotten that despair did not grip the people until the decisive victories heralded by the General Staff failed to occur, until millions of German men bled to death in purposeless struggles against an opponent far superior in numbers and better armed, and until hunger brought death and disease to those who had stayed at home.This is not to say that the behavior of the radical wing of the Social Democratic Party in October and November of 1918 did not entail the most frightful consequences for the German people. Without the complete collapse brought on by the revolts in the hinterland and behind the lines, the armistice conditions and the peace would have turned out quite differently. But the assertion that we would have triumphed if only we had held out a short time longer is quite groundless. No less far from the truth is the other myth, which blames the war and so the defeat on capitalism, the economic system based on private ownership of the means of production. It is forgotten that liberalism was always pacifistic and anti-militaristic, that not until its overthrow, which was achieved only by the united efforts of the Prussian Junker class and the Social Democratic working class, was the way opened up for the policy of Bismarck and William II; the last trace of the liberal spirit had first to disappear from Germany and liberalism had to become regarded as a kind of dishonorable ideology before the people of poets and thinkers could become a weak-willed tool of the war party. It is forgotten that the German Social Democratic Party had unanimously supported the war policy of the government and that the defection first of individuals and then of ever-larger masses ensued only as military failures showed the inevitability of defeat ever more clearly and as famine became more strongly felt. Before the battle of the Marne and before the great defeats in the East, there was no resistance to the war policy among the German people.
Such myth-making bespeaks a lack of that political maturity that only he who must bear political responsibility achieves. The German had none to bear; he was a subject, not a citizen, of his state. To be sure, we had a state that was called the German Reich and that was praised as the fulfillment of the ideals of St. Paul's Church. Yet this Great Prussia was no more the state of the Germans than the Italian kingdom of Napoleon I had been the state of the Italians or the Polish kingdom of Alexander I the state of the Poles. This empire had not arisen from the will of the German people; against the will not only of the German people but also of the majority of the Prussian people, hanging behind its conflict-minded deputies, it had been created on the battlefield of Königgrätz. It also included Poles and Danes, but it excluded many millions of German-Austrians. It was a state of German princes but not of the German people.
Many of the best people never reconciled themselves with this state; others did so late and reluctantly. Yet it was not easy to stand aside bearing a grudge. There came brilliant days for the German people, rich in outward honors and in military victories. The Prussian-German armies triumphed over imperial and over republican France, Alsace-Lorraine became German again (or rather Prussian), the venerable imperial title was restored. The German Empire assumed a respected position among the European powers; German warships plowed the oceans; the German flag floated over—rather worthless, to be sure—African, Polynesian, and East Asian possessions. All this romantic activity was bound to captivate the minds of the masses that gape at processions and court festivities. They were content because there were things to admire and because they were satiated. At the same time German prosperity was growing as never before. These were the years when the wonderful opening up of the remotest territories through development of modern means of transportation was bringing undreamed-of riches to Germany. That had nothing to do with the political and military successes of the German state, but people hastily judge post hoc ergo propter hoc.
The men who had filled the jails before the revolution of March 1848 and who had stood on the barricades in 1848 and then had to go into exile had in the meanwhile become old and feeble; they either made their peace with the new order or kept silent. A new generation arose that saw and noted nothing but the uninterrupted growth of prosperity, of the size of population, of trade, of shipping, in short, of everything that people are accustomed to call good times. And they began to make fun of the poverty and weakness of their fathers; they now had only contempt for the ideals of the nation of poets and thinkers. In philosophy, history, and economics, new ideas appeared; the theory of power came to the fore. Philosophy became the bodyguard of throne and altar; history proclaimed the fame of the Hohenzollerns; economics praised the socially oriented kingship and the gap-free tariff schedules and took up the struggle against the "bloodless abstractions of the English Manchester School."
To the statist school of economic policy, an economy left to its own devices appears as a wild chaos into which only state intervention can bring order. The statist puts every economic phenomenon on trial, ready to reject it if it does not conform to his ethical and political feelings. It is then the job of state authority to carry out the judgment pronounced by science and to replace the botch caused by free development with what serves the general interest. That the state, all-wise and all-just, also always wishes only the common good and that it has the power to fight against all evils effectively?this is not doubted in the slightest. Although the views of individual representatives of this school may diverge in other respects, in one point they all agree, namely, in disputing the existence of economic laws and in tracing all economic events to the operation of power factors. Böhm-Bawerk masterfully evaluates this doctrine in "Macht oder ökonomisches Gesetz," Zeitschrift für Volkswirtschaft, Sozialpolitik und Verwaltung, vol. 23, pp. 205-271. The statist school of German economics has indeed reached its high point in the state theory of money of Georg Friedrich Knapp. What is notable about it is not that it has been set forth; for what it taught had already been believed for centuries by canonists, jurists, romantics, and many socialists. What was notable, rather, was the book's success. In Germany and Austria it found numerous enthusiastic adherents, and basic agreement even among those who had reservations. Abroad it was almost unanimously rejected or not noticed at all. A work recently published in the United States says regarding the Staatliche Theorie des Geldes: "This book has had wide influence on German thinking on money. It is typical of the tendency in German thought to make the State the centre of everything." (Anderson, The Value of Money [New York: 1917], p. 433 n.) Against economic power the state can set its superior political-military power. For all the difficulties that confronted the German people at home and abroad, the military solution was recommended; only ruthless use of power was considered rational policy.
These were the German political ideas that the world has called militarism. In Germany the opinion is very widespread that foreign countries understand by militarism the fact of strong military armaments; it is pointed out, therefore, that England and France, which have maintained powerful fleets and armies on water and land, have been at least as militaristic as Germany and Austria-Hungary. That rests on an error. By militarism one should understand not armaments and readiness for war but a particular type of society, namely, the one that was designated by pan-German, conservative, and social-imperialistic authors as that of the "German state" and of "German freedom" and that others have praised as the "ideas of 1914." Its antithesis is the industrial type of society, that is, the one that a certain line of opinion in Germany during the war scorned as the ideal of "shopkeepers," as the embodiment of the "ideas of 1789." Compare Herbert Spencer, Die Prinzipien der Soziologie, German translation by Vetter (Stuttgart: 1889), vol. 3, pp. 668-754. In the elaboration and contrasting of the two types there exists a considerable degree of agreement between Germans and Anglo-Saxons, but not in terminology. The assessment of the two types is naturally not agreed on. Even before and during the war there were not only militarists but also antimilitarists in Germany and not only antimililarists but also militarists in England and America.
Nevertheless, the formula that attributes the World War simply to the machinations of this militarism is wrong. For German militarism does not spring, as it were, from the violent instincts of the "Teutonic race," as the English and French war literature says; it is not the ultimate cause but the result of the circumstances in which the German people has lived and lives. Not too much insight into how things are interrelated is needed to recognize that the German people would have desired the war of 1914 just as little as the English, French, or American people did if they had been in the position of England, France, or the United States. The German people trod the path from the peaceful nationalism and cosmopolitanism of the Classical period to the militant imperialism of the Wilhelministic era under the pressure of political and economic facts that posed quite other problems for them than for the more fortunate peoples of the West. The conditions under which it has to proceed today toward reshaping its economy and its state are, again, thoroughly different from those under which its neighbors in the West and in the East live. If one wants to grasp these conditions in all their specialness, one must not shrink from looking into things that seem only remotely related.
The authoritarian-militaristic spirit of the Prussian authoritarian state finds its counterpart and completion in the ideas of German Social Democracy and of German socialism in general. To hasty observation the authoritarian state and Social Democracy appear as irreconcilable opposites between which there is no mediation. It is true that they confronted each other for more than fifty years in blunt hostility. Their relation was not that of political opposition, as occurs between different parties in other nations also; it was complete estrangement and mortal enmity. Between Junkers and bureaucrats on the one hand and Social Democrats on the other hand, even every personal, purely human contact was ruled out; scarcely ever did one side or the other make an attempt to understand its opponent or have a discussion with him.
The irreconcilable hatred of the monarchy and of the Junker class did not concern, however, the social-economic program of the Social Democratic Party. The program of the German Social Democratic Party contains two elements of different origins tied together only loosely. It includes on the one hand all those political demands that liberalism, especially its left wing, represents and also has partly implemented already in most civilized states. This part of the Social Democratic Party program is built on the great political idea of the national state, which wants to dissolve the princely and authoritarian state and turn the subject into a citizen of the state. That the Social Democratic Party has pursued this goal, that it took the banner of democracy from the enfeebled hands of dying German liberalism and alone held it high in the darkest decades of German politics despite all persecutions—that is its great pride and fame, to which it owes the sympathy that the world accords it and that first brought it many of its best men and the masses of the oppressed and of "bourgeois fellow-travelers." The very fact, however, that it was republican and democratic drew onto it the inextinguishable hatred of the Junkers and bureaucrats; that alone brought it into conflict with authorities and courts and made it into an outlawed sect of enemies of the state, despised by all "right-thinking people."
The other component of the program of German Social Democracy was Marxian socialism. The attraction that the slogan about the capitalistic exploitation of the workers and that the promising utopia of a future state exerted on the great masses was the basis of an imposing party and labor-union organization. Many, however, were won over to socialism only through democracy. As the German bourgeoisie, after the annihilating defeats that German liberalism had suffered, submitted unconditionally to the authoritarian state of Bismarck, as, in line with the German protective-tariff policy, the German entrepreneurial class identified itself with the Prussian state, so that militarism and industrialism became politically related concepts for Germany, then the socialist side of the party program absorbed new strength from democratic aspirations. Many refrained from criticizing socialism in order not to harm the cause of democracy. Many became socialists because they were democrats and believed that democracy and socialism were inseparably connected.
In truth, though, close relations exist precisely between socialism In regard to economic policy, socialism and communism are identical; both strive for socialization of the means of production, in contrast with liberalism, which wants on principle to let private ownership even of the means of production continue. The distinction that has recently come into use between socialism and communism is irrelevant with regard to economic policy unless one also foists on the communists the plan of wanting to discontinue private ownership of consumption goods. On centralist and syndicalist socialism (actually, only centralist socialism is true socialism), see below, pp, 195 ff. and the autocratic-authoritarian form of state that correspond to the essence of both.On the intimate relation between militarism and socialism, cf. Herbert Spencer, loc. cit., vol. 3, p. 712. The imperialistic tendencies of socialism are treated by Seillière, Die Philosophie des Imperialismus, second edition of the German version (Berlin: 1911), vol. 2, pp. 171 ff., vol. 3, pp. 59 ff. Sometimes socialism does not even outwardly deny its intimate relation with militarism. That comes to light especially clearly in those socialistic programs that want to arrange the future state on the model of an army, Examples: wanting to solve the social question by setting up a "food army" or a "worker army" (cf Popper-Lynkeus, Die allegemeine Nährpflicht (Dresden: 1912], pp. 373 ff.; further, Ballod, Der Zukunftsstaat, second edition, [Stuttgart: 1919], pp. 32 ff.). The Communist Manifesto already demands the "establishment of industrial armies." It should be noted that imperialism and socialism go hand in hand in literature and politics. Reference was already made earlier (pp. 94 ff.) to Engels and Rodbertus; one could name Many others, e.g., Carlyle (cf Kemper, "Carlyle als Imperialist," Zeitschrift für Politik, XI, 115 ff.). Australia, which, as the only one among the Anglo-Saxon states, has turned away from liberalism and come closer to socialism than any other country, is the imperialistic state par excellence in its immigration legislation. For that reason the authoritarian state also did not fight socialist efforts at all as harshly as it confronted all democratic impulses. On the contrary, the Prussian-German authoritarian state evolved strongly toward the side of "social kingship" and would have turned still more toward socialism if the great workers' party of Germany had been ready even before August 1914 to give up its democratic program in exchange for the gradual realization of its socialistic goals.
The sociopolitical doctrine of Prussian militarism can best be recognized in the literary products of the Prussian school of economic policy. Here we find complete harmony established between the ideal of the authoritarian state and that of a far-reaching socialization of large industrial enterprise. Many German social thinkers reject Marxism—not, however, because they reject its goals but because they cannot share its theoretical interpretation of social and economic developments. Marxism, whatever one may say against it, nevertheless has one thing in common with all scientific economics: it recognizes a conformity to law in the historical process and presupposes the causal interconnection of all that happens. German statism could not follow it in this respect because it sees everywhere only marks of the activity of great kings and powerful states. The heroic and teleological interpretation of history seems more obvious to statism than the causal; it knows no economic law; it denies the possibility of economic theory.This spirit of hostility to theoretical investigation has also infected the German Social Democrats. It is characteristic that just as theoretical economics could flourish on German-speaking territory only in Austria, so also the best representatives of German Marxism, Kautsky, Otto Bauer, Hilferding, and Max Adler, come from Austria. In that respect Marxism is superior to German social-policy doctrine, which has no theoretical basis at all and never has sought to create one. All social problems appear to this school as tasks of state administration and politics, and there is no problem on whose solution it does not venture with a light heart. Always, however, it is the same prescription that it issues: commands and prohibitions as lesser means, state ownership as the great, never-failing means.
Under such circumstances Social Democracy had an easy position. Marxian economic theory, which in Western Europe and America was able to win only a small following and was not able to assert itself alongside the accomplishments of modern economic theory, did not have to suffer much under the criticism of the empirical-realistic and historical school of German economics. The critical work to be done against Marxian economic theory was carried out by the Austrian school, ostracized in Germany, and above all by Böhm-Bawerk.It is naturally not intended here to undertake a critical assessment of Marxism. The discussion in this section is intended only to explain the imperialistic tendencies of socialism. Also, enough writings are available anyway to whoever is interested in these problems (e.g., Simkhowitsch, Marxismus versus Sozialismus, translated by Jappe Jena; 1913]). Marxism could easily dispose of the Prussian school; it was dangerous to it not as an opponent but as a friend. Social Democracy had to take care to show that social reform such as German social policy strove for could not replace the social revolution and that state ownership in the Prussian sense was not identical with socialization. This demonstration could not succeed, but its failure did not damage Social Democracy. For it was, after all, the party eternally condemned to fruitless opposition, which was always able to make capital for its party position precisely out of the defects of the social-reform and socialization measures.
That Social Democracy became the most powerful party in the German Reich it owes primarily to the democratic part of its program, taken over as the heir of liberalism. That, however, socialism as such also enjoys the greatest sympathy among the German people, so that only isolated voices speak out seriously and in principle against socialization and that even so-called bourgeois parties want to socialize the branches of production that are "ripe" for socialization—that is the result of the propaganda work that statism has performed. Socialist ideas constitute no victory over the Prussian authoritarian state but are its consistent development; their popularity in Germany has been furthered no less by the academic socialism of privy councilors than by the propaganda work of Social Democratic agitators.
Among the German people today, thanks to the views advocated for fifty years by the Prussian school of economic policy, there is no longer even any understanding of what the contrast between liberalism in economic policy and socialism really consists of. That the distinction between the two orientations lies not in the goal but in the means is not clear to many. Even to the antisocialist German, socialism appears as the sole just form of economic organization, assuring the people the most abundant satisfaction of their needs; and if he himself opposes it, he does so in the consciousness of resisting what is best for the common interest, doing so for his own benefit because he feels himself threatened in his rights or privileges. The bureaucrats mostly take this position, which is often enough found, however, among entrepreneurs also. It has long been forgotten in Germany that liberalism also, just as socialism does, recommends its economic system out of concern not for the interests of individuals but for those of all, the great masses. That "the greatest happiness of the greatest number" should he the goal of policy was first maintained by a radical free-trader, Jeremy Bentham. Bentham also carried on his famous struggle against usury laws, for example, not out of concern for the interests of the moneylenders but out of concern for the interests of all.Cf. Bentham, Defence of Usury, second edition (London: 1790), pp. 108 f. The point of departure of all liberalism lies in the thesis of the harmony of rightly understood interests of individuals, of classes, and of peoples. It rejects the basic idea of Mercantilism that the advantage of the one is the disadvantage of the other. That is a principle that may hold true for war and plunder; for economics and trade it does not hold. Therefore liberalism sees no basis for opposition between classes; therefore it is pacifist in relations between peoples. Not because it considers itself called upon to represent the special interests of the possessing classes does it advocate maintenance of private ownership of the means of production, but rather because it sees the economic order resting on private ownership as the system of production and distribution that assures the best and highest material satisfaction for all sections of the people. And just as it calls for free trade at home not out of regard for particular classes but out of regard for the welfare of all, so it demands free trade in international relations not for the sake of foreigners but for the sake of one's own people.
Interventionist economic policy takes another standpoint. It sees irreconcilable antagonisms in relations among states. Marxism, however, has proclaimed the doctrine of class struggle; on the irreconcilable opposition of classes it erects its doctrine and its tactics.
In Germany liberalism was never understood; it never found a base here. Only thus can it be explained that even the opponents of socialism more or less accepted socialist doctrines. That appears most clearly in the position of the opponents of socialism on the problem of the class struggle. Marxian socialism preaches the struggle of the proletariat against the bourgeoisie. Elsewhere this battle cry is opposed by that of the solidarity of interests. Not so in Germany. Here the proletarians are confronted by the bourgeoisie as a class. The united bourgeois parties confront the proletarian party. They do not see that in this way they recognize the argumentation of the Marxists as correct and thereby make their struggle hopeless. He who can adduce in favor of private ownership of the means of production nothing other than that its abolition would harm the rights of the possessors limits the supporters of the antisocialist parties to the nonproletarians. In an industrial state the "proletarians" naturally have numerical superiority over the other classes. If party formation is determined by class membership, then it is clear that the proletarian party must gain victory over the others.
The older socialists were opponents of democracy. They want to make the whole world happy with their plans and are impatient with anyone who is of another opinion. Their favorite form of state would be enlightened absolutism, in which they always secretly dream of themselves occupying the position of enlightened despot. Recognizing that they neither occupy this position nor can attain it, they seek the despot who would be ready to adopt their plans and become their tool. Other socialists, again, are oligarchically minded and want to have the world ruled by an aristocracy that includes the—in their opinion—really best people. In that regard it is a matter of indifference whether these aristocrats should be the philosophers of Plato, the priests of the Church, or the Newtonian Council of Saint-Simon.
With Marx there occurs in this respect, also, a complete change of interpretation. The proletarians form the immense majority of the population. They all necessarily have to become socialists, though, since consciousness is determined by social reality. Thus socialism, in contrast with all earlier class struggles, which had been movements of minorities or in the interests of minorities, is said to be the movement of the vast majority in the interest of the vast majority for the first time in history. It follows that democracy is the best means for realizing socialism. The real bedrock on which democratic socialism was built was that it found its base primarily in Germany, Austria, and Russia, thus in countries in which democracy had not been realized. There the democratic program was the obvious program of every opposition party and so necessarily of socialism also.
When the possibility offered itself in Russia to a very small number of socialists in relation to the millions of the people to grasp rule for themselves by capturing the means of power of broken-down Czarism, the principles of democracy were quickly thrown overboard. In Russia socialism certainly is not a movement of the immense majority. That it claims to be a movement in the interest of the immense majority is nothing special; all movements have claimed that. It is certain that the rule of the Bolsheviks in Russia rests just as much on possession of the government apparatus as the rule of the Romanovs once did. A democratic Russia would not be Bolshevik.
In Germany under the dictatorship of the proletariat there can be no problem, as its proponents assert, of defeating the resistance of the bourgeoisie to the socialization of the means of production. If the socialization of small peasant farms is renounced in advance and the continued receipt of small rentier incomes allowed also, as present-day socialism intends, then scarcely any resistance to socialization is to be expected in Germany. Liberal ideas, with which alone resistance against socialism could be mounted, have never won much ground in Germany; today they are shared by scarcely a dozen persons in Germany. Resistance to socialization based on the standpoint of private interests never has, however—rightly—any prospect of success, least of all in a country in which all industrial and mercantile wealth has always seemed to the great masses to be a crime. The expropriation of industry, of mining, and of big landholdings and the elimination of trade are the impetuous demand in Germany today of the overwhelming majority of the German people. To carry it out, dictatorship is needed least of all. Socialism can rely on the great masses at the moment; it does not yet have to fear democracy.
The German economy is today in the most difficult position imaginable. On the one hand the war has destroyed immense property values and laid upon the German people the obligation to pay huge reparations to the opponents; on the other hand it has brought clearly to consciousness the fact of the relative overpopulation of the German land. Everyone must recognize today that it will be extraordinarily difficult, if not impossible, for German industry after the war to compete with foreign industry without a sharp reduction of the wage level. Hundreds of thousands, even millions, of Germans are today seeing their small possessions melting away day by day. People who still considered themselves rich a few months ago, who were envied by thousands and, as "war winners," did not exactly enjoy affectionate attention in public, can today calculate exactly when they will have consumed the modest remains of their apparent wealth and will be left beggars. Members of the independent professions see how their standard of living is sinking day by day without hope of improvement.
That a people in such a position can be gripped by despair is not astonishing. It is easy to say that there is only one single remedy for the danger of the increasing misery of the entire German people, namely, to resume work as fast as possible and try, through improvements in the productive process, to make up for the damages inflicted on the German economy. But it is understandable that a people to whom the idea of power was preached for decades, whose instinct for force was awakened by the horrors of the long war, also seeks first of all in this crisis to resort again to power politics. The terrorism of the Spartacists continues the policy of the Junkers, as the terrorism of the Bolsheviks continues the policy of Czarism.
The dictatorship of the proletariat would facilitate getting over economic difficulties for the moment by expropriating the consumption goods held by the propertied classes. It is dear that that is not socialism and that no socialist theorist has ever advocated it. In this way one can only badly and only for a short time disguise the difficulties that confront production on a socialist basis. Imports of foodstuffs from abroad can be financed for a certain time by selling foreign securities and by exporting works of art and jewels. Sooner or later, however, this means must fail.
The dictatorship of the proletariat wants to use terror to nip any stirring up of opposition in the bud. Socialism is believed established for all eternity once its property has been taken away from the bourgeoisie and all possibility of public criticism has been abolished. It cannot be denied, of course, that much can be done in this way, that, above all, all European civilization can thus be destroyed; but one does not thereby build a socialist order of society. If the communist social order is less suited than one resting on private ownership of the means of production to bring about "the greatest happiness of the greatest number," then the ideas of liberalism cannot be killed off even by terrorist measures.
Marxian socialism, as a fundamentally revolutionary movement, is inwardly inclined toward imperialism. No one will dispute that, least of all the Marxists themselves, who straightforwardly proclaim the cult of revolution. It is less noted, however, that modern socialism of necessity must be imperialistic outwardly also.
Modern socialism does not come forth in propaganda as a rationalist demand; it is an economic-policy position that presents itself as a doctrine of salvation in the manner of religions. As an economic-policy idea it would have had to compete intellectually with liberalism; it would have had to try to invalidate the arguments of its opponents logically and to turn aside their objections against its own doctrines. Individual socialists have done that, too. By and large, though, socialists have scarcely bothered themselves with scientific discussion of the advantages and disadvantages of the two conceivable systems of social production. They have proclaimed the socialist program as a doctrine of salvation. They have represented all earthly suffering as an emanation of the capitalist social order and have promised, with the implementation of socialism, the removal of everything painful. They held the capitalist economy responsible for all shortcomings of the past and present. In the state of the future all longing and hoping will be fulfilled; there the restless will find rest; the unhappy, happiness; the inadequate, strength; the sick, cure; the poor, wealth; the abstinent, enjoyment. In the state of the future, work will be a pleasure and no longer a torment. In the state of the future, an art will flourish of whose magnificence "bourgeois" art gives no idea, and a science that will solve all riddles of the universe without remnant. All sexual need will disappear; man and wife will give each other happiness in love that earlier generations never dreamed of. Human character will undergo a thoroughgoing change; it will become noble and spotless; all intellectual, moral, and bodily inadequacies will fall away from mankind. What flourishes for the German hero in Valhalla, for the Christian in God's bosom, for the Moslem in Mohammed's paradise—socialism will realize all that on earth.
The Utopians, above all Fourier, were insatiable in wanting to paint the details of this life of ease. Marxism has most strictly tabooed every sketch of the state of the future. But this prohibition referred only to description of the economic, governmental, and legal order of the socialist state and was a masterful propaganda gambit. Since the arrangements of the future state were left in mysterious obscurity, the opponents of socialism were deprived of all possibility of criticizing them and perhaps showing that their realization could in no way create a paradise on earth. Depicting the favorable consequences of the socialization of property, on the contrary, was by no means as proscribed by Marxism as was demonstration of the ways and means by which it could be accomplished. In again and again representing all earthly evils as necessary concomitants of the capitalist social order and further declaring that they would be absent from the state of the future, it has, in utopian depiction of the happiness that it promises to bring, outdone the most imaginative authors of utopian novels. Mysterious intimation and mystical allusion have far stronger effect than open explanation.
That socialism appeared as a doctrine of salvation made the struggle against liberalism easy for it. Whoever seeks to refute socialism rationally encounters among most socialists not rational considerations, as he expects, but rather a belief, not derived from experience, in redemption by socialism. One undoubtedly can also defend socialism rationally. Yet for the great mass of its adherents it is a doctrine of salvation; they believe in it. For those for whom the religious gospels have lost force, it is, in place of faith, a consolation and hope in the difficulties of life. In the face of such conviction, all rationalist criticism fails. Whoever comes to the socialist of this sort with rational objections finds the same lack of understanding that rationalist criticism of the doctrines of faith encounters with the believing Christian.
In this sense, comparing socialism with Christianity was thoroughly justified. Yet the Kingdom of Christ is not of this world; socialism, on the contrary, wants to establish the kingdom of salvation on earth. Therein lies its strength, therein, however, its weakness too, from which it will collapse some day just as quickly as it has triumphed. Even if the socialist method of production really could raise productivity and provide greater welfare for all than the liberal method, it would be bound bitterly to disappoint its adherents, who also expect the highest exaltation of the inner feeling of happiness from it. It will not be able to remove the inadequacy of everything earthly, not quiet the Faustian drive, not fulfill inner yearning. When socialism will have become reality, it will have to recognize that a religion not referring to the life to come is an absurdity.
Marxism is an evolutionary theory. Even the word "revolution" has the meaning "evolution" in the sense of the materialistic interpretation of history. Yet regard for the Messianic character of the socialist gospel was bound to drive Marxian socialism again and again to endorsing violent overthrow, revolution in the strict sense of the word. It could not admit that evolution was coming nearer to socialism in any other way than that the contradictions of the capitalist mode of production were becoming ever more glaring and thereby bringing the revolutionary overthrow of capitalism into the near future. If it had been willing to admit that evolution was leading to the realization of socialism step by step, then it would have gotten into the embarrassment of having to explain just why its prophecies of salvation were not also being fulfilled step by step to some extent. For that reason Marxism necessarily had to remain revolutionary if it did not want to give up the strongest device of its propaganda, the doctrine of salvation; for that reason, despite all science, it had to hold firm to its theory of increasing misery and collapse. For that reason it had to reject the revisionism of Bernstein; for that reason it had to let not one iota of its orthodoxy be stolen from it.
Now, however, socialism is the victor. The day of fulfillment has dawned. Millions stand around impetuously demanding the salvation that is supposed to await them; they demand riches, they demand happiness. And now shall the leaders come and console the multitude by saying that diligent labor, perhaps after decades or centuries, will become their reward and that inner happiness can never be attained with outward means? Yet how have they reproached liberalism because it recommended diligence and thrift to the poor! Yet how have they derided the doctrines that would not ascribe all earthly hardship to the deficiency of social arrangements
Socialism has only one way out of this position. Regardless of the fact that it holds power, it must still keep trying to appear as an oppressed and persecuted sect, impeded by hostile powers from pushing through the essential parts of its program, and so shift onto others the responsibility for the nonappearance of the prophesied state of happiness. Along with that, however, the struggle against these enemies of general salvation becomes an unavoidable necessity for the socialist commonwealth. It must bloodily persecute the bourgeoisie at home; it must take the offensive against foreign countries that are not yet socialist. It cannot wait until the foreigners must turn to socialism voluntarily. Since it can explain the failure of socialism only by the machinations of foreign capitalism, it necessarily arrives at a new concept of the offensive socialist international. Socialism can be realized only if the whole world becomes socialist; an isolated socialism of one single nation is said to be impossible. Therefore, every socialist government must immediately concern itself with the extension of socialism abroad.
That is quite a different kind of internationalism from that of the Communist Manifesto. It is not defensively but offensively conceived. To help the idea of socialism to victory, however, it should suffice—one should think—for the socialist nations to arrange their societies so well that their example leads others to imitate them. Yet for the socialist state, attack on all capitalist states is a vital necessity. To maintain itself internally it must become aggressive externally. It cannot rest before it has socialized the whole world.
Socialist imperialism is also quite without a basis for economic policy. It is hard to see why a socialist commonwealth could not also acquire in trade with foreign countries all those goods that it could not produce itself. The socialist who is convinced of the higher productivity of communist production could dispute that least of all.Note how deficient the argument is in Marxist literature before 1918 for the thesis that socialism is possible only as world socialism.
Socialist imperialism outdoes every earlier imperialism in scope and depth. The inner necessity that has caused it to arise, rooted in the essence of the socialist gospel of salvation, drives it to fundamental boundlessness in every direction. It cannot rest before it has subjugated the entire inhabited world and before it has annihilated everything reminiscent of other forms of human society. Every earlier imperialism could do without further expansion as soon as it came up against obstacles to its spread that it could not overcome. Socialist imperialism could not do this; it would have to see such obstacles as difficulties not only for outward expansion but also for its development at home. It must try to annihilate them or itself disappear.
Marxism sees the coming of socialism as an inescapable necessity. Even if one were willing to grant the correctness of this opinion, one still would by no means be bound to embrace socialism. It may be that despite everything we cannot escape socialism, yet whoever considers it an evil must not wish it onward for that reason and seek to hasten its arrival; on the contrary, he would have the moral duty to do everything to postpone it as long as possible. No person can escape death; yet the recognition of this necessity certainly does not force us to bring about death as quickly as possible. Marxists would have to become socialists just as little as we must become suicides if they were convinced that socialism would be bound to bring about no improvement but rather a worsening of our social conditions.Cf. Hilferding, Das Finanzkapital (Vienna:] 91 0), p. X.
Socialists and liberals agree in seeing the ultimate goal of economic policy as attainment of a state of society assuring the greatest happiness for the greatest number. Welfare for all, the greatest possible welfare for the greatest possible number—that is the goal of both liberalism and of socialism, even though this may now and then be not only misunderstood but even disputed. Both reject all ascetic ideals that want to restrain people to frugality and preach renunciation and flight from life; both strive for social wealth. Only over the way of reaching this ultimate goal of economic policy do their views disagree. An economic order resting on private ownership of the means of production and according the greatest possible scope to the activity and free initiative of the individual assures to the liberal the attainment of the goal aspired to. The socialist, on the other hand, seeks to attain it by socialization of the means of production.
The older socialism and communism strove for equality of property and of income distribution. Inequality was said to be unjust; it contradicted divine laws and had to be abolished. To that liberals reply that fettering the free activity of the individual would harm the general interest. In the socialist society the distinction between rich and poor would fall away; no one would any longer possess more than another, but every individual would be poorer than even the poorest today, since the communistic system would work to impede production and progress. It may indeed be true that the liberal economic order permits great differences in income, but that in no way involves exploitation of the poor by richer people. What the rich have they have not taken away from the poor; their surplus could not be more or less redistributed to the poor in the socialist society, since in that society it would not be produced at all. The surplus produced in the liberal economic order beyond what could also be produced by a communistic economic order is not even entirely distributed to the possessors; a part of it even accrues to the propertyless, so that everyone, even the poorest, has an interest in the establishment and maintenance of a liberal economic order. Fighting erroneous socialist doctrines is therefore not a special interest of a single class but the cause of all; everyone would suffer under the limitation of production and of progress entailed by socialism. That one has more to lose, another less, is incidental in relation to the fact that all would be harmed and that the misery awaiting them is equally great.
That is the argument in favor of private ownership of the means of production that every socialism that does not set up ascetic ideals would have to refute. Marx did indeed perceive the necessity of this refutation. When he sees the driving factor of the social revolution in the fact that the relations of ownership change from forms of development of the productive forces into fetters on them,Cf. Marx, Zur Kritik der politischen Ökonomie, edited by Kautsky (Stuttgart: 1897), P. xi. when he once in passing tries to offer a proof—which failed—that the capitalist manner of production impedes the development of productivity in a particular case,Cf. Marx, Das Kapital, vol. 3, first part, third edition (Hamburg: 1911), pp. 242 ff. he does incidentally recognize the importance of this problem. But neither he nor his followers could attribute to it the significance it deserves for deciding the question of socialism or liberalism. They are hampered in doing so even by the entire orientation of their thinking around the materialist interpretation of history. Their determinism just cannot understand how one can be for or against socialism, since the communist society does form the inescapable necessity of the future. It is moreover settled for Marx, as a Hegelian, that this development toward socialism is also rational in the Hegelian sense and represents progress toward a higher stage. The idea that socialism could mean a catastrophe for civilization would necessarily have seemed completely incomprehensible to him.
Marxian socialism therefore had no incentive to consider the question whether or not socialism as an economic form was superior to liberalism. To it, it seemed settled that socialism alone signified welfare for all, while liberalism enriched a few but abandoned the great masses to misery. With the appearance of Marxism, therefore, controversy over the advantages of the two economic orders died away. Marxists do not enter into such discussions. Ex professo [avowedly] they have not even tried to refute the liberal arguments in favor of private ownership of the means of production, not to mention actually refuting them.
In the view of individualists, private ownership of the means of production fulfills its social function by conveying the means of production into the hands of those who best understand how to use them. Every owner must use his means of production in such a way that they yield the greatest output, that is, the highest utility for society. If he does not do this, then this must lead to his economic failure, and the means of production shift over to the disposal of those who better understand how to use them. In that way the inappropriate or negligent application of means of production is avoided and their most effective utilization assured. For means of production that are not under the private ownership of individuals but rather are under social ownership, this is not true in the same way. What is missing here is the incentive of the owner's self-interest. The utilization of equipment is therefore not as complete as in the private sector; with the same input the same output cannot therefore be achieved. The result of social production must therefore remain behind that of private production. Evidence of that has been supplied by public enterprises of the state and municipalities (so individualists further argue). It is demonstrated and well known that less is accomplished in these than in the private sector. The output of enterprises that had been quite profitable under private ownership sank at once after coming under state or municipal ownership. The public firm can nowhere maintain itself in free competition with the private firm; it is possible today only where it has a monopoly that excludes competition. Even that alone is evidence of its lesser economic productivity.
Only a few socialists of Marxist orientation have recognized the significance of this counterargument; otherwise they would have had to admit that this is a point on which everything depends. If the socialist mode of production will be able to achieve no additional output in comparison with private enterprise, if, on the contrary, it will produce less than the latter, then no improvement but rather a worsening of the lot of the worker is to be expected from it. All argumentation of the socialists would therefore have to concentrate on showing that socialism will succeed in raising production beyond the amount possible in the individualistic economic order.
Most Social Democratic writers are quite silent on this point; others touch on it only incidentally. Thus, Kautsky names two methods that the future state will use for raising production. The first is the concentration of all production in the most efficient firms and the shutting down of all other, less high-ranking, firms.Cf. Kautsky, Die soziale Revolution, third edition (Berlin: 1911), II, pp. 21 ff. That this is a means of raising production cannot be disputed. But this method is in best operation precisely under the rule of free competition. Free competition pitilessly culls out all less-productive enterprises and firms. Precisely that it does so is again and again used as a reproach against it by the affected parties; precisely for that reason do the weaker enterprises demand state subsidies and special consideration in sales to public agencies, in short, limitation of free competition in every possible way. That the trusts organized on a private-enterprise basis work in the highest degree with these methods for achieving higher productivity must be admitted even by Kautsky, since he actually cites them as models for the social revolution. It is more than doubtful whether the socialist state will also feel the same urgency to carry out such improvements in production. Will it not continue a firm that is less profitable in order to avoid local disadvantages from its abandonment? The private entrepreneur ruthlessly abandons enterprises that no longer pay; he thereby makes it necessary for the workers to move, perhaps also to change their occupations. That is doubtless harmful above all for the persons affected, but an advantage for the whole, since it makes possible cheaper and better supply of the markets. Will the socialist state also do that? Will it not, precisely on the contrary, out of political considerations, try to avoid local discontent? In the Austrian state railroads, all reforms of this kind were wrecked because people sought to avoid the damage to particular localities that would have resulted from abandonment of superfluous administrative offices, workshops, and heating plants. Even the Army administration ran into parliamentary difficulties when, for military reasons, it wanted to withdraw the garrison from a locality.
The second method of raising production that Kautsky mentions, "savings of very many kinds," he also, by his own admission, finds already realized by the trusts of today. He names, above all, savings in materials and equipment, transport costs, and advertising and publicity expenses.Die soziale Revolution, p. 26. Now as far as savings of material and transport are concerned, experience shows that nowhere are operations carried on with so little thrift in this respect and nowhere with such waste of labor and materials of all kinds as in public service and public enterprises. Private enterprise, on the contrary, seeks, even in the owner's own interest alone, to work as thriftily as possible.
The socialist state will, of course, save all advertising expenses and all costs for traveling salesmen and for agents. Yet it is more than doubtful whether it will not employ many more persons in the service of the social apparatus of distribution. We have already had the experience in the war that the socialist apparatus of distribution can be quite ponderous and costly. Or are the costs of the bread, flour, meat, sugar, and other tickets really smaller than the costs of advertisements? Is the large staff that is necessary for the issue and administration of these rationing devices cheaper than the expenditure on traveling salesmen and agents?
Socialism will abolish small retail shops. But it will have to replace them with goods-delivery stations, which will not be cheaper. Even consumer cooperatives, after all, have no fewer employees than retail trade organized in a modern way employs; and precisely because of their higher expenses, they often could not stand the competition with merchants if they were not given tax advantages.
We see on what weak ground Kautsky's argumentation stands here. When he now asserts that "by application of these two methods a proletarian regime can raise production at once to so high a level that it becomes possible to raise wages considerably and at the same time reduce hours of work," well, this is an assertion for which no proof has so far been provided.One has heard often enough in recent years of frozen potatoes, rotten fruit, and spoiled vegetables. Did not things like that happen earlier? Of course, but to a much smaller extent. The dealer whose fruit spoiled suffered losses of wealth that made him more careful in the future; if he did not pay better attention, then this was finally bound to lead to his economic disappearance. He left the management of production and was shifted to a position in economic life where he was no longer able to do harm. It is otherwise in dealings with state-traded articles. Here no self-interest stands behind the goods; here officials manage whose responsibility is so divided that no one particularly concerns himself about a small misfortune.
The social functions of private ownership of the means of production are not yet exhausted in assuring the highest attainable productivity of labor. Economic progress rests on the continuing accumulation of capital. That was never disputed either by liberals or by socialists. The socialists who have concerned themselves somewhat more closely with the problem of the organization of the socialist society also do not neglect, then, always to mention that in the socialist state the accumulation of capital, which today is undertaken by private parties, will be society's responsibility.
In the individualistic society the individual accumulates, not society. Capital accumulation takes place by saving; the saver has the incentive of receiving income from the saved capital as the reward of saving. In the communist society, society as such will receive the income that today flows to the capitalists alone; it will then distribute this income equally to all members or otherwise use it for the good of the whole. Will that alone be a sufficient incentive for saving? To be able to answer this question, one must imagine that the society of the socialist state will be faced every day with the choice whether it should devote itself more to the production of consumer goods or more to that of capital goods, whether it should choose productive processes that do indeed take a shorter time but correspondingly yield less output or choose ones that take more time but then also bring greater output. The liberal thinks that the socialist society will always decide for the shorter production period, that it will prefer to produce consumer goods instead of capital goods, that it will consume the means of production that it will have taken over as heir of the liberal society or at best maintain them but in no case increase them. That, however, would mean that socialism will bring stagnation, if not the decline of our whole economic civilization, and misery and need for all. That the state and the cities have already pursued investment policy on a large scale is no disproof of this assertion, since they pursued this activity entirely with the means of the liberal system. The means were raised by loans, that is, they were provided by private parties who expected from them an increase in their capital incomes. If in the future, however, the socialist society should face the question whether it will feed, clothe, and house its members better or whether it will save on all these things in order to build railroads and canals, to open mines, to undertake agricultural improvements for the coming generations, then it will decide for the former, even on psychological and political grounds alone.
A third objection to socialism is the famous argument of Malthus. Population is said to have a tendency to grow faster than the means of subsistence. In the social order resting on private ownership, a limitation of the increase in population is posed by the fact that each person is able to raise only a limited number of children. In the socialist society this impediment to population increase will fall away, since no longer the individual but rather the society will have to take care of raising the new generation. Then, however, such a growth of population would soon occur that need and misery for all would be bound to appear.While the socialists have scarcely deigned to reply to the two first arguments mentioned, they have concerned themselves more exhaustively with the Malthusian law, without, to be sure, in the view of the liberals, refuting the conclusions that follow from it.
Those are the objections to the socialist society with which everyone would have to come to grips before he took the side of socialism.
It is no refutation at all of the objections raised against socialism that the socialists seek to stigmatize everyone who is not of their opinion with the label "bourgeois economist" as representative of a class whose special interests run counter to the general interest. That the interests of the possessors run counter to those of the whole would indeed first have to be proved; that is precisely what the entire controversy revolves around.
The liberal doctrine starts with the fact that the economic order resting on private ownership of the means of production removes the opposition between private and social interest because each individual's pursuit of his rightly understood self-interest assures the highest attainable degree of general welfare. Socialism wants to establish a social order in which the self-interest of the individual, selfishness, is excluded, a society in which everyone has to serve the common good directly. It would now be the task of the socialists to show in what manner this goal could be reached. Even the socialist cannot call into question the existence of a primary and direct opposition between the special interests of the individual and those of the whole, and he must also admit that a labor order can be based just as little on the categorical imperative alone as on the compulsory force of penal law. Up to now, however, no socialist has ever made even the mere attempt to show how this gap between special interest and general welfare could be bridged over. The opponents of socialism, however, along with Schäffle, consider precisely that question to be "the decisive but up to now entirely undecided point on which in the long run everything would depend, on which victory or defeat of socialism, reform or destruction of civilization by it, would be dependent from the economic side."Cf. Schäffle, Die Quintessenz des Sozialismus, 18th edition (Gotha: 1919), p. 30.
Marxian socialism calls the older socialism utopian because it tries to construct the elements of a new society out of one's head and because it seeks ways and means of implementing the contrived social plan. In contrast, Marxism is supposed to be scientific communism. It discovers the elements of the new society in the laws of development of capitalist society, but it constructs no future state. It recognizes that the proletariat, because of its conditions of life, can do nothing else than finally overcome every class opposition and thereby realize socialism; however, it does not seek philanthropists, as the utopians do, who would be ready to make the world happy by the introduction of socialism. If one wants to see the distinction between science and utopia in that, then Marxian socialism rightly claims its name. One could, however, make the distinction in another sense also. If one calls utopian all those social theories which, in outlining the future social system, start with the view that after introduction of the new social order people will be guided by essentially different motives than in our present conditions,Cf. Anton Menger, Das Recht auf den vollen Arbeitsertrag, fourth edition (Stuttgart: 1910), pp. 105 ff. then the socialist ideal of Marxism is also a utopia. In another sense than is usual, of course, one can distinguish between scientific and philanthropic socialism. Those socialists who are concerned in their prograins to start with economic lines of thinking and take the necessity of production into account can be called scientific socialists, in contrast with those who know how to bring forth only ethical and moral discussions and set up only a program for distribution but not for production also. Marx clearly noted the defects of merely philanthropic socialism when, after moving to London, he proceeded to study the economic theorists. The result of this study was the doctrine presented in Das Kapital. Later Marxists, however, have badly neglected this side of Marxism. They are much more politicians and philosophers than economists. One of the chief defects of the economic side of the Marxian system is its connection with classical economics, which corresponded to the state of economic science at that time. Today socialism would have to seek a scientific support in modern economics, in the theory of marginal utility. Cf. Joseph Schumpeter, "Das Grundprinzip der Verteilungslehre," Archiv für Sozialwissenschaft und Sozialpolitik, vol. 42, 1916/1917, P. 88. Its continued existence presupposes men who are in no position to pursue any special interest against the general interest.How easily the Marxists disregard this argument can be seen in Kautsky: "If socialism is a social necessity, then if it came into conflict with human nature, it would be the latter that would get the worse of the matter and not socialism." Preface to Atlanticus [Ballod], Produktion und Konsum im Sozialstatt (Stuttgart: 1898), p. xiv. Again and again, when this objection is made to him, the socialist refers to the fact that both today and in every earlier stage of society very much work, and often precisely the most highly qualified work, was indeed performed for its own sake and for the community and not for the direct advantage of the worker. He points to the indefatigable effort of the researcher, to the sacrifice of the physician, to the conduct of the warrior in the field. In recent years one could hear again and again that the great deeds performed by soldiers in the field were to be explained only by pure devotion to the cause and by a high sense of sacrifice, or at worst, perhaps, by striving for distinction, but never by striving for private gain. This argumentation overlooks the fundamental distinction that exists, however, between economic work of the usual kind and those special performances. The artist and the researcher find their satisfaction in the pleasure that the work in itself affords them and in the recognition that they hope to reap at some time, even if perhaps only from posterity, even in the case when material success should be lacking. The physician in the area of pestilence and the soldier in the field repress not only their economic interests but also their drive for self-preservation; even that alone shows that there can be no question of a regular state of affairs but only of a transitory, exceptional state from which no far-reaching conclusions can be drawn.
The treatment that socialism allots to the problem of self-interest points clearly to its origin. Socialism comes from the circles of intellectuals; at its cradle stand poets and thinkers, writers and men of letters. It does not deny its derivation from those strata that even on professional grounds alone have to concern themselves with ideals. It is an ideal of noneconomic people. Therefore, it is not much more striking that writers and men of letters of every kind were always represented among its adherents in large numbers and that it could always count on fundamental agreement among officials.
The view characteristic of officials comes clearly to light in the treatment of the problem of socialization. From the bureaucratic point of view, it involves only questions of management and administrative technique that can easily be solved if only one allows the officials more freedom of action. Then socialization could be carried out without danger of "eliminating free initiative and individual readiness to bear responsibility on which the successes of private business management rest."Cf. Bericht der Sozialisierungskommission über die Sozialisierung der Kohle [Report of the Socialization Commission on the Socialization of Coal), Frankfurter Zeitung, 12 March 1919. Actually, free initiative of individuals cannot exist in the socialized economy. It is a fateful error to believe it possible, by some sort of organizational measures, to leave scope for free initiative even in the socialized enterprise. Its absence does not hinge on defects of organization; it is grounded in the essence of the socialized enterprise. Free initiative means taking risks in order to win; it means putting up stakes in a game that can bring gain or loss. All economic activity is composed of such risky undertakings. Every act of production, every purchase by the trader and by the producer, every delay in selling, is such a risky undertaking. Still more so is undertaking every sizable investment or change in the enterprise, not to mention the investment of new capital. Capitalists and entrepreneurs must take chances; they cannot do otherwise, since they have no possibility of maintaining their property without such risk-bearing.
Anyone who has means of production at his disposal without being their owner has neither the risk of loss nor the chance of gain, as an owner does. The official or functionary need not fear loss, and for that reason he cannot be allowed to act freely and unrestrictedly like the owner. He must be restricted in some manner. If he could manage without restrictions, then he simply would be the owner. It is playing with words to want to impose readiness to bear individual responsibility on the nonowner. The owner does not have readiness to bear responsibility; he just does bear responsibility because he feels the consequences of his actions. The functionary may have ever so much readiness to bear responsibility; yet he never can bear responsibility other than morally. Yet the more moral responsibility one imposes on him, the more one cramps his initiative. The problem of socialization cannot be solved by civil-service instructions and reforms of organization.
The losses that the national economy suffers from war, apart from the disadvantages that exclusion from world trade entails, consist of the destruction of goods by military actions, of the consumption of war material of all kinds, and of the loss of productive labor that the persons drawn into military service would have rendered in their civilian activities. Further losses from loss of labor occur insofar as the number of workers is lastingly reduced by the number of the fallen and as the survivors become less fit in consequence of injuries suffered, hardships undergone, illnesses suffered, and worsened nutrition. These losses are only to the slightest degree offset by the fact that the war works as a dynamic factor and spurs the population to improve the technique of production. Even the increase in the number of workers that has taken place in the war by drawing on the otherwise unused labor of women and children and by extension of hours of work, as well as the saving achieved by limitation of consumption, still does not counterbalance them, so that the economy finally comes out of the war with a considerable loss of wealth. Economically considered, war and revolution are always bad business, unless such an improvement of the production process of the national economy results from them that the additional amount of goods produced after the war can compensate for the losses of the war. The socialist who is convinced that the socialist order of society will multiply the productivity of the economy may think little of the sacrifices that the social revolution will cost.
But even a war that is disadvantageous for the world economy can enrich individual nations or states. If the victorious state is able to lay such burdens on the vanquished that not only all of its war costs are thereby covered but a surplus is acquired also, then the war has been advantageous for it. The militaristic idea rests on the belief that such war gains are possible and can be lastingly held. A people that believes that it can gain its bread more easily by waging war than by work can hardly be convinced that it is more pleasing to God to suffer injustice than to commit injustice. The theory of militarism can be refuted; if, however, one cannot refute it, one cannot, by appeal to ethical factors, persuade the stronger party to forgo the use of its power.
The pacifistic line of argument goes too far if it simply denies that a people can gain by war. Criticism of militarism must begin by raising the question whether the victor can then definitely count on always remaining the stronger or whether he must not fear being displaced by still stronger parties. The militaristic argumentation can defend itself from objections raised against it from this point of view only if it starts with the assumption of unchangeable race characters. The members of the higher race, who behave according to pacifistic principles among themselves, hold firmly together against the lower races that they are striving to subjugate and thus assure themselves eternal predominance. But the possibility that differences will arise among the members of the higher races, leading part of their members to join with the lower races in battle against the remaining members of the higher ones, itself shows the danger of the militaristic state of affairs for all parties. If one entirely drops the assumption of the constancy of race characters and considers it conceivable that the race that had been stronger before will be surpassed by one that had been weaker, then it is evident that each party must consider that it could be faced with new battles in which it too could be defeated. Under these assumptions, the militaristic theory cannot be maintained. There no longer is any sure war gain, and the militaristic state of affairs appears as a situation of constant battles, at least, which shatter welfare so badly that finally even the victor obtains less than he would have harvested in the pacifistic situation.
In any case, not too much economic insight is needed to recognize that a war means at least direct destruction of goods, and misery. It was dear to everyone that the very outbreak of the war had to bring harmful interruptions in business life on the whole, and in Germany and Austria at the beginning of August 1914 people faced the future with fear. Astonishingly, however, things seemed to work otherwise. Instead of the expected crisis came a period of good business; instead of decline, boom. People found that war was prosperity; businessmen who, before the war, were thoroughly peace-minded and were always reproached by the friends of war for the anxiety that they were always showing at every flare-up of war rumors now began to reconcile themselves to the war. All at once there were no longer any unsalable products, enterprises that for years had run only at a loss yielded rich profits. Unemployment, which had assumed a menacing extent in the first days and weeks of the war, disappeared completely, and wages rose. The entire economy presented the picture of a gratifying boom. Soon writers appeared who sought to explain the causes of this boom.The majority of authors, in conformity with the intellectual tendency of statism, did not occupy themselves with the explanation of the causes of the good course of business but rather discussed the question whether the war "should be allowed to bring prosperity." Among those who sought to give an explanation of the economic boom in war should be mentioned above all Neurath ("Die Kriegswirtschaft," reprint from the Jahresberischt der Neuen Wiener Handelsakademie, V [16], 1910, pp. 10 ff.), since he—following in the steps of Carey, List and Henry George—had already before the war, in this as in other questions of "war economy," adopted the standpoint that gained broad diffusion in Germany during the war. The most naive representative of this view that war creates wealth is Steinmann-Bucher, Deutschlands Volksvermögen im Krieg, second edition (Stuttgart: 1916), pp. 40, 85 ff.
Every unprejudiced person can naturally have no doubt that war can really cause no economic boom, at least not directly, since an increase in wealth never does result from destruction of goods. It would scarcely have been too difficult to understand that war does bring good sales opportunities for all producers of weapons, munitions, and army equipment of every kind but that what these sellers gain is offset on the other hand by losses of other branches of production and that the real war losses of the economy are not affected thereby. War prosperity is like the prosperity that an earthquake or a plague brings. The earthquake means good business for construction workers, and cholera improves the business of physicians, pharmacists, and undertakers; but no one has for that reason yet sought to celebrate earthquakes and cholera as stimulators of the productive forces in the general interest.
Starting with the observation that war furthers the business of the armament industry, many writers have sought to trace war to the machinations of those interested in war industry. This view appears to find superficial support in the behavior of the armament industry and of heavy industry in general. The most energetic advocates of the imperialistic policy were admittedly found in Germany not in the circles of industry but in those of the intellectual occupations, above all of officials and teachers. The financial means for war propaganda were provided before and during the war, however, by the armament industry. The armament industry created militarism and imperialism, however, just as little as, say, the distilleries created alcoholism or publishing houses trashy literature. The supply of weapons did not call forth the demand, but rather the other way around. The leaders of the armament industry are not themselves bloodthirsty; they would just as gladly earn money by producing other commodities. They produce cannons and guns because demand for them exists; they would just as gladly produce peacetime articles if they could do a better business with them.It is a mania of the statists to suspect the machinations of "special interests" in all that does not please them. Thus, Italy's entry into the war was traced to the work of propaganda paid for by England and France. Annunzio is said to have been bribed, and so on. Will one perhaps assert that Leopardi and Giusti, Silvio Pellico and Garibaldi, Mazzini and Cavour had also sold themselves? Yet their spirit influenced the position of Italy in this war more than the activity of any contemporary. The failures of German foreign policy are in large part to be traced to this way of thinking, which makes it impossible to grasp the realities of the world.
Recognition of this connection of things would have been bound to become widespread soon, and people would have quickly recognized that the war boom was to the advantage of only a small part of the population but that the economy as a whole was becoming poorer day by day, if inflation had not drawn a veil around all these facts, a veil impenetrable to a way of thinking that statism had made unaccustomed to every economic consideration.
To grasp the significance of inflation, it helps to imagine it and all of its consequences taken out of the picture of the war economy. Let us imagine that the state had forsworn that aid for its finances that it resorted to by issuing paper money of every kind. It is clear that the issue of notes—if we disregard the relatively insignificant quantities of goods obtained from neutral foreign countries as a counterpart of gold withdrawn from circulation and exported—in no way increased the material and human means of waging war. By the issue of paper money not one cannon, not one grenade more was produced than could have been produced even without putting the printing press into operation. After all, war is waged not with "money" but with the goods that are acquired for money. For the production of war goods, it was a matter of indifference whether the quantity of money with which they were bought was greater or smaller.
The war considerably increased the demand for money. Many economic units were impelled to enlarge their cash balances, since the greater use, of cash payments in place of the granting of long-term credit, which had been usual earlier, the worsening of trading arrangements, and growing insecurity had changed the entire structure of the payments system. The many military offices that were newly established during the war or whose range of activity was broadened, together with the extension of the monetary circulation of the Central Powers into the occupied territories, contributed to enlarging of the economy's demand for money. This rise in the demand for money created a tendency toward a rise in its value, that is to say, toward an increase in the purchasing power of the money unit, which worked against the opposite tendency unleashed by the increased issue of banknotes.
If the volume of note issue had not gone beyond what business could have absorbed in view of the war-induced increase in the demand for money, merely checking any increase in the value of money, then not many words would have to be spent on it. In fact, though, the banknote expansion was far greater. The longer war continued, the more actively was the printing press put into the service of the financial administration. The consequences occurred that the quantity theory describes. The prices of all goods and services, and with them the prices of foreign bills of exchange, went up.
The sinking of the value of money favored all debtors and harmed all creditors. That, however, does not exhaust the social symptoms of change in the value of money. The price rise caused by an increase in the quantity of money does not appear at one stroke in the entire economy and for all goods, for the additional quantity of money distributes itself only gradually. At first it flows to particular establishments and particular branches of production and therefore first increases only the demands for particular goods, not for all; only later do other goods also rise in price. "During the issue of notes," say Auspitz and Lieben, "the additional means of circulation will be concentrated in the hands of a small fraction of the population, e.g., of the suppliers and producers of war materials. Consequently, these persons' demands for various articles will increase; and thus the prices and also the sales of the latter will rise, notably, however, also those of luxury articles. The situation of the producers of all these articles thereby improves; their demands for other goods will also increase; the rise of prices and sales will therefore progress even further and spread to an ever larger number of articles, and finally to all."Cf. Auspitz and Lieben, Untersuchungen über die Theorie des Preises (Leipzig: 1889), pp. 64 f.
If the decline in the value of money were to pervade the entire economy at one stroke and be registered against all goods to the same extent, then it would cause no redistribution of income and wealth. For in this respect there can only be a question of redistribution. The national economy as such gains nothing from it, and what the individual gains others must lose. Those who bring to market the goods and services whose prices are caught up first in the upward price movement are in the favorable position of already being able to sell at higher prices while still able to buy the goods and services that they want to acquire at the older, lower prices. On the other hand, again, those who sell goods and services that rise in price only later must already buy at higher prices while they themselves, in selling, are able to obtain only the older, lower prices. As long as the process of change in the value of money is still under way, such gains of some and losses of others will keep occurring. When the process has finally come to an end, then these gains and losses do also cease, but the gains and losses of the interim are not made up for again. The war suppliers in the broadest sense of the word (also including workers in war industries and military personnel who received increased war incomes) have therefore gained not only from enjoying good business in the ordinary sense of the word but also from the fact that the additional quantity of money flowed first to them. The price rise of the goods and services that they brought to market was a double one: it was caused first by the increased demand for their labor, but then too by the increased supply of money.
That is the essence of so-called war prosperity; it enriches some by what it takes from others. It is not rising wealth but a shifting of wealth and income.Cf. Mises, Theorie des Geldes und der Umlaufsmittel (Munich: 1912), pp. 222 ff.; second edition translated by H. E. Batson as The Theory of Money and Credit (Indianapolis: Liberty Classics, 1981), pp. 251 ff. A dear description of conditions in Austria during the Napoleonic Wars is found in Grünberg, Studien zur österreichischen Agrargeschichte (Leipzig: 1901), pp. 121 ff. also Broda, "Zur Frage der Konjunktur im und nach dem Kriege," Archiv für Sozialwissenschaft, vol. 45, pp. 40 ff.; also Rosenberg, Valutafragen (Vienna: 1917), pp. 14 ff.
The wealth of Germany and of German-Austria was above all an abundance of capital. One may estimate the riches of the soil and the natural resources of our country ever so high; yet one must still admit that there are other countries that are more richly endowed by nature, whose soil is more fruitful, whose mines are more productive, whose water power is stronger, and whose territories are more easily accessible because of location relative to the sea, mountain ranges, and river courses. The advantages of the German national economy rest not on the natural factor but on the human factor of production and on a historically given head start. These advantages showed themselves in the relatively great accumulation of capital, mainly in the improvement of lands used for agriculture and forestry and in the abundant stock of produced means of production of all kinds, of streets, railroads, and other means of transportation, of buildings and their equipment, of machines and tools, and, finally, of already produced raw materials and semifinished goods. This capital had been accumulated by the German people through long work; it was the tool that German industrial workers used for their work and from whose application they lived. From year to year this stock was increased by thrift.
The natural forces dormant in the soil are not destroyed by appropriate use in the process of production; in this sense they form an eternal factor of production. The amounts of raw materials amassed in the ground represent only a limited stock that man consumes bit by bit without being able to replace it in any way. Capital goods also have no eternal existence; as produced means of production, as semifinished goods, which they represent in a broader sense of the term, they are transformed little by little in the production process into consumption goods. With some, with so-called circulating capital, this takes place more quickly; with others, with so-called fixed capital, more slowly. But the latter also is consumed in production. Machines and tools also have no eternal existence; sooner or later they become worn out and unusable. Not only the increase but even the mere maintenance of the capital stock therefore presupposes a continual renewal of capital goods. Raw materials and semifinished goods which, changed into goods ready for use, are conveyed to consumption must be replaced by others; and machines and tools of all kinds worn out in the production process must be replaced by others to the extent that they wear out. Performing this task presupposes making a clear assessment of the extent of the wearing out and using up of productive goods. With means of production that always are to be replaced only with others of the same kind, this is not difficult. The road system of a country can be maintained by trying to hold the condition of the individual sections technically the same by ceaseless maintenance work, and it can be extended by repeatedly adding new roads or enlarging the existing ones. In a static society in which no changes in the economy take place, this method would be applicable to all means of production. In an economy subject to change, this simple method does not suffice for most means of production, for the used-up and worn-out means of production are replaced not by ones of the same kind but by others. Worn-out tools are replaced not by ones of the same kind but by better ones, if indeed the whole orientation of production is not changed and the replacement of capital goods consumed in a shrinking branch of production does not take place by installation of new capital goods in other branches of production that are being expanded or newly established. Calculation in physical units, which suffices for the primitive conditions of a stationary economy, must therefore be replaced by calculation of value in money.
Individual capital goods disappear in the production process. Capital as such, however, is maintained and expanded. That is not a natural necessity independent of the will of economizing persons, however, but rather the result of deliberate activity that arranges production and consumption so as at least to maintain the sum of value of capital and that allots to consumption only surpluses earned in addition. The precondition for that is the calculation of value, whose auxiliary means is accounting. The economic task of accounting is to test the success of production. It has to determine whether capital was increased, maintained, or diminished. The economic plan and the distribution of goods between production and consumption is then based on the results that it achieves.
Accounting is not perfect. The exactness of its numbers, which strongly impresses the uninitiated, is only apparent. The evaluation of goods and claims that it must work with is always based on estimates resting on the interpretation of more or less uncertain elements. Insofar as this uncertainty stems from the side of goods, commercial practice, approved by the norms of commercial legislation, tries to avoid it by proceeding as cautiously as possible; that is, it requires a low evaluation of assets and a high evaluation of liabilities. But the deficiencies of accounting also stem from the fact that evaluations are uncertain from the side of money, since the value of money is also subject to change. So far as commodity money, so-called full-value metallic money, is concerned, real life pays no regard to these deficiencies. Commercial practice, as well as the law, has fully adopted the naive business view that money is stable in value, that is, that the existing exchange relation between money and goods is subject to no change from the side of money.On this, cf. Mises, Theorie des Geldes und der Umlaufsmittel, pp. 237 ff. (English translation, pp. 268 ff.). Accounting assumes money to be stable in value. Only the fluctuations of credit and token-money currencies, so-called paper currencies, against commodity money were taken account of by commercial practice by setting up corresponding reserves and by write-offs. Unfortunately, German statist economics has paved the way for a change of perception on this point also. In nominalistic money theory, by extending the idea of the stability of value of metal money to all money as such, it created the preconditions for the calamitous effects of decline in the value of money that we now have to describe.
Entrepreneurs did not pay attention to the fact that the decline in the value of money now made all items in balance sheets become inaccurate. In drawing up balance sheets, they neglected to take account of the change in the value of money that had occurred since the last balance sheet. Thus it could happen that they regularly added a part of the original capital to the net revenue of the year, regarded it as profit, paid it out, and consumed it. The error which (in the balance sheet of a corporation) was made by not taking account of the depreciation of money on the liability side was only partly made up for by the fact that on the asset side also the components of wealth were not reported at a higher value. For this disregard of the rise in nominal value did not apply to circulating capital also, since for inventories that were sold, the higher valuation did appear; it was precisely this that constituted the inflationary extra profit of enterprises. The disregard of the depredation of money on the asset side remained limited to fixed investment capital and had as a consequence that in calculating depreciation, people used the smaller original amounts that corresponded to the old value of money. That enterprises often set up special reserves to prepare for reconversion to the peacetime economy could not, as a rule, make up for this.
The German economy entered the war with an abundant stock of raw materials and semifinished goods of all kinds. In peacetime, whatever of these stocks was devoted to use or consumption was regularly replaced. During the war the stocks were consumed without being able to be replaced. They disappeared out of the economy; the national wealth was reduced by their value. This could be obscured by the fact that in the wealth of the trader or producer, money claims appeared in their place—as a rule, war-loan claims. The businessman thought that he was as rich as before; generally he had sold the goods at better prices than he had hoped for in peacetime and now believed that he had become richer. At first he did not notice that his claims were being ever more devalued through the sinking of the value of money. The foreign securities that he possessed rose in price as expressed in marks or crowns. This too he counted as a gain.The nominalists and chartalists among monetary theorists naturally agreed with this layman's view: that upon the sale of foreign securities, the increased nominal value received because of the decline of the currency represented a profit; cf. Bendixen, Währungspolitik und Geldtheorie im Lichte des Weltkrieges (Munich: 1916), p. 37. That is probably the lowest level to which monetary theory could sink. If he wholly or partially consumed these apparent profits, then he diminished his capital without noticing it. It naturally would not have been possible to take account of these changes in accounting serving official purposes; this accounting had to be carried out in the legal currency. It would indeed have been possible, though, to base economic calculation on the recalculation of balance sheets and of profit-and-loss calculation in gold money.
The inflation thus drew a veil over capital consumption. The individual believed that he had become richer or had at least not lost, while in truth his wealth was dwindling. The state taxed these losses of individual economic units as "war profits" and spent the amounts collected for unproductive purposes. The public did not become tired, however, of concerning itself about the large war profits, which, in good part, were no profits at all.
All fell into ecstasy. Whoever took in more money than earlier—and that was true of most entrepreneurs and wage earners and, finally, with the further progress of the depreciation of money, of all persons except capitalists receiving fixed incomes—was happy about his apparent profits. While the entire economy was consuming its capital and while even stocks of goods ready for consumption held in individual households were dwindling, all were happy about prosperity. And to cap it all, economists began to undertake profound investigations into its causes.
Rational economy first became possible when mankind became accustomed to the use of money, for economic calculation cannot dispense with reducing all values to one common denominator. In all great wars monetary calculation was disrupted by inflation. Earlier it was the debasement of coin; today it is paper-money inflation. The economic behavior of the belligerents was thereby led astray; the true consequences of the war were removed from their view. One can say without exaggeration that inflation is an indispensable intellectual means of militarism. Without it, the repercussions of war on welfare would become obvious much more quickly and penetratingly; war-weariness would set in much earlier.
Today is too soon to survey the entire extent of the material damage that the war has brought to the German people. Such an attempt is bound in advance to start from the conditions of the economy before the war. Even for that reason alone it must remain incomplete. For the dynamic effects of the World War on the economic life of the world cannot thus be considered at all, since we lack all possibility of surveying the entire magnitude of the loss that the disorganization of the liberal economic order, the so-called capitalistic system of national economy, entails. Nowhere do opinions diverge so much as on this point. While some express the view that the destruction of the capitalistic apparatus of production opens the way for an undreamed-of development of civilization, others fear from it a relapse into barbarism.
But even if we disregard all that, we should, in judging the economic consequences of the World War for the German people, in no way limit ourselves to taking account only of war damages and war losses that have already actually appeared. These losses of wealth, which in and for themselves are immense, are outweighed by disadvantages of a dynamic nature. The German people will remain economically confined to their inadequate territory of settlement in Europe. Millions of Germans who previously earned their bread abroad are being compulsorily repatriated. Moreover, the German people have lost their considerable capital investment abroad. Beyond that, the basis of the German economy, the processing of foreign raw materials for foreign consumption, has been shattered. The German people are thereby being made into a poor people for a long time.
The position of the German-Austrians is turning out still more unfavorable in general than the position of the German people. The war costs of the Habsburg Empire have been borne almost completely by the German-Austrians. The Austrian half of the Empire has contributed in a far greater degree than the Hungarian half of the Empire to the outlays of the Monarchy. The contributions that were incumbent on the Austrian half of the Empire were made, furthermore, almost exclusively by the Germans. The Austrian tax system laid the direct taxes almost exclusively on the industrial and commercial entrepreneurs and left agriculture almost free. This mode of taxation in reality meant nothing other than the overburdening of the Germans with taxes and the exemption of the non-Germans. Still more to be considered is that the war loans were subscribed to almost entirely by the German population of Austria and that now, after the dissolution of the state, the non-Germans are refusing any contribution toward interest payments and amortization of the war loans. Moreover, the large German holding of money claims on the non-Germans has been greatly reduced by the depreciation of money. The very considerable ownership by German-Austrians of industrial and trade enterprises and also of agricultural properties in non-German territories, however, is being expropriated partly by nationalization and socialization measures, partly by the provisions of the peace treaty.
There were three ways available to cover the costs that the State Treasury incurred in the war.
The first way was confiscating the material goods needed for waging war and drafting the personal services needed for waging war without compensation or for inadequate compensation. This method seemed the simplest, and the most consistent representatives of militarism and socialism resolutely advocated employing it. It was used extensively in drafting persons into actually waging war. The universal military-service obligation was newly introduced in many states during the war and in others was substantially extended. That the soldier received only a trifling compensation for his services in relation to the wages of free labor, while the worker in the munitions industry was highly paid and while the possessors of expropriated or confiscated material means of war received an at least partially corresponding compensation, has rightly been called a striking fact. The explanation for this anomaly may be found in the fact that only a few people enlist today even for the highest wages and that in any case prospects of putting together any army of millions on the basis of enlistments would not be very good. In relation to the immense sacrifices that the state demands of the individual through the blood tax, it seems rather incidental whether it compensates the soldier more or less abundantly for the loss of time that he suffers from his military-service obligation. In the industrial society there is no appropriate compensation for war services; In such a society they have no price at all; they can be demanded only compulsorily, and then it is surely of slight significance whether they are paid for more generously or at the laughably low rates at which a man was compensated in Germany. In Austria the soldier at the front received a wage of 16 heller and a field supplement of 20 heller, 36 heller a day in all!And, moreover, the troops that had to fight through the fearful battles in the Carpathians and in the swamps of the Sarmatian plain, in the high mountains of the Alps, and in the Karst were poorly supported and inadequately clothed and armed! That reserve officers, even in the continental states, and that the English and American troops received a higher compensation is explained by the fact that a peacetime wage rate had been established for officer service in the continental states and for all military service in England and America which had to be taken as a point of departure in the war. But however high or however low the compensation of the warrior may be, it is never to be regarded as a full compensation for the compulsorily recruited man. The sacrifice that is demanded of the soldier serving by compulsion can be compensated only with intangible values, never with material ones.From the political point of view it was a grave mistake to follow completely different principles in the compensation of the officer and the enlisted man and to pay the soldier at the front worse than the worker behind the lines. That contributed much to demoralizing the army!
In other respects the uncompensated expropriation of war material was scarcely considered. By its very nature alone it could occur only with regard to goods on hand, in individual economic units in sufficient quality at the beginning of the war, but not also where producing new goods was concerned.
The second way available to the state for acquiring resources was introducing new taxes and raising already existing taxes. This method too was used everywhere as much as possible during the war. The demand was made from many sides that the state should try, even during the war, to cover the total war costs by taxes; in that connection reference was made to England, which was said to have followed this policy in earlier wars. It is true that England covered the costs of smaller wars that were only insignificant in relation to its national wealth in greatest part by taxes during the war itself. In the great wars that England waged, however, this was not true, neither in the Napoleonic Wars nor in the World War. If one had wanted immediately to raise such immense sums as this war required entirely by taxation without incurring debt, then, in assessing and collecting taxes, one would have had to put aside regard for justice and uniformity in the distribution of tax burdens and take from where it was possible to take at the, moment. One would have had to take everything from the owners of movable capital (not only from large owners but also from small ones, e.g., savings-bank depositors) and on the other hand leave the owners of real property more or less free.
If, however, the high war taxes were assessed uniformly (for they would have had to be very high if they were fully to cover each year the war costs incurred in the same year), then those who had no cash for paying taxes would have had to acquire the means for paying by going into debt. Landowners and owners of industrial enterprises would then have been compelled to incur debt or even to sell part of their possessions. In the first case, therefore, not the state itself but rather many private parties would have had to incur debts and thereby obligate themselves to interest payments to the owners of capital. However, private credit is in general dearer than public credit. Those land and house owners would therefore have had to pay more interest on their private debts than they had to pay indirectly in interest on the state debt. If, however, they had found themselves forced to sell a smaller or larger part of their property in order to pay taxes, then this sudden offer of a large part of real property for sale would have severely depressed prices, so that the earlier owners would have suffered a loss; and the capitalists who at this moment had had cash at their disposal would have gained a profit by buying cheaply. That the state did not fully cover the costs of the war by taxes but rather in largest part by incurring state debt, whose interest was paid from the proceeds of taxes, therefore does not signify, as is often assumed, a favoring of the capitalists.Cf. Dietzel, Kriegssteuer oder Kriegsanleihe? (Tübingen: 1912), pp.13 ff.
One now and then hears the interpretation expressed that financing war by state loans signifies shifting the war costs from the present onto following generations. Many add that this shifting is also just, since, after all, the war was being waged not only in the interest of the present generation but also in the interest of our children and grandchildren. This interpretation is completely wrong. War can be waged only with present goods. One can fight only with weapons that are already on hand; one can take everything needed for war only from wealth already on hand. From the economic point of view, the present generation wages war, and it must also bear all material costs of war. Future generations are also affected only insofar as they are our heirs and we leave less to them than we would have been able to leave without the war's intervening. Whether the state now finances the war by debts or otherwise ran change nothing about this fact. That the greatest part of the war costs was financed by state loans in no way signifies a shifting of war burdens onto the future but only a particular principle of distributing the war costs. If, e.g., the state had to take half of his wealth from each citizen to be able to pay for the war financially, then it is fundamentally a matter of indifference whether it does so in such a way that it imposes a onetime tax on him of half of his wealth or takes from him every year as a tax the amount that corresponds to interest payments on half of his wealth. It is fundamentally a matter of indifference to the citizen whether he has to pay 50,000 crowns as tax one time or pay the interest on 50,000 crowns year in, year out. This becomes of greater significance, however, for all those citizens who would not be able to pay the 50,000 crowns without incurring debt, those who would first have to borrow the share of tax falling on them. For they would have to pay more interest on these loans that they take out as private parties than the state, which enjoys the cheapest credit, pays to its creditors. If we set this difference between the dearer private credit and the cheaper state credit at only one percentage point, this means, in our example, a yearly saving of 500 crowns for the taxpayer. If year after year he has to pay his contribution to interest on his share of the state debt he saves 500 crowns in comparison with the amount that he would have had to pay every year as interest on a private loan that would have enabled him to pay the temporary high war taxes.
The more socialist thinking gained strength in the course of the war, the more were people bent on covering the war costs by special taxes on property.
The idea of subjecting additional income and the growth of property obtained during the war to special progressive taxation need not, fundamentally, be socialistic. In and of itself the principle of taxation according to ability to pay is not socialistic. It cannot be denied that those who achieved a higher income in the war than in peacetime or had increased their property were ceteris paribus more able to pay than those who did not succeed in increasing their income or their property. Moreover, one can quite rule out the question of how far these nominal increases in wealth and income were to be regarded as real increases in income and wealth and whether it was not a question here merely of nominal increases in amounts expressed in money in consequence of the decline in the value of money. Someone who had an income of 10,000 crowns before the war and increased it during the war to 20,000 crowns doubtless found himself in a more favorable position than someone who had remained with his prewar income of 10,000 crowns. In this disregard of the value of money, which only goes without saying in view of the general tenor of German and Austrian legislation, there did lie, to be sure, a deliberate disadvantaging of movable capital and a deliberate preference for landowners, especially farmers.
The socialistic tendencies of war-profit taxation came to light above all in their motives. War-profit taxes are supported by, the view that all entrepreneurial profit represents robbery from the community as a whole and that by rights it should be entirely taken away. This tendency comes to light in the scale of the rates, which more and more approach complete confiscation of the entire increase in property or income and doubtless finally will reach even this goal set for them. For one should indeed suffer no illusion about the fact that the unfavorable opinion of entrepreneurial income manifested in these war taxes is not attributable to wartime conditions alone and that the line of argument used for the war taxes—that in this time of national distress every increase in wealth and every increase in income is indeed unethical—can also be maintained in the period after the war with the same justification, even if with differences in detail.
Socialistic tendencies are also quite clear in the idea of a one-time capital levy. The popularity that the slogan about a one-time capital levy enjoys, a popularity so great that it makes any serious discussion of its appropriateness quite impossible, can be explained only by the entire population's aversion to private property. Socialists and liberals will answer quite differently the question whether a one-time property tax is preferable to a current one. One can refer to the fact that the current, yearly recurring, property tax offers the advantage in comparison with the one-time property tax that it does not remove capital goods from the disposal of the individual (quite apart from the fact that it is fairer and more uniform, since it permits errors made in one year's assessment to be corrected the next year and that it is independent of the accident of possession and evaluation of property at a particular moment because it deals with property year in and year out according to the current amount of wealth that it constitutes). When someone operates an enterprise with a capital of his own of 100,000 marks, then it is not at all a matter of indifference to him whether he has to pay an amount of 50,000 marks at one time as a property tax or pay each year only the amount corresponding to the interest that the state has to pay on a debt of 50,000 marks. For it is to be expected that with this capital beyond the amount that the state would have to demand from him for paying interest on the 50,000 marks, he could earn a profit that he could then keep. This is not what is decisive for the liberal's position, however, but rather the social consideration that by the one-time capital levy the state would transfer capital out of the hands of entrepreneurs into the hands of capitalists and lenders. If the entrepreneur is to carry on his business after the capital levy on the same scale as before it, then he must acquire the missing amount by obtaining credit, and as a private party he will have to pay more interest than the state would have had to pay. The consequence of the capital levy will therefore be a greater indebtedness of the enterprising strata of the population to the non-enterprising capitalists, who, as a result of the reduction of the war debt, will have exchanged part of their claims on the state for claims on private parties.
The socialists, of course, go still further. They want to use the capital levy not only for lightening the burden of war debts—many of them want to get rid of war debts in a simple manner by state bankruptcy—but they demand the capital levy in order to give the state shares of ownership in economic enterprises of all kinds, in industrial corporations, in mining, and in agricultural estates. They campaign for it with the slogan about the state's and society's sharing in the profit of private enterprises.Cf. above all Goldscheid, Staatssozialismus oder Staatskapitalismus, fifth edition (Vienna: 1917); idem., Sozialisierung der Wirtschaft oder Staatsbankerott (Vienna: 1919). As if the state were not sharing in the profits of all enterprises through tax legislation anyway, so that it does not first need a civil-law title to draw profit from the enterprises. Today the state shares in the profits of enterprises without being obliged to cooperate at all in the management of the production process and without being exposed to harm in any way by possible losses of the enterprise. If, however, the state owns shares in all enterprises, it will also share in losses; moreover, it will even be forced to concern itself with the administration of individual businesses, just that, however, is what the socialists want.
The clearer it had to become in the course of the war that the Central Powers were bound to be finally defeated in the war of starving out, the more energetically were references made from various sides to the necessity of preparing better for the next war. The economy would have to be reshaped in such a way that Germany would be capable of withstanding even a war of several years. It would have to be able to produce inside the country everything required for feeding its population and for equipping and arming its armies and fleets in order to be no longer dependent on foreign countries in this respect.
No long discussions are needed to show that this program cannot be carried out. It cannot be carried out because the German Reich is too densely populated for all foodstuffs needed by its population to be produced at home without use of foreign raw materials and because a number of raw materials needed for production of modern war material just do not exist in Germany. The theorists of the war economy commit a fallacy when they try to prove the possibility of an autarkic German economy by reference to the usability of substitute materials. One supposedly must not always use foreign products; there are domestic products scarcely inferior to foreign ones in quality and cheapness. For the German spirit, which has already famously distinguished itself in applied science, a great task arises here which it will solve splendidly. The efforts previously made in this field have led to favorable results. We are said already to be richer now than we were before, since we have learned how to exploit better than before materials that earlier were neglected or were used for less important purposes or not fully used.
The error in this line of thinking is obvious. It may well be true that applied science is far from yet having spoken the last word, that we may still count on improvements in technology that will be no less significant than the invention of the steam engine and of the electric motor. And it may happen that one or the other of these inventions will find the most favorable preconditions for its application precisely on German soil, that it will perhaps consist precisely in making useful a material that is abundantly available in Germany. But then the significance of this invention would lie precisely in shifting the locational circumstances of a branch of production, in making the productive conditions of a country that were previously to be regarded as less favorable more favorable under the given circumstances. Such shifts have often occurred in history and will occur again and again. We will hope that they occur in the future in such a way that Germany will become, to a higher degree than at present, a Country of more favorable conditions of production. If that should happen, then many burdens will be lifted from the German people.
Yet these changes in the relative pattern of conditions of production must be sharply distinguished from introducing the use of substitute materials and producing goods under worse conditions of production. One can of course usse linen instead of cotton and wooden soles instead of leather soles. However, in the former case one has replaced a cheaper by a dearer material, that is, by one in whose production more costs must be incurred, and in the latter case a better by a less usable material. That means, however, that the meeting of needs becomes worse. That we use paper sacks instead of jute sacks and iron tires on vehicles instead of rubber tires, that we drink "war" coffee instead of real coffee, shows that we become poorer, not richer. And if we now carefully put to use garbage that we had earlier thrown away, then this makes us richer just as little as if we obtained copper by melting works of art.Cf. Dietzel, Die Nationalisierung der Kriegsmilliarden (Tübingen: 1919), pp. 31 ff. To be sure, living well is not the highest good; and there may be reasons for peoples as well as individuals to prefer a life of poverty to a life of luxury. But then let that be said openly without taking refuge in artificial theorems that try to make black out of white and white out of black; then let no one seek to obscure the clear case by allegedly economic arguments.Not only economists have been active in this direction; still more has been done by technicians, but most by physicians. Biologists who, before the war, declared the nutrition of the German industrial worker to be inadequate suddenly discovered during the war that food poor in protein is especially wholesome, that fat consumption in excess of the quantity permitted by the authorities is damaging to health, and that a limitation of the consumption of carbohydrates has little significance.
It should not be disputed that war needs can beget and, in fact, have begotten many useful inventions. How much they represent a lasting enrichment of the German economy can be known only later.
Only those proponents of the idea of autarky who subordinate all other goals to the military one are thinking consistently. He who sees all values as realized only in the state and thinks of the state above all as a military organization always ready for war must demand of the economic policy of the future that it strive, pushing all other considerations aside, to organize the domestic economy for self-sufficiency in case of war. Regardless of the higher costs that thereby arise, production must be guided into the channels designated as most suitable by the economic general staff. If the standard of living of the population thereby suffers, well, in view of the high objective to be attained, that does not count at all. Not the standard of living is the greatest happiness of people, but fulfillment of duty.
But there is a grave error in this line of thinking also. Admittedly it is possible, if one disregards costs, to produce within the country everything necessary for waging war. But in war it is important not only that weapons and war material just be on hand but also that they be available in sufficient quantity and in best quality. A people that must produce them under more unfavorable condition of production, that is, with higher costs, will go into the field worse provisioned, equipped, and armed than its opponents. Of course, the inferiority of material supplies can to a certain extent be offset by the personal excellence of the combatants. But we have learned anew in this war that there is a limit beyond which all bravery and all sacrifice are of no use.
From recognition that efforts for autarky could not be carried through, there arose the plan for a future state stockpiling system. In preparation for the possible return of a war of starvation, the state must build up stockpiles of all important raw materials that cannot be produced at home. In that connection a large stock of grain was also thought of, and even stocks of fodder.Cf. Hermann Levy, Vorratswirtschaft und Volkwirtschaft (Berlin: Verlag von Julius,Springer), 1915, pp. 9 ff.; Naumann, Mitteleuropa; pp. 149 f; Diehl, Deutschland als geschlossener Handelstaat im Weltkrieg (Stuttgart: 1916), pp. 28 f.
From the economic standpoint, the realization of these proposals does not seem inconceivable. From the political standpoint, though, it is quite hopeless. It is scarcely to be assumed that other nations would calmly look on at the piling up of such war stocks in Germany and not, for their part, resort to countermeasures. To foil the whole plan, they indeed need only watch over the exports of the materials in question and each time permit the export only of such quantities as do not exceed the current demand.
What has quite incorrectly been called war economy is the economic preconditions for waging war. All waging of war is dependent on the state of the division of labor rached at the time. Autarkic economies can go to war against each other; the individual parts of a labor and trade community can do so, however only insofar as they are in a position to go back to autarky. For that reason, with the progress of the division of labor we see the number of wars and battles diminishing ever more and more. The spirit of industrialism, which is indefatigably active in the development of trade relations, undermines the warlike spirit. The great steps forward that the world economy made in the age of liberalism considerably narrowed the scope remaining for military actions. When those strata of the German people who had the deepest insight into the world economic interdependence of the individual national economies doubted whether it was still at all possible that a war could develop and, if that should happen at all, expected at most a war that would end quickly, they thereby showed better understanding of the realities of life than those who indulged in the delusion that even in the age of world trade one could practice the political and military principles of the Thirty Years' War.
When one examines the catchword about war economy for its content, it turns out that it contains nothing other than the demand to turn economic development back to a stage more favorable for waging war than the 1914 stage was. It is a question only of how far one should go in doing that. Should one go back only as far as to make warfare between great states possible, or should one try to make warfare possible between individual parts of a country and between city and countryside also? Should only Germany be put in a position to wage war against the entire remaining world, or should it also be made possible for Berlin to wage war against the rest of Germany?
Whoever on ethical grounds wants to maintain war permanently for its own sake as a feature of relations among peoples must clearly realize that this can happen only at the cost of the general welfare, since the economic development of the world would have to be turned back at least to the state of the year 1830 to realize this martial ideal even only to some extent.
So-called war socialism has been regarded as sufficiently argued for and justified with reference mostly to the emergency created by the war. In war, the inadequate free economy supposedly cannot be allowed to exist any longer; into its place must step something more perfect, the administered economy. Whether or not one should return after the war to the "un-German" system of individualism was said to be another question that could be answered in different ways.
This argumentation for war socialism is just as inadequate as it is characteristic of the political thinking of a people that was hampered in every free expression of views by the despotism of the war party. It is inadequate because it could really be a powerful argument only if it had been established that the organized economy is capable of yielding higher outputs than the free economy; that, however, would first have to be proved. For the socialists, who advocate the socialization of the means of production anyway and want to abolish the anarchy of production thereby, a state of war is not first required to justify socializing measures. For the opponents of socialism, however, the reference to the war and its economic consequences is also no circumstance that could recommend such measures. For anyone of the opinion that the free economy is the superior form of economic activity, precisely the need created by the war had to be a new reason demanding that all obstacles standing in the way of free competition be set aside. War as such does not demand a [centrally] organized economy, even though it may set certain limits in several directions to the pursuit of economic interests. In the age of liberalism, even a war of the extent of the World War (so far as such a war would have been thinkable at all in a liberal and therefore pacifistic age) would in no way have furthered tendencies toward socialization.
The most usual argument for the necessity of socialist measures was the argument about being besieged. Germany and its allies were said to be in the position of a besieged fortress that the enemy was trying to conquer by starving it out. Against such a danger, all measures usual in a besieged city had to be applied. All stocks had to be regarded as a mass under the control of a unified administration that could be drawn on for equally meeting the needs of all, and so consumption had to be rationed.
This line of argument starts from indisputable facts. It is clear that starving out (in the broadest sense of the term), which in the history of warfare had generally been used only as a tactical means, was used in this war as a strategic means.One war in which starving the opponent out was used as a strategic means was the Herero uprising in German Southwest Africa in 1904; in a certain sense the Civil War in North America and the last Boer War can also count here. But the conclusions drawn from the facts were mistaken. Once one thought that the position of the Central Powers was comparable to that of a besieged fortress, one would have had to draw the only conclusions that could be drawn from the military point of view. One would have had to remember that a besieged place, by all experience of military history, was bound to be starved out and that its fall could be prevented only by help from outside. The program of "hanging on" would then have made sense only if one could count on time's working for the besieged side. Since, however, help from outside could not be expected, one should not have shut one's eyes to the knowledge that the position of the Central Powers was becoming worse from day to day and that it was therefore necessary to make peace, even if making peace would have imposed sacrifices that did not seem justified by the tactical position of the moment. For the opponents would still have been ready to make concessions if they, for their part, had received something in return for the shortening of the war.
It cannot be assumed that the German General Staff had overlooked this. If it nevertheless clung to the slogan about "hanging on," that reflected not so much a misunderstanding of the military position as the hope for a particular psychic disposition of the opponent. The Anglo-Saxon nation of shopkeepers would get tired sooner than the peoples of the Central Powers, who were used to war. Once the English, also, felt the war, once they felt the satisfaction of their needs being limited, they would turn out to be much more sensitive than the Central Europeans. This grave error, this misunderstanding of the psyche of the English people, also led to adoption first of limited and then of unlimited submarine warfare. The submarine war rested on still other false calculations, on an overestimation of one's own effectiveness and on an underestimation of the opponent's defense measures, and finally on a complete misunderstanding of the political preconditions of waging war and of what is permitted in war. But it is not the task of this book to discuss these questions. Settling accounts with the forces that pushed the German people into this suicidal adventure may be left to more qualified persons.
But quite apart from these deficiencies, which more concern the generally military side of the question, the theory of siege socialism also suffers from serious defects concerning economic policy.
When Germany was compared with a besieged city, it was overlooked that this comparison was applicable only with regard to those goods that were not produced at home and also could not be replaced by goods producible at home. For these goods, apart from luxury articles, the rationing of consumption was in any case indicated at the moment when, with the tightening of the blockade and with the entry of Italy and Rumania into the war, all import possibilities were cut off. Until then it would have been better, of course, to allow full free trade, at least for the quantities imported from abroad, in order not to reduce the incentive to obtain them in indirect ways. It was mistaken in any case, as happened at the beginning of the war, especially in Austria, to resist price rises of these goods by penal measures. If the traders had held the goods back with speculative intent to achieve price increases, this would have limited consumption effectively right at the beginning of the war. The limitation of price increases was bound, therefore, to have downright harmful consequences. For those goods that could in no way be produced at home and also could not be replaced by substitutes producible at home, the state would better have set minimum rather than maximum prices to limit consumption as much as possible.
Speculation anticipates future price changes; its economic function consists in evening out price differences between different places and different points in time and, through the pressure which prices exert on production and consumption, in adapting stocks and demands to each other. If speculation began to exact higher prices at the beginning of the war, then it did indeed temporarily bring about a rise of prices beyond the level that would have been established in its absence. Indeed, since consumption would also thus be limited, the stock of goods available for use later in the war was bound to rise and thus would have led to a moderation of prices at that later time in relation to the level that was bound to have been established in the absence of speculation. If this indispensable economic function of speculation was to be excluded, something else should have immediately been put in its place, perhaps confiscation of all stocks and state management and rationing. In no way, however, was it suitable simply to be content with penal intervention.
When the war broke out, citizens expected a war lasting about three to six months. The merchant arranged his speculation accordingly. If the state had known better, it would have had the duty of intervening. If it thought that the war would already be ended in four weeks, then it could have intervened to keep price increases from being larger than seemed necessary for bringing stocks into harmony with demand. For that, too, fixing maximum prices would not have sufficed. If, however, the state thought that the war would last far longer than civilians thought, then it should have intervened, either by fixing minimum prices or by purchase of goods for the purpose of state stockpiling. For there was a danger that speculative traders, not familiar with the secret intentions and plans of the General Staff, would not immediately drive up prices to the extent necessary to assure the distribution of the small stocks on hand over the entire duration of the war. That would have been a case in which the intervention of the state in prices would have been thoroughly necessary and justified. That that did not happen is easy to explain. The military and political authorities were informed least of all about the prospective duration of the war. For that reason all their preparations failed, military as well as political and economic ones.
With regard to all those goods that even despite the war could be produced in territory of the Central Powers free of the enemy, the siege argument was already totally inapplicable. It was dilettantism of the worst sort to set maximum prices for these goods. Production could have been stimulated only by high prices; the limitation of price increases throttled it. It is hardly astonishing that state compulsion for cultivation and production failed.
It will be the task of economic history to describe in detail the stupidities of the economic policy of the Central Powers during the war. At one time, for example, the word was given to reduce the livestock by increased slaughtering because of a shortage of fodder; then prohibitions of slaughtering were issued and measures taken to promote the raising of livestock. Similar planlessness reigned in all sectors. Measures and countermeasures crossed each other until the whole structure of economic activity was in ruins.
The most harmful effect of the policy of siege socialism was the cutting off of districts with surpluses of agricultural production from territories in which consumption exceeded production. It is easy to understand why the Czech district leaders in the Sudetenland, whose hearts were on the side of the Entente, sought as much as possible to limit the export of foodstuff's out of the districts under their leadership to the German parts of Austria and, above all, to Vienna. It is less understandable that the Vienna government put up with this and that it also put up with its imitation by the German districts and also with the fact that Hungary shut itself off from Austria, so that famine was already prevailing in Vienna while abundant stocks were still on hand in the countryside and in Hungary. Quite incomprehensible, however, is the fact that the same policy of regional segmentation took hold in the German Reich also and that the agrarian districts there were permitted to cut themselves off from the industrial ones. That the population of the big cities did not rebel against this policy can be explained only by its being caught up in statist conceptions of economic life, by its blind belief in the omnipotence of official intervention, and by its decades-long ingrained mistrust of all freedom.
While statism sought to avoid the inevitable collapse, it only hastened it.
The economic aspects of the World War are unique in history in kind and in degree; nothing similar ever existed before nor ever will exist again. This combination of developments was in general conditioned both by the contemporary stage of development of the division of labor and state of war technique, but in particular by both the grouping of the belligerent powers and the particular features of their territories as far as geography and technique of production were concerned. Only the conjunction of a large number of preconditions could lead to the situation that was quite unsuitably summarized in Germany and Austria under the catchword "war economy." No opinion need be expressed whether this war will be the last one or whether still others will follow. But a war which puts one side in an economic position similar to that in which the Central Powers found themselves in this war will never be waged again. The reason is not only that the configuration of economic history of 1914 cannot return but also that no people can ever again experience the political and psychological preconditions that made a war of several years' duration under such circumstances still seem promising to the German people.
The economic side of the World War can scarcely be worse misunderstood than in saying that in any case "the understanding of most of these phenomena will not be furthered by a good knowledge of the conditions of the peacetime economies of 1913 but rather by adducing those of the peacetime economies of the fourteenth to eighteenth centuries or the war economy of Napoleonic times."Cf. Otto Neurath, "Aufgabe, Methode und Leistungsähigheit der Kriegswirtschaftslehre," Archiv für Sozialwissenschaft und Sozialpolitik, vol. 44, 1917/1918, p. 765; cf., on the contrary, the discussion of Eulenburg, "Die wissenschaftliche Behandlung der Kriegswirtschaft," ibid., pp. 775-785. We can best see how much such an interpretation focuses on superficialities and how little it enables us to grasp the essence of the phenomena if we imagine, say, that the World War had been waged ceteris paribus at the stage of the international division of labor reached 100 years before. It could not have become a war of starving out then; yet that was precisely its essence. Another grouping of the belligerent powers would also have resulted in quite a different picture.
The economic aspects of the World War can only be understood if one first keeps in view their dependence on the contemporary development of world economic relations of the individual national economies, in the first place of Germany's and Austria-Hungary's and then of England's also.
Economic history is the development of the division of labor. It starts with the self-contained household economy of the family, which is self-sufficient, which itself produces everything that it uses or consumes. The individual households are not economically differentiated. Each one serves only itself. No economic contact, no exchange of economic goods, occurs.
Recognition that work performed under the division of labor is more productive than work performed without the division of labor puts an end to the isolation of the individual economies. The trade principle, exchange, links the individual proprietors together. From a concern of individuals, the economy becomes a social matter. The division of labor advances step by step. First limited to only a narrow sphere, it extends itself more and more. The age of liberalism brought the greatest advances of this sort. In the first half of the nineteenth century the largest part of the population of the European countryside, in general, still lived in economic self-sufficiency. The peasant consumed only foodstuffs that he himself had grown; he wore clothes of wool or linen for which he himself had produced the raw material, which was then spun, woven, and sewn in his household. He had built a house and farm buildings and maintained them himself, perhaps with the help of neighbors, whom he repaid with similar services. In the out-of-the-way valleys of the Carpathians, in Albania, and in Macedonia, cut off from the world, similar conditions still existed at the outbreak of the World War. How little this economic structure corresponds, however, to what exists today in the rest of Europe is too well known to require more detailed description.
The locational development of the division of labor leads toward a full world economy, that is, toward a situation in which each productive activity moves to those places that are most favorable for productivity; and in doing so, comparisons are made with all the production possibilities of the earth's surface. Such relocations of production go on continually, as, for example, when sheep-raising declines in Central Europe and expands in Australia or when the linen production of Europe is displaced by the cotton production of America, Asia, and Africa.
No less important than the spatial division of labor is the personal kind. It is in part conditioned by the spatial division of labor. When branches of production are differentiated by locality, then personal differentiation of producers must also occur. If we wear Australian wool on our bodies and consume Siberian butter, then it is naturally not possible that the producer of the wool and of the butter are one and the same person, as once was the case. Indeed, the personal division of labor also develops independently of the spatial, as every walk through our cities or even only through the halls of a factory teaches us.
The dependence of the conduct of war on the stage of development of the spatial division of labor reached at the time does not in itself, even today, make every war impossible. Individual states can find themselves at war without their world economic relations being essentially affected thereby. A German-French war would have been bound to lead or could have led to an economic collapse of Germany just as little in 1914 as in 1870-71. But today it must seem utterly impossible for one or several states cut off from world trade to wage war against an opponent enjoying free trade with the outside world.
This development of spatial division of labor is also what makes local uprisings appear quite hopeless from the start. As late as the year 1882, the people around the Gulf of Kotor and the Herzegovinians could successfully rebel against the Austrian government for weeks and months without suffering shortages in their economic system, composed of autarkic households. In Westphalia or Silesia, an uprising that stretched only over so small a territory could already at that time have been suppressed in a few days by blocking shipments into it. Centuries ago, cities could wage war against the countryside; for a long time now that has no longer been possible. The development of the spatial division of labor, its progress toward a world economy, works more effectively for peace than all the efforts of the pacifists. Mere recognition of the worldwide economic linkage of material interests would have shown the German militarists the danger, indeed impossibility, of their efforts. They were so much caught up in their power-policy ideas, however, that they were never able to pronounce the peaceful term "world economy" otherwise than in warlike lines of thought. Global policy was for them synonymous with war policy, naval construction, and hatred of England.Especially characteristic of this tendency are the speeches and essays published by Schmoller, Sering, and Wagner under the auspices of the "Free Association for Naval Treaties" under the title Handels und Machtpolitik (Stuttgart; 1900), 2 volumes.
That economic dependence on world trade must be of decisive significance for the outcome of a campaign could naturally not also escape those who had occupied themselves for decades with preparation for war in the German Reich. If they still did not realize that Germany, even if only because of its economic position, could not successfully wage a great war with several great powers, well, two factors were decisive for that, one political and one military. Helfferich summarized the former in the following words, "The very position of Germany's borders as good as rules out the possibility of lengthy stoppage of grain imports. We have so many neighbors—first the high seas, then Holland, Belgium, France, Switzerland, Austria Russia—that it seems quite inconceivable that the many routes of grain import by water and by land could all be blocked to us at once. The whole world would have to be in alliance against us; however, to consider such a possibility seriously, even for a minute, means having a boundless mistrust in our foreign policy."Cf. Helfferich, Handelspolitik (Leipzig; 1901), p. 197; similarly Dietzel, "Weltwirtschaft und Volkswirtschaft,"Jahrbuch der Gehe-Stiftung, vol. 5 (Dresden: 1900), pp. 46 f.; Riesser, Finanzielle Kriegsbereitschaft und Kriegfuhrung (Jena; 1909), pp. 73 f. Bernhardi speaks of the necessity of taking measures to prepare ways during a German-English war "by which we can obtain the most necessary imports of foods and raw materials and at the same time export the surplus of our industrial products at least partially" (Deutschland und der nächste Krieg [Stuttgart: 19121, pp. 179 f.). He proposes making provisions for "a kind of commercial mobilization." What illusions about the political situation he thereby indulged in can best be seen from his thinking that in a fight against England (and France allied with it), we would "not stand spiritually alone, but rather all on the wide earthly sphere who think and feel freedom-oriented and self-confident will be united with us" (ibid., p. 187). Militarily, however, recalling the experiences of the European wars of 1859, 1866, and 1870-71, people believed that they had to reckon with a war lasting only a few months, even weeks. All German war plans were based on the idea of success in completely defeating France within a few weeks. Anyone who might have considered that the war would last long enough for the English and even the Americans to appear on the European continent with armies of millions would have been laughed down in Berlin. That the war would become a war of emplacements was not understood at all; despite the experiences of the Russo-Japanese war, people believed that they could end the European war in a short time by rapid offensive strikes.Modern war theory started with the view that attack is the superior method of waging war. It corresponds to the spirit of conquest-hungry militarism when Bernhardi argues for this: "Only attack achieves positive results; mere defense always delivers only negative ones." (Cf. Bernhardi, Vom heutigen Klieg [Berlin: 1912], vol. 2, p. 223.) The argumentation for the attack theory was not merely political, however, but was also based on military science. Attack appears as the superior form of fighting because the attacker has free choice of the direction, of the goal, and of the place of the operations, because he, as the active party, determines the conditions under which the fight is carried out, in short, because he dictates to the party under attack the rules of action. Since, however, the defense is tactically stronger in the front than the offense, the attacker must strive to get around the flank of the defender. That was old war theory, newly proved by the victories of Frederick II, Napoleon I, and Moltke and by the defeats of Mack, Gyulai, and Benedek. It determined the behavior of the French at the beginning of the war (Mulhouse). It was what impelled the German army administration to embark on the march through neutral Belgium in order to hit the French on the flank because they were unattackable in the front. His remembering the many Austrian commanders for whom the defensive had become misfortune drove Conrad in 1914 to open the campaign with goalless and purposeless offensives in which the flower of the Austrian army was uselessly sacrificed. But the time of battles of the old style, which permitted getting around the opponent's flank, was past on the great European theaters of war, since the massiveness of the armies and the tactics that had been reshaped by modern weapons and means of communication offered the possibility of arranging the armies in such a way that a flank attack was no longer possible. Flanks that rest on the sea or on neutral territory cannot be gotten around. Only frontal attack still remains, but it fails against an equally well armed opponent. The great breakthrough offensives in this war succeeded only against badly armed opponents, as especially the Russians were in 1915 and in many respects also the Germans in 1918. Against inferior troops a frontal attack could of rourse succeed even against equally good, even superior, weapons and armaments of the defender (twelfth battle of the Isonzo). Otherwise, the old tactics could be applied only in the battles of mobile warfare (Tannenberg and the Masurian Lakes in 1914 and individual battles in Galicia). To have misunderstood this has been the tragic fate of German militarism. The whole German policy was built on the theorem of the military superiority of attack; in war of emplacements the policy broke down with the theorem. The military calculations of the General Staff were just as false as its economic and political ones.
The assertion is not true, therefore, that the German Empire had neglected to make the necessary economic preparations for war. It simply had counted on a war of only short duration; for a short war, however, no economic provisions had to be made beyond those of finance and credit policy. Before the outbreak of the war the idea would no doubt have been called absurd that Germany could ever be forced to fight almost the whole rest of the world for many years in alliance only with Austria-Hungary (or more exactly in alliance with the German-Austrians and the Magyars, for the Slavs and Rumanians of the Monarchy stood with their hearts and many of them also with weapons on the side of the enemy), Turkey, and Bulgaria. And in any case one would have had to recognize, after calm reflection, that such a war neither could have been waged nor should have been waged and that if an unspeakably bad policy had let it break out, then one should have tried to conclude peace as quickly as possible, even at the price of great sacrifices. For, indeed, there never could be any doubt that the end could be only a fearful defeat that would deliver the German people defenseless to the harshest terms of its opponents. Under such circumstances a quick peace would at least have spared goods and blood.
That should have been recognized at once even in the first weeks of the war and the only possible implications then drawn. From the first days of the war—at the latest, however, after the defeats on the Marne and in Galicia in September 1914—there was only one rational goal for German policy: peace, even if at the price of heavy sacrifices. Let us quite disregard the fact that until the summer of 1918 it was repeatedly possible to obtain peace under halfway acceptable conditions, that the Germans of Alsace, the South Tyrol, the Sudetenland, and the eastern provinces of Prussia could probably have been protected from foreign rule in that way; even then, if continuation of the war might have afforded a slightly more favorable peace, the incomparably great sacrifices that continuation of the war required should not have been made. That this did not happen, that the hopeless, suicidal fight was continued for years—political considerations and grave errors in the military assessment of events were primarily responsible for that. It was an incomprehensible delusion to speak of the possibility of a victorious peace when German failure had already been settled from the time of the battle of the Marne. But the Junker party preferred to let the German people be entirely ruined rather than give up its rule even one day earlier. But delusions about economic policy also contributed much.
Right at the beginning of the war a catchword turned up whose unfortunate consequences cannot be completely overlooked even today: the verbal fetish "war-economy." With this term all considerations were beaten down that could have led to a conclusion advising against continuing the war. With this one term all economic thought was put aside; ideas carried over from the "peacetime economy" were said not to hold for the "war economy," which obeyed other laws. Armed with this catchword, a few bureaucrats and officers who had gained full power by exceptional decrees substituted "war socialism" for what state socialism and militarism had still left of the free economy. And when the hungry people began to grumble, they were calmed again by reference to the "war economy." If an English cabinet minister had voiced the watchword "business as usual" at the beginning of the war, which however, could not be continued in England as the war went on, well, people in Germany and Austria took pride in traveling paths as new as possible. They "organized" and did not notice that what they were doing was organizing defeat.
The greatest economic achievement that the German people accomplished during the war, the conversion of industry to war needs, was not the work of state intervention; it was the result of the free economy. If, also, what was accomplished in the Reich in this respect was much more significant in absolute quantity than what was done in Austria, it should not be overlooked that the task which Austrian industry had to solve was still greater in relation to its powers. Austrian industry not only had to deliver what the war required beyond peacetime provisions; it also had to catch up on what had been neglected in peacetime. The guns with which the Austro-Hungarian field artillery went to war were inferior; the heavy and light field howitzers and the mountain cannons were already out of date at the time of their introduction and scarcely satisfied the most modest demands. These guns came from state factories; and now private industry, which in peacetime had been excluded from supplying field and mountain guns and could supply such material only to China and Turkey, not only had to produce the material for expanding the artillery; in addition, it also still had to replace the unusable models of the old batteries with better ones. Things were not much different with the clothing and shoeing of the Austro-Hungarian troops. The so-called bluish-gray—more correctly, light blue—fabrics proved to be unusable in the field and had to be replaced as rapidly as possible by gray ones. The supplying of the army with boots, which in peacetime had been done while the mechanized shoe industry that worked for the market was excluded, had to be turned over to the factories previously shunned by the quartermasters.
The great technical superiority that the armies of the Central Powers had achieved in the spring and summer of 1915 in the eastern theater of the war and that formed the chief basis of the victorious campaign from Tarnów and Gorlice to deep into Volhynia was likewise the work of free industry, as were the astonishing achievements of German and also of Austrian labor in the delivery of war material of all kinds for the western and the Italian theaters of war. The army administrations of Germany and Austro-Hungary knew very well why they did not give in to the pressure for state ownership of the war-supplying enterprises. They put aside their outspoken preference for state enterprises, which would have better suited their world view, oriented toward power policy and state omnipotence, because they knew quite well that the great industrial tasks to be accomplished in this area could be accomplished only by entrepreneurs operating on their own responsibility and with their own resources. War socialism knew very well why it had not been entrusted with the armaments enterprises right in the first years of the war.
- The Nation as a Speech CommunityThe concepts nation and nationality are relatively new in the sense in which we understand them. Of course, the word nation is very old; it derives from Latin and spread early into all modern languages. But another meaning was associated with it. Only since the second half of the eighteenth century did it gradually take on the significance that it has for us today, and not until the nineteenth century did this usage of the word become general.Cf. Meinecke, Weltbürgertum und Nationalstaat, third edition (Munich: 1915),pp. 22 ff.; Kjellén, Der Staat als Lebensform (Leipzig: 1917), pp. 102 ff. Its political significance developed step by step with the concept; nationality became a central point of political thought. The word and concept nation belong completely to the modern sphere of ideas of political and philosophical individualism; they win importance for real life only in modern democracy.
If we wish to gain insight into the essence of nationality, we must proceed not from the nation but from the individual. We must ask ourselves what the national aspect of the individual person is and what determines his belonging to a particular nation.
We then recognize immediately that this national aspect can be neither where he lives nor his attachment to a state. Not everyone who lives in Germany or holds German citizenship is a German merely for that reason. There are Germans who neither live in Germany nor hold German citizenship. Living in the same places and having the same attachment to a state do play their role in the development of nationality, but they do not pertain to its essence. It is no different with having the same ancestry. The genealogical conception of nationality is no more useful than the geographic or the state conception. Nation and race do not coincide; there is no nation of pure blood.Cf. Kjellén, loc. cit., pp. 105 ff., and the works cited there. All peoples have arisen from a mixture of races. Ancestry is not decisive for belonging to a nation. Not everyone descended from German ancestors is a German merely for that reason; how many Englishmen, Americans, Magyars, Czechs, and Russians would otherwise have to be called Germans? There are Germans whose ancestors include not one German. Among members of the higher strata of the population and among famous men and women whose family trees are commonly traced, foreign ancestors can be demonstrated more often than among members of the lower strata of the people, whose origins are lost in darkness; yet the latter, too, are more seldom of pure blood than one tends to assume.
There are writers who have worked in good faith to investigate the significance of ancestry and race for history and politics; what success they attained will not be discussed here. Again, many writers demand that political significance be attached to community of race and that race policy be pursued. People can be of different opinions about the justness of this demand; to examine it is not our concern. It may also remain an open question whether that demand has already been heeded today and whether and how race policy really is pursued. Yet we must insist that just as the concepts nation and race do not coincide, so national policy and race policy are two different things. Also, the concept of race, in the sense in which the advocates of race policy use it, is new, even considerably newer than that of nation. It was introduced into politics in deliberate opposition to the concept of nation. The individualistic idea of the national community was to be displaced by the collectivist idea of the racial community. Success has so far eluded these efforts. The slight significance accorded to the race factor in the cultural and political movements of the present day contrasts sharply with the great importance that national aspects have. Lapouge, one of the founders of the anthroposociological school, expressed the opinion a generation ago that in the twentieth century people would be slaughtered by the millions because of one or two degrees more or less in the cephalic index.Cf. Manouvrier, ""L'indice céphalique et la pseudo-sociologie," Revue, Mensuelle de l'École Anthropologie de Paris, vol. 9, 1899, p. 283. We have indeed experienced the slaughter of people by the millions, but no one can assert that dolichocephaly and brachycephaly were the rallying cries of the parties in this war. We are, of course, only at the end of the second decade of the century for which Lapouge expressed his prophecy. It may be that he will yet prove right; we cannot follow him into the field of prophecy, and we do not wish to dispute over things that still rest darkly concealed in the womb of the future. In present-day politics the race factor plays no role; that alone is important for us.
The dilettantism that pervades the writings of our race theorists should not, of course, mislead us into skipping lightly over the race problem itself. Surely there is hardly any other problem whose clarification could contribute more to deepening our historical understanding. It may be that the way to ultimate knowledge in the field of historical ebb and flow leads through anthropology and race theory. What has so far been discovered in these sciences is quite scanty, of course, and is overgrown with a thicket of error, fantasy, and mysticism. But there exists true science in this field also, and here also there are great problems. It may be that we shall never solve them, but that should not keep us from investigating further and should not make us deny the significance of the race factor in history.
If one does not see racial affinity as the essence of nationality, that does not mean that one wants to deny the influence of racial affinity on all politics and on national politics in particular. In real life many different forces work in different directions; if we want to recognize them, then we must try to distinguish them in our minds as far as possible. That does not mean, though, that in observing one force, we should quite forget that still others are working along side it or against it.
We recognize that one of these forces is the speech community; this is indeed beyond dispute. If we now say that the essence of nationality lies in language, this is no mere terminological point about which there could be no further dispute. First, let it be stated that in saying so, we are in conformity with the general use of language. To the language we apply first, and to it alone in the original sense, the designation that then becomes the designation of the nation. We speak of the German language, and everything else that bears the label "German" gets it from the German language: when we speak of German writing, of German literature, of German men and women, the relation to the language is obvious. Moreover, it does not matter whether the designation of the language is older than that of the people or is derived from the latter; once it became the designation of the language, it is what became decisive for the further development of the use of this expression. And if we finally speak of German rivers and of German cities, of German history and of German war, we have no trouble understanding that in the last analysis this expression also traces back to the original naming of the language as German. The concept of the nation is, as already said, a political concept. If we want to know its content, we must fix our eyes on the politics in which it plays a role. Now we see that all national struggles are language struggles, that they are waged about language. What is specifically "national" lies in language.Cf. Scherer, Vorträge und Aufsätze zur Geschichte des geistigen Lebens in Deutschland und Österreich (Berlin: 1874), pp. 45 ff. That the criterion of nation lies in language was the view of Arndt and Jacob Grimm. For Grimm, a people is "the sum total of persons who speak the same language" (Kleinere Schriften, vol. 7 [Berlin: 1884], p. 557). A survey of the history of doctrine about the concept of nation is given in Otto Bauer, Die Nationalitätenfrage und die Sozialdemokratie (Vienna: 1907), pp. 1 ff., and Spann, Kurzgefasstes System der Gesellschaftslehre (Berlin: 1914), pp. 195 ff.
Community of language is at first the consequence of an ethnic or social community; independently of its origin, however, it itself now becomes a new bond that creates definite social relations. In learning the language, the child absorbs a way of thinking and of expressing his thoughts that is predetermined by the language and so he receives a stamp that he can scarcely remove from his life. The language opens up the way for a person of exchanging thoughts with all those who use it; he can influence them and receive influence from them. Community of language binds and difference of language separates persons and peoples. If someone finds the explanation of the nation as a speech community perhaps too paltry, let him just consider what immense significance language has for thinking and for the expression of thought, for social relations, and for all activities of life.
If, despite recognition of these connections people often resist seeing the essence of the nation in the speech community, this hinges on certain difficulties that the demarcation of individual nations by this criterion entails.Moreover, let it be expressly noted that with every other explanation of the essence of the nation, difficulties turn up in much higher degree and cannot be overcome. Nations and languages are not unchangeable categories but, rather, provisional results of a process in constant flux; they change from day to day, and so we see before us a wealth of intermediate forms whose classification requires some pondering.
A German is one who thinks and speaks German. Just as there are different degrees of mastery of the language, so there are also different degrees of being German. Educated persons have penetrated into the spirit and use of the language in a manner quite different from that of the uneducated. Ability in concept formation and mastery of words are the criterion of education: the school rightly emphasizes acquiring the ability to grasp fully what is spoken and written and to express oneself intelligibly in speech and writing. Only those are full members of the German nation who have fully mastered the German language. Uneducated persons are German only insofar as the understanding of German speech has been made accessible to them. A peasant in a village cut off from the world who knows only his home dialect and cannot make himself understood by other Germans and cannot read the written language does not count at all as a member of the GermanThat the concept of national community is a matter of degree is also recognized by Spahn (loc. cit., p. 207); that it includes only educated persons is explained by Bauer (loc. cit., pp. 70 ff). nation. If all other Germans were to die out and only people who knew only their own dialect survived, then one would have to say that the German nation had been wiped out. Even those peasants are not without a tinge of nationality, only they belong not to the German nation but rather to a tiny nation consisting of those who speak the same dialect.
The individual belongs, as a rule, to only one nation. Yet it does now and then happen that a person belongs to two nations. That is not the case merely when he speaks two languages but rather only when he has mastered two languages in such a way that he thinks and speaks in each of the two and has fully assimilated the special way of thinking that characterizes each of them. Yet there are more such persons than people believe. In territories of mixed population and in centers of international trade and commerce, one frequently meets them among merchants, officials, etc. And they are often persons without the highest education. Among men and women with more education, bilinguists are rarer, since the highest perfection in the mastery of language, which characterizes the truly educated person, is as a rule attained in only one language. The educated person may have mastered more languages, and all of them far better than the bilinguist has; nevertheless, he is to be counted in only one nation if he thinks only in one language and processes everything he hears and sees in foreign languages through a way of thinking that has been shaped by the structure and the concept formation of his own language. Yet even among the "millionaires of education"Cf. Anton Menger, Neue Staatslehre, second ed. (Jena: 1904), p. 213. there are bilinguists, men and women who have fully assimilated the education of two cultural circles. They were and are found somewhat more frequently than elsewhere in places where an old, fully developed language with an old culture and a still slightly developed language of a people only just completing the process of acquiring culture confront each other. There it is physically and psychically easier to achieve mastery of two languages and two cultural circles. Thus, there were far more bilinguists in Bohemia among the generation which immediately preceded the one now living than at present. In a certain sense one can also count as bilinguists all those who, besides the standard language, have full mastery of a dialect also.
Everyone belongs as a rule to at least one nation. Only children and deaf-mutes are nationless; the former first acquire an intellectual home through entry into a speech community, the latter through development of their thinking capacity into achievement of the capability of mutual understanding with the members of a nation. The process that operates here is basically the same as that by which adults already belonging to one nation switch over to another.It used to happen that children of German parents who had to be brought up at the expense of the municipality (so-called boarded children) were put by the municipality of Vienna into the care of Czech foster parents in the countryside; these children then grew up as Czechs. On the other hand, children of non-German parents were Germanized by German foster parents. One aristocratic Polish lady used to relieve the city of Vienna of the care of children of Polish parents in order to have the children grow up as Poles. No one can doubt that all these children became good Czechs, Germans, or Poles without regard to what nation their parents had belonged to.
The language researcher finds relationships among languages; he recognizes language families and language races; he speaks of sister languages and daughter languages. Some people have wanted to extend this concept directly to nations also; others, again, have wanted to make the ethnological relationship into a national one. Both ideas are totally inadmissible. If one wants to speak of national relationship, one may do so only with reference to the possibility of mutual understanding between the members of the nations. In this sense dialects are related to each other and to one or even to several standard languages. Even between standard languages, for example, between individual Slavic languages, such a relation holds. Its significance for national development exhausts itself in the fact that it facilitates a transition from one nationality to another.
On the other hand, it is politically quite unimportant that the grammatical relationship between languages facilitates learning them. No cultural and no political affinity emerges from it; no political structures can be erected on the basis of it. The notion of the relationship of peoples originates not from the national-policy/individualistic sphere of ideas but rather from the race-policy/collectivistic sphere; it was developed in conscious opposition to the freedom-oriented notion of modern autonomy. Pan-Latinism, Pan-Slavism, and Pan-Germanism are chimeras which, in confrontation with the national strivings of individual peoples, have always come out on the short end. They sound very good in the fraternizing festivities of peoples who for the moment are following parallel political goals; they fail as soon as they are supposed to be more. They never have possessed power to form states. There is no state that has been based on them.
If people have long resisted seeing the characteristic feature of the nation in language, one of the decisive circumstances was that they could not reconcile this theory with the reality that allegedly displays cases in which one nation speaks several languages and other cases in which several nations use one language. The assertion that it is possible for the members of one nation to speak several languages is supported with reference to the conditions of the "Czechoslovak" and "Yugoslav" nations. Czechs and Slovaks acted in this war as a unified nation. The particularist strivings of small Slovak groups have at least not manifested themselves outwardly and have not been able to achieve any political successes. It now seems that a Czechoslovak state will be formed to which all Czechs and Slovaks will belong. However, Czechs and Slovaks do not, for that reason, yet form one nation. The dialects from which the Slovak language was formed are extraordinarily close to the dialects of the Czech language, and it is not difficult for a rural Slovak who knows only his own dialect to communicate with Czechs, especially Moravians, when the latter speak in their dialect. If the Slovaks, back at the time before they began developing an independent standard language, that is, around the turn from the eighteenth to the nineteenth century, had come into closer political connection with the Czechs, then the development of a Slovak standard language would doubtless no more have occurred than the development of an independent Swabian standard language in Swabia. Political motives were decisive for the effort made in Slovakia to create an independent language. This Slovak standard language, which was formed quite according to the model of Czech and was closely related to it in every respect, could not develop, however, likewise because of political circumstances. Under the rule of the Magyar state, excluded from school, office, and court, it led a miserable existence in popular almanacs and opposition leaflets. Again, it was the slight development of the Slovak language that caused efforts to adopt the Czech standard language, which had been under way in Slovakia from the very beginning, to gain more and more ground. Today two movements oppose each other in Slovakia: one that wants to root all Czechism out of the Slovak language and develop the language pure and independent and a second that wishes its assimilation to Czech. If the latter movement should prevail, then the Slovaks would become Czechs and the Czechoslovak state would evolve into a purely Czech national state. If, however, the former movement should prevail, then the Czech state would gradually be compelled, if it did not want to appear an oppressor, to grant the Slovaks autonomy and finally, perhaps, complete independence. There is no Czechoslovak nation composed of Czech speakers and Slovak speakers. What we see before us is a particular Slavic nation's struggle for life. How it will turn out will depend on political, social, and cultural circumstances. From a purely linguistic point of view, either of the two developments is possible.
The case is no different with the relation of the Slovenes to the Yugoslav nation. The Slovene language, also, has been struggling since its origin between independence and approximation to or complete blending with Croatian. The Illyrian movement wanted to include the Slovene language also in the sphere of its strivings for unity. If Slovene should be able to maintain its independence even in the future, then the Yugoslav state would have to grant the Slovenes autonomy.
The South Slavs also present one of the most frequently cited examples of two nations speaking the same language. Croats and Serbs use the same language. The national difference between them, it is asserted, lies exclusively in religion. Here is said to be a case that cannot be explained by the theory that perceives the distinctive attribute of a nation in its language.
In the Serbo-Croatian people the sharpest religious contrasts confront each other. One part of the people belongs to the Orthodox Church and another part to the Catholic Church, and even today the Mohammedans form a not inconsiderable part. In addition to these religious contrasts, there are old political enmities that still stem in part from times whose political conditions have today long ago been superseded. The dialects of all these religiously and politically splintered peoples are, however, extraordinarily closely related. These dialects were so closely related to each other that the efforts to form a standard language proceeding from different sides always led to the same result; all efforts always resulted in the same standard language. Vuk Stefanovic Karadzic wanted to create a Serbian language, Ljudevit Gaj a unified South Slavic; Pan-Serbism and Illyrianism bluntly confronted each other. But since they had the same dialectical material to deal with, the results of their work were identical. The languages that they created differed so little from each other that they finally blended together into a unified language. If the Serbs did not use the Cyrillic alphabet and the Croats the Latin alphabet exclusively, then there would be no external sign for attributing a written work to one nation or the other. The difference of alphabets cannot split a unified nation in the long run; the Germans also use different forms of writing without this having acquired any national significance. The political development of the last years before the war and during the war itself has shown that the religious difference between Croats and Serbs upon which the Austrian policy of Archduke Francis Ferdinand and his followers had built castles in the air has long since lost its earlier significance. There seems to be no doubt that in the political life of the Serbs and Croats also, the national factor of a common language will override all impeding influences and that the religious difference will play no greater role in the Serbo-Croatian nation than it does in the German people.
Two other examples commonly named to show that speech community and nation do not coincide are the Anglo-Saxon and Danish-Norwegian cases. The English language, it is asserted, is used by two nations, the English and the Americans; and this alone shows that it is inadmissible to seek the criterion of nationality in language alone. In truth, the English and Americans are a single nation. The inclination to count them as two nations stems from the fact that people have become accustomed to interpret the nationality principle as necessarily including the demand for unifying all parts of a nation into a single state. It will be shown in the next section that this is not true at all and that, therefore, the criterion of the nation should in no way be sought in efforts to form a unified state. That Englishmen and Americans belong to different states, that the policies of these states have not always been in consonance, and that the differences between them have occasionally even led to war—all that is still no proof that Englishmen and Americans are not one nation. No one could doubt that England is bound together with its dominions and with the United States by a national bond that will show its binding force in days of great political crisis. The World War brought proof that disagreements between the individual parts of the Anglo-Saxon nation can appear only when the whole does not seem threatened by other nations.
It seems even more difficult at first sight to harmonize the problem of the Irish with the linguistic theory of the nation. The Irish once formed an independent nation; they used a separate Celtic language. At the beginning of the nineteenth century, 80 percent of the population of Ireland still spoke Celtic, and more than 50 percent understood no English at all. Since then the Irish language has lost much ground. Only somewhat more than 600,000 persons still use it, and only seldom are people still to be found in Ireland who understand no English. Of course, there are also efforts in Ireland today to awaken the Irish language to new life and to make its use general. That fact is, however, that very many of those who are on the side of the political Irish movement are English by nationality. The opposition between Englishmen and Irishmen is of a social and religious and not exclusively of a national nature; and so it can happen that inhabitants of Ireland who by nationality are no Irishmen also belong to the movement in great number. If the Irish should succeed in achieving the autonomy they strive for, then it is not ruled out that a large part of today's English population of Ireland would assimilate itself to the Irish nation.
The much-cited Danish-Norwegian example also cannot undercut the assertion that nationality lies in language. During the centuries-long political union between Norway and Denmark, the old Norwegian standard language was completely driven out by the Danish standard language; it still managed a miserable existence only in the numerous dialects of the rural population. After the separation of Norway from Denmark (1814), efforts were made to create a national language of its own. But the efforts of the party striving to create a new Norwegian standard language on the basis of the old Norwegian language definitely failed. Success went to those who seek only to enrich Danish by introduction of expressions from the vocabulary of the Norwegian dialects but otherwise are in favor of retaining the Danish language. The works of the great Norwegian writers Ibsen and Bjørnson are written in this language.Ibsen made fun of the efforts of the adherents of the separate "Norwegian" language in the person of Huhu in Peer Gynt (fourth act, madhouse scene). Danes and Norwegians still today, then, form a single nation, even though they belong politically to two states.
- Dialect and Standard LanguageIn primitive times every migration causes not only geographical but also intellectual separation of clans and tribes. Economic exchanges do not yet exist; there is no contact that could work against differentiation and the rise of new customs. The dialect of each tribe becomes more and more different from the one that its ancestors spoke when they were still living together. The splintering of dialects goes on without interruption. The descendants no longer understand one other.
A need for unification in language then arises from two sides. The beginnings of trade make understanding necessary between members of different tribes. But this need is satisfied when individual middlemen in trade achieve the necessary command of language. In early times, when the exchange of goods between distant regions had only a relatively slight significance, scarcely more than individual expressions and word families must have come into more general use in this way. Political changes had to be much more significant for the unification of dialects. Conquerors appeared and created states and political unions of all kinds. The political leaders of broad territories came into closer personal relations; members of all social strata of numerous tribes were united in military service. Partly independently of the political and military organization and partly in closest connection with it, religious institutions arise and spread from one tribe to another. Hand in hand with political and religious strivings for unity go linguistic strivings. Soon the dialect of the ruling or the priestly tribe gains predominance over the dialects of the subjects and laity; soon, out of the different dialects of fellow members of state and religion, a unified mixed dialect is formed.
Introduction of the use of writing becomes the strongest basis for the unification of language. Religious doctrines, songs, laws, and records preserved in writing give preponderance to the dialect in which they have been expressed. Now the further splintering of the language is impeded; now there is an ideal speech that seems worth striving to attain and to imitate. The mystical nimbus that surrounds the letters of the alphabet in primitive times and that even today—at least in regard to their printed form—has not yet quite disappeared raises the prestige of the dialect in which the writing is done. Out of the chaos of dialects there arises the general language, the language of rulers and laws, the language of priests and singers, the literary language. It becomes the language of the higher-placed and more educated persons; it becomes the language of state and culture;One must distinguish between written language and cultural or standard language. When dialects possess a written literature, it will no longer do to deny them the designation of written languages. All those languages should then be called standard languages that make the claim to express all human thoughts orally and in writing and thus also to be scientific and technical languages. The boundaries between the two naturally cannot always be sharply drawn. it appears finally as the sole correct and noble language; the dialects from which it has arisen, however, are thenceforth regarded as inferior. People consider them corruption's of the written language; people begin to despise them as the speech of the common man.
In the formation of unified languages, political and cultural influences are always working together from the very beginning. The natural element in the dialect of the people is that it draws its strength from the life of those who speak it. On the other hand, the standard and unified language is a product of studyrooms and chancelleries. Of course, it too stems in the last analysis from the spoken word of the common man and from the creations of gifted poets and writers. But it is always shot through with more or less pedantry and artificiality also. The child learns the dialect from his mother; it alone can be his mother tongue; the standard language is taught by the school.
In the struggle that now arises between standard language and dialect, the latter has the advantage that it already takes possession of the person in his most receptive years. But the former also does not stand helpless. That it is the general language, that it leads beyond regional disunity to understanding with broader circles, makes it indispensable to state and church. It is the bearer of the written heritage and the intermediary of culture. Thus it can triumph over the dialect. If, however, it is too distant from the latter, if it is or over time becomes so estranged from the latter that it is still intelligible only to persons who learn it with effort, then it must succumb; then a new standard language arises from the dialect. Thus Latin was displaced by Italian, Church Slavonic by Russian; thus in modern Greek the common speech will perhaps triumph over the katharevousa of classicism.
The luster with which the school and the grammarians are accustomed to surround the standard language, the respect they pay to its rules, and the contempt they show for anyone who sins against these rules cause the relation between the standard language and the dialect to appear in a false light. The dialect is not corrupted standard language; it is primeval language; only out of the dialects was the standard language formed, whether a single dialect or else a mixed form artificially formed out of different dialects was raised to the status of standard language. The question therefore cannot arise at all whether a particular dialect belongs to this or that standard language. The relation between standard language and dialect is not always that of unequivocal association or indeed of superiority and inferiority, and the circumstances of linguistic history and grammar are not alone decisive in that respect. Political, economic, and general cultural developments of the past and present determine to which standard language the speakers of a particular dialect incline; and it can happen that in this way a unified dialect attaches itself partly to one and partly to another standard language.
The process by which the speakers of a particular dialect make the transition to using a particular standard language thereafter, either exclusively or along with the dialect, is a special case of national assimilation. It is especially characterized by being a transition to a grammatically closely related standard language, with this way being as a rule the only conceivable one in a given case. The Bavarian peasant's son has in general no other way open to culture than through the German standard language, even though it may also happen in rare particular cases that, without this detour, he becomes French or Czech directly. Yet for the Low German there are already two possibilities: assimilation to the German or to the Dutch standard language. Which of the two courses he takes is decided neither by linguistic nor genealogical considerations but by political, economic, and social ones. Today there is no longer any purely Plattdeutsch village; at least bilingualism prevails everywhere. If a Plattdeutsch district were to be separated from Germany today and be joined to the Netherlands, with the German school and the German official and judicial language replaced by Dutch ones, then the people affected would see all that as a national rape. Yet one hundred or two hundred years ago, such a separation of a bit of German territory could have been carried out without difficulty, and the descendants of the people who were separated at that time would be just as good Hollanders today as they in fact are good Germans today.
In Eastern Europe, where school and office still do not have anywhere near as much significance as in the West, something of the kind is still possible today. The linguistic researcher will be able to determine of most of the Slavic dialects spoken in upper Hungary whether they are closer to Slovak than to Ukrainian and perhaps also to decide in many cases in Macedonia whether a particular dialect is closer to Serbian or to Bulgarian. Yet that still does not answer the question whether the people who speak this dialect are Slovaks or Ukrainians, Serbs or Bulgarians. For this depends not only on linguistic conditions but also on political, ecclesiastical, and social ones. A village with a dialect undoubtedly more closely related to Serbian can more or less adopt the Bulgarian standard language relatively quickly if it acquires a Bulgarian church and a Bulgarian school.
Only thus can one gain an understanding of the exceedingly difficult Ukrainian problem. The question whether the Ukrainians are an independent nation or only Russians who speak a particular dialect is senseless in this form. If the Ukraine had not lost its political independence in the seventeenth century to the Great Russian state of the Czars, then a separate Ukrainian standard language would probably have developed. If all Ukrainians, including those in Galicia, Bukovina, and upper Hungary, had come under the rule of the Czars as late as the first half of the nineteenth century, then this might not have hindered the development of a separate Ukrainian literature; but this literature would probably have assumed a position in relation to Great Russian no different from that of Plattdeutsch writings in relation to German. It would have remained dialect poetry without particular cultural and political pretensions. However, the circumstance that several million Ukrainians were under Austrian rule and were also religiously independent of Russia created the preconditions for the formation of a separate Ruthenian standard language. No doubt the Austrian government and the Catholic Church preferred that the Austrian Rusins develop a separate language instead of adopting Russian. In this sense there is a spark of truth in the assertion of the Poles that the Ruthenians are an Austrian invention. The Poles are wrong only in saying that without this official support of the early beginnings of the Ruthenian aspirations there would have been no Rusin movement at all in East Galicia. The national rising of the East Galicians could have been suppressed just as little as the awakening of other nations without history. If state and church had not sought to guide it into other channels, then it would probably have developed from the beginning with a stronger Great Russian orientation.
The Ukrainian movement in Galicia, then, significantly furthered, at least, the separatist strivings of the Ukrainians in South Russia and perhaps even breathed life into them. The most recent political and social upheavals have furthered South Russian Ukrainianism so much that it is not entirely impossible that it can no longer be overcome by Great Russianism. But that is no ethnographic or linguistic problem. Not the degree of relationship of languages and races will decide whether the Ukrainian or the Russian language will win out but rather political, economic, religious, and general cultural circumstances. It is easily possible for that reason that the final outcome will be different in the former Austrian and Hungarian parts of the Ukraine than in the part that has long been Russian.
Conditions are similar in Slovakia. The independence of the Slovakian language from Czech is also a product of an in a certain sense accidental development. If there had been no religious differences between the Moravians and Slovaks and if Slovakia had been politically linked with Bohemia and Moravia no later than the eighteenth century, then a separate Slovak written and standard language would hardly have evolved. On the other hand if the Hungarian government had given less emphasis to Magyarization of the Slovaks and had allowed their language more scope in school and administration, then it would probably have developed more strongly and would today possess more power of resistance against Czech.Still more examples could be cited, including, for example, the Slovene language also. Particular interest attaches to those cases in which something similar was attempted on a smaller scale. Thus—according to information for which I am indebted to the Vienna Slavicist Dr. Norbert Jokl—the Hungarian government tried in the county of Ung to make the Slovak and Ruthenian local dialects used there independent; it had newspapers appear in these dialects in which, for the Ruthenian dialect, Latin letters and a Magyarizing orthography were used. Again, in the county of Zala the effort was made to make a Slovene dialect independent, which was facilitated by the fact that the population, in contrast to the Austrian Slovenes, was Protestant. Schoolbooks were published in this language. In Papa there was a special faculty for training teachers of this language.
To the language researcher it may in general seem not impossible to draw language boundaries by classifying individual dialects with particular standard languages. Yet his decision does not prejudice the historical course of events. Political and cultural events are decisive. Linguistics cannot explain why Czechs and Slovaks became two separate nations, and it would have no explanation if the two in the future should perhaps blend into one nation.
- National ChangesFor a long time nations have been regarded as unchanging categories, and it has not been noticed that peoples and languages are subject to very great changes in the course of history. The German nation of the tenth century is a different one from the German nation of the twentieth century. That is even outwardly evident in the fact that the Germans of today speak a different language from that of the contemporaries of the Ottonians.
For an individual, belonging to a nation is no unchangeable characteristic. One can come closer to one's nation or become alienated from it; one can even leave it entirely and exchange it for another.
National assimilation, which must of course be distinguished from the blending and turnover of races, with which it undergoes certain interactions, is a phenomenon whose historical significance cannot be assessed too highly. It is one manifestation of those forces whose operation shapes the history of peoples and states. We see it at work everywhere. If we could fully understand it in its conditions and in its essence, then we would have taken a good step further on the path that leads to understanding of historical development. In striking contrast to this importance of the problem is the disregard with which historical science and sociology have so far passed it by.
Language serves for intercourse with one's fellow men. Whoever wants to speak with his fellow men and to understand what they say must use their language. Everyone must therefore strive to understand and speak the language of his environment. For that reason individuals and minorities adopt the language of the majority. It is always a precondition for that, however, that contacts occur between the majority and the minority; if this is not the case, then no national assimilation ensues either. Assimilation proceeds the faster the closer are the contacts of the minority with the majority and the weaker the contacts within the minority itself and the weaker its contacts with fellow nationals living at a distance. From that it immediately follows that the social positions of the different nationalities must be of special significance in this regard, for personal contacts are more or less bound up with class membership. Thus, particular social strata in an environment of a foreign nation can not only maintain their own customs and own languages for centuries but also assimilate others to them. A German nobleman who immigrated to Eastern Galicia around 1850 did not become a Ruthenian but a Pole; a Frenchman who settled in Prague around 1800 became not a Czech but a German. However, the Ruthenian peasant in Eastern Galicia who by upward social mobility joined the ruling class also became a Pole, and the Czech peasant's son who rose into the bourgeoisie became a German.Cf. Otto Bauer, "Die Bedingungen der Nationalen Assimilation," Der Kampf, vol. V, pp. 246 ff.
In a society organized by classes or castes, different nations can live side by side in the same territory for centuries without losing their national distinctness. History provides enough examples of that. In the Baltic lands of Livonia, Estonia, and Courland, in Carniola and in South Styria, the German nobility maintained itself for many generations amidst the environment of a different people; so did the German bourgeoisie in the Bohemian, Hungarian, and Polish cities. Another example is the Gypsies. If social contacts between the nations are lacking, if between them no connubium and only to a restricted extent commercium exists, if changing one's class or caste is possible only in rare exceptional cases, then the conditions for national assimilation are rarely present. Thus, self-contained peasant settlements inside a country inhabited by a population with another language could maintain themselves as long as the agricultural strata were bound to the soil. As, however, the liberal economic order set aside all bonds, removed the special privileges of classes, and gave the workers freedom of movement, the rigid national stratification was loosened. Upward social mobility and migrations made national minorities disappear rapidly, or at least pushed them into defensive positions tenable only with difficulty.
The tearing down of barriers that guarded against shifting from one social class to another, freedom of movement of the person, everything that has made modern man free, has very much facilitated the advance of standard languages against dialects. "Where the so greatly improved means of transport and communication have shaken people up today and mingled them together in an undreamed-of manner, this signals the end of local dialects, of local manners, traditions and usage's; the railroad whistle has sung their funeral dirge. In a few years they will disappear; in a few years it will be too late to collect them and perhaps still protect them," an English philologist already remarked decades ago.Cf. Socin, Schriftsprache und Dialekte im Deutschen nach Zeugnissen alter und neuer Zeit (Heilbronn; 1888), p. 501. Today one can no longer live even as a peasant or worker in Germany without at least understanding the standard High German language and being able, if necessary, to use it. The school is making its contribution to hastening this process.
Quite distinct from natural assimilation through personal contact with people speaking other languages is artificial assimilation—denationalization by state or other compulsion. As a social process, assimilation hinges on certain preconditions; it can only occur when its preconditions exist. Compulsory methods then remain powerless; they can never succeed when the preconditions are not at hand or are not created. Administrative compulsion can sometimes bring about these conditions and so indirectly bring about assimilation; it cannot bring about national transformation directly. If individuals are put into an environment where they are cut off from contact with their fellow nationals and made exclusively dependent on contacts with foreigners, then the way is prepared for their assimilation. But if one can use only compulsory means that do not influence the colloquial language, then attempts at national oppression have scarcely any prospect of success.
Before the opening of the age of modern democracy, when national questions did not yet have the political significance that they have today, for this reason alone there could be no question of national oppression. If the Catholic Church and the Habsburg state suppressed Czech literature in the seventeenth century in Bohemia, they were motivated by religious and political but not yet by national-policy considerations; they persecuted heretics and rebels, not the Czech nation. Only very recent times have seen attempts at national oppression on a large scale. Russia, Prussia, and Hungary, above all, have been the classical countries of compulsory denationalization. How much success Russianization, Germanization, and Magyarization have achieved is well known. After these experiences, the prognosis that one can make about possible future efforts at Polonization or Czechification is not a favorable one.
Ludwig von Mises wrote Nation, State and Economy in the same year, 1919, as John Maynard Keynes wrote The Economic Consequences of the Peace, a better known diagnosis of and prescription for the postwar economic situation. Mises, writing a few months earlier, presumably had less detailed knowledge of the Versailles Treaty and so was less concerned with its specific provisions. Keynes went into more detail than Mises in estimating such things as the wealth of the belligerents, the amount of destruction suffered, and the capacity of the Germans to pay reparations. His focus was narrower, than that of Mises, who regarded his own analysis as one particular instance of applying lessons derived from both history and economic theory.
The two books have much in common. Both compare prewar and postwar economic conditions. Both authors recognize that each country's prosperity supports rather than undercuts that of others. Both appreciate how much the standard of living of Europe and particularly of Germany had depended on world trade and regret its interruption. Both, rightly or wrongly, perceived something of an overpopulation problem in Europe and in Germany in particular and made some not too optimistic remarks about the possibilities of emigration as a remedy. Mises even waxed wistful over loss of opportunities that Germany might have had in the nineteenth century peacefully to acquire overseas territories suitable for settlement.
Both authors more or less took it for granted that the German ruling class and segments of public opinion had been largely responsible for the war. Mises deployed history, politics, sociology, psychology, and other disciplines in exploring the intellectual and ideological background of German militarism. Keynes also engaged in psychology. His dissection of the character and personality of Woodrow Wilson is justly renowned, and he made biting comments on the immorality of Lloyd George's "Hang the Kaiser" election campaign of December 1918.
Both Mises and Keynes emphasized how currency deterioration causes social as well as economic disorder. Keynes endorsed Lenin's supposed observation about the best way to destroy the capitalist system. "Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose." Keynes warned against misdirecting blame onto "profiteers," and Mises, too, understood the constructive function of profit, even in wartime. Mises explained how inflation undercuts the vital functions performed by accounting. Keynes and Mises were exhibiting prescience, writing four years before the hyperinflationary collapse of the German mark would dramatize the points they were already making.
Keynes's book included no signs of anticapitalism or of support for comprehensive government economic intervention. Mises was emphatic on these issues. He exposed some of the inefficiencies of socialism, although he had not yet formulated his later demonstration of the impossibility of accurate economic calculation under socialism.
Both Keynes and Mises come across in their respective books as analytical in their diagnoses and humanitarian in their recommendations. Both were pessimistic about economic conditions on the European continent, at least in the short run. Both opposed a vindictive peace; Keynes's warnings about reparations are well known. It is too bad that Keynes's fame did not carry over more effectively into actual influence and that Mises's book was not more accessible to the English-speaking world at the time. If only the two men could have joined forces!
Mises's book illustrates the differences between the political and economic philosophies of conservatism and of liberalism (liberalism in the European and etymologically correct sense of the word). Mises was emphatically not a conservative. His book rails repeatedly against political and economic privilege. He championed political democracy as well as a freemarket economy. He admired democratic revolutions against hereditary and authoritarian regimes; he sympathized with movements for national liberation and unity. As he explained, liberal nationalism—in sharp contrast with militaristic and imperialistic nationalism—can be an admirable attitude and a bulwark of peace. Different peoples should be able to respect and—to interpret a bit—even share in each one's pride in its own culture and history. (I think I can understand what Mises had in mind by recalling my feelings while traveling in Italy in 1961 at the time of celebrations and exhibitions commemorating the one hundredth anniversary of the founding of the Kingdom of Italy. As my traveling companion remarked, he almost felt like an Italian patriot.)
Mises's devotion to political democracy was tinged with a touching naiveté. Passages in his book suggest that he could hardly conceive of how the people, given the opportunity to rule through freely elected representatives, would fail to choose those politicians and policies that would serve their genuine common interest. This optimism is not to his discredit. It underlines the genuineness of his liberalism. It reminds us that he was writing more than sixty years ago, before the subsequent accumulation of sobering experience with democratic government. He was writing before the development of pubic-choice theory, that is, the application of economic analysis and methodological individualism to understanding government and government failure, analogous to the better publicized market failure (fragmented and inaccurate cost/benefit comparisons, externalities, and all that). But Mises certainly was not naive in relation to the experience and political analysis available in 1919. On the contrary, some of the most insightful parts of his book analyze the obstacles to the development of democracy in Germany and Austria. Mises saw the significance of the nationality and language situations in those two polyglot empires. He did not single-handedly develop an economic and psychological analysis of government, but he made an impressive beginning on that task in this and later books.
Mises could expect his German-speaking readers of over sixty years ago to recall the salient facts of German and Austrian history. Such an expectation may not hold for English-speaking readers of the 1980s. For this reason, a sketch follows of the historical background that Mises took for granted. In particular, it identifies events and persons that Mises alludes to.
German-speaking territories were ruled for centuries by dozens and even hundreds of hereditary or ecclesiastical monarchs—kings, dukes, counts, princes, archbishops, and the like. Mises speaks of "the pitiable multiplicity of several dozen patrimonial principalities, with their enclaves, their hereditary affiliations, and their family laws" and of "the farcical rule of the miniature thrones of the Reuss and Schwarzburg princes," Even after formation of the German Empire in 1871, its component states numbered four kingdoms, four grand duchies, fourteen lesser duchies and principalities, and three Hanseatic cities, as well as the conquered territory of Alsace-Lorraine.
Until beyond the middle of the nineteenth century, Germany was understood to include the German-speaking sections of Austria, which was usually the dominant German state. In the words of the Deutschlandlied, or national anthem (written in 1841 by the exiled liberal August Heinrich Hoffman von Fallersleben), Germany ranged from the Maas River in the West to the Memel River in the East and from the Etsch (Adige) River in the South to the Belt (Baltic Sea passages) in the North.
The domain of German rulers was not limited, however, to German-speaking territories. Poles and other Slavic peoples lived in the eastern sections of Prussia, especially after the conquests by Frederick the Great to which Mises refers. Brandenburg, where Potsdam and Berlin are located, was the nucleus of what became the Kingdom of Prussia in 1701. The Hohenzollern family held the title of Margrave of Brandenburg from 1415 on and continued as the Prussian royal family until 1918. Frederick William, the "Great Elector" (the meaning of "elector" is explained below), ruled from 1640 to 1688. He presided over the rebuilding and expansion of his state after the Thirty Years' War and obtained full sovereignty over Prussia. His son, Frederick I, who ruled from 1688 to 1713, was crowned the first King of (technically, "in") Prussia. Frederick William I, king from 1713 to 1740, was largely the founder of the Prussian army. His son Frederick II became known to history as Frederick the Great. He wrested Silesia from Austria in 1745 and joined with Russia and Austria in the first partition of Poland in 1772. His successor, Frederick William II, joined in the second and third partitions of 1793 and 1795, which wiped Poland off the map.
The Austrian Empire included not only speakers of German but also Hungarians, Rumanians, Czechs, Slovenes, Poles, Ruthenians, Italians, and others. According to a 1910 census, the population of the Austrian part of the Austro-Hungarian Monarchy consisted of 35 percent Germans, 23 percent Czechs, 17 percent Poles, 19 percent other Slavs, 2 ¾ percent Italians, and scattered others.
The Holy Roman Empire of the German Nation, to use its full name, existed until 1806. It coincided roughly, but only roughly, with German-speaking territory. It sometimes included parts of northern Italy but left out the eastern parts of Prussia. It was organized (or revived) under Otto I, whom the Pope crowned Emperor in 962. (He was succeeded by Otto II and Otto III; Mises refers to the age of the Ottonians.) The Empire was a loose confederation of princely and ecclesiastical sovereignties and free cities. Seven, eight, or nine of their rulers were Electors, who chose a new Emperor when a vacancy occurred. From 1273, except for a few intervals (notably 1308 to 1438), the Holy Roman Emperors belonged to the Habsburg family, whose domains included many lands outside the boundaries of the Empire. The dynastic expansion of the Habsburgs explains Mises's reference to the "married-together state." The male line of the family died out in 1740, when Charles VI was succeeded in his domains by his daughter Maria Theresa, an event that touched off the War of the Austrian Succession. Maria Theresa's husband was the former Duke of Lorraine and Holy Roman Emperor as Francis I from 1745 to 1765, which explains why the dynasty became known as the house of Habsburg-Lorraine.
Mises mentions several other events and personalities in the history of the Holy Roman Empire. Until his death in 1637, Ferdinand II reigned from 1617 as King of Bohemia, from 1618 as King of Hungary, and from 1619 as Emperor. His fanatical Catholicism alienated the Protestant Bohemian nobles, who rebelled in 1618 (the picturesquely named Defenestration of Prague occurred at this time), beginning the Thirty Years' War. The war, which wrought havoc on Germany, hinged not only on religious differences but also on the ambition of the Habsburgs to gain control of the entire country. The Imperial forces won the war's first major battle, fought on the White Mountain, near Prague, in 1620, ending Bohemian independence for three centuries. The Protestant side was aided at times by the Danes, the Swedes, and even the French under Louis XIII and Louis XIV. The Treaty of Westphalia, in 1648, awarded certain German provinces on the Baltic Sea to Sweden and southern Alsace to France, while the Emperor's authority over Germany became purely nominal. Acceptance of the religious split of Germany was an important step toward religious toleration. Leopold I, whom Mises mentions, was Holy Roman Emperor from 1657 to 1705. The greater part of his reign was occupied by wars with Louis XIV of France and with the Turks. Leopold II, Emperor from 1790 until his death in 1792 and the last crowned King of Bohemia, succeeded his brother Joseph II (also a son of Maria Theresa). He instigated the Declaration of Pillnitz, which helped precipitate the French Revolutionary Wars a few weeks after his death.
The Napoleonic Wars brought lasting changes to the map and the political systems of Europe. The Enactment of Delegates of the Holy Roman Empire (Reichsdeputationshauptschluss) was adopted in 1803 under pressure of Napoleon. Mises mentions this Enactment as an illustration of the old idea that lands were the properties of their sovereigns and so could be bought and sold, traded, reshaped, divided, and consolidated without regard to the wishes of their inhabitants, who were mere appurtenances of the land. The Enactment greatly reduced the number of sovereignties in the Empire, in part by ending the temporal rule of dignitaries of the Catholic Church and putting their lands under the rule of neighboring princes. In 1806, again under pressure of Napoleon, who had detached the western parts of Germany?only temporarily, as things turned out?and organized them into a Confederation of the Rhine, the old Empire was liquidated. Francis II gave up his title of Holy Roman Emperor but retained the title of Emperor of Austria as Francis I.
Mises mentions two men who strove for a unified Italian state at the end of the Napoleonic Wars. Joachim Murat, a Marshall of France whom Napoleon had made King of Naples in 1808, tried in 1815 to make himself king of all Italy; but he was captured and shot. Florestano Pepe, one of Murat's generals, fought against the Austrians in 1815. (Mises's allusion is presumably to Florestano Pepe rather than to his brother Guglielmo, another Neapolitan general, who organized the Carbonari and who led an unsuccessful proconstitutional revolt in 1821.)
After the Napoleonic Wars, the reigning dynasties of Europe tried to restore the old regime. The Holy Alliance, to which Mises repeatedly refers with scorn, is a phrase frequently but imprecisely used to label the reactionary policies of Russia, Prussia, and Austria in particular. Strictly speaking, the Holy Alliance was an innocuous declaration of Christian principles of statesmanship drawn up by Czar Alexander I in 1815 and signed by almost all European sovereigns. The repressive policies are more properly associated with the Congress system and the Quadruple Alliance of 1815, Mises mentions, by the way, the Polish kingdom of Alexander I. The Congress of Vienna (1814-1815) created the kingdom in personal union with Russia but with a constitution of its own (which was suspended after the Polish insurrection of 1830-1831).
With the Holy Roman Empire defunct, a decision of the Congress of Vienna loosely joined some 38 (soon 39) German sovereignties together again as the German Confederation. The federal diet, which met in Frankfurt under the presidency of Austria, had little power because unanimity or a two-thirds majority was required for most decisions.
In 1834, after achieving a free-trade area within its own territories, Prussia took the lead in establishing the Zollverein among most German states, not including Austria, through the merger of two regional customs unions. The new union is considered a step toward political unification. In 1861 it was reorganized with a constitution and parliament of its own. Mises mentions one of its intellectual fathers, the economist Friedrich List. List had been forced to emigrate to the United States in 1825 for advocating administrative reforms in Württemberg but had returned to Germany in 1832 as U.S. consul at Leipzig. He favored internal free trade, together with strictly temporary tariff protection to encourage the development of infant industries.
Mises makes many admiring and wistful references to the European revolutions of 1848. The revolutions were mostly the work of the middle-class intellectuals, who were bringing mainly French ideas to bear against political repression. The February revolution in Paris, resulting in the overthrow of King Louis Philippe and establishment of the Second Republic, was emulated elsewhere. In the numerous sovereignties into which Italy was still split, a movement for liberal constitutions was followed by an unsuccessful patriotic war to eject the Austrians.
Revolutionary riots came to Austria and Germany in March 1848, which explains why Mises refers to the March revolution and compares conditions afterwards with conditions as they were "before March" (to translate the German literally). In Vienna, Prince Clemens von Metternich, minister of foreign affairs and chief minister since 1809, had to resign and flee the country. The first Pan-Slav Congress met in Prague in June 1848 under the presidency of Frantisek Palacky, the Bohemian historian and nationalist. (Mises cites Palacky's much-quoted remark to the effect that if the Austrian multinational state had not existed, it would have been necessary to invent it.) Field Marshal Prince Alfred Windischgrätz bombarded the revolutionaries in Prague into submission in June 1848 and later turned to Vienna, where a further wave of radical unrest had broken out in October. He helped restore Habsburg power, with Prince Felix Schwarzenberg as the new chief minister from November 1848. Schwarzenberg engineered the abdication of Emperor Ferdinand I in favor of his 18-year-old nephew Francis Joseph, who would reign until his death in 1916.
Mises alludes not only to Schwarzenberg but also to Count Eduard von Clam-Gallas, who played a decisive role in suppressing the Italian and Hungarian revolutions of 1848-1849. (Actually, Mises mentions the Clam-Martinics, who were the Bohemian wing of the same wealthy noble family.) The Hungarian independence movement succeeded at first but was finally put down by Schwarzenberg and the Habsburgs with the aid of some of their Slavic subjects and the forces of the Russian Czar Nicholas I. After their defeat by the Russians in August 1849, the Hungarians suffered vengeance at the hands of the Austrian General Julius Freiherr von Haynau.
In Germany the revolutionaries sought both representative government in the various states and unification of the country. The King of Prussia and lesser German rulers at first granted democratic concessions but later withdrew them on observing the success of counterrevolution in Austria. The Crown Prince of Prussia, who had fled the country only shortly before, as Mises notes, was able to mount a counteroffensive. Yet some prospects seemed hopeful for a while. Aspiring for a united Germany, a self-constituted "preliminary parliament" convoked a German National Assembly, also known as the Frankfurt Parliament, which met in St. Paul's Church from 18 May 1848 to 21 April 1849. Its delegates were chosen by direct male suffrage throughout Germany and Austria. It was predominantly a middle-class body inspired by liberal and democratic ideas. This is what Mises had in mind when repeatedly referring to the ideals of St. Paul's Church, (He occasionally refers in the same sense to the "Ideas of 1789," thinking of course of the aspirations for freedom and political equality expressed at the beginning of the French Revolution and not to the Terror into which the revolution later degenerated.)
One party among the Frankfurt delegates favored bringing Austria and Bohemia into the projected united Germany, although doing so would have disrupted the Habsburg Monarchy; another party thought it wiser to leave Austrian territory out. (With his reference not limited to this particular occasion, Mises does mention the tension between the great-German and small-German approaches to national unity.) The issue became academic when the Austrian government showed hostility to any splitting of its territory and when the Austrian constitution of 4 March 1849 reasserted the unity of the Habsburg domains. After lengthy debates, the Frankfurt delegates adopted a federal constitution and elected the King of Prussia, Frederick William IV, as Emperor. At the end of April, the King refused the offer on the grounds that accepting a crown from an elected assembly would be inconsistent with his divine right. The assembly then came apart. Meanwhile, with the suppression of revolutions and the consolidation of authoritarian rule in the German princely states, democratic leaders found it prudent to remain politically silent, as Mises observes, or even to emigrate.
The activities of the Frankfurt Parliament brought suspension of the diet of the German Confederation in 1848-1850. After rejecting the proffered imperial crown, the King of Prussia still hoped to unify Germany in his own way and with the consent of his fellow princes. An inner confederation, the Prussian Union, would join with the Habsburg Monarchy in a broader confederation. Most of the smaller German states initially accepted the plan, and first a national assembly and later a parliament met at Erfurt in 1849 and 1850 to put a constitution into effect. With the distractions in Hungary now overcome, however, the Austrian government was able to press its opposition. At Schwarzenberg's invitation, representatives of the petty states and Austria met at Frankfurt in May 1850 and reconstituted the diet of the old German Confederation. In November 1850, by the Punctation of Olmütz (known by Prussian historians as the Humiliation of Olmütz), the Prussians abandoned their Prussian Union scheme and recognized the reestablished diet of the Confederation.
Austria and the rest of Germany managed to stay out of the Crimean War of 1853-1856, in which Turkey, Great Britain, France, and Sardinia-Piedmont defeated Russia. Austrian threats of joining the war did help prod Russia to evacuate the occupied Danubian principalities in 1854, however, and later to agree to the proposed peace terms; prolonged mobilization drained Austrian finances. In 1859 Austria suffered defeat in a war with France and Sardinia-Piedmont, losing Lombardy but retaining Venetia in the peace settlement.
In 1863 Austria again demonstrated dominance among the German states in that Emperor Francis Joseph served as president of a congress of German princes in Frankfurt. However, Otto von Bismarck, who had become Prussian prime minister in 1862, was able to persuade his king not to attend. Prussia's absence helped keep the congress from accomplishing much.
In the summer of 1864, in a brief war touched off by the question of who was to inherit the rule of the duchies of Schleswig and Holstein, Prussia and Austria together defeated Denmark and acquired joint control over the two duchies. Bismarck skillfully escalated tensions over their administration and ultimate disposition into a war between Prussia and Austria in the summer of 1866. Austria had all the rest of Germany on its side except Mecklenburg and a few of the smaller north German states. Italy allied itself with Prussia. Austria defeated Italy on land and sea; but the decisive battle of the Seven Weeks' War was fought near Königgrätz (and Sadowa), about 65 miles east of Prague, on July 3. The timely arrival of troops commanded by the Crown Prince of Prussia (later, for 99 days in 1888, the Emperor Frederick III) helped clinch the victory of Field Marshal Count Helmuth Karl Bernhard von Moltke (who was later to be victorious in the war with France also) and seal the defeat of Austrian General Ludwig von Benedek.Benedek had had much experience on the Italian front but had been assigned to the northern front, supposedly to leave the easier Italian command to members of the Habsburg dynasty. Moltke and Benedek are named here because Mises mentions them as examples of victorious and defeated generals, respectively. He also mentions Karl Mack von Leiberich, an Austrian general who surrendered to Napoleon at Ulm in 1805, and Franz Gyulai, an Austrian general defeated in the war of 1859.
Mises's many references to Königgrätz, then, allude to the changes brought about by the brief war of 1866, which was ended by the preliminary peace of Nikolsburg and the definitive treaty of Prague. The King of Hanover was dethroned and his state absorbed into Prussia. (It is interesting to speculate on how differently the course of history might have turned out if only Queen Victoria of England had been a man. Her accession in 1837 separated the previously united crowns of England and Hanover, where the Salic Law barred females from the throne.) Austria lost Venetia to Italy but no territory to Prussia. Its expulsion from the German Confederation, however, ended Austria's dominance in German affairs. Austrians did not, though, immediately stop thinking of themselves as Germans. Mises illustrates their sentiment by quoting from the dramatist Franz Grillparzer (1791-1872).
The old German Confederation gave way to the North German Confederation, composed of Prussia and the other states north of the Main River, The component states retained their own administrations but placed their military forces and foreign policy under the federal government, dominated by Bismarck. Prussia also negotiated alliances with the south German states.
The defeated Austrians turned to tidying up their domestic affairs. They reached a compromise (Ausgleich) with the Hungarians, granting Hungary quasi-independence with its own parliament and government. Emperor Francis Joseph submitted to coronation as King of Hungary in Budapest on June 8, 1867 (only eleven days, by coincidence, before his brother Maximilian, the defeated and captured Emperor of Mexico, was executed at Querétaro).
The Franco-Prussian War of 1870-1871 resulted in the cession of Alsace-Lorraine to Germany. France also had to pay an indemnity of 5,000,000,000 francs, providing an unfortunate precedent for allied demands on Germany after its defeat in 1918.
The German Empire was proclaimed in a ceremony at Versailles, near Paris, in January 1871. Bismarck had persuaded the reluctant King Ludwig II of Bavaria (later called the "mad king") to invite King William I of Prussia to assume the hereditary title of German Emperor. The Empire absorbed the institutions of the North German Confederation of 1867, including the Federal Council and elected Reichstag; a modified constitution admitted the southern states of Bavaria, Württemberg, and Baden.
Meanwhile, Italy also achieved unification. Other Italian states joined with Sardinia-Piedmont in 1861 to proclaim its King, Victor Emmanuel II, King of Italy. In 1870, while the French, who had been protecting the Pope, were at war with Germany, the Italians seized the opportunity to conquer the Papal States and transfer the capital of Italy to Rome. Mises mentions three heroes of the movement for Italian liberation and unification: Giuseppe Mazzini, Giuseppe Garibaldi, and Count Camillo Benso di Cavour. He also mentions three Italian poets and patriots of the first half of the nineteenth century: Giacomo Leopardi, Giuseppe Giusti, and Silvio Pellico.
Not all Italian-speaking territory yet formed part of the Kingdom of Italy; some remained under Austro-Hungarian rule. This territory was called Italia irredenta, and irredentism was the movement calling for its liberation and absorption into Italy. World War I largely achieved the objectives of the movement. Mises mentions Gabriele D'Annunzio, a poet, novelist, and dramatist who helped persuade Italy to join the allies in that war, who lost an eye in aerial combat, and who later (after Mises was writing) led an unofficial occupation of Flume (now Rijeka, Yugoslavia) that eventuated in its incorporation into Italy.
Mises sometimes uses the word "irredentism" in its broader sense of a movement for any country's absorbing territories still outside its boundaries inhabited by people speaking its national language. Irredentism in this broader sense refers, in particular, to advocacy of incorporation of German-speaking Austria into the German Empire.
Representatives of the great European powers convened in Berlin in 1878 to impose on Russia a revision of the harsh treaty that it had imposed on Turkey after defeating it in a war. The Congress of Berlin also, incidentally, authorized Austria-Hungary to occupy and administer the Turkish provinces of Bosnia and Herzegovina, now in Yugoslavia. The occupation was not entirely trouble-free; Mises mentions rebellions in Herzegovina and around the Gulf of Kotor. Austria-Hungary finally annexed the occupied provinces in 1908.
Another important development in international politics was the negotiation of an alliance between Germany and Austria-Hungary in 1879. Apparently Bismarck's decision not to impose an excessively harsh peace on Austria in 1866 was paying off. This alliance, like the Russian-French alliance and others, set the stage for a chain reaction whereby the countries not directly involved in the original dispute between Austria and Serbia in 1914 got drawn into World War I.
The Wilhelministic Era, which Mises refers to, was the reign of William II as German Emperor, particularly from the dismissal of Bismarck as chancellor in 1890 until World War I.
The defeat of the Central Powers in that war split Austria-Hungary up into several states. Currency inflations gained momentum. In Germany the Spartacists, whom Mises mentions and who reorganized themselves into the German Communist Party in December 1918, seemed for a time to have prospects of gaining power in at least the major cities.
We now turn to a few explanations and identifications that did not fit into the preceding chronological survey. Cabinet ministers in both Germany and Austria were responsible to the Emperor rather than to parliament. Although a government could not be thrown out of office by a vote of no confidence, parliamentary majorities were necessary to enact specific pieces of legislation; and the government occasionally resorted to political maneuvers and tricks to achieve the necessary majorities. Mises refers scornfully to these circumstances. In Austria, in particular, the parliamentary situation and the alignment of parties was complicated by the mixture of nationalities and by such issues as what languages should be used in particular schools. Mises refers, for example, to Badeni's electoral reform of 1896. (Count Kazimierz Felix Badeni, a Polish aristocrat, became prime minister in 1895. The finance minister and foreign minister in his cabinet also came from the Polish part of the Empire. Badeni was dismissed in 1897 through the pressure of German-speaking factions, who considered his policies on use of language in the civil service too favorable to the Czechs.) Mises also notes allusions made at the time to the government's courting of the ironically nicknamed "Imperial and Royal Social Democrats" (the term "Imperial and Royal," commonly abbreviated in German as "K.k.," referred to the Austrian Empire and Kingdom of Hungary and meant something like "governmental" or "official").
The nationality situation is also in the background of Mises's reference to the Linz Program of 1882. The extreme German nationalists proposed the restoration of German dominance in Austrian affairs by detaching Galicia, Bukovina, and Dalmatia from the Monarchy, weakening the ties with Hungary to a purely personal union under the same monarch, and establishing a customs union and other close ties with the German Reich. They apparently did not realize that Bismarck had little reason to provide help, since the existing domestic situation in Austria-Hungary was consonant with his approach to international affairs. The leader of the extreme German-Austrian nationalists was Georg Ritter von Schönerer, who later made anti-Semitism a part of his program.
Employing synecdoche, Mises sometimes opposes Potsdam to Weimar. Potsdam was the home of the Prussian monarchy, and the word symbolizes the authoritarian state and militarism. Weimar, the literary and cultural center, stands for the aspect of Germany evoked by calling it the "nation of poets and thinkers." (The "classical period" of German literature, to which Mises also refers, corresponds roughly to the time of Goethe.)
The Gracchi, referred to in a Latin saying that Mises quotes, were the brothers Tiberius and Gaius Gracchus, agrarian, social, and political reformers of the second century B.C. Both perished in separate public disturbances, one of them after having sought an unconstitutional reelection as tribune of the people.
It is quite unnecessary to identify every event, person, or school of thought that Mises refers to—Alexander the Great and so on. Still, there is no harm in adding that the Manchester School was a group of English economists of the first half of the nineteenth century, led by Richard Cobden and John Bright, who campaigned for a market economy and a free-trade policy. François Quesnay, 1694-1774, was a French physician and economist who stressed the central role of agriculture and who prepared the Tableau Economique, a kind of rudimentary input-output table.
Benedikt Franz Leo Waldeck, 1802-1870, was Mises's example of the possibility of being both a Prussian nationalist and a sincere liberal democrat. Waldeck, a member of the highest Prussian court, had been a radical deputy in the Prussian constituent assembly in 1848 and leader of a committee that drafted a constitution. Later, as an opposition member of the Prussian chamber of deputies, he continued resisting authoritarian trends in government.
This introduction might fittingly end by especially recommending the discussion with which Mises ends his book?his discussion of the respective roles of value judgments and positive analysis in the choice between socialism and liberal capitalism. Mises proceeds not only from a liberal democratic outlook but also, and especially, from a rationalist and utilitarian philosophy.
Thanks are due to the Thomas Jefferson Center Foundation and the James Madison Center of the American Enterprise Institute for contributing much of the secretarial help required in preparing the translation. Thanks for their good work also go to Mrs. Anne Hobbs, Mrs. Carolyn Southall, and Miss Linda Wilson.
Leland B. YeagerLudwig von Mises Professor of Economic EmeritusAuburn University
The pages that I herewith submit to the public do not presume to be more than observations about the crisis in world history that we are living through and contributions to understanding the political conditions of our time. I know that any attempt to offer more would be premature and therefore mistaken. Even if we were in a position to see interrelations clearly and to recognize where developments are heading, it would be impossible for us to confront the great events of our day objectively and not let our view be blurred by wishes and hopes. Standing in the middle of battle, one strives in vain to keep cool and calm. It exceeds human capacity to treat the vital questions of one's time sine ira et studio [without anger and partiality]. I should not be blamed for not being an exception to this rule.
It may perhaps seem that the topics treated in the individual parts of this book hang together only superficially. Yet I believe that they are closely connected by the purpose that this study serves. Of course, reflections of this kind, which must always remain fragmentary, cannot deal with the completeness and unity of the whole. My task can only be to direct the reader's attention to points that public discussion does not usually take sufficiently into account.
Vienna, beginning of July 1919
Professor Dr. L. Mises
The question whether so-called war socialism is true socialism has been discussed repeatedly and with great passion. Some have answered yes just as firmly as others have answered no. In that connection the striking phenomenon could be observed that as the war continued and as it became even more obvious that it would end with failure of the German cause, the tendency to characterize war socialism as true socialism diminished also.
To be able to handle the problem correctly, one must first of all keep in mind that socialism means the transfer of the means of production out of the private ownership of individuals into the ownership of society. That alone and nothing else is socialism. All the rest is unimportant. It is a matter of complete indifference for deciding our question, for example, who holds power in a socialized community, whether a hereditary emperor, a Caesar, or the democratically organized whole of the people. It does not belong to the essence of a socialized community that it is under the leadership of soviets of workers and soldiers. Other authorities also can implement socialism, perhaps the church or the military state. It is to be noted, furthermore, that an election of the general directorship of the socialist economy in Germany, carried out on the basis of full universality and equality of the right to vote, would have produced a far stronger majority for Hindenburg and Ludendorff in the first years of the war than Lenin and Trotsky could ever have achieved in Russia.
Also nonessential is how the outputs of the socialized economy are used. It is of no consequence for our problem whether this output primarily serves cultural purposes or the waging of war. In the minds of the German people or at least of its preponderant majority, victory in the war was seen beyond doubt as the most urgent goal of the moment. Whether one approves of that or not is of no consequence.Max Adler (Zwei Jahre . . . ! Weltkriegsbetrachtungen eines Sozialisten [Nürnberg: 1916], p. 64) disputes the idea that war socialism is true socialism: "Socialism strives for the organization of the national economy for the sufficient and uniform satisfaction of the needs of all; it is the organization of sufficiency, even of superfluity; 'war socialism,' on the other hand, is the organization of scarcity and of need." Here the means is confused with the end. In the view of socialist theoreticians, socialism should he the means for achieving the highest productivity of the economy attainable under the given conditions. Whether superfluity or shortage reigns then is not essential. The criterion of socialism is, after all, not that it strives for the general welfare but rather that it strives for welfare by way of production based on the socialization of the means of production. Socialism distinguishes itself from liberalism only in the method that it chooses; the goal that they strive for is common to both. Cf. below, pp. 181 ff.
It is equally of no consequence that war socialism was carried out without formal reorganization of ownership relations. What counts is not the letter of the law but the substantive content of the legal norm.
If we keep all this in mind, then it is not hard to recognize that the measures of war socialism amounted to putting the economy on a socialistic basis. The right of ownership remained formally unimpaired. By the letter of the law the owner still continued to be the owner of the means of production. Yet the power of disposal over the enterprise was taken away from him. It was no longer up to him to determine what should be produced, to acquire raw materials, to recruit workers, and finally to sell the product. The goal of production was prescribed to him, the raw materials were delivered to him at definite prices, the workers were assigned to him and had to be paid by him at rates on whose determination he had no direct influence. The product, furthermore, was taken from him at a definite price, if he was not actually carrying out all the production as a mere manager. This organization was not uniformly and simultaneously implemented in all branches of industry—in many not at all. Also, its net had big enough meshes to let much get through. Such an extreme reform, which completely turns the conditions of production around, just cannot be carried out at one blow. But the goal being aimed at and being approached ever more closely with every new decree was this and nothing else. War socialism was by no means complete socialism, but it was full and true socialization without exception if one had kept on the path that had been taken.
Nothing about that is changed by the fact that the proceeds of production went first to the entrepreneur. The measures characterized as war-socialist in the narrow sense did not abolish entrepreneurial profit and interest on capital in principle, although the fixing of prices by the authorities took many steps in this direction. But precisely all the economic-policy decrees of the war period do belong to the full picture of war socialism; it would be mistaken to keep only particular measures in view and disregard others. Whatever the economic dictatorship of the various agencies of the war economy left free was gotten at by tax policy. War tax policy established the principle that all additional profit achieved beyond the profits of the prewar period was to be taxed away. From the beginning this was the goal that the policy aimed at and that it came closer to with each later decree. No doubt it would have completely reached this goal also if only it had had a little more time. It was carried out without regard to the change in the value of money that had occurred in the meanwhile, so that this meant a limitation of entrepreneurial profit not just to the amount obtained before the war but to a fraction of this amount. While entrepreneurial profit was thus limited on the top side, on the other side the entrepreneur was guaranteed no definite profit. As before, he still had to bear losses alone, while keeping no more chance of gain.
Many socialists declared that they were not thinking of an uncompensated expropriation of entrepreneurs, capitalists, and landowners. Many of them had the notion that a socialist community could allow the possessing classes to continue receiving their most recently received incomes, since socialization would bring such a great rise in productivity that it would be easy to pay this compensation. Under that kind of transition to socialism, entrepreneurs would have been compensated with larger amounts than under the one introduced by war socialism. They would have continued to receive as guaranteed income the profits that they had last received. It is incidental whether these incomes of the possessing classes would have had to continue only for a definite time or forever. War socialism also did not settle the question finally for all time. The development of wealth, income, and inheritance taxes would have been able, especially through extension of the progressivity of the tax rates, to achieve a complete confiscation soon.
The continued receipt of interest remained temporarily permitted to the owners of loan capital. Since they were suffering persistent losses of property and income from inflation, they offered no propitious object for greater intervention by the tax office. With regard to them, inflation was already performing the task of confiscation.
Public opinion in Germany and Austria, entirely dominated by the socialistic spirit, complained again and again that the taxation of war profits had been delayed too long and that even later it had not been applied with appropriate severity. One supposedly should have acted at once to collect all war profits, that is to say, all increases in wealth and income obtained during the war. Even on the first day of the war, therefore, complete socialization should have been introduced—leaving alone property incomes received before the war. It has already been explained why this was not done and what consequences for the conversion of industry onto a war footing would have resulted if this advice had been followed.
The better war socialism was developed, the more palpable did individual consequences of a socialistic order of society already become. In technical respects enterprises did operate no more irrationally than before, since the entrepreneurs, who remained at the head of the enterprises and formally filled their old positions, still harbored the hope of being able to keep for themselves—even if only by illegal means—a larger or smaller part of the surpluses earned and at least hoped for future removal of all measures of war socialism, which, after all, were still always officially declared exceptional wartime orders. Yet a tendency toward increasing expenses became noticeable, especially in trade, because of the price policy of the authorities and the practice of the courts in handling the provisions of penal law regarding exceeding the maximum prices: permitted prices were ascertained on the basis of the entrepreneur's outlays plus a margin of "simple profit," so that the entrepreneur's profit became all the greater the more dearly he had made purchases and the more expenses he had incurred.
Of greatest significance was impairment of the initiative of entrepreneurs. Since they shared more heavily in losses than in profits, the incentive to undertake risky ventures was only slight. Many production possibilities remained unused in the second half of the war because entrepreneurs shied away from the risk bound up with new investments and with introducing new production methods. Thus the policy of the state's taking over responsibility for possible losses, adopted especially in Austria right at the beginning of the war, was better suited for stimulating production. Toward the end of the war, views on this point had changed. With regard to importing particular raw materials into Austria from abroad, the question arose of who should bear the "peace risk," the danger of a loss from the price crash that was expected in the event of peace. The entrepreneurs associated in "centrals," whose chances of profit were limited, wanted to undertake the business only if the state were ready to bear the possible loss. Since this could not be arranged, the importation did not take place.
War socialism was only the continuation at an accelerated tempo of the state-socialist policy that had already been introduced long before the war. From the beginning the intention prevailed in all socialist groups of dropping none of the measures adopted during the war after the war but rather of advancing on the way toward the completion of socialism. If one heard differently in public, and if government offices, above all, always spoke only of exceptional provisions for the duration of the war, this had only the purpose of dissipating possible doubts about the rapid tempo of socialization and about individual measures and of stifling opposition to them. The slogan had already been found, however, under which further socializing measures should sail; it was called transitional economy.
The militarism of General Staff officers fell apart; other powers took the transitional economy in hand.
ABSTRACT: This article introduces a new approach to the problem of political spectrum polarization. Political science has introduced a multitude of spectrograms based on different factors, dimensions, axes, and cardinal points. Most often the graphics do not complement each other, and it seems that each of them describes a completely different reality. There was an urgent need to conduct an objective analysis of political philosophies and find the factors that influence political spectrum polarization. An unbiased rubric to evaluate political doctrines would enable a more accurate understanding of political ideologies. To this end, thirteen political doctrines were analyzed using qualitative comparative analysis, which introduced objectivity to the study due to its use of a formalized mathematical apparatus of the theory of sets. It was found that spectrum polarization depends on three conditions: attitudes toward private property, individual freedom, and wealth redistribution. As the factors that influence political spectrum polarization were firmly determined, it became possible to build a spectrogram unambiguously.]
Keywords: wealth redistribution, private property, economic freedom, socialism, fascism, libertarianism, marxism, political spectrum, political philosophy, qualitative comparative analysis
Allen Gindler (agindler@cyberrex.com) is a scholar from the former USSR specializing in political economy, econometrics, and industrial engineering. He taught economic cybernetics, standard data systems, and computer-aided work design in the Khmelnytskyi National University, Ukraine. He is currently a private consultant to IT industry on database administration and cryptography.
In the course of evolution, people have formulated many philosophical ideas concerning the socioeconomic structure of society. Some of these ideas became a reality, while others remained purely imaginary constructs. All real and abstract socioeconomic ideas constitute the political spectrum. Humans have habitually tried to classify and visualize political variety in order to make sense of its structure and find a proper place for their world views. Thus, the political spectrum is most often understood as a graphic representation of various politico-philosophical positions on diverse issues that are relevant to a given society in a certain period of time.
This definition implies that the political spectrum is not only historical but multidimensional. The specific time frame is extremely important, as some issues that are relevant now were not considered in the past. Different eras produce different social issues, and the weight of these issues changes accordingly. For example, the legalization of marijuana or same-sex marriage was not a problem that worried society a century ago. Some questions have stood the test of time; they were prominent in the past and they are relevant now. Such eternal questions include concerns about individual freedom and attitudes toward property, justice, and civil rights, to name a few.
Humankind has developed a practice of solving issues comprehensively by creating political philosophies or ideologies that suggest solutions to the main issues in a packaged form. People can choose from among bundled solutions by clinging to this or that ideology. These ideologies suggest different ways of solving problems facing society. The more backward a society, the fewer questions are tackled through political doctrine. There is also interconnection between issues within a political ideology: the solution to some problems depends on the solution to others. Every ideology must have its own answer to the questions. Political doctrine cannot be silent on actual societal problems; otherwise, it will be ignored by people.
Historians have traced the most common and long-standing “left-right” political spectra to seating arrangements in the French Parliament after the revolution (1789–99). As the story goes, the aristocracy sat on the privileged seats at the right; their agenda was to preserve an existing state of affairs. Commoners occupied the left wing; they were for laissez-faire commerce and civil liberties (Knapp and Wright 2001). Since then, agents of the status quo have been associated with the right wing and representatives of change have been linked to the left wing. Therefore, in people’s perceptions, leftist ideologies are actively seeking modifications to the existing socioeconomic formation, while the right-wingers are proponents and keepers of the existing order.
THE POLITICAL SPECTRUM DYNAMICS At the time of the French Revolution, when the original left-right political spectrum was born, French society had a straightforward structure composed of the aristocracy, the clergy, and commoners. A political struggle was staged between the nobility on one side and everybody else on the other. At that time, the political spectrum exhibited a pronounced dichotomy.
It was the epoch of feudalism’s swan song, in which Western European countries battled with outdated feudalism. Ultimately, feudal aristocracy lost to capitalism. Capitalism was a left-wing agent of change, and feudalism represented the right-wing preservation of the status quo. Indeed, the nobility and clergy identified commoners as radical leftists. The latter sought to restrict the nobles' power, privileges, and wealth.
After the victory of the bourgeois democratic revolutions in the overwhelming majority of European countries, from the mid-nineteenth century to the beginning of the twentieth century, the political situation changed. During capitalism’s advance, the political spectrum developed in two distinct ways based on two events.
The first event was a switch of the political spectrum's polarization. Using the terminology of the one-dimensional political spectrum introduced by the French, the former left became the Right and vice versa. Absolutism was defeated and joined the ranks of outdated ideologies. The free market ideology began to take the right-wing position, because its supporters were committed to maintaining the new status quo. It should be noted that the destruction of the capitalist democratic state by the Bolsheviks, Fascists, and Nazis all led to a switch in the polarization of the political spectrum in their respective regions. However, under totalitarian regimes, this change was camouflaged by the collapse of legal political activity, which was expressed as a ban on dissent. Based on the foregoing, it is tempting to originate a common sociopolitical law that states: the socioeconomic changes in society result in a switch in the polarization of the political spectrum.
The most significant achievements of the democratic revolutions were guaranteed civil rights, political freedom, and economic freedom. These resulted in a quantum leap in all aspects of human activities. Those involved with science, technology, architecture, literature, and art reached unprecedented achievements. Society became more developed, knowledgeable, and heterogeneous, producing a vast amount of different politico-philosophical ideas.
Therefore, the second event after the democratic revolutions was a broadening of the political spectrum. This expansion occurred only during the development of capitalism and democratic institutions. No other political orders have resulted in anything similar in the entire history of mankind. When radical changes are proposed, the political spectrum is shifted to the left, and ideological struggles ensue. When this occurs, the political spectrum widens, because the Right, as status quo, is in principle static and exhibits almost no movement. The Right remained fixed in place until it abandoned its hold by losing the political struggle. The capitalist democratic system was defeated by various currents of socialism in some countries during the twentieth century. The vast majority of the former Communist bloc of Eastern Europe embraced capitalism once again several decades later after their defeat in the Cold War.
Regardless of an imaginary or real switch in the polarization of the political spectrum, the modern political spectrum in question is a progeny of capitalism. No other political system has made possible the coexistence of a great variety of different sociopolitical philosophies, currents, and movements. Ironically, the majority of these philosophies have been trying to dissolve capitalism to varying degrees. Only right-wing ideologies are trying to conserve the gains of the democratic bourgeoisie revolution: the free market, civil rights, and the supremacy of law.
FINDING OBJECTIVITY A political spectrum is a system of qualitative comparisons of different political philosophies. Humans try to grasp the main characteristics of political ideologies and sort them by importance, relevance, and usefulness for an individual and society as a whole. The political spectrum is not a natural phenomenon taking place in the physical world but rather a product of human cognitive abilities. It is a subjective perception and valuation of the variety of political thoughts that are generated within society.
People tend to associate themselves with a particular ideology that suits their world view and to reject ones that do not fit their mentality. At present, the political spectrum has become broader and more heterogeneous, since freedom has spawned many different political ideas. People became politically savvy and wise in all the vicissitudes of politics. Therefore, the conditions that determine the classification and ranking of political doctrines along a political spectrum have become rather intricate. Moreover, these conditions that differentiate political ideologies have been obscured by political necessities, propaganda and counterpropaganda, human emotions, and historical revisionism.
Whatever arguments one side of the political spectrum brings, the other side refutes with ease. Then, the former rebuffs the latter, and this goes on forever. Thus, it is necessary to present a method that examines the political discourse with neutrality and objectivity. It is essential to find traits that will unambiguously sort ideologies along a political spectrum. What does it mean to belong to the leftist movement? What conditions lead to a particular rightist ideology? What are the mechanisms and factors responsible for the classifications and rankings of political ideas?
Take Italian fascism, for example. Neither the Left nor the Right wants to claim ownership of fascism. There is no consensus among political scientists, sociologists, and economists on the placement of fascism on a political spectrum. Leftists have been so vigorously fighting off fascism that they thrust it to the ultraright position, to the right of classical liberalism. The Right has considered fascism as phenomena of the Left, foremost from the foundational principle that there is nothing to the right of liberal capitalism in a capitalistic society. The founder of fascism proclaimed that fascism superseded both capitalism and Marxian socialism and positioned it neither on the left nor on the right. It was supposed to be an ideology that transcended the left-right paradigm.
The phenomenon of fascism was difficult to grasp, as it contained different elements from both left- and right-wing doctrines. Moreover, the analysis of the problem with fascism has been subject to ideological bias and emotional predisposition. Placing fascism in a specific position on the political spectrum has depended on political correctness and propaganda, not on scientific and objective efforts. Many visualizations of the political spectrum could not put fascism in its historical and ideological place, which arguably invalidates them.
Moreover, scholars have not found agreement on which principal factors influence the placement of a particular ideology along the political spectrum, whether the political spectrum is unidimensional or multidimensional. Scientists have ignored the phenomenon of the switching polarization of the spectrum and the importance of a specific frame of reference when building it.
The twentieth-century one-dimensional spectrum has communism on the left and fascism and Nazism on the right along with ideologies that support a free market economy. Left-wing academia still adheres to this graphic representation of the political spectrum. However, the positioning of communism and fascism with Nazism on diametrically opposite poles neglects totalitarianism as a critical commonality between all three regimes. In order to bring fascism and communism closer, the linear spectrum was curved to form a circle, as described by McGann (1967.) In the circular spectrum, communism and fascism occupied adjacent positions, correspondingly to the left and the right of the vertical diameter. “Democracy” was positioned on the other side of the circle.
McGann criticized the “circular theory.” He pointed out that there is no room in the model for another uncomfortable player in building a spectrum—anarchism—and proposed a modified linear model instead. His model classified political ideology according to the degree of state control and has two cardinal points: anarchy, with 0 percent government regulation, and totalitarianism, with 100 percent state control. “Democracy” falls somewhere in between.
Bryson and McDill (1968) offered a bidimensional model of the political spectrum in which the vertical axis represents the degree of governmental control (statism versus anarchy) and the horizontal axis represents the degree of egalitarianism favored (left versus right). In the same issue of Rampart Journal, Hall (1968) suggested the LFE (lopsided figure eight) theory of the political spectrum. Hall combined the bidirectional spectrum with some circular features. On the x axis, there is “respect for private property,” while the y axis denotes “political regulation.” The author claimed that his approach combined the best of the circular and linear theories. However, even a glance at the chart would reveal some inconsistencies in the placement of some political doctrines. For example, “collectivist anarchists” are placed on a point with a fairly high degree of “respect for private property,” which is not correct.
David Nolan, the founding member of the US Libertarian party, presented his chart in 1971, which depicted different political ideologies along two axes: “Economic Freedom” and “Personal Freedom.” His approach seems to be the most promising; however, the question of properly placing fascism and anarchism on the graph remains open for discussion. People still want a definite answer: Which ideology belongs to the Left and what ideology belongs to the Right?
Scholars have suggested a variety of political spectrum graphs employing different geometries, dimensions, axes, and cardinal points. However, the controversy surrounding the political spectrum has not subsided. In order to change the current state of affairs, it is imperative to find an objective way to assign a particular ism to the Left or to the Right. Therefore, the goal is to find unbiased categories of political philosophies that can unambiguously determine placement on the political spectrum. Such a task entails a comprehensive examination of political doctrines (case studies) and comparison between them (cross-case studies).
The best method of conducting corresponding research in social science is called qualitative comparative analysis (QCA). The research in question differs from the traditional social science investigation in two crucial aspects. First of all, the subject of the study is not a country or a social group, but rather particular characteristics of political ideologies. Secondly, the observable phenomenon is a somewhat artificial mental construct rather than observable social or political fact.
The latter half of the nineteenth century and the first half of the twentieth were rich in generating various political ideologies that changed the social order. Consequently, it is rational to investigate the real and abstract political ideas that flourished at that time. The following political philosophies were selected for examination: Marxism, Trotskyism, social democracy, Marxism-Leninism, Maoism, anarcho-syndicalism, anarcho-communism, revolutionary syndicalism, fascism, National Socialism, conservative liberalism, progressivism, and classical liberalism.
The question that needs to be answered is which factors determine doctrines’ polarization. This would further reveal the exact geometry, dimensions, and axes of the political spectrum. The undeniable advantage of QCA is the formalization of the verbal provisions of political doctrines and their translation into the mathematical language of set theory.
QUALITATIVE COMPARATIVE ANALYSIS OF POLITICAL IDEOLOGIES Charles Ragin developed qualitative comparative analysis in the late 1990s. Since then, the method has rapidly advanced and become widely used in social studies. In this method, relations between social phenomena are perceived as set relations. In order to uncover interconnections between cases and outcomes, QCA therefore employs the mathematical apparatus of set theory, which is based on Boolean algebra.
The domains of this study are political philosophies that constitute a political spectrum. They are verbal by nature and can be stated in terms of sets and set relations. For instance, “conservatism is a right-wing ideology” is equivalent to the phrase “conservatism is a subset of right-wing 'ideologies'”; in turn, “right-wing ideologies are a subset of the whole political spectrum.” Moreover, every unique aspect of political ideologies is a member of its corresponding conceptual set. Thus, “revolution” and “evolution” are both elements of the set “methods of change.”
The goal of set theoretic methods is to establish explicit connections between sets of interest. QCA assists in identifying commonalities across an array of political ideologies that prompt meaningful empirical connections. This means that QCA could discover causal relationships between political ideologies' attributes and their role in the placement of a particular theory on the political spectrum.
In QCA terms, aspects of political philosophies that are thought to be causes of a phenomenon are called "conditions," while the phenomenon itself is called an "outcome." An outcome in this study is the assignment of a political ideology to the Left or the Right on the political spectrum. In other words, the outcome is political spectrum polarization. Philosophical aspects can be causally linked to an outcome as necessary or sufficient conditions, either by themselves or in combination with others. Thus, set relations are interpreted in terms of sufficiency, necessity, and forms of causalities.
For this study, fuzzy set QCA (fsQCA) was chosen as the most adequate. Fuzzy sets are both qualitative and quantitative. They allow researchers to establish difference in kind between cases (qualitative difference) and determine difference in degree (quantitative difference) between qualitatively identical cases (Schneider and Wagemann 2012). Every political philosophy is considered to be an individual case under the study.
The data on which QCA operates are the membership scores of cases in sets which represent political science concepts. Fuzzy sets explicitly require that the definition of membership values for sets be based on three qualitative anchors: full set membership (1), full nonmembership (0), and indifference (0.5). The anchor of indifference is a point of maximum ambiguity; therefore, assigning a 0.5 membership score is not recommended.
For example, “proletariat” is an element of the set “agents of change.” A membership score of Marxism-Leninism in the “agents of change” set is 1, as this theory designates a proletariat as the only force of a socialist revolution. In the case of Maoism, however, the “proletariat” was not a major social influencer. A membership score of Maoism in the “agents of change” set would be a 0, as it relies on the peasantry as an agent of change. In this example, “proletariat” and “peasantry” are supposed to illustrate two boundary membership values of the “agents of change” fuzzy set.
In general, the membership score in fuzzy sets varies from 0 to 1 and could be any value except the value of maximum ambiguity. In this study, the four-value scheme (table 1) has been employed, which is especially useful in situations where researchers have a substantial amount of information about cases but the evidence is not systematic or strictly comparable from case to case (Ragin 2008).
One of the first tasks in qualitative research is to find aspects (conditions) that describe a political theory best and might influence an outcome. Any mature political theory outlines its positions on designated goals; primary enemies; agents of change; methods of change; scope and pace of implementation; economic and social policies; relations between classes; dealings between state and individuals; questions of nationalism and race; immigration; taxation and tariffs; wages and wealth redistribution; etc.
Table 1: Verbal description of fuzzy-set membership scores
While seeking the focal, descriptive attributes of political ideologies, careful attention was paid to the questions that caused heated quarrels among the competing philosophical doctrines. Those questions became common points of bifurcation between theories. The issue of the "role of a state" alienated anarchists and Marxists, while the question of "scope of change" estranged Trotskyists and Stalinists. After thorough and repeated examination, the following five principal conditions were chosen for QCA:
Attitude toward private propertyType of economyWealth redistributionIndividual freedomNationalism/racism These aspects of political studies can be considered most relevant in the context of the political struggle in the period between 1850 and 1950.
“Attitude toward private property” determines whether the means of production are collectivized or remain in private hands. The extreme left ideologies of the period under examination were unconditionally against private property and called for the socialization of all means of production. Reformists set the same goals but in a more gradual way. In any case, the Left aimed to control private enterprise in one way or another. On the contrary, the right ideologies cherished private property. Thus, due to the opposed approaches to private property, collectivization of property (CP) has been included as a condition in the QCA of political ideologies.
“Type of economy” means whether a political doctrine promotes a market economy or a planned one. The Left developed a personal dislike for the market economy. Many leftist political ideologies advocated for a planned economy instead. The right political ideologies, of course, fully supported a market economy with different degrees of regulation. This condition is essential and gains inclusion in the final analysis as PE—planned economy.
“Wealth redistribution” describes a transfer of wealth from one individual or stratum to others by means of expropriation, taxation, welfare, etc., which fuels a plethora of social programs. Political doctrines from 1850 to 1950 suggested a wide scope of social programs ranging from minimal to very generous. The Left usually advocated for the expansion of wealth redistribution programs, whereas the Right sought to keep them to a minimum. This dichotomy prompts the inclusion of wealth redistribution (WR) as condition in the model.
The attitudes dealing with “individual freedom” range from its complete negation (collectivization of consciousness) to minimal intrusion into private life. Currents on the left had different approaches to this issue. Thus, anarchists promoted a stateless community and complete individual freedom: some viewed a state as a temporary entity, others as the main achievement of the society. The Right traditionally cherished individual freedom, pluralism of opinions, and a nonintrusive state. The issue of personal freedom is therefore included in the qualitative analysis as a potentially significant condition as collectivization of consciousness (CC).
“Nationalism and racism” are self-explanatory attributes, but are extremely sensitive, distorted, and therefore politicized. It is a common perception that the Left was a proponent of internationalism and that nationalism was the trademark of the Right. A careful examination of the different political ideologies and actions of different regimes reveals that nationalism and racism are equally applicable to the doctrines situated at both ends of the political spectrum. Nationalism and racism (NR) could potentially influence an outcome, and therefore is a condition of the analysis.
The next step in fsQCA is defining qualitative anchors that denote full membership (1) and full nonmembership (0) for every condition (aspect of the doctrine) and outcome (place on the spectrum). The qualitative benchmarks that will be used in fuzzy set calibration are presented in table 2.
Table 2: Qualitative anchors
There are two cases of political ideologies, which are characterized by full membership and full nonmembership in both corresponding conditions and outcome: Marxism-Leninism and classical liberalism.
Marxism-Leninism stood for the complete abolishment of private property (CP = 1), utilized planned economy (PE = 1), built a welfare system (WR = 1), totalitarian state (CC = 1), and exerted extreme atrocities on different ethnic groups (NR = 1).Faithful Leninists carried out a policy of coerced Russification: they closed national schools, newspapers, magazines, and houses of worship. The Soviet regime repressed Don Cossacks; deported Poles, Ukrainians, Moldovans, and people from the Baltic states; resettled Volga Germans, Crimean Tatars, Chechens, and Ingush in other territories; starved 4 million Ukrainians to death during the Holodomor; and were outright anti-Semitic. Only Stalin’s death saved Soviet Jewry from a genocide that could match the Nazi one (Gindler 2019a). On the contrary, classical liberalism advocated for the prevalence of private property (CP = 0), a market economy (PE = 0), a minimum of wealth redistribution (WR=0), full individual freedom (CC = 0), and international trade (NR = 0).
Undoubtedly, Marxism-Leninism is a left-wing political doctrine (Left = 1), as it actively seeks the destruction of the democratic state and complete collectivization of the means of production. There is no uncertainty that classical liberalism is a genuine right-wing ideology (Left = 0), guaranteeing property rights and individual freedom. These ideologies are complete opposites based on their membership scores in their corresponding condition configurations and outcomes.
Table 3: Two polar ideologies and their membership scores
The rest of the political philosophies considered, whose ideas are also grounded in the interpretation of the five main factors used in this study, lie between these two extremes. Their membership scores in corresponding sets have to be determined through a calibration procedure.
There are two methods of calibration suggested in fsQCA: direct and indirect. Both methods imply calibration of fuzzy sets using external criteria. In the direct method, values of external standards (economic indexes, for example) are assigned to the corresponding three qualitative anchors (full membership, full nonmembership, and the crossover point). Then, these benchmarks are used to transform the original interval-scale values into fuzzy membership scores. In the indirect method, the researcher performs an initial sorting of cases into different levels of membership, assigning different levels of preliminary membership scores and then refining these membership scores using the interval-scale data.
These techniques assume that interval-scale external indicators exist for every condition and outcome. Unfortunately, a study of political spectrums does not possess such a luxury. There are several reasons for this. The subjects under study are political theories that are abstract ideas, not real social facts. If an idea has never been put in practice, the external standards cannot be appropriately applied to it. For those political ideas that have been institutionalized, some conditions still could not be correlated with existing external indicators. Moreover, for such conditions that can be explained using external standards, the data does not go back chronologically, i.e., to the latter half of the nineteenth century, as much as necessary in order to properly calibrate all the cases. External data could calibrate some of the conditions; nonetheless, it is not advisable to utilize different methods to score membership assessment across various cases and conditions.
Does this mean that a fuzzy set analysis of political ideologies is inappropriate? The answer is definitely no. It is possible to refine the initial membership scores in the indirect method but by some other external procedure. For this purpose, the Delphi method was employed. The Delphi method is a process that involves interaction and cooperation between the researcher and a group of experts proficient in the subject under study. Initially, this method was used in the forecasting procedures and, like any forecast endeavor, it had mixed results. In the study of political spectrums, such prognosis is not an aim. On the contrary, experts are looking back at historical processes and facts that were not systematized, enumerated, or ranked. These circumstances simplify experts’ work, as they need to systematize existing knowledge. Thorough interactions and collaborations between the researcher and experts resulted in the refined fuzzy sets presented in table 4.
Table 4: Fuzzy sets of political doctrine, casual conditions, and memberships score
The first task was to find factors that deterministically classify a political doctrine as leftist. Therefore, only parameters that have universal consensus were chosen for the outcome (Left). Outcomes for fascism and National Socialism were intentionally marked “?,” as there is no consensus among scholars in the placement of these regimes on the political spectrum. This means that neither fascism nor Nazism were taken into account in the initial iterations of mathematical calculations.
A further assay was to build a truth table. A truth table is the main instrument in analyzing casual complexity. It is evident that the same outcome, for example, “ideologies leaning to the left,” can be achieved via several different combinations of casual conditions. In QCA, such combinations are customarily called “recipes,” or configurations. A truth table consists of all logical configurations and corresponding outcomes. The main goal of a truth table analysis is to identify explicit casual connections between “recipes” and outcomes (Ragin 2008).
A truth table differs from the data matrix presented in table 4, where every row denotes a different case. In a truth table, each row instead represents one of the logically possible outcomes AND combinations between the conditions. A truth table that is derived from a fuzzy set establishes a qualitative difference between cases above the anchor of maximum ambiguity—0.5 (more in than out)—and cases below that point (more out than in). As every single condition may be either present or absent, there are 2k total rows in the truth table, where k is the number of conditions. Since the model consists of five conditions, there are thirty-two rows in the table. Among the thirty-two cases, only thirteen have been “observed.”Including cases for fascism and National Socialism. Neither empirical nor abstract evidence is available for the rest. They are, in essence, thought experiments, called counterfactual cases.
Each set constitutes one dimension of the vector space. The five fuzzy set conditions produce a five-dimensional space. Each corner of the space represents one specific combination of the two extreme values that are possible in fuzzy sets—full membership (1) and full nonmembership (0). For each condition, the ones and zeros indicate the different corners of the vector space defined by the fuzzy set’s causal conditions. Therefore, each corner represents an ideal combination where full membership and nonmembership are clearly defined. In fuzzy set QCA, cases might have partial membership in all rows, but they have a membership higher than 0.5 in only one row. Consequently, each case is allocated to that particular ideal row which it fits best.
The fsQCA software developed by Ragin and Davey (2014) was used to construct a truth table from the fuzzy sets in table 4.
Table 4: Truth table (excluding fascism and National Socialism)
"Number" refers to the number of cases with membership greater than 0.5 in that corner of the vector space. Row consistency is the degree to which membership in a given corner of the vector space is a consistent subset of membership in an outcome.
ANALYZING THE TRUTH TABLE Reported row consistency, the last column, demonstrates if a specific truth table row’s conditions are sufficient for its outcome. In other words, it determines whether a conjunction of five specified conditions is a subset of an outcome set. Causal combinations with consistency scores above the cutoff value (0.85 is recommended) are assigned to be subsets of the outcome and are coded 1. If a conjunction of conditions scores below the cutoff value, it is not a subset of the outcome, and it is coded 0 (table 2). The four upper rows in the truth table above scored 1 in the “Left” (outcome) column. It can be understood that the conditions of the rows that score 1 in the outcome are sufficient for the outcome to occur. In other words, there are four combinations of causal conditions that are sufficient to bend a political ideology to the left.
However, the goal is to single out the main factors that influence the polarization of the political spectrum. Thus, a more laconic and parsimonious answer is needed. For this, fsQCA is employed by the Quine-McCluskey algorithm (Quine 1955; McCluskey 1956) to minimize the sufficiency statements presented in the truth table logically. This algorithm uses the simplification rules of Boolean expressions presented in the truth table. If two expressions differ in only one condition but produce the same outcome, then the casual condition that distinguishes the two expressions can be considered irrelevant and can be removed. The end products of the pairwise consecutive logical minimization process are “prime implicants.” “Prime implicants” are combined through logical operand “OR” and under certain circumstances could be logically redundant. Some of them can be dropped from the solution term in order to obtain the most parsimonious formula. The Quine-McCluskey algorithm designates a prime implicant as logically redundant if all of the primitive expressions are covered without including it in the solution formula (Schneider and Wagemann 2012).
The subjects of this study are political philosophies. Some of them materialized but died out, and some continue to prosper. Some political ideas have never been institutionalized and continue to live in the realm of the ideal. Some of the philosophical thoughts included in this study are illogical utopian descriptions of societies living in paradise. These are here considered counterfactual, imaginary political philosophies that are not worse than existing and documented ideas. Political philosophies are not impossible remainders and could be applied in thought experiments. All political ideas have a right to exist; as such, the counterfactual cases should be included in QCA and should undergo the minimization process. For example, take a look at configurations in table 5.
Table 5: Examples of counterfactual cases
The first case describes a political doctrine that neglects private property and the market economy, advocates for extreme nationalism and racism, and desires the implementation of an unobtrusive state. The other political philosophy respects private property and the market economy, preaches bigotry, and advocates for individual freedom. (By the way, this is what right-wing nationalism should look like.) These ideologies are imaginary, but there are no fundamental reasons that such ideas could not be thought of in the past or could not be formulated or their implementation attempted in the future. They are as real as Marxism or Trotskyism in this sense.
Therefore, all types of minimization should be applied in the framework of this research, which would result in the most laconic interpretation of causality between political factors and outcomes. The standard analysis produced the result below.
Table 6: QCA parsimonious result
Solution coverage: 0.96, Solution consistency: 0.96
The results could be interpreted as follows. First, QCA selects three causal conditions that influence the outcome. They are CP (collectivization of property), WR (wealth redistribution), and CC (collectivization of consciousness). Each selected condition has a very high coefficient of consistency and coverage. Therefore, none can be dismissed as insignificant. The overall solution is characterized by an almost perfect score for coverage as well as consistency. Thus, QCA has produced a robust solution that passes the statistical significance test.
In terms of set theory, the solution is written as follows:
(1) CP + WR + CC → Left,
where + is an "or" operand and → is subset operand.
Since all three factors (CP, WR, CC) are subsets of the outcome set (Left), they are sufficient conditions for the outcome to occur. In other words, socialization of the means of production, wealth redistribution, and the subjugation of the individual to the collective are the cornerstone provisions of the Left's ideology. And furthermore, the conditions are connected by the "or" operand, which means that if any of the three conditions happen to be true, the whole expression becomes true as well. That is, if a political ideology suggests the collectivization of property (CP is true) but opposes wealth redistribution (WR is false), the doctrine still belongs to the Left.
This result outlines three distinct paths to leftism: collectivization of private property, wealth redistribution, and collectivization of consciousness. Those paths can be employed individually or complement each other. For example, communism utilizes all three paths; evolutionary socialism predominantly employs a wealth redistribution mechanism; and fascism engages in the collectivization of consciousness and introduction of generous social programs. Recall that fascism and National Socialism were specifically omitted from the model. However, the obtained results show the paths to socialism that both odious regimes employed. One can argue that these regimes did not de jure forbid private property, but one cannot dispute the fact that both the Italian fascists and Nazis implemented a totalitarian state and implemented very generous social programs aimed at the comprehensive support of working people.
Therefore, fascism and Nazism genuinely belong to the socialist current, having at least two conditions out of three as true. For their case, the formula takes the following form:
(2) [CP is false] OR [WR is true] OR [CC is true] → [LEFT is true]
It is also worth mentioning that even though private property was nominally allowed, it was controlled by the omnipotent and omnipresent state. To end the ambiguity surrounding fascism and Nazism, it is necessary to firmly state the following: Italian fascism and National Socialism belong to the Left, as they are incarnations of the non-Marxian socialism that utilized collectivization of consciousness rather than the socialization of private property as the primary path toward socialism (Gindler 2019b). And yet state control over the economy ultimately led to the gradual socialization of private property, which made the state de jure owner.
Also note that the condition NR—nationalism and racism—was not selected as a part of the solution, meaning that this factor is not one that needs to be invoked in designing the political spectrum. Indeed, xenophobic inclinations can be attributed to any political doctrine on the left as well as on the right.
At first sight, it may seem like the exclusion of the factor "planned economy" is an anomaly in the model. However, such is not the case. Some exotic socialist currents exclude the state and all services associated with it from their doctrine. The existence of such political theories in the model has effectively eliminated PE from the parsimonious solution.
Fascism and National Socialism can be included back into the QCA model with the following membership scores in the outcome set: 0.67 for fascism and 1 for National Socialism. Then we will recalculate a truth table. Fascism is assigned a score of 0.67 as an acknowledgment that Fascists proclaimed to be forming a society that, at least in theory, was neither right nor left.
Table 7: Truth table (including fascism and National Socialism)
The standard analysis of the truth table (table 7) led to virtually the same solution, with high coefficients of coverage (0.97) and consistency (0.94), described by the formula (1). Once again, it is essential to remember that formula (1) determines that CP, WR, and CC are sufficient conditions to bend a political ideology to the left. Are these conditions also necessary? In order to answer this question, QCA provides an analysis of the necessary conditions.
A necessity test was performed by the same software that was used in the truth table analysis. The result is presented in table 8. The consistency score was sorted in descending order. With a liberal cutoff value of 0.85, only three individual conditions passed the necessity test. Neither “planned economy” nor “nationalism/racism” made the cut.
Table 8: Analysis of necessary conditions
Thus, it can be concluded that socialization of property, wealth redistribution, and collectivization of consciousness are necessary and sufficient conditions of a left-wing ideology, and that any one of them when true uniquely identifies a political philosophy as leftist. Consequently, these findings lead to a comprehensive definition of socialism.
Socialism is a set of artificial socioeconomic systems which is characterized by varying degrees of socialization of property and consciousness, scales of wealth redistribution, and the imposition of these on the community by revolutionary or governmental elites without the consent of the population.
The next question that needs to be answered is what configurations of conditions characterize right-wing ideology. For that, it is necessary to analyze the outcomes denoted as ~Left (NOT Left) in truth table. The algorithm to find the solution remains the same and brings similar results to formula (1). That is,
(3) ~CP + ~WR + ~CC → ~Left,
where + is "or" operand and → is subset operand.
The formula reads that respect for private property rights, the negation of wealth redistribution, and cherishing of individual freedom are sufficient conditions to bend a political ideology to the right. If any of these conditions happen to be true, the political doctrine is defined as right-wing. The analysis of necessary conditions shows that ~CP and ~WR are statistically valid, whereas ~CC has a low consistency level of 0.78. As the number of cases of right-wing ideologies in this model is small, these cases are allowed a lower consistency threshold for the necessity test.
Anarchism and libertarianism seem to both advocate for individual freedom. However, the stateless society advocated by anarchists does not guarantee the degree of individual freedom promoted by libertarians. For example, Anarcho-communism first materialized in Ukraine from 1918 to 1921 during the revolution in the Russian Empire (Voline 2019). Stateless, multinational communities were organized in a "free territory" in southeastern Ukraine that contained approximately 7 million people. They lived during a time of extreme calamities under the protection and strict regulation of Nestor Makhno’s Revolutionary Insurrectionary Army. Anarchists conducted a social experiment by building a society according to their theoretical provisions but under the umbrella of powerful military forces. The population was subordinated to the dominant political idea that prevailed in these territories. That is why the membership score in “Collectivization of Consciousness” for anarchists is 0.67 instead of 0.
Thus, anarchists' call for liberty does not preclude the collectivization of consciousness. Moreover, it will be shown further that full personal liberty cannot be achieved without complete economic freedom. Even so, anarcho-communists carried out a policy of socialization of private property. Therefore, the degree of freedom attained by anarchists does not reach the bar set by the libertarians.
The solution for the outcome “Right” exhibits complete symmetry with the answer derived for “Left," which is as follows:
CP + WR + CC → Left is a mirror image of ~CP + ~WR + ~CC → ~Left.
This fact allows for the assertion that all three conditions affect the polarization of the entire political spectrum. Thus, we have found the factors that can be used in the construction of objective spectrograms. Given one dependent variable—political spectrum—and three independent variables—CP, WR, and CC—the spectrum would be four-dimensional. However, it is impossible to visualize a four-dimensional space. That is why it is necessary to sacrifice one dimension, i.e., one parameter has to be eliminated. The best candidate for such elimination is WR—wealth redistribution.
It can be assumed that the redistribution of wealth is a form of systematic and gradual encroachment on private property. Suppose an entrepreneur has capital, C, which makes a profit, P. The state confiscates part of the profit in favor of others, using progressive taxation; therefore, the profit becomes P', where >P < P’. An entrepreneur could earn a smaller profit of P' with less capital, C', that is, C' < C, with no progressive tax. Therefore, the state reduces the productive capital of a businessman by the amount C– C'. Wealth redistribution is latent socialization of the means of production. Thus, it is reasonable to assume that wealth redistribution is reflected in the parameter “collectivization of property.” That is why it is safe to eliminate WR from the model without significant deficiency.
The new formulae would be as follows:
CP + CC → Left
(4) ~CP + ~CC → ~Left
It reads that collectivization of property or assault on individual freedom defines the left political doctrine. Inversely, respect for private property rights or personal freedom defines the right ideology.
Now it is possible to build a political spectrogram in three-dimensional space. Let us denote the xaxis as Economic Freedom, the y axis as Individual Freedom, and the z axis as Political Spectrum. Political Spectrum has a range from 0 to 1, where point 0 corresponds to the Left and point 1 to the Right. The x and y axes also have unit lengths. Specific values which correspond to Economic Freedom and Individual Freedom are derived for each political philosophy from membership assessments for CP and CC conditions, (table 1). However, for better visibility, the inverse value is used: 1 becomes 0, 0.33 becomes 0.67, and so forth. Figure 1 presents the theoretical spectrogram of political ideologies in tridimensional space.
Figure 1: Spectrum vs. economic freedom, personal freedom
The graph has the form of a falling leaf, in which the upper end corresponds to the parameters of the ideologies leaning toward the right wing. Thus, at the very peak are political philosophies advocating for maximum personal and entrepreneurial freedom. As the values of individual and economic liberties decrease, the leaf expands in the center, and then it reaches the bottom. The lower end corresponds to the totalitarian ideologies with minimum values for personal and economic freedom. All other ideologies are located on the body of the leaf between these two extremes. However, each one has its respective mark on the spectrum axis. Therefore, different combinations of economic and personal freedoms correspond to particular spots on the political spectrum.
It should be recognized that the three-dimensional representation of the spectrogram is still not convenient for analysis and comprehension. In order to simplify visualization, it is better to represent a three-dimensional figure on a two-dimensional plane. In order to do this, let us cut the three-dimensional figure with planes that are parallel to a coordinate plane Xx, Yy (Economic Freedom, Individual Freedom). Every cutting plane produces plane sections that are called contour lines. A contour line for a function of two variables is a curve that connects points where the function has the same particular value. Thus, every contour line will correspond to the value of the same spectrum.
Figure 2: Political spectrum contour plot
Figure 2 represents the contour lines of the political spectrum that are cut with a pitch of 0.2. The graph is divided into five regions that are all characterized by an equal spectrum range. Indeed, different combinations of xand y> values can determine entry into an area with the same spectrum range. The upper right-hand corner corresponds to political philosophies that are distinguished by high values for individual and economic freedom. These are real right-wing ideologies that occupy a relatively small area and have political spectrum values from 0.8 to 1.0.
The right-wing ideologies occupy a plateau separated from the centrist ones by a steep slope. The slope derives from the small interval between the adjacent contour lines with spectrum values of 0.6 and 0.4. Further, the spectrum expands as the distance between contour lines increases. Thus, left centrist and hard-core left-wing ideologies are located on a wide, gentle slope. This is an indicator that the spectrum inflates to the left. The left totalitarian regimes are at the bottom, having individual freedom and economic freedom values close to zero. Authoritarian regimes have a low magnitude of individual freedom and moderate values for economic freedom. They are located to the right of the totalitarian regimes and below centrists.
The upper-left and lower-right areas are marked as impossible corners. The former has a high degree of individual freedom and a minimal magnitude of economic freedom; the latter has a high level of economic freedom and a low level of individual freedom. The reason for this label follows from the presence of a positive correlation between the degree of individual freedom and the level of economic freedom.
Figure 3: Fitted line plot
The concept of the socialization of private property and the collectivization of consciousness in a broad sense can be most adequately described by indices of economic freedom and individual freedom, calculated in the framework of the Human Freedom Index. The Human Freedom Index describes the state of human freedom in the world based on a broad measure that encompasses personal, civil, and economic freedom. The report is copublished by the Cato Institute, the Fraser Institute, and the Liberales Institut at the Friedrich Naumann Foundation for Freedom (Vásquez and Porčnik 2018).
Correlation analysis between two vectors of freedom determined a significant degree of a positive correlation between them, r = 0.67. It means that an increase in the level of economic freedom leads to an increase in individual freedom and vice versa. The equation of the fitted line plot (figure 3) essentially reads y = x. The line is diagonal, because the angle of inclination with respect to the x axis is forty-five degrees. This means that each unit of increase in the amount of economic freedom leads to a unit of increase in individual freedom. When economic freedom is at its maximum, one should see maximum individual freedom. Correspondingly, a minimum of economic freedom predetermines a minimum of individual freedom. Therefore, the upper left-hand and the lower right-hand corners, which correspond to a minimum of economic freedom and a maximum of individual freedom, on the one hand, and a maximum of economic freedom and a minimum of individual freedom, on the other, constitute impossible combinations. Collectivist anarchists would never achieve a maximum of personal liberty while having a low degree of economic freedom. A coarse despotism will never create a society with a high level of economic freedom.
The indices of economic and individual freedom act as proxies for the theoretical concepts of the socialization of private property and the collectivization of consciousness. They were calculated for individual countries instead of distinct political philosophies. What kind of external index could serve to provide values for an initial approximation for the conceptual left-right political spectrum? The historical data suggests that right-wing political theories are responsible for inducing democratic transformation in society. At the same time, various left-wing ideologies tend to build up totalitarian and authoritarian states. That is why it is plausible to utilize an index of democracy to roughly represent a political spectrum polarization by countries.
In addition to the indices of economic and individual freedom, this study uses the Democracy Index, a product of a UK-based company called The Economist Intelligence Unit (EIU) (The Economist 2018). This index classifies countries by four categories: full democracies, flawed democracies, hybrid regimes, and authoritarian regimes.
Thus, indices for the analysis were created by two different institutions that each employed a unique methodology. After the direct recalibration of index data to the interval [0,1], it became possible to build a three-dimensional graph of degree of democracy versus individual and economic freedom (figure 4). The first thing that catches the eye is the similarity of the leaf-shaped graph to the theoretical surface of figure 1. Closer to the center and the bottom, the surface became more wrinkled, which is expected for the unprocessed data; However, the trend remains the same. Countries with high values of economic and individual freedom occupy the plateau. Totalitarian states are at the bottom, whereas in the middle there are countries with mixed regimes.
Figure 4: Degree of democracy versus individual and economic freedom
This dispersion is most clearly seen in the contour plot (figure 5). The graph has retained a feature depictured for the political spectrum (figure 2). The contour line divided the graph into five zones with different degrees of democracy. There are some irregularities that, for the most part, could be explained by the differences in experts' estimates and opinions of the data. Thus, the developers of the Human Freedom Index assigned Argentina a low economic freedom score, but the EUI experts assigned it a high one for degree of democracy. Argentina is a clear outlier. On the opposite side are Bahrain and the United Arab Emirates, which are classified as authoritarian regimes (which is correct) but score pretty highly in the level of economic freedom. These countries should be placed closer to Saudi Arabia, which bears the same political, economic, and cultural characteristics. Nevertheless, regardless of a few outliers, the graph demonstrates that there are no countries that simultaneously have a high level of individual freedom and a low degree of economic freedom. The combination of a high value of economic freedom and a low level of individual freedom is implausible as well.
Figure 5: Countour plot: degree of democracy
Countries in the upper right-hand corner enjoy economic prosperity. Their average per capita income ($39,249) is significantly higher than those of the other quartiles; the average per capita income in the least free quartile is $12,026 (Vásquez and Porčnik 2018).
Right-wing ideology, which builds on the notion of individual freedom and respect for private property, creates a prosperous society, whereas proponents of leftist ideology—collectivization of private property and consciousness—run societies to misery. The state of affairs in Venezuela is a vivid example; the country deteriorated within two decades. It should be noted that even in developed, industrial countries there is a continuous political battle between the keepers of the status quo—the rightists—and proponents of "change"—the leftists. The war of ideologies goes on with varying success. However, the graph shows that if the leftist idea wins, there is only one direction away from the comfortable plateau—downhill.
Now, let us draw a schematic plot of the political spectrum, bearing in mind the features that have been discovered. The upper-left and lower-right areas are impossible corners. The upper-right region with a maximum degree of both freedoms is a tiny spot that only about two dozen societies have been able to occupy in Fig. 6. The spectrum is inflated to the left. Thus, the central area with a mixed degree of both freedoms is rather large. The packet of utter misery is in the lower left-hand corner. This area is much smaller compared with the centrists’ area but more prominent than the area of prosperity. The lines of the political spectrum values delimit each area.
Figure 6: Spectrum diagram
CONCLUSION When building a political-philosophical spectrogram, scientists faced many obstacles, many of which were ideological. The shape of the graph was influenced by the compiler’s personal preferences and biases. The most challenging task was appointing suitable positions to anarchism, fascism, and Nazism. Different factors, dimensions, axes, and cardinal points have been used in different political spectrograms. Most often, the graphs do not complement each other, and it seems that each of them describes an entirely different reality. There was an urgent need to conduct an objective analysis of political philosophies and find the factors that influence the political spectrum’s polarization. These conditions would determine the geometric dimensions of the spectrogram and its principal axes. For these purposes, the qualitative comparative analysis (QCA) was used, as it allowed the introduction of a fraction of objectivity due to the use of a formalized mathematical apparatus of the theory of sets.
QCA helped to identify the most concise causal conditions that influence the bending of an ideology to one side or the other. Thus, it was found that spectrum polarization depends on three conditions: attitudes toward private property (CP), individual freedom (CC), and wealth redistribution (WR). It should be noted that these factors are both sufficient and necessary and statistically reliable. They influence both wings of the political spectrum. The ideology is left leaning if it advocates for the socialization of private property, collectivization of consciousness, and generous wealth redistribution. These three factors denote different paths to socialism, and even if just one of them is present, the ideology or regime is belongs to the Left. Communists utilized all three ways to achieve a “paradise”; evolutionary socialists employed wealth redistribution as the primary path; National Socialists and Fascists used subjugation of the individual to the collective and wealth redistribution; collectivist anarchists were engaged in the collectivization of property. On the contrary, the ideology is right leaning if it respects private property and individual freedom and declines excessive wealth redistribution.
With firmly determined factors that influence the political spectrum's polarization, it became possible to build a spectrogram unambiguously. However, a function of three variables can be presented only in four-dimensional space, which is quite challenging to visualize. Therefore, one condition had to be eliminated. The wealth redistribution factor was chosen, because it can be regarded as inherently a latent collectivization of the means of production meaning that its influence can be reflected in the socialization of property. Moreover, the Economic Freedom Index has already considered the impact of such governmental monetary and fiscal actions.
The spectrogram was presented as a contour plot where each contour line divided the graph into regions. The resulting graph resembled the trimmed Nolan chart, as it is utilized the same axes; however, it should be remembered that this is a two-dimensional representation of the three-dimensional surface, which reflects "left-right" polarization of the political spectrum. The political spectrum developed here ranges from 0 to 1, where the left-leaning political philosophies are grouped closer to 0, and the right leaning ones are in the proximity of 1. In our example, the values of the political spectrum from 0.8 to 1 are occupied by the right-wing ideologies. On the opposite end, the interval between 0 and 0.2 is reserved for hard-core leftist doctrines. The rest of the political philosophies are in between. Therefore, even though the two-dimensional contour plot was derived from a three-dimensional model, it is still makes it possible to classify doctrines along the left-right axis, which is especially convenient for a layperson.
It is very plausible to use economic and individual freedom indices as proxies for the causal factors in our model. Very roughly, an index of democracy can be used as a representation of political spectrum polarization. Nevertheless, using those indices in this model showed a good match between the theory and reality. There is a significant positive correlation between two vectors of freedom. This means that an increase in the magnitude of one leads to a rise in the other. The regression line has a form of y = x, which effectively eliminates two combinations of factors from consideration. Thus, maximal economic freedom cannot coincide with minimal individual freedom. Also, maximal individual freedom is incompatible with minimal economic freedom. These combinations of factor values are reflected in the graphs as impossible corners. Therefore, spectrograms schematically can be presented in the shape of a leaf crossed by spectrum lines. A user can plot different ideologies and regimes on the graph and grade them along available axes, including one-dimensional classification as well.
Electing better planners won't make socialism work. Central planning fails because planning without the feedback mechanisms of the market is an impossible task.
Original Article: "Central Planning by Business Is Not the Same as Central Planning by Government"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
The discontent and unrest that followed the 2020 presidential election was, at least in major part, one of the innumerable destructive consequences of an almost 250-year-old error in economic theory made by Adam Smith: namely, the belief that profits are a deduction from wages.
Original Article: "Class Harmony, Not Class War"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
In January 1921, thirty-five hundred people packed the Lexington Theater in midtown Manhattan to hear a debate of socialism. Ludwig von Mises in Vienna later called the debate "instructive."
Original Article: "Debating Socialism: The Seligman-Nearing Debate at 100"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
In most economies, inventories are valued at market prices, while in China they are valued by the authorities and adjusted later. This is just one of many ways China manipulates GDP data.
Original Article: "There Is No Chinese Economic Miracle".
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
In most economies, inventories are valued at market prices, while in China they are valued by the authorities and adjusted later. This is just one of many ways China manipulates GDP data.
Original Article: "There Is No Chinese Economic Miracle".
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
[This talk was given at the Mises Institute Spring Seminar Series, Auburn, Alabama, March 5, 2003, and included in Speaking of Liberty (2003).]
The Mises Institute was founded as a research center based on liberal ideas that have always been under fire: the ideas of Mises and the tradition of thought he represents. That means a focus on the Austrian school of economics, and, in political philosophy, individual liberty and the need to prevent the state and its interests from crushing it, as all states everywhere are inclined to do.
The first priority of such an institute is to keep a body of ideas alive. Great ideas have no inherent life of their own, especially not those that are opposed by the powers that be. They must circulate and be a part of the academic and public mind in order to avoid extinction.
And yet we must do more than merely keep a body of thought alive. We don’t just want our ideas to live; we want them to grow and develop, advance within the culture and public debate, become a force to be reckoned with among intellectuals, be constantly employed toward the end of explaining history and current reality, and eventually win in the great ideological battles of our times.
What is the best means of achieving such victory? This is a subject that is rarely discussed on the free market right. Murray Rothbard pointed out that strategy is a huge part of the scholarship of the Left. Once having settled on the doctrine, the Left works very hard at honing the message and finding ways to push it. This is a major explanation for the Left’s success.
Our side, on the other hand, doesn’t discuss this subject much. But since some sort of strategy is unavoidable, let me just list a few tactics that I do not believe work. The following, I’m quite sure, will fail for various reasons:
QUIETISM. Faced with the incredible odds against success, there is a tendency among believers in liberty to despair and find solace in being around their friends and talking only to each other. This is understandable, of course, even fruitful at times, but it is also irresponsible and rather selfish. Yes, we may always be a minority, but we are always either growing or shrinking. If we shrink enough, we disappear. If we grow enough, we win. That is why we must never give up the battle for young minds and for changing older minds. Our message has tremendous explanatory power. We must never hide our light under a bushel.
RETREAT. One mark of the liberal tradition is its intellectual rigor. It contains more than enough intellectual substance to occupy the academic mind for several lifetimes. There is a tendency, then, to believe that retreating into academia and eschewing public life is the correct path. The idea is that we should just use our knowledge to pen journal articles and otherwise keep to ourselves, in the hopes that someday this path will pay off in terms of academic respectability. But this has not been the path of brilliant minds from Turgot and Jefferson, Bastiat and Constant, Mises and Hayek, to Rothbard and the adjunct scholars of the Mises Institute. They are all engaged at some level in public debate. They believed that too much is at stake to retreat solely to private study. We cannot afford that luxury.
HOLDING CHAIRS IN THE IVY LEAGUE. I’ve seen this related error take a real toll on otherwise good minds. A young person can start out with real commitments, but he may fear the marginalization that comes with holding unpopular ideas. He tries to pass himself off as a conventional scholar, while sneaking in libertarian thoughts along the way. He may intend to reveal his true colors eventually, but then there are the demands of tenure and promotion, and social pressures to boot. Eventually, in short, he comes to sell out.
CONVINCING THE POLITICIANS. Another type of problem stems from the belief that political organizing is the answer. But this can only lead to despondency, as effort after effort fails to yield fruit. Despite what you hear, the political class is not interested in ideas for their own sake. They are interested in subsidizing their friends, protecting their territory, and getting re-elected. Political ideology for them is, at best, a hobby. It is only useful insofar as it provides a cover for what they would do otherwise. I’m generalizing here, and yes, exceptions are possible. In fact, I can think of one in our century: Ron Paul.
PLACING HIGH-PROFILE ARTICLES. I know think tank people who would do just about anything to get in the New York Times or Wall Street Journal. This is a snare and delusion. Once you put a priority on the medium over the message—and this is inevitable once you begin to think this way—you are forgetting why you got in this business to begin with. If these venues come to you and ask you to offer an opinion you hold, by all means do so. But that is not the way it works.
GETTING ON TV. The same applies here. I know people who were once dedicated to the ideas of liberty who developed a hankering for media attention, and eventually forgot why they got into the ideas business in the first place.
STARTING MORE THINK TANKS. I know this sounds silly, but some people on our side of the fence believe that the more nonprofit organizations there are, the more likely we are to win the battle of ideas. To me, this amounts to confusing the success that franchising represents in the commercial marketplace with ideological success, which is not guaranteed by the proliferation of websites and institutes. Indeed, ideology is not solely a commercial enterprise. We are a nonprofit research institute for a reason. What we do pays huge returns for civilization but not in the form of accounting profits. Our reward comes in other ways.
BUILDING AN IMMENSE ENDOWMENT AND HIRING A HUGE STAFF. Funding and staff alone will solve nothing. Funding is crucial and heaven knows the Mises Institute needs more of it. Staffing is great, so long as the people are dedicated and competent. But neither is an end in itself. The crucial question is whether the passion for ideas is there, not just the financial means. Amazing things are possible on small budgets, as I think the success of the Mises Institute shows.
WAIT FOR THE COLLAPSE. We know that socialism and interventionism cannot work. We know they fail, and we suspect that they might finally fail in a catastrophic manner. This may be true, but we are mistaken if we believe that the ideas of liberty will naturally emerge in such a setting. Crisis can present opportunities but no guarantees.
Finding errors such as these is easy, and I could list a dozen more. Let me offer a few points I think we should remember.
Our ideas are unpopular. We are in the minority. Our views are not welcome by the regime. They often fall on the deaf ears of an indifferent public. Big newspapers don’t often care what we think. In fact, they want to keep us out of their pages. Politicians will always find us impractical at best, and threatening at worst.
In short, we fight an uphill battle. We must recognize this at the outset. We are what Albert Jay Nock called the remnant, a small band of brothers who have special knowledge of theory and history and a concern for the well-being of civilization. What we do with that knowledge and concern is up to us. We can retreat or sell out, or we can use it as our battle cry and go forward through history to face the enemy.
Let me offer just a quick outline of some principles I use:
EDUCATE EVERY STUDENT who is interested in what we do. Never neglect anyone. One never knows where the next Mises or Rothbard or Hayek or Hazlitt is going to come from.
ENCOURAGE A PROLIFERATION OF TALENTS. Some people are great writers. Others are great teachers. Still others have a talent for research. There are other abilities too, like public speaking and technological competence. It takes all these abilities to make up the great freedom movement of our time. There is no need to insist on a single model; rather, we should make use of the division of labor.
USE EVERY MEDIUM we can to advance our ideas, from the smallest newsletter to the largest website. Never believe that a medium is beneath you, or above you. We must be in the academic journals and we must be in the pages of the local newspaper. Along these lines, the web has solved the major problem we faced throughout history, namely finding a medium to communicate our ideas in a way that makes them available to everyone who is interested. But it never happens automatically. It requires tremendous effort and creativity to bring about change.
ADHERE TO WHAT IS TRUE. This means avoiding fancy ways of pitching your ideas in keeping with current trends. It’s fine to be attentive to sales techniques. But never let this concern swamp your message.
SAY WHAT IS TRUE. Never underestimate the power of just stating things plainly and openly. Whatever the topic, the ideas of liberty have something to add that is missing from public debate. It is our job to make that addition.
DON’T NEGLECT ACADEMIA. Yes, colleges and universities are corrupt. But they are where the ideas that rule civilization come from. We must not neglect them. We must publish journals, sponsor colloquia, help faculty and students. Never let academia believe it has the luxury of forgetting about our ideas. This is why the Mises Institute holds seminars for professors and students, as well as financial professionals and interested people of every sort.
DON’T NEGLECT POPULAR CULTURE. Yes, popular culture is corrupt, but not entirely. We must not neglect it, because it has a huge impact on the way people see themselves and learn about their world.
USE YOUR MINORITY STATUS TO YOUR OWN BENEFIT. There is no sense in duplicating what others already do. If you publish, publish something radical and surprising. If you produce a book, make it a book that will change people’s minds. If you hold a seminar, say things that are worth saying. Never fear the unconventional. It is possible to be conventional in form and radical in content.
REMEMBER THAT INFLUENCE CAN BE INDIRECT. The effect of ideas on a civilization is like waves on water. By the time they reach the shore, no one remembers or knows for sure where they came from. Our job is to stick to the task. We should use every means at our disposal to get the ideas out there; what happens after that is as unpredictable as the future always is.
SUCCESS CAN TAKE MANY FORMS. I am often asked how we can think we are succeeding even as the government keeps growing. To me, this poses no great quandary. All governments want total control. What stops them, primarily, is ideological opposition. Without it, the government would grow much quicker and civilization would be doomed in short order. To what extent has the circulation of the ideas of liberty slowed down the growth of the state? How much worse off might we be?
CHANGE CAN HAPPEN QUICKLY. The ideological foundations of statism weaken in ways that are not always detectable. Change can happen overnight, after which all becomes clear in retrospect. If you had told the average Russian in 1985 that in five years the Soviet Union would be defunct, you would have been dismissed as a madman. It’s my opinion that statism in America may have run its course. We should all do our best to speed up the process.
In the history of warfare, there have always been armies that are ruled by the center and emphasize drills, lines, and discipline. They tend to treat their soldiers as expendable. They can win but at a huge price.
The other model is guerrilla warfare, usually undertaken by the underdog in the battle. Guerrilla armies usually consist of volunteers; every soldier is considered valuable. Their tactics are unpredictable. They are not ruled by the center but rather exploit the creativity of each member. Such armies have proven remarkably effective in the history of warfare.
I believe that the guerrilla model is what suits us best—a campaign of ideological guerrilla warfare conducted by the remnant. This is no guarantee of success but it is the best guarantee against failure that I know.
The key to our success, I believe, is that the Mises Institute is all about being attached to principle and truth before anything else. We’ve never traded short-term attention for building for the long term.
Mises did not either, and he paid a personal price. But his ideas are changing the world. We must all follow his lead, never giving in, never giving up, fighting for truth until our last breath. We have the passion and energy. Most importantly, we have truth on our side. I believe we can have the victory.
Klaus Schwab of the World Economic Forum has big plans for a "sustainable" future. Most of it involves the destruction of markets and basic human rights.
Original Article: "The Dystopian "Fourth Industrial Revolution" Will Be Very Different from the First One".
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Why don't corporations just get bigger and bigger until they take over the whole economy? Unlike states, firms aren't necessarily better off as they get bigger.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Original Article: "Why the Economy Isn't Controlled by One Big Corporation".
ABSTRACT: The central thesis of this article is that Plato’s philosophy is the foundation of Keynesian economics. First, Plato’s philosophy and his socialism are discussed and it is shown that Keynes was a disciple of his. Next, evidence is presented to show that Keynes advocated a brand of socialism that was virtually identical to Plato’s. Finally, the paper demonstrates the Platonic structure of Keynesian economics.
KEYWORDS: socialism, Plato, John Maynard Keynes
INTRODUCTION It is impossible to completely understand John Maynard Keynes (1883–1946) and his economics without understanding his early philosophical beliefs. His main intellectual interest as a young man was philosophy, not economics. And later, when he turned to economics, he developed Keynesian economics along the lines of his early philosophical beliefs. Robert Skidelsky (2009, 56) agrees that “his economic work was philosophically inspired.” Thus, as Rod O’Donnell (1996, 214) observes, “to understand Keynes’s economics fully, we must first take a step backwards and come to grips with his philosophy.”
Conventional accounts of Keynes’s intellectual development emphasize the role of his ethical master George Edward Moore (1873–1958). However, ethics is only one branch of philosophy, and any ethical theory must rest on the more fundamental branches of metaphysics and epistemology. Unfortunately, scholars have almost totally neglected these areas of Keynes’s thought. No doubt, this neglect has been convenient for his defenders. The protectors of the Keynesian faith are desperate to portray Keynes as one of history’s great liberals (Harrod 1951, 192; Skidelsky 1992, xv; 2009, 157). But his metaphysical and epistemological thought is totally incompatible with liberalism. In metaphysics and epistemology, Keynes’s master was the father of socialism: Plato (c. 428–347 BC). Those desperate to associate Keynes with liberalism have overblown Moore’s influence at the expense of Plato’s.
The central thesis of this article is that Plato’s philosophy is the foundation of Keynesian economics. The following section discusses Plato’s metaphysics, epistemology, and political philosophy. Section 2 provides evidence that Keynes was deeply influenced by Plato and adopted his metaphysics and epistemology. Section 3 examines the many similarities between Plato’s and Keynes’s political philosophies. Finally, section 4 illustrates the Platonism inherent in Keynesian economics through a reductio ad absurdum.
- PLATO’S PHILOSOPHY AND POLITICS Before Plato, the Greek philosopher Heraclitus (f. 504 BC) argued that humankind lives in a world of constant change. As Heraclitus exclaimed, “Everything is in flux and nothing is at rest” (Plato, Cratylus 402a). Although it may appear that something exists in an unchanging state, this is just a trick played on the mind by the unreliable senses. Given that everything is constantly changing, Heraclitus concluded that nothing can truly exist. But if everything is constantly changing, if nothing truly exists, then it is impossible to have any objective knowledge about reality. After all, it is impossible to know that which does not exist. As Karl Popper writes, “If all things are in continuous flux, then it is impossible to say anything definite about them. We can have no real knowledge of them” (Popper 1945, 23; Guthrie 1975, 32). Heraclitus’s theory of flux made him the father of the Sophists, the Greek philosophers who argued that it is impossible to have any objective knowledge of reality.
Plato’s goal was to refute the Sophists. He wanted to show that it is possible for human beings to have objective knowledge about reality. Of course, Plato could not deny that things change in this world. But to show that objective knowledge is possible, he felt compelled to show that there are some things that do not change.
Taking a cue from the Pythagoreans, Plato’s solution was to argue that there are two different realities. He posits “two kinds of existences, the visible and the invisible” (Phaedo 79a). The visible reality in which human beings live is Heraclitus’s world of flux. Beyond this visible and changing reality, there is an invisible reality that is completely devoid of change. This invisible and unchanging reality is Plato’s famous world of Forms. As Plato writes:
[The world of Forms] keeps its own form unchangingly, which has not been brought into being and is not destroyed, which neither receives into itself anything else from anywhere else, nor itself enters into anything else anywhere, is one thing. It is invisible—it cannot be perceived by the senses at all—and it is the role of understanding to study it. [The visible world] is that which shares the other’s name and resembles it. This thing can be perceived by the senses, and it has been begotten. It is constantly borne along, now coming to be in a certain place and then perishing out of it. (Timaeus 52a)Plato also expresses his theory of two realities with his Allegory of the Cave (Republic 514a–520d). The cave is Plato’s analogy for the visible world in which humans live, while the world outside the cave is his analogy for the world of Forms. See Copleston ([1946] 1993, 160) and Jones (1952, 114).
W. T. Jones summarizes Plato’s theory of two realities as follows:
According to Plato, reality is not exhausted by the world of sense perception. This world of sense perception is the world of physical objects in space and time; but besides this world, different from it but standing in intimate relation to it, is another world—nonphysical, nonspatial, nontemporal. This world Plato called the world of [Forms]….Plato believed that there is a world of Forms, over and beyond the sensible world, and that these forms are nonphysical, nonspatial, and nontemporal, yet very real. (Jones 1952, 103–04; Copleston [1946] 1993, 166; Guthrie 1975, 14, 330)
Plato maintained that it is impossible to obtain objective knowledge about the visible world. However, to Plato it is possible to have objective knowledge about the world of Forms. In fact, all objective knowledge is knowledge of the world of Forms (Copleston [1946] 1993, 149; Jones 1952, 105). This means that the world of Forms is the higher, truer reality. The visible reality in which humans live is merely a poor copy, or distorted reflection, of the perfect and immutable world of Forms.
Plato’s metaphysical theory of two realities created an epistemological problem: How do human beings, confined to this lower reality, acquire knowledge from the higher world of Forms? Enter Plato’s theory of the soul, or psychology. Plato argued that the soul exists in the world of Forms prior to birth:
If those realities we are always talking about exist, the Beautiful and the Good and all that kind of reality, and we refer all the things we perceive to that reality, discovering that it existed before and is ours, and we compare these things with it, then, just as they exist, so our soul must exist before we are born. (Phaedo 76d–e)
Since the soul existed in the true reality before birth, it contains all of the objective knowledge from the world of Forms. In contrast to Aristotle, who argued that the human mind is a blank slate (tabula rasa) at birth, Plato argued that human beings are born with innate knowledge from the world of Forms.
Again, Plato is faced with an epistemological problem: Why do most humans seem incapable of accessing the soul’s objective knowledge from the world of Forms? Plato’s solution is his theory of recollection. He argues that the process of being born into this reality causes humans to forget the soul’s objective knowledge from the world of Forms. To Plato, acquiring knowledge, or learning, involves remembering the knowledge we possessed while the soul existed in the world of Forms: “For us learning is no other than remembering. According to this, we must at some previous time have learned what we now remember. This is possible only if our soul existed somewhere before it took on this human shape” (Phaedo 72e–73a; Meno 81c–e). Clearly, Plato’s metaphysics requires his epistemology, and vice versa. Metaphysically, there are two realities, and epistemologically, learning in the lower reality means remembering objective knowledge from the higher reality. Frederick Copleston writes on Plato’s remembrance theory:
The [Forms] exist in their heaven….Plato’s way of speaking about the…[Forms] clearly supposes that they exist in a sphere apart [from the world of Forms]. Thus in the Phaedo he teaches that the soul existed before its union with the body in a transcendental realm, where it beheld the subsistent intelligible entities or [Forms]….The process of knowledge, or getting to know, consists essentially in recollection, in remembering the [Forms] which the soul once beheld clearly in its state of pre-existence. ([1946] 1993, 166; Guthrie 1975, 249, 329, 426)
The soul is Plato’s indispensable link between his metaphysics and epistemology. According to Plato, the soul consists of three parts (Republic 435b–42d; Phaedrus 246a–b; Copleston [1946] 1993, 208–10).Plato also expresses his theory of the three-part soul in his Myth of the Metals (Republic 412a–415c). The first part of the soul is the appetitive soul. This is the lowest part of the soul, and it drives the human desire for food, shelter, wealth, and the like. The second part of the soul is the spirited soul. It is the middle part of the soul, and it is driven by the passions or emotions. The spirited soul impels human beings to power and glory. Finally, the highest part of the soul is the rational soul, and it is driven by reason. According to Plato, every soul contains all three parts: appetitive, spirited, and rational. Importantly, however, the three parts are not equal in every person. One part of the soul tends to dominate each person. In most people the appetitive soul dominates, in some the spirited soul dominates, and in special cases the rational soul dominates.
Plato divides society into three separate classes: the producers at the bottom, the auxiliaries in the middle, and the guardians at the top. These three classes correspond to the three-part soul (Republic 441c; Jones 1952, 136–39). The producers are dominated by the appetitive soul, and the money motive is their defining characteristic. Just as the appetitive part of the soul is the lowest part of the soul, the producers are the detestable, money-motivated class at the bottom of society. The auxiliaries are the soldiers, and they are governed primarily by the spirited soul. Finally, the guardians are the philosophers. The guardians are the blessed class, the class whose souls are ruled by reason. Unfortunately, most human beings are dominated by the appetitive soul, and only a special few are dominated by the rational soul. Hence, most members of society are in the depraved producer class, while the blessed guardian class contains only a small number of natural elites (Republic 428e).
Plato’s division of society into three classes is the key to his politics. Based on his class theory, Plato holds that a nonviolent, spontaneous order is impossible. Since the masses, or producers, are dominated by the appetitive soul, social order must be imposed with systematic government violence. Generally, the ancient Greeks failed to understand how society can be organized nonviolently, or spontaneously, via the invisible hand. Like Plato, Heraclitus and the Sophists advocated violent methods of social organization. Heraclitus claims, “We must know that war is common to all and strife is justice” (Fragments 62). For the Sophists Callicles and Thrasymachus, “the superior should take by force what belongs to the inferior...the better should rule the worse” and “justice is nothing other than the advantage of the stronger” (Gorgias 488b; Republic 338c). Moreover, the depravity of the masses means that they must be barred from participation in politics; democracy is out of the question:
A mass of any people whatsoever would never be able to acquire this sort of expert knowledge and so govern a city with intelligence…we must look for that one constitution, the correct one, in relation to a small element in the population, few in number, or even a single individual. (Statesman 297b–c; Jones 1952, 146–47)Plato had personal reasons to reject democracy. He was born into a noble family that despised democracy. His uncle, Charmides, and his cousin, Critias, were members of the notorious Thirty Tyrants (Jones 1952, 92; Guthrie 1975, 11). This group attempted to abolish Athenian democracy in 404 BC. Plato’s contempt for democracy only intensified when Athenian democrats executed his master Socrates.
Naturally, Plato insists that the ruler must come from his own class, the guardians. Why? The producers are almost totally removed from the world of Forms. Consequently, they have no real objective knowledge of reality. The auxiliaries are superior to the money-motivated producers, but they are also too far removed from the world of Forms to rule. Only the guardians have an intimate connection with the world of Forms; only the philosophers have objective knowledge of what is true and good (Republic 476d–80a). Thus, Plato famously advocates the rule of the philosopher-king:
Until philosophers rule as kings or those who are now called kings and leading men genuinely and adequately philosophize, that is, until political power and philosophy entirely coincide, while the many natures who at present pursue either one exclusively are forcibly prevented from doing so, cities will have no rest from evils, Glaucon, nor, I think, will the human race. (Republic 473c–d)
What kind of economic system must the guardians impose? Plato’s ideal republic is a socialist, or communist, republic.As Ludwig von Mises writes, “There is no economic difference between socialism and communism. Both terms, socialism and communism, denote the same system of society’s economic organization, i.e., public control of all the means of production….The two terms, socialism and communism, are synonyms” ([1956] 2006, 38; [1922] 1981, 497; [1949] 1998, 259, 713). Also see note 20. As Copleston writes, “Plato expressly clings to communism as an ideal” ([1946] 1993, 235; Popper 1945, 40–41). Goldsworthy Lowes Dickinson, one of Keynes’s mentors, admits, “[Plato] was, in fact, a communist” (1931, 80; [1896] 1911, 96). Plato advocated a communist republic ruled by an elite philosopher-king.
Many interpreters attempt to moderate Plato by insisting that he only advocated communism for the guardians and auxiliaries. For example, Dickinson argues, “The communism of Plato…applied only to the guardians and soldiers, and not to the productive class on whom they depended” ([1896] 1911, 99). On the contrary, Plato advocates communism for all:
You’ll find the ideal society and state, and the best code of laws, where the old saying “friends’ property is genuinely shared” is put into practice as widely as possible throughout the entire state….[I]n such a state the notion of “private property” will have been by hook or by crook completely eliminated from life. Everything possible will have been done to throw into a sort of common pool even what is by nature “my own.” (Laws 739c, 877d–e; Republic 423e–24a)
Certainly, it would be impossible for the guardians and auxiliaries to live in communism without imposing socialism on the producers as well. The guardians and auxiliaries do not produce any goods, let alone the basic goods required for survival. To survive, the guardians would have to systematically pilfer goods and services from the producers. This would require the use of systematic government violence against the producers and their property.As Mises stressed, institutionalized violence against person and property is the essence of socialism: “Socialism is the expression of the principle of violence” ([1922] 1981, 320; Huerta de Soto [1992] 2010, 49, 84–85). Moreover, the guardians would have to exercise significant, if not complete, control over production. The guardians and auxiliaries require certain goods to rule the city-state and wage war, and the guardians would have to force producers to produce those goods in the right quantity and quality at specified times. In turn, this would require the guardians to control key raw materials and capital goods.
Socialism is defined as government control of production (Schumpeter [1942] 2006, 167). Undoubtedly, Plato’s ideal society would require extensive government control over production. As Jones writes, “Interference, or intervention, by the state is necessary, Plato held, in every aspect of life….[A]ll would be controlled and regulated from above” (1952, 149–50). And since people can only consume what is produced, government control of production also gives it control of consumption. In the end, Plato’s ideal republic would be a full-blown socialist republic.
All brands of socialism require government control over the size of the population. As Ludwig von Mises writes, “Without coercive regulation of the growth of population, a socialist community is inconceivable. A socialist community must be in a position to prevent the size of the population from mounting above or falling below certain definite limits” ([1922] 1981, 175). Like every consistent socialist, Plato advocates totalitarian controls on the size of the population:
[The guardians’] aim will be to keep the number of males as stable as they can, taking into account war, disease, and similar factors, so that the city will, as far as possible, become neither too big nor too small….And then, as the children are born, they’ll be taken over by the [government] officials appointed for the purpose…[T]hey’ll take the children of good parents to the nurses in charge of the rearing pen situated in a separate part of the city, but the children of inferior parents, or any child of the others that is born defective, they’ll hide in a secret and unknown place, as is appropriate….A woman is to bear children for the city from the age of twenty to the age of forty, a man from the time that he passes his peak as a runner until he reaches fifty-five. (Republic 460a–e)
In addition to the size of the population, Plato advocates government control over its quality. He holds that government must prohibit individuals from procreating with members of other classes: “The intermixing of [producers] with [auxiliaries] and [producers] with [guardians] that results will engender lack of likeness and unharmonious inequality” (Republic 546e–547a). He even recommends killing inferior children to promote the quality of the human race: “The best men must have sex with the best women as frequently as possible, while the opposite is true of the most inferior men and women…[I]f our herd is to be of the highest possible quality, the former’s offspring must be reared but not the latter’s” (Republic 459d; Adam [1902] 2010, 357–60; Popper 1945, 44). In short, Plato was an early father of eugenics (Taylor [1926] 1955, 275; Copleston [1946] 1993, 229).
Plato was a sexist who held that women are inferior to men.Plato allowed women to be guardians, and this has led some to argue he was a feminist. But as Gregory Vlastos says, “In his personal attitude to the women in his own contemporary Athens Plato is virulently anti-feminist” (1989, 116). On Plato’s anti-feminism, see Annas (1976) and Buchan (1999). He proclaims, “Do you know of anything practiced by human beings in which the male sex isn’t superior to the female in all these ways?…It’s true that one sex is much superior to the other in pretty well everything….In every way of life women are inferior to men” (Republic 455c–d, 388a, 431c, 557c, 563b, 605e). Plato’s sexism tainted his politics. As Dickinson notes, “Woman, in fact, was regarded as a means, not as an end; and was treated in a manner consonant with this view” ([1896] 1911, 169). Plato endorses common ownership, or communism, in women: “All these women are to belong in common to all the men…[N]one are to live privately with any man…[T]he children, too, are to be possessed in common, so that no parent will know his own offspring or any child his parent” (Republic 457d, 423e–24a).
Like all socialists, Plato despised money and the money, or profit, motive. For Plato, the love of money is detestable, and the producers “are by nature most insatiable for money” (Republic 442a). Plato wants individuals to remove themselves from earthly life and live in contemplation of the world of Forms (Phaedo 65a–66a). The money motive distracts the soul and prevents the producer from contemplating the higher reality: “The [producer] types pull the constitution towards money-making and the acquisition of land, houses, gold, and silver, while both the [guardians and auxiliaries]—not being poor, but by nature rich or rich in their souls—lead the constitution towards virtue” (Republic 547b). For guardians and auxiliaries, “it is unlawful to touch or handle gold or silver” (Republic 417a). He wanted to outlaw the producers from hoarding gold and silver: “No private person shall be allowed to possess any gold or silver, but only coinage for day-to-day dealings” (Laws 742a). Scorn for money and the profit motive has been a hallmark of socialist thought since Plato.
Plato’s ideal republic is a socialist republic ruled by a totalitarian dictator. As Popper (1945, 149) stresses, “Plato’s political programme is purely totalitarian.” Mises agrees: “Plato…elaborated a plan of totalitarianism” (1962, 120, 85–86).Some interpreters deny Plato’s totalitarianism. But C. C. W. Taylor writes, “It is…uncontroversial that the ideal state of the Republic is a totalitarian state. Where there is room for dispute is on the question of what kind of totalitarian state it is” ([1986] 1999, 282). Plato attempted three times to establish a totalitarian state in Syracuse (Jones 1952, 101). Further, as Popper writes, “[Plato’s] Academy was notorious for breeding tyrants” (1945, 229n25). At least eight of Plato’s students either became tyrants or attempted to become tyrants: Callippus of Syracuse, Chaeron of Pellene, Clearchus of Heraclea, Coriscus of Skepsis, Euagon of Lampsacus, Erastus of Skepsis, Hermias of Atarneus, and Timolaus of Cyzicus. And how did Plato justify the tyranny of the philosopher-king? With his metaphysics and epistemology. To Plato, the human race comprises three fundamentally different species, or animals. Most souls are cursed to domination by the depraved appetitive soul. Given the depravity of the masses, totalitarian socialism must be imposed to establish social order and usher in the utopia. And who must rule the socialist state? Absolute dictatorial power must belong only to the elite philosophers, those blessed few who are dominated by the superior, rational soul. All must submit to the omnipotent philosopher-king, for only he is endowed with the objective knowledge needed to establish the earthly utopia.
A mystic is a person who claims to obtain objective knowledge from a supernatural source. Clearly, Plato was a mystic: “That he was a theist, deeply religious and with more than a touch of mysticism in him, no one would deny” (Guthrie 1978, 33; Dickinson 1931, 76, 194). His metaphysical theory of the world of Forms is a mysticoreligious theory. Even a devoted Platonist such as Alfred E. Taylor ([1926] 1955, 285) must admit that “when the forms are mentioned in a Platonic dialogue, their reality is neither explained nor proved.” Questioning Plato is forbidden, however. Any person with the audacity to question the existence of the supernatural world of Forms must have a defective soul. The chief virtue of the ignorant producer is uncritical obedience to the omniscient philosopher-king.
- KEYNES’S PLATONIC METAPHYSICS AND EPISTEMOLOGY Although Plato’s influence on Keynes is almost universally neglected, some scholars have hinted at the connection. For example, O’Donnell admits in a footnote, “It is possible to view Keynes’s philosophy as a variety of Platonism” (1989, 345n32). Athol Fitzgibbons acknowledges that “even in the General Theory, there remain suggestive structural similarities between Keynes’s political philosophy and Plato” (1988, 174, 177). Still, sympathetic commentators have been reluctant to explore his Platonism in any detail.
Keynes became a disciple of Plato when he was an undergraduate at King’s College, Cambridge. John P. Hill notes, “There had always been something of a Platonic tradition at Cambridge” (1976, 3). As an undergraduate, Keynes surrounded himself with the Cambridge philosophers George Edward Moore, Goldsworthy Lowes Dickinson, and John M. E. McTaggart. Soon after he arrived at Cambridge in October 1902, Keynes was invited to join Dickinson’s Discussion Society (Skidelsky 1983, 112).Dickinson is perhaps the most neglected figure in Keynes’s intellectual development. The Platonist Dickinson wrote in August 1884, “I’ve just descended from a seventh heaven….[I’ve been] reading and meditating on Plato’s Symposium….I’m ‘sitting at Plato’s feet’ at present, and have really never experienced such ‘ecstasy’” (quoted in Forster 1934, 43). He proclaimed, “I was led by Plato (among other things) to a belief that there was some supernormal mystic avenue to truth” (1973, 67). In May 1908, Dickinson helped secure Keynes a lectureship at Cambridge (Moggridge 1992, 178–79). Unfortunately, the voluminous Keynes-Dickinson correspondence did not survive (Skidelsky 1992, 692). In early 1903, he attended Moore’s lectures on ethics and McTaggart’s lectures on metaphysics (Keynes 1903a, 1903b). On February 28, 1903, he was “born” into the Cambridge Apostles, a secret society of which Moore, Dickinson, and McTaggart were key members (Moggridge 1992, 66).
Keynes read Moore’s Principia Ethica in October 1903, just after it was published, and he praised it as “a stupendous and entrancing work, the greatest on the subject” (1903c). As Skidelsky says, Moore’s Principia Ethica was “the most important book in [Keynes’s] life” (1983, 119). Unfortunately, Keynes’s defenders have failed to stress Moore’s Platonism.As O’Donnell admits, “It is significant that a Platonic form of realism pervades…Moore’s Principia Ethica” (1990, 338n8). Moore’s fellowship dissertation was titled The Metaphysical Basis of Ethics, and he acknowledges, “So far therefore as general philosophical scheme goes, the standpoint here taken up seems to agree most with that of Plato” ([1897] 2011, 14; [1898] 2011, 128). He boasted on August 14, 1898, “I am pleased to believe that this is the most Platonic system of modern times” (1898; Hylton 1990, 137).Lytton Strachey aligned Moore with Plato: “[Lytton] saw Moore as another Plato, and Principia Ethica as a new and better Symposium” (Holroyd [1967] 2005, 89).
Plato’s influence in Principia Ethica is most apparent in Moore’s definition of the good. For Plato, good is an indefinable Platonic Form, and the soul contains innate, or intuitive, knowledge of the good from the world of Forms (Republic 476a, 507b, 509b, 517b; Phaedo 75d, 77d; Parmenides 130b, 135c). As Taylor writes, “the apprehension of [the good] is strictly ‘incommunicable’ [indefinable]….Either a man possesses it [intuitively] and is himself possessed by it, or he does not, and there is no more to be said” ([1926] 1955, 231, 289; Copleston [1946] 1993, 178, 189). As with all other Platonic Forms, only the philosophers possess objective knowledge of the good: “Most men [are] incapable of knowing the good” (Jones 1952, 146).
Moore was a consequentialist. He argued that we must choose those actions that produce the greatest good. Being a consequentialist, Moore held that “‘good’ is the notion upon which all Ethics depends” ([1902] 1991, 105; 1903, 142). So what is good? Moore built his ethical theory upon Plato’s mystical theory of the good: “if I am asked ‘How is good to be defined?’ my answer is that it cannot be defined, and that is all I have to say about it” (1903, 5). He says, “I deny good to be definable” ([1902] 1991, 13; 1903, 7–8). As Tom Regan explains,
The similarities between Moore’s views and those of Plato’s are unmistakable….[W]hat Moore means when he claims that “Good is indefinable” is barely distinguishable (if distinguishable at all) from what Plato would mean if he said “the Form (or Idea) of Good is indefinable”….Moore explicitly acknowledges the Platonic roots of the metaphysics that grounds his ethical theory. (1991, xxxii)
Like Moore, Keynes was a consequentialist and believed that action must aim at producing the greatest good. And what is good in his view? He writes, “I grant with Moore that good is a simple and indefinable quality which I can only identify by direct inspection [intuition]” (1906a, 2). He claimed to possess “reliable intuitions of the good” (Keynes 1971–89, 10:447; hereafter cited as CW). Following Plato, Keynes held that the good is a mystical Platonic Form only accessible to the special elite: “How amazing to think that we and only we know the rudiments of the true theory of Ethic” (1906b, 123–24). By adopting the Plato-Moore definition of the good, Keynes rooted his ethical theory in Plato’s metaphysics and epistemology.
Keynes’s main philosophical work is A Treatise on Probability. Although it was not published until 1921, A Treatise on Probability was a reworking of his fellowship dissertation. The fundamental ideas contained in the dissertation and A Treatise on Probability can be traced to a paper he read to the Apostles on January 23, 1904, entitled “Ethics in Relation to Conduct” (Keynes 1904a; O’Donnell 1989, 12). On September 27, 1905, he produced his first outline of his dissertation, Principles of Probability. His dissertation was rejected on March 21, 1908, and the revised dissertation was finally accepted on March 16, 1909 (Keynes 1908, 1909).
Keynes’s theory of probability is called the logical theory of probability, and he developed it in opposition to the frequency theory of probability. According to the frequency theory, empirical observation is the only way to gain objective knowledge of probability. For example, consider the probability of rolling a three-spot on a die. In the frequency theory, the probability can only be found by throwing the die a large number of times in the real, visible world. After throwing it many times, the observer counts the number of times a three-spot occurred. This frequency is the probability of throwing a three-spot on a die.
The frequency theory is incompatible with Plato’s philosophy. To Plato, empirical frequencies from the Heraclitian flux can never provide any objective knowledge of probability: “We shall not look for knowledge in sense-perception at all” (Theaetetus 187a; Phaedo 65a–66a). Being a good Platonist, Keynes rejected the frequency theory: “this view of probability upon [empirical] series is certainly false” (1904, 11).Like Plato, Keynes was a rationalist who rejected empiricism: “Keynes is a particular kind of rationalist, rather than an empiricist” (O’Donnell 1989, 81). Anna Carabelli agrees, “Certainly, Keynes was not an empiricist” (2003, 214; Dostaler 2007, 74). Instead, he argued that probability is mental, or “purely logical” (1908, 18; CW, 8:4). Just as Plato argued that the mind possesses innate knowledge of Forms, Keynes argued that the mind possesses innate, or intuitive, knowledge of probability. In the case of throwing a three-spot, the probability is determined by mental contemplation of the perfect, eternal die in the world of Forms. On Keynes’s logical theory, probabilities are mystical Platonic Forms that only exist in the mental realm of ideas. At bottom, A Treatise on Probability, Keynes’s philosophical opus, is steeped in Plato. Fitzgibbons agrees:
The abstract Platonic insight which permeates Keynes’s system is a strict division between the mental sphere of pure ideas [Forms] and the real [visible] world of fluctuation and change….Like G.E. Moore [and Plato], Keynes believed that universals [Forms] originate and exist only in the mind….The Platonic metaphysics was conveyed…in the Treatise [on Probability] as the doctrine of rational intuition, which is the central theme of that work. (Fitzgibbons 1991, 130; Gillies 2000, 33)
Keynes also held Platonic views on gender and sexuality. Like Plato, Keynes was a sexist. He wrote to his lover Duncan Grant: “I shall have to give up teaching females after this year. The nervous irritation caused by two hours’ contact with them is intense. I seem to hate every movement of their minds. The minds of the men, even when they are stupid and ugly, never appear to me so repellent” (quoted in Moggridge 1992, 183–84). Skidelsky notes, “women were inferior—in mind and body. Love of young men was, he [Keynes] believed, ethically better than love of women” (Skidelsky 1983, 129; Hession 1984, 40; Deacon 1986, 63–64; Turnbaugh 1987, 28). Like his lover and fellow Platonist Lytton Strachey, Keynes was “a male chauvinist pig” (Levy 2005, xi).Strachey’s biographer writes, “Once [Lytton] had relinquished Christianity, Plato’s Symposium became for him a new Bible” (Holroyd [1967] 2005, 39). As with Plato, Strachey was a “communist” (Strachey [1926] 2005, 556).
All agree that Keynes had a short-run philosophy, as conveyed in his famous expression “In the long run we are all dead” (CW, 4:65, 28:62).For similar statements on his short-term orientation, see Keynes (CW, 1:120, 8:342, 10:445, 23:224, 28:62). In the secondary literature, see Carabelli (1988, 128), Deacon (1986, 173), Fitzgibbons (1988, 49), Hayek ([1960] 2011, 460; 1988, 57, 76, 84), Himmelfarb (1986, 37), Moggridge (1992, 127), O’Donnell (1989, 118, 278), Schumpeter (1946, 506), and Skidelsky (1983, 155–56; 1992, 60; 2000, 156). But it has not been emphasized that Keynes’s scorn for the long run reflects his belief in Plato’s metaphysics. The inferior reality in which human beings live is temporal, whereas Plato’s superior world of Forms is nontemporal, or timeless (Jones 1952, 103). Like Plato, Keynes wants human beings to detach themselves from life in the temporal world of past, present, and future. Mental contemplation of the timeless world of Forms is nobler than any possible long-run action taken in the inferior temporal reality. As Keynes put it,
Nothing mattered except states of mind….These states of mind…consisted in timeless, passionate states of contemplation and communion, largely unattached to “before” and “after”….The appropriate subjects of passionate contemplation and communion were a beloved person, beauty and truth, and one’s prime objects in life were love, the creation and enjoyment of aesthetic experience and the pursuit of knowledge….How did we know what states of mind were good? This was a matter of direct inspection, of direct unanalysable intuition [of the world of Forms]. (CW, 10:436–37)
On April 18, 1905, Keynes wrote to Bernard Swithinbank, “I find my chief comfort more and more in Messrs Plato” (1905b, 142). In October, Strachey grumbled to Keynes, “We’ll suffer in an eminent silence, and be Platonists till the day after tomorrow” (1905, 211). Keynes consoled Strachey on February 7, 1906:
My dear, I have been deep in Greek philosophy these last few days, Thales and Pythagoras, Zeno and his lover Parmenides: I am sure your sufferings are only due to this prison world, not the particular circumstances in it. Only when after a thousand existences and a thousand loves we have become purified from Not-Being and are a perfect harmony, we may fly on wings of love into the heaven of Pythagoras and Plato and McTaggart, when there is the comfort of souls. I am sure it must be all true. (1906c, 102)
In this passage, “heaven” is an allusion to Plato’s world of Forms. The reference to “this prison world” reflects Plato’s theory of the soul: there is an inherent conflict between the body and the soul, and the body is a prison that prevents the soul from returning to the heavenly world of Forms. The soul can only escape its earthly existence after “a thousand” reincarnations. The soul can only return to a state of “Being” in Plato’s heaven after going through the wheel of birth and rebirth (Copleston [1946] 1993, 212; Guthrie 1975, 476). Although violently opposed to Christianity, Keynes embraced Plato’s mystic religion.
A Treatise on Probability was an utter failure, and Keynes never wrote another major work on philosophy.Lawrence Klein, a dedicated Keynesian, admits, “Keynes’s ideas on probability represent a minority position among current workers on the subject and are not those for which we shall long remember his work….[H]e did not make a sensational advance in probability theory” (1951, 446). Of course, his entire ethical theory collapses if his theory of probability is flawed. See Donald Gillies (2000, 25–49) for a critique of the logical theory. Still, he always remained a disciple of Plato. In 1938, he gave a speech called “My Early Beliefs” in which he admitted, “I have called [my] faith a religion, and some sort of relation of neo-platonism it surely was” (CW, 10:438). He boasts that he was “brought up…with Plato’s absorption of the good” (10:442). He says of “The Ideal,” the sixth chapter of Moore’s Principia Ethica, “I know no equal to it in the literature since Plato” (10:444). In the summer of 1944, as he traveled to the Bretton Woods conference, he supplemented Friedrich Hayek’s The Road to Serfdom with a new edition of Plato (Skidelsky 2000, 343). In summary, the evidence confirms that Keynes was a committed Platonist through his entire adult life.
- KEYNES’S PLATONIC POLITICAL PHILOSOPHY Keynes’s political philosophy is virtually identical to Plato’s. However, Plato’s totalitarian socialism has made sympathetic commentators reluctant to admit this reality. Fitzgibbons acknowledges that “Platonic metaphysics…permeates Keynes’s political philosophy” (1991, 131). Still, he is careful to insist that “Keynes rejected Plato’s authoritarian politics” (1988, 174). Skidelsky is the most ardent defender of Keynesianism today, and he notes: “Keynes welcomed the coming to power of a new class of Platonic Guardians” (1992, 224). To protect his master from the bad name of socialism, however, Skidelsky has repeatedly maintained that “Keynes was not a socialist” (1990, 52; 1992, 233; 2000, 478; 2009, 135; Harrod 1951, 333).
But like Plato, Keynes was a socialist. As O’Donnell writes, “Keynes envisaged and espoused a particular form of socialism” and “It is clear, explicit and unambiguous; he used the term socialism to characterise his own views” (1999, 149, 164; 1989, 322; 1992, 781–82). Fitzgibbons admits that “he wanted capitalism to be eventually replaced by a non-Marxist socialism” (1988, 190–91). Still, interpreters who admit Keynes’s socialism tend to hedge their admission by insisting that he advocated a milder form called liberal socialism. For example, Gilles Dostaler says, “he proposed liberal socialism” (2007, 98; Moggridge 1992, 469; Groenewegen 1995, 153; Crotty 2019).A classical liberal must reject the notion of liberal socialism. For a classical liberal, liberalism and socialism are mutually exclusive, and the notion of liberal socialism is as self-contradictory as the notion of a triangular square. Keynes is better described as a non-Marxist socialist. See Raico (2008) on Keynes’s antiliberalism. Contrary to sympathetic commentators, however, the evidence shows that Keynes advocated a brand of socialism that contained nearly all of the totalitarian elements of Plato’s socialism.
Like Plato, Keynes had a class theory. As noted, Plato divides society into three classes: producers, auxiliaries, and guardians. Similarly, Keynes divides the population into three classes: investors, consumers, and government. Whereas the producer is the villain for Plato, the investor is the villain for Keynes: “The weakness of the inducement to invest has been at all times the key to the economic problem” (CW, 7:347–48). It should be stressed that in economic science investment does not refer to financial investment, but real investment. Investment goods are capital goods, or the means of production. Under capitalism, investors are responsible for controlling the means of production. Hence, Keynes’s attack on the investor class bears a close resemblance to Plato’s attack on the producer class.
By 1905, Keynes’s desire to “swindle the investing public” reflected his scorn for private investors (Skidelsky 1983, xxiii). He exclaimed in 1910, “There are still a good many perfect fools amongst our business men [investors]” (Keynes 1910a). In his 1910 lecture series, Company Finance and Stock Exchange, he belittles the accounting and financial tools used by private investors (Keynes 1910b). Keynes’s pessimistic theory of investment was the key to The General Theory (1936). But he had already developed his gloomy theory of investment by 1910: “[Investment] will often depend upon fashion, upon advertisement, or upon purely irrational waves of optimism or, depression” (CW,15:46, 7:162).Anna Carabelli writes, “Keynes’s attitude towards investment…remained substantially unchanged from his early articles written at the beginning of the century to the latest contributions written after The General Theory” (1988, 195; Skidelsky 1983, 208). Keynes’s theory of investor psychology reeks of Plato’s theory of producer psychology.
Like Plato, Keynes argued that a spontaneous, nonviolent social order is unworkable. Instead, systematic government violence is the only viable way to organize society. For Keynes, the only solution to the problem of social order is government control, or socialization, of investment: “A somewhat comprehensive socialisation of investment will prove the only means of securing an approximation of full employment” (CW, 7:378, emphasis added). Government control of investment means government control over the means of production. And government control of the means of production is the definition of socialism (Mises [1922] 1981, 505; Friedman 1993, 4). Thus, Keynes was correct when he “avow[ed] himself a socialist” (J. N. Keynes, 1911).
Keynes recommended government control over investment many years before The General Theory. On June 8, 1924, he drafted an outline for a book with the telling title “Prolegomena to a New Socialism.” Here, “Investment of Fixed Capital [is one of the] chief preoccupations of the State” (Keynes 1924a; O’Donnell 1992, 807). Hence, government control of investment, or fixed capital, is central to his new socialism, or “true socialism of the future” (CW, 19:222). Following Plato, the fundamental problem is the investor class’s lack of objective knowledge: “a great deal of money [is] invested by those who ha[ve] no special knowledge” (Keynes 1924b, 313).Skidelsky says, “What chiefly impressed Keynes about British businessmen was their stupidity” (1992, 259; Johnson and Johnson 1978, 105). Given the lack of objective knowledge, we need “central regulation of the machine” and “public control of entrepreneurs” (1924c, 150–51).
In September 1925, he traveled to the Soviet Union and preached to the Soviet Politburo. As Leon Trotsky ([1925] 1927, 286) recognized, he called for a transition from capitalism to socialism:
I direct all my mind and attention to the development of new methods and new ideas for effecting the transition from the economic anarchy of the individualistic capitalism which rules today in Western Europe towards a regime which will deliberately aim at controlling and directing economic forces. (CW, 19:439)
Like Plato, he advocated “centralized state control” of society:
I believe that there are many other matters, left hitherto to individuals or to chance, which must become in future the subject of deliberate state policy and centralised state control. Let me mention two—(1) the size and quality of the population and (2) the magnitude and direction of employment of the new national savings year by year [for investment]. (19:441)
Beatrice Webb is the most important woman in the history of British socialism, and of Keynes she recorded in 1926: “I see no other man that might discover how to control the wealth [or investment goods] of nations in the public interest” ([1926] 1985, 93–94).Keynes was close friends with the Webbs. In 1936, he praised the Webbs’ problematic book Soviet Communism (CW, 28:333). He considered Beatrice “the greatest woman of the generation” (1943). In 1928, he proposed an investment politburo, called the National Investment Board, “to mobilise and to maintain the supply of capital and the stream of savings [for investment]” (Keynes 1928a, 69). The socialist politician Hugh Dalton realized, “Such a board will, I believe, be one of our most effective instruments of Socialist planning” (quoted in Pimlott 1985, 218).The British Labour Party acknowledged that Keynes advocated socialist policy when it included his National Investment Board in its 1934 program, For Socialism and Peace (Labour Party 1934, 14). Keynes voted for the socialist Labour Party three months before he published The General Theory. Keynes demands “a new system of public control” (1928b, 109). He states in his 1929 speech “Social Reform as the New Socialism,” “Modern economic organisation is liable to produce unintended and undesired results unless it is controlled from the centre” (1929, 187).
Keynes published his first major work on economics, A Treatise on Money, on October 31, 1930. In this work, he argues that private investment is the central economic problem (Patinkin 1982, 230; Meltzer 1988, 113–14; Moggridge 1992, 486). Naturally, he calls for government control of it: “Perhaps the ultimate solution lies in the rate of capital development becoming more largely an affair of the state, determined by collective wisdom and long views” (CW, 6:145). In fact, the penultimate chapter is titled “Control of the Rate of Investment.” In it he imagines “socialistic action by which some official body steps into the shoes which the feet of the entrepreneurs are too cold to occupy” (6:335).
Keynes abandoned his flawed Treatise on Money almost immediately after it was published, and he started developing The General Theory in late 1931.In September 1930, he admitted that it was a “failure” (CW, 13:176). The Keynesian Don Patinkin writes, “[I]t is not a good book,” and “the Treatise was not a successful book” (1976, 25; 1982, 32). Also see Laidler (1999, 131), Meltzer (1988, 103), and Moggridge (1992, 530). Around this time, he gave a speech to the Society for Socialist Inquiry and Propaganda (Cole 1961, 230, 235). He exclaimed, “Central control of investment” is “urgently called for on practical grounds” (CW, 21:31). In September 1932, he wrote an article in the press calling for “a large measure of control over the volume of new investment” (21:130). He elaborates, “The chief problem would be to maintain the level of investment at a high enough rate to ensure the optimum level of employment….The grappling with these central controls [on investment] is the rightly conceived socialism of the future” (21:137). During the summer of 1933, he gave a speech on his “Control Scheme” in which he said: “My proposals for the control of the business cycle are based on the control of investment” (Keynes 1933, 675).
As with Plato, Keynes has a psychological class theory in which members of different classes are fundamentally different species, or animals. The word psychology comes from the Greek psyche, meaning soul. Just as Plato’s producers have defective souls, Keynes asserts that the “functionless investor” has “uncontrollable and disobedient psychology” (CW, 7:376, 317). Investors have “animal spirits,” meaning that “the mass psychology of a large number of ignorant [investors] is liable to change violently” (7:161–62, 154). Investors must be handled like “domestic animals,” because they have “delusions” (21:438). Keynes’s theory of investor psychology, or animal spirits, is a Platonic theory of the soul. He wrote in 1905, “the soul is divided into several simpler entities—the spirited, animal, vegetative souls and so on (i.e. Plato)….The body is moved by animal spirits” (1905d, 17).
Keynes published The General Theory in 1936 to provide an economic justification for Platonic socialism, or “anti-Marxian socialism” (CW, 7:355). He writes, “I expect to see the State, which is in a position to calculate the marginal efficiency of capital-goods on long views and on the basis of the general social advantage, taking an ever greater responsibility for directly organizing investment” (7:164). He endorses “a somewhat comprehensive socialization of investment,” and says that “Socialisation can be introduced gradually” (7:378). He declares, “I conclude that the duty of ordering the current volume of investment cannot safely be left in private hands” (7:320, 29:232). As many reviewers noticed at the time, The General Theory argues that “national control of investment is an essential prelude to any permanent solution of unemployment,” and that “investment must be socially directed and not left to the vagaries of the individual striving for gain” (Williams 1936, 8–9).
Keynes never abandoned socialism after The General Theory. He wrote in 1938, “Durable investment must come increasingly under state direction” (CW, 21:438). For him, “The Board of National Investment would in one way or another control by far the greater part of investment” (14:49). He advocated a society in which “the bulk of investment [is] under public or semi-public control” (27:322). In summary, Keynes’s goal was, in his very words, “to move out of the nineteenth century laissez-faire into an era of liberal socialism” (21:500).
As with Plato, Keynes’s ideal society is a totalitarian society. If government controls investment goods, it controls what is produced and, by extension, what is consumed. Moreover, if government controls investment goods, it must also exercise control over the human factors that operate those goods. Government must control each person’s occupation and when and where each person works (Mises [1922] 1981, 165; [1944] 2011, 60–61; [1949] 1998, 284). And to do this, it must have ultimate control over where each member of the workforce lives. Of course, some investment goods are unpleasant to operate. State violence would be required to force members of the population to work undesirable jobs on investment goods deemed essential to society. In short, Keynes’s plan to socialize investment entails totalitarianism. He admits that his plan “is much more easily adapted to the conditions of a totalitarian state” (CW, 7:xxvi).Don Patinkin, a Keynesian, observes that Keynes “speaks almost enviously (and, I think, naively) of the greater ease (as it were) with which a totalitarian government can achieve a new equilibrium position” (1976, 122).
Keynes did not advocate communism in women and children as Plato did. Still, he must be considered an opponent of the family. Clarence W. Barron, the legendary financial journalist, met Keynes in September 1918 and noted, “Lady Cunard says Keynes is a kind of socialist and my judgment is that he is a Socialist of the type that does not believe in the family” ([1918] 1930, 189). Following Plato, Keynes advocated totalitarian population controls with far-reaching implications for the family, and especially for women.
Like Plato, Keynes wanted the government to control the size of the population. His 1914 paper “Population” says, “That degree of populousness in the world, which is most to be desired, is not to be expected from the working of natural order,” and “There would be more happiness in the world if the population of it were to be diminished.” He calls for government to “mould law and custom deliberately to bring about that density of population which there ought to be” (Keynes 1914, 16, 20, 36). He declared on January 4, 1923:
In the light of present knowledge I am unable to see any possible method of materially improving the average human lot which does not include a plan for restricting the increase in numbers….It may prove sufficient to render the restriction of offspring safe and easy….Perhaps a more positive policy may be required….[I] would like to substitute schemes conceived by the mind in place of the undesigned outcome of instinct and individual advantage playing within the pattern of existing institutions. (CW, 17:453, emphasis added)
Keynes was a eugenicist from 1907 until his death, and, like Plato, he wanted government to control the quality of the population as well. In “Prolegomena to a New Socialism,” he writes, “Population, Eugenics [are] Chief Preoccupations of the State” (Keynes 1924; O’Donnell 1992, 807). He advocates “centralised state control [over the] quality of the population” (CW, 19:441, 19:124). At a meeting of the Malthusian League, of which he was chairman, he declared: “I believe that for the future the problem of population will emerge in the much greater problem of Hereditary and Eugenics. Quality must become the preoccupation” (Keynes 1927, 114). Just weeks before his death, he endorsed “the most important, significant and, I would add, genuine branch of sociology which exists, namely eugenics” (Keynes 1946, 40).
Like Plato, Keynes rejected private property. As noted, Plato wanted “the notion of ‘private property’ [to be] completely eliminated from life” (Laws 739c). Like Plato and all socialists, Keynes attacked private property: “There is no ‘compact’ conferring perpetual rights on those who Have or on those who Acquire [property]” (CW, 9:287). No doubt, the Keynesian ethical theory is totally incompatible with the notions of private property, individual rights, and the rule of law.
Although he was a consequentialist, Keynes rejected Moore’s rule consequentialism. In Principia Ethica, Moore concluded that general rules must always be obeyed: “With regard to any rule which is generally useful, we may assert that it ought always to be observed….Though we may be sure that there are cases where the rule should be broken, we can never know which those cases are, and ought, therefore, never to break it” (1903, 162–63). This conclusion was repugnant to Keynes, and he wanted to reverse it. “Ethics in Relation to Conduct” reads, “I am doubtful whether it is ever possible to show that a rule of action is generally right” (1904a, 20). He reaffirmed, “What we ought to do is a matter of circumstance; metaphysically we can give no rules” (Keynes 1905e, 2). He declared in 1938:
[I rejected] the part [of Moore’s theory] which discussed the duty of the individual to obey general rules. We entirely repudiated a personal liability on us to obey general rules. We claimed the right to judge every individual case on its merits, and the wisdom, experience and self-control to do so successfully. This was a very important part of our faith, violently and aggressively held….We repudiated entirely custom morals, conventions and traditional wisdom. We were, that is to say, in the strict sense of the term, immoralists….I remain, and always will remain, an immoralist. (CW, 10:446–47)
Keynes developed his Platonic theory of probability to attack general rules of conduct. He thought that the frequency theory forced Moore to advocate general rules. Since the conditions of human action are never repeatable, the frequency theory does not permit us to analyze the consequences of our actions with probability. By contrast, the logical theory allows us to use probability to evaluate the consequences of action. In this way, Keynes’s logical theory enhances our ability to understand the consequences of our actions. And if the consequences of violating a general rule are good, then the rule should be violated. Keynes believed he had reversed Moore’s case for general rules by Platonizing Moore’s ethical framework with the logical theory.
It would be difficult to imagine an ethical theory more radical than Keynes’s. Unfortunately, his defenders have been reluctant to spell out the radical politico-economic implications of his ethics. Capitalism is defined as a social system based on private property in the means of production. Thus, capitalism is a social system based on general rules—specifically the rules of private property. By rejecting all general rules, Keynes rejected the rules of private property and, by extension, capitalism. In contrast to capitalism, socialism opposes the general rules of private property: “the theory of the communists [or socialists] may be summed up in the single sentence: Abolition of private property” (Marx and Engels [1848] 1988, 223).Marx used the terms socialism and communism interchangeably. As Mises writes, “Until 1917 communism and socialism were usually used as synonyms” ([1944] 2011, 60–61). During the Bolshevik Revolution of 1917, Keynes described himself as a “Bolshevik” and proudly declared: “The only course open to me is to be buoyantly Bolshevik” (CW, 16:266–67). On communism and socialism, see note 5. Certainly Keynes’s policy of socializing investment would require government to overturn the institution of private property. In summary, Keynes was an ethical socialist by January 23, 1904, when he read “Ethics in Relation to Conduct” to the Apostles.
Like Plato, Keynes was an authoritarian. His ethical theory meant that he rejected all rules, or constitutional limits, to restrain government power. He opposed any rules to safeguard individual liberty from government violence. Indeed, he rejected the principle of individual liberty. In accordance with Plato’s elitist metaphysics and epistemology, he maintained that the masses are too ignorant for liberty: “It is not true that individuals possess a prescriptive ‘natural liberty’…[I]ndividuals acting separately to promote their own ends are too ignorant or too weak” (CW, 9:287–88).Dostaler notes the connection between Keynes’s “elitism” and “paternalism,” and he acknowledges that Keynes thought “working people [are] incapable of managing their own lives” (2007, 102). Only Keynes has objective knowledge of the good, and the good is far more important than individual liberty. Echoing Plato, he calls for a totalitarian government to impose the good life on the masses with institutionalized violence.Gordon Fletcher admits, “Keynes’s scheme does seem to favour the notion of a forced march to utopia” (2008, 175). As Dostaler observes, “He was and would always remain convinced that only an intellectual elite, of which he undoubtedly considered himself a gifted member, could understand the complex mechanics of economics and politics and would thus be able to implement the reforms necessary to achieve happiness” (2007, 89).
As with Plato and all totalitarians, Keynes advocated noble lies.See Hayek ([1944] 1994, 172; 1988, 138) and Popper (1945, 122–23) on the link between Plato, totalitarianism, and noble lies. For Plato, “our rulers will have to make considerable use of falsehood and deception for the benefit of those they rule….[A]ll such falsehoods are useful as a form of drug” (Republic 459c–d; 414b–15e). Keynes agrees, “A preference for truth or for sincerity as a method may be a prejudice based on some aesthetic or personal standard, inconsistent, in politics, with practical good” (CW, 2:2). He expressed the totalitarian’s cynical view on noble lies when he declared, “It’s the art of statesmanship to tell lies, but they must be plausible lies” (quoted in Colander 1984, 1574).
Like Plato, Keynes condemned the love of money. He exclaimed, “The love of money is detestable” and “The moral problem of our age is concerned with the love of money” (CW, 9:268, 331). As with Plato’s producers, Keynes’s investors are driven by the money, or profit, motive. Socializing investment will abolish the profit motive, and “once we allow ourselves to be disobedient to the test of an accountant’s profit, we have begun to change our civilization” (21:241–42). Plato also condemned interest as unnatural and called for its prohibition (Laws 742). By 1904, Keynes was attacking “unearned increments” such as interest and rent (1904b; 1914, 21). He advocated “the euthanasia of the rentier [or interest earner], and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital” (CW, 7:376). Keynes’s socialist views on money, gold, hoarding, profits, and interest smack of Plato.
Like Plato, Keynes was also a utopian. He describes himself as “among the last of the utopians” (CW, 10:447).On Keynes’s utopianism, see Brunner (1996, 208), Dostaler (2007, 99), Fitzgibbons (1988, 68, 191), Fletcher (2008, 171, 175), Hansen (1953, 215), Hession (1984, 375), Johnson and Johnson (1978, 228), Meltzer (1988, 185), Raico (2008, 171–73), Salerno (1992, 18), and Skidelsky (1992, 234-38; 2000, 478). Mises describes Plato as a “utopian” ([1962] 2006, 111). He denies that scarcity is an inevitable feature of human existence: “There are no intrinsic reasons for the scarcity of capital” (7:220). Like so many charlatans throughout history, he promised that his plan would produce an earthly utopia: “We should in 25–30 years have constructed all capital required. We would increase quantity of capital until it has ceased to be scarce” (Keynes 1989, 179–80; CW, 9:326, 21:37–38). Keynes’s goal was to abolish capitalism and establish a socialist utopia on earth.
Conventional portraits present Keynes as the intentional saviour of capitalism….The conventional picture, however, is badly incomplete and misleading….Keynes was very much concerned with the long term abolition of capitalism as he conceived it. His ultimate goal was a non-capitalist, ethically rational utopia, whose characteristics resembled more closely those of communist or left-wing utopias. (O’Donnell 1991, 15–16; 1989, 294)
And who must rule in Keynes’s socialist utopia? Like Plato, Keynes rejected democracy (Fitzgibbons 1988, 185, 197; Skidelsky 1992, 228). Just as the masses are too stupid for liberty, they are too stupid to participate in politics. “I get the feeling that most of the rest never see anything at all—too stupid or too wicked” (1905f, 124). Instead, Keynes’s ideal socialist republic would be ruled by a cadre of elite economists, such as himself. He writes, “The right solution will involve intellectual and scientific elements which must be above the heads of the vast mass of more or less illiterate voters” (CW, 9:295). Whereas Plato advocated the rule of the philosopher-king, Keynes advocates the rule of the omniscient economist-king: “No! The economist is not king; quite true. But he ought-to be!” (17:432).Roy Harrod admits that Keynes “cultivated the appearance of omniscience” (1951, 468). Quentin Bell reports that members of the Bloomsbury group resented “Maynard’s claim to omniscience” (1995, 97).
- PLATO AND KEYNES’S GENERAL THEORY Keynesian economics is Platonic to the core, and this is best illustrated with a reductio ad absurdum.Skidelsky notes, “One of Keynes’s favourite and most effective techniques was the use of the reductio ad absurdum to ridicule the reasoning of his opponents” (1992, 425; Johnson and Johnson 1978, 36). As the Keynesian economist Paul Davidson writes, “Keynes’s primary level of attack on classical theory involved the expansion of demand into two distinct classes” (2005, 456–57; Hansen 1953, 26).Also see Dillard (1984, 425), Dostaler (2007, 170), Pasinetti (1974, 36), Patinkin (1982, 244), and Skidelsky (1992, 498, 544; 2009, 90). Keynes divided aggregate demand between consumers and investors, and he vilified the investor class. But aggregate demand can be divided in any way to vilify any class. To illustrate, imagine that all spenders are either auxiliaries or producers. In this case, total income (Y) equals spending by the auxiliaries (A) plus spending by the producers (P):
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After expanding aggregate demand into the auxiliary and producer classes, it is necessary to invent a theory of spending for each class. The auxiliaries are dominated by the spirited part of the three-part soul, meaning that they spend in a highly disciplined, robotic manner. It is asserted that there is a strict mathematical, or “functional,” relationship between auxiliary spending and income (CW, 7:90). It is possible to formulate the auxiliary spending function, where a is autonomous auxiliary spending and b is the slope of the auxiliary spending function:
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Now comes the fundamental psychological law: “[Auxiliaries] are disposed, as a rule and on average, to increase their consumption as their income increases, but not by as much as the increase in their income” (CW, 7:96). The fundamental psychological law means that the slope of the auxiliary spending function (b) must be between zero and one. The use of the term “psychological” in the name of this fundamental law is significant. Recall, the Greek for soul is psyche. Thus, the fundamental psychological law is a Platonic theory of the soul.
Given Plato’s theory of the three-part soul, the producer is a fundamentally different species, or animal. Hence, the theory of producer spending is radically different from the theory of auxiliary spending. Producer spending is not a function of income at all, because, unlike the disciplined auxiliaries, producers are dominated by “animal spirits” (CW, 7:161–62). Since producers are dominated by the appetitive soul, there is no tendency for producer spending to be optimal: “There is no reason to suppose that there is ‘an invisible hand’…which ensures…that the amount of…[producer spending] shall be continuously of the right proportion” (21:386–87). The analysis can be diagrammed to give the theory a scientific aura. Figure 1 can be called the Platonic cross.
Figure 1: Platonic Cross
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The producers’ defective souls, their psychological disobedience, means that society cannot be organized with nonviolent methods. To illustrate, we combine the income equation with the auxiliary spending function. This gives us Plato’s demand constraint.On the Keynesian demand constraint, see Roger Garrison (2001, 136).
equation
Plato’s demand constraint means that overall living standards depend on producer spending. If producer spending is high, then the amount of auxiliary spending must be high too. If producer spending is low, then the amount of auxiliary spending must also be low. Therefore, the amount of auxiliary spending can only be optimal if producer spending is optimal. Figure 2 illustrates the precise, positive relationship between producer spending and auxiliary spending.Keynes’s theory “holds not that C[onsumption] and I[investment] are alternatives but rather they move together” (Keynes 1988, L9). On the positive relationship between investment and consumption in Keynesian theory, see Dimand (1988, 151, 189), Garrison (2001, 136), and Meltzer (1988, 153).
Figure 2: Platonic Demand Constraint
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Chronic economic stagnation is thus the fundamental economic problem facing humankind. Since the producers have defective souls, their spending is normally suboptimal. Chronically low producer spending causes chronic economic stagnation and unemployment: “There should be on the average a tendency to severe unemployment [of resources and workers]” (Keynes 1988, L9; CW, 7:249–50). In figure 3, producer spending is optimal at PO. However, producer spending tends to be suboptimal at PSO. Given the Platonic demand constraint, this means that the amount of auxiliary spending will also be chronically suboptimal. In short, suboptimal producer spending means that the national income is chronically stuck below the optimal national income, at YSO rather than YO.
Figure 3: Chronic Stagnation
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Chronic stagnation is the central economic problem, for it prevents humankind from entering the utopia.Keynes’s main economic concern is not the business cycle, but “a chronic state of unemployment” (Patinkin 1976, 114; 1982, 88). Skidelsky writes, “[Keynes] thought that a state of unemployment or underemployment was the general condition of mankind,” and that “suboptimal performance is normal” (1992, 615; 2009, 99). Also see Brunner (1996, 196), Dillard (1948, 3–4, 155, 269), Fletcher (1987, 165, 186), Garrison (2001, 129, 145, 168, 177), Johnson and Johnson (1978, 27, 204), Laidler (1999, 154, 265), Meltzer (1988, 6, 123, 153, 172, 300), and Schumpeter (1946, 501). What must be done? The philosopher-king must take control. In terms of figure 3, the philosopher-king forcibly increases producer spending to the optimal level, from PSO to PO. This increases national income to the optimal level, from YSO to YO. After the optimal national income is achieved, the philosopher-king must permanently maintain producer spending at the optimal level, year in and year out. If this is done, humankind will enter the utopia “within a single generation” (CW, 7:220).
This reductio ad absurdum illustrates an essential point: Keynesian economics can be repurposed to attack any class. In the example above, aggregate demand was divided between auxiliaries and producers rather than consumers and investors. But aggregate demand can be divided between men and women, whites and blacks, Aryans and Jews, heterosexuals and homosexuals, proletarians and capitalists, etc. Then the “philosopher-economist” asserts that the superior class’s spending is a function of income, while the inferior class’s spending depends on animal spirits. The pseudoscientific Keynesian equations and diagrams can be formulated to vilify any class. And the analysis always leads to the same conclusion: everyone can live in a utopia if a totalitarian government controls society. No matter the class division, it is impermissible to question the scientific validity of the theory. Only the elite philosopher-economist can peer into the world of Forms. Anyone who doubts the new economics is an ignorant soul trapped in the Heraclitian flux.Bertrand Russell and others noticed that “Keynes dismissed opponents as idiots” (Holroyd [1967] 2005, 104). Hubert Henderson observed that Keynes regarded opponents of Keynesianism as “intellectually inferior beings” ([1936] 2003, 540). Harrod wrote, “I admit that [Keynes’s] manners, where his own theories are concerned, are impossible” ([1936] 2003, 532).
CONCLUSION
John Maynard Keynes is perhaps the most important Platonist in modern history. He adopted Plato’s metaphysics and epistemology in 1903 when he was an undergraduate student at Cambridge. And, as it is prone to do, Plato’s philosophical system led him step by step to socialism. By 1904, Keynes built a socialist ethical theory on the basis of Plato’s metaphysics and epistemology. From his socialist ethical theory he derived a political philosophy that was virtually identical to Plato’s totalitarian socialism. Finally, decades later, he invented Keynesian economics to justify his brand of Platonic socialism. In summary, Keynes’s economic theory has its ultimate origins in Plato’s philosophy.
The Platonic origins of Keynesian economics must trouble economists. Like Plato, Keynes was an old-fashioned mystic: “I am sure it must be all true. We are mystic numbers,” and “I have called [my] faith a religion, and some sort of relation of neo-platonism it surely was” (1906c, 102; CW, 10:438).Kinglsey Martin confirmed that Keynes described his philosophy “as a religion” (1966, 99), and Skidelsky admits that he “thought of himself as a part of the ‘clerisy’” (1992, 8). He believed he had special access to objective knowledge in a transcendental, mystical reality. From this supernatural realm he obtained knowledge of the good, of probability, of class psychology, and, most importantly, of Keynesian economics. Keynes’s Platonism means that Keynesian economics is a mysticoreligious theory, not legitimate economic science. Not only are the Platonic origins of Keynesian economics deeply unscientific, but they are dangerous. For totalitarian socialism naturally follows from any philosophy that holds that the elite have exclusive access to objective knowledge in a mystical reality.O’Donnell confesses, “Plato’s republic was to be governed by highly educated philosopher-guardians. For Keynes, it was the intelligentsia….Far from being a mere personality trait, the intellectual elitism detectable in some of Keynes’s writings and attitudes can be given some foundation in his philosophy. Elitism is always a possible companion of intuitionist [i.e., Platonic] philosophies” (1989, 66).
Mises in 1944: "The German and the Russian systems of socialism have in common the fact that the government has full control of the means of production."
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Original Article: "Rand Paul Is Right about the Nazis and Socialism".
The new progressive world order is little more than the latest version of the socialist revolutions pushed in the Old World. But this agenda is cloaked in promises of "efficiency" and "sustainability."
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Original Article: "The Progressivism of the Future Is Really Just the Socialism of the Past".
We're building a bridge from Austrian theory to its application in business. This can help us gain a greater understanding of the merits of Austrian economics.
Presented at the historic Jekyll Island Club Resort on Jekyll Island, Georgia, on 9 October 2020.
For more information on the Economics for Business program, visit Econ4Business.com.
What we are now witnessing in the larger society is the result of decades of work within academia and government to destroy the private-property system of the West and replace it with a new socialist order. From the 2020 Supporters Summit, presented at the historic Jekyll Island Club Resort on Jekyll Island, Georgia, on 9 October 2020.
Police reforms are making it easier to monitor police activities, and even to hold officers personally liable when found guilty of abusing their power. But some officers don't like that at all.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Original Article: "Police Officers Threaten to Quit If the Public Keeps Demanding Accountability".
Thomas Sowell has explained that while "Marx may have explicitly advocated the idea of a democratic workers’ government, his own personal style was dictatorial, manipulative, and intolerant."
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "Soviet Terror Was the Natural Evolution of Marx's Communism".
It may be emotionally satisfying for many to favor sticking it to billionaires, but reason informs us that in so doing it is the poor who would end up paying the steepest price.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "Should Billionaires Exist?".
Gender feminism, the New Left, and Marxism all share an anticapitalist stance and the framework of class struggle. The difference is that gender feminism, the New Left, and their ideological heir have redefined the antagonists.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original article: "The Gender Feminist–New Left–Marxist Axis Attacks All Civil Society."
It becomes clear that ramping up inflation is a tool for those who wish to overthrow the existing economic and social order—to get rid of what little is left of the free market system.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "Inflation as a Tool of the Radical Left".
Jeff Deist joins David to discuss the latest news of Nashville officials withholding covid numbers from bars and restaurants. What lessons can future generations learn from the stupidity of governments shutting down economies on bogus information? Are mainstream journalists sacrosanct in our culture?
Find more from David Gornoski on A Neighbor's Choice.
Dr. Michael Rectenwald was a professor of liberal studies at NYU from 2008 to 2019. Although at one point he was a committed Marxist, he gradually lost faith, and is now an outspoken critic of campus activists. Bob asks Rectenwald about apparent contradictions in the current cultural Marxist / postmodern movement, and they discuss several themes from his new book, Beyond Woke.
Mentioned in the Episode and Other Links of Interest: The YouTube version of this episode.Michael Rectenwald’s website.Michael Rectenwald’s books Beyond Woke and Springtime for Snowflakes. #CommissionsEarned (As an Amazon Associate I earn from qualifying purchases.)Michael’s lecture on postmodernism at the Mises Institute. For more information, see BobMurphyShow.com. The Bob Murphy Show is also available on iTunes, Stitcher, Spotify, and via RSS.
Thomas Sowell concluded that, “A vastly expanded welfare state in the 1960s destroyed the black family, which had survived centuries of slavery and generations of racial oppression.” This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Original Article: "The Welfare State Did What Slavery Couldn't Do".
Jeff Deist returns to the show. Are there any differences between North Korea and Antifa? David asks. Deist says that, for the left, democracy is a means to an end. Listen to the full episode for all this and more.
Find more from David Gornoski on A Neighbor's Choice.
Syndicalism is a method of attack by organized labor for the attainment of certain political ends. It requires widespread acts of destruction on "capitalist" institutions as a means of ushering in a socialist regime.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "Mises on Syndicalism".
It does not bode well for our society when proposals to simply expropriate property are becoming more and more prevalent and discussed with more seriousness.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "The War on Landlords Has Begun".
Pennsylvania is telling hospitals to distribute covid-19 drugs based on race. Those from "disadvantaged communities" get the drugs first.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "Pennsylvania Is Playing Politics with Drug Rationing".
Jeff Deist joins David Gornoski to critique the DNC and their pro-war and divisive policies. Deist also provides some humorous commentary on the DNC’s anti-capitalist rhetoric. On the economic shutdowns and calls for more socialism, Deist remarks: “We’re actually sacrificing the young to the old.”
Find more from David Gornoski on A Neighbor's Choice.
Today's anticapitalists fall into a familiar pattern pioneered by Mussolini and Giovanni Gentile.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "Today's Anticapitalists Are Closer to Fascism Than They Think".
The global "elites" of the World Economic Forum seek a "Great Reset" that will usher in a new and far more powerful technocracy defined by central planning and the end of freedom as we know it.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "From Lockdowns to 'The Great Reset'".
A survey of the research shows that the science of mask wearing is hardly "settled." And this up-in-the-air nature of it all is a reminder of how immoral it is to impose mandates on people, backed with state violence.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "When It Comes to Masks, There Is No 'Settled Science'".
The Black Lives Matter organization explicitly states it seeks to "disrupt" the "nuclear family structure." In this, BLM is no different from countless other Marx-inspired organizations which seek to destroy the family as part of the "patriarchy."
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "Why Marxist Organizations Like BLM Seek to Dismantle the 'Western Nuclear Family'".
Every economic system is a mixture of market action and state control. The Marxist strategy is to blame every ill caused by state intervention on capitalism.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "New Opportunities for Marxists: Climate Change and Coronavirus".
While collectivism was implied in Sismondi’s idea of a “general interest,” Owen and Fourier offered the first formal expression of full socialist collectivization.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "The First Socialists: The Saint-Simonians and the Utopians".
The deadliest virus consists of the deification of human reason and the systematic use of coercion, which the state embodies.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "The State: The Deadliest Virus".
Chile is the most prosperous country in South America precisely because it has (so far) avoided adopting the socialist policies being pushed on it by left-wing reformers.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "The Scandinavian Model Won’t Work in Chile".
China’s “new infrastructure” will likely be but one more example of the false promise of technology as an antidote to the irrationality of state-controlled economies.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "Goverment-Subsidized Technology Won't Save China's Economy".
Measures of wealth inequality overstate actual inequality in terms of the standard of living of wealthy people relative to the rest.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "Inequality is Overstated—and Overrated".
Mises knew: “Mass unemployment destroys the moral foundations of the social order. The young people…forced to remain idle, are the ferment out of which the most radical political movements are formed."
Narrated by Daniella Bassi.
Original Article: "Governments Have Crippled the World's Economies. Revolution May Soon Follow".
Who has the best claim to government property?
Narrated by Daniella Bassi.
Original Article: "Seattle's CHAZ: Homesteaders or Illegal Squatters?".
Free the liquor stores to sell what products they want, what days of the week they want, what hours they want, and to whom they want.
Narrated by Daniel Diefenbach.
Original Article: "Free the Liquor Stores!".
It is in a time of crisis where the leviathan state has the greatest opportunity to grow. The global coronavirus pandemic has given cover to governments around the world to give into totalitarian instincts and implement authoritarian policies against their people. It is in times like this when an uncompromising defense of liberty and markets is needed most. We are grateful that people around the world have sought out the content of the Mises Institute to better understand the environment we find ourselves in, pushing traffic on mises.org to all-time highs.
In this issue of The Austrian, we provide highlights from some of the most important and salient articles we have published during this unprecedented crisis.
The Benefits of a Free Society during Pandemics by Per Bylund
In this time of crisis, many exclaim how impressed they are by the “swift and decisive” actions by the Chinese regime. Instead of recognizing the abhorrent disrespect for human life, the Chinese response is put forth as an exemplar for combatting a pandemic.
These hailers conveniently forget the many weeks of silencing and censorship that preceded the brutal shutting down of the city of Wuhan and the whole Hubei Province. They also turn a blind eye to the nature of hierarchy and bureaucracy, pretending what is needed to choose proper action is simply power and that access to accurate, reliable information is of little concern.
The calls for a strongman solution are misguided at best but have been used to paint the picture of freedom as being impotent. Per the strongman delusion, libertarianism would seem to lack exactly what is needed for “swiftly and decisively“ dealing with a pandemic—centralized power…
But a centralized solution also makes us more vulnerable. An example might illustrate this. Consider the difference between a structured, centralized national defense and an armed populace. Switzerland is the popular example of the latter, but this is not a unique idea. For example, Sweden’s defense comprises both a traditionally structured military and the Home Guard. While you can rather easily cripple the military by taking out a couple of their bases, the decentralized and dispersed forces of the Home Guard are almost impossible to wipe out.
What does this have to do with a virus pandemic? It illustrates the false promises of centralization, which is a costly and inadequate solution that in fact makes a society more vulnerable. The same argument applies whether it is the national defense, centralized education, or the monopoly of the CDC. A centralized command structure offers only a false sense of security.
Libertarian society has exactly the decentralized structure that our present society is lacking. Rather than a pyramid with information selected and repackaged on its way up and orders issued from the top, it would be a collaborative network of individuals and neighborhoods. A neighborhood affected by an outbreak could quickly and easily choose to contain the virus, perhaps in collaboration with adjacent neighborhoods. Others could choose to temporarily quarantine themselves to not get infected.
There would also be little reason for them to not share information. While the Chinese apparently believed they didn’t have to do anything, other than silencing whistleblowers, a government is typically not held responsible for its failures. It’s the other way around: a government agency that fails in its task is not punished, but instead offered larger budgets and more discretion.
In rather stark contrast, a libertarian neighborhood that chooses to suppress vital information about an outbreak could (and would) be held liable for the harm caused to others. They face the same mechanism as the private store owner, who would be liable if s/he welcomed those knowingly carrying a virus to enter the premises and infect other customers. It is thus in their interest not to hide the facts, as is the government modus operandi, but to share the information and get in front of the problem.
None of what is appropriate action during an outbreak or pandemic requires central command. The downsides of centralization in fact make matters worse and are what made us vulnerable to begin with. The many calls for increased centralization, and their outright dismissal of libertarianism and freedom as “impotent,” are fundamentally confused. Rather than being reasonable and rational, these outcries are emotional and contrary to fact. They are but symptoms of the strongman ideology.
Calls for Central Planning in the COVID-19 Panic Are like the Calls for the “War Socialism” of Old by Philipp Bagus
The similarity between the reasoning in favor of war socialism and the arguments that have been brought forward during the corona emergency is striking. Today war rhetoric abounds. Emanuel Macron explicitly stated, “We’re at war,” and sent, as in Spain, the military to the streets. US president Donald Trump similarly speaks of “Our Big War” and invokes the wartime authority of the Defense Production Act. We hear the slogan “We are in this together” all the time.
Mises discusses German war socialism during the First World War in detail. He points out that Emperor Wilhelm II basically lost all powers to the General Staff. General Ludendorff “became virtually [an] omnipotent dictator,” he explains in Omnipotent Government, and subordinated everything to the war effort.
Winning the war was thought to be the outstanding goal, which could only be achieved by centralizing all powers. These powers were given to the military. After all, they were the experts in military matters.
Today, we face a similar tyranny of experts, to borrow a term from William Easterly. In the medical emergency, enormous power lies in the hands of doctors such as Anthony Fauci in the US or Christian Drosten in Germany. These experts advise governments on what to do—for instance, which size of gatherings shall be prohibited (events of 1000, 100, or 3 persons), if and for how long economies shall be locked down, and if the wearing of masks shall become mandatory. And politicians follow the advice of the doctors. After all, they are the experts…
The central medical planning focuses only on measurable variables such as the infection rate. By not taking into account other ends (and not being able to do so), this planning exerts enormous harm from the point of view of voluntarily interacting individuals. In contrast to the central planning approach, which focuses on one end, all ends in human society are taken into account in the market economy through (expected) profits. Production is adjusted swiftly and efficiently toward the changing ends of consumers.
It is entrepreneurial profit seeking that unleashes human creativity and genius and thereby satisfies human needs as efficiently as humanly possible. The right answer to a war, and to the corona war as well, is therefore to eliminate all barriers to entrepreneurship. Mises said:
“For anyone of the opinion that the free economy is the superior form of economic activity, precisely the need created by the war had to be a new reason demanding that all obstacles standing in the way of free competition be set aside.”
In other words, in order to win the corona war, government should cut taxes and regulations vigorously. Unfortunately, governments around the world have opted for the opposite path, namely war socialism. If they do not quickly rectify their responses and end their war, the socialization of our economies will continue. Mises warns: “in the long run war and the preservation of the market economy are incompatible.”
The COVID-19 “Lockdowns” Are What Twenty-First Century Mob Rule Looks Like by Ryan McMaken
As of April 6, forty-one states have statewide “stay-at-home” decrees in place. These orders vary widely from place to place.
In some states, there are long lists of exempted industries including marijuana dispensaries, liquor stores, hardware stores, and of course, grocery stores. In some states with these edicts, public lands, state parks, and beaches remain open. In some states, city parks are more crowded than ever as local residents, with little else to do, attempt to recreate. In other places—such as California—one can be arrested for paddleboarding all alone in the ocean.
Yet in all of these places, the current regime of rule by decree will have—and already has had—a devastating effect on many small and medium-sized businesses and their employees. As governments have created new arbitrary definitions of what constitutes an “essential” business, some businesses find themselves forced to close. Employees have lost these jobs. The owners of these enterprises will likely lose far more as debts mount and business investments are destroyed. As unemployment and poverty increase, the usual pathologies will arise as well: suicides, child abuse, and stress-induced death.
Yet the politicians—mostly state governors, mayors, and unelected bureaucrats—remain popular. In New York State, where the lockdown orders are among the most draconian in the nation, it is now claimed that 87 percent of those polled approve of Governor Andrew Cuomo’s handling of the situation. As Donald Trump’s administration has recommended ever harsher government limits on the freedom of Americans, his poll numbers have only improved.
Meanwhile, among critics there appears to be a misconception of these lockdowns (which are very often only partially imposed or enforced) as being imposed over the howls of the local population, which is being silenced and cowed by jackbooted local police.
If only that were true. In most places, it appears clear that a great many residents approve of the lockdowns. We see this support in the form of all the local scolds who complain on nextdoor.com about neighborhood children who don’t properly engage in “social distancing.” We see it in the people who call the police to report violators of stay-at-home orders. We see it in those who report local businessesfor allowing too many people inside…
Thus, we’re not witnessing a usurper regime imposing unpopular measures on a resistant but helpless citizenry. We’re more likely witnessing widespread mob rule, the central characteristic of which is rule by the majority with no regard for the rights of dissenting minorities. The government may now be ruling by decree, but it is in many places doing so with the hearty approval of the majority. Politicians have calculated that they’re likely to remain popular so long as they cultivate an image of “decisive leadership“ through strong decrees and demands for compliance in the name of safety. As Cuomo’s surging popularity suggests, this may be a safe political move.
Certainly there are those who resist. There are those for whom the rule of law, the Bill of Rights, and basic freedoms actually matter. But for others, principles such as these are quickly forgotten once fear and anxiety enter the picture. The rights of minority groups (such as business owners or old-fashioned Bill of Rights enthusiasts) mean little or nothing once the majority—conditioned by years of public schooling to demand a government solution to nearly everything—decides that such rights are an inconvenient obstacle to “doing something.”
The public demands action. Politicians are more than happy to oblige.
Anthony Fauci, the “Learned Ignoramus“ by Zachary Yost
As the COVID-19 shutdown across the US continues, one cannot but help see the importance of specialization and the division of labor time and time again, as many Americans deal with true shortages of goods for the first time in their lives. Specialization has allowed us to enjoy a much more prosperous life than we would were we all to do everything ourselves. However, as with everything in this imperfect world, specialization comes with certain tradeoffs that are important to understand. As the unemployment numbers continue to rise by millions more every week, as meager savings are eliminated, and as our highly organized society slides into chaos it is important to understand the way in which an unbalanced intellectual specialization has contributed to bringing about the current crisis.
In his 1930 book The Revolt of the Masses, Spanish philosopher José Ortega y Gasset addresses what he considers to be a strange byproduct of the prevalence of specialization in everything, specifically the intellectual sphere. “Previously,” he writes, “men could be divided simply into the learned and the ignorant, those more or less the one, and those more or less the other.” Now, however, a new kind of person has emerged, “an extraordinarily strange kind of man” who cannot be called “learned for he is formally ignorant of all that does not enter into his specialty,” yet at the same time cannot be considered “ignorant because he is ’a scientist’ who ’knows’ very well his own tiny portion of the universe.“ Thus, Ortega y Gasset says that the only fitting name for such a person is a “learned ignoramus.”
There can be no doubt that numerous learned ignoramuses can be found in all parts of society, but most importantly they are very clearly involved in the response to the COVID-19 virus, as sweeping calls for months of lockdown make clear.
Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases and seen by many as the face of the federal virus response, has perhaps made the most ridiculous assertion, stating at a White House briefing on April 1 that “we could ’relax social distancing’ once there’s ’no new cases, no deaths,’ but the real turning point won’t come until there’s a vaccine.” Similarly, Dr. Zeke Emanuel, an architect of Obamacare and current advisor to Joe Biden, declared that it will be impossible to return to “normalcy” for eighteen months and that no matter the economic cost: “The truth is we have no choice….We cannot return to normal until there’s a vaccine.”
Such ideas are frankly madness, and would take an incalculable toll on the health and wealth of all Americans. Tens of millions of Americans find themselves out of work or with reduced hours or pay. The idea that society could continue to exist in such a state betrays a lack of any understanding of the social order…
The phenomenon of the learned ignoramus can be seen in every field and at all levels of intellectual life and popular punditry. However, the current crisis reveals the damage such “experts“ can wreak upon civilization itself.
Ortega y Gasset fully recognized the important role that specialization has in making modern life possible; however, he calls for a balanced intellectual specialization, in contrast to the unbalanced status quo that he fears threatens the advancement of scientific discovery itself. Two such balanced intellectuals are without a doubt Ludwig von Mises and F.A. Hayek; although economists, they could be more accurately called social thinkers whose work encompassed far more than that of the typical economist today.
Rather than insular, unbalanced specialization, Mises argued that “He who wants to achieve anything in praxeology must be conversant with mathematics, physics, biology, history, and jurisprudence.” Hayek similarly warned that “Unless you really know your economics or whatever your special field is, you will be simply a fraud. But if you know only economics and nothing else, you will be a bane to mankind, good, perhaps, for writing articles for other economists to read, but for nothing else.”
Undoubtedly, the entire situation would look entirely different from the chaotic disruptive mess it is now if our public health officials and social scientists were trained in the mold of Mises and Hayek. Whereas both men stressed the complex and ultimately fragile nature of the social order, and therefore the need for broad understanding of this complexity, the learned ignoramus, in the words of Ortega y Gasset, “believes that civilization is there in just the same way as the earth’s crust and the forest primeval.”
Every time the “experts” demand that life be halted into the indeterminate future, they vindicate Ortega y Gasset’s observation that the learned ignoramuses are ignorant of the very nature of the social order itself and are therefore a menace to its preservation. This crisis demonstrates how prescient Ortega y Gasset’s warning was. Hopefully it is not too late to prevent a true societal catastrophe.
Airline Bailouts Destabilize the Economy and Inflate Asset Prices William L. Anderson
In the end, after all of the political posturing and all of the speeches and exhortations for Congress to “do something,” a $2 trillion “coronavirus stimulus” bill landed on the president’s desk for The Donald to sign. And sign he did, uttering all of the platitudes and everything else that comes with “historic” spending legislation that never should have seen the light of day. Although COVID-19 has helped expose vast weaknesses in public health systems in the USA, it also has shown that with much of corporate America, the emperor has no clothes.
Although tracking where the money goes is not an easy thing, we do know that the airlines will receive about $50 billion in cash and loans, while Boeing will receive a share of $17 billion earmarked for industries favored by Congress. Another $500 billion will go to cruise lines, hotels, and other firms that have lost business because of travel restrictions and the economic shutdowns.
Politicians of both parties heaped praise upon themselves for their “bipartisan” efforts, which in real life only can mean that Congress cleaned out what was left of the IOUs in the till. Rep. Thomas Massie, a Republican from Kentucky, drew attacks from all sides as he tried to force a roll call vote (as opposed to the voice vote that the members wanted) and announced his opposition to the bailout. President Trump called for his expulsion from the Republican Party while Democrats declared him to be an unsavory ideologue.
There is not much to do but to wait for the results, and they will unfold over time. However, much of this bill’s harm is invisible, the way that termites quietly but surely destroy a house when homeowners fail to detect them. The politicians and the pundits, along with corporate executives, are hailing this infusion of public funds to business as a lifeline to the economic system itself, when, in reality, it will weaken these firms in the long run.
This commentary deals mostly with the airlines, but what we say here applies to any firm receiving rescue funds and loan guarantees. While some of these essentially bankrupt firms gain some relief as taxpayers and consumers pony up to pay the companies’ bills, the temporary cash infusion allows them to kick the financial can down the road and not deal with the underlying problems that they are facing, at least for now…
Although most politicians and airline executives want us to believe that airlines are an “essential” industry that is the equivalent of the “thin blue line” between prosperity and a depressed economy, the markets see things differently. First, and most important, with the current situation there is no way that airlines can meet their loan payments, issue stock dividends, or even pay all of their employees at current rates (including their executives). Faced with that situation, the healthier companies would most likely come to terms with their creditors and restructure their finances.
The unlucky firms, however, would go into Chapter 7 bankruptcy, with all assets sold to pay off their creditors. That means massive layoffs, fewer flights—and realistic valuation of their assets. If the economic need for airlines really were as great as airline executives and political pundits claim, then whoever has purchased those assets at bargain prices would be able to put them to use in no time. The industry will have had its necessary cold-water bath, and asset values, along with prices of airline tickets, would settle at true market values, not the bloated numbers that pollute current airline balance sheets.
Because the “bad effects” of allowing airlines to go under would result at first in massive layoffs, bankruptcies, and fewer passengers in the air, the media and political classes would be condemning those who voted down the federal largess. “Bad effects,” not surprisingly, are quite visible and the plight of the newly unemployed and of stranded travelers plays well on the news.
The “good effects,” however, are less visible. By the time airline assets were sold at bankruptcy auctions and new companies hit the airport runways with market-priced capital and market-paid employees, the media would be on another crusade and the resurrection of airlines would not receive the coverage it deserved.
By shoveling out cash to the airlines and more promises to the banks whose unsteady solvency always lurks in the background, Congress and Trump have perpetrated a financial fraud greater than much of the mess we saw on Wall Street more than a decade ago. Yes, they will receive praise in the media and votes from those grateful to have taxpayers pay their wages and salaries, but they have solved no problems and have created a generation of new ones. Almost surely we will be covering the next crisis in these pages.
How to Think about the Fed Now by Jeff Deist
The Great Crash of 2020 was not caused by a virus. It was precipitated by the virus, and made worse by the crazed decisions of governments around the world to shut down business and travel. But it was caused by economic fragility. The supposed greatest economy in US history actually was a walking sick man, made comfortable with painkillers, and looking far better than he felt—yet ultimately fragile and infirm. The coronavirus pandemic simply exposed the underlying sickness of the US economy. If anything, the crash was overdue.
Too much debt, too much malinvestment, and too little honest pricing of assets and interest rates made America uniquely vulnerable to economic contagion. Most of this vulnerability can be laid at the feet of central bankers at the Federal Reserve, and we will pay a terrible price for it in the coming years. This is an uncomfortable truth, one that central bankers desperately hope to obscure while the media and public remain fixated on the virus.
But we should not let them get away with it, because (at least when it comes to legacy media) the Fed’s gross malfeasance is perhaps the biggest untold story of our lifetimes.
Symptoms of problems were readily apparent just last September during the commercial bank repo crisis. After more than a decade of quantitative easing, relentless interest rate cutting, and huge growth in “excess” reserves (more than $1.5 trillion) parked at the Fed, banks still did not have enough overnight liquidity? The repo market exposed how banks were capital constrained, not reserve constrained. So what exactly was the point of taking the Fed’s balance sheet from less than $1 trillion to over $4 trillion, anyway? Banks still needed money, after a decade of QE?…
So monetary “policy” as we know it is dead as a doornail. What central banks and Fed officials do no longer falls within the realm of economics or policy; in fact the Fed no longer operates as what we think of as a central bank. It is not a backstop or “banker’s bank,” as originally designed (in theory), nor is it a steward of economic stability pursuing its congressionally authorized dual mandate. It does not follow its own charter in the Federal Reserve Act (e.g., impermissibly buying corporate bonds). It does not operate based on economic theory or empirical data. It no longer pursues any identifiable public policy other than sheer political expediency. Fed governors do not follow “rules” or targets or models. They answer to no legislature or executive, except when cravenly collaborating with both to offload consequences onto future generations.
The Fed is, in effect, a lawless economic government unto itself. It serves as a bizarro-world ad hoc credit facility to the US financial sector, completely open ended, with no credit checks, no credit limits, no collateral requirements, no interest payments, and in some cases no repayments at all. It is the lender of first resort, a kind of reverse pawnshop which pays top dollar for rapidly declining assets. The Fed isnow the Infinite Bank. It is run by televangelists, not bankers, and operates on faith.
The Destructive Effects of the Coronavirus Relief Package by Thorsten Polleit
Governments and their central banks have put together mega-bailout packages. In the US, President Donald J. Trump has signed off on a $2 trillion “virus relief package” amounting to around 10 percent of the US gross domestic product. It is meant to provide massive financial support—in the form of loans, tax breaks, and direct payments—to large and small businesses as well as individuals whose revenue and income have been destroyed by the politically dictated “lockdown.”
What is more, the US Federal Reserve (the Fed) has provided a colossal “backstop” to financial markets. It injects ever higher amounts of central bank money into the financial system by buying up all sorts of credit instruments—not only government bonds, but also mortgage debt, corporate bonds, commercial papers, etc. The Fed thereby props up financial asset prices, keeping the cost of credit artificially low and, most importantly, avoids payment defaults on a grand scale.
In fact, the Fed is at the heart of all these rescue measures, for the US administration does not have the money to finance all its promises. The US Treasury will issue new bonds that will be bought by the Fed, which thereby creates new US dollar deposits in the hands of the US government. These are then transferred to the bank accounts of entrepreneurs, consumers, and most of all to government beneficiaries (its employees, service providers, and contractors). As a result, the newly created money shows up in people’s bank accounts, increasing the stock of money in the economy.
Beyond that, the Fed purchases credit instruments—bonds and bills (and perhaps even other assets at some stage). As it does business with banks, the Fed ramps up the central bank money supply to the interbank market: banks hand credit papers over to the Fed in exchange for newly created central bank money deposits. As a result, the “excess reserves” of banks increase and credit risk is taken off theirbalance sheets. Equity capital is freed up and can be used to increase lending to corporates, consumers, and, of course, government entities. This also contributes to the increase in the outstanding money stock.
If and when the Fed purchases credit products from, say, hedge funds, mutual funds, and insurance companies, the quantity of money will also be increased: these market players will hand unwanted credit products over to the Fed in exchange for deposits held with commercial banks. These new money balances can, and most likely will, be used to purchase other assets (e.g., stocks, land, commodities, etc.).
It becomes obvious that the mega-bailout package will effectively result in an increase in the quantity of money in the economy. Sound economics tells us what the consequences are: the increase in the quantity of money will result in higher goods prices, thereby lowering the purchasing power of money. In other words: the mega-bailout package boils down to “money printing”—to an inflationary policy. Again, sound economics tells us that inflation is a policy redistributing income and wealth among people: it does not create a win-win situation; it creates winners and losers…
Today, the policy of printing new money to hold up an economic and financial system that cannot last is being pursued again—as it has been in the past, on many occasions. The question is not whether money will lose its purchasing power. It is just a question of how much and how quickly. The best-case scenario is that the economic slump will be overcome quickly and, as a result, central banks will not have to monetize too much debt and issue too much newly created money.
But even then the underlying problem will not be solved; it will merely be postponed, because the government-controlled unbacked paper money system will predictably lead to ever greater amounts of debt on the part of entrepreneurs, consumers, and, most importantly, governments. At some point, debtors will no longer be in a position to service their debt. This is the point at which the unbacked paper moneysystem collapses altogether through payment defaults, or when governments begin to issue ever greater amounts of money in a last-ditch effort to fend off the inevitable. That said, economies that have become addicted to unbacked money will, at some point, be confronted with a “recession-depression” à la 1929 or a German hyperinflation à la 1923.
Meanwhile, however, governments and central banks’ mega-bailout programs may very well succeed in keeping the artificial boom going—that is, in transposing the approaching economic and financial bust into yet another boom, thereby preventing the system from collapsing. One thing, however, is certain: the official currencies—be it the greenback, the euro, Chinese renminbi, or the Japanese yen—will most likely lose their purchasing power. The truth is that they have never been a reliable means to store wealth—and never will be.
The weird thing about dialectical materialism is that Marx seems to have cobbled it together from two philosophies that contradicted each other.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "The Big Reason Mises Rejected Marx's Dialectical Materialism"
Socialism Sucks: Two Economists Drink Their Way through the Unfree WorldRobert Lawson and Benjamin PowellWashington, DC: Regnery Publishing, 2019192 pp.
David Gordon (dgordon@mises.org) is a senior fellow at the Mises Institute.
Robert Lawson and Benjamin Powell are well-known free market economists, and they do not look with favor on a disturbing trend among American young people. “In the spring of 2016,” they explain, “a Harvard survey found that a third of eighteen- to twenty-nine year olds supported socialism. Another survey, from the Victims of Communism Memorial Foundation, reported that millennials supported socialism over any other economic system” (p. 8).
Unfortunately, the young people in question have little idea of the nature of socialism. Lawson and Powell would like to remedy this situation, but they confront a problem. Ordinarily, one would urge students to read Hazlitt’s Economics in One Lesson, Mises’s “Economic Calculation in the Socialist Commonwealth,” and similar classic works, in order to understand the basic facts about the free market and socialism, but the millennials are unlikely to do so. One must attract their attention. What can be done?
Lawson and Powell have had the happy idea of presenting elementary economics in a humorous way that will appeal to those “turned off” by serious and sober scholarship. In the latter adjective lies the key to their approach. Both of the authors enjoy drinking beer, and they travel around the world to various socialist countries in pursuit of their beloved beverage, making incisive comments about the economy of each country as they do so. They write in a salty style that will make millennials laugh, though some readers will find it jarring.
For the young, “socialism” means no more than vague ideas about “fairness,” but, the authors note, the term has a precise meaning: “To separate the state from socialism in any large society is like trying to separate private property from capitalism. It can’t be done. I’ll say it once more for the people in the back: socialism, in practice, means that the state owns and controls the means of production” (p. 128). No country is completely socialist, but some are more socialist than others. How can the degree of socialism be evaluated? Lawson has, along with James Gwartney, produced an annual economic freedom index for the Fraser Institute, which the authors use to answer this question, sometimes with surprising results.
Many professed socialists look to Sweden for inspiration, but according to the freedom index “Sweden gets a 7.54 rating, which is good enough for twenty-seventh place out of the 159 countries in the study…Bottom line: Sweden is a prosperous, mostly capitalist country” (pp. 10–11).
The authors must now confront an objection. Why should we not prefer welfare-state capitalism to the straightforward free market economy the authors want? They reply that Sweden prospered under freedom but that the increased taxation needed to finance the welfare state has brought about stagnation. “Sweden grew most when it was freer than it is today” (p. 13).
If some people admire Sweden, few except fanatics have good words for the economy of Cuba. Nevertheless, must we not recognize the wonders accomplished by the Cuban socialized medicine? We must give the devil his due. Lawson and Powell are not convinced.
Official Cuban health statistics are impressive…Yet, we also know that the hospitals most Cubans use are so poorly equipped that people often have to bring their own sheets. What gives? The silence [on the streets] is part of the answer. The lack of automobiles means a lack of traffic fatalities. Since automobile accidents are a leading cause of death among younger people, the lack of automobiles has a disproportionate impact on life expectancy statistics for reasons that have nothing to do with health care. The low rate of infant mortality is a product of data manipulation. (p. 53)
Why has Cuban socialism, like all other centralized socialist economies, failed? The authors present with great clarity the essential point:
almost a hundred years ago, the Austrian economist Ludwig von Mises explained that socialism, even if run by benevolent despots and populated with workers willing to work for the common good, could still not match capitalism’s performance. Socialism requires abolishing private property in the means of production. But private property is necessary to have the free exchange of labor, capital, and goods that establish proper prices. Without proper prices, socialist planners could not know which consumer goods were needed or how best to produce them…Socialism also gives tremendous power to government officials and bureaucrats who are the system’s planners—and with that power comes corruption, abuse, and tyranny. (p. 37)
Socialist tyrants were the greatest mass murderers in history, and the young must be apprised of this melancholy fact. “Stalin ranks just behind Mao as history’s second greatest mass murderer, with Hitler coming in third—and all three dictators were, of course, committed socialists of one sort or another.” (p. 115)
Some millennial socialists respond with a distinction: the despotic governments mentioned were not genuinely socialist. The authors answer with appropriate severity:
This is the same dirty trick socialists have played for decades. Whenever things go south, as they inevitably do, they claim that it wasn’t “real” socialism. I [Lawson] find the whole thing more than a little disingenuous and very irritating. When socialists, democratic and otherwise, held up Venezuela as a great socialist experiment in the 2000s, the message was, “See, we told you so; socialism works!” But when the failure happened, the message changed to, “No, wait—that’s not real socialism!” They want to claim socialism during the good times but disavow it during the bad. (pp. 127–28)
A related gross error, the famous “nirvana fallacy,” is to compare an ideal state of affairs conjured up by socialists with the difficulties of real-world capitalism.
If the authors are ready to rebuke the errors of misguided youth, they look with sympathy on some of their hopes. Many young people condemn the drug war with its rampant racism and mass incarcerations, and they are right to do so:
The U.S. government’s war on drugs is unwinnable because, in the language of economists, it is a supply-side war, where demand isn’t very price-sensitive. This means when the U.S. government scores a “win” in the war, the price of the remaining drugs goes up more than the usage falls. As a result, net revenue to drug cartels increases, which increases their ability to corrupt law enforcement and buy weapons and other smuggling equipment. The result has been an endless cycle of increasing violence along the entire supply chain in Central and South America. (p. 135)
It is not only the drug war but also the war on terror that ought to be condemned, and here once more the many millennials who protested against the war are in the right:
We feel the same about the war on terror. The wars and violence associated with it in the Middle East are a major reason for Europe’s immigration wave….advocates for capitalism can be against war precisely because war undermines capitalist institutions and freedoms….Chris Coyne wrote a book entitled After War: The Political Economy of Exporting Democracy, in which he shows that when the U.S. engages in foreign intervention, it rarely creates the kind of lasting institutional change that supports what some might call a “neoliberal” society. Economist Robert Higgs’s classic book, Crisis and Leviathan, shows how crises in the United States, especially wars, have led to expanded government at the expense of markets. Chris’s latest book, Tyranny Come Home: The Domestic Fate of U.S. Militarism, co-authored with another friend of ours, Abby Hall, has shown how U.S. military interventions abroad “boomerang” back to the United States in ways that decrease our freedoms at home. See, anti-war isn’t a uniquely leftist position. Capitalists should be anti-war too. (pp. 136–37)
The use of “neoliberal” as a term of praise and the solecism “advocates for” are regrettable.
I confess that I approached the authors’ project of a drinking tour of the socialist countries with skepticism. Would it be more than a jeu d’esprit? Reading the book has laid my skepticism to rest. Socialism Sucks has the potential to do great good if it gets into the right hands, and its impressive sales suggest that it will do so.
Abstract: Leigh Phillips and Michal Rozworski’s The People’s Republic of Walmart entered the scene in 2019 with the remarkable idea that mammoth firms such as Walmart and Amazon, by being able to direct huge volumes of resources—sometimes with the capacity of entire countries—without an inner market to signal prices, are living evidence of the viability of a collectively planned economy. Moreover, they argue that the nondemocratic command system that often accompanies the structure of firms is due to their operation in a profit-seeking market system. Using the Austrian arguments propounded during the economic calculation debate, this essay shows that not only are firms, like other organizations, unable to substitute the market in coordinating their economic plans, but that their nondemocratic elements arise precisely from their function as “miniature planned economies,” demonstrating that the authors have misunderstood the nature of economic planning in a market economy. It is further argued that the problems that a planned economy would face without market signals would no less obstruct the efficient and successful operation of private firms if they ever tried to eliminate the market creating them.
JEL Classification: P21
Márton Kónya (marton.konya@stud.uni-corvinus.hu) is a BA student of applied economics at the Corvinus University of Budapest.
I would like to thank everyone who aided me in writing this paper, especially Dr. Karl-Friedrich Israel of the University of Leipzig and my good friend Bálint Madlovics.
INTRODUCTION The People’s Republic of Walmart contains many ideas that are truly provocative to someone with Austrian views. In some everyday political circles, the book is cited as exposing how many neoclassical scholars’ objections to the high ideas of socialism are in fact unsubstantiated. It would seem that this book has become one of the fundamental “weapons” of today’s socialists. While reading it, the possible sources of its ideas became ever more apparent and its errors in economic theory showed themselves, which with a more careful study of Mises’s works would not have occurred.
The book’s argument, grossly simplified, is the following: socialist governments of the past failed to produce an efficient planned economy that could rival the market system, but this failure is almost entirely due to technological constraints that have since disappeared. Not only is a modern planned economy not impossible, but capitalism is partially operating it right before our very eyes. Megacorporations, such as Amazon and Walmart, are working at an economic capacity far greater than that of most of the former socialist countries. They are not only afloat, but can supply millions upon millions of consumers and arrange their production processes without having an inner market, which would need a price system based on private property to operate. These companies are the living evidence that the fears and objections of Austrian thinkers such as Ludwig von Mises and F. A. Hayek are wrong and that we have a system that can coordinate human efforts without a market.
This critique revives, in their accurate forms, the thoughts of Austrian school thinkers, mainly Ludwig von Mises, for he refuted the errors in the book long ago. Although this might be true for other arguments in the book as well, those elements which are not strictly connected to economic calculation will be avoided. Some of the book’s other fundamental ideas often appear in socialist works: for example, the exploitation theory of capital, the robber baron myth, the denial of the tragedy of the commons, the linking together of anarchism and the command economy, the idea that overproduction causes depressions, etc. These questions have been dealt with in countless books and essays. Instead, this essay’s purpose is to show that Mises and Hayek’s writings, if read correctly, already refute Phillips and Rozworski’s arguments and that Austrian economics provides more insight into the workings of large corporations than the book’s authors claim to.
This essay will first consider the book’s main terminological confusion, followed by a short restatement of the basic problem of economic planning. The second section applies these findings of the Austrian thinkers to the cases of large corporations. The final chapter briefly discusses the relation between planning as it occurs in a market economy, and in a collectivist economy.
I. PLANNED ECONOMY AND ECONOMIC PLANNING The central error of the book is that it uses two fundamentally different terms synonymously, economic planning and planned economy, and views both as incompatible with the market. But one of them is not only compatible with market economies, but is one of their foundational tools: economic planning. In order to make a clearer distinction between the two phrases, they need to be defined first. Simply put, economic planning is the process by which the various participants in the economy make calculations about the economic steps they must take in the future. In contrast, a planned economy is an entirely centralized system in which the allocation of everything from raw materials to capital goods, to consumer goods is implemented by a central authority, without the market mechanism.
To a naïve reader the only difference may be the scale of the planning operation, but the distinction is much more fundamental. To briefly summarize and illustrate the problemThe illustration here used is heavily influenced by an example given in a YouTube video by the Learn Liberty channel (2015) called “What If There Were No Prices?” that Mises originally pointed out in Economic Calculation in the Socialist Commonwealth ([1920] 1990) and later elaborated in Socialism ([1922] 1981) and Human Action (1949), let us take a planned economy. There are no profit-oriented firms or capitalists, and all means of production (including labor) are under central control. Let us suppose that the board of directors is tasked with building a railroad connecting two cities between which there is a high mountain. Let us suppose further that somehow the board of directors knows that the routes going through and around the mountain would increase social welfare to the same degree, and that their goal is to use the society’s resources in the most economical way (meaning that they must only use up resources that are not needed by an enterprise that promises a higher increase in social welfare). In short, we have simplified the scenario so that the directors only have to wrestle with the problem of finding the lowest cost possible. For the sake of simplicity, let us say that only two means of production are necessary to build a railroad, engineering and steel, and let us establish that the route through the mountain requires a lot of engineering work but less steel, and that the route around it takes more steel and less engineering. The problem, then, is to determine whether the society needs steel or engineering more. How can this be discovered? The other uses of the two factors must be known.
Consider engineering. It is the foundation of modern industry. There are immeasurable known uses for it (and even more that are unknown!). What if, it might be asked, more tractors are made instead of the railroad, as they might be more beneficial? How can this be known? With more tractors, there could be a larger output of goods that require the use of tractors. But these are usually not final goods, but various crops in their raw forms, so it is not known how much these would increase the utility of people. We have to go further down the chain of production: it must be known how much the increased crop yield would benefit the industries that use them (such as livestock farms, canning factories, restaurants, mills, etc.). It needs to be realized that an increase in the quantity of tractors affects a huge number of processing industries that serve the consumer in a wide variety of ways. In the end, what the consumers think about these alternative uses of more tractors, manifested as final products, would need to be known. The citizens would presumably have to be asked for their preference between the railroad route and every existing and potential food and drink item whose production at some point involves a tractor. But in this case, the same process would have to occur with every existing and potential use of engineering as a means of production, not just tractors, since engineering can also has many other applications. (Of course, this assumes that collecting the data of people’s preferences is technically feasible, despite the known fact that there are various obstacles that prevent the acquisition of some basic information. It would be wrong to assume that a person expresses the same pattern of preferences under surveying conditions as he would when acting under real circumstances. He might answer carelessly, just to get the survey over with. It may even be in his interest to falsify a survey.)
The same exercise can be done with steel. Social welfare might be increased in millions of ways using steel, not just by laying down rails. For example, frying pans might be made out of it. But how important are frying pans? In order to know this, we would have to know how much every consumer (and potential consumer) of frying pans would value more pans. If, for example, the people have various kinds of frying pans, they might want the railway between the two cities more than an additional pan. But if they have nothing to cook scrambled eggs in but would happily go from city A to city B on foot, they would probably want the pans more. And we must consider not only consumer goods, but the staggering multitude of production goods made of steel (machinery, for example), not to mention those consumer goods that can be created with production goods made of steel.
Add technology to this problem, which, although in a free market society is a blessing, in this case appears to be a great problem. In Human Action, Mises writes: “It is permissible to say that the present state of technological knowledge makes it possible to produce almost anything out of almost everything” (p. 695). A couple of lines later he gives the example of tap water: in modern society, we gain drinkable water by cleaning local water deposits or by using expensive aqueducts to transport spring water to the cities. But with modern technology it is equally possible to produce drinkable water synthetically. Today, of course, people smile at such a suggestion, but only because they cannot even imagine a world without sensible economic planning. Water-supplying companies (mostly government owned in Europe) can choose these efficient means of “producing” and transporting clean water, because market prices make these solutions the most economical for them. Without such guidance, they would have no idea whether to build huge cleaning facilities or synthetic water “factories,” or which option deprives society of the most precious resources relative to the “value” of output. There would be real chaos of production.
It is easy to see that even in this elementary example, with just two nonhuman factors of production, the examination of all their possible involvement in production would require that we know (1) who the possible consumers are and (2) whether they would prefer that a new railroad route be built or some other use of the factors and their resulting consumer goods. Here the problem is not, as the authors of The People’s Republic of Walmart wish to present it, to have a sufficiently accurate method of linear programming that could process the available data and solve the optimization problems before the data becomes obsolete. Rather, the problem is that in order to make just one economic decision we need to know all the preferences of all the participants in economic life. Just in the case of steel and engineering, we can say that we have to know all the latest thoughts of every consumer about every existing and potential consumer good. Due to the intertwining of production processes, almost all factors of production affect almost every other factor of production (and we have not even mentioned human labor, which is part of every production process and must be economized as well, since it is also a scarce resource). As a result, just to assess the extent of a few costs, we would have to be aware of all the thoughts of all the economic participants.
And here it is not enough, contrary to the authors’ assertion, to find partial solutions.As the authors write: “That’s the trick: to find the best possible, even if partial, approximations. Amazon’s modelers work to bring intractably complex problems down to size, to build plans that neither stretch into infinite time, nor respond to all the possible random events that could happen at every step, but that simply work. This means coming as close as possible to the true answer of a planning question within a realistic time frame and with the use of available computing power. When it is impossible to use an ‘algorithm of algorithms’ to mechanically find the algorithm that best approximates the original problem, creativity then comes into play” (Phillips and Rozworski 2019, 34). As will be seen later, a planning unit in a market economy can resort to such simplifications, but in our example, which is a genuine planned economy, what can be simplified? There is nothing precise to approach. In the case of a railway project, wasting a bit of steel or wasting a bit of engineering skill might not seem drastic, but if the methods and inputs are chosen randomly, or just without precision, in every conceivable line of production, soon society will find itself with shortages of resources that can have catastrophic consequences.
The book is noticeably quiet about the failures of socialist attempts at solving this problem. We can read about Otto Neurath’s brave revolutionary deeds (Phillips and Rozworski 2019, 10), but his central “calculation in kind” idea, which has long been debunked, does not appear. Marx’s and Engels’s critiques of capitalism rage though the pages (ibid., 27), but the “labor theory of value” that they advocated is not discussed. In fact, all these previous failures point to the central distinction between economic planning and a planned economy: money prices.
If a railway company is in the hands of a private entrepreneur, he has every incentive to choose the method of construction with the lowest monetary costs, assuming the same utility to the consumers (the total income of the project in monetary terms), in order to achieve the highest degree of profit. However, this also serves society best. What does it mean that engineering is too expensive? It means that other participants in the market (for example, farmers) are willing to pay engineers more. The reason for this is most probably that the farmers’ consumers (producers of foodstuffs) are willing to pay them more for their goods (crops). These producers of lower-order goods, in turn, are willing to pay more, because their own customers are willing to pay more for their final goods (foodstuffs). In accordance with the marginalist theory of value elaborated by the founders of the Austrian school, such as Carl Menger ([1871] 2007, 114–65), a change in consumer demand (at whichever stage of production it may occur) creates a signal for producers at higher stages that tells them which needs are to be satisfied more and which less urgently. A rise in the price of engineering means that engineering is being used in production processes that are creating goods which the consumers urgently need, and thus only producers satisfying even more urgent needs may acquire it.
The price system, based on the maximization of profit and utility, seemingly coordinates economic participants without any planning. Looking at the big picture, this is certainly true. Yet planning as such not only does not disappear, but is only possible in a free market environment. The Austrian thinkers, such as Hayek (1945), were right in calling the price system a system of information sharing. The price system does nothing more than divide a kind of mental labor between several miniature “planned economies,” mental labor that could not be carried out by a single, publicly owned planned economy. Its tool for this task is money. Money provides the common denominator which the socialist thinkers were unable to invent. It is the tool which enables market participants to use accounting methods to compare the incomes and costs of their activities, and to plan their future steps accordingly (Mises 1949, 230). It is at this level that the important act of economic planning happens. Accounting is how corporations, governmental organizations, nonprofit organizations, the army, the police, the nationalized schools and hospitals, every level of human organization is able to solve its planning problems: via money prices established by the market process based on the private ownership of the means of production. This holds true, of course, only if the preconditions of the formation of a market price are satisfied. In the case of the armed forces, police, and other governmental monopolies, the consumers do not get to decide the price which they would be willing to pay for these services, and as a result prices of production factors employed in these branches (such as policemen’s and soldiers’ wages or the prices of various weaponry) can’t accurately reflect their value relative to other resources, leading to waste. (Later the reason such a monopoly (be it governmental or private) on factors of productions would impede the economic actor’s ability to determine their prices will be explored.) It is fair to say, therefore, that although governmental monopolies can calculate with money prices, their presence in the economy in fact obstructs the economic calculus (on a long-term basis, as opposed to private monopolies, whose errors in calculation are not compensated by taxation).
The authors fell into the same trap as earlier socialists. The difference is that while the authors discuss large firms, earlier thinkers spoke about governmental bodies, since earlier in history those organizations were the largest economic units without an inner market. Mises ([1922] 1981, 136), however, showed that government institutions’ ability to calculate is only due to the market surrounding them:
State and municipal enterprises calculate with those prices of the means of production and of consumption goods which are formed on the market. Therefore it would be precipitate to conclude from the fact that municipal and state enterprises exist, that socialist economic calculation is possible.
The same principle applies to the modern case: considering that large corporations, however great the volume of their activity, plan in terms of market prices, corporate planning on a huge scale is not sufficient evidence for the feasibility of a planned economy without market prices. It would still be “just groping about in the dark,” using Mises’s (1949) words.
II. SCALE AND DEPTH Before it can reach the consumer (especially with today’s refined technology), a consumer good must go through several long stages of production. From the extraction of raw materials from nature through the various steps of manufacturing, time-consuming and complex processes are connected so that in the end some member of society may receive the final good or service. As has been shown above, the central management of the whole process would require complete knowledge—a supernatural if not impossible condition. But the reason for this is not the size of the economy or the greatness of cash flows occurring in it, nor the number of consumers. The constraint of a planned economy is not volume, but the complexity of alternatives.
Let Amazon and Walmart be as large as possible, even the sole monopolists of their industry on the entire globe. Still they could only coordinate their activities with market prices. True, their size would be gigantic, but this is not what makes economic calculation difficult. They are wide but thin slices of the entire system. And it is depth that really matters in calculation. Here it is worth mentioning the irony that the main activity of both Amazon and Walmart is the distribution of final goods. Mises (1981 [1922], 118) himself has pointed out in his works that the prices of (already available) consumption goods may be asserted even by a planned economy. Simply, the central planner should give money to the citizens and then hand out the final goods to the highest bidders. This is the farthest a socialist community (with available final goods) may go as far as gathering information is concerned, and only because the prices are expressed in terms of privately owned money and this process is still permitted by our definition of a collectivist society (producer goods still remain common property, but money is private property).Mises’s example goes as follows: “True, a socialistic society could see that 1000 litres of wine were better than 800 litres. It could decide whether or not 1000 litres of wine were to be preferred to 500 litres of oil. Such a decision would involve no calculation. The will of some man would decide. But the real business of economic administration, the adaptation of means to ends only begins when such a decision is taken. And only economic calculation makes this adaptation possible. Without such assistance, in the bewildering chaos of alternative materials and processes the human mind would be at a complete loss. Whenever we had to decide between different processes or different centres of production, we would be entirely at sea.” It is clear from what has been said above that the real problem only starts with the possible uses of the available production goods, and with finding production methods that are yet unknown. The latter point is illustrated by Ericson (1991, 21) when he writes about the Soviet Union’s tendency to only replicate the methods of production already used by capitalist firms and its inability pioneer such methods.As he wrote: “The [Soviet] system has been particularly effective when the central priorities involve catching up, for…the problems of what to do, when and how to do it, and whether it was properly done, are solved by reference to a working model, by exploiting what Gerschenkorn…called the ‘advantage of backwardness.’”
Knowing this, the book’s lengthy discussion about how complex and high-level technology is used by these corporations to find out the demand for different goods, seems only to be the knocking on an already open door. Moreover, the authors’ description precisely backfires: trading with final goods is just the ending move of the process of production, and this already requires a huge and costly computing system based on complex mathematics from these mammoth firms. Yet all this is only one function. We must not be deceived by the multitude of products these firms are selling, because Walmart and Amazon fundamentally produce only one good: they link the producers with the final consumers. Huge scale, little depth. And in order to carry out this function they must align their activity with market prices, much like every other corporation. Every step toward the complete ownership of the market would make their tasks exponentially more complex, since, as the example above showed, at every stage the number of different real and potential alternative uses of the factors multiplies until the point at which they would need complete knowledge. The need for calculation arises from the variety of alternative uses of the means of production. As long as this is solved by the market, Walmart can calculate how much income it has received from the suppliers who want to sell their goods at its stores (how high a need the members of society have expressed for the service rendered by Walmart), how much it had to spend on wages, capital goods, public utilities (how important the resources used up by its activity are to society), and how much profit these two leave (the difference between the valuation of its services and the resources used up). If all these were the property of Walmart, its efforts toward an efficient economic plan would also be in vain, since it would be unable to decide the most economical way of employing its production goods.
This problem is greatly elaborated in many relevant sections of Rothbard’s Man, Economy, and State ([1962] 1970, 547–48), especially those highlighted by Klein (1996) concerning the constraints economic calculation imposes upon the possible size of business units. Here Rothbard shows that firms require markets in order to efficiently calculate and plan their methods of production and operation. If a firm integrates stages of productions, it is required to conduct transfers within its divisional units without the market. If the managers want to know how profitable the operations of and transfers between the various units were, they have to use some kind of reference price in the accounts of the units. When a market of the transferred factor exists outside the firm, they can use its price as a “substitute price,” which helps them determine costs and thereby the most efficient methods of production. But if such a market does not exist, if, for example, the firm in question is the sole owner of the factors of production, then the managers have a very small chance of accurately determining the opportunity cost of the factors. This would result in gross misallocation of factors of productions, meaning not only losses on the firm’s accounts but also a wasteful, inefficient management of society’s resources. Rothbard argues that this problem forms an upper boundary on the size of the firm. The greater its share in the ownership of a factor of production, the less accurately it will be able to determine the factor’s opportunity cost, and the greater its losses will be on existing markets.In Rothbard’s words: “The force of this law multiplies as the area of the economy increases and as islands of noncalculable chaos swell to the proportions of masses and continents. As the area of incalculability increases, the degrees of irrationality, misallocation, loss, impoverishment, etc., become greater. Under one owner or one cartel for the whole productive system, there would be no possible areas of calculation at all, and therefore complete economic chaos would prevail.”
There is no doubt that this is true in the case of Amazon and Walmart. It may well be, as the authors have noted, that Walmart is able to utilize the huge volume of its capital equipment without an inner market. As they write, “[t]he different departments, stores, trucks and suppliers [of Walmart] do not compete against each other in a market; everything is coordinated” (Phillips and Rozworski 2019, 12). But if Walmart were the only owner of trucks in the world (or if it were somehow isolated in a such way as to be oblivious of the costs of transportation determined on the market), the only way of vaguely deciding the costs of trucking in order to plan the feasible amount of capital used for this purpose would be to approximate based on some other mode of transportation that does have a market price—and this would still lead to great inaccuracies. The fewer the reference points for this approximation are, the more inaccurate the calculation will be and the greater the amount of wasted resources will be.
III. ISLANDS OF TYRANNY As it is evident from the first sentences of their introduction, the authors more or less had to explain themselves in front of their fellow socialists. After all, writing a revering book about two corporate giants is quite a foreign thought in the circles to which the book is mainly addressed. To avoid confusion, after every admiration of planning comes an establishment of the fact that both Amazon and Walmart use planning for profit-induced reasons characteristic of capitalist corporations. We can read at length about how the firms, after buying the time and energy of the working class (Phillips and Rozworski 2019, 26–27), use them as they please, and that the workers are forced into this dictatorial system because they would starve to death without a salary. The working conditions, the authoritarian methods of force, the strict inner bureaucracy, the tools for the surveillance of workers are well detailed (Phillips and Rozworski 2019, 38). All this, of course, is attributed to the fact that despite being the living evidence of the possibility of planning, in a capitalistic environment all this efficiency benefits the capitalist class and oppresses the working class, which is forced into an autocratic system. They use the words of Noam Chomsky, who claims that firms, contrary to the “black box” concept of standard microeconomics and the cooperation models of business economics, are indeed “Islands of Tyranny.”
These are perhaps the most ironic parts of the book. The book’s main idea is that large corporations prove the viability of a planned economy, but its authors are forced to accuse these very examples of “planned economy” of using autocratic methods. And this, most ironically, they blame on the market economy surrounding these corporations. For those familiar with the ideas of Austrian economics it might be obvious that the case is just the other way around. It is easy to derive from what has been said above that the whole point of a market economy is to minimize the amount of planning necessary for an efficient economy. This is the “mental division of labor” of the market. It coordinates personal and organizational plans the central and complete coordination of which would take supernatural powers. However, the top-down organized hierarchal structure is an indispensable element of every planned economic process.
It seems expedient to mention here one of the most crucial chapters in The Road to Serfdom, “Planning and Democracy” (Hayek [1944] 2001, 59–74). In this chapter, Hayek clearly explains that in every planning process only one plan may exist and that it has to be one concrete aim. In such a process we are looking for a democratic element in vain. Every participant who opposes the plan constructed by the experts is sabotaging its realization. And if we want to plan the entire economy, there is no room for coexisting inner plans, either. There cannot be a separate steel industry plan, which contradicts the agricultural plan or the infrastructural plan. This leads to the centralizing nature of planning: in the end, only one plan can prevail. Under such conditions, it is impossible to create a consensus between people’s different motives, aims, and moral judgments. At most we can create an outcome which would not satisfy anyone. As Hayek explains:
That planning creates a situation in which it is necessary for us to agree on a much larger number of topics than we have been used to, and that in a planned system we cannot confine collective action to the tasks on which we can agree, but are forced to produce agreement on everything in order that any action can be taken at all, is one of the features which contribute more than most to determining the character of a planned system. (Hayek [1944] 2001, 65)
Speaking of “islands of tyranny,” the authors only listed those attributes of planning that are required for the realization of a certain goal. We know from business economics that the nonmarket inner world of a firm necessitates a high degree of harmony among its workers. If the experts at the top of the company have set a goal of opening a new plant, lessening administrative costs, installing a new technical system, changing some aspect of production, or anything else, every employee has to adjust his activity according to the company’s plan. Otherwise, they would sabotage the plan. In such a case, the leadership may choose to penalize lack of cooperation through the withdrawal of certain grants or privileges, by firing the employees or even starting lawsuits against them. But none of this originates from the profit motive of capitalism: it is inherent in planning as such. Profit only tells the managers how they can serve best the consumers as far as profit in a competitive industry represents the difference between the high valuation of the produced good and the low valuation of the factors of production used up. This profit system is not, however, what requires the centralized command structure, but firms have to employ undemocratic means precisely because they are the only effective way of carrying out a plan.
It would be mistaken to think that a completely planned economy would have not less but more democratic elements. The intertwining of production processes demands the cooperation of every part with every other:
A complex whole where all the parts must be most carefully adjusted to each other, cannot be achieved through a compromise between conflicting views. To draw up an economic plan in this fashion is even less possible than, for example, successfully to plan a military campaign by democratic procedure. As in strategy it would become inevitable to delegate the task to the experts….But the ends of an economic plan, or of any part of it, cannot be defined apart from the particular plan. It is the essence of the economic problem that the making of an economic plan involves the choice between conflicting or competing ends—different needs of different people. But which ends do so conflict, which will have to be sacrificed if we want to achieve certain others, in short, which are the alternatives between which we must choose, can only be known to those who know all the facts; and only they, the experts, are in a position to decide which of the different ends are to be given preference. It is inevitable that they should impose their scale of preferences on the community for which they plan. (Hayek 2001 [1944], 68)
It must not be denied that in the final sentences of the book, the authors themselves gave voice to the concern that the idea of a planned economy arouses in people:
It is not enough to say, ”Nationalize it!” We have to think hard about how to ensure that the already enormous amounts of information controlled by large, unaccountable corporate bureaucracies do not become the basis for new unaccountable bureaucracies (state-run or otherwise). As the two twins of undemocratic planning, Soviet Union and Walmart, show, planning on its own is no synonym for socialism. (Phillips and Rozworski 2019, 103)
However, all these concerns are naively set aside as the matter for some other book. After this paragraph, a remarkably humorous quotation (at least for an Austrian scholar) follows by Friedrich Engels, who expresses his deep contempt against all those who call every planned system “socialistic.” He says that if this were so, then “Metternich and Napoleon would be counted as the founding fathers of socialism,” and “the Royal Maritime Society and the nationalized Royal Porcelain Manufactures could all be called chief socialist institutions.” To the advocates of a free market economy, the elaboration of the irony surrounding these sentences is not necessary.
CONCLUSION The economic calculation debate was perhaps the most important debate of the entire history of economic science. It has moved such brilliant minds that it is safe to say that the problem has been processed to such an extent that practically everything has already been said about it. Neurath, Böhm-Bawerk, Lange, Hayek, Lerner, Mises, and Dickinson have examined this area in such detail that the following generations only have to pull one of their works from the shelves in order to come across an answer for almost any question about it. In order to counter every collectivist supposition, it is enough to find out where in the twentieth-century debate we have to “look closer.”
To The People’s Republic of Walmart we can assign several such dates, but certainly to its early sections, since in them even the necessity of money prices is missing, which neosocialists (such as Oskar Lange and Abba P. Lerner) have already discovered. The ideas in Hayek’s The Road to Serfdom about economic planning, well-trodden ground, are also absent. But implicitly we can find the tendency characteristic to the economic calculation debate, namely that in every one of its stages the debate has approached step by step the triumph of the market economy. It is a history of constant concessions: first the collectivist idea of the common ownership of consumer goods had to be discarded, then the untenable ideas of the labor theory of value and the elimination of the market, and finally the entire idea of the public ownership of the means of production. It is a slow awakening from a deep slumber, in which during every doze we have to shake the dreamers awake. In the words of Ludwig von Mises:
The socialists cannot help admitting their crushing final defeat. They no longer claim that socialism is matchlessly superior to capitalism because it brushes away markets, market prices, and competition. On the contrary. They are now eager to justify socialism by pointing out that it is possible to preserve these institutions even under socialism. They are drafting outlines for a socialism in which there are prices and competition. (Mises 1949, 702)
Abstract: This paper extends Austrian business cycle theory to the command economy and demonstrates that Mises’s socialist commonwealth would not be free from Rothbardian error cycles, which J. Guido Hülsmann has argued must originate in “institutions in which the error of many persons is inherent.” Booms and busts are shown to be unavoidable under socialism because (1) the central planner’s incomplete understanding of the opportunity costs associated with any given rate of growth would result in growth targets that are unsustainably high and (2) the planner would be blind to the resulting imbalances until they became sufficiently severe to become “visible” in the statistical data that form her only picture of the world. In this case, Hülsmann’s “erroneous institution” is central planning, which misidentifies the state’s image of the economy with the totality of economic reality.
JEL Classification: B51, B53, E32, P21, P51 Mark A. DeWeaver (madeweaver@gmail.com) is an adjunct professor at American University’s Kogod School of Business and cofounder of the fund management company Ithaca Advisors, LLC. The author would like to thank the participants at the 2019 Libertarian Scholars Conference and an anonymous referee for their helpful comments and suggestions.
“Economic construction proceeds in wave-like fashion with its ups and downs, and one wave chasing another. This is to say that there are balance, disruption, and balance restored after disruption.”–Mao Zedong (1959)
It is often supposed that business cycles would not occur under central planning. Indeed, in most business cycle models a central planner should be able to improve upon the “anarchy of the market.” Keynes’s ([1936] 1997) animal spirits could be eliminated, the adaptive expectations of Samuelson’s (1939) accelerator/multiplier model could be replaced by a rational program, the planner’s supposed informational advantages would solve the incomplete information problem in the Lucas (1972) rational expectations story, and, in the absence of the “exploitation” of labor by capital, Marx’s ([1863] n.d., chapter XVII, part 6) “crises of accumulation” would not occur.
Although most business cycle theorists have not explicitly advocated central planning, explanations based on the limitations of private actors can easily be misinterpreted as implying that eliminating market forces would be an improvement. Keynes ([1936] 1997, 320) makes this claim explicitly, arguing that “the duty of ordering the current volume of investment cannot safely be left in private hands.” Here the implicit assumption is that the state official will behave more rationally than the businessperson, a view entirely consonant with Keynes’s lifelong advocacy of socialist policies (Fuller 2019). His argument is a good example of what Demsetz (1969) calls the “nirvana approach”—a case for state intervention made by contrasting real-world free market outcomes with what an ideal government could achieve in a “first best” world. Keynes is essentially saying that a system directed by angels would be preferable to one run by fallible human beings.
In the Austrian tradition the planner tends to be seen as demonic rather than angelic. Here too, however, we find claims that central planning would not generate economic fluctuations. In Human Action, for example, Ludwig von Mises ([1949] 1998) argues that the periodic crises experienced in free enterprise economies, which he attributes to incompatibilities among the plans of different economic actors, would not occur under socialism, which would allow for only one plan—that of the dictator. “If the dictator invests more and thus curtails the means available for current consumption,” he writes, “the people must eat less and hold their tongues. No crisis emerges because the subjects have no opportunity to utter their dissatisfaction” (566). Although rational decision-making would be impossible in his socialist commonwealth, there would at least be no booms and busts.
Similarly, for Huerta de Soto (2006) the claim that “an economy of real socialism offers the advantage of eliminating economic crises is tantamount to affirming that the advantage of being dead is immunity to disease.” If cycles are not observed in socialist countries, this is not the mark of a superior system but rather a sign that they are “are continually and permanently in a situation of crisis and recession” (472–73).
Yet the economic history of socialist countries includes boom-bust episodes that in many cases have been even more extreme than those observed elsewhere. Kornai’s (1992) classic study of the Soviet Union and Eastern Europe found that “while some socialist economies grow relatively smoothly, others show wild fluctuations, even larger ones than in many capitalist countries” (187). He noted that the coefficients of variation for annual investment growth in Yugoslavia, Poland, and Hungary were 278 percent, 187 percent, and 171 percent, respectively, all higher than those for the capitalist countries in his sample, which covers the period from 1960 to 1989. (Of these, Ireland had the highest value, at 159 percent.) Similarly, the Chinese economy has experienced dramatic cycles in fixed asset investment going back to the Great Leap Forward in 1958 (Eckstein 1976; Fan and Zhang 2004; Wang 2008; DeWeaver 2012).
Research on Soviet-type economies has generally attributed cyclical fluctuations to inconsistencies in the central plan. Wellisz (1964, 233), for example, describes the plan as being “fitted together like a jig-saw puzzle,” where “an individual piece cannot be trimmed or replaced without spoiling the whole picture.” This meant that “a weakness is tolerated as long as possible in order to avoid rearrangement of all the pieces. Finally, when the situation becomes unbearable, radical steps are taken to remedy it. Thus, the economy proceeds by starts and jolts, with successive drives or campaigns to eliminate this or that mistake.”
Winiecki (1988) shows how this state of affairs resulted from enterprises’ efforts to have their projects included in the five-year plan (FYP) by exaggerating the projected benefits and underestimating the costs. “In consequence,” he finds, “the FYP typically starts with significant built-in distortions in its investment component. These distortions exercise, over time, an increased pressure on aggregate equilibrium…shortages multiply and excess demand begins to grow.” In the majority of cases, the cycle peaked in the second or third year of the plan, at which point the planners “resign themselves to the fact that all planned investment projects will not be completed by the end of the FYP…many projects are ‘mothballed’, with further construction postponed until the next FYP, and some others discontinued altogether” (1988, 20–21).
In practice, it is evident that central planning has never been an antidote for economic fluctuations. It might still be argued, however, that these historical precedents do not rule out in principle the possibility of a stabilizing role for the planner. If administrative arrangements specific to the countries involved account for the volatility of the socialist economies, perhaps the system might somehow be “perfected,” for example by improving the incentives facing enterprise managers and local-level officials. Under ideal conditions, socialism without booms and busts might yet be achievable.
Here my objective is to show that this is not the case. I extend Austrian business cycle theory to the command economy by showing that malinvestment will still occur under central planning whenever any form of economic growth is prioritized. The model, which combines Friedrich Hayek’s (1945) insights on the importance of local knowledge with Scott’s (1998) concept of “legibility,” assumes a planning authority with a limited, though time-varying, statistics-based picture of economic conditions. Cycles then correspond to changes in what can be “read” through statistical data. I find that Mises’s calculation problem implies not only static but also dynamic inefficiency.
The fundamental issue is the planner’s lack of access to local knowledge, which makes comprehensive planning an impossibility regardless of how the plan is formulated. Ideal local-level officials might selflessly follow the leadership’s directives in every particular but will find that these are incomplete. Much will still have to be left to the discretion of the “cadre on the spot,” as Hayek might have put it, who will have to set aside his local-knowledge advantage to focus on plan fulfillment. Investment fluctuations will be unavoidable, because (1) the planner’s incomplete understanding of the opportunity costs associated with any given rate of growth will result in growth targets that are unsustainably high and (2) the planner will be blind to the resulting imbalances until they became sufficiently severe to become “visible” at the aggregate level.
Although the institutional setting is different—administratively set targets take the place of monetary expansions—these dynamics are essentially the same as those described in Austrian business cycle theory. In both cases, faulty signaling of society’s rate of time preference leads to the misallocation of resources into more roundabout production, resulting in distortions that must inevitably be corrected through an investment slowdown. When shortages become sufficiently severe, the central planner will be forced to restore order through administrative measures much as central banks in today’s market economies have to “take away the punch bowl” when faced with rising inflation.
Today, the socialist business cycle is not only of theoretical and historical interest but also of great practical importance. In China the investment cycle continues to be primarily a state-led phenomenon, operating in much the same way as it did in the pre-reform era (DeWeaver 2012). Booms continue to be driven by investment promotion at the local government level while busts result from central government administrative interventions designed to reimpose macroeconomic stability. Although prior to the beginning of the “reform and opening” period in 1978, the Chinese economy’s ups and downs had relatively little relevance to the outside world, today they impact everyone from Swiss watchmakers to Zambian copper miners.
The business cycle in the socialist commonwealth can be considered as an example of what Hülsmann (1998), following Rothbard ([1962] 2004, ch. 11), calls an “error cycle.” The root cause of any business cycle, he argues, is what he refers to as an “illusion”—an error that is independent of time and place and can therefore give rise to recurring erroneous behavior. In this case, the illusion is built into the very idea of central planning. It is the misidentification of the image of the economy that is visible to the planner with the totality of economic reality.
The remainder of this paper traces the origins of this illusion, demonstrates why it gives rise to booms and busts, and describes how Austrian business cycle theory can be extended to the centrally planned economy to account for these aberrations. Part I shows how socialism was built on a denial of the economic significance of local knowledge, which made it possible for theorists to believe in the possibility of an all-seeing planner. Part II presents a model of fluctuations in an ideal socialist commonwealth and demonstrates that these fluctuations can be considered as a subspecies of the Austrian business cycle where state-set output targets play the role of free market interest rates as a signal of society’s rate of time preference. In part III, I review Hülsmann’s argument and argue that his “essentialist” error-cycle approach is particularly well suited to this case. Part IV concludes.
I. THE BIRTH OF AN ILLUSION The founders of the Soviet system believed that industrial modernization would give rise to the conditions necessary for central planning to work by eliminating the relevance of local knowledge. This idea is implicit in Marx’s claim that with advanced factory technology “the motion of the whole system does not proceed from the workman but from the machinery,” implying that “a change of persons can take place at any time without an interruption of the work.” (Marx [1887] 1999, 285). Standardization and automation would leave Hayek’s man on the spot with no particular informational advantages. Anyone could take his place.
Similarly, Engels ([1894] 1975) believed that modern industry had “freed production from restrictions of locality.” “Water power,” he noted, “was local; steam power is free” (351). Where “knowledge of the particular circumstances of time and place” (Hayek, 1945) would obviously be important for siting a water-powered mill, replacing water with steam could potentially make an understanding of locality-specific geographic conditions largely irrelevant. Engels expected that it would become possible for any factory to be located practically anywhere as technological progress swept aside the myriad local differences that had formerly constrained economic development and would allow “industry to be distributed over the whole country…on the basis of one single vast plan” (Engels [1894] 1975, 351).
Lenin (1920) later updated this conception, replacing steam with electric power. Capitalism, he claimed, “depends on small-scale production and there is only one way of undermining it, to place the economy…on a new technical basis, that of modern large-scale production. Only electricity provides this basis.” Hence his famous dictum, “Communism is Soviet power plus the electrification of the whole country.”
The backwardness of peasant Russia, he went on, would be transformed by power stations, which would become “strongholds of enlightenment.” Electricity would not only light up the night but would also create a manufacturing base free from the idiosyncrasies of traditional economic arrangements. The central planner would not be groping in the dark but able to see clearly. Lenin was aiming at something much more than the electrification of the whole country. He hoped to leverage the rationalizing potential of technology to achieve what Scott (1998) refers to as the “thoroughly legible society,” which “eliminates local monopolies of information and creates a kind of national transparency” (78).
There would then be no need for the “new dispositions made every day in the light of circumstances not known the day before” that Hayek (1945, 524) argued were essential to the “continuous flow of goods and services.” Instead, as Nikolai Bukharin and Evgenii Preobrazhensky claimed in their 1920 book The ABC of Communism, the state will “know in advance how much labor to assign to the various branches of industry, which products are required and how much of each it is necessary to produce; how and where machines must be provided” ([1920, trans. 1922] 2001, chap. 3). Chaotic interactions among privately owned firms would give way to a smoothly functioning state-directed mechanism.
In China, where Bukharin and Preobrazhensky’s readers included Mao Zedong, Deng Xiaoping (Wu and Ma 2016, 23), Beijing mayor and Politburo member Peng Zhen, and People’s Liberation Army founder Zhu De (Snow 1968, 271, 335), this notion was taken up uncritically by the Chinese Communist Party. It is, for example, the unstated assumption behind the “chessboard strategy” described in the famous 1959 People’s Daily editorial “The Whole Country as a Chess Game” [Quan guo yi pan qi]. Written in response to the chaos following the launch of the Great Leap Forward in the previous year, it called for a return to disciplined central planning, likening the national economy to a chessboard, on which the movements of each piece must conform to an overall strategy based on the rules of the game. Implicit in this analogy is the idea that it would be possible for economic life to be just as transparent to the planner as a board game is to the players.
In practice, of course, technology has not created anything like the level of national transparency envisaged by any of these authors. The operations of a large-scale factory can no more be reduced to a straightforward set of rules than the techniques of the traditional artisan. Modern forms of communication have not eliminated “knowledge silos” in complex organizations. Computer algorithms seem unlikely ever to penetrate fully the opacity of asset markets.
Innovations may render older categories of economically significant local knowledge obsolete but may be equally likely to create new ones. Consider the case of the defense aerospace industry. There, Gilli and Gilli (2018) note that “the number of components in military platforms has risen dramatically: in the 1930s, a combat aircraft consisted of hundreds of components, a figure that surged into the tens of thousands in the 1950s and to 300,000 in the 2010s.” As a result, “the number of potential incompatibilities and vulnerabilities” has increased “geometrically” (150) and “the knowledge related to a given weapon system has become increasingly less codifiable—it has become tacit” (163). Unlike the knowledge required to produce a World War I era biplane, which could to a large extent be derived from a blueprint, the essential knowledge resources behind a platform such as Lockheed-Martin’s Joint Strike Fighter are primarily local, residing in the collective memory of an organization and difficult if not impossible to express in any explicit form. From this example it is easy to see that advances in technology can have exactly the opposite effect from that expected by the early socialists, making the workings of the industrial system ever more opaque.
There can thus be no central planning that does not rely on “state simplifications” that are “always some distance from the full reality these abstractions are meant to capture,” as Scott (1998, 77) puts it. These, he argues, differ from the full reality because they (1) “cover only those aspects of social life that are of official interest,” (2) “are nearly always written,” implying that nondeclarative knowledge is necessarily left out, and are (3) “typically static,” (4) “aggregate,” and (5) “standardized.” In the real world, where the relevance of different types of information is constantly changing and the particular circumstances of time and place continue to be economically relevant, there will unavoidably be significant blind spots in the planner’s “synoptic” view.
The problem, as Hayek (1988, 85) pointed out, is that “what cannot be known cannot be planned.” But even in the absence of an adequate basis for decision-making, plans will still be made. Decisions will be taken based on whatever the central planners can “see” at any particular time as the bureaucracy collectively succumbs to the illusion that this is a complete picture. Policy goals will necessarily be limited to targets for “synoptically observable abstractions” while the unobservable details of their implementation are left to officials at the local level. The extent to which such a system gives rise to booms and busts will thus depend critically on the activities of these lower-level cadres.
II. BOOMS AND BUSTS UNDER CENTRAL PLANNING The local cadre’s responsibility for realizing targets for aggregate variables will be economically destabilizing, because he will be incentivized to generate outcomes that the central government can observe but not to take the associated unobservable economic costs into consideration. As a result, resources will be diverted into planned policy priorities at the expense of activities that are not emphasized, or even contemplated, by the plan. There will be chronic contradictions between the needs of the actual economy and the plans of the economic decision-makers.
When increasing economic output is the primary objective, as has generally been the case historically, this may in principle be achieved through either extensive or intensive growth. But only the former (increasing output by using more inputs) falls within the competence of the planner. Intensive growth, which relies on increased productivity, is intrinsically unplannable. It is straightforward to set material targets for specific items (tons of steel, kilometers of railway lines), as was commonly done in the Soviet Union (Davies 1974), or goals for aggregate measures such as provincial or municipal GDP growth, which have been typical in post-reform China (Zhou 2004). But similar “state simplifications” (e.g., number of patents issued) do a poor job of incentivizing genuine innovation.
Attempts to transform the “mode of economic growth” in the Soviet Union and, more recently, in China have been notably unsuccessful. In the 1980s, the Soviets adopted the policy of uskorenie (acceleration), “subordinating everything to the aim of making the economy more intensive and achieving higher production outputs with smaller inputs and less resources” (Tikhonov 1981, 24), which was to be facilitated through the “universal introduction of fundamentally new machinery and materials and the large-scale use of highly efficient energy- and material-saving technology” (Tikhonov 1981, 29–30). This produced few breakthroughs. The difficulties can be seen from the experience of the machine-building industry, a top priority sector, where of the three thousand new products introduced in 1986 to satisfy innovation targets, 40 percent were found to have involved “no substantial shifts” in technology (Matosich and Matosich 1988).
Similarly, every Chinese five-year plan since 1981 has emphasized the importance of greater economic efficiency for the country’s future development (DeWeaver 2012, chap. 9). Yet levels of excess capacity in industrial sectors such as steel, cement, float glass, and aluminum—to name but a few—have skyrocketed while China’s incremental capital-output ratio has been on a steady uptrend since 2007. And although the jury is still out on Beijing’s “National Medium- and Long-Term Plan for the Development of Science and Technology (2006–2020),” its goals illustrate the difficulty of transitioning to intensive growth using command economy methods: R&D expenditure is supposed to increase to 2.5 percent of GDP, reliance on foreign technology must fall to 30 percent, China must reach fifth place globally in number of patent filings, and so on (McGregor 2010).
Given the obvious problems with raising productivity by fiat, the planner will generally find that extensive growth is the only viable option. As she cannot be aware of all of the opportunity costs associated with any given growth rate, she will necessarily set growth-rate objectives (whether for the entire economy or for specific sectors) that are unsustainably high. The cadre on the spot will respond by investing in infrastructure and the manufacturing base. Hitting material targets will require additional fixed assets once the existing capital stock is fully employed. Investment drives will also be the surest route to an aggregate output benchmark, both because fixed asset accumulation is itself a part of aggregate output in the period in which it occurs and because it makes it possible to increase output in subsequent periods. Although the cadre might conceivably attempt to introduce local-level productivity enhancements, his first choice will be to mobilize factors of production that he perceives as having an opportunity cost of zero because they are currently employed in activities that lie outside the planner’s field of vision.
Murray Rothbard ([1962, 1970] 2004, 337) notes that intertemporal transactions may take the form of either credit extension or the “purchase of producer goods and services.” The latter, he points out, are effectively “future goods” because they will be converted into final products in future periods. In the socialist commonwealth, although money and credit may not exist at all, it will be no less true that the employment of producer goods and services constitutes a substitution of future for present output. And in the absence of changes in productivity or in the availability of land and labor, any growth rate set by the planner will imply a specific requirement for additional capital, which will in turn require some particular increase in investment at the expense of consumption.
Thus, under central planning, state-set targets for output increases based on an extensive growth strategy play an analogous role to the interest rate in a free market system. Both are signals of the rate at which society is willing to sacrifice present for future consumption, that is, of its rate of time preference. Prioritizing economic growth under central planning will therefore give rise to the same outcome as artificially lowering interest rates in a credit-based economy: resources will be shifted into more roundabout production processes. Growth targets have essentially the same effect on the cadre on the spot as do interest rate cuts on Hayek’s man on the spot. Both skew the investment decision-maker’s incentives in favor of subsequent periods, resulting in a mismatch between the aggregate requirements of investment projects and the means available to carry them out.
Alfred Zauberman (1964, 25) notes that historically central planners have generally behaved as “managers of a joint stock company whose shareholders are future generations.” In other words, we may think of them as assigning a discount rate of zero to outcomes occurring at some indefinite date in the future. That Austrian business cycle theory, with its emphasis on faulty signals of society’s true rate of time preference, should be applicable to “actually existing socialism” is thus unsurprising.
In both the socialist and free market cases the outcome will be the same: an initial boom that eventually leads to a crisis as the resulting imbalances become unsustainable. Although in a free market such a crisis can be resolved more or less spontaneously, in the absence of price signals a resolution will not be possible until the essential features of the situation at last come clearly into focus for the planner.
Even under central planning a course correction will eventually be possible, because the planner’s picture of the world, although always incomplete, will not be unvarying. The presence of widespread problems in parts of the economy that the planner cannot see will eventually manifest itself through the aggregated information that she can see, revealing disruptions such as raw materials shortages, crop failures, power outages, and transportation bottlenecks. At this point, the threat to longer-term economic growth will force the planner’s attention to shift from growth targets to the alleviation of shortfalls. Investment plans will have to be cancelled or put on hold as resources are redirected toward previously neglected activities. This will lead to a crisis analogous to those observed in the free market case, though centrally directed rather than the result of a multitude of individual decisions. Given that the planner is the only truly autonomous decision maker, there will be only a single determination that the plan is incompatible with the available resources rather than the mass panic that occurs when “all or nearly all businessmen find that their investments and estimates have been in error” (Rothbard [1962] 2004, ch. 11). Rather than running for the exits on their own, the local cadres will have to be instructed to do so. “The brake” as Kornai tells us, “is applied by central control,” after which a period of austerity will be necessary until such time as the leadership is “reassured that tension has fallen, or even a measure of slack, an apparent underuse of resources, has appeared” (Kornai 1992, 190, 192).
These socialist slowdowns will be no less prone to inefficiencies than the booms that precede them. Lacking the ability to determine whether or not specific activities make economic sense, the planner will have to use arbitrary criteria such as project size or industry type in determining which investments to halt. There will be no way to avoid throwing out the baby with the bathwater.
Just as in a free market economy, the fact that decision-makers have experienced one cycle does not mean that they will be able to avoid another. The details may be different the next time—novel investment rationales may be imagined, innovative technologies may be employed, new sectors may be involved. But as long as economic growth remains the priority, the fact that planning must be conducted in the absence of local knowledge guarantees that recurring rounds of malinvestment will be unavoidable.
Investment booms are not merely a possibility under central planning, but a logical inevitability. This conclusion follows from the following three premises:
The planner’s primary objective is economic growth, whether this be growth in an aggregate measure such as GDP or in output statistics for particular priority sectors.Local knowledge will be economically significant regardless of how the economy is organized.Plan fulfillment is the sole objective of the cadre on the spot.Premise (3) means that the cadre on the spot will take advantage of the lacunae in the plan resulting from premise (2) to meet the planner’s targets. And because (1) implies that future output increases will be targeted, it will be optimal for him to overinvest in roundabout production processes regardless of the resulting malinvestment at the macroeconomic level.
Busts are a logical inevitability as well if we add the following two additional premises:
The macroeconomic effects of malinvestment must eventually become general knowledge.These effects will pose a threat to longer-term economic growth if left uncorrected. These imply that the planner must at some point become aware of the intertemporal distortions resulting from the extensive growth strategy and introduce new policies to resolve them, thereby terminating the boom. Although the subjects may have “no opportunity to utter their dissatisfaction” and initially have to “eat less and bite their tongues,” as Mises argued, this state of affairs will obviously have to end at some point before the entire population has starved to death.
III. SOCIALIST ERROR CYCLES J. Guido Hülsmann (1998) presents an alternative approach to modeling business cycles based on what he refers to as an “essentialist” account of the errors in investment decision-making that drive them. He believes that conventional “consequentialist” stories are unsatisfactory because “as long as human beings choose, that is, as long as they are beings with free will, the correctness of choice must in principle be unrelated to preceding events and choices” (8). The problem with traditional Austrian business cycle theory (ABCT) specifically, he argues, is that it is not generally valid to claim that increases in the money supply cause entrepreneurs to invest in projects that will later turn out to be unprofitable. There is no reason in principle why they could not foresee that these investments would fail and choose not to make them.
During a boom a significant number of people make the same mistake at the same time. Consequentialism explains this clustering of errors as the result of an event (e.g., a money supply increase) that leads decision-makers to err in some particular way. Hülsmann proposes that we instead take error as “the ultimate given.” The question then becomes not “how does error come about?” but rather how can we explain the “repetitive occurrence of more or less synchronous errors of many persons.” This requires identifying “more or less permanent patterns of action (institutions) in which the error of many persons is inherent.” Such an institution must be built upon “a kind of error that is independent of time and place,” which Hülsmann calls an “illusion” (1998, 8–9).
For Hülsmann, this institution is government, which he sees as founded on the illusion that society cannot function in the absence of the institutionalized violence of the state. The task for the theorist is then to “identify particular instances of government intervention and spell out precisely where the illusion is manifest.” There will be “various specific error cycle theories (the economic aspect of which would be specific business cycle theories)” (1998, 14).
My argument in part II is consequentialist—error is caused by the planner’s failure to access local knowledge, which results in the provision of malincentives to her subordinates. Note that this model differs from conventional ABCT in that the faulty decision-making is centralized. While in both explanations the malinvestments occur at the local level, these are only truly errors for the man on the spot. The cadre on the spot is a representative of the state, not an autonomous individual. His activity consists solely in carrying out instructions, using the resources at his disposal in a manner that is optimal for his plan-fulfillment objective. Ultimately it is the planner who errs by mistaking statistics for reality, thereby choosing means that must ultimately prove suboptimal for achieving her long-term goal of maintaining economic growth. This difference is a natural consequence of the cadre’s relative lack of decision-making autonomy. Unlike his free market counterpart, he is not really at liberty to decide whether or not to invest. This decision is imposed on him by the logic of a system set in motion by a single authority acting in the name of the “people” as a collectivity rather than by the aggregation of decisions made by the individual citizens themselves via the market process.
On a more fundamental level, reformulating the story in essentialist terms reveals that the socialist cycle may be thought of as a particular instance of Hülsmann’s general theory. If government is indeed an “illusory institution,” under socialism, where economic life is entirely dominated by the state, recurring erroneous behavior will be unavoidable, though this behavior will be concentrated in the person of the planner, who is uniquely empowered to set the objectives for society as a whole. (Alternatively, we may think of Hülsmann’s “synchronous errors of many persons” as being made by ideal cadres whose individuality has been entirely merged into a single collective “popular will” and therefore err collectively rather than individually.) And we may identify central planning as being “precisely where the illusion is manifest.” Indeed, we can be even more certain that “it is not money but government intervention that accounts for the business cycle,” as Hülsmann concludes, in a commonwealth where interest rates are not relevant to investment and money, at least in a theory, might not even exist at all.
Mihai Macovei (2015, 433) finds that “the essentialist approach is useful, but lacks convincing arguments to become a general theory of business cycles”. He challenges Hülsmann’s claim to generality on two counts. First, a story premised on the idea that government is essentially a form of institutionalized aggression can easily be rejected by anyone who does not happen to share this view. Second, “except for the ABCT, Hülsmann only mentions two other possible examples, such as the ‘military-imperialistic’ and the ‘social security’ cycle. He does not develop them further in order to explain their workings, which is a clear shortcoming in terms of expounding a theory that claims to be general and all-encompassing” (2015, 427). Furthermore, Macovei argues that even the “argumentation” underlying the essentialist reconstruction of the ABCT is “not irrefutable” (2015, 433).
Our consideration of the socialist business cycle, although not relevant to Macovei’s specific objections to this argumentation, suggests possible counterarguments to his two more general points. It suggests, first of all, that the key characteristic of the state for the purposes of business cycle theory may be blindness rather than violence. This position is defensible given the obvious economic importance of local knowledge and the fact that planning is no less a part of any government’s activity than coercion. In addition, one can point to the socialist cycle as an additional special case, thereby strengthening the assertion that the theory is “general and all-encompassing.”
We may think of central planning as one specific instance in which the illusion of government, as Hülsmann characterizes it, is manifested, thereby arriving at a specific version of his general theory appropriate to the socialist commonwealth. But we may also restate this general theory by considering faith in governments’ ability to plan, rather than belief in the necessity of state property rights violations, to be the illusion underlying government itself—not an unreasonable view given that the former must presumably precede the latter. The business cycle then becomes less a consequence of the expropriation of private property than of the state’s inability to use what it has taken in an efficient manner. This restatement has the advantage of making the essentialist position easier to defend while leaving it basically intact.
IV. CONCLUSION In Economic Calculation in the Socialist Commonwealth, Mises argues that without access to the local knowledge embedded in the price system, the socialist economic order will end up “floundering in the ocean of possible and conceivable economic combinations without the compass of economic calculation” (23). In the absence of any rational basis for decision-making, “the wheels will turn, but will run to no effect” (19).
Here, I have made a case for going beyond Mises’s essentially static framework to explore his argument’s dynamic implications. The planner may never see a complete picture of the economy, but what she does see can nevertheless be expected to vary over time. As a result, her mistakes will be serially correlated, leading to a pattern of alternating overinvestment and austerity not unlike a series of private sector manias and panics. Although the wheels will “run to no effect,” they will run faster during some periods than others.
The incentive issues and political factors characteristic of real-world socialism complicate the story without changing its essential features. The main difference between our idealized commonwealth and existing socialist countries is that real cadres will find ways to influence the contents of the plan and strive to overachieve its goals (Winiecki 1988, Kornai 1992, Zhou 2004). Their priority is typically not plan fulfillment per se but advancing their own careers. But the basic problem—the diversion of resources from activities outside the planner’s field of vision—will be the same, though exacerbated by cadres’ attempts to game the system. The possibility of eliminating booms and busts through administrative reforms can also be ruled out. Central planning is inherently destabilizing.
It is straightforward to generalize Austrian business cycle theory to include both planned and market economies. In either setting, the essential features of the cycle are: (1) an expansionary impulse resulting in (2) a distorted signal of society’s rate of time preference, followed by (3) malinvestment, (4) excess demand, and finally (5) contraction. Under socialism, we simply have the planner in the role of the banker, with the planner’s economic growth policy replacing money supply increases as the expansionary impulse and unrealistically high output targets taking the place of below equilibrium interest rates as the distorter of the time preference signal. In either case, the result is malinvestment, while the excess demand may be manifested either directly, as physical shortages, or indirectly, as inflation. The final contraction will provide the same necessary readjustment whether it results from administratively imposed austerity or interest rate increases.
Far from being an impossibility, as many have imagined, the socialist business cycle may in fact be the state-driven business cycle par excellence. Without markets and private property, policy does not have to be transmitted indirectly to the private sector through a monetary or fiscal “transmission mechanism” nor are there any truly independent decision-makers. The state’s economic management will have a direct and immediate impact and cannot fail to produce booms and busts under the five assumptions enumerated at the end of section II.
The socialist business cycle is also arguably the Hülsmannian error cycle par excellence. Where there are no private sector “animal spirits,” the source of the “recurring erroneous behavior” is unambiguous. It can only be the state’s blindness to the “particular circumstances of time and place,” whether considered as a specific manifestation of the illusion of government or as this illusion’s ultimate source.
Prosperity and Liberty: What Venezuela Needs…Rafael Acevedo, ed.Miami: Econintech, 2019xvii + 153 pp.
Abstract: Prosperity and Liberty: What Venezuela Needs is a compilation of essays gathered together by distinguished Venezuelan economist Rafael Acevedo. Venezuela has suffered from shortages of essential consumer goods, and a high inflation rate. The path forward, for a country devastated by decades of socialism, is to move toward a free market. The only missing element in this book is a discussion of the dire effects of American economic sanctions on the Venezuelan people.
socialism — economic policy — economic freedom — venezuela
David Gordon (dgordon@mises.org) is a senior fellow at the Mises Institute.
Rafael Acevedo is a distinguished Venezuelan economist, now in part-time residence at Texas Tech University, who is deeply concerned about the future of his native country. Socialism has brought Venezuela to rack and ruin, and if the country is to recover, a move to the free market is essential.
Many have said the same thing, but Acevedo has done much more than bemoan his country’s fate and point to the obvious remedy. He is the head of a think tank called Econintech, and he and his collaborators have proposed detailed plans for the reconstruction of Venezuela from its present state of wreckage.
In Prosperity and Liberty, Acevedo has gathered together a number of these plans, as well as essays by eminent scholars who tell Venezuela’s sad tale and compare the situation of the country with what has taken place elsewhere.
A vital point made in the book is that Venezuela’s descent into disaster did not begin with the overtly socialist regime of Hugo Chávez. To the contrary, the relatively free economy that had existed before 1958, albeit under a political dictatorship, was gradually supplanted by interventionist policies that brought with them massive corruption and a decline in economic growth. Though Venezuela is blessed with immense natural resources, oil deposits foremost among them, these did not suffice to fend off disaster.
Given the economy’s poor performance, what was to be done? One might think the answer obvious, a return to a freer economy, but unfortunately another path gained popularity. Advocates of this path said that Venezuela’s economic problems resulted not from too much socialism, but rather from too little of it. As Acevedo and Luis Cirocco note in an illuminating essay,
Over time, the gradual destruction of economic freedom led to more and more impoverishment and crisis. This, in turn, set the stage for the rise of a political outsider with a populist message: Hugo Chávez. He was elected in 1998 and promised to replace our “lighter” socialism by a form of hard socialism, which he called “the revolution of the 21st century” and which only magnified the problems we had faced for decades. He was able to pass an even more anti-private property constitution. Since Chávez’s death in 2013, the attacks against private property continued, and Chávez’s successor, Nicolás Maduro, keeps promising more of the same. The government has turned toward outright authoritarian socialism.
Students of Austrian economics will not be surprised that the socialist program has failed completely. The most overt sign of economic chaos is the country’s extraordinary inflation rate. Essential consumer goods are at best in short supply, and the entrepreneurial spirit, a key to economic growth, has been stifled. Small wonder that many have fled the country, and many among those who remain cross the border to engage in black market exchanges. It must be said, though, that the contributors to the book fail to address the dire effects of American economic sanctions on the Venezuelan people.
The disaster that has resulted from socialism is by no means confined to the economic sphere. Those who openly challenge the regime have been arrested and sometimes tortured as well, and again, this should come as no surprise. As Bob Lawson and Ben Powell pointed out, “In his 1944 book The Road to Serfdom, Friedrich Hayek argued that a competitive capitalist economy is necessary to sustain democracy, and that once a country becomes ‘dominated by a collectivist creed, democracy will inevitably destroy itself.’” The reason is simple. “Centrally planned economic systems necessarily concentrate economic power in the hands of government planners, who can punish dissent through their economic edicts.” (Lawson and Powell 2019)
If Hayek accurately depicted the road to serfdom, our pressing question becomes: what is the road to freedom? The answer does not lie in the deposing of Maduro and his replacement by his rival Juan Guaidó. He is, sad to say, also a socialist, though not so extreme a one as Maduro, and his program would not rescue Venezuela from the economic doldrums. I should add, though the contributors to the volume do not state this directly, that it would be a path of folly to install Guaidó by force, a course of action urged by many American neoconservatives, ever eager to mind the business of other countries.
As Ron Paul has trenchantly remarked about the recent CIA-backed effort to oust Maduro,
While US Administrations engaged in “regime change” have generally tried to mask their real intentions, this US-backed coup is remarkable for how honest its backers are being. Not long ago the National Security Advisor to the president, John Bolton, openly admitted that getting US companies in control of Venezuelan oil was the Administration’s intent. Trump Administration officials have gone so far as mocking the suffering of Venezuelans when a suspiciously-timed nationwide power failure heightened citizens’ misery…. Was the US behind the take-down of Venezuela’s power grid? It would not be the first time the CIA pulled such a move, and US officials are open about the US goal of making life as miserable as possible for average Venezuelans in hopes that they overthrow their government.
The starvation blockade imposed on Venezuela, denounced by the eminent international lawyer Alfred de Zayas, has brought about great suffering. Most Venezuelans, even those not favorable to Maduro, naturally resent efforts by foreigners to order them to change their government, and they remember with bitterness the CIA-orchestrated coup against Chávez in 2002. Support for such efforts, even in the name of opposition to socialism, plays into the CIA’s efforts, dating from the inception of that agency, to promote at all costs global American hegemony.
Political and economic salvation for Venezuela can come only from the Venezuelan people themselves. They cannot be “forced to be free” but must seek, if they have the wit and wisdom to do so, the guidance of experienced free market economists such as Acevedo and his coworkers at Econintech.
What is the best way to establish a free market economy? Acevedo with penetrating insight accepts the counsel of the greatest Austrian economist of the latter half of the twentieth century, Murray Rothbard. Economic reform must be extensive and fast, not creeping and piecemeal: “Freeing only a few areas at a time,” Rothbard said, “will only impose continuous distortions that will cripple the workings of the market and discredit it in the eyes of an already fearful and suspicious public.”
It is heartening that Acevedo and his colleagues have learned so much from the Austrian school, and he and his colleagues have made abundantly clear the best course of action for Venezuela. It is a course of action that only the Venezuelan people themselves can take.
With oil prices in likely long-term tailspin, corrupt governments can't count on oil sales to bail them out anymore. But Mexico's government didn't get the memo and still clings to the state oil monopoly.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "As Oil Craters, Mexico's Government Still Bets on Its Oil Monopoly"
Professor Peter Klein from Baylor University joins the show to discuss Part Six of Human Action, where Mises presents his exposition of interventionism in all its manifestations. Mises breaks socialism down into Soviet and German versions; the first purely bureaucratic (state ownership) and the second nominally private but state-directed. He gives us a contrasting definition of laissez-faire, the choice of freedom over government omnipotence. Successive chapters take readers through taxation, restrictionism (tariffs, regulations, labor laws), and price controls (goods, wages, interest rates).
Dr. Klein is a fascinating guest with great insights into Mises and "the Hampered Market Economy." This is a conversation you don't want to miss!
Use the code HAPOD for a discount on Human Action from our bookstore: Mises.org/BuyHA.
Additional Resources Human Action: Mises.org/HumanAction
Bob Murphy's Study Guide to Human Action: Mises.org/Study
Ryan McMaken, an economist and editor of Mises.org, joins the show to consider Part Five of Human Action: "Social Cooperation without a Market." This section of the book provides Mises's updated exposition of socialism, the impossible project of substituting 'One Will' for the subjective actions and preferences of everyone in society. Mises gives us the history behind support for socialism, and the enduring appeal of ascribing the best intentions and omniscience to the central state.
Can a socialist system really operate using the division of labor? Can mathematical equations lead us to equilibrium, the final and static price for any good or factor? Can the managerial state make the impossible possible? This is a rewarding discussion of socialism from Mises's brilliant and radical point of view.
Use the code HAPOD for a discount on Human Action from our bookstore: Mises.org/BuyHA.
Additional Resources Human Action: Mises.org/HumanAction
Bob Murphy's Study Guide to Human Action: Mises.org/Study
[This interview with Jeff Deist and Hans Hoppe will appear in the upcoming issue of The Austrian (March–April 2020).]
JEFF DEIST: Your recent talk in Vienna mentioned growing up happy but poor, the son of East German parents who had been driven west during the Cold War by the Soviets. Can you elaborate on the lasting impact their experience had on you, in terms of how you view state power and its attendant evils? Are you in some ways still influenced by their “eastern” roots?
HANS-HERMANN HOPPE: The fact that my parents were both refugees, ending up in the West by the accident of WWII, driven away and separated from their original homes in Soviet-occupied East Germany, played a huge role in our family life. In particular the expropriation of my mother’s family and its expulsion from house and home by the Soviets, in 1946, as so-called East Elbean Junkers, was a constantly recurring topic at home and assumed even more importance after the collapse, in 1989, of East Germany and the following German “reunification.” My mother, as many other victims of communist expropriations, then sought and hoped for the restitution of her property—in which case I would have been set for life. However, as I already knew and correctly predicted by then, this was not going to happen. There was to be no justice. But my parents were shocked and outraged.
The numerous trips we took to visit various relatives in East Germany confirmed my parents’ judgment of the Soviet system. Shortages, waiting lines, empty stores, inferior products, and lousy services. All around controls, spies, and informants. Everywhere grey ugliness and decay. A prison wall built around the whole country to prevent anyone from escaping. And commie-proles droning on endlessly about the great successes achieved under their leadership.
Yet as a little boy and a teenager I did not understand the reason for all this mischief and misery. Indeed, the East German experience did little if anything to shake my own leftist convictions at the time. East Germany, I thought, was just the wrong type of socialism, with the wrong people at the helm.
Apart from their anticommunism, my parents, as most people of their generation, were highly guarded or even timid regarding political pronouncements. Germany had lost a devastating war, and the German population was subjected to a systematic, American-led reeducation campaign, a Charakterwaesche (character-wash), as I was to realize only many years later, of truly enormous proportions, which involved a complete rewriting of history from the victor’s viewpoint, essentially portraying Germans as congenital villains. This made it all the more difficult to finally discover the fundamental importance of private property rights and the evil of statism and so-called public property.
As far as any genuine “eastern” influences are concerned, I am skeptical. Far more important in any case was the fact that my parents were impoverished refugees who eagerly wanted to recover from their losses, get ahead in life, and instill their own will to succeed also in their children. (In fact, empirical studies later on demonstrated the comparatively greater professional success of refugee children as compared to their nonrefugee peers.) However, in the German context you may count my Protestant—Lutheran—upbringing and the character traits typically associated with it, i.e., the “Protestant ethic,” as described by Max Weber, as somehow eastern.
JD: You also mentioned your time at university, studying philosophy under the direction of left-wing critical theorist Jürgen Habermas. Although your political philosophy differs radically from his, discuss his influence on you and your development of “Austrian” class analysis. Is he purely a malign figure, or can we learn from him?
HH: Looking back, I can certainly say that Habermas has been a largely malign figure. He became Germany’s most famous and influential intellectual, and as such played an important role in Germany’s gradual but steady move leftward, both economically and culturally. Indeed, he can be regarded as the high priest of historical and political correctness, of social democracy, and of political centralization.
Nonetheless, my relationship with Habermas, while not close, was cordial, and I learned quite a bit from him, especially from his earlier works such as Erkenntnis und Interesse (Knowledge and Interest). (Since the late 1970s I essentially stopped following his work, as it was increasingly tedious and murky.) In any case, it was Habermas who introduced me to the Anglo-Saxon tradition of analytic philosophy and the philosophy of language. He helped me understand “methodological dualism,” i.e., that the study of objects with which we can communicate (and communicative action) requires different methods than those appropriate for the study of noncommunicative objects (and instrumental action). And contra all empiricist and relativist claims, Habermas always defended the notion of some sort of synthetic a priori truths.
As far as my work on class analysis and the theory of history is concerned, however, it owes nothing to Habermas, who had actually little interest in economics and political economy, but instead to my earlier study of Marx. I wrote the original paper on the subject for a Mises Institute conference on Marx, and I tried to show how, by only substituting State for Business Firms and Taxes for Wages, Marx’s exploitation theory and his theory of history would make perfect sense.
JD: Your speech titled “Coming of Age with Murray” in New York City two years ago reveals much about your personal relationship with the late Murray N. Rothbard. In fact you moved to New York primarily to work with him. Looking back, are you glad to have left Germany for America? Would your career and work look very different had you remained at a European university?
HH: Oh yes, that move was about the best and most important decision I ever made. Given my views at the time, i.e., my Misesian-Rothbardian outlook, an academic career in Germany, even if not entirely impossible, would have been extremely difficult, even with stellar academic credentials. I might have become depressed and given up. Certainly, without constant encouragement such as I would receive from Rothbard in America, I would have written less and then mostly in German, which no one but Germans read.
In the meantime, thanks to the growing influence and worldwide internet presence of the Ludwig von Mises Institute in Auburn, the situation has significantly changed. It is still difficult, but nowadays you can also have a successful academic career in Europe even as an Austrian (but you will have to write in English).
JD: Rothbard remains relevant and controversial today. Why is he so consistently misunderstood? Given your long history with him, both in New York and at UNLV, what do his critics fail to grasp? Was he warm and convivial as his supporters contend, or acerbic and mercurial as per his detractors? Does his work in social theory overshadow his work as an economist?
HH: Rothbard was a genius of the first order. He ranks among the greatest economists, but he was not and did not want to be a mere economist-economist. He was also a great philosopher, sociologist, and historian, and as such became the creator of a grand, integrated intellectual system. Anyone familiar with Rothbard’s entire oeuvre can only stand in awe before his achievement. But there also lies the problem. The sheer volume and the interdisciplinary character of Rothbard’s work makes it difficult for anyone but the most dedicated and talented student to give a full and fair account of his work. Moreover, especially economics, the centerpiece of Rothbard’s system, is a rather dry, technical field with very limited sex appeal. Much easier, then, for the envious, lazy, and talentless to engage in nit-picking. And easier still not to talk about Rothbard’s scholarly work at all, but reduce him to the libertarian activist (that he also was, if only in his spare time and for his own amusement).
As far as Rothbard the man is concerned there is something to both seemingly contradictory statements about his personality. You certainly did not want to become the target of one of Rothbard’s many written missives. As a writer, Rothbard could be merciless and devastating, ready to go in for the argumentative kill. On the other hand, as a person, in social gatherings, he was a softy: warm, convivial, charming, and entertaining.
JD: Rothbard frequently defended you and your work, charging critics with “Hoppephobia.” What did this mean to you as a young scholar? Why does loyalty and gratitude seem so scarce in academia generally, and in libertarian circles?
HH: If you write and take a clear and unambiguous stand on highly contentious issues, you should expect some heat. Otherwise, if you don’t like the heat, stay out of the kitchen. Given what I wrote or said in public (or the way I said or wrote it), I knew that I would be a controversial figure; and as a young man I took a good deal of delight from provocation and vigorous intellectual debate. Nonetheless, I had no idea how downright personal, nasty, and even defamatory and libelous some critics and criticisms could get. In such situations, then, Rothbard’s coming forward in my defense was a welcome relief and gave me a great boost of confidence. After some years in academia, however, I developed quite a thick skin and learned that many a critic and criticism were not worth my attention and best ignored.
As for loyalty and gratitude, it is necessary that a person recognizes and admits that he owes something to another person; that this other person has done something of value for him that deserves to be acknowledged. I tend to agree with your assessment of academia and certain libertarian circles as ranking rather low in this regard. And in both cases I suspect the prevalence of egalitarian ideas to be responsible for this outcome. The typical or “modal” libertarian, as described by Rothbard, is an egalitarian, respect-no-authority guy, with little knowledge of history and world affairs. He fancies himself to have come up with everything he has and knows on his own, as a self-made man, and as such thinks that he owes no one any gratitude or special respect.
The egalitarianism of academia, or more precisely that part of it that is principally concerned with writing and speaking (rather than doing, such as engineering, for instance), is of a different kind. Let’s call this group the intellectuals. Intellectuals generally suffer from an inflated ego. They consider intellectual work and hence themselves as more important than mundane or manual work and workers. In their eyes, then, the fact that they are all subsidized today and kept financially afloat by nonintellectuals is only how things should be anyhow. No need to be thankful for what is self-understood, as far as they are concerned. In this regard, intellectuals are elitists. Vis-à-vis each other, however, they are typically egalitarians. They all equally write and speak, and who is to say that this writing is better or more original than that. True enough, their salaries and their standing in academia may be quite different. However, such differences are solely the result of bureaucratic procedures and criteria that have nothing to do with truth or beauty. Nor does popularity matter as far as truth and beauty are concerned. No need, then, for an intellectual to ever feel less of an intellectual than anyone else.
JD: You mention sharing with Rothbard a profound interest in religion and the sociology of various faiths despite being an agnostic. Have you changed your perspective on Christianity and its influence on the West? Is the post-Christian West going to be a nasty and tribal place, contra the assurances of secularists?
HH: Whether you are a believer or not, there is no way of denying that religion has played a hugely important role in human history and that it is the West, i.e., the part of the world shaped by Latin Christendom in particular, that has surpassed all other world regions both in terms of its material as well as its cultural achievements, and that among its superior cultural achievements in particular is also the idea of natural human rights and human freedom. The Christian notion that each person is created in the image of God contributed to the uniquely Western tradition of individualism and was instrumental in abolishing, at long last, the institution of slavery within the Christian orbit (all the while it lingered on outside the West, even until today). And the institutional separation and jealous competition for social recognition and authority in the West between the Christian church and its hierarchy of popes, cardinals, bishops, and priests, on the one hand, and all worldly power with its hierarchy of emperors, kings, nobles, and heads of households on the other contributed greatly to the uniquely Western tradition of limited (as opposed to absolutist) government.
This happy, power-limiting arrangement began to crumble already in the sixteenth and seventeenth centuries with the Protestant Reformation and the Counter-Reformation following. Today, the various Christian churches are essentially appendices of the state. As such they promote even the mass importation of people of rival faiths into formerly Christian lands, thus further undermining whatever authority they may still possess in public opinion and strengthening at the same time the power of the all-secular, post-Christian state.
JD: Democracy: The God That Failed remains perhaps your best-known and most controversial book. Nearly twenty years later, give us your thoughts on the book’s legacy. Are you happy with its notoriety and impact, or do you wish your work on socialism, property, and ethics was better appreciated?
HH: Indeed, of all of my major writings Democracy has been the bestseller, and it is no exaggeration to say that the book in the meantime has exerted some notable influence in helping desanctify the institution of democracy (majority rule) in public opinion. Naturally, I am quite happy about this. The book has a certain “sex appeal,” if you will. It is interdisciplinary and not too technical, and it offers some new, original, and provocative theoretical theses and insights, combined with alternative, revisionist historical vistas and perspectives. It may be the only major work of mine a person reads and associates with my name. But then, I always hope, there may also be other people to whom it opens the door to some other, possibly more important if less sexy, works of mine.
JD: Both your fans and critics seized on a passage in Democracy arguing that individuals with goals and lifestyles at odds with a libertarian social order would be “physically removed” from that community. Since then you have clarified how this phrase functions as an adjective, not a verb. In other words, people at odds with the agreed-upon terms of a private community simply should live elsewhere, just as one town is physically separate from a nearby town. What are your thoughts about the controversy today?
HH: This harks back to your earlier question concerning Hoppephobia. The whole affair, most likely initiated by one of the usual left-libertarian suspects from the DC beltway, was a deliberate attempt to smear and malign me personally and with that also the program of a realistic or right-libertarianism first outlined in the book.
Essentially, I did not say anything more controversial or scandalous in the short passage than that anyone insisting on wearing a bathing suit on a nude beach may be expelled from this beach (but be free to look for another one), just as anyone insisting on nudity may be expelled from a formal dinner party (but be free to look for another party). In my example, however, it was not nudes but homosexuals that figured. I wrote that in a covenant established for the purpose of protecting family and kin, people openly displaying and habitually promoting homosexuality may be expelled and compelled to look for another place to live. But in some “woke” circles, mentioning homosexuality and expulsion in one and the same sentence apparently leads to intellectual blank-out and a loss of all reading comprehension.
Ultimately, the entire smear campaign failed and even backfired, only increasing my own popularity and the influence of the book.
JD: At your Property and Freedom conference in Turkey you have spoken on the process of “de-civilization,” whereby positive law overtakes natural law under the domination of a monopolized state actor. Property rights and adjudication of conflicts fall under the grasp of this monopoly power. We like your conception of the opposite: a social order emerging from “justice principles,” taking the form of a private-law society—entirely voluntary—more in harmony with simple natural order. It sounds better and more reasonable than anarchism to ordinary people! Are anarcho-capitalism and resulting private “covenant communities” actually far less radical than commonly thought? Are they in fact outgrowths of natural law concepts that many people already accept?
HH: Indeed, yes, and yes again. Even if it appears to be little more than a shift in semantics, for the reasons you mention I have long preferred the terms “private-law society” and “natural order” to “anarcho-capitalism.” Because everyone is familiar with the basics of private law. From our everyday lives, we know what property is and implies and how it is acquired and transferred (and how not). As well, we know what an exchange, an agreement, and a contract are (and what is not to count as such). There is nothing difficult or especially demanding about the natural law of property and contract. Indeed, in many small villages people live by these laws, without the presence or pressure of any outside government police or judge. There is self-policing. Yet whoever polices is subject to the same rules as everyone else. And if need be, in the case of conflict, there is self-arbitration and self-adjudication. But whoever acts as judge or arbiter, too, is subject to natural private law.
The emergence of a natural order ruled by private law, then, is not difficult to explain. What is difficult to explain is the emergence of a state. Why should there be anyone, any institution, not subject to private law? Why should there be someone who can make laws? Why should there be an institution that can exempt itself from the rules applied to everyone else? Why should there be some policemen who cannot violate the law or some judges who cannot break the law? Why, indeed, should there be any ultimate and final judge, exempt from any and all prosecution? Certainly, all of this cannot be the result of an agreement or contract, because no one in his right mind would sign on to a contract which stipulated that in any conflict that might arise between you and me, you will always have the final word.
JD: Let’s turn to immigration. You propose contractual admission of immigrants, with sponsors (or immigrants themselves) funding a bond or liability insurance to pay for any criminal or civil cost imposed on existing taxpayers. Immigrants remain in their new home conditionally for an initial period, subject to revocation of admission for contractual violations. They do not receive “welfare”; citizenship and voting rights come much later. You refer to this system as satisfying the “full cost principle.” In many ways this is far more “open” than open borders proposals, because it requires no checkpoints or intake centers or vast border police agencies. It uses contracts and market forces to shape immigration, rather than political machinations. This seems far more humane and practical, yet you are assailed as anti-immigration. What explains this?
HH: As already touched upon, in some circles the mere mention of two words in one sentence—this time “immigration” and “restriction”—is sufficient to trigger a blank-out. No need to read any further and try to comprehend. First homophobe, then xenophobe. In fact, I have never met a serious advocate of “no immigration, period!” Nor have I ever taken a stand that could be described as anti-immigration. Instead I have always argued for the commonsensical approach of selective immigration.
Ideally, with all pieces of land and everything on them privately owned, there would be a huge variety of entrance requirements, i.e., of degrees, respectively, of openness and closedness. I have described this, for instance, in my piece “Natural Order, the State, and the Immigration Problem.” Airports, roads, shopping malls, hotels, etc., would be rather open, whereas residential associations, private retreats, clubs, etc., might be almost completely closed. In any case, however, all migration would be by invitation and invariably the full cost principle would apply. Either the inviting host or the invited guest or both jointly would have to pay the full cost associated with the guest’s presence. No cost could be shifted and externalized onto third parties, and the inviter and/or invitee would be held liable for any and all damage resulting from the invitation to the property of others.
If and as long as there is a state with so-called public property in place, as happens to be the case in today’s world, then the best one may hope for is an immigration policy that tries to approach this ideal of a natural order. You have mentioned some possible measures in this regard. But to advocate, under current conditions, the adoption of a “free immigration” policy—every foreigner can come in and move and stay around the entire country, no questions asked—is certainly no way to achieve this goal. To the contrary, it would make forced integration and cost-shifting ubiquitous, and quickly end in disaster. Only people devoid of all common sense could possibly advocate any such policy.
JD: In your exchanges with Walter Block about immigration, he argues that all government property ought to be subject to open homesteading by immigrants. Your response is often characterized as “taxpayers should own taxpayer-funded public goods.” But in fact your argument applies only in the context of Block’s argument, to disprove the notion that public property should be viewed as “unowned.” If we must have public property, state agents at least ought to act as trustees of that property on behalf of the taxpayers who fund it. Accurate?
HH: Accurate. Let me only add that in today’s world the sometimes mentioned “wilderness” of mountaintops, swamps, tundra, etc., is no longer truly wild and thus ready to be homesteaded. There is no inch left on earth today that is not claimed to be the “property” of some government. Whatever wilderness there is, then, it is wilderness that has been barred and prevented by some government, i.e., with taxpayer funds, from being homesteaded by private parties (most likely by neighboring property owners). If anyone, it is domestic taxpayers who are the legitimate owners of such wilderness.
And quite apart from this, even if some wilderness were opened for homesteading, it would be neighboring, domestic residents, who had been most immediately and directly barred from doing so before, who should have the first shot at homesteading, well before any distant foreigner.
JD: Hoppean argumentation ethics remains a subject of rigorous debate, most recently between (economist) Robert Murphy and (legal theorist) Stephan Kinsella. How important is a purely logical justification for human liberty, as opposed to Rothbard’s normative natural law arguments or Mises’s utilitarianism? Is the shared human experience of physical personhood the best starting point for arguments against the initiation of violence, i.e., arguments against the state?
HH: There are some questions that can be answered definitively by the performance of a simple experiment. For many others that is not possible. Sometimes we are satisfied with answers that sound plausible or appear convincing on intuitive grounds. But to the curious mind, some questions are of such great importance as to ask for more than just plausibility or intuition.
Transcendental arguments are designed to satisfy this desire for more, i.e., for logical certainty or ultimate justification. They are answers to the skeptic who denies that there is any such thing as ultimate justification and a priori truths. They try to establish, by means of self-reflection, what the skeptic must already presuppose as given and true simply in order to be the skeptic that he is, i.e., to make his skepticism possible. One has reached certainty about something, then, if one can show that even a skeptic must admit to it, if only in order to meaningfully express his very own doubt.
The ethics of argumentation is the answer to the ethical relativist, i.e., to any one person claiming—as a proponent vis-à-vis an opponent in argumentation—that there is no such thing as a rational or objective ethics.
In response to the relativist proponent it is essentially pointed out that by virtue of his own engagement in argumentation he has already effectively rejected his own thesis, because argumentation is an activity, a special, conflict-free form of interaction between a proponent and an opponent with the specific purpose of clarifying and possibly coming to a mutual agreement concerning some rival truth claims. As such, it presupposes the acceptance as valid of such norms or rules of human conduct as make argumentation itself possible. And it is impossible, then, to argue against and deny the validity of such norms without thereby running into a performative or dialectic contradiction.
The praxeological presuppositions of argumentation, then, are twofold—and we all know them from personal experience more generally also as the conditions and requirements of peace and peaceful interactions: first, each person is entitled to exclusive control or ownership of his physical body (that he and only he can control directly, at will) so as to act independently of others and come to a conclusion on his own. And secondly, for the same reason of mutually independent standing or autonomy, both proponent and opponent must be entitled to their respective prior possessions, i.e., the exclusive control of all other, external means of action appropriated indirectly by them prior to and independent of one another.
Rothbard immediately accepted my proof. In fact, he hailed it as a major breakthrough. As for the various criticisms I have encountered, I have not been impressed, to put it mildly.
JD: Are you generally optimistic or pessimistic about the future of the West? Do you think sclerotic, bureaucratic states will yield to happier and more decentralized political arrangements? Or do you think Washington, DC, Brussels, et al. will repeat the terrible mistakes of the twentieth century: aggressive foreign policy, unrestrained central banking, and political globalism?
HH: In the short and medium run, I am pessimistic. True, our living standards have gone up and technological progress allows us to do things not long ago thought impossible, but at the same time the coercive powers of the state have continuously expanded, and private property rights and personal freedom have been correspondingly diminished. The process of political and monetary centralization has proceeded unabated. Central banks create more money and credit out of thin air than ever before. Government debt and obligations have risen to exorbitant heights, so as to make some future default a virtual certainty. All the while taxes and regulations have brought economic growth to a standstill. It is clear, then, that a severe economic meltdown is in the making.
At the same time, throughout most Western countries the populations have been thoroughly dehomogenized by immigration policies favoring multiculturalism. And migration into the West by non-Westerners has been massively increased still as a fallout of the endless US wars and military adventures in the Middle East and elsewhere. Most Western countries now contain within their own native cultures large pockets and clusters of people of not just different, but rival and even hostile cultures.
Combined with a major economic crisis, this makes for an explosive mixture, the ingredients of a civil war.
It is amazing how the ruling elites have so far managed to keep the show running. But there can be no doubt that the day of reckoning must eventually come, and when it does I see two likely scenarios of how to escape the danger of civil war. The first one is the strong man variant, an authoritarian regime that tries to hold all things together by means of centralized, dictatorial powers. And the second variant is that of decentralization: of secession, separation, and disaggregation so as to approach the ideal of a natural order. Naturally, the second variant is the one favored by libertarians (and recommended by Mises). Yet to make this variant win, libertarians have to prepare the ground. The public must be educated about the economic and social advantages of small, competing political units, and it is necessary to find and nurture potential charismatic leaders for the various decentralist and secessionist causes.
JD: Finally, how does living in Turkey affect your perspective? Are old notions of East and West breaking down, and should we consider looking East for allies in the fight for civilization and property?
HH: As mentioned before and emphasized also by Mises, the idea of liberty is originally a Western idea, created by white Western males, and although it has lost some strength there, it is still most prominent and widespread in the West. That does not mean that it is restricted to the West or only accessible to Western minds, however.
If there is anything I have learned from living in various countries and from my many travels, it is that there exists far more sociocultural variety and variance on earth than the typical Westerner might imagine: not just the variety of different countries, but even more so the regional and local variations within each country. Almost everywhere you can find a few libertarians or classical liberals, and you should look out for them wherever they are, of course. But just as we must learn in our private dealings with other individuals how to distinguish between potential converts on the one hand and hopeless cases on the other, so as not to waste our time and effort to no end, so, and for the same reason, we must also learn in our search for allies how to distinguish between hopeful, less hopeful, or even hopeless countries, regions, and localities. And we must realistically recognize that different places offer hugely different and unequal prospects and potential in this regard.
Is Bernie right to say America has become a socialist country? Jeff Deist joins guest host Judge Andrew P. Napolitano on Kennedy (on Fox Business Network) to discuss the "Capitalism vs. Socialism" debate within the Democrat Party.
Original video © 2020 FOX News Network, LLC. Republished here under "Fair Use" for scholarship and research purposes by a nonprofit educational institution.
Abstract: The French social model is mainly a model of state interventionism, which creates a strange contrast between two things: the fact that France is a collectivized society and the fact that it has produced some of the most famous and important intellectuals (for instance, Turgot, Bastiat, and Jean-Baptiste Say). We are inclined to wonder why these liberal writers—who are famous all around the world—have not been able to convince French people so that France would be a model of liberalism.
socialism interventionism liberalism france Pascal Salin (pascal.salin@dauphine.fr) is professor emeritus at the Université Paris-Dauphine, and former president of the Mont Pelerin Society.
The present article is a lecture made at the Property and Freedom Society meeting in Bodrum, Turkey, in September 2018.
It is often said in France that there is a “French social model” which all people around the world do envy. But the French social model is mainly a model of state interventionism, since France has the sad record of being the country in which public expenditures and taxation are the highest. And it may also be one of the countries with the greatest number of public regulations. As a consequence of this situation, France has had a low economic growth rate and a high unemployment rate for many decades.
There is therefore a very strange contrast between two things: the fact that France is a collectivized society and the fact that it has produced some of the most famous and important liberal intellectuals (for instance Turgot, Bastiat, Jean-Baptiste Say, etc.).
As we may believe that “ideas have consequences,” we are inclined to wonder why these liberal writers—who are famous all around the world—have not been able to convince French people so that France would be a model of liberalism. Truly, I have always tried to find answers to this important question, but I must confess that, for the time being, I am not certain that I have found convincing explanations.
Milton Friedman answered to someone who wondered why liberalism had not been implemented in France: “To describe Hell correctly, you have to live inside.” This is certainly true. However, the most important liberal thinkers wrote their famous books at a period which has not been the worst in France. France has become less and less liberal—more and more close to hell—along the whole 20th century and the 21st century so that we are certainly living in hell now. However it is not during this recent period that outstanding liberal authors have been the most numerous.
Therefore we may even assume that there is a reverse causality: state interventionism is an obstacle to the development of liberal ideas. However it is also true that—maybe as a reaction to the present situation—there are more and more young people who are much interested by liberal ideas and I must say that it is the main hope I have for the future of my country.
In the present presentation I will recall some characteristic facts concerning both the history of France and the history of French liberal ideas. I will also tell about part of my own experience. And I will try to analyze the interplay of ideas and reality (the influence of ideas on policies and the influence of public powers on ideas).
In reality, there has always been in France the juxtaposition of liberal and extremely interventionist and authoritarian positions.
18TH–19TH CENTURIES Until the end of the 18th century—i.e., until the French Revolution in 1789—France was a very centralized kingdom in which the king had important powers.
As regards ideas in the 18th century (the “enlightenment century”) one must stress the influence of the physiocrats who believed in the importance of individual freedom and of natural law. Turgot is a remarkable representative of this liberal thought. According to him, each individual, looking for his personal interest, will contribute to the “general interest” because there is a natural order. Turgot, as a finance comptroller of the state, suppressed internal customs and promoted the free movement of corn. He had tried to suppress corporations, which would be done by the French Revolution. The physiocrats thus laid the foundations for a liberalism which will be developed by French and English writers.
The French Revolution
The French Revolution in 1789 may be considered as an example of the influence of ideas on social events. In fact, one may consider that the physiocrats had contributed to a change in the ideology of many people. Thus the Revolution has been a strong supporter of individual freedom, of the freedom of contracts and human rights (for instance property rights).
The official motto of France is “freedom, equality, fraternity.” It appeared during the French Revolution. This slogan became the official motto in the Constitution of 1848. Initially equality meant “equality in rights” as it has been claimed in the “Declaration of the Rights of People and Citizens” (1789) according to the famous sentence, “All human beings are born free and equal in rights.” But in the 20th century particularly, equality has been interpreted as an equality in standards of life and as a justification for redistributive policies. Similarly, fraternity has been interpreted as meaning that the state is in charge of charitable activities.
However, the French Revolution also offers to us an example of the ambiguous characteristic of French ideologies and policies. Thus, there have been nationalizations and as early as 1793 there was what has been called the “Terror,” i.e. a situation in which the state did not hesitate to kill political opponents. The Terror was also a period of hatred against bourgeois and wealth. In reality, people may have focused more on the organization of the state and its representatives than on individual rights. They cared mainly about the disappearance of kings.
In fact, the French revolution may be considered as a fundamental cause of the importance of the powers taken by the state. Thus, a few years after the Revolution, emperor Napoléon took public power and developed a very interventionist and authoritarian regime. Most activities became state activities, in particular education.
Liberal Ideas at the Beginning of the 19th Century
The development of the liberal theory was particularly important at the beginning of the 19th century:
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Thus, Benjamin Constant and the “groupe de Coppet” (Mrs. de Staël) were supporters of individual freedom. Benjamin Constant may be considered as the first supporter of liberal democracy, namely a democracy in which public power is limited to be respectful of individual freedoms. It is not sufficient to have a state organized according to the precepts of Montesquieu, i.e. a “separation of powers” in which public institutions are controlling one the other (“checks and balances” in the US).
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Frédéric Bastiat is certainly one of the most important French liberal thinkers. He wrote several books, such as Economic Harmonies, and it is not necessary to summarize his ideas since they may be well known. But it is characteristic that Bastiat has been completely forgotten in France for a very long time: from the end of the 19th century his books were not republished until 1983, when a French economist (Florin Aftalion) published a book entitled Œuvres économiques with some of the most interesting contributions of Bastiat.
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Jean-Baptiste Say had stressed that the value of goods were not to be explained by labor value but by utility. Moreover one may consider Say’s Law (“supply creates demand”) as a fruitful argument against Keynesianism. Jean-Baptiste Say stressed the role of the entrepreneur and his famous statement “goods are exchanged against goods” implies that there is no risk of overproduction; adjustment is done by prices and freedom of exchange.
During the 19th century, liberals were called economists. Their opponents were “socialists.” Liberal economists expressed their views in the Journal des économistes and the Société d’économie politique. They were not University professors. These French liberals were not utilitarist—as might be Anglo-Saxon liberals—but they considered individual liberty as a natural right.
In his famous book, Les soirées de la rue Saint Lazare, Gustave de Molinari imagined debates between three persons, an economist (liberal), a socialist, and a conservative. Now, it is interesting that, quite often, the socialist and the conservative agree together and disagree with the economist. One may compare this approach to that of Friedrich Hayek who stressed the opposition between liberals and constructivists: the constructivists may be either socialists or conservatives.
Evolution of Intellectual Ideas at that Time
However, in spite of the outstanding importance of liberal ideas, this period offers a characteristic example of the great divergence between dominant ideas. After the physiocrats, opposite ideas developed. Thus, at the end of the 18th century and the beginning of the 19th century, Saint-Simon got an important intellectual position. He believed that human will can rationally decide economic activities. Members of the Saint-Simon school—sometimes called “positivists”—are against private property and they suggest that the State be the owner of the means of production.
Charles Fourier in the same period was in favor of “phalanstères,” namely great production corporations in which workers would live together and decide production.
Proudhon is famous for having said “What is property? It is robbery.”
The explanation by Friedrich Hayek of the French situation may be the best answer to the initial question of the present article. In his book, The Counter-Revolution of Science, he devotes several chapters to the problems of France and one might be impressed by his incredible knowledge of French history and French writers. According to him the French problem is mainly a methodological problem: France has produced at the end of the 18th century and the beginning of the 20th century some of the most famous physicists. Given their success, people and intellectuals have been inclined to think that the method used in physical sciences ought to be used to understand social problems. Thus there has been a development of what Hayek calls rationalism, namely the belief that one may be clever enough as to understand and to manage social phenomena. Thus, there has been a development of social engineers, i.e. people who believe that they can rationally organize a society, as they would do for practical problems.
From this point of view Hayek pointed out the importance of École polytechnique (founded by Napoléon) in which the French elite has been educated, precisely with this positivist prejudice.
I suspect that, if Friedrich Hayek were writing his book now, he would stress the role not only of the École polytechnique, but also of the École nationale d’administration (ENA, national administration school) which is educating nearly all high civil servants. Many politicians are also former students of this school. Once I was asked to deliver a course on international economics to the students of ENA, but I had first to meet the students in order to tell them what I wanted to teach. I mentioned to them several important topics which we could study, but all students, without an exception, told me that they had no interest in ideas and that the only thing about which they cared was to know how civil servants were making their decisions. I could not deliver the course, but I thus got an interesting (and regrettable) illustration of the intellectual characteristics of those who have the power in France.
Hayek also wrote several chapters in his book about Saint-Simon and the Saint-Simonians (the positivists) and he stressed that they have played an important role in the development of French ideologies and French policies.
Thus, the characteristics of the French society and French politics are certainly contrary to what the famous liberal thinkers have written, but they are coherent with other ideas, those of the positivists. From this point of view there is not a paradox in the French situation because of the divergence between (liberal) ideas and realities, but there is a coherence between these realities and part of the intellectual mainstream (positivist ideas).
Hayek also devoted many pages in his book to explain why one might consider that Saint-Simon inspired the ideas of Hegel. From this point of view, it can be said that ideas have consequences, at least bad ideas! And the importance of Marxist ideas in France in the 20th century is coherent with the importance of Saint-Simonian ideas.
I must also say that I am fascinated by the attention devoted by Friedrich Hayek to French problems, which may mean that it is impossible to find something similar in other parts of the world: the French situation is very specific and needs specific explanations. Friedrich Hayek used to say that “whenever France becomes liberal, it will mean that the whole world would already have become liberal.” He thus considered France as the least liberal country in the world.
Let me then tell something which is one of my great memories. With some friends of mine we had organized a lecture of Friedrich Hayek at the National Assembly. The day after I visited him at his hotel and he told me, “your friends and you are part of the hope I have in the world.” He considered it as a great achievement and a great hope that liberals do exist in a non-liberal country such as France.
Economic Policies in the Early 19th Century
There have been rather liberal economic policies, for instance free trade and free enterprises; the Revolution had suppressed the corporations and had eliminated internal customs. There was in the 19th century an important development of industrial capitalism and a great increase in the number of wage-earners.
End of the 19th Century
In the second half of the 19th century there was a development of social Catholicism (Lamennais, La Tour du Pin, Le Play, etc...) advocating for trade unionism and State interventionism (“Le Sillon”—“the furrow”—of Marc Sangnier).
In the 20th century, after the first world war, social Catholicism will inspire several organizations which have had a very great influence: Action Catholique (specific organizations for students, women, etc..), Christian trade-unions, “Social weeks” (regular famous conferences).
Marxism has been successful in France, for instance with Jean Jaurès (end of the 19th century and beginning of the 20th century). After the second world war, it might be the most important ideology in France, particularly in universities.
In 1895 a revolutionary trade union was created, CGT (Confédération générale du travail). It was in favor of a state representative of trade unions, with workers owners of means of production. It has been close to the Communist party and it is still very active in France (for instance as organizer of many strikes).
EDUCATION AND IDEAS IN THE 19th AND 20th CENTURIES France has been for many centuries a very centralized country with a strong state. Thus, people are used to such a situation and, moreover, the state has the possibility to influence mainstream ideas. It is particularly true for education since there is a quasi-monopoly for public education in schools and universities. Some so-called private schools do exist, but it is forbidden to have more than 20 percent of private schools in France and, moreover, these schools are in fact much dependent on state decisions, for instance as regards teaching programs or the hiring of professors. As regards universities they are all public universities, with the exception of some so-called “great schools.” Thus there is a sort of vicious circle between the state and education: mainstream ideology is in favor of state interventionism and the state is imposing its ideology. Being a liberal in French universities is very difficult. Thus, when a student told me that he wanted me to be the supervisor for his doctoral dissertation, I felt obliged to tell him that, if ever he wished to do an academic career, he took a risk by writing his dissertation with a liberal supervisor such as myself.
At the end of the 19th century and the beginning of the 20th century, even economists considered liberals were in favor of state interventionism, particularly with regard to the labor market and protectionism. Between the first world war and the second world war the extreme left and the socialists were often successful in elections and there were fewer and fewer liberal economists. In fact, the first world war had increased the role of the state and state interventionism remained important in the twenties and thirties. It may be added that the great crisis of 1929 has certainly had an important influence on French minds, since it has been interpreted as a proof of the instability of capitalism.
During the second world war communists were first linked to Russia and Germany; then trade unions—mainly CGT and CFTC (Christian trade union)—joined the informal liberalization movement (Conseil national de la Résistance) and, when the war ended, they influenced the important reforms designed by General de Gaulle (usually considered as conservative, but who has been very close to communists and trade unions). Many state interventions were created at that time and they still exist now (for instance the privileges given to trade unions, the public monopoly for health insurance, etc.). After the end of the second world war many great firms were nationalized and national planning was decided. General de Gaulle claimed that “planning is an ardent obligation.”
For a long time, the communist party has had many members in the Parliament and there have been several communist ministers. Thus some French politicians have had close links with Stalin! Right now, the Communist Party has nearly disappeared, but there are several very active extreme-left parties.
In the forties there was the development of what has been called neo-liberalism, which is pragmatically in favor of state interventions. The Journal des économistes disappeared in 1940. It was also a period in which social Catholicism was developing.
Let me quote some of the economists who were considered liberals after the second world war:
- Maurice Allais, Nobel Prize of economics, who is usually considered as a liberal economist, tried to develop a synthesis between liberalism and socialism. He claimed, for instance, that profits and interest rates should be suppressed, he was in favor of collective property for soil. He participated in the first meeting of the Mont Pèlerin Society, but declined to become a member of the Society because it stressed the importance of private property rights!
Maurice Allais was a former student of École polytechnique. His methodology was close to positivism and opposite to Austrian methodology. He developed mathematical models of economics and he can be considered as a “social engineer,” according to the terminology used by Friedrich Hayek. Maurice Allais was mainly in favor of protectionism and I often heard people saying that protectionism was justified since a liberal economist such as Maurice Allais was supporting it!
There is a tremendous gap between someone like Frédéric Bastiat and Maurice Allais. It may be considered a symptom of the decline of liberal ideas in France. In my book, Libéralisme, I show in details which are the main ideas of both economists. I consider Frédéric Bastiat a representative of what I call “humanistic liberalism” and Maurice Allais as representative of “utilitarian liberalism.”
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Among intellectuals it was usual to say that “it is preferable to be wrong with Sartre than right with Aron.” Jean-Paul Sartre—founder of “existentialism”—was close to the Communist Party. As regards Raymond Aron he is often considered one of the most important French liberals in the 20th century. But, in fact, he was mainly opposed to communism, without a good understanding of economics (he was spontaneously more or less Keynesian and in favor of state interventions)
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Jacques Rueff—who is also one of the most famous French liberals—is another example of utilitarian liberalism. Former student at École polytechnique, he was a director of the public Treasury and he was most respectful of the state as a high-standard civil servant. To some extent he was famous more as an important civil servant than as a liberal.
An autodidact in economics, he used his own language and there is no real relation between what he wrote and traditional liberal literature. As with Maurice Allais, he was in favor of private property as an instrument of economic efficiency, but not for ethical reasons. He said that he was a liberal because the price system made possible economic equilibrium.
He was not against state interventionism insofar as it is not an obstacle to the working of the price system. But he did not criticize taxation because he considered that it did not modify the free working of the price system. Thus he was against price regulations by the state, but not against public expenditures and taxes.
He is certainly an important example of the traditional French “engineer-economists.” However, I remember a dinner at my home with Jacques Rueff and Friedrich Hayek (a long time ago) and, in spite of their intellectual differences, they had very friendly relations (since they met each other in the Mont Pèlerin Society meetings).
As regards politics, some politicians have been considered liberals during this period, for instance Raymond Barre or Valéry Giscard d’Estaing. But, in fact, they developed interventionist policies. As regards Raymond Barre, let me just relate the following anecdote. Taking the opportunity of the presence of Friedrich Hayek in Paris, I went with him to meet Raymond Barre, who was prime minister at that time. Raymond Barre had translated into French part of Hayek’s book, The Counter Revolution of Science (but not the chapters about France!) and I thought that both would appreciate this opportunity to meet. However, Raymond Barre did not want the meeting to last more than ten minutes and when Hayek suggested some reforms to be made (for instance as regards monetary policy to fight against inflation), Raymond Barre laughed and said : “It is not as easy as you believe!”
- Valéry Giscard d’Estaing—who was president of the Republic from 1974 to 1981—claimed to be in favor of “advanced liberalism,” but he prepared the way for the coming of socialists. At that time I used to say that Giscard was doing an “under-higher bid.” By using this expression, I meant that, whenever socialists were proposing a reform, Giscard d’Estaing, instead of supporting an opposite reform, agreed with the proposal, just saying that it ought to be somewhat smaller than what was sugested by socialists. He had said that, if ever taxation was to increase beyond 40 percent of GNP, the country would become a socialist country. But during his presidency, taxation increased from 33.5 percent to 39.4 percent, thus very close to socialist taxation according to his own opinion!
Taking the opportunity of a meeting with Giscard d’Estaing, after he had failed to be elected once more as president of the Republic in 1981, I asked him, “Why have you not carried out a liberal policy when you were president of the republic?” He answered : “As there was an economic crisis I did not want to implement liberal policies because people would have said that liberalism was responsible for the economic crisis.” He had not understood that liberalism was the way to cure the economic crisis!
In 1981 the extreme socialist François Mitterrand was elected as president of the Republic. I would like to quote a statement which is characteristic of the political mentality of this period. A socialist member of the Parliament answered to a member of the right: “You are wrong from a juridical point of view because you belong to a minority from a political point of view.” François Mitterrand decided upon dangerous socialist reforms, but a few years later the disappointment of people was so great that there was an exceptional growth of liberal ideas in public opinion and I had the feeling that France could become a liberal country. It appeared that socialists might soon lose the elections at the national Assembly in 1986, which was in fact the case. Liberalism was more and more desirable because of the obvious failure of socialism which was unable to solve the most important economic problems.
Therefore, anticipating this important change, before 1986 we had regular meetings between academics and liberal politicians to prepare the program of the government in 1986.
Meanwhile Jacques Chirac, who had previously claimed that he was in favor of “labor philosophy of the French fashion” (“travaillisme à la française”), happened to be convinced that a conversion to liberalism was politically fruitful. Therefore, in order to appear as a liberal politician, he asked me in 1984 to make a very long interview of him in an important magazine (Figaro-magazine). I wrote the numerous questions of the interview, but also most of the answers (which however were discussed with him and his adviser, Alain Juppé). Unhappily, some time later, he made statements which were not perfectly coherent with what was written in the interview.
The period 1986–88 was a period of great hope for me and all liberals: The Right won the elections at the National Assembly (but François Mitterrand was still the president of the Republic). There were six liberal ministers who were friends of mine and I had very regular contacts particularly with Alain Madelin, minister of industry, and Edouard Balladur, minister of economy and finance.I may mention that, at that time, the ministry of economy and finance was located in the famous Musée du Louvre. It is there that Edouard Balladur organized a nice reception to make me a member of the “Légion d’Honneur.” We had designed some important reforms, but, unhappily, Jacques Chirac, prime minister, did not really carry out a liberal policy and in 1988 Mitterrand again won the presidential election and socialists won elections at the National Assembly. Jacques Chirac was a candidate at the presidential election and, as he did not succeed, it was said that it was because he was liberal, in spite of the fact that he had not done many really liberal reforms, except, maybe, suppressing the wealth tax (but many people, particularly on the right, suggested that he lost elections because of this reform).
In 1995, Jacques Chirac was elected president of the republic and Alain Juppé became prime minister. Alain Madelin, the most liberal politician, was appointed as minister of economy and finance and I had again a great hope that liberal policies would be adopted. In particular I had prepared wih Alain Madelin, before his appointment, a very important tax reform and I was quite certain that it would be implemented. Unhappily, three months after having been appointed, Alain Madelin—who rightly disagreed with Alain Juppé—was dismissed by Jacques Chirac and our tax reform was never adopted. In 2002 Alain Madelin was a candidate in the presidential election and he got only 3.91 percent of the votes. Jacques Chirac was reelected president of the Republic at this same election.
French EconomistsCf. Arena (2000).
In universities there were, in the second half of the 20th century, liberal economists and economists who stressed the importance of sociological facts. For a long time marginalism and Keynesianism have been mainly studied outside universities. “Structuralism” (André Marchal) was mainly descriptive and did not care about the influence of institutions on individual behavior. These “realist and sociologist” economists were rightly critical of a mathematical approach of economics, but for them the solution consisted in describing economic structures and institutions and not in analyzing human behavior.
It must be stressed that there has been no department of economics in French universities in France until recently; economics were taught as a small part of the education of students in law. It was the case when I began to study at the University. However there has been for a long time a “concours d’agrégation” in economics (namely a national examining committee to appoint new professors in economics in all French universities), but examining committees cared more about teaching capabilities of candidates than their ability to do economic research.
According to François Facchini (2015), “in 1877, among Professors of economics, 64 percent were liberal, 9 percent socialists and 27 percent were in favor of a compromise between both schools”; “In 1970 liberals were 8 percent, 32 percent socialists and 59 percent in favor of an intermediate approach.”
In 1877 several professors of economics were appointed in law universities and in 1897 an option in economics was added for the “concours d’agrégation” of law. Until then economics had been taught mainly in “high schools.” Thus, at this time economics was taught by law professors. According to François Facchini, they were inspired by the Journal des économistes (a liberal publication), but they rather developed a kind of historicism since they did not believe in economic laws. In 1887 the Revue d’économie politique was created as a reaction against the Journal des économistes and this new magazine was intended mainly to contribute to the education of people in judicial, administrative, and political activities. These professors in favor of a mixed economy inspired politicians, for instance minister Méline, who made protectionist decisions. But some liberal economists still existed (for instance Daniel Villey). Moreover, the president of the “concours d’agrégation” was appointed by the government—as it is still the case now—and this had certainly an influence on the selection of candidates.
All the economists I have known in the fifties to eighties were Marxist and/or Keynesian.
Napoléon had decided to create a monopoly in the teaching of law, but this monopoly extended to economics and there has always been a vicious circle between state activities and academic activities. From this point of view one might say that ideas have consequences, but ideas may be manipulated by public authorities.
PERSONAL MEMORIES To illustrate part of what has been said before, let me give some examples from my own experience.
My family was much inspired by the ideas of social Catholicism and I had to discover liberalism by myself. I certainly did not learn anything from my professors at school and in universities. My academic training in Paris could be described as a social chatter with good feelings (for instance Christian charity, which was also inspiring the MRP which was the government party).
However, learning microeconomics I had the feeling that individual behavior was the foundation of any understanding of economics. I was frustrated because I felt that there was something else than what had been taught to me. With a few friends we created the Jean-Baptiste Say seminar of economic theory, but it was a provocation to our professors. They told us: “you read American journals and you are therefore in the trailer of American imperialism. You ought to develop a specific French way of thinking.” However the Jean-Baptiste Say seminar has been recognized and funded by the University and considered seriously.We have still meetings of the Jean-Baptiste Say seminar, but the seminar does not depend on any university or other organization.
As regards the French University, as soon as Keynesian economics were discovered in France, it became the dominant ideology (with Marxism) in both universities and in public opinion, certainly because it brought justification to state interventionism. And the teaching of economics which was in my time a “mundane chatter,” quickly became a mathematical approach. This is also consistent with the French tradition giving importance to engineers (and social engineers, as stressed by Hayek).
I learned economics with my friends of the Jean-Baptiste Say seminar mainly by reading American and British journals (such as AER, JPE, etc.). We had the feeling that we had learnt nothing during the numerous years we had been university students. But, at the beginning we had the prejudice that, to be a scientist, one has to do equations, and we even organized specific courses of mathematics for ourselves.
I also remember that I was shocked that Keynes was not well known in France. Thus, on the occasion of a meeting organized by the Jean-Baptiste Say seminar with Jacques Rueff, we were surprised that he did not understand the fundamental equations of Keynes.
But our first discovery was the Chicago school and we wrote a book on permanent income. Thus I got contact with Milton Friedman, who later introduced me to the Mont Pèlerin Society.
I discovered Robert Mundell, whose writings inspired my doctoral dissertation, particularly the monetary approach to the balance of payments which I still consider as an important contribution to economic theory.But I am less convinced by another theory of Robert Mundell, the theory of the optimal currency area.
Later on I discovered Hayek and the Austrian School. I had immediately the feeling that I had always been an Austrian economist without knowing it. I think that the first text I read was “The Use of Knowledge in Society.”
As a further example of the difficulty to be liberal in the French academic sphere, I would like to give the following example. In 2003 I was appointed by the minister of education as president of the “concours d’agrégation” (the committee in charge of appointing new professors of economics in all French universities) because there are traditional rules which implied that I had to be the president. But there was a terrific media campaign against me (and the members of the committee) because it was considered that a liberal ought not to be in charge of recruiting new professors in economics!
This appeared to me as being a particularly obvious—and regrettable—illustration of French intolerance and of the domination of anti-liberal ideas in universities and in public opinion. In fact, nearly all media are always very critical of liberalism.
Finally I would like to end this presentation by quoting the introduction of a new book of mine which is to be published soon and which I have written using articles I have published in various newspapers over about four decades. The title of this book might be Right and Left United in Errors:
The alternation has been frequent between the right and the left in past decades, but it is striking that the policies unfortunately were roughly the same regardless of the ruling parties. Yet it is precisely this regrettable phenomenon which explains the frequency of political alternation. As all presidents and all governments have made bad choices of economic policies, namely socialist policies, they necessarily failed to improve the economy. In the face of these visible failures, voters regularly hoped that a change in the majority could finally solve the problems. However, despite the electoral statements about the necessity of policy changes, the desirable changes have never been decided and thus French people have always been disappointed in their hopes.
Certainly, François Mitterrand, elected President of the Republic in 1981, implemented major policy changes, but in the wrong direction, and nobody radically questioned them. The book recalls the political alternatives and the regrettable similarity of all policies. It points out the severe confusion that exists from the point of view of ideas. Indeed, the failure of the policies conducted by socialists has often led voters to vote for majorities on the right. Insofar as these majorities have continued the same policies as socialists, they have obviously failed; however, as they were decided by majorities on the right, it was frequently argued that it was the failure of liberal policies. Unfortunately we have never had real liberal policies, but only a socialism from the left or from the right...
To conclude let me quote an idea of Bertrand de Jouvenel: When the state is very powerful and has many important activities, people do not try to fight the state, but they fight to get the state power. But one may add that, when a government has a very important role, people are inclined to care more about politics than about ideas. There is a politicization of social life in France and people are more concerned by the choice of politicians than by their programs and the role of the state. It can be considered as an illustration of Bastiat’s famous sentence: “The state is the great illusion according to which everyone tries to live at the expense of others.” Therefore, political debates—and intellectual debates—are more interested in the possibility of specific categories of people to get power than by general views on the working of the society. This may be one reason, among other ones, why liberals have difficulties in being heard.
[Why Cities Lose: The Deep Roots of the Urban-Rural Political Divide. By Jonathan Rodden. Basic Books, 2019. 313 pages.]
Jonathan Rodden is unhappy. In American elections, Democrats often receive a larger number of votes than their Republican rivals, but they nevertheless frequently fail to win elections. “In most democracies, the path to victory is simple: win more votes than your competitors. For the Democratic Party in the United States, however, this is often not good enough.…Democrats must win big in the overall popular vote, as they did in the ‘blue wave’ elections of 2018 and 2006, in order to win a majority of seats in the House. The Democrats’ problem with votes and seats is even more pronounced in state legislatures.”
Rodden, who is a professor of political science at Stanford, specializes in political geography. In Why Cities Lose, he devotes enormous effort to finding out the reasons the situation just described has come about, but the gist of his answer is simple. Democrats are highly concentrated in cities, but Republicans are spread out in the suburbs and rural areas. As a result, a Democrat who wins in a city will likely gain a large majority. In our “first-past-the-post” electoral system, a large majority is no better than a narrow victory. The winner of a seat in Congress, for example, gets one seat regardless of the margin of his victory. “Surplus” votes do him no good. Republicans in rural areas are more spread out. Their votes tend to be more “efficient,” as Rodden puts it, than the wasted votes of the concentrated Democrats. They win by narrower margins but gain more seats. Rodden spends a great deal of time showing that partisan gerrymandering does not bear exclusive responsibility for the situation. Through careful comparison with Britain and the Commonwealth nations that have a “first-past-the-post” system but no gerrymandering, he shows that cities still suffer from “wasted” votes.
Rodden argues that proportional representation would change matters. Under this system, votes are not wasted. “There are important variations from one country to another, but in most cases, the country is divided up into a series of multimember districts, and within each district, every party receives a number of seats that is proportionate to its share of the vote.…In highly proportional systems with large districts, like those in northern Europe, the geography of a party’s support is largely irrelevant for the transformation of votes to seats. It is just as useful to have 30 percent of the vote that is highly concentrated in cities as to have 30 percent of the vote evenly dispersed throughout the country.” I have said that Rodden is unhappy with the dilution of votes in American cities, but why does he regard this situation as bad? (One might object that this misreads him; he is simply an objective political scientist describing and analyzing an important trend in voting patterns. But his dismay is unmistakable.) Speaking of countries in northern Europe with proportional representation, he says: “Above all, the proportional systems of Europe have developed larger public sectors, more generous social expenditure, higher levels of redistribution, and more stringent efforts at environmental protection.”
These are the measures Rodden favors, but then the question arises, what is so good about them? Not only does Rodden fail to tell us, but his way of looking at political values prevents him from doing so. He never discusses the reasons in favor of and against any “progressive” legislation. Instead, he amalgamates all political values into “objective” scales. “In joint work with Aina Gallego, I [Rodden] have selected a series of questions about abortion, homosexuality, and other social issues.…We used these questions to generate a scale measuring how liberal or conservative each respondent is on this set of social issues. We have done the same thing for classic economic issues related to the role of the government in the economy.”
Rodden might reply that he has done this purely as a way to analyze trends, and that he has not claimed to have shown that progressive measures are good and conservative ones bad. But if that is so, he has not given us any reason to endeavor to alter the urban-rural disparity in voting about which he spends so much time complaining.
One might object to what I have so far contended in this way: “Even if you are not an urban progressive, we do after all live in a democracy. Shouldn’t people be equally represented, rather than have fewer representatives than others? Isn’t it unfair that some votes pack more electoral ‘power’ than others?” To which our answer must be, “No, not at all. It depends on aims sought by those voting. People cannot legitimately invade the rights of others, and to the extent they try to do so, a weakening of their voting power is to be welcomed.”
As Murray Rothbard, writing in Power and Market, noted with characteristic wisdom: “Democracy may be thought of, not so much as a value in itself, but as a possible method for achieving other desired ends. The end may be either to put a certain political leader into power or to attain desired governmental policies. Democracy, after all, is simply a method of choosing governors and issues, and it is not so surprising that it might have value largely to the extent that it serves as a means to other political ends. The socialist and the libertarian, for example, while recognizing the inherent instability of the democratic form, may favor democracy as a means of arriving at a socialist or a libertarian society. The libertarian might thus consider democracy as a useful way of protecting people against government or of advancing individual liberty.” Like democracy, equal voting power isn’t an end itself, but valuable only to the extent it protects people’s rights.
A similar point applies to the proportional representation that Rodden favors. It is true that voters have more choices than they do in a system with only two parties, but whether this is good or bad depends on the nature of the choices. More choices for socialism are not a good thing. Further, European political parties in proportional systems are often rigidly controlled by the central party organization. Those who vote against the party’s dictates will be expelled from the party. Voters have a choice only between ideological platforms, not persons.
Rodden at one point adopts a more sensible position. Given the unalterable fact that people differ so widely in their political preferences, is it not desirable to deal with problems at the state or, even better, local level rather than to engage in a futile effort to impose the same policies on diverse regions? “As federal politics becomes increasingly mired in gridlock, investigations, and partisan posturing, voters come to rely on state and municipal governments for practical policy solutions to everyday problems.…As long as people with strong preferences are clustered conveniently into different jurisdictions, decentralization can, at least in theory, increase the number of people who are satisfied with government policy.”
But decentralization from his perspective is of limited value. “A broad constraint on decentralization as a way of managing polarization is the fact that local governments must often compete with one another.…Wasteful taxes and regulation and poor governance can lead to capital flight, which forces local governments to be prudent. For the left, this has always been a liability, not an asset of decentralization. Strong labor unions and protections for workers were hard to maintain in the North when southern states began competing for investment, and today, intergovernmental competition makes it difficult for blue cities and states to enact generous welfare policies or costly regulations.” (Possibly, though, what Rodden calls the “third industrial revolution” may brighten the prospects for a leftist local government, at least in the wealthiest cities.)
Contrary to Rodden, the path to progress does not lie in tinkering with our political system to make it easier for the Left to enact its political and social agenda. Instead, we need a free people living in a free market.
ABSTRACT: This article is an evaluation of the General Theory largely on its own terms. Extensive quotations from The General Theory of Employment, Interest, and Money are used in order to allow Keynes himself to expound the theory. The goal of this article is to show that even on its own terms the General Theory must be considered a failure, for the problem it purports to solve, involuntary unemployment, does not exist. Many of the individual points made here have been made before, but no references are provided. Benjamin Anderson (1980), for example, remarks on the counter-intuitive (indeed, worthless) nature of Keynes’s “volume of employment,” and Henry Hazlitt ([1959] 2007) points out that one parts with liquidity whenever one buys anything. I think at least two points here have not been made before: 1) that deficit-spending plays an insignificant or non-existent role in the General Theory, and 2) that involuntary unemployment (used in the manner in which Keynes uses the phrase) is incapable of being known to exist—which removes any justification for the assertion that full employment does not exist.
Carlton Smith (cmsmith@roadrunner.com) is an independent scholar.
THE PROBLEM Keynes’s General Theory purports to provide a solution to a problem. That problem is not generic unemployment but rather a species of it that Keynes calls involuntary unemployment. What is involuntary unemployment?
Men are involuntarily unemployed if, in the event of a small rise in the price of wage-goods relatively to the money-wage, both the aggregate supply of labour willing to work for the current money-wage and the aggregate demand for it at that wage would be greater than the existing volume of employment. (Keynes 1965, 15)
What is the criterion by means of which we detect the presence of involuntary unemployment? The effect that something has had on the volume of employment. What does Keynes mean by the phrase “volume of employment”? The
quantity of employment can be sufficiently defined for our purpose by taking an hour’s employment of ordinary labour as our unit and weighting an hour’s employment of special labour in proportion to its remuneration; i.e. an hour of special labour remunerated at double ordinary rates will count as two units. (Keynes 1965, 41)
Calling Keynes’s measure of employment dubious (at the very least, curious) seems warranted. Consider a community with four adults, Tom, Dick, Richard, and Harry. On Tuesday Tom was unemployed; Dick and Richard both worked for eight hours and were paid $20 per hour; and Harry worked for eight hours and was paid $600 per hour. On Wednesday Tom was still unemployed; so, alas, was Dick, who was fired; Richard worked for eight hours and was paid $20 per hour; and Harry worked for eight hours and was paid $650 per hour (he received a raise). Tom and Dick, fortunately, were not disgruntled, for the quantity of employment had increased.
But wait—there is more. Not only did the quantity of employment increase, so, too, did the quantity of output. For the measure of output as a whole—a vague concept as Keynes himself admits (1965, 43) —is nothing other than the quantity of employment:
It follows that we shall measure changes in current output by reference to the number of hours of labour paid for (whether to satisfy consumers or to produce fresh capital equipment) on the existing capital equipment, hours of skilled labour being weighted in proportion to their remuneration. (Keynes 1965, 44)
This is fun. Not only did Harry’s raise produce an increase in employment, it also produced an increase in output. Want to increase employment and output? Raise the wages of the well-paid!
Now let us return to the test that we use to detect the existence of involuntary unemployment. The mere fact that people are unemployed does not mean that involuntary unemployment exists, for Keynes expressly allows for the existence of voluntary unemployment and excludes from involuntary unemployment “the withdrawal of their labour by a body of workers because they do not choose to work for less than a certain real reward.” (Keynes 1965, 15) It should be obvious that Keynes’s volume of employment tells us nothing about the level of unemployment (the volume of employment can increase when the number of workers employed and the number of hours worked both decrease). Can it tell us something about the level of involuntary unemployment?
It certainly cannot tell us what the level of involuntary unemployment is—or even if there is any involuntary unemployment—for the test for the existence of involuntary unemployment is what the effect on the volume of employment would be if the price of wage-goods rose relatively to the money-wage. Can we use the volume of employment to detect the previous existence of involuntary unemployment? Let us construct a case favorable to Keynes’s position.
On Tuesday Tom is unemployed; Dick, Richard, and Harry each work for eight hours and are paid $20 per hour. On Wednesday the price of wage-goods has risen relatively to the money-wage, which we will assume has remained the same. Tom, Dick, Richard, and Harry all have jobs: each works for eight hours and is paid $20 per hour. The volume of employment has increased. We may not know if there is still any involuntary unemployment on Wednesday, but surely we know that there was involuntary unemployment on Tuesday? Unfortunately, we do not. Tom’s unemployment on Tuesday may have been the result of his decision not to “work for less than a certain real reward.” His employment on Wednesday may stem from his decision to accept a lower real reward on Wednesday than he was willing to accept on Tuesday. Nothing in the facts of the case—the increase in the volume of employment that has occurred after a rise in the price of wage-goods relative to the money-wage—permits us to infer that there was any involuntary unemployment on Tuesday.
The unavoidable conclusion is that Keynes’s test for the existence of involuntary unemployment cannot be used to detect the existence of involuntary unemployment. Keynes himself seems to have realized that the existence of involuntary unemployment is problematic, for he informs us that “if the classical theory is only applicable to the case of full employment, it is fallacious to apply it to the problems of involuntary unemployment—if there be such a thing (and who will deny it?).” (Keynes 1965, 16) I do not profess to be able to decipher the meaning of his remark with complete assurance, but I do not see how it can be taken not to include an admission that there may be no such thing as involuntary unemployment.
Full employment is “the absence of ‘involuntary’ unemployment.” (Keynes 1965, 15) The problem associated with the concept of full employment is therefore the problem associated with the concept of involuntary unemployment. Because we can never know that involuntary unemployment exists, we can never know that full employment does not exist. At the risk of pointing out what should be obvious, a remedy for a problem which is not known to exist—indeed, which cannot be known to exist—might not be much of a remedy.
KEYNES’S SYSTEM Keynes’s system contains given factors, independent variables, and dependent variables. (Keynes 1965, 245) We may ignore the given factors because they are the “factors in which the changes seem to be so slow or so little relevant as to have only a small and comparatively negligible short-term influence on our quaesitum….”(Keynes 1965, 247)
The “independent variables are, in the first instance, the propensity to consume, the schedule of the marginal efficiency of capital and the rate of interest….” (Keynes 1965, 245) We soon learn that “the rate of interest depends partly on the state of liquidity-preference (i.e. on the liquidity function) and partly on the quantity of money measured in terms of wage-units.” (Keynes 1965, 246) For that reason we need to include liquidity-preference and the quantity of money among the independent variables. (Keynes 1965, 246–47) The remaining independent variable that Keynes identifies is the wage-unit, (Keynes 1965, 246–47) which he defines as “the money-wage of a labour-unit.” (Keynes 1965, 41) The dependent variables are “the volume of employment and the national income (or national dividend) measured in wage-units.” (Keynes 1965, 245)
What is the propensity to consume? Keynes defines the propensity to consume as “the functional relationship… between Yw, a given level of income in terms of wage-units, and Cw the expenditure on consumption out of that level of income.” (Keynes 1965, 90) Keynes’s definition suffers from at least one defect: it suggests that the decision to consume depends only on current income and not on other factors such as assets that one owns. Keynes seems to recognize the defect, for he tells us later that the people who take an active interest in their Stock Exchange investments “are, perhaps, even more influenced in their readiness to spend by rises and falls in the value of their investments than by the state of their income.” (Keynes 1965, 319)
What is the marginal efficiency of capital? Although Keynes defines the marginal efficiency of capital in a manner that connects it exclusively with the continued ownership of a capital-asset, (Keynes 1965, 135) I think the concept needs to be expanded. Keynes seems to think so too, for in other places it is the gap between the price at which a good sells and the cost of producing it which has causal significance.“We can then define the income of the entrepreneur as being the excess of the value of his finished output sold during the period over his prime cost. The entrepreneur’s income, that is to say, is taken as being equal to the quantity, depending on his scale of production, which he endeavours to maximise, i.e. to his gross profit in the ordinary sense of this term….” (Keynes 1965, 53–54) “As I now think, the volume of employment (and consequently of output and real income) is fixed by the entrepreneur under the motive of seeking to maximise his present and prospective profits….” (p. 77) I think we are justified in using the phrase “marginal efficiency of capital” to refer to the expected return (excess of price received over costs incurred) from production.
The rate of interest is determined by liquidity-preference and the quantity of money. What is liquidity-preference? I see no reason not to call it the desire to acquire or retain the ownership of money,In other words, what is the degree of his liquidity-preference—where an individual’s liquidity-preference is given by a schedule of the amounts of his resources, valued in terms of money or of wage-units, which he will wish to retain in the form of money in different sets of circumstances?” (Keynes 1965, 166) a desire often called the demand for money.“We must now develop in more detail the analysis of the motives to liquidity-preference which were introduced in a preliminary way in Chapter 13. The subject is substantially the same as that which has been sometimes discussed under the heading of the Demand for Money.” (Keynes 1965, 194) What effect does it have on the rate of interest? Keynes tells us that
the mere definition of the rate of interest tells us in so many words that the rate of interest is the reward for parting with liquidity for a specified period…. Thus the rate of interest… is a measure of the unwillingness of those who possess money to part with their liquid control over it. (Keynes 1965, 167)
In Keynes’s terminology, when one lends money to someone else, one has parted with liquidity. The smaller the supply of liquidity (money) offered for sale, the higher its price will be.
The link that Keynes draws between the demand for money and the rate of interest is unwarranted. To start with, it is too narrow. The demand for money clearly has an effect on all transactions, not merely on transactions in the loan-market. If the demand for money rises, the prices of other goods will fall. After all, one parts with liquidity whenever one buys anything. In addition, Keynes tells us that the demand for money has an effect on the rate of interest within the context of the psychological time-preferences of an individual. (Keynes 1965, 166) If those preferences are sufficient to account for the rate of interest, nothing is gained by the introduction of the demand for money. I will not pursue the subject, however, because I am principally concerned with an evaluation of the General Theory on its own terms.
What effect does the quantity of money have on the rate of interest? According to Keynes, “As a rule, we can suppose that the schedule of liquidity-preference relating the quantity of money to the rate of interest is given by a smooth curve which shows the rate of interest falling as the quantity of money is increased.” (Keynes 1965, 171) Expanding on the point when discussing open-market operations, Keynes explains that “in normal circumstances the banking system is in fact always able to purchase (or sell) bonds in exchange for cash by bidding the price of bonds up (or down) in the market by a modest amount; and the larger the quantity of cash which they seek to create (or cancel) by purchasing (or selling) bonds and debts, the greater must be the fall (or rise) in the rate of interest.” (Keynes 1965, 197)
When the central bankKeynes tells us that it is the central bank that determines the quantity of money. (Keynes 1965, 247) buys a bond, the price of bonds rises, and the rate of interest thereby falls. On that point Keynes is, of course, correct, but he is correct about there being a connection between the quantity of money and the rate of interest only if the increase in the quantity of money is “pointed” at the price of bonds. Suppose that no central bank existed. Suppose that money consisted exclusively of gold coins. If all newly-minted coins were spent on the purchase of bonds, the rate of interest would fall. But what reason is there to think that all the newly-minted coins would be spent (i.e., offered for sale in the loan-market) on the purchase of bonds? There is not. Keynes is able to establish a connection between the quantity of money and the rate of interest only because his system permits—indeed, requires—a central bank that not only controls the quantity of money but also creates new money in a manner which has to lower the rate of interest. Q.E.D.
Keynes has one remaining independent variable, the wage-unit, which is the money-wage of a labor-unit. The wage-unit allows us to convert special labor into ordinary labor by dividing the wage paid to special labor by the wage-unit—and so arrive in due course at the volume of employment.
The dependent variables are income and employment. How is income connected to the independent variables? “The decisions to consume and the decisions to invest between them determine incomes.” (Keynes 1965, 64) Decisions to consume may be called the propensity to consume made flesh. And decisions to invest? “The amount of current investment will depend, in turn, on what we shall call the inducement to invest; and the inducement to invest will be found to depend on the relation between the schedule of the marginal efficiency of capital and the complex of rates of interest on loans of various maturities and risks.” (Keynes 1965, 27–28) Indeed, “the actual rate of current investment will be pushed to the point where there is no longer any class of capital-asset of which the marginal efficiency exceeds the current rate of interest.” (Keynes 1965, 136) Income therefore depends on the propensity to consume, the marginal efficiency of capital, and the rate of interest, which itself is shorthand for liquidity-preference and the quantity of money.
And employment? “The amount of labour N which the entrepreneurs decide to employ depends on the sum (D) of two quantities, namely D1, the amount which the community is expected to spend on consumption, and D2, the amount which it is expected to devote to new investment.” (Keynes 1965, 29) Income depends on consumption and investment; employment depends on expected consumption and expected investment.
The elements of Keynes’s system are now in place. What makes the actual operation of the system so complicated?
[W]hilst an increase in the quantity of money may be expected, cet. par., to reduce the rate of interest, this will not happen if the liquidity-preferences of the public are increasing more than the quantity of money; and whilst a decline in the rate of interest may be expected, cet. par., to increase the volume of investment, this will not happen if the schedule of the marginal efficiency of capital is falling more rapidly than the rate of interest; and whilst an increase in the volume of investment may be expected, cet. par., to increase employment, this may not happen if the propensity to consume is falling off. (Keynes 1965, 173)
In other words, there are times when ceteris is not paribus. Suppose that consumers stop consuming. Suppose that the marginal efficiency of capital heads south. Suppose that the rate of interest rises. The system might need a lube-job: better get some grease.
THE SOLUTION Increase in consumption and investment = good. Investment depends on the marginal efficiency of capital and the rate of interest. Increase in marginal efficiency of capital = good. Increase in rate of interest = bad. The rate of interest depends on liquidity-preference and the quantity of money. Increase in liquidity-preference = bad. Increase in quantity of money = good. Where do we go from here? “Our final task might be to select those variables which can be deliberately controlled or managed by central authority in the kind of system in which we actually live.” (Keynes 1965, 247) Let us start with the marginal efficiency of capital.
Keynes informs us that “[t]he Trade Cycle is best regarded, I think, as being occasioned by a cyclical change in the marginal efficiency of capital….” (Keynes 1965, 313) During the slump the principal obstacle to recovery is that “it is not so easy to revive the marginal efficiency of capital, determined, as it is, by the uncontrollable and disobedient psychology of the business world.” (Keynes 1965, 317) The suggestion that the business world is a naughty six-year old is almost amusing—only “almost” because the question of who gets to play mommy or daddy is far from benign—but the important word is “uncontrollable.” The marginal efficiency of capital cannot be deliberately controlled or managed by central authority. Let us turn to the rate of interest.
The rate of interest depends on the quantity of money and liquidity-preference. We already know that the quantity of money is controlled by the central bank. We also know that an increase in the quantity of money will, ceteris paribus, produce a decline in the rate of interest. One obvious question is, will prices rise if you print more money? Keynes provides an answer:
When full employment is reached, any attempt to increase investment still further will set up a tendency in money-prices to rise without limit, irrespective of the marginal propensity to consume; i.e. we shall have reached a state of true inflation. Up to this point, however, rising prices will be associated with an increasing aggregate real income. (Keynes 1965, 118–19)
Thus, prices will rise, but—short of full employment—that will not be a problem.
What about liquidity-preference? Subject to control or management by central authority? One would not think so, yet in a passage that has to have embarrassed his fans (assuming that they were capable of being embarrassed by anything), Keynes toys with the idea of issuing money that comes with an expiration date. What Keynes does is to endorse—with reservations—Gesell’s proposal that currency-notes should expire at the end of a month unless they are stamped with stamps purchased at a post-office. (Keynes 1965, 357) Keynes seems to have only two objections. In the first place, Gesells’s proposal does not go far enough: “it would clearly need to apply as well to some forms at least of bank-money….” (Keynes 1965, 357) In the second place, Gesell was “unaware that money was not unique in having a liquidity-premium attached to it….” (Keynes 1965, 357) We do not need to pursue the subject of liquidity-premiums attached to items other than money; suffice it to say, Keynes does not think that liquidity-preference is subject to control or management by central authority, at least not yet.“The idea behind stamped money is sound. It is, indeed, possible that means might be found to apply it in practice on a modest scale.” (Keynes 1965, 357)
If investment depends on the marginal efficiency of capital, liquidity-preference, and the quantity of money, and if the quantity of money is the only variable which is subject to control or management by central authority, the system might even need a new transmission:
the schedule of the marginal efficiency of capital may fall so low that it can scarcely be corrected, so as to secure a satisfactory rate of new investment, by any practicable reduction in the rate of interest. Thus with markets organised and influenced as they are at present, the market estimation of the marginal efficiency of capital may suffer such enormously wide fluctuations that it cannot be sufficiently offset by corresponding fluctuations in the rate of interest. Moreover, the corresponding movements in the stock-market may, as we have seen above, depress the propensity to consume just when it is most needed. In conditions of laissez-faire the avoidance of wide fluctuations in employment may, therefore, prove impossible without a far-reaching change in the psychology of investment markets such as there is no reason to expect. I conclude that the duty of ordering the current volume of investment cannot safely be left in private hands. (Keynes 1965, 319–20)
How will the state order (and can the state order investment without ordering investors to stop being naughty and to eat their vegetables?) the current volume of investment? Keynes informs us that
[i]t is not the ownership of the instruments of production which it is important for the State to assume. If the State is able to determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them, it will have accomplished all that is necessary. (Keynes 1965, 378)
One assumes that ownership of the means of production will remain—nominally—in private hands but that decisions about the volume of production will not. What will this mean in practice? One cannot subject a proposal that is never made to scrutiny. The only safe conclusion is that the state may have to order production—in more ways than one.
What about the propensity to consume? Any prospect of control or management by central authority? One might not think so, but
[t]he only radical cure for the crises of confidence which afflict the economic life of the modern world would be to allow the individual no choice between consuming his income and ordering the production of the specific capital asset which, even though it be on precarious evidence, impresses him as the most promising investment available to him. (Keynes 1965, 161)
Unless you spend all your income on something, you will be arrested? Shot? And how do you establish that you have spent all your income on something? When you buy a soft drink from a vending machine, do you need to ask it for a receipt? Assume that you get lucky and that the State passes a Paperwork Reduction Act. You no longer need receipts, but your mattress will be examined monthly to ensure that there is no currency hiding in the horse-hair?
Let us take a different tack. Is it possible to use taxation as an instrument that will give the propensity to consume a jump-start? Keynes assets that “it is … obvious that a higher absolute level of income will tend, as a rule, to widen the gap between income and consumption…. These reasons will lead, as a rule, to a greater proportion of income being saved as real income increases.” (Keynes 1965, 97) Perhaps taxes should be levied on those with high incomes and the proceeds given to those with low incomes or no income?
There is a problem. “Provided it is agreed that income is equal to the value of current output, that current investment is equal to the value of that part of current output which is not consumed, and that saving is equal to the excess of income over consumption—all of which is conformable both to common sense and to the traditional usage of the great majority of economists—the equality of saving and investment necessarily follows.” (Keynes 1965, 63) That portion of income which is not spent on consumption is saved, and that which is saved is invested. Aggregate demand is derived from consumption and investment.“Opportunities for employment are necessarily limited by the extent of aggregate demand. Aggregate demand can be derived only from present consumption or from present provision for future consumption.” (Keynes 1965, 104) Using taxation to transfer income from those who save to those who consume may increase consumption, but it can do nothing to increase aggregate demand because of the effect that it will have on investment.
Does the conclusion change if saving can exceed investment? Keynes tells us elsewhere that “a relatively weak propensity to consume helps to cause unemployment by requiring and not receiving the accompaniment of a compensating volume of new investment….” (Keynes 1965, 370) In fact, “there has been a chronic tendency throughout human history for the propensity to save to be stronger than the inducement to invest.” (Keynes 1965, 347) If aggregate demand is derived from consumption and investment, is money that is not spent either on consumption or on investment hoarded? If so, levying a tax on hoarders and distributing the proceeds to spenders should increase aggregate demand.
The problem with that suggestion is that it is by no means clear that hoarding—in any meaningful sense—exists, for Keynes admits that
it is impossible for the actual amount of hoarding to change as a result of decisions on the part of the public, so long as we mean by ‘hoarding’ the actual holding of cash. For the amount of hoarding must be equal to the quantity of money (or—on some definitions—to the quantity of money minus what is required to satisfy the transactions-motive); and the quantity of money is not determined by the public. (Keynes 1965, 174)
If all money, in the nature of the case, is hoarded, we will never be in a position where we can “unhoard” it: if you take money that Peter is hoarding and give it to Paul, the only thing you have changed is the name of the hoarder.
Perhaps “hoarding” is really a synonym for “liquidity-preference”“The concept of Hoarding may be regarded as a first approximation to the concept of Liquidity-preference. Indeed, if we were to substitute ‘propensity to hoard’ for ‘hoarding,’ it would come to substantially the same thing.” (Keynes 1965, 174) and interest “is the reward of not-hoarding.” (Keynes 1965, 174) If so, hoarding is really a refusal to lend money in the loan-market. Nowhere in the General Theory, however, does Keynes argue that the propensity to hoard will increase as income increases, and it is difficult to understand why it should be so: one would expect one’s willingness to make loans to increase with the size of one’s bank account (or stash in the mattress), not to decrease. Where does all this leave us? Keynes never provides a plausible argument that “appropriate” taxation will increase aggregate demand.Keynes (1965) argues in at least two places that fiscal policy can be used to increase the propensity to consume. The reasoning, however, is fallacious, and the appropriate criterion should be the effect of fiscal policy on aggregate demand, not merely its effect on the propensity to consume. See pp. 94–95 and pp. 372–73.
Perhaps deficit-spending will come to the rescue? One curious feature of Keynes’s General Theory is that it contains so little material dealing with deficit-spending, the very feature most often associated with the work. Keynes’s only extended discussion of deficit-spending occurs in a footnote:
It is often convenient to use the term “loan expenditure” to include the public investment financed by borrowing from individuals and also any other current public expenditure which is so financed. Strictly speaking, the latter should be reckoned as negative saving, but official action of this kind is not influenced by the same sort of psychological motives as those which govern private saving. Thus, “loan expenditure” is a convenient expression for the net borrowings of public authorities on all accounts, whether on capital account or to meet a budgetary deficit. The one form of loan expenditure operates by increasing investment and the other by increasing the propensity to consume. (Keynes 1965, 128–29)
Two significant points in the preceding passage that ought to be noted are that borrowing by public authorities on “capital account” does not qualify as deficit-spending and that the money for the “loan expenditures” is borrowed from individuals, not printed by the central bank.
One obvious question is, will borrowing by the government have an adverse effect on the rate of interest? Keynes provides an answer when discussing the effect of borrowing for public works (i.e., on “capital account”), but his conclusion clearly applies to all borrowing by the government: “[t]he method of financing the policy … may have the effect of increasing the rate of interest and so retarding investment in other directions, unless the monetary authority takes steps to the contrary….”(Keynes 1965, 119)
If the demand to borrow money increases, so will its price. The only possible escape from that conclusion is an increase in the supply of money offered for sale. Because the central bank is precluded from buying the government’s bonds by Keynes’s statement that the money for “loan expenditures” is borrowed from individuals, the central bank must purchase other debt in open-market operations. Only in that manner can it counter the adverse effect that borrowing by the government would otherwise have on the rate of interest.
Does that mean that deficit-spending can increase aggregate demand? Even if aggregate demand does increase, the motor is the printing-press, not the “loan expenditure,” and there is no reason to think that the “loan expenditure” played an indispensable role: if the government balances its budget and the central bank buys debt in open market operations, the rate of interest will fall, and the inducement to invest will rise. The protagonist of the General Theory is the printing-press; deficit-spending is just a walk-on.
Once again, the obvious question is, what will happen to prices? Keynes’s answer is the General Theory in a nutshell:
We have shown that when effective demand is deficient there is under-employment of labour in the sense that there are men unemployed who would be willing to work at less than the existing real wage. Consequently, as effective demand increases, employment increases, though at a real wage equal to or less than the existing one, until a point comes at which there is no surplus of labour available at the then existing real wage; i.e. no more men (or hours of labour) available unless money-wages rise (from this point onwards) faster than prices. (Keynes 1965, 289)
In sum, prices will rise, but money-wages (assuming the existence of involuntary unemployment) will not rise as quickly as the prices of wage-goods, and those who are willing to work for less than the previously existing real wage will accept the jobs that are thereby made available.
The obvious question then becomes, why tinker with the printing press (paper and ink may not be expensive, but no one ever said that they were free) if there are people who are willing to work for less than the existing real wage? Why do not those who are willing to work for less than the existing real wage simply accept jobs at less than the existing real wage (i.e., for a lower money-wage) before any paper is printed? Keynes answers that question:
Let us assume, for the moment, that labour is not prepared to work for a lower money-wage.… although a reduction in the existing money-wage would lead to a withdrawal of labour, it does not follow that a fall in the value of the existing money-wage in terms of wage-goods would do so, if it were due to a rise in the price of the latter. In other words, it may be the case that within a certain range the demand of labour is for a minimum money-wage and not for a minimum real wage. (Keynes 1965, 8)
In other words, labor will not accept a reduction in its real wage effected by a lower money-wage. Why not? It does not want to. I am glad that problem has been cleared up.
In Keynes’s system, the only arrow in the quiver is the printing press. Provided that involuntary unemployment exists, the ultimate result will be more employment at a lower real wage—so runs the argument. Bullseye?
CONCLUSION Keynes’s General Theory purports to be a theory of employment, interest, and money, yet it contains no useful (from Keynes’s point of view) theory of employment. What it does contain is a definition of the term “volume of employment” which is fully consistent with an increase in the volume of employment even when the number of workers and the number of hours worked both decrease. Was that the quaesitum that Keynes was looking for? And that same “volume of employment” is of no avail when searching for the involuntarily unemployed.
Keynes’s theory of interest is defective, for Keynes makes the rate of interest depend on the demand for money, or liquidity-preference, and the quantity of money. The demand for money has an effect on all transactions, not merely (if at all) on transactions in the loan-market, and a convincing link between the quantity of money and the rate of interest exists only in so far as new money is offered for sale in the loan-market.
We discussed some of what Keynes had to say on the subject of money in the preceding paragraph. One thing that needs to be made clear is that Keynes did not present a general theory of money in his General Theory. Instead, he presented a special theory of money, aptly called The Green Cheese Theory of Money,“Unemployment develops, that is to say, because people want the moon;—men cannot be employed when the object of desire (i.e. money) is something which cannot be produced and the demand for which cannot be readily choked off. There is no remedy but to persuade the public that green cheese is practically the same thing and to have a green cheese factory (i.e. a central bank) under public control.” (Keynes 1965, 235) which only applies to money made of green cheese (well, to money newly manufactured by a central bank and used to purchase debt in the loan-market).
The significant independent variables in Keynes’s system are the propensity to consume, the marginal efficiency of capital, the rate of interest (which is itself determined by the demand for, and the quantity of, money), and the wage-unit, which is “determined by the bargains reached between employers and employed.” (Keynes 1965, 247) Keynes hopes to be able to identify those variables “which can be deliberately controlled or managed by central authority in the kind of system in which we actually live.” The overarching goal is the solution to a problem called involuntary unemployment and the achievement of its absence, full employment. How successful is the General Theory on its own terms?
If saving equals investment, no justification exists for talk about allowing the individual “no choice between consuming his income and ordering the production of a specific capital-asset” nor for talk about the need for the state to assume “the duty of ordering the current volume of investment.” Nor is it possible to justify taxation that falls disproportionately on those with high incomes. Do matters change if saving can exceed investment? If saving can exceed investment, Keynes’s General Theory is self-contradictory, and we no longer need to concern ourselves with any of its features.
“Central authority” has no control over the marginal efficiency of capital, liquidity preference (at least not yet), nor the wage-unit, and deficit-spending can have no effect on aggregate demand without a printing-press in the foreground. When all is said and done, Keynes’s system contains only one treatment, more money, for the ill that ails us, for the quantity of money is the one thing that central authority does control—provided, of course, that there is a central bank.
And what is the ill that ails us? Involuntary unemployment. We saw earlier that we can never know that involuntary unemployment exists (not even that it did exist), but why should that deter our efforts to eradicate it? If printing a little bit of paper does not do the trick, print some more. That will teach them a lesson they will never forget. Who is the “them”? Labor—do you really think that all the naughty six-year olds are entrepreneurs and investors? If labor will not agree to a reduction in real money-wages, you print more paper and hope that some of them will change their minds. And if a child will not eat his vegetables, you double the size of his portion and hope that he will eat half. It almost makes sense.
It does not. Someone who “withdraws his labor” because he will not accept a lower real-wage is, by Keynes’s own admission, voluntarily unemployed, yet it is precisely those who are voluntarily unemployed who form the body of what one might call Keynes’s army of the involuntarily unemployed in training. For—and here is the kicker—if they change their minds after the printing press has done its magic (after, that is to say, the central bank has debased the currency) and agree to accept employment at a lower real wage, they receive a promotion: it turns out that those who were once voluntarily unemployed were actually involuntarily unemployed. It almost makes sense.
It does not. When someone is voluntarily unemployed on Tuesday because he “does not choose to work for less than a certain real reward,” then changes his mind on Wednesday and agrees to work for a lower real wage than he was willing to accept on Tuesday, that does not change his status on Tuesday to someone who was involuntary unemployed. Rather, it changes his status on Wednesday to someone who is voluntarily employed. Keynes’s General Theory is a solution to a problem that does not exist, and Keynes himself clearly was a crank, which makes the praise which the General Theory has received in the corridors of power—though hardly unexpected—appalling, and the praise in academia, scandalous.
ABSTRACT: The goal of this article is to extend the argument about the possibility of economic calculation under socialism first advanced by Ludwig von Mises (and later extended by Rothbard) to a related topic, the possibility of developing a comprehensive plan of production as a whole when all of the means of production are owned by a single entity. A division of ownership of the means of production permits a division of intellectual labor, a necessity when the scale of production is large. When plans of production are made independently, there is always the chance that the content of Plan A will not be compatible with the content of Plan B. I make a distinction between the direct coordination of plans of production and the indirect coordination of plans of production, which is effected by the direct coordination of plans to buy and to sell. Buying and selling requires two owners, which means that the indirect coordination of plans of production is impossible when there is only one owner, which means that the indirect coordination of plans of production is impossible under socialism. I explain in detail why it is impossible for anyone to come up with a comprehensive plan of production as a whole, i.e., with a Plan, and then apply that conclusion to the experience of the Soviet Union: there may have been central planners in the Soviet Union, but there never was central Planning for the simple reason that central Planning is impossible.
Carlton M. Smith (cmsmith@roadrunner.com) is an independent scholar.
INTRODUCTION Peter and Paul are bank robbers. Both have read Adam Smith. Peter’s specialty is cracking safes; Paul’s is driving the get-away car. Peter and Paul decide to collaborate. A division of labor ensues. Peter draws up a plan for cracking the safe, and Paul does the same for the get-away car. If the content of Peter’s plan is selected by Peter and the content of Paul’s plan is selected by Paul, what reason is there to think that the contents of both plans will be compatible?
Unless the content of Peter’s plan is compatible with the content of Paul’s plan, the best laid-plans … grief and pain, etc. If Peter plans to walk out of the bank with the stolen money at 3 A.M. and Paul plans to arrive with the get-away car at 10 A.M., both men may end up regretting the uncoordinated nature of their plans. For that reason, Peter and Paul will probably compare the contents of their plans before they attempt to implement them. Removing any inconsistent elements in the two plans will produce a unified plan. Until such time as someone has consciously combined the elements of Peter’s plan with the elements of Paul’s plan, Peter and Paul have no plan to rob a bank. Rather, Peter and Paul have plans to rob a bank, and the content of Peter’s plan may be incompatible with the content of Paul’s plan. The direct coordination of plans requires a conscious agent, and the result of that activity is a unified plan: e pluribus unum.
The distinction between the direct coordination of plans of production and what one might call the indirect coordination of those plans is every bit as significant as the distinction between direct exchange, or barter, and indirect exchange, which requires a medium of exchange. The subject will be discussed in some detail in the fourth part of the third section of this work. For the time being it is sufficient to state that the indirect coordination of plans of production is effected by the direct coordination of plans to buy and to sell.
The following sections are an examination of some of the problems created when ownership of the means of production resides in a single entity. In an article published in 1920, Ludwig von Mises argued that economic calculation is impossible when all of the means of production are owned by the state. Oskar Lange offered a rebuttal in the 1930s (Lange 1936, 1937). I not only hope to show in the body of this work that Lange never rebutted Mises, I also hope to show that the problem of economic calculation under socialism can best be understood when it is seen as one aspect of a larger problem, the problem of planning the production of everything when all of the means of production are owned by a single entity. The unavoidable conclusion of the argument is that it is impossible to produce a unified plan of production as a whole when all of the means of production are owned by a single entity. In the light of that conclusion, a brief examination of central planning in the Soviet Union will follow.
In an attempt to forestall misunderstanding, I should mention now that some words or phrases will appear with upper-case letters where they would not normally be required. The reader will encounter the phrases “single manufacturer,” “single owner,” and “a plan,” but he will also encounter the phrases “Single Manufacturer,” “Single Owner,” and “a Plan.” In the latter examples the upper case has been used to signify the fact that the entity in question is not simply one member of a class but also the sole, or only, member of that class. For example, a Single Manufacturer is not simply a manufacturer but also the sole, or only, manufacturer. In like manner, a Plan of production would be not simply a plan of production but also the sole, or only, plan of production. A distinction between socialism and Socialism will also be made in the conclusion, but the distinction—and the reason for it—will be explained then.
I. THE ANARCHY OF PRODUCTION A. Time to Hammer Home a Point
What is the best way to hammer home a point? With a hammer. The only problem is, where to get one? Assume that I am a manufacturer of hammers. Problem solved. Where to get a hammer? From me. Where did I get the hammer? I manufactured it. Which means what? It means that I had a plan which I implemented. Part of the content of that plan clearly involved the factors of production required for the manufacture of the hammer. Unless I already had the factors of production on hand, i.e., owned them, I clearly would have needed to acquire them. How could I have done so?
If a factor of production that I require and do not yet own has no owner, I can appropriate it. Assume that I need some land for a factory in which to manufacture the hammer. Fortunately, there is some land nearby which no one owns. I appropriate it for my purpose by erecting a factory on it. Suppose, however, that all the factors of production required for the implementation of my plan are owned by someone else. I’m left with three alternatives: the owner of a factor I require can give it to me, I can buy it from its owner, or I can steal it. That exhausts the possibilities.
Now let us eliminate two of those alternatives. Assume that I am reluctant to steal a factor of production, perhaps because of moral scruples. Also assume that none of the owners of the factors that I require are philanthropists, friends, or relatives—and therefore are not disposed to give them to me. The only remaining course of action is to buy those factors from the person or persons who own them. Each such transaction requires not simply two parties but also two owners. I own whatever is being transferred to someone else in exchange for the factor I am buying from him, and the person I am buying the factor from owns that factor until such time as he has transferred its ownership to me. Every voluntary exchange requires two owners. The full significance of that fact should become apparent later in this work.
Do I intend to manufacture the hammer for my own use (meaning, of course, do I intend to retain ownership of the hammer after I have manufactured it?), or do I intend to manufacture the hammer and then transfer its ownership to someone else? Assume the latter. Also assume that I am not a philanthropist and have no friends or relatives. It would then seem to be a reasonable assumption that my intention in manufacturing the hammer is to sell it to someone else (I presumably would not manufacture it with the intention that it be stolen nor with the intention of abandoning it).
Now let us up the ante. Assume that I plan to manufacture ten thousand hammers, all of which I intend to sell to someone else. Also assume that the production of each hammer requires one pound of steel. If my math is correct (and I hate to think what a discussion of economics would be like with no math), the production of ten thousand hammers would require ten thousand pounds of steel. Because steel does not grow on trees—it needs to be manufactured—how do I acquire it? Let us rule out appropriation (no abandoned steel), theft, and gift. What is left? I can either manufacture the steel myself or buy it from someone else. How do I decide?
Maybe I am a calculating guy who thinks that manufacturing the steel myself would cost two dollars per pound. If I can buy the steel I need from someone else for one dollar per pound and my goal is to manufacture the hammers as cheaply (in terms of money) as possible, my decision has been made for me: two owners, of whom I am one, will engage in a voluntary exchange.
Maybe I am a lazy guy whose goal is not to manufacture the hammers as cheaply (for as little money) as possible but to manufacture them with as little effort on my part as possible. Not only is time required to implement a plan, it is also required to make one. Not having to plan the production of steel would save me both time and labor. I may therefore decide to buy the steel I need from someone else rather than to manufacture it myself. If so, two owners, of whom I am one, will engage in a voluntary exchange.
Now assume that my goal is to sell the hammers for more money than it costs me to manufacture them, that my calculations have shown that it costs eight dollars to manufacture and sell each hammer, and that I think ten dollars is a nice, round figure that will more than cover the cost of each hammer. My plan to manufacture and sell the hammers is beginning to take shape. During the coming month I intend to manufacture ten thousand hammers in a factory which I own. I will buy the remaining factors of production that I require (including ten thousand pounds of steel at one dollar per pound) from someone else. When the hammers have been manufactured, I will sell them to someone else for ten dollars apiece, which will leave me with a profit of two dollars on each hammer sold. My plan has been made. In order to implement it, what conditions must be met?
It should be obvious that the implementation of my plan requires the cooperation of at least two other parties, the party from whom I buy the steel and the party to whom I sell the hammers. If I plan to buy steel from someone else, the implementation of my plan requires a corresponding plan on someone else’s part to sell it to me. If I plan to sell hammers to someone else, the implementation of my plan requires a corresponding plan on someone else’s part to buy them from me. In short, the implementation of my plan requires that its content is compatible with the content of the plans made by at least two other parties.
B. Omniscience and the Lack Thereof
Now let us make an assumption that almost no economist has made for more than a century. Assume that I am not omniscient. That assumption might prove a blow not only to my pride but also to my wallet. After all, unless I were omniscient, I might not know the content of other parties’ plans. Let us examine some of the possible consequences of my ignorance.
As a result of my ignorance I may find it impossible to implement my plan to manufacture hammers for eight dollars and sell them for ten. Perhaps another manufacturer of hammers, unbeknownst to me, has decided to flood the market with his hammers, making it impossible for me to sell mine for ten dollars apiece.Cf. Wootton (1935, 151):This tendency arises from the fact that no producer, planning his own production programme, knows what his colleagues are doing. He knows only that it is to his interest, first, that the total production of the kind of goods in which he deals should not pass the point at which these can be profitably sold; and, second, that as large a part of that total as possible should be produced by himself, and not by any of his fellows, so that he may reap the profit and not they. The obvious consequence is that all the producers between them, in their anxiety to look after this second interest, neglect the inevitably damaging consequences of their action upon the first.Cf. also Cole (1935, 196):But under competitive conditions, no single entrepreneur can, even by the most correct anticipation of demand, assure himself of satisfactory selling conditions. For he does not know what anticipations other entrepreneurs will make, or how they will act in the light of them. Even if he could know—as he cannot—the exact total demand at a given price, he cannot be sure that anything he can do will cause this to be the ruling price, for the actions of his competitors may cause the total supply offered for sale to exceed, or to fall below, what is for him the optimum quantity. As a result of competition from the same manufacturer I may find it impossible to find a manufacturer of steel who will sell it to me for one dollar per pound—or perhaps the competition has come from a manufacturer of sickles. Maybe the problem is simply that the customers for my product have pulled a disappearing act—perhaps a fad for sickles is the culprit. It is certainly easy to see why the phrase “anarchy of production” has been used to describe a situation in which the content of every party’s plan is not known to every other party. How much simpler, and perhaps more profitable, production would be if it were. How to solve the problem? One could assume that all the parties are omniscient, but I am not sure that that would solve the problem anywhere except on paper. Perhaps one could permit the parties to exchange information about the content of their plans with one another? Sounds like a good idea. Let us examine it.
Why not permit every manufacturer to place a monthly phone call to all the other manufacturers in an attempt to learn something about the content of their plans? I can see at least two drawbacks to this proposed solution to the problem of ignorance. The first is, other manufacturers might be reluctant to disclose the content of their plans to parties they regard as their competitors (maybe the other manufacturers of hammers do not want me to know what they are up to). The second is, one might end up with a huge phone bill. The price of the steel I require to manufacture hammers depends, after all, not only on the content of the plans of other manufacturers of hammers but also on the content of the plans of those who manufacture anything containing steel. Not only would I have to call every manufacturer of hammers, I would also have to call every manufacturer of sickles. Indeed, I would have to call every manufacturer who used—or might use—any of the factors of production that I might use myself. That is a lot of phone calls.
Consider my plight. I am not omniscient, and I know that I am not omniscient. Indeed, when you get right down to it, I am ignorant, and I know that I am ignorant. And look what happens when I try to do something that might dispel my ignorance. I spend all my time on the phone trying to get in touch with other manufacturers, and most of them will not return my calls. And when I finally find another manufacturer who will return my call, I have to worry that I will be prosecuted for collusion by some bureaucrat whose salary I pay. If only there were an easier way to make a living.... If only there were some way that I could learn something about the content of other parties’ plans without the need for an explicit disclosure of that content by those parties.... If only I did not have to spend so much time on the phone.... If only there were things called prices which charged in response to the underlying conditions of supply and demand.... Fortunately, there are. We will postpone an examination of them until the third section of this work.
By this point it should be apparent that the existence of parties who are ignorant of the content of other parties’ plans creates the possibility that some plans will gang aft agley. Some parties may be unable to implement the plans they have made if the content of those plans requires corresponding content in the plans of other parties. Plans that require, but lack, corresponding content in another plan are incompatible. If two plans are incompatible, neither one can be implemented. Anarchy of production? So it would seem—unless we can figure out some way to reduce the ignorance of the parties who make the plans. If we cannot? Maybe we should take a different tack. Maybe we should reduce the number of parties who make plans.
II. SOCIALISM A. An End to the Anarchy of Production?
Many socialists have presented socialism as an alternative to what they called “the anarchy of production.” That phrase can be found in the works of Marx, Engels, and Lenin. We saw in the previous section that the phrase “anarchy of production” might seem to be an apt description of a situation in which the parties who make plans are ignorant of the content of one another’s plans. If only one party made a plan, there is no possible way he could be ignorant of the content of other parties’ plans. Other parties would have no plans—for all practical purposes there would be no other parties. Before pursuing that thought, however, we need to examine what one might call the skeleton of every plan.
The implementation of every plan made by man requires the use of at least two distinct factors of production, land and labor. Land—at least in the sense of space—clearly is a prerequisite: every man is located somewhere. So, too, is labor: what plan made by man has ever been implemented without the use of his body? Ownership is control of the use of that which has extension. The implementation of every plan therefore requires the ownership of at least two distinct factors of production. If the person who is using something doesn’t own it, someone else does. Any discussion of the implementation of a plan that ignores the subject of ownership is suspect.
Returning to our discussion of socialism, we find that socialism, which ordinarily is defined as ownership (note the word) of the means of production by the state, almost certainly was a proposal by some socialists to eliminate the anarchy of production by reducing the number of owners. If the state is the only manufacturer of hammers, does it need to worry that the market will be flooded by other manufacturers? There are no other manufacturers. If the state is the only manufacturer, does it need to worry about competition for the factors of production from other manufacturers? There are no other manufacturers. If the state is the only manufacturer of hammers, does it need to worry that the market for those hammers will disappear? What market? There is no market. If the state is the only owner of the means of production and hammers themselves are means of production, there is no possible way to sell those hammers: there is no other party to sell them to. Those hammers were not produced with the intention of selling them.
What an exceptionally elegant solution to the problems created by a multiplicity of owners, most or all of whom are ignorant of the content of the plans made by the other owners. Why not replace a multiplicity of owners with a Single Owner? Would that owner be ignorant of the content of the plans made by other owners?Cf. Dobb (1945, 271):So far as what may be termed the mechanics of each system are concerned (with which the present chapter will mainly deal), the essential contrast is between an economy where the multifarious decisions which rule production are taken each in ignorance of all the rest and an economy where such decisions are co-ordinated and unified. Cf. also Schumpeter (1950, 186):solution of the problems confronting the socialist management would be not only just as possible as is the practical solution of the problems confronting commercial managements: it would be easier. Of this we can readily convince ourselves by observing that one of the most important difficulties of running a business—the difficulty which absorbs most of the energy of a successful business leader—consists in the uncertainties surrounding every decision. A very important class of these consists in turn in the uncertainties about the reaction of one’s actual and potential competitors and about how general business situations are going to shape. Although other classes of uncertainties would no doubt persist in a socialist commonwealth, these two can reasonably be expected to vanish almost completely. The managements of socialized industries and plants would be in a position to know exactly what the other fellows propose to do and nothing would prevent them from getting together for concerted action. How could he be? There are no other owners—and thus no other plans. Would the content of the plan made by the Single Owner be incompatible with the content of a plan made by another owner? How could it be? There is no other owner—and thus no other plan. The heck with plans, it is time for a Plan.Cf. Steele (1992, 255):The replacement of “the market” by planning means the replacement of many plans by one plan, a ‘single great plan’ in the words of Engels. These two forms of planning are not only distinct; they are at odds. The more that is decided by a single great plan, a society-wide plan, the less can be decided by individuals or by groups (other than the individual or group which makes the single great plan). It sounds like a good idea. Perhaps it is time to subject it to some scrutiny.
B. Time for the Other Shoe to Drop
In a performance at the United Nations on Oct. 12, 1960, Nikita Khrushchev used a shoe to hammer home a point (there was probably a shortage of hammers in the Soviet Union at the time). That shoe was manufactured somewhere, and it was manufactured somewhere only after a decision had been made to manufacture it. What decisions were implicated by the decision to manufacture it? Let us interrogate the usual suspects: who, what, where, when, and why. Who is going to produce something? Peter? Paul? Peter and Paul? What is going to be produced? A shoe? As we will see shortly, that decision raises more questions than it answers. Where will something be produced? Europe? Canada? Europe and Canada? When will something be produced? This week? Next week? This week and next week? And last and—in this context—least, why will something be produced? I intend to ignore that question and to compress the other four suspects into what one might call the two questions of production, what will be produced and how will it be produced. Back to Khrushchev’s shoe.
Assume that the manufacturer of Khrushchev’s shoes knew the dimensions of Khrushchev’s feet and therefore knew the size of the shoes that needed to be manufactured. What questions still needed an answer? Who should manufacture them. A mason? A carpenter? A cobbler? The cobbler named Peter? When should they be manufactured. This week? Next week (please bear in mind that engaging the services of the cobbler named Peter for the coming week will not do much good if the shoes cannot be manufactured until the following week)? Where should they be manufactured. If the manufacturer has two factories at his disposal, in which factory will the pair of shoes be made? If the manufacturer has no factory at his disposal, where and how will he acquire one?
Even after the manufacturer of shoes has answered the preceding questions, we still do not know much about some of the shoes’ characteristics. Do they have leather uppers? If so, did the leather come from a cow? From a horse? From an alligator? Do the shoes have leather heels or rubber heels? Are the soles made of leather or of a composite material? Are the soles attached to the uppers with glue or with thread? Are the heels attached with nails? If so, are the nails made of steel? Iron? Wood? I may be belaboring the obvious, but a decision to manufacture a pair of shoes is a decision to make a lot of decisions.
Assume that our manufacturer has answered the questions raised in the preceding paragraph and has decided that the shoes in question will have leather (from a cow) uppers, that the soles will be made of leather and will be sewn to the uppers, and that the heels will be made of rubber and will be attached with steel nails. Planning the production of a relatively simple product like a shoe can be hard work. Perhaps our manufacturer could use some time off?
Not so fast. If the state owns all the factors of production, socialism entails the existence of a Single Manufacturer. Which means what? It is not enough for a manufacturer under socialism merely to plan the production of shoes; he must also plan the production of all the other products that are used to make the shoes. In the example given in the previous paragraph, not only would the manufacturer have to plan the production of the shoes, he would also have to plan the production of the leather used for the uppers, the rubber used for the heels, the leather used for the soles, the thread used to attach the soles to the uppers, and the steel nails used to attach the heels to the soles.
Now let us examine the decisions the manufacturer would have to make when planning the production of something as apparently trivial as those steel nails. Where will the raw materials needed to make the steel come from? How will they be transported from those locations to the place where the steel is manufactured? What source of energy will be used when the steel is manufactured? Any electricity? If so, where will it be generated? And how? Oil? Gas? Coal? Hydro? Nuclear? Does our manufacturer of shoes have to plan the construction of a hydro-electric project in order to come up with the electricity needed to manufacture the steel used for the nails?
Once the steel has been manufactured, where and how will it be fashioned into nails? If the plant where the nails are manufactured is five hundred miles from the shoe factory, how will those nails be transported a distance of five hundred miles? Airplane (does our manufacturer of shoes also have to plan the production of airplanes—if he does, his list of things-to-do is getting longer by the second)? Rail (does our manufacturer of shoes also have to plan the production of a railroad)? Truck (does our manufacturer of shoes also...)?
Assume that the answer is a truck. Trucks require fuel. Assume that the fuel is gasoline. Where will the refinery (must our manufacturer of shoes also…) be located? Who will staff it? And where will the crude oil come from? If wells already exist, from which well or wells will it be taken? If there are no wells, where should our manufacturer sink one—and what equipment will he need to do so? Must our manufacturer of shoes now plan the production of the drilling equipment used to extract the crude oil which will be refined into the gasoline used to transport one of the components of his shoes from the place where it was manufactured to the place where the shoes are manufactured?
The examples that I have given could be multiplied endlessly, but I trust that by this point it is clear that a manufacturer of shoes who is also the manufacturer of every thing (i.e., capital good) used to make those shoes and is also the manufacturer of every thing used to make every thing which is used to make those shoes and is also ... I am out of breath. Suffice it to say, a Single Manufacturer has his work cut out for him. If the notion of a Plan seems simple, the actual drafting of a Plan should not. Would anyone blame our Single Manufacturer if he went in search of a short-cut? Is there a short-cut?
C. The Division of Ownership and the Division of Intellectual Labor
In an example given in the preceding section a manufacturer of shoes found himself forced not only to plan the production of those shoes but also to plan the production of every product used to make those shoes—and then found himself forced to plan the production of every product used to make every product used to make those shoes, and then found himself forced.… What created so much work for the manufacturer? The reason the manufacturer had to plan the production of so many things was that the manufacturer in question was the only manufacturer of every thing. There was no other manufacturer to plan the production of any thing, which is why the task of planning the production of every thing fell on the Single Manufacturer. And there was no other manufacturer because there was no other owner: our manufacturer of shoes owned all the factors of production.
Suppose that there had been other owners. Suppose, for example, that there had been a manufacturer of nails as well as a manufacturer of shoes (i.e., two distinct manufacturers). The only way that one can acquire the ownership of that which has an owner is gift, theft, or purchase. Ignore the first two possibilities. If the manufacturer of shoes buys the nails that he needs from the manufacturer of nails, does the manufacturer of shoes need to plan the production of those nails? The only thing that he needs to plan is their purchase. The task of planning the production of those nails falls on the manufacturer of the nails.
The implementation of every plan requires the ownership of at least two factors of production. The manufacturer of nails cannot implement his plan for their production unless he owns the factors of production needed to make them; so, too, with the manufacturer of shoes. Single owner? Single producer. Single producer? Single plan. Single plan? Single planner. More than one owner? The possibility of more than one producer. More than one producer? At least two plans—and planners.
A division of ownership of the means of production permits a division of intellectual labor. A Single Owner, in the nature of the case, is responsible for planning the production of everything. Where there is more than one owner, no single owner needs to do all of the planning. After all, some of that planning can always be done by ... another owner.
Return to the case of the Single Manufacturer of shoes who was also the manufacturer of all the products used to make those shoes. Is there any reason why, faced with a task that exceeds his capacity (planning the production of everything—in short, producing a Plan), he cannot farm out the task of planning the production of some of those things to other parties? No, there is not, but that will not solve the problem. Unless the Single Manufacturer can consciously combine the elements of all the plans made by all the different parties (planners) with the elements of his own plan—and so eliminate all of the incompatible elements—the result of all that farming out, that division of intellectual labor, will be a mish-mash of plans that have not been coordinated, not a unified plan of production as a whole (i.e., a Plan). The Single Manufacturer will find the task of directly coordinating all of those disparate plans to be no less impossible than the task of making all of those plans by himself. Indeed, the task—and the problem—that he faces will be the same in both cases.Cf. Hayek (1997, 141):The first point which must be stressed is that it is the very complexity of the task—i.e., the very fact which usually makes comprehensive planning necessary—which renders it impracticable for the economic system as a whole. In a plan, as the engineer draws it up, all the relevant facts must enter, and to make it a coherent plan all these facts must in the last resort be commanded and mastered by a single mind. This sets a limit on the degree of complexity of the task which can be solved by completely thinking it through, because the number of variables which any mind, even with the best assistance, can manipulate is limited.
The second part of this section ended with a Single Manufacturer looking for a short-cut that would make the task he faced less burdensome. Has a short-cut been unearthed? The task faced by a single manufacturer can be made less burdensome by enlisting the services of another manufacturer. No such shortcut is available to a Single Manufacturer. Part B of the first section of this work also ended with a producer who was looking for a short-cut. The destination he wanted to reach? Knowledge of the content of other parties’ plans. Let us see if such a short-cut can be found.
III. PRICES A. The Role of Prices in the Reduction of Ignorance
We saw in the first section of this work that when plans are made by different parties, each party might want to know something about the content of the other parties’ plans because the content of those plans could have a bearing on its ability to implement its own. The problem, of course, was how to acquire that knowledge. No easy solution seemed to be available. Fortunately, one is: sometimes if you want something badly enough, the only thing you have to do is pay the price.
What is a price? The price paid for anything is the property whose ownership one relinquishes in a voluntary exchange. One buys something from someone by selling him something else. A market is the place where a voluntary exchange occurs. A price therefore presupposes the existence of a market and a voluntary exchange, and a voluntary exchange presupposes the existence of at least two owners. And every voluntary exchange entails the existence not merely of one price but of two: there are always two parties in a voluntary exchange who are relinquishing the ownership of something.
Are any prices current? Not really. The only voluntary exchanges that have ever occurred are those which have already occurred. The only prices we can have any knowledge of are prices from the recent past (commonly called current prices) and the not-so-recent past.
Is it possible to compare prices? We will return to the subject shortly, but if Peter paid two apples to buy one orange and Paul paid one lemon to buy one orange, it is by no means clear that it is possible to compare the prices paid by Peter and Paul.
We do not seem to be making much progress. In the first place, every voluntary exchange presents us with two prices rather than with one. The only prices we can have any knowledge of are prices from the past, and all plans are prospective: no one ever makes a plan to do something two years ago. And different prices might be incommensurable. On the other hand, having money has been known to solve a lot of problems.
If Peter paid two dollars (what a dollar is need not concern us provided that one dollar is a unit of money) for the orange and Paul paid one dollar, we know that the price that Peter paid was more than the price that Paul paid. And if we assume that money is one of the prices paid in every voluntary exchange (every voluntary exchange, remember, engenders two prices), the remainder of those prices begin to speak in a common tongue. We are still left with the fact that the only knowledge provided by prices is knowledge of the past. When we reflect, however, on the fact that decisions made in the past often have a bearing on future events, we will probably be grateful for such knowledge as we have. Why? Because prices convey information about the contents of other parties’ plans.
Prices talk, and it is not just idle chatter. Assume again that I am a manufacturer of hammers. The demand of another manufacturer of hammers for steel expresses itself in the price that he pays for that steel; so, too, does the demand of a manufacturer of sickles. Better still, not only does the price of steel convey information about the content of other parties’ plans, it conveys that information in an abridged, and therefore manageable, form.Cf. Hayek (1948, 86–87):The most significant fact about this system [the price system] is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information is passed on and passed on only to those concerned. It is more than a metaphor to describe the price system as a kind of machinery for registering change, or a system of telecommunications which enables individual producers to watch merely the movement of a few pointers, as an engineer might watch the hands of a few dials, in order to adjust their activities to changes of which they may never know more than is reflected in the price movement. Do I need to know all the ends for which steel is being purchased? Do I need to know all the contents of other parties’ plans? Not only do I not need to know all the contents of other parties’ plans, it is by no means clear that I would want to. Assume that there are one million other plans that have some bearing on my own. How could I ever digest the contents of those plans if they were fed to me in all their excruciating detail? The information that prices provide is imperfect, but it is significant and, no less important, concise.
B. The Role of Prices in the Formation of Plans
Earlier in this work I said that the two questions of production are what to produce and how to produce it. The information that prices provide can help producers decide what to produce and how to produce it—in other words, it can help producers make their plans.
Prices can help producers answer the “what” question of production. A producer who wants to satisfy the preferences of buyers cannot base his decisions on his knowledge of what those preferences will be. Production takes time. The preferences that will express themselves in future transactions are unknown to all parties, buyers included. A producer who wants to satisfy the preferences of buyers can only proceed on the basis of what he thinks those preferences will be, but he can use his knowledge of what those preferences were as a clue that may help him solve that mystery.
If Peter’s desire to acquire the ownership of a lemon owned by someone else is stronger than his desire to retain the ownership of an apple, he may very well buy a lemon by selling his apple—provided, of course, that he can find someone else with the opposite preference. If Peter makes that exchange, his preference is manifested by the transaction itself. Knowledge of that transaction is knowledge of that preference. Knowledge of that transaction can also be knowledge of other preferences on Peter’s part. The fact that Peter bought a lemon rather than an orange—assuming that an orange costing one apple was there for the taking—tells us that Peter wanted to acquire ownership of the lemon more than he wanted to acquire ownership of the orange. How can buyers express their preferences? By buying. How can sellers learn something about those preferences? When prices talk, they can listen.
Prices can also help producers answer the “how” question of production. Every producer will want to produce his “what” with the expenditure of as few valuable resources as possible. What does the word expenditure mean in this context? An item is expended when it is no longer owned. If I buy a dollar’s worth of gasoline, I no longer own that dollar. And when that gasoline has been expended, I no longer own that gasoline. What does the word valuable mean in this context? A valuable resource is something worth owning. Every producer will want to produce his “what” with the expenditure of as few valuable resources as possible.
The broader the definition of the “what,” the more leeway a producer has in terms of the “hows” available to him. If the “what” is a hammer, he can use steel to manufacture it, but he can also use other materials, e.g., titanium. If the “what” is a steel hammer, the choice of using titanium has disappeared. Given the “what,” the producer will want to employ that “how” which will result in the expenditure of as few valuable resources as possible. This need not mean that he will always attempt to produce his “what” at the lowest possible cost in terms of money. Money may be a valuable resource to the producer, but it need not be the only one. Having said which, money does enable the producer to compare the costs of different “hows” in terms of money and to make a selection on that basis if he so chooses.
The same caveat needs to be made about prices in connection with the “how” question of production that was earlier made in connection with the “what” question. A producer who does not yet own the factors of production that he requires does not know how much it will cost to acquire them, i.e., he has no knowledge of future prices. If the caveat is the same, so also is the response: the producer can base his expectations of those future costs on such knowledge as he has of the prices those factors have fetched in the past. Prices not only can help a producer answer the “what” question of production, they can also help him answer the “how” question.
Although the information that prices convey can help producers make their plans, that information by itself will not be sufficient to ensure that the content of any plan so made is—or will be—compatible with the contents of the plans made by other parties. The only way to ensure that the content of a plan one has made is compatible with the content of a plan made by someone else is to compare the contents of both plans. When a producer uses his knowledge of prices to select the content of his plan, he is not attempting to directly coordinate the content of that plan with the contents of the plans made by other parties. Indeed, one could almost say that that is the very thing he is attempting to avoid.
Making a plan and implementing a plan are two different things. When producers use their knowledge of prices to select the contents of their plans, they are making plans that they think they will be able to implement at some future date because they know that similar plans were implemented in the past. The coordination of the contents of those plans with the contents of the plans made by other parties ordinarily will occur—if it does occur—only when attempts are made to implement them.
C. The Role of Prices in the Revision of Plans
Plans need not be writ in stone. Indeed, plans are often revised on the basis of information discovered during the attempt to implement them.Cf. Hayek (1948, 85–86):Fundamentally, in a system in which the knowledge of the relevant facts is dispersed among many people, prices can act to co-ordinate the separate actions of different people in the same way as subjective values help the individual to co-ordinate the parts of his plan. It is worth contemplating for a moment a very simple and commonplace instance of the action of the price system to see what precisely it accomplishes. Assume that somewhere in the world a new opportunity for the use of some raw material, say, tin, has arisen, or that one of the sources of supply of tin has been eliminated. It does not matter for our purpose—and it is significant that it does not matter—which of these two causes has made tin more scarce. All that the users of tin need to know is that some of the tin they used to consume is now more profitably employed elsewhere and that, in consequence, they must economize tin. There is no need for the great majority of them even to know where the more urgent need has arisen, or in favor of what other needs they ought to husband the supply. Producers not only can use the information that prices convey when they make their plans, they can also use that information when they revise them.
A developer buys one hundred acres of land with the intention of building one hundred houses on it. Before he can secure financing for the construction of the houses, he notices that prices in the local housing market are showing signs of weakness. On thinking the matter over, he decides that the market is much too soft to continue with his plan. He therefore revises it: for the time being (a plan, remember, includes a “when”), his plan is on hold.
A housewife heads to market with a plan to buy beef for dinner that evening—she will not, however, pay more than six dollars a pound for the beef. She revises her plan and buys chicken instead of beef when she discovers that all of the available beef costs more than six dollars a pound. Alternatively, she revises her plan and buys chicken instead of beef not because no beef is available for six dollars a pound—it is—but because the chicken is on sale. Plans are neither made nor revised exclusively by producers who intend to sell their products.
Plans of production are revised by the parties who made them for a variety of reasons. The developer’s original plan presumably called for the construction and sale of the houses in the not too distant future (perhaps during the coming eighteen months) at prices the developer found acceptable. He revises his plan not because he knows that the plan cannot be implemented (he certainly can have no knowledge of future prices) but because new information—in the form of current prices—has led him to think that the implementation of his original plan is doubtful.
The housewife who revised her plan to buy beef for dinner because all the beef available cost more than six dollars a pound revised her plan because she discovered that she could not implement it: the content of her plan was incompatible with the content of the plan to sell it made by the owner of the beef. If, however, she revised her plan to buy beef only because she discovered that chicken was on sale, she revised her plan to buy beef for dinner not because she could not implement it but because, prompted by the price of chicken, she came up with what she thought was a better plan.
The “prices” encountered by the housewife in the previous paragraph were not prices proper but rather asks. Bids and asks are what one might call potential prices: they are offers to buy and to sell. A price is formed only when a second party accepts the offer. Having said which, I can see no reason not to treat bids and asks in the same manner as prices proper: they certainly convey information about the content of the plan made by the party that makes the offer, a second party can use that information when he makes or revises his own plan, and they are current in a way in which even “current” prices are not. Potential prices may even perform a more conspicuous role in the coordination and implementation of plans than prices proper. That subject will be explored in the next part of this section.
D. Prices and the Indirect Coordination of Plans of Production
A self-sufficient household has no need to coordinate its plans of production with the plans of production of another self-sufficient household because the successful implementation of its plans does not depend on the content of the plans made by the other self-sufficient household. It only needs to ensure that such plans as it has made are compatible with one another, which is not a particularly difficult task, and an easy remedy is available if (perhaps through inadvertence) they are not: the plans can be revised—indeed, must be revised—by the household that made them.
Once households begin to engage in trade, some households may discover that some of the plans of production they have made are incompatible with the plans of production made by other households. Peter and Paul are neighbors. Each one has decided to produce more eggs than his household can consume and to sell his surplus to his neighbor. In such a situation it may be possible to remedy the problem by means of the direct coordination of those plans. Peter and Paul may agree, for example, that Peter should continue to produce a surplus of eggs and Paul should attempt to produce a surplus of milk, which he could then exchange for some of Peter’s eggs. The direct coordination of plans of production need not be difficult provided that the number of plans that need to be coordinated is small.
Suppose, however, that there are ten million households (more generally, entities) that engage in production and trade. How could anyone possibly compare the contents of the plans of production made by those ten million entities, eliminate the incompatible elements, and so produce a unified plan of production as a whole (in other words, a Plan)? Some of those entities may be able to engage in the direct coordination of plans of production with some other of those entities, but no one will be able to effect the direct coordination of all of those plans. Put differently, the direct coordination of plans of production will still be possible at what one might call the micro level, but the direct coordination of all of those plans will not be possible at the macro level.
The distinction between the direct coordination of plans of production and the indirect coordination of plans of production is no less significant a distinction than the one between direct exchange, or barter, and indirect exchange, which requires a medium of exchange. Just as indirect exchange is effected by acts of direct exchange with a particular character—the direct exchange of a less marketable commodity for a commodity that is more easily marketable and will be used in that capacity, i.e., sold—so is the indirect coordination of plans of production effected by the direct coordination of plans with a particular character, plans to buy and to sell. Plans to buy and to sell are directly coordinated by the decisions made by different parties to buy and to sell particular goods and services.
It is almost impossible to exaggerate the significance of the fact that some of the content of the plans of production which are made in a free market almost always involves the purchase and sale of goods and services. A farmer plans to buy a new tractor for one hundred thousand dollars and to use that tractor to increase his output of wheat. Should we say that the farmer really has two plans, a plan to buy a tractor and a plan to use the tractor to increase his output of wheat, or should we say that the farmer really has only one plan, a plan which is composed of two segments (mini-plans?) which have been combined by the farmer into a unified plan? The language that we use is not important; grasping the import of the content of one of those mini-plans, or segments, is.
Ten farmers all plan to buy a new tractor for one hundred thousand dollars and to use that tractor to increase their outputs of wheat. Only eight new tractors are available for sale. The plans made by the ten farmers to increase the production of wheat are incompatible with the plans of production previously made by the manufacturers of tractors. Clearly, we have a problem, ten farmers and eight tractors. How do we resolve it? We don’t have to. The problem will be resolved by the decisions made by the farmers themselves and by the owners of the tractors.
If we make the appropriate assumption about the conditions under which the tractors are sold (that the tractors, in effect, are sold at auction), it is clear that all ten farmers will need to revise at least one segment of their plans of production. If the price that emerges for a new tractor is one hundred and ten thousand dollars, eight farmers will revise a segment of their plans to increase the production of wheat, the segment to buy a new tractor for one hundred thousand dollars, but the remainder of those eight plans—the segment to use a new tractor to increase the production of wheat—will remain intact. Two farmers will not only have to scuttle their plans to buy a new tractor for one hundred thousand dollars, they will also have to scuttle their plans to use those new tractors to increase the production of wheat. The eight remaining plans to increase the production of wheat are now compatible with the plans of production made previously by the manufacturers of tractors. Plans of production have been coordinated indirectly by the direct coordination of plans to buy and to sell.
What is it about the indirect coordination of plans of production that makes it so useful? What makes it so useful—indeed, so essential—is that it eliminates almost all of the need for a direct coordination of plans of production. In the example just given, does a farmer need to know anything about the plans made by the manufacturers of tractors to acquire the factors of production necessary to manufacture those tractors? Does the farmer need to know anything about the plans of production made by other farmers to increase their production of wheat? The only thing a farmer needs to know in order to bring his plan of production into synch—to coordinate it—with all the other plans of production made by all the other producers is, in this example, the price at which he can buy a tractor; the only thing a manufacturer of tractors needs to know in order to bring his own plan of production into synch—to coordinate it—with all the other plans of production made by all the other producers is the price at which he can sell a tractor. Omniscience is still in short supply, but so is the need for it.
Let us give the socialists their due. When plans are made by ignorant parties, it may not be possible to implement all of them. Many of them may be incompatible. How do we extricate ourselves from this morass? If a free market exists, we do not have to. The parties who made the incompatible plans will extricate themselves by revising those plans. It is not as if they have any choice in the matter: a plan that cannot be implemented has to be revised.
The solution to the problem of ignorance proposed by some socialists was socialism itself. How to eliminate what were sure to be the unfortunate consequences if a myriad of independent producers made their plans in ignorance of the content of one another’s plans? Eliminate the producers and replace them with a Producer; eliminate the plans and replace them with a Plan. The fact that it is impossible for anyone to produce a Plan makes that a less than ideal solution to the problem of ignorance.
Is there a better—at any rate a more feasible—solution to the problem of ignorance? Maybe Marx spoke truer than he knew. The free-market version of the anarchy of production contains within itself the seeds of its own destruction. Those seeds are called prices. The only adequate solution to the problem of ignorance and all that it entails—the proliferation of plans that have not been coordinated—is that reduction of ignorance effected by those things we call prices.
IV. MISES AND LANGE A. Mises
In an article published in 1920Mises (1920); cf. Hayek (1935, 87). Ludwig von Mises argued that socialism and economic calculation could never know a peaceful co-existence. Consider first the following passage:
It will be evident, even in a socialist society, that 1,000 hectolitres of wine are better than 800, and it is not difficult to decide whether it desires 1,000 hectolitres of wine rather than 500 of oil. There is no need for any system of calculation to establish this fact: the deciding element is the will of the economic subjects involved. But once this decision has been taken, the real task of rational economic direction only commences, i.e. economically, to place the means at the service of the end. That can only be done with some kind of economic calculation. The human mind cannot orient itself properly among the bewildering mass of intermediate products and potentialities of production without such aid. It would simply stand perplexed before the problems of management and location.
It is an illusion to imagine that in a socialist state calculation in natura can take the place of monetary calculation. Calculation in natura, in an economy without exchange, can embrace consumption goods only; it completely fails when it comes to deal with goods of a higher order. And as soon as one gives up the conception of a freely established monetary price for goods of a higher order, rational production becomes completely impossible. Every step that takes us away from private ownership of the means of production and from the use of money also takes us away from rational economics.See Hayek (1935), pp. 103–04.
What point did Mises make in the passage just quoted? Mises is willing to grant that what was earlier called the “what” question of production will not be a particularly difficult decision to make.Please bear in mind that for Mises the “what” in question is a consumption good. The argument I am presenting differs slightly from his argument. See note 14. That decision can be “grounded in the will of the economic subjects involved.” That leaves us with the “how” question, i.e., which means will be used to produce that “what”? For Mises this is the heart of the matter.
A producer will want to achieve his end, his “what,” with the expenditure of as few valuable resources as possible. That means, of course, that a “how” that requires the expenditure of less valuable resources will be a better “how” than a “how” that requires the expenditure of resources which are more valuable. How does one determine the value of the resources expended in a “how”? Allow Mises to answer the question:
Picture the building of a new railroad. Should it be built at all, and if so, which out of a number of conceivable roads should be built? In a competitive and monetary economy, this question would be answered by monetary calculation. The new road will render less expensive the transport of some goods, and it may be possible to calculate whether this reduction of expense transcends that involved in the building and upkeep of the next line. That can only be calculated in money. It is not possible to attain the desired end merely by counterbalancing the various physical expenses and physical savings. Where one cannot express hours of labour, iron, coal, all kinds of building material, machines and other things necessary for the construction and upkeep of the railroad in a common unit it is not possible to make calculations at all. The drawing up of bills on an economic basis is only possible where all the goods concerned can be referred back to money. (Hayek 1935, 108–09).
For Mises, the only way to express the value of the different factors of production used in a “how” is “in a common unit.” I said previously that when money is one of the prices paid in every voluntary exchange, the remainder of those prices begin to speak in a common tongue. When there is no common unit? Babel. Mises let his readers off the hook by not drawing up a bill computed in something other than money. I see no reason to be that charitable.
I paid a teenager five dollars to mow my lawn. He used my lawnmower, which runs on gasoline. The cost of the gasoline was one dollar. My lawnmower cost two hundred dollars, and I have decided that it is good for another one hundred and ninety-nine jobs—this was its first. I produced a mown lawn. What did it cost? Seven dollars. Note that the cost is computed in terms of money. In what else could it be computed? I suppose one could compute its cost in terms of the factors of production used to produce it.
What were those factors of production? I will here ignore the land (volume of space, soil, and grass) and concentrate on the remaining factors: labor, gasoline, and lawnmower. Assume that the teenager spent one hour mowing my lawn and that a half-gallon of gasoline was used. The factors of production spent on the production of a mown lawn were an hour of the teenager’s labor, a half-gallon of gasoline, and 1/200th of a lawnmower. Even if the factors of production do not speak in a common tongue, enumerating those factors seems to be a relatively simple task. Not necessarily.
In the example just given, I bought the gasoline from another party, and I did the same with the lawnmower. That means that there were at least three (I was one of them) distinct producers. Because I did not produce the gasoline, I did not have to compute the cost of its production. That was a job for another producer. So, too, with the lawnmower. Here is another illustration of a point made earlier, that a division of ownership permits a division of intellectual labor: if I only produce one thing, I only have to compute the cost of one thing.
Suppose, however, that production took place where there was only a Single Producer—what would I, or anyone else for that matter, have to do in order to compute the cost of one mown lawn? Clearly my job will not have ended when I have specified the factors of production used to mow the lawn. I will also have to specify the factors of production used to make the factors of production (i.e., the capital goods) used to mow the lawn. Am I finished yet? Of course not. I will also have to specify the factors of production used to make the factors of production used to make the factors of production used to mow the lawn. Am I finished yet? Of course not. I will also have to specify....
Consider the gasoline that was used to fuel the lawnmower. Some portion of the cost—specified in terms of the factors of production used to produce it—of the refinery where the gasoline was produced will have to be allocated to that half-gallon of gasoline. So, too, with the crude oil: some portion of the factors of production used to produce it will have to be allocated to that half-gallon of gasoline. Some portion of the cost—specified in terms of the factors of production required to produce it—of the drilling equipment used to sink the well from which the crude oil was extracted will therefore have to be allocated to that half-gallon of gasoline. I could continue, but it is time to let my readers off the hook.
I trust that it is clear by now that computing the cost of a good or service in a state of socialism will not be easy, and I hope that it is apparent that part of the reason why it will be difficult is the same reason why it will be difficult to plan the production of one good or service in a state of socialism: once you start, where do you stop? No Single Planner in a state of socialism can enlist the services of another planner, for there is no other planner. In the same sense no Single Accountant can enlist the services of another accountant, for there is no other accountant. The computation of cost occurs within the boundaries set by ownership. Where there is a Single Owner, there are no boundaries.
A distinction should be made between the computation of cost and the calculation of costs. The computation of cost is historical; the calculation of costs is prospective. It is important to compute cost when one wants to evaluate prior actions. It is important to calculate costs when one wants to select future actions. Calculating the costs of goods and services enables the producer to husband his resources. Killing two birds with one stone might make more sense than killing two birds with two stones. If stones are a valuable resource, it does make more sense. Where two different “hows” are available, the calculation of costs enables the producer to select the “how” that requires the expenditure of the less valuable resources.
“The drawing up of bills on an economic basis is only possible where all the goods concerned can be referred back to money.” The obvious question is, why can the factors of production not be referred back to money in a state of socialism? Why must each factor speak a different language? As usual, Mises provides the answer: “Moreover, just because no production-good will ever become the object of exchange, it will be impossible to determine its monetary value. Money could never fill in a socialist state the role it fills in a competitive society in determining the value of production-goods. Calculation in terms of money will here be impossible.”Ibid., p. 92. The factors of production cannot be referred back to money in a state of socialism because the factors of production are never bought and sold. And the factors of production are never bought and sold because...? There is no other party to buy something from or sell something to: there is, after all, only one owner.
“Calculation in terms of money will here be impossible.” What consequence follows from that fact? “Where there is no free market, there is no pricing mechanism; without a pricing mechanism, there is no economic calculation.”Ibid., p. 111. What point is Mises making? That without monetary calculation there can be no economic calculation.Mises makes it clear that economic calculation without monetary calculation can occur when the conditions of production are primitive:Only under simple conditions can economics dispense with monetary calculation. Within the narrow confines of household economy, for instance, where the father can supervise the entire economic management, it is possible to determine the significance of changes in the processes of production, without such aids to the mind, and yet with more or less of accuracy. In such a case the process develops under a relatively limited use of capital. Few of the capitalistic roundabout processes of production are here introduced: what is manufactured is, as a rule, consumption-goods or at least such goods of a higher order as stand very near to consumption-goods. The division of labour is in its rudimentary stages: one and the same labourer controls the labour of what is in effect, a complete process of production of goods ready for consumption, from beginning to end. All this is different, however, in developed communal production. The experiences of a remote and bygone period of simple production do not provide any sort of argument for establishing the possibility of an economic system without monetary calculation. (Hayek 1935, 102–03)
Why must there be monetary calculation if there is going to be economic calculation? Consider the alternative. How could one compare the cost of electricity generated at a large hydro-electric project with the cost of electricity generated at a nuclear power plant if the cost of that electricity had to be specified in terms of all the concrete factors of production that had played a role, however small, in its generation? Calculation in natura would be unnatural. It would also be impossible.
What does the absence of economic calculation entail? Again, Mises has the answer:
Without economic calculation there can be no economy. Hence, in a socialist state wherein the pursuit of economic calculation is impossible, there can be—in our sense of the term—no economy whatsoever. In trivial and secondary matters rational conduct might still be possible, but in general it would be impossible to speak of rational production any more. There would be no means of determining what was rational, and hence it is obvious that production could never be directed by economic considerations.Hayek (1935, 105).
What point is Mises making? How can one select the least costly “how,” i.e., how can one deploy one’s resources in an economical manner, if one does not know what the least costly “how” is?The point Mises actually made was more comprehensive than I have made it out to be. Economic calculation can come into play not only when a choice of “hows” is available, it can also come into play when only one “how” is available. In that situation the question is, “Given both the ‘what’ and the ‘how,’ does it make sense to proceed with the ‘what’?” In other words, does the value of the “what” justify the expenditure entailed by the “how”? For Mises’s position, read the text to notes 7 and 9. Mises’s contention is not that socialism is impossible but that production under socialism could never be directed by economic considerations.Cf. Hayek (1935, 36):But although the discussion on this point dragged on for several years, in the course of which Mises twice replied to his critics, it became more and more clear that in so far as a strictly centrally directed planned system of the type originally proposed by most socialists was concerned, his central thesis could not be refuted. Much of the objections made at first were really more a quibbling about words caused by the fact that Mises had occasionally used the somewhat loose statement that socialism was impossible, while what he meant was that socialism made rational calculation impossible.
B. Lange
In two papers published in 1936 and 1937See Lippincott (1939, 57). Oskar Lange responded to Mises’s argument. How should production proceed in a socialist state? Consider first the following passage:
The decisions of the managers of production are no longer guided by the aim of maximizing profit. Instead, certain rules are imposed on them by the Central Planning Board which aim at satisfying consumers’ preferences in the best way possible. These rules determine the combination of factors of production and the scale of output.
One rule must impose the choice of the combination of factors which minimizes the average cost of production. This rule leads to the factors being combined in such proportion that the marginal productivity of that amount of each factor which is worth a unit of money is the same for all factors. This rule is addressed to whoever makes decisions involving the problem of the optimum combination of factors, i.e., to managers responsible for running existing plants and to those engaged in building new plants. A second rule determines the scale of output by stating that output has to be fixed so that marginal cost is equal to the price of the product. This rule is addressed to two kinds of persons. First of all, it is addressed to the managers of plants and thus determines the scale of output of each plant and, together with the first rule, its demand for factors of production. The first rule, to whomever addressed, and the second rule when addressed to the managers of plants perform the same function that in a competitive system is carried out by the private producer’s aiming to maximize his profit, when the prices of factors and of the product are independent of the amount of each factor used by him and of his scale of output.Ibid., pp. 75–76.
Lange here informs us that the “what” decisions will be governed by consumers’ preferences. In a different passage he also discusses a situation where the “what” decisions are governed by the preference scale of the Central Planning Board, but that discussion introduces no new issues and so can be ignored. For Mises, remember, the “what” decisions are largely peripheral.
Before examining Lange’s position in more detail, let me note one curious fact: according to Lange, managers are going to make decisions. Why is that curious? It certainly is not curious if managers make decisions in a free market, but managers who make decisions in a state of socialism—what could be more curious? No manager of a plant makes decisions in a state of socialism; he implements the decisions made by someone else.Cf. Dobb (1945, 276): “Competition necessarily implies not only diffusion but also autonomy of separate decisions.... Either planning means overriding the autonomy of separate decisions or it apparently means nothing at all.” His job, after all, is not to make plans. We’re all supposed to be socialists here—don’t want no anarchists messing with the Plan. Don’t want, in short, no anarchy of production.
Now let me note an even more curious point about Lange’s response: Lange could not be more outspoken about the role played by prices in the system he has devised. According to Lange, his managers must have prices if they are going to follow his rules: “To enable the managers of production to follow these rules the prices of the factors and of the products must, of course, be given. In the case of consumers’ goods and services of labor they are determined on a market; in all other cases they are fixed by the Central Planning Board. Those prices being given, the supply of products and the demand for factors are determined.”Lippincott (1939, 78).
The operation of Lange’s system might seem to resemble the operation of a free market in most respects. Indeed, Lange makes that very point:
Our study of the determination of equilibrium prices in a socialist economy has shown that the process of price determination is quite analogous to that in a competitive market. The Central Planning Board performs the functions of the market. It establishes the rules for combining factors of production and choosing the scale of output of a plant, for determining the output of an industry, for the allocation of resources, and for the parametric use of prices in accounting. Finally, it fixes the prices so as to balance the quantity supplied and demanded of each commodity. It follows that a substitution of planning for the functions of the market is quite possible and workable.Ibid., pp. 82–83.
Perhaps it does, but does it follow that a substitution of Planning for the functions of the market is quite possible and workable? Where in Lange’s system can one discover any Planning whatsoever? Where in Lange’s system can one discover either a Planner who produces a Plan by himself or an Uber-planner who consciously combines the elements of the plans made by the different managers into a unified plan of production (i.e., a Plan) devoid of incompatible elements? One cannot. And it is not even clear that his “central planners” qualify as central planners. In fact, it is quite clear that they do not. His “central planners” make rules; his managers make plans of production.Cf. Polanyi (1951, 125):Unnoticed both by its advocates and its critics, modern Socialist theory, by adopting the principles of commerce, has quietly abandoned the cardinal claim of Socialism: the central direction of industrial production. Apart from calling his chief economic authority by the name of Central Planning Board, Oscar Lange makes no reference to planning in the proper sense.
What does Lange have to say on the subject of an efficient allocation of resources? Lange tells us that “there is no way of measuring the efficiency in carrying out the plan without a system of accounting prices which satisfies the objective equilibrium condition, for the rule to produce at the minimum average cost has no significance with regard to the aims of the plan unless prices represent the relative scarcity of the factors of production.”Lippincott (1939, 94). Lange makes this point when discussing production governed by the preference scale of the Central Planning Board, but it clearly applies also to production aimed at satisfying the preferences of consumers. He also mentions in a footnote a special case where prices are not needed to carry out the plan efficiently, but the special case, in his own words, is “extremely unrealistic.” Lange’s position is that it is possible to talk about an efficient allocation of resources only if the prices of the factors of production are equilibrium prices.
Lange has already informed us that one responsibility of the Central Planning Board is to fix the prices so as to balance the quantity supplied and demanded of each commodity. Why is this such an important task? Lange provides the answer:
The condition that the quantity demanded and supplied has to be equal for each commodity serves to select the equilibrium prices which alone assure the compatibility of all decisions taken. Any price different from the equilibrium price would show at the end of the accounting period a surplus or a shortage of the commodity in question. Thus the accounting prices in a socialist economy, far from being arbitrary, have quite the same objective character as the market prices in a regime of competition. Any mistake made by the Central Planning Board in fixing prices would announce itself in a very objective way—by a physical shortage or surplus of the quantity of the commodity or resources in question—and would have to be corrected in order to keep production running smoothly.Ibid., pp. 81–82.
Please read once more the first sentence in the passage from Lange just quoted. As we saw in the first section of this work, when plans are made independently, there is always the possibility that they will not be compatible. Lange is fully aware of the fact that the decisions (i.e., plans) of his managers might not be compatible. How is that possible? Suppose that ten managers, misled by an artificially low price, bid for eight tractors (and there are only eight tractors because the managers of the tractor plants were misled themselves by the artificially low price of tractors and so produced only eight). The result, of course, would be a shortage: there is no way all ten plans could be implemented. Does the phrase “anarchy of production” spring to mind? How could it not?
Lange has told us that if the Central Planning Board makes a mistake by fixing prices too low, there will be a shortage and production will not run smoothly. That is a bit of an understatement. Consider the case in which ten managers want eight tractors. Not only will two would-be users of tractors find it impossible to implement their plans, the plans of other would-be producers could suffer a similar fate. Indeed, many of the plans whose content depends on the content of the plans of the two managers who do not get the tractors would suffer a similar fate. No tractors? No grain. No grain? No flour. No flour? No bread. No bread? No thanks.
What Lange has told us in the passage we have been examining can only be called astonishing. Any price in the entire system that is something other than an equilibrium price will cause problems—and will cause problems to the extent that the plans of the producers are compatible with one another. Out of chaos, order? Out of order, chaos. And who is responsible for the existence of a price that is not an equilibrium price? Who, if not the Central Planning Board that fixed it? The obvious question is, why permit the Central Planning Board—or any body—to fix prices? Why not permit buyers and sellers to set the proper prices themselves? The answer, of course, is that if the state is a Single Owner, there can be no buyers and sellers. Lange’s prices for the factors of production are ersatz prices because they have to be.
In the passage we have been examining, Lange never tells us what will happen before the Central Planning Board has corrected its mistake. Assume that the Central Planning Board sets the “price” of a tractor at one hundred thousand roubles, that eight tractors are available, and that ten managers want those tractors at that “price”. What procedure will determine which eight of those ten managers get the tractors? Only three (I here ignore the possibility of bribery) methods can be adopted: first come, first served; a lottery; and an allocation.
First come, first served: the tractors are acquired by the first eight managers who place dibs on them. In technical language this is known as a queue. A lottery: stick the names of all would-be “buyers” in a hat and extract the appropriate number of names. This might not be the worst solution, but it is difficult to believe that any self-respecting “scientific” socialist would adopt it. An allocation: someone, presumably from the Central Planning Board, allocates the eight tractors to eight of the ten would-be “buyers.”
The lineaments of Lange’s response to Mises should now be clear. It is time for a verdict.
C. The Verdict
In the article published in 1920 Mises argued that socialism and production directed by economic considerations are incompatible. With no market for the factors of production, monetary calculation is impossible. Because no substitute for monetary calculation exists, there can be no economic calculation. Because economic calculation is impossible, no attempt can be made to deploy resources in an economical manner.
Did Mises overstate his case? Not only did Mises not overstate his case, the argument against socialism that he presented can be made even more comprehensive and compelling. As Murray Rothbard has shown,See Rothbard (1962, 548–49). the argument that Mises advanced applies not merely to one type of owner, the state, but also to any other Single Owner. In addition, one can also assert with absolute confidence that central Planning (i.e., Planning by the state) is impossible whenever the task of planning the production of everything, i.e., producing a Plan, is too great a task for any one planner to accomplish. If central Planning is impossible, how does that square with what took place in the Soviet Union? As we will see in the next section, central Planning never existed in the Soviet Union.
What was Lange’s response to Mises’s argument? Did Lange deny that prices for the factors of production are necessary for an efficient allocation of resources? Deny it? He insists on it—and notes that those prices had better be equilibrium prices or else. Did Lange argue that economic calculation is possible in the absence of monetary calculation? No, he quotes with approval Kautsky’s rejection of such a notion.See Lippincott (1939, 136–37). How, then, did Lange rebut Mises? He did not. He “rebutted” Mises by conceding the very points that Mises made. Nice work ... if you can get it.
What was Mises’s verdict on Lange’s “rebuttal”?
It is therefore nothing short of a full acknowledgment of the correctness and irrefutability of the economists’ analysis and devastating critique of the socialists’ plans that the intellectual leaders of socialism are now busy designing schemes for a socialist system in which the market, market prices for the factors of production, and catallactic competition are to be preserved. The overwhelmingly rapid triumph of the demonstration that no economic calculation is possible under a socialist system is without precedent indeed in the history of human thought. The socialists cannot help admitting their crushing final defeat. (Mises 1966, 706)
Well put.
V. PRODUCTION IN THE SOVIET UNION A. The Structure of the Five-Year Plans
Did Joseph Stalin ever draft a Five-Year Plan by himself? Did anyone else in the Soviet Union ever draft a Five-Year Plan by himself? “Don’t be absurd—the length of the first Five-Year Plan was approximately forty thousand pages.“In Russia the authorities decide that in a particular year there shall be woven so many thousand yards of cotton cloth; and they publish this decision, or perhaps we should rather say this good resolution, somewhere in the forty thousand pages of their Five Year Plan.” (Wootton 1935, 17) The Five-Year Plans were the product of the collaboration of countless central planners.” Indeed they were—and therein lies the problem. Did Joseph Stalin ever read a Five-Year Plan? Did anyone else in the Soviet Union ever read a Five-Year Plan? Allow me to answer the questions: “Don’t be absurd—the length of the first Five-Year Plan was approximately forty- thousand pages.”
Let me see if I have this straight. If every Five-Year Plan was really a collection of disparate plans produced by different parties and if no one ever even read all of those disparate plans, who then combined all those disparate plans into a unified plan of production devoid of incompatible elements? Who engaged in the direct coordination of all of the plans of production? Who served as the uber-planner? The answer, of course, is, “No one.”
Every Five-Year Plan was a mish-mash of different plans that were, so to speak, stapled together and then fobbed off on the credulous as a Plan.Cf. Polanyi (1951, 134):Bearing this in mind, let us now examine the structure of a national production plan. Such plans state the sum of various types of goods and services that are to be produced. The products are divided into classes and sub-classes. We may see for example Industry and Agriculture as our main divisions. Then Industry may be subdivided into Production of Raw Materials, Finished Products and Industrial Services, while Agriculture may again fall into parts, such as Food Production, Forestry and Raw Materials for Industry. Each of these classes can be subdivided again into sub-classes and this process can be continued until we finally come down to the proposed quantities of individual products, which form the ultimate items of the plan. At first sight, this looks exactly like a true plan, namely like a comprehensive purpose elaborated in detail through successive stages; the kind of plan, in fact, which can be carried out only by appropriate central direction. But in reality such an alleged plan is but a meaningless summary of an aggregate of plans, dressed up as a single plan. It is as if the manager of a team of chess-players were to find out from each individual player what his next move was going to be and would then sum up the result by saying: “The plan of my team is to advance 45 pawns by one place, move 20 bishops by an average of three places, 15 castles by an average of four places, etc.” He could pretend to have a plan for his team, but actually he would be only announcing a nonsensical summary of an aggregate of plans. It is no mere play on words to say that the existence of central planners almost certainly precludes the existence of a central Plan. If there are central planners, there must also be an uber-planner who directly coordinates all of the different plans made by those central planners. Absent that uber-planner, there is no central Plan. The only possible conclusion one can reach is that although central planners existed in the Soviet Union, central Planning did not.Cf. Lavoie (1985, 156):The point is not only that the Soviet model has performed badly but also that the extent to which the Soviet economy has managed to muddle through corresponds to the degree to which its planning agencies have relinquished effective control over economic decisions to the plant managers. In a very important sense the Soviet economy is not really a centrally planned economy at all. As Eugene Zaleski concluded in his monumental study of the Soviet economy, “The centralization of power does not imply an equal concentration of decision-making authority, and the formal appropriation of all power does not carry with it the ability to exercise that power.” As his research shows, “The existence of ... a central national plan, coherent and perfect, to be subdivided and implemented at all levels, is only a myth. What actually exists, as in any centrally administered economy, is an endless number of plans, constantly evolving, that are coordinated ex post after they have been put into operation.” In short, what exists is not planning but economic rivalry.
Incidentally, when I refer to the length of a Five-Year Plan as approximately forty thousand pages, I trust that it is understood that I am referring to what should be called the abridged versions of those Five-Year Plans. The forty thousand page monsters were really only outlines that needed to be fleshed out as they were distributed to lower and lower levels of the food chain. Although I can give no reference to support my figures, by the time the Five-Year Plans reached the level of the plants or enterprises where production actually took place, the length of those Five-Year Plans had to have numbered in the tens of millions of pages, maybe even in the hundreds of millions. Ideal candidates to tote to the beach this summer? Nyet.
B. Economic Calculation in the Soviet Union
If economic calculation requires prices for the factors of production and if there were no markets for factors of production (labor excepted) in the Soviet Union, it might be tempting to conclude that economic calculation was impossible in the Soviet Union, that central planners could not even attempt to deploy resources in an economical manner. That conclusion would be false. We saw earlier that prices can help producers decide what to produce and how to produce it, can help them when they make their plans of production. The absence of prices for the factors of production inside the Soviet Union did not mean that no prices for those factors were formed outside the Soviet Union.
Consider the following case. A plant that will generate electricity is going to be built in the Soviet Union. Should the burners be fueled by natural gas or by oil? Central planners in the Soviet Union could “cheat” by peeking at the prices for which the two commodities were sold in the markets of the world—and use that information to help them arrive at a decision. Inside the Soviet Union the state may well have been a Single Owner (insofar as the Five-Year Plan was concerned, it was); in the world at large, that state was but a single owner. Economic calculation was possible in the Soviet Union but only because the world contained a multiplicity of owners.Cf. Mises (1951, 136):The attempt of the Russian Bolsheviks to transfer Socialism from a party programme into real life has not encountered the problem of economic calculation under Socialism, for the Soviet Republics exist within a world which forms money prices for all means of production. The rulers of the Soviet Republics base the calculations on which they make their decisions on these prices. Without the help of these prices their actions would be aimless and planless. Only so far as they refer to this price system, are they able to calculate and keep books and prepare their plans. Their position is the same as the position of the state and municipal Socialism of other countries: the problem of socialist economic calculation has not yet arisen for them. State and municipal enterprises calculate with those prices of the means of production and of consumption goods which are formed on the market. Therefore it would be precipitate to conclude from the fact that municipal and state enterprises exist, that socialist economic calculation is possible.
C. The Coordination of Plans of Production in the Soviet Union Planning the production of everything produced in the Soviet Union was a task no mere mortal could have accomplished. The task of planning production was therefore sub-divided—there was a division of intellectual labor in the Soviet Union. Alas, the task of directly coordinating all of the plans of production made by the central planners was also a task no mere mortal could have accomplished.
We know that all of the plans of production made in the Soviet Union were never directly coordinated. How, then, were plans of production coordinated? Were they coordinated? The fact that the direct coordination of all of the plans of production was impossible does not mean that the direct coordination of some of those plans was impossible. There can be no doubt that the direct coordination of plans of production did take place in the Soviet Union, but the direct coordination of plans of production will only take you so far. Indeed, it may even create its own problems.
In order to illustrate what I mean when I say that the direct coordination of plans of production will only take you so far, let us make as favorable an assumption as possible about the quality of work done by the central planners in the Soviet Union. Assume that one of the Five-Year Plans called for the production of two new tractors at each of five different plants and the delivery of one new tractor to each of ten different state farms. We will also assume that the new tractors were included in the plans of production made for those state farms. No central planner has made a mistake: all the relevant plans of production are compatible. Now assume that a fire occurs at one of the plants with the result that only eight new tractors are produced. We now find ourselves in the same situation we found ourselves in previously when discussing Lange’s system, eight tractors with ten suitors.
Ten “farmers” plan (hope?) to acquire (the word buy should be conspicuous by its absence) a new tractor and to use that tractor to increase the output of wheat. Four tractor plants each plan to release (the word sell should be conspicuous by its absence) two new tractors to the appropriate parties. It will no longer be possible to implement the ten plans of production made for the ten state farms. The plans of production made for two state farms will need to be revised, and some procedure will have to be selected in order to deal with the shortage of tractors. Before we examine how the problem was solved in the Soviet Union, let us ask ourselves what did not occur.
The eight tractors were not sold to the highest bidders. Why not? The plants where the tractors were manufactured did not own the tractors. Those tractors—and the plants that produced them—were owned by the state. And the ten suitors? The ten state farms were also owned by the state. How do you sell something to yourself? You cannot. A voluntary exchange requires two owners. The “market” for those eight tractors was never cleared by the direct coordination of plans to buy and to sell because there was no market, and there was no market because there were no buyers and sellers: there was only one owner. How, then, was the “market” for tractors cleared in the Soviet Union? We will return to the subject shortly.
What else did not occur in the Soviet Union? A great deal of the coordination of plans of production that occurs in a free market is effected indirectly, is effected by the direct coordination of plans to buy and to sell. Where there are no plans to buy and to sell, there can be no indirect coordination of plans of production. We saw in the previous part of this section that central planners in the Soviet Union could “cheat” by using prices that were formed outside the Soviet Union to help them make their plans of production. One cannot “cheat” when it comes to the indirect coordination of plans of production. The absence of a market for capital goods and land inside the Soviet Union made the indirect coordination of plans of production that required the use of capital goods or land impossible. Put differently, the indirect coordination of plans of production was illegal in the Soviet Union.
Back to the eight tractors. Who got them, and why? If we ignore the cases where the manager of a state farm bribed the manager of a tractor factory (an extremely common practice in the Soviet Union), the tractors were allocated. The winners were selected at a higher level of the food chain. What criteria were used to select the winners? The usual suspects. Was the manager of State Farm No. 7 a crony of a powerful bureaucrat? A relative? Married to a relative? Willing to pay a bribe to a powerful bureaucrat? Allocation by its very nature is arbitrary. For that reason one cannot produce a formula that would enable one to specify the winners. Let us move on to a different subject, the revision of plans of production.
Producing a Five-Year Plan was an arduous task. So was revising a Five-Year Plan. Consider the task the central planners would have faced as a result of the fire at the tractor plant. Not only would it have been necessary to revise the plans of production made for one tractor plant and two state farms, it would also have been necessary to revise all of the plans of production that had been directly coordinated with the plans of production made for those two state farms. Fewer tractors presumably means less fuel consumed. Plans for the production or distribution of fuel will need to be revised. Fewer tractors presumably means less wheat produced. Less wheat produced presumably means less flour. Does that mean that the planned expansion of a flour mill should be placed on hold? Less flour presumably means less bread. Or does it mean less pasta? Or does it mean less bread and less pasta? If less bread is going to be produced, will it be necessary to revise plans made for the production of jam? How many millions (tens of millions?) of pages will this revision of a Five-Year Plan require?
Revising a Five-Year Plan was so difficult that it was often revised only at the end of the period to which it applied. One tabulated the results that had been achieved during the period in question, one then revised the numbers in the original Five-Year Plan, and, abracadabra, another successful implementation of a Five-Year Plan.Cf. Steele (1992, 267):The Soviet economy never was planned in the sense that a group of people at the top were able to work out what everyone should do and then tell them to do it. “Plans” were published: five-year plans, which generated yearly, quarterly, and monthly plans, and, of course, the attempts to implement these plans did have major effects. But the plans were usually issued after the commencement of the period to which they applied, and were always amended repeatedly in the course of “implementation.” When the government triumphantly announced that the five-year plan had been fulfilled, this was a drastically different document than had been first published under that name about four years earlier. Let us give credit where credit is due. Central planners in the Soviet Union were able to achieve two things that might previously have been thought impossible. I said earlier that all plans are prospective, that no one ever makes a plan to do something two years ago. In the sense just described, a Five-Year Plan was really a plan to do something during the previous five years. And—wonder of the ages—the plan succeeded.
The other achievement may have been even more spectacular. Not only was the Soviet Union always awash in plans of production that could not be implemented because the content of those plans was incompatible with the content of other plans, i.e., in plans of production that had not been coordinated, the Soviet Union was always awash in plans of production that could not be implemented because they had been directly coordinated. Consider the case of the fire at the tractor plant. One could not implement the plans of production made for the two state farms that did not get the new tractors—nor any of the other plans of production that had been directly coordinated with those two plans—not because they were incompatible with the plans of production made for the tractor plants but because they had been directly coordinated with those plans.
Central planning takes the anarchy of production to a whole new level. You begin with central planners who could not possibly know all of the contents of the plans of production made by other central planners—you begin, that is, with the anarchy of production—and you allow them to directly coordinate as many of those plans as possible. It will not, of course, be possible to directly coordinate all of them. You then toss in a plan whose content is incompatible with the content of another plan—those two plans have escaped direct coordination—and the havoc you wreak is proportional to the extent to which the plans of production have been directly coordinated (where is the indirect coordination of plans of production now that we need it?). I am not even sure that the term “anarchy of production” does it justice. I think the term we need for central planning is “THE ANARCHY OF PRODUCTION.” After all, central planning really is the anarchy of production writ large.Cf. Brutzkus (1935, 49):It is obvious that an economic system which possesses no mechanism for co-ordinating production with the needs of society cannot be maintained. Socialism overcomes the “anarchy of capitalist production” by substituting a condition of super anarchy; and in comparison with this ‘super anarchy’ capitalism presents a picture of the utmost harmony.
CONCLUSION A distinction should be made between socialism, or ownership of some of the means of production by the state, and Socialism, or ownership of all of the means of production by the state. If the state owns some, but not all, of the means of production, it follows that the means of production have more than one owner. In the light of that distinction, Mises’s argument in the paper published in 1920 was that economic calculation under Socialism is impossible. It certainly was not his contention that socialism is impossible (see Note 29), nor was it his contention that Socialism is impossible (see Note 15).
Murray Rothbard extended the argument made by Mises by showing that the argument applied to all cases of Single Ownership, that economic calculation is impossible when all of the means of production are owned by any entity, not just by the state. One goal of this work was to take the argument against Single Ownership even further by examining the problem that would confront the Single Owner when it came time to plan the production of everything—the argument advanced by Mises and Rothbard dealt with the problem that would confront a Single Owner when it came time to plan the production of one thing. The Single Owner would never be able to plan the production of everything by himself—the mere suggestion that he would is ludicrous. The Single Owner would therefore be forced to employ a division of intellectual labor and farm the planning of production out to different parties.
The result of that division of intellectual labor would be a collection of disparate plans made by different people who could not possibly know all of the contents of all of the plans made by all the different parties. The result of that division of intellectual labor would be the dreaded condition known as the anarchy of production. In order to escape from its clutches—in order to ensure that all the different plans were compatible—it would be necessary for an uber-planner to directly combine all the disparate plans into a unified plan of production as a whole. That clearly could not have occurred, and it is ludicrous even to suggest otherwise. Nor would the Single Owner and his minions be able to escape from the clutches of the anarchy of production and all that it entails by enlisting the services of the indirect coordination of plans of production, which is effected by the direct coordination of plans to buy and to sell: the Single Owner, after all, is nothing if not the Single Owner.
It should now be clear that Planning itself is impossible, that the creation of a unified plan of production as a whole, i.e., a Plan, cannot be achieved. It follows, of course, that central Planning, or Planning by the state, is impossible. It does not follow that central planning is impossible. Central planning (central plans-ing?) isn’t impossible, it is merely disastrous, and it is disastrous because it makes the indirect coordination of plans of production impossible. How so? The problem is the same as the problem of economic calculation under Socialism: where there is only one owner, i.e., a Single Owner, there can be no buying and selling.
What is it that makes the division of intellectual labor that occurs in a free market fruitfulCf. Rothbard (1962, 765–66):One reason why economics has tended to concentrate on the free market is that here is presented the problem of order arising out of a seemingly ‘anarchic’ and ‘planless’ set of actions. We have seen that instead of the ‘anarchy of production’ that a person untrained in economics might see in the free market, there emerges an orderly pattern, structured to meet the desires of all individuals, and yet eminently suited to adapt to changing conditions. In this way we have seen how the free, voluntary actions of individuals combine in an orderly determination of such seemingly mysterious processes as the formation of prices, income, money, economic calculation, profits and losses, and production. and the division of intellectual labor that occurs under central planning barren? In the latter case there is no underlying division of ownership. The planning of production occurs within the boundaries set by ownership. Where there is a Single Owner, there are no boundaries. No entity in a free market needs to coordinate all of the plans of production because no entity in a free market is responsible for planning the production of everything. The only plans of production that it needs to coordinate are its own.
All of the plans of production that are made in a free market are ultimately coordinated because the parties that made them have to coordinate them: a plan that cannot be implemented because its content is incompatible with the content of another plan has to be revised. A great deal of that coordination is effected indirectly, is effected by the direct coordination of plans to buy and to sell. The “fact” that the plans of production that are made in a free market are never coordinated isn’t an argument in favor of central planning. Rather, it is a gross falsehood that can only proceed from gross stupidity—or from something worse.
Jeff Deist: Professor Bylund, you grew up in Sweden. What stands out from your childhood?
PER BYLUND: I grew up in a suburb of Stockholm, separated from Stockholm by just a lot of nature. It’s close enough to be part of the Stockholm metropolitan area, but far enough away from it to be on its own.
When I grew up in the 70s and 80s, I was given a very romantic view of Sweden and how everything worked, but I only realized later it wasn’t very true. It was the happy 80s, so there was no end to public funds for anything. Everybody went to free dental care and everybody had their teeth fixed, so everybody could have good smiles. I did that as well. During the early grades — from first through sixth grade — we had a lady who was hired only for one task. She visited each class once a week with a big tray of very colorful little plastic cups with fluoride. You were supposed to just swoosh that fluoride in your mouth between your teeth and then spit it out, but the beauty was that we got to keep the cups, so that was something that all the children collected back then. We got hundreds of those different fluoride cups in different colors. That gives you sort of a taste of what growing up in Sweden in the 70s and 80s was like. No problems. More money and government takes care of everything, basically.
JD: We hear a lot about Scandinavian models of governance. What can we learn from Sweden today, a country of 10 million people?
PB: We can learn a lot. Sweden is a story that goes back more than the past 150 years — going from being the poorest country in Europe to being the world’s fourth richest in 1970. That’s totally a free market story. It’s about deregulation, it’s about limiting the powers of government. It’s about separation of powers between the king and the parliament. There was lots of investments in infrastructure, but only in the supportive sense. There was not a whole lot of welfare state. That meant the welfare state started to grow, but not as fast as the economy, which means that the economy can cover for all the inefficiencies of the welfare state before the 1970s. And then, the more important lesson — or the not-so-common lesson — would be that the welfare state was started in 1970 and it really went berserk and it completely imploded after 22 years. So, that’s how fast it goes if you try to nationalize everything and really go for socialism.
You can see policies Sweden pursued back then are policies that politicians today are promising. One of the things that was a turning point in the 80s, at least policy wise and in people’s ideological consciousness was the Employees Fund. It was this new progressive proposal that the government would tax corporations and put part of their profits into a fund that was going to be run by the national labor unions. This fund had only one purpose and it was to reinvest that stolen profit into buying stocks in those corporations. It was nationalization, not of single businesses, but of the whole free enterprise system. And that was the wakeup call for the nonsocialist part of the Swedish population. As a result, there was a huge protest. If you know anything about Swedes, Swedes do not protest. The way we tend to say it about ourselves is that a Swede is really angry if he closes his fist in his pocket. You don’t get more out of a Swede. So, when you have tens of thousands of people protesting the government, of all things, in Sweden, it is a really big thing.
Beginning in 1970, progressive policies were enacted throughout that decade, depreciating the currency numerous times in a few years, just to cover the holes and increase exports to cover the expenses of the government’s progressive policies. Then in ’92, when the Swedish currency completely imploded, they set interest rates to 500%, trying to defend the fixed currency exchange rate. They couldn’t defend it, so they let it go and it immediately dropped substantially in exchange value. Then, surprise, it became a repeat of the Golden Century — from 1870 to 1970 — when government wasn’t the main driver of the economy. After 1992, all the parties agreed to cut back on the very generous universal welfare system. That is where Sweden is right now. The government is still very big even after they cut back a lot. Now since there is a little more money, they are discussing how to expand the welfare state, as politicians always do.
JD: As a young man in Sweden did you make a conscious decision to leave for America, or to become an academic?
PB: Yes, that was a conscious decision. I always was playing with the thought of having the whole world as a platform. I was always fascinated by, and dreamt in some sense, of moving to the US. That was a dream come true. Pursuing an academic career, that was a conscious choice. I was an IT consultant in Stockholm. I had a Master’s degree in informatics and I was working as a senior software developer and business consultant. But I spent basically all my time, when I’m not in the office, writing libertarian columns online. I published around 200 columns in one year on all different websites. Mises.org was one. And my then-girlfriend, now wife, simply asked me, “you don’t like your job, all you do is just study philosophy and economics, why don’t you quit your job and go back to school and pursue an academic career?” And like any man confronted by his woman, and being young, I immediately decided to do it.
JD: But why America in particular?
PB: The reason I ended up in the US is simple. I applied for PhD programs in Sweden, for three years. But I couldn’t get into those PhD programs. Part of the reason is that they are fully funded and are in reality full-time employments with an okay salary. You can only pursue a PhD in areas where you already have previous degrees. Swedish academia works like it does all over Europe. Your bachelor’s degree is very focused, and then you study your major and minor and nothing else. After that, you can pursue a Master’s and then you can pursue a PhD in the same discipline. I had, at that point, a degree in informatics that I was sort of basing my career on. And on the side, I was studying political theory at the university. I finished a Masters degree in that too. I was trying to get into a PhD program in political theory as a libertarian, and as a white heterosexual male. That made me sort of the last applicant that they would choose. I think the best year during which I applied they had four open positions in the country. I was not going to get any of those. I had one interview in three years. Then I sent my résumé to friends at the Mises Institute. I think the very next day, I get an email from Peter Klein saying “how about Missouri?” And that’s how I ended up in the US.
JD: Fast forward to today, and you’re a professor of entrepreneurship at the business school at Oklahoma State University. You’re very active on Twitter. You write for popular outlets like Entrepreneur magazine. Do you intentionally seek out a popular audience, beyond the parameters of a normal tenured professor?
PB: To some degree. I’ve been influenced by people like Joe Salerno, who says that an economist should really see economics as a vocation and not a professional career. I think that is correct. I also recall Mises saying that a public intellectual should be just that, a public intellectual. I realized the limitations of the classroom. I remember from my college career, you studied really hard for the test and then you go and party like hell to forget everything, so you have some space in your brain for the next test. People don’t really remember what they study a whole lot. But they do remember good stories and I think they need to be reminded over and over again of what the truth really is.
My job and my role as a professor is, yes, teaching in the classroom, and yes, do research, which is the main task. The job is also to reach out with everything I know and everything I’ve come across and with everything I learn to help others understand the world better. Today, most college professors are progressives and they definitely do not hesitate to take their own “arbitrary theories” of the world and make that their starting point in what they teach. So, I don’t see why I shouldn’t be able to tell the world about Austrian economics and how free markets work. For us as Austrians, it’s not as arbitrary as it is from a progressive perspective. We start with the action axiom and then we derive truths from there. It’s not an ideological thing. I’m spreading knowledge. I’m spreading what I know and what I understand. What I’ve learned doing this, both online getting comments from readers, and especially on Twitter, is that I get a lot of pushback. But I get a whole lot of questions too, and questions that make me have to rethink some things and dig deeper into my own knowledge. I use the classroom in the same way. I teach stuff that I know, but I encourage pushback and it’s all discussion-based, meaning I want them to push back and ask hard questions because that’s how we can all learn. It’s sort of a discovery process, overall, for both me and for others.
JD: You’re adept with Twitter. Despite the character limit, you don’t use it for trite self-promotion or sound bites. You actually create substantive threads.
PB: You know that’s really odd because Twitter is supposed to be this really fast medium — just slogans and stuff like that. I found out very quickly that the really long threads consisting of 30-35 tweets, with one argument building up throughout in those tweets, those are by far the most popular ones. Those are the ones that people retweet. Those are the ones that people like. Those are the ones that people connect with you and ask questions about. They go through private messaging on Twitter itself and that’s how I get the little following I have on Twitter. It’s totally through those longer ones, and it happens over and over again. When I think I write something really clever and really cool in just one single tweet, even if I retweet it a bunch of times, it just never takes off. People don’t really like slogans as much.
JD: A recent example of your Twitter campaign is a lengthy conceptual thread concerning value. People still struggle with the labor theory and marginal utility. They think cost, time, and inputs determine value, and ultimately determine prices. Why does this still trip people up more than a century after Böhm-Bawerk explained it?
PB: It is the power of economics, and I think it was Mises who somewhere said that the power of economics is to show people that it’s really the opposite of what it looks like. I think that is at the very core: people think they see things, they think they understand things, and they just create those patterns. The patterns do exist and they do observe the patterns, but they do not recognize the actual processes that create those patterns. And the role of the economist is to point out that these are the true processes, whereas everybody thinks that those processes are very different.
The labor theory of value was debunked by Böhm-Bawerk almost 150 years ago, and yet, it’s very much alive because that is where people start. They think of value as objective and they think of value as being the creation of labor. But it is really the other way around. We invest labor because we think we’re going to end up with something valuable. I think that is the very core of the Austrian school. It’s also a core insight that completely changes how you view the world and I use that a lot when I teach entrepreneurship. That’s something that entrepreneurs figure out themselves because they make so many mistakes following the objective-labor-theory-of-value type of view of the world. They realize that it doesn’t matter what they think or what they think they have seen, but value is truly in the eyes of the consumer. They have to figure that out and that’s their task. Entrepreneurs in general, especially experienced entrepreneurs, are truly and fundamentally Austrians.
JD: Even entrepreneurs focus too much on cost?
PB: Yes, it is strange, but people tend to think of cost, which makes sense, when you’re producing something. What do you have first? Well, the thing you have first is the cost, and because you assume that cost, you have a product that you can then potentially sell and make a profit. If you think about it in technological terms, it makes sense to start with the cost because there is value. But, as Menger showed us, that’s not the case. We pursue this end because we think the end is valuable to us. We expect value from this end and therefore we are willing to assume those costs. And there we go again. It’s exactly the reverse of what we think of the world, but people are really, really sure that it’s cost that creates value. Unfortunately, they are taught that in school, too. I mean, it’s intuitive. For most of us just observing the world, there isn’t much pushback, not even in school. Not in the first 12 years, not in college, even if they major in economics. They’re not going to understand subjective value, they’re just going to look at it as money values and it’s not until they encounter a professor associated with the Mises Institute, or Austrian economics, that they’re going to get some pushback. By then they’re already old and you know about old dogs and new tricks. It’s hard.
JD: Why did you decide to specialize in entrepreneurship and theories of the firm?
PB: It happened through Peter Klein. When I started, he was an assistant professor, still not tenured, in the Department of Agricultural Economics at Missouri. But agricultural economics is not “real” economics, if you ask any economist. The department was a little bit weird and marginalized to begin with and they are, of course, very focused on farming and agriculture. But there was also a focus on regional economic development because they are an outgrowth of the land grant mission as with many public universities. In this department, they had an eclectic approach to economics because there was already a group of professors doing entrepreneurship and transaction-cost economics. It was a little more practical and applied than a regular economics department.
But in my work there, when reading Ronald Coase, I immediately realized that something is completely and fundamentally wrong with his thesis. I couldn’t figure out exactly what, so I dedicated my dissertation to, in a sense, disproving him and drafting my own theory of why there are firms and what sort of function they have in the market economy. That idea was interesting because it also has to do with the Mises Institute.
I was sitting in the second floor of the Mises campus as a Research Fellow during one of my first summers as a grad student and sifting through books by Mises. I was reading up on, and trying to figure out, what the heck is going on in the economy overall and how to understand where productivity comes from, and where wealth comes from. And it suddenly just struck me that maybe it has something to do with specialization. I remember going immediately to Joe Salerno’s office and asking him if he thought that was a good project to work on, and he looked at me and said, basically, “huh? I’ve never heard that explanation for the firm before.” That, of course, was enough for me to think that that’s something worth pursuing. If he has never heard of it, then obviously there’s got to be something there, or I’m completely wrong, and if so then I’m going to figure that out. Peter totally approved of the idea too, and I pursued that. My dissertation is, in a sense, a refutation of Coase’s concept of the firm. My position was, “how can you have firms if you don’t have the entrepreneur at the very core?” So, that became it.
And how did I get into the professional academic career as an entrepreneurship professor? Well, there’s a bunch of luck and coincidence, because both Peter and I were in the Department of Agricultural Economics. It’s not an obvious path to move into the business school and start teaching and doing research there. I mean, as competitive as it is to try to get a tenure-track position, if you have training in a completely different discipline, then you’re basically excluded. So, how do you do that?
Here is where luck and coincidence play a part. I was playing squash with friends in grad school. One of them was in the Management Department where entrepreneurship is usually studied. It happened he was also playing squash with his advisor, who turned out to be the new department chair in Management. So, I played his advisor as well and the advisor said, “oh you’re an entrepreneurship guy, right? … We need someone to teach entrepreneurship because we don’t know anything about it and no one’s really interested in entrepreneurship in our department. Do you want to teach for us?” So, my first job after graduating was one year of adjuncting, which I can’t recommend to anyone because it’s nuts, and not really paid. I made less money being an adjunct teaching seven courses that year than I did as a grad student.
That year a research position at Baylor University also opened up, and they were looking for someone in entrepreneurship and policy. The position was also associated with free enterprise. It turns out that if you want something in entrepreneurship and policy, you are in a very bad position because entrepreneurship scholars know nothing about policy and those who do know something about policy are either political scientists or they don’t know anything about entrepreneurship because economics threw out the entrepreneur from their models a long time ago.
I was the only candidate for two positions and I fit in perfectly as an Austrian economist studying and teaching entrepreneurship. I got that research position. It was a three-year position and that gave me enough time to just do research and try to get published in the journals, which is necessary to get a job in academia. And that, in turn, led to my position now at Oklahoma State. It was quite a bit of luck and lots of coincidences. The reason I have a pretty good career, and a good position now, is basically because I was playing squash with the right people and because I happened to be with Peter and other professors doing entrepreneurship stuff. And now, of course, Peter is at Baylor, so we both moved away from agricultural economics.
JD: Distill for us your theory of the role of the entrepreneur, and your theory of the firm. How does the Austrian school inform your thinking?
PB: My focus is on studying the problem of production. We know that through the more intensive division of labor, we get more productive, but we also know that the market economy is decentralized. If it’s decentralized and it is also very specialized, that means that you have to also be compatible with everything around you in the sense that if you’re specialized, you use standard inputs to produce standard outputs in any supply chain or production process. So, how do you get from there to introducing highly specialized production processes? You can’t do it individually. I can’t suddenly specialize in the standard way of thinking of specialization, which is simply cutting up an existing task into smaller and smaller, moreand more narrowly defined subtasks. If I have this standardized task that I am carrying out, if I say “well, I’m really good at this one-third in the middle,” I can’t just do the one-third in the middle because that makes me incompatible with both the other standard inputs traded in the economy and I will not produce complete outputs that someone else can use. If I do the middle third, I have to combine my efforts with the first third and the second third. I have to work collectively with them to organize and coordinate the introduction much more intensively than a specialized production processes.
I developed this imaginary construct of this specialization deadlock. The deadlock is this: if we push people to just continue specializing as much as possible, we’re going to end up at a point where no one can specialize any further because that will make them incompatible with the economy, and then whatever they’re producing is incomplete. They will not be able to be part of any existing production process. And from there, of course, the solution is, in a sense, obvious. You need someone to come up with the idea for how to replace a part of the production process or the whole production process, whatever it is and coordinate those new tasks that need to be carried out. You need to create this whole process, in a sense, with new types of specializations that have not existed before. Obviously, the whole thing stands or falls with everything working out because if anybody fails in this new chain that you’ve created, it is itself incomplete and incompatible with the rest of the economy. In order to break free from the specialization deadlock, you need to create these islands of more intensive specialized production. This must be coordinated by and led by the entrepreneur, who Mises has as the driving force of the economy.
Ludwig Lachmann talks about it as the truth function of the entrepreneur: it is to change the capital structure of the economy which is exactly what this is. This is how you make the production structure more roundabout: by splitting tasks up in more specialized subtasks, introducing capital potentially to make this happen. For me, at least, it fits perfectly in how the market economist solves that problem of specialization itself.
JD: Mises characterized entrepreneurs as “uncertainty bearers” and Israel Kirzner characterized their alertness to opportunities. Is this a distinction lay people like me should care about?
PB: I think it’s very important to understand the role and function of entrepreneurship as creation of new goods and services, and new conceptualizations of goods and services. I like to call it more the facilitation of value, since value is in consumption. The consumer can create the value by simply consuming a good or service, but where do these goods and services come from? They come from entrepreneurs trying to figure out how to better serve the consumers. That makes it very clear that the judgment necessitated by entrepreneurship — and the uncertainty-bearing function and also the imagination of it — are really core to understanding the economy overall.
JD: When Mises says uncertainty that means risk, the possible loss of capital and time. We might call it skin in the game. As you know business school critics like Nassim Taleb say entrepreneurship and business acumen can’t be taught. Professors aren’t business people with skin in the game. Give us your take: can entrepreneurship be taught?
PB: The short answer is yes and no. What I mean by that is simply I don’t think you can teach how to be a successful entrepreneur. That’s pretty obvious because if you could teach that, then obviously I, and other professors, would know how to be successful in the marketplace, and then why the heck would we be professors instead of not making money in the economy? We do not know how to actually be successful, but we know how to avoid a lot of errors that people make. What you teach first is all the tools that are either necessary or have a function: accounting, marketing, and all this stuff that business schools teach. In terms of entrepreneurship per se, learning how to think about business and where value comes from can be taught and it has to do with what we were talking about before. Understanding value and how to get to it, is very important. There really are two components to this. The first part is to understand the economy — that is, sound economics — so you don’t start investing just before the bubble bursts, so that you’re not tricked by asset bubble thinking. The other part is to understand people, primarily consumers, being able to put yourself in their shoes and understand what would create the most value for them. What are the most urgent and important problems that they have? How can you satisfy their wants or help them move away from the uneasiness that they’re feeling? Those two aspects can definitely be taught. Maybe not completely, but enough to understand how to not mess up as an entrepreneur.
JD: Austrians suggest that many entrepreneurs don’t recognize how important monetary policy really is. Professor Bryan Caplan criticizes Austrian business cycle theory on the ground that smart business people could figure out the booms and busts central banks create, rather than fall prey to malinvestment. Do you think this holds up?
PB: Entrepreneurs are not specialized in economic theory, and why would they be? Economic theory is not always super applicable to what they’re doing, and there is an opportunity cost to learning stuff and deep diving into most of the aggregate data. So theory is probably not worthwhile. There’s also this little thing called profit. During a boom — even an unsustainable boom — you can make tons of money if you are investing right. And most entrepreneurs think they are investing right and they’re following signals that are false because the interest rates are too low. Even if they know that the bubble will burst, why would they sit at home and not get that money that is available for them? They can grab the money by running a business. What they need to do is get out before anybody else. They usually think that they can do that, when they see the signs. I don’t think even if you have the time and interest in learning business cycle theory, you would be a poor entrepreneur if you just said, “well, this is an unsustainable bubble, so I’m just going to sit this one out.” Besides, it could be an unsustainable bubble that lasts for 10 years, like we’ve seen now, since the financial crisis. Are you just going to sit on your hands and not make any money for 10 years just because you know that this bubble will eventually burst? That doesn’t make any sense at all. Many entrepreneurs do get out in time, so it’s not really about learning because every actual situation is unique in many ways. Learning the theory which tells you what is going on in universal terms, theoretical terms, that definitely helps you. But it doesn’t help you to get out in time because the timing of it is not down to the theory that can help you predict.
JD: I have one last question for you. Critics on both the Left and Right increasingly seem to claim economics is not a real science or discipline. Economists just provide intellectual cover for business interests. There are no economic laws, just policies that legislatures can command. I’d like your response.
PB: I think it’s silly. That’s my short answer. What it really shows is, in a sense, economics has made its own bed because economics is not very helpful. Economists, using math and throwing out the entrepreneur, what they’re doing is providing the planning tools for the central planner and they think that they can do it. The recent Nobel Prize is just proof of this, that they’re conducting experiments thinking that they can find real truths about how to produce better policy so that they can make micro adjustments to society and the economy and create better outcomes. What they’re missing is that we’re dealing with people, so it’s not truly mechanistic. But, just because it’s not truly mechanistic doesn’t mean that there aren’t patterns to it and regularities. There are regularities to the economy. But better understanding can be directly derived from us as people, and also from what we do, and especially our actions. We’re always trying to attain some value that we think is valuable enough for us to pursue. That’s the axiom that Mises develops with praxeology, and that explains this really well. The problem in economics now is that they have completely thrown out subjective value. Now they start with using proxies by looking at money price instead of subjective value because it fits their models better.
But now they don’t even know that there is such a thing. I was fortunate, I suppose. I took my advanced microeconomics course at Missouri, and was taught in the economics department and not in the ag commerce department. That professor started by saying, “we know that value is subjective. Assuming that we could still plot it in the utility function and use utils, we should be able to maximize it as well.” Then he started filling the blackboard with one big equation and the rest of the semester was trying to maximize this equation with using partial derivatives of different variables. He was part of the old guard in the sense that he recognized that value is subjective, but he just chose to disregard it. Whereas now, I don’t think there are any economists being trained in economics programs, at least not in the classical sense, because they are now technocrats. They don’t think about economic issues. They think about how to program different statistics programs and how to check their results for biases and then they come up with some clever explanation for their findings. They use economic terminology, but there’s really no economic understanding behind that at all. They’re trying to predict and they’re trying to get into a career in government basically, trying to help policymakers produce better policy, which is very different from the type of economics that we do in Austrian economics.
We’re trying to understand the world and help people become better people. We’re not trying to push people around the way you do with policy and always create new problems because that’s what policy ends up doing. There are both large and small problems, but still problems. This is because there are unintended consequences. They assume that people are not people. In other words, we can tell a story about what is actually going on, that people can understand and learn from.Real life entrepreneurs, they understand Austrian economics, they just don’t have the tools, the terminology or the theory. They have the experience telling them exactly what we know — that is Austrian economic theory is correct in how it explains the market economy and how it works. That’s how we can explain all these problems that come out of policy and all these errors made by politicians. We can, in this sense, predict or at least foresee all the suffering that people will have to go through simply because they want these quick fixes through policy that have never worked and will never work. Economics is a social science, but it’s definitely also a tool for uncovering the true state of the world and the true dynamics of the world. At present, there are really two categories of people who understand the world and understand the economy and those are experienced entrepreneurs and Austrian economists.
JD: Is it an overstatement to say most mainstream economists have no concept or theory of the entrepreneur at all? They think individuals are interchangeable widgets?
PB: The way they treat entrepreneurship is to look at startups. For these economists, the aggregate number of businesses and jobs being created is all they’re interested in. They have no conception of the entrepreneur as a person, or the entrepreneur’s function in the economy beyond just jobs creation. It makes me think of the famous Schumpeter quote about how studying the economy without the entrepreneurs is really Hamlet without the Danish prince.
Quarterly Journal of Austrian Economics 22, no. 2 (Summer 2019) full issue. ABSTRACT: One of the fundamental conditions for overcoming the economic disaster in Venezuela and being sure that a new government could not snatch away economic freedom again, is the desocialization of the economy. Following Rothbard (1992), we propose one of the required steps to achieve a real free market economy in a post-socialist Venezuela. In this paper we analyze, based on previous experiences, how to desocialize enterprises in this country, as well as the historical skepticism that socialist politicians, media, and economic elites have created against the capacities of Venezuelans to manage their own property. In addition, we provide a draft of a privatization law that minimizes the presence and control of government in this process, a requirement because of the historical trend of corruption and cronyism of all Venezuela’s governments. Also, we provide a general description of our proposal of distributing among Venezuelans by birth and legal age, all special taxes and royalties that oil enterprises have to pay to governments in such a way as to starve the government and consolidate its fiscal dependence with citizens to strength democracy and liberty. Finally, we conclude that even though it is fundamental, it is not enough just to desocialize enterprises, but also to apply other radical free-market policies oriented to increase the individual liberties and minimize as much as possible the State.
privatization — socialism — venezuela JEL Classification: B53, E32, E42, E58, G21 I. INTRODUCTION Venezuelans have become accustomed to the view whereby oil and all natural resources belong to the citizens. The mercantilist and socialist media has broadcast and instilled this false idea. The educational system also espouses this erroneous narrative. However, Venezuelans have neither received the proceeds from oil extraction, royalties, taxes and dividends nor been allowed to possess equity shares in the business. On the contrary, because Petróleos de Venezuela Sociedad Anónima (PDVSA, Venezuela’s oil company) is a state-owned company, governments are the only direct recipients of those benefits, which confers upon them a tremendous economic power and considerable independence from Venezuelan tax payers.
State ownership of the commanding heights of the economy is not an original policy created in the Chávez-Maduro regime, but an exclusionary economic institution resulting from an increasingly dominant combination of democratic socialism and mercantilism implemented by elites in power decades before the advent of Chávez (Faría and Filardo 2015). With such a huge economic power concentrated in the hands of political and economic elites, representatives of “the socialism of the 21st century” have been able to promote a varied array of destabilizing activities abroad and to increase their power hold in the country, which has morphed into an internationally recognized tyranny. Hence the prescience of Mises’s wisdom:
If control of production is shifted from the hands of entrepreneurs, daily anew elected by a plebiscite of the consumers into the hands of the supreme commander of the ‘industrial armies’ or of the ‘armed workers’, neither representative government nor any civil liberties can survive. (Mises 2008).
This paper, which is also inspired by (Rothbard 1992), abides by the principles of not confiscating people’s money, keeping taxes as low and simple as possible, and not allowing government ownership of firms. Furthermore, following the general approach to the privatization process argued in (Acevedo 2018), we present a proposal to desocialize not only PDVSA but all Venezuela’s state-owned companies and assets.
We understand that this process is difficult but not impossible to apply. In 2017 Transparencia Venezuela reported 526 state-owned companies. Therefore, other structural reforms necessarily have to accompany such property devolvement from the state domain to the private sphere; nonetheless, we will develop them in separate papers: monetary freedom, freedom to trade, rule of law and independence of the judicial system, flexibility of labor laws, minimization of government expenditures, and the systematic privatization of public services, among others.
In this paper, we explain the relevancy of desocializing enterprises in Venezuela and propose a desocialization law. In a nutshell, firstly, we discuss the historical skepticism on the capacities of Venezuelans to enjoy total economic freedom and be real shareholders of the enterprises currently run by the state. Secondly, we analyze the historical process of desocialization in countries with characteristics similar to those of today’s Venezuela. Thirdly, we propose a desocialization law justified with the socialist rhetoric that claims Venezuelans are the owners of the companies, thus to convert this fiction into reality, putting an end to deceptive and self-serving socialist narratives.
In addition, this paper provides a preliminary exploration of the issue of equally distributing among Venezuelans taxes and royalties that corporations in the oil sector are today legally forced to transfer to the government. The final goal is to starve the government constraining it to live off the people, a necessary condition for the firm establishment of the rule of law and democracy, contributing to replace the currently perverse practice whereby the people live off the government (Faría 2008).
Finally, we conclude that it is better to distribute shares among all Venezuelan citizens by birth aged eighteen years or older, while selling a relevant stake to foreign and domestic investors to attract managerial expertise. We contend that our proposal is better adapted to Venezuela’s institutional fragility than if we were to adopt other well-known alternatives implemented by Eastern European countries and England under the Thatcher government.
II. SKEPTICISM ON THE CAPACITIES OF VENEZUELANS: A HISTORICAL CURSE? In this section, we explore the roots of the belief, mainly disseminated by politicians and certain scholars, that Venezuelans are not capable of handling their own freedom and wealth in a proper manner. It is important to understand the origin of that stance because when we publicly state our proposal on the effective distribution of shares among all Venezuelan citizens by birth, aged eighteen years or older, we have faced hard skepticism, based upon an alleged lack of knowledge or ability of the average people.
Such underestimation is widespread and not only an exclusive characteristic of politicians and other elites. On social media, the lack of trust concerning how beneficiaries would manage their shares is commonly expressed. The populist rhetoric, implemented since 1958, has instilled a strong bias, to the point that there are people who do not believe in the power of healthy incentives and individual freedom but do believe in bureaucrats and other elitist groups deciding on behalf of all citizens. Nevertheless, this situation has a historical root since politicians and power elites have always undervalued the ability of Venezuelans.
After a brief review of Venezuela’s history, it is relatively easy to understand that the bulk of the independence heroes did not embrace liberal or libertarian ideas at all. The father of the nation, best known as the “Liberator,” Simón Bolívar, stated “Generally speaking, our fellow citizens are not yet ready to take on the full and independent exercise of their rights, because they lack the political virtues marking the true citizen of a Republic” (Bolívar [1812] 2003a, 6)
Nonetheless, that was not the only sentence expressing reluctance to believe in his fellow countrymen which the Liberator stated in his life. “Until our compatriots acquire the political skills and virtues that distinguish our brothers to the north, entirely popular systems, far from being favorable to us, will, I greatly fear, lead to our ruin” (Bolívar [1815] 2003b, 23). He also said:
Freedom, says Rousseau, is a succulent food but hard to digest. Our weakened citizens will have to strengthen their spirits mightily before they succeed in digesting the healthful nourishment of freedom. Their arms and legs numbed by chains, their sight dimmed in dark dungeons, and stricken by the plague of servility, will they ever be capable of marching with firm steps toward the august temple of Freedom? (Bolívar [1819] 2003c, 34)
Another sentence attributed to Bolívar, showing the dawn of this “historical curse,” is: “these gentlemen believed that they were in Greece, building air republics that are not consistent with the situation and reality of the Venezuelan people, not prepared for the supreme good of freedom” (Acevedo and Andrade 2018, 1). In this statement, Bolívar referred to the people who wrote the first constitution of Venezuela in 1811, which was—by the way—federalist and “inspired in the US constitution and the politic liberalism of that moment” (Acevedo and Andrade 2018, 1).
Aguiar (2018, 1) argues that Bolivar’s sentence in Cartagena in 1812, “the Venezuelan people, not prepared for the supreme good of freedom,” has been used and applied in the political context in Venezuela in at least two specific moments, 1959 and 1999. Venezuelan politicians and power elites have used—and keep using—the same phrase to justify the need for a “big, powerful and indulgent dad”—represented by a big state, and a person—the president—whom people have to trust and let decide everything on behalf of everybody.
It was in 1821 when, finally, the independence of Venezuela was reached. Nevertheless, as Faría and Montesinos (2016, 214) state “…while Americans founders wanted freedom, Venezuelan generals (caudillos) wanted independence from Spain…. Venezuela’s independence was established in 1821 by European descendants and for European descendants.”
From 1821 to 1957, Venezuela did not embark on a “real” democracy as it did from 1958—with all of its weaknesses and defects. Before this year, many caudillos—who took power and control of the nation through revolts and/or incipient forms of democracy—ruled the country. Other particular characteristics of this term were political and constitutional uncertainties—25 constitutions were “made to cover the desires and needs of the “caudillo” who ruled the country… federalism was increased and decreased depending on the interests of the government” (Acevedo and Andrade 2018, 1). Nevertheless, in the first half of the 20th century, Venezuelans tasted just one part of freedom, Acevedo and Cirocco (2017, 5) state, about the 1914 to 1957 timeframe:
…during those years, of the five presidents we had, four were dictators and generals of the army. Our civil and political rights were restricted. We didn’t have freedom of the press, for example; we didn’t have universal suffrage. But, while we lived under dictatorships, we could at least enjoy high levels of economic freedom.
When Rómulo Betancourt, a Social Democrat, won the presidential election in December 1958, the democratic era started in Venezuela. For the first time, citizens enjoyed civil and political rights that did not exist before, nevertheless, such “gifts” of democracy came along with a cost, economic freedom. Acevedo and Cirocco (2017, 6) said about Betancourt that “he started destroying the economic institutions we had by implementing price controls, rent controls, and other regulations we hadn’t had before. On top of that, he and his allies created a new constitution that was hostile to private property.” The worst of all this is that, currently, Betancourt’s admirers and a great number of social media influencers still justify those policies, saying that Venezuelans were not prepared to enjoy total freedom.
In addition to the politicians and elites’ arrogance that underestimates the capacities of Venezuelans, we found other potentially limiting factors for the implementation of our proposal, which involves embracing high levels of economic freedom: cultural factors such as trust in othersSee Arrow (1972). and the gap between individualism and collectivism;See Heine (2018). the historical origin of the country’s laws;See La Porta, Lopez-de- Silanes, and Shleifer (2008). and the legacy of human capital.See Faría and Montesinos (2016) and Bennett et al. (2017).
Faría and Montesinos (2016, 225) argue about the importance of the above-mentioned factors. First, trusting others is necessary to embrace economic freedom, but “Venezuela is among the countries of the world with the lowest trust level.” With regard to the gap between individualism and collectivism, these authors state that individualistic societies privilege natural rights while collectivistic societies create a population characterized by conformity and “discourage individuals from dissent and standing out.”Individualistic cultures prefer rules applied to everyone, whereas collectivistic cultures emphasize friendship for the administration of justice, see Bennett et al. (2019). Not surprisingly, on measuring individualism, Venezuela is located in the lowest quartile among the rated countries. The origin of a country’s legal system can explain the level of state meddling: French civil legal tradition allows more interventionism than the English common law system. Venezuela, these authors say, “can be construed as an extreme case of a country with a legal system originating in French civil law” (Faría and Montesinos 2016a, 226). There is “strong evidence suggesting that cognitive skills, a proxy for the quality of education, have a systematic positive effect on the quality of economic institutions” (Faría and Montesinos 2016, 227), which represents another serious problem because, as they also state, “Lamentably, a great misfortune still plagues Venezuela’s educational quality… Venezuela within Latin America ranks next-to-last in translating years of schooling into cognitive skills, as measured by international test scores” (Faría and Montesinos 2016, 227).
Finally, the context explained in this section cannot be omitted: the bias against freedom and the distrust regarding individual capacities that the historical and political processes have created, with the intent to preserve an omnipotent, interventionist and socialist state assuring the monopolistic management and control of power and of the commanding heights of the economy.
HOW TO DESOCIALIZE ENTERPRISES IN VENEZUELA At this moment (circa March 2019), Venezuela is one of the most commented news stories around the world. President Trump’s administration in the US and at least 30 more countries are leading efforts to help Venezuelans recover freedom. Nonetheless, this attempt seems to just focus on the “political freedom” arena, because the recovery of “democracy” is apparently the unique objective. Sadly, Venezuela has experienced that just democracy is not enough for long-run prosperity. Indeed, Venezuelans enjoyed such a political system for more than 40 years, but rooted in an omnipotent state, overwhelmingly independent of its citizens in fiscal terms and considered the “big dad” (Acevedo and Cirocco 2017, Faría 2019). In our view, this has been the main cause of the progressive deterioration leading to the current tyranny, a cause that will continue even in the case of a potential change of the rulers.
Since the main objective of this paper is to propose a privatization program—based upon the Austrian School’s view, to the best extent possible—it is important to start our theoretical framework by reviewing the specialized literature on this matter. Rothbard (1992, 66) shows the guidelines that we have adapted after considering the particular situation of Venezuela. He argues that “you cannot plan markets” in a desocialization strategy and that the only thing you can do is “set people free so that they can interact and exchange, and thereby develop markets themselves” (Rothbard 1992, 66). He explains the impossibility of planning capital markets, as occurred in the failed attempts of some Western economies to develop stock exchanges. For these reasons, Rothbard (1992, 66) explains “stock markets cannot be planned… you cannot have markets in titles to capital if there are still virtually no private owners of capital in existence.”
Nevertheless, the history of Eastern European countries demonstrated that some privatization programs have succeeded. For example, the Georgia case, after a Social-Democrat government and some attempts of privatization involving a lot of corruption, cronyism, and political influences, the new real pro- free market government started a privatization program headed by Bendukidze. To the best of our knowledge, it is one of the most successful ones that we have researched during the writing of this proposal. Some other attempts of desocializing enterprises, with relative success, are not difficult to find in recent history. The privatization program headed by Lewandowski in Poland, with all its pros and cons, is another clear example that when rulers let free markets rule, things go right.
For the sake of brevity, in this research, we just address the main issue of desocializing the enterprises currently owned and managed by the government. Nevertheless, we develop proposals for similar processes that should take place in other areas, such as taxes and money, in separate papers. We are quite conscious that this is not an isolated action and that, on the contrary, it should be implemented as part of a general plan which minimizes or prevents government’s meddling in critical economic issues.
Problems Desocialization of Enterprises Will Face
In this paper, we try to cover the most relevant privatization topics of Venezuela’s enterprises, based upon its current situation; nevertheless, the literature on this matter is wide and varied. Since Venezuela would be in a breakpoint by the moment of a potential implementation of this proposal,We admit that the only chance our proposal has to be implemented is that a new real pro-free market government be established. Nevertheless, the political history and the current closeness of the Interim President, the fact that his political party belongs to the International Socialist, and the highly publicized Keynesian “The Morning After” plan, best known in country as “Plan País,” make it almost impossible for our desocialization proposal to be considered in the short run. Our hope is that someday, as in Georgia, the free-market principles win not only the battle of ideas but also the political war taking place in Venezuela. we need to analyze the historical problems and failures of such a complex action as privatization. The people and the government implementing our program might understand that desocializing—in any economy—“is almost never painless” (Kikeri and Nellis 2002, 20). Strictly speaking, some attempts at privatizing in other countries have ended in tremendous failures,See (Li, Wang, Cheung, and Jiang 2011). because as Carter (2013, 108–09) argues, “privatization involves changing institutional archetypes which structure the governmental, societal, and economic arrangements and behaviors; it can be both challenging and problematic.” However, those failures are the proof of what Rothbard (1992) stated: the bulk of Western economists who were consulted on how to desocialize and build a free market economy had to handle not only the obstruction of bureaucrats but also their own confusions and misunderstandings about how real free markets function.Rothbard (1992) says: “Western economists have accepted the view that there is no calculation problem under socialism.” For this reason a great part of them have failed in their wrong attempts to set up a real free market economy.
Therefore, when a country is breaking the chains of socialism or communism and wants to desocialize, it is not only important to transfer the ownership from the public sector to private hands, but to really implement a free-market economy as well. In a general context, we understand a real free-market economy as one in which the state is limited and minimal, totally dependent on citizens, and unable to intervene in the economy, where natural rights are constitutionally enshrined and highly protected, and where private property and wealth—well created and acquired—are sacred. With such an economy, we are confident that our proposal will overcome the possible cons of privatization that Goodman and Loveman (1991, 4) argue. These authors say, “Neither public nor private managers will always act in the best interests of their shareholders,” nevertheless free markets will give managers the incentive to be efficient or, otherwise, competition will push them off the market. Following these authors’ reasoning, when the new privatized enterprises have free competition, the presence of other companies will be an excellent factor “to discipline managerial behavior” (Goodman and Loveman 1991, 4). Nonetheless, if a free-market economy is not implemented, although Venezuela’s rulers apply any proposal of privatization, “continued governmental involvement will likely be necessary” (Goodman, and Loveman 1991, 5)
Other problems that privatization processes bring along with them are corruption and cronyism. The example of Uganda in the 1990s is representative. The government controlled the complete privatization process, and, although the International Monetary Fund (IMF) and the World Bank (WB) argued that this African country was a great example of economic recovery, and—as Venezuelan Keynesians expect to have—these institutions provided Uganda with hard financial support.“The Morning After Plan” or “Plan País” involves borrowing at least 100 billion US$ from the IMF to finance the recovery of state-owned enterprises, subsidies to producers, and other Keynesian strategies which just represent more state interventionism. Some economists who are also deputies of the National Assembly—belonging to the opposition faction—have declared that public expenditures will not be decreased but exponentially increased to “re-activate” the economy. Haussman, the “father of this plan,” is a former Minister of the Central Planning Economy Office of the second term of Carlos Andrés Pérez, and currently Director of the Center of International Development (CID) at Harvard. He has publicly declared that the way he sees the Venezuelan economy now is analogous to a taxi driver who has his car but no money to buy gasoline, so with his plan he will be “given” the gasoline for free. We accept that, at this moment, the critical conditions of Venezuela require the implementation of some social helps, but we would agree if such helps were provided through direct subsidies; in other words, by subsidizing the demand and not the supply. In a nutshell, this plan is just the second chance of a failing plan applied by Keynesians in Venezuela in the 1980s, according to which the state will continue to be the great owner of the commanding heights, boost the economy through public expenditure financed with more debt, monopolize the monetary market, have the power to control and intervene, and promote a false free-market economy. The Keynesian plan mainly aims at solving short term problems associated with the business cycle, while paying little attention to the economic institutional quality which determines whether the economy experiences high and sustained economic growth (Cirocco, Faria, Morales, and Navarro 2019). Despite funds and advice provided by international donors, the lack of transparency and ability to check the “government divestiture decisions, privatization could be a highly manipulative process” (Tangri, and Mwenda 2001, 118). As the cited authors state, the lack of punishment in corruption and cronyism cases has left the door open for politicians to continue with this improper behavior. “Discriminatory and corrupt privatizations have been common because political leaders have wanted public companies to be divested to their favored clients” (Tangri and Mwenda 2001, 118).
Nevertheless, Uganda is not the only example of these vices. We admit that it is almost impossible to totally eradicate corruption and cronyism from post-socialist and post-communist economies immediately, which is a reason why limiting the independency and management of the state is needed in the process. We briefly comment on the transition of the former Soviet Union, and some Central and Eastern European privatization processes (perhaps, the biggest in history) to understand the problems they faced. (Kaufmann, and Siegelbaum 1996, 419–20) counted the terrific number of 188,000 among small, medium and large scale enterprises privatized, but they also stated that “corruption has reached endemic levels in the transition economies.” In Georgia, the privatization process started after its independence in 1992; nevertheless, corruption and cronyism surrounded it up to the “Rose Revolution,” when the political fight was won by Mikheil Saakashvili, who assigned Kakha Bendukidze as Minister of Economy (Burakova and Lawson, 2013).
However, history demonstrates that desocializing a country involves facing some problems. But there are also good examples of how to succeed with the lowest—or null—state interventionism, support of the rulers, and “setting their subjects free, as fast and as completely as it takes to unlock their shackles” (Rothbard 1992, 66). Briefly, our desocialization proposal will face some problems, but they will be overcome with the implementation of a real free-market economy and by minimizing the presence, influence and management of the state in the process. This is an indispensable condition to succeed in any desocialization plan for Venezuela, as Rothbard (1992, 66) indicates “freeing only a few areas at a time, will only impose continuous distortions that will cripple the workings of the market and discredit it in the eyes of an already fearful and suspicious public.”
Why Desocialize Enterprises?
A devastated economy is the worst thing people can live through. The latest statistics and indicators show that in Venezuela the scarcity of products have risen to 80 percent, hyperinflation forecasts by the IMF reached the 10 million percent level for 2019 (IMF, 2018), and the humanitarian crisis is internationally recognized. When basic goods and services are not affordable for citizens, they start to think about how to solve that problem and, believe it or not, most of the people find the answer in a phrase attributed to Rothbard: Privatize Everything!
Why is it so important to privatize? (Rider and Zajicek 1995, 135) explain a paramount advantage: firms “become more efficient and more responsive to their customer’s needs.” There is no doubt that private management is far better than governmental management, and “the stimulus that private ownership gives to innovation” (Rider and Zajicek 1995, 135) is important to overcome the problems that a post-socialist country will come across. Another reason is to reduce the size of the state and stop interventionism in the economy;See Rider and Zajicek 1995, Carter 2013, Lewandowski 1996, and Brooks 2004. indeed, this should be the most important goal of any post-socialist or post-communist country.
Hoppe (2011) suggests that privatization is required even to avoid all conflicts among people, given scarcity, and that the consequent private property must be clearly defined for such purpose. Hazlitt (1996, 210), in turn, indicates that public wealth derives from property in private hands, used for the production of goods and services for the market, and it serves people “just as much as—in fact, far more effectively than—if it were owned and operated by the government.”
As we pointed out, transferring the property of enterprises owned and managed by governments to private hands is a process sensitive to corruption, cronyism and other problems, which can be minimized if appropriate actions are followed. But if prosperity, efficiency and the total dependence of the government on its citizens is the path a country wants to go through, privatization is one of the most important plans to be performed.
Which Is the Best Method to Desocialize Enterprises?
Another great problem involved in this process is how to privatize, which we decided to analyze in a different section. As we have argued before, the literature in this field is wide; nevertheless, we focused our efforts and research on the current situation of Venezuela. This is why we do not include some experiences, although the United States, Canada, the United Kingdom, and other institutionally better countries around the world have great examples of how governments manage and head the privatization processes.See McDavid (1985), Moore (1992), Brooks (2004), Brunsdon and Corssmit (1998), David (1988), McMeekin (1999), and Goodman and Loveman (1991). Venezuela is very far away of the reality and context where those examples succeeded. Countries included in this paper are the closest to the social, political, and economic conditions of Venezuela.
Rothbard (1992, 73) explains the egalitarian handouts method, meaning that each “citizen receives in the mail one day an aliquot share of ownership of various previously state-owned properties,” but he does not agree with this procedure because “the number of people would be too much and shares too few to allow every person to have a share” (Rothbard 1992, 73). He also comments about the voucher system in which “each citizen receives basic certificates, which could be exchanged for a certain number or variety of shares” (Rothbard 1992, 73). However, Rothbard does not agree with this method either, but proposes and supports the homestead principle that states “assets are to devolve, not upon the general abstract public as in the handout principle, but upon those who have actually worked upon these resources: that is, their respective workers, peasants, and managers” (Rothbard 1992, 73). Another method Rothbard analyzes is the public auction, according to which the government sells everything to the highest bidder; nevertheless, he immediately asks, “Why does government deserve to own the revenue from the sale of these assets?” (Rothbard 1992, 75). Finally, the fourth principle analyzed in his paper is returning all stolen—or nationalized or expropriated—properties to their legitimate owners, but he says that for many reasons, “there are no owners to identify” (Rothbard 1992, 75).
Following (Rider and Zajicek, 1995), there are at least six common methods of privatization in post-socialist or post-communist economies. The voucher method, explained above; it has been implemented with some varieties like mutual funds and freedom to trade vouchers. Notwithstanding, this method should be highly popular among population, it faces some cons. It does not report any profit to the government—which is a strength in our view—and populist politicians—and interest groups—argue that it is acceptable to scam people who do not have any financial knowledge and who would value a couple of coins more than a share. Nonetheless, the National Mutual Funds applied by Lewandowski in Poland,See Hunter and Ryan (2004), Rider and Zajicek (1995), and Lewandowski (1996). and other proved settings in different countries—like the non-tradable condition for a couple of years—have demonstrated that it is possible to overcome those problems.
The public auction is one of the best methods to privatize small enterprises, but the great problem is that transition economies are vulnerable to be corrupted by revealing relevant information and directly assigning to favorite bidders. Nonetheless, there is nothing that transparent auction systems and solid free market institutions cannot overcome. Georgia, after its independence in 1992, began a privatization process but, as Lawson, and Powell (2018) say, it “was mostly corrupt and limited. Comprehensive privatization did not begin until 2004, when Kakha Bendukidze declared that ‘everything was for sale except Georgia’s honor.’” Bendukidze started a public auction with no limitations or restrictions; everybody could bid for any asset, even Russians with the resentments that Georgians could have against them. Everyone was able to check out on the www.privatization.ge website who bid, how much, and what the last bid was. Under Bendukidze’s leadership, privatization was a complete success because he eradicated corruption and cronyism (Lawson and Powell 2018).
The third method that Rider and Zajicek (1995) present is employee privatization, which falls under the homestead principle supported by Rothbard (1992). The problem with this method is that if the privatization is only to employees, the “desocializers” might consider that the bulk of the beneficiaries would be former communists—or socialists.Even people who supported or committed human right crimes, or foreigners from “friendly countries” of the former governments, i.e. in Venezuela there are a lot of Venezuelan military personnel, and Cuban military personnel, and civil employees who are employees and managers from many years ago in some “strategic enterprises” such as the oil industry and others. Do they deserve—more than the rest of Venezuelans—to be the new owners of enterprises such as PDVSA or some other multi-billion dollar company? In other words, the great part of the employees in a former socialist or communist country belonged to the former government. The fourth method is the Initial Public Offering, which allows government to raise funds, but the results have been “massive oversubscription… it is a costly and time-consuming procedure… high transaction costs and public discontent” (Rider and Zajicek 1995, 138), and finally, those who really benefit from this method are “insiders and a few professional speculators” (Rider and Zajicek 1995, 138).
The Liquidation and the (direct) Sales to Foreign Investors are the last methods that Rider and Zajicek (1995) explain. Despite some advantages of these mechanisms (for example, liquidation allows to divide and sell the entity in several parts and foreign investors have “deeper pockets than domestic residents” (Rider and Zajicek 1995, 139), the disadvantages—mostly related to cronyism and corruption—and then, bad experiences related to them are greater than the pros.
The proposal that we formalize in this paper follows Acevedo’s (2018) plan, which encompasses minimum state intervention, the impossibility for the government to vote, seventy per cent of the shares delivered to Venezuelans, special conditions for the expropriated people, certain limitations on the percentage of shares owned, and a special restriction of three years on selling or transferring shares for all Venezuelans who previously received them as part of the process.
We agree with the four general recommendations that Rothbard (1992) provides about desocialization processes: 1) drastic reduction in taxes, government expenditures, and government employment; 2) returning property of the assets owned by the government to the original expropriated owners or their heirs, or granting shares to productive workers and peasants who had worked on these assets; 3) honoring complete and secure property rights in the sense of providing complete freedom to transfer property; and 4) depriving the government the power to create new money. However, for reasons of applicability due to the current situation of the country—one of chronic widespread corruption, at extreme levels, particular cultural characteristics, and the fact that industries were effectively bought by the government when they were nationalized—and in light of previous experiences of other countries undertaking similar privatization processes, some restrictions are included in our proposal, especially concerning points 2) and 3) of Rothbard’s paper. Moreover, if expropriated owners were fully compensated, then it is natural that the legitimate owners should be the Venezuelans.
THE DESOCIALIZATION OF ENTERPRISES LAW PROPOSAL This paper is aimed at proposing a desocialization of enterprises law in light of the current situation of Venezuela. After analyzing relevant experiences in former communists and socialist countries, we have developed this draft of law with the intent to overcome some errors captured in its previous attempts, as in Acevedo (2018). It is worth remarking that this program just encompasses desocializing enterprises and assets currently managed by the government, although the desocialization of other fundamental pillars of the Venezuelan economy is of paramount importance as well. Gradual steps towards this ultimate goal of desocializing an economy are not effective. On the contrary, as Rothbard (1992, 69) argues, those steps “…could, and should, be instituted immediately and all at once.”
Circa March 2019, Venezuela is going through serious economic problems and aiming at potentially getting rid of a socialist and tyrannical regime and at establishing a new government that will surely fall into the “charms” of a democratic socialism with total control of the commanding heights of the economy, once again. From a humanitarian perspective, a change in the Venezuela’s political arena would be a gain, since the current humanitarian crisis would be relieved. Nonetheless, our desocialization proposal will continue to be seen—we greatly fear—as the work of some promoters of freedom who intend to lead the country towards a real path of prosperity, but not taken into consideration.
A Draft of the Desocialization of Enterprises Law
Generalities
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The scope of this law involves all State-Owned Enterprises (SOE) and State-Owned Assets (SOA).
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The Beneficiaries (B) are all Venezuelans by birth and aged at least 18 years at the moment when the desocialization process takes place, residents or not in Venezuela. They will have to enroll in the private national or international financial institution of their preference, which will represent them throughout the process.
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The Desocialization Board (DB) will head the process.
3.1 The DB will be formed as follow: one (1) representative per financial institution having at least 4 percent of the total Venezuelans enrolled in the process; one (1) representative per branch of the state: executive, judicial and legislative.
3.2 All representatives have “voice” in the process, but just financial institutions’ representatives have the right to vote in a proportion defined by the number of Venezuelans they represent.
3.3 If a financial institution does not represent 4 percent of the total Venezuelans enrolled in the process, it can delegate its representation functions to another institution.
3.4 All official and unofficial meetings of the DB will be broadcast live, recorded, and published, for transparency purposes.
3.5 All communications among the representatives will be considered public and will have to be recorded.
- A Financial Rescue Fund (FRF) will be created as a fund managed by the DB to rescue some SOEs and pay liabilities. Funds will come from the process itself.
Classification
- The DB will categorize the SOEs and SOAs into six groups:
5.1 Desocialization Group: those SOEs fulfilling the desocialization process requirements.
5.2 Rescuable Group: those SOEs that can reach the requirements of the Desocialization Group upon following this process.
5.3 Public Auction: those SOEs that this process could not rescue and SOAs not classified as Clearance Assets.
5.4 Clearance Assets: all SOAs totally depreciated or in junk conditions.
5.5 Expropriated Assets or Enterprises: all those enterprises and/or assets expropriated or nationalized against the will of their former owners.
5.6 Social Assets: all those assets related to social programs given to citizens with no full property.
Procedure
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The Present Value of all certified reserves of natural resources of each SOE and/or SOA will be included in their respective accountability.
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For Social Assets: the DB will immediately transfer, along with the corresponding tenure, the full property of the asset to the citizens, without restrictions in the rights to sell, mortgage, build, or rent. Citizens will not pay any fee for the property transfer process.
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For Expropriated Assets or Enterprises: The DB, based upon consistent proofs, will proceed as follows
8.1 If the governmental administration indemnified the former owner by paying a price lower than the real value of the asset at that moment, the DB will transfer the property back to the former owner. The former owner will return the surplus resulting from the difference between the current value and the received amount minus the difference between the value at the moment of the expropriation and the received amount; if that final difference is negative the DB will transfer the property immediately to the former owner with no fees, and the difference will be paid through the FRF.
8.2 If the administration did not indemnify the former owner for the expropriated assets or enterprises, the DB will immediately transfer the property to their former owners. If the difference between the current and past value is negative, the DB will pay such difference through the FRF.
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For Clearance Assets: the DB will open a public sale process, using a technological system based on blockchain, and sell these assets in batches. The system will be transparent, with full public access to information about prices, buyers, and sale conditions. Up to 25 percent of the raised funds will be destined to pay the fees and other expenses associated with this process, including those related to the DB. The DB will deposit the rest of the funds in the FRF.
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For Public Auction: the DB will auction each SOE and SOA through a technological system based on blockchain. The system will be transparent, with full public access to information about prices, buyers, and sale conditions. Up to 12.5 percent of the raised funds will be destined to pay the fees and other expenses associated with this process, including those related to the DB. The DB will deposit the rest of the funds in the FRF.
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For the Rescuable and Desocialization Group: the DB will establish a desocialization date for each one and estimate liabilities for each company, even considering the human resources liabilities, and including them in the balance sheet up to the date of the property transfer.
Desocialization Process
- For companies with Total Assets greater than Total Liabilities, by 30 percent or more: the DB will capitalize liabilities and transfer the property as follows
12.1 Through a liabilities-equity swap, each creditor, and employee, will obtain an exact amount in shares than the enterprise owes them.
12.2 70 percent of the rest in identical parts to B, in the form of shares.
12.3 The new Board of Directors of the enterprise, elected by the new shareholders through their legal representatives, will sell the remaining 30 percent of the equity with a premium no more than 30 percent, considering the initial restriction in point 16 below. Up to 10 percent of the raised funds will be destined to pay the fees and other administrative expenses associated with the process, including those related to the DB. The DB will deposit the rest of the funds in the FRF.
- Companies with Total Assets less than Total Liabilities or Total Assets higher than Total Liabilities by less than 30 percent, even 0 percent:
13.1 The DB will determine if creditors can be proportionally paid, with no more than 30 percent of the available FRF at the moment, an amount sufficient to make Total Assets greater than Total Liabilities, by 30 percent or more. The procedure described in point 12 will be followed then.
13.2 If the DB determines that more than the 30 percent of the available FRF is required and that there is at least another SOE classified in the desocialization group, then the DB will have to wait up to the end of the process to analyze if this SOE can be rescued through the FRF. If, at the end of the process, this is the last SOE classified in the Rescuable Group and there are enough funds in the FRF, then the DB will use those funds required to accomplish the proportion of Total Assets and Liabilities described in point 13.1. If there are not enough funds in the FRF to accomplish the proportion of Total Assets to Total Liabilities described in point 13.1, and to rescue the last SOE classified as Rescuable, the DB will re-classify it into the Public Auction Group.
Remainder of the Financial Rescue Fund
- If the desocialization process ends and the FRF still has funds, the DB will proceed as follows:
14.1 It will pay a desocialization process premium, in proportion to the represented B, to each member of the DB of the financial institutions. The grand total of this bonus will not be more than the 10 percent of the available funds.
14.2 The rest of the funds will be distributed proportionally among all SOEs that followed point 12 up to the amount of the premium that point 12.3 establishes.
14.3 If, after following point 14.2, the FRF still has funds, the DB will distribute them in equal parts to B.
Final Considerations
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The property of all SOEs and SOAs that this desocialization program encompasses will include the property of the corresponding soil and subsoil.
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For a term of 3 years, after the day of the official desocialization, neither any person nor any company can buy and/or hold more than 3 percent of the equity of any SOEs desocialized through point 12. Nevertheless, a person or institution can represent, through a legal power, more than 3 percent of the total equity.
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There is no other limitation to foreigners than the one stated in this law.
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New shareholders will be able to immediately transfer, back debts or sell their shares. Nevertheless, those shares given to B following point 12.2 will be non-negotiable and non-transferable for 3 years from the day that B receives them.
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Immediately after the desocialization day of each enterprise, new owners and employees will privately bargain new rules and laws of their labor contract. They can establish new private deals and rules considering or not the national’s labor legal framework.
Taxes and Royalties from the Oil Sector Distributed among All Venezuelans
Following Faría and Filardo (2015) and Faría (2019), the main objective of our proposal is to “starve the government” and make it completely dependent on its citizens. So a crucial and complementary part of our proposal encompasses letting all the oil proceeds, paid in US dollars to governments as taxes and royalties by the transnational companies for the activities they carry out in country, be deposited directly into the accounts of Venezuelans by birth and of legal age. A measure of such nature would reduce the economic power of governments and would force them to come to their citizens to negotiate the tax rate levied on those proceeds. The civil society, in turn, would have more power to demand services of higher quality, and one of the fundamental bases of a long-lasting democracy would have been established: a government with an absolute fiscal dependence on its people.At present, the government is more than 50% independent of its people because it directly receives oil proceeds.
The delivery of all oil proceeds to Venezuelans confers upon them power and responsibility since it limits the state, on preventing it from directly receiving money which does not result from the efforts of its people; the state, in turn, would only survive by applying a reasonable tax burden to citizens.
We will cover this specific aspect of the reform, in more detail, in a separate paper about desocializing taxes.
CONCLUDING REMARKS Although it might seem unorthodox, mainly due to some restrictions imposed, our proposal results from considering the current economic and social conditions prevailing in Venezuela, as well as previous privatization experiences in other countries. Certain aspects of this work are still being explored and/or revisited, so it could be subject to change in the future.
We think that two of the most critical points of discussion are associated with the initial restrictions imposed: 1) the impossibility for a new shareholder to sell his/her shares during the first three years, and 2) the impossibility for a private company or person to purchase more than 3 per cent of the equity.
Previous experiences in other countries, where citizens felt cheated by the new private approach, exchanged their shares for food or alcohol right after obtaining the stock, and started blaming the program before the performance of the privatized companies stabilized, were the main reason to impose the constraint of not allowing selling during the first three years. Nevertheless, it has to be emphasized that this restrictive measure is applicable just to shares received according to point 12.2 of our law proposal. Other forms of acquisition are not affected by this temporary sell restriction (i.e. if employees receive shares as part of their labor benefits).
On the other hand, the impossibility for an institution or person to acquire more than 3 percent of the total equity is another restriction of the proposal, imposed with the intent of avoiding cartelization at the early stages of the privatization process. According to point 16 of the law, besides, any person or institution can represent more than 3 percent of the total assets.
Selling shares in batches to different buyers, selling under futures contracts, actively participating in the company (in the board of directors, for instance), or transferring their voting rights to institutions are options available for the new shareholders, so restrictions should not represent a significant problem.
As stated before, we are still working to cover other aspects of the privatization of the Venezuelan state-owned assets, so this proposal might be subject to change; restrictions could be eliminated or re-adapted as part of the research process.
Our present work should be framed in a more general approach embracing the deregulation of the labor markets, a radical simplification of the taxation system, the elimination of the minimum wage, the opening of the economy, and the eradication of the state’s monopoly of money, among others. At Econintech.org, we are working on all of those margins as well.
Quarterly Journal of Austrian Economics 22, no. 2 (Summer 2019) full issue. ABSTRACT: This paper examines John Maynard Keynes’s ethical theory and how it relates to his politico-economic thought. Keynes’s ethical theory represents an attack on all general rules. Since capitalism is a rule-based social system, Keynes’s ethical theory is incompatible with capitalism. And since socialism rejects the general rules of private property, the Keynesian ethical theory is consistent with socialism. The unexplored evidence presented here confirms Keynes advocated a consistent form of non-Marxist socialism from no later than 1907 until his death in 1946. However, Keynes’s ethical theory is flawed because it is based on his defective logical theory of probability. Consequently, Keynes’s ethical theory is not a viable ethical justification for socialism.
ethics socialism keynes JEL Classification: B22, B24, E122, P20 INTRODUCTION John Maynard Keynes (1883–1946) was the most influential economist of the twentieth century. However, ethics and probability were Keynes’s primary intellectual interests for the first seventeen years of his academic career. In fact, his early ideas on ethics and probability inspired and suffused his politico-economic theory. His biographer, Robert Skidelsky, agrees: “His theories of politics and economics were expressions of his beliefs about ethics and probability” (1991, 104). The Keynes scholar Athol Fitzgibbons states, “His economics has not been adequately recognized as an expression of his probabilistic and moral philosophies. These are the implicit and inseparable foundations of Keynes’s economic policies” (1988, 5). The editor of The Further Collected Writings of John Maynard Keynes, Rod O’Donnell, writes, “To comprehend the political-economist adequately, we must first understand the philosopher” (1989, 1–2). Simply put, a complete understanding of Keynes and his economics requires an understanding of his ethical theory and his theory of probability.
Unfortunately, Keynes’s theories of ethics and probability were almost completely unknown for five decades after he published The General Theory of Employment, Interest and Money (1936). These theories only started receiving serious scholarly attention in the 1980s. Still, the literature remains problematic. Specifically, the literature never connects his radical stance on general rules to capitalism and socialism, and the literature never addresses potential problems with the Keynesian probability theory. First, this paper shows that Keynes’s ethical theory is an intellectual justification for violating general rules. Then the paper shows that Keynes was a non-Marxist socialist, and his ethical theory is consistent with his non-Marxist socialism. Finally, the paper explains why Keynes’s probability theory is flawed.
GENERAL RULES AND PROBABILITY THEORY Keynes’s ethical master was the British philosopher George Edward Moore (1873–1958). Moore’s Principia Ethica (1903) was “the most important book in [Keynes’s] life” (Skidelsky 1983, 119). Keynes first read Principia Ethica in October 1903, just after starting his second undergraduate year at the University of Cambridge. He described the book as “a stupendous and entrancing work, the greatest on the subject” (1903). He exclaimed, “It is impossible to exaggerate the wonder and originality of Moore.… How amazing to think that we and only we know the rudiments of the true theory of Ethic” (1906, 123–24).
Opposed to natural law, Moore argued it is impossible to prove that a general rule of conduct is correct. He writes, “It is plain that no moral law is self-evident” (1903, 148). Still, Moore was highly skeptical that human beings could know all the consequences of their actions: “Our causal knowledge is utterly insufficient to tell us what different effects will probably result from two different actions…. We can only pretend to calculate the effects of actions” (1903, 202). Despite his claim that general rules can never be proved universally true, Moore concluded that general rules must always be obeyed: “With regard to any rule which is generally useful, we may assert that it ought always to be observed…. Though we may be sure that there are cases where the rule should be broken, we can never know which those cases are, and ought, therefore, never to break it” (1903, 162–63). In short, Moore rejected natural law and advocated a form of rule consequentialism.
On reading Principia Ethica, Keynes embraced Moore’s view that it is impossible to prove a general rule is universally true. While he adopted Moore’s attack on the truth of general rules, however, he was revolted by the conclusion that general rules must be obeyed. Like Moore, Keynes rejected natural law.On Keynes and natural law, see Dostaler (2007, 82) and O’Donnell (1989, 286; 1991, 6). But he went even further and categorically rejected all general rules: “What we ought to do is a matter of circumstance; metaphysically we can give no rules” (1905a, 2). He wanted to overturn Moore’s case for following rules, so he developed a variation of Moore’s ethical theory. He kept the basic structure of Moore’s framework, but he modified it in a way that allowed actors to violate general rules. Keynes declared in a 1938 speech called “My Early Beliefs,”
[I rejected] the part [of Moore’s theory] which discussed the duty of the individual to obey general rules. We entirely repudiated a personal liability on us to obey general rules. We claimed the right to judge every individual case on its merits, and the wisdom, experience and self-control to do so successfully. This was a very important part of our faith, violently and aggressively held.… We repudiated entirely custom morals, conventions and traditional wisdom. We were, that is to say, in the strict sense of the term, immoralists…. I remain, and always will remain, an immoralist. (CW 10, 446–47)
Keynes’s rebellion against general rules propelled him into probability theory. As he saw it, Moore’s conclusion that rules must be obeyed followed from his theory of probability. Keynes recalled in 1938, “[Moore] has a section on the justification of general rules of conduct. The large part played by considerations of probability in his theory of right conduct was, indeed, an important contributory cause to my spending all the leisure of many years on the study of that subject [probability]” (CW 10, 445). Although he studied mathematics at Cambridge, he wrote his fellowship dissertation on the philosophy of probability. The dissertation was rejected in 1908 and accepted in 1909, meaning Keynes was elected a fellow of King’s College, Cambridge for his theory of probability, not for his economics. A revised version of the dissertation was published twelve years later as A Treatise on Probability (1921). Although he published two works before 1921, A Treatise on Probability must be considered his first book.
On Keynes’s interpretation, Moore’s conclusion that rules must be obeyed was premised on the frequency theory of probability. As Keynes noticed, the frequency theory of probability places strict limits on the scope of probability. According to the frequency theory, probability can only be applied to repeatable events. The mathematician Richard von Mises was a leading developer of the frequency theory, and he writes: “In order to apply the theory of probability we must have a practically unlimited sequence of uniform observations” ([1928] 1981, 11; Gillies 2000, 89–90). In short, probability can only be applied when it is possible to construct a long series of homogeneous repetitions.
Significantly, the frequency theory’s requirement of repeatability makes probability inapplicable to human action. Mises writes, “The theory of probability can never lead to a definite statement concerning a single event” ([1928] 1981, 33; Gillies 2000, 97). Human actions are singular events because the conditions of human action are never homogeneous and repeatable. Thus, on the frequency theory, it is illegitimate to apply probability to human action. Keynes realized the “narrow limits” of the frequency theory and concluded, “If we allow [the frequency theory] to hold the field, we must admit that probability is not the guide of life” (CW 8, 103–04).
What does all this have to do with general rules? As Keynes interpreted Moore, it is best to follow general rules because it is impossible to have any probabilistic knowledge about action. To Keynes’s mind, the strict limits of the frequency theory forced Moore to conclude that general rules must always be obeyed.
Keynes developed his logical theory of probability to replace the frequency theory in Moore’s ethical framework. On the frequency approach, probability theory is a branch of empirical science. But for Keynes, it is a branch of logic. In classical logic, the logical structure of the human mind can intuitively perceive whether a conclusion follows from the premises. In the same way, Keynes argues the logical structure of the human mind can intuitively perceive probability. The human mind can naturally grasp probability without empirical observation of repetitions. This means that, in sharp contrast to the frequency theory, the logical theory allows one to apply probability to singular events. Consequently, the logical theory makes probability applicable to human action. Compared to the frequency theory, the logical theory greatly magnifies the human capacity to intuitively understand the probable consequences of actions.Intuition is vital to Keynes (Moggridge 1992, 553; O’Donnell 1989, 209–13; Skidelsky 1992, xix, 411, 424; 2009, 141). In this way, the logical theory of probability sets actors free to violate general rules.
For example, consider the general rule “Thou shalt not steal.” While stealing is bad for the victim, it is good for the thief. To Moore, it is impossible to comprehend and weigh all the good and bad consequences of stealing in a probabilistic manner. Thus, the rule “Thou shalt not steal” must always be obeyed. But the logical theory amplifies the human ability to understand the consequences of action. It allows the actor “to judge every individual case on its merits” (CW 10, 446). The logical theory permits the thief to form (objective) probabilistic beliefs about the consequences of stealing. While objective, these probabilities are non-numerical rather than numerical. In fact, for Keynes, most probabilities are non-numerical: “Not all probabilities are numerical … Numerical measurement is often impossible” (CW 8, 70).On Keynes’s non-numerical probability, see Carabelli (1988, 42–50), Gillies (2000, 33–35), Lawson (1985, 913), Meltzer (1988, 139), Moggridge (1992, 149), O’Donnell (1989, 50–55; 1990), Runde (1995, 334), and Skidelsky (1992, 59). Still, non-numerical probability enhances the thief’s ability to understand the consequences of stealing. If the probable consequences of stealing are good, then the thief should steal the property. This example illustrates that the logical theory functions as an intellectual justification for breaking general rules such as “Thou shalt not steal,” “Thou shalt not kill,” “Thou shalt not aggress against person and property,” and the like.
KEYNES ON SOCIALISM Keynes categorically rejected all general rules, but how does this relate to his political vision? Unfortunately, controversy over his political thought has muddled the relation between his ethics and politics. The standard interpretation is that Keynes was a great liberal. Robert Skidelsky writes, “Keynes was a lifelong liberal” and “He was not a socialist” (2009, 135, 157; 1992, 233; 2000, 478).Also see Backhouse and Bateman (2011, 148), Clarke (2009, 101, 179), Davidson (2007, 13–14), and Harrod (1951, 192). Contrary to Skidelsky, important Keynes scholars have aligned him with socialism.Keynes’s socialism has been acknowledged in passing by Dostaler (2007, 98), Fitzgibbons (1988, 191), Groenewegen (1995, 153), Lekachman (1985, 37), and Moggridge (1976, 38; 1992, 469). Joan Robinson worked closely with Keynes, and she considered him a socialist (Lekachman 1985, 37). For example, Rod O’Donnell writes, “Keynes envisaged and espoused a particular form of socialism” and “It is clear, explicit and unambiguous; he used the term socialism to characterise his own views” (1999, 149, 164; 1989, 322; 1992, 781–82). To comprehend the real significance of Keynes’s ethical theory, it is necessary to explore his politico-economic thought.
The evidence confirms Keynes was a non-Marxist socialist throughout his adult life.Ludwig von Mises used the term non-Marxist or non-Marxian socialism ([1922] 1981, 12, 356; 1949 [1998], 52, 503, 579; [1944] 2011, 234; 1956 [2006], 51; [1957] 2005, 43). In fact, he dedicated a paper to anti-Marxian socialism ([1929] 1977, 120–27). Later, Mises aligned Keynes with socialism: “Keynes was influenced by the German socialists of the chair and … he outdid them in many points” (quoted in Hülsmann 2007, 881). Although O’Donnell’s work on Keynes’s socialism is noteworthy, there are several problems with his account. First, O’Donnell (1999, 149) avoids defining capitalism or socialism, and this leads him to neglect Keynes’s policy views. Second, O’Donnell (1999, 150) argues Keynes first embraced socialism in the mid-1920s. However, his ethical theory was on display by January 23, 1904, and he wrote a draft outline of his dissertation The Principles of Probability by September 5, 1905 (1904a, 1905b, document 1). Hence, O’Donnell faces a temporal problem when he connects Keynes’s ethical and political thought.Skidelsky faces a similar temporal problem. He incorrectly claims Keynes’s life before 1914 was a period of “political indifference” (1983, 229, 262). Even a cursory examination of the Keynes Papers (OC/1–6) will show Keynes was deeply interested in politics when he was developing his ethical theory. Contrary to O’Donnell, the evidence indicates Keynes advocated a stable form of non-Marxist socialism from no later than October 1907 until his death in 1946.
Just after reading Principia Ethica, Keynes supported the motion “that this house approves of the rise of the Independent Labour [socialist] Party in present day English Politics” (1904b). He was an early member of a socialist club at the University of Cambridge called the Cambridge University Fabian Society (Dow 2016, 11n24). The Fabian leader George Bernard Shaw spoke to the club on October 24, 1907, and Keynes wrote to his lover Lytton Strachey the next day: “Mr. Bernard Shaw converted us all to socialism last night” (1907, document 2).Keynes and Shaw were lifelong friends. Keynes wrote in 1927, “What a debt every intelligent being owes to Bernard Shaw!” (CW 9, 320). In 1946, Keynes noted the “love and honour in which I hold G.B.S.” (CW 10, 381). Shaw was a socialist and a supporter of Hitler, Mussolini, Lenin, and Stalin. Also see note 27. At the Cambridge Union on February 7, 1911, Keynes argued publically that “the progressive reorganisation of Society along the lines of Collectivist Socialism is both inevitable and desirable” (1911). He was extremely close to his father John Neville Keynes, and Neville recorded in his diary on September 6, 1911: “Maynard avows himself a Socialist and is in favour of the confiscation of wealth” (1911, emphasis added, document 3). This shows that Keynes described himself as a socialist, and did so in the first decade of the twentieth century.
Keynes celebrated the Bolshevik Revolution of 1917. He wrote to his mother, “I was immensely cheered up and excited by the Russian news” (1917). On December 24, 1917, he proclaimed, “The only course open to me is to be buoyantly bolshevik” (CW 16, 266). That month, he cofounded the socialist 1917 Club with Ramsay MacDonald, the man who became Britain’s first socialist prime minister (Thomas 1973, 68). In February 1918, he confessed to “being a Bolshevik” (CW 16, 267). The famous financial journalist Clarence W. Barron met Keynes in September 1918, and he reported: “Lady Cunard says Keynes is a kind of socialist and my judgment is that he is a Socialist of the type that does not believe in the family” ([1918] 1930, 189).
Keynes wrote in 1922, “An extraordinary experiment in socialism is in course of development. I think there may be solid foundations on which to build a bridge” (CW 17, 420). That year, he stated Vladimir Lenin’s “political control of affairs was of a high intellectual competence. The histories of revolution contain nothing more remarkable or more coldly and splendidly glittering than the career of Nicholas [sic] Lenin” (CW 17, 436–37). He demanded in 1923, “Liberals must move towards Labour [socialism] and not in the other direction” (1923a). He declared in a 1924 speech, “In many respects [the Labour Party] want[s] the same thing [as the Liberal Party]” (1924a, 262). Although he was a member, Keynes always wanted to transform Britain’s Liberal Party into a socialist party of the far left.Keynes’s affiliation with the Liberal Party does not mean he was a liberal. Keynes’s friend Kingsley Martin recognized that most British socialists at this time “aimed at the permeation of the existing political parties” (1970a, 33). Although Keynes, Leonard Woolf, Gerald Shove, David Garnett, Francis Birrell, Rupert Brooke, and James Strachey were involved in Liberal Party politics and clubs, they all aligned themselves with socialism. This shows not all members of liberal parties are liberals.
In February 1924, he boasted that he joined a “new USSRian Society,” and in May he joined “a new Society… for getting into intellectual touches with Russians!” (1924b, 1924c). On June 8, 1924, he drafted an outline for a book called Prolegomena to a New Socialism (1924d, document 4). In July 1924, Keynes was a founding vice president of the Society for Cultural Relations with the USSR (SCR 1924, document 5). This explicitly pro-Soviet society was financed and controlled by VOKS, the Soviet government’s international propaganda agency (Miner 2003, 228, 248). In September 1925, he visited the USSR and he addressed the Soviet politburo. Leon Trotsky attended, and Trotsky described Keynes as an advocate of socialism: “Even the most ‘progressive’ economist Keynes told us only the other day that the salvation of the British economy lies in Malthusianism! And for England, too, the road of overcoming the contradiction between city and country leads through Socialism” (1925, 286).
Contrary to O’Donnell, the evidence above shows Keynes aligned himself with socialism long before the mid-1920s. Overlooked evidence confirms he aligned himself with socialism until his death in 1946. For example, in 1926, his close friendship with the leaders of Fabian socialism, Sidney and Beatrice Webb, led Virginia Woolf to observe: “Lydia [Keynes’s wife] and Maynard are both completely under the sway of the Webbs…. [The great Keynes] is at [Beatrice Webb’s] feet” ([1926] 1978, 289). Beatrice wrote, “There is no reason why Keynes … should not be among the leaders of the Labour Party—[he] is certainly more advanced than [the socialist Ramsey] MacDonald” ([1926a] 1985, 103). Keynes proclaimed, “I am less conservative in my inclinations than the average Labour [socialist] voter; I fancy that I have played in my mind with the possibilities of greater social changes than come within the present philosophies of, let us say, Mr Sidney Webb.... The republic of my imagination lies on the extreme left of celestial space” (CW 9, 309).Ludwig von Mises describes Sidney Webb as “the outstanding man in the British socialist movement” ([1922] 1981, 484).
After his 1928 trip to the Soviet Union, he noted “my sympathy with communists over money motives” (1928a). That year, he endorsed the socialist program Labour and the Nation: “Since this motion was framed, [the] Labour Programme [Labour and the Nation was] published. The Lib[eral] Summer School met with pleasure and no false sense of proprietorship how much of it overlaps … [The] Lib[eral] and Lab[our] [Parties] shall cooperate. For there is a large enough measure of agreement on what to do next” (1928b). This program was concerned with “transforming Capitalism into Socialism” and “the establishment of the Socialist Commonwealth” (Labour Party 1928, 3, 14).Keynes made these statements in a debate with Labour politician Thomas Johnston. In that debate, Johnston “regarded many of the proposals in the Liberal Yellow Book as proposals for which Socialists could vote with both hands” (1928, 11). Moggridge notes, “Keynes’s contributions to the Inquiry’s report Britain’s Industrial Future, or the Yellow Book as it was and is known, were substantial” (1992, 458). Mises writes, “The English ‘Liberals’ of today are more or less moderate socialist” ([1922] 1981, 17). He continues in a footnote, “This is shown clearly in the programme of present-day English Liberals: Britain’s Industrial Future” ([1922] 1981, 17n3).
In a 1929 speech, “Social Reform as the New Socialism,” he sketches his “type of social[ist] action for the future” (1929).Hayek notes that the term ‘social reform’ is a euphemism for socialism: “Efforts for social reform, for something like a century, have been inspired mainly by the ideals of socialism” ([1960] 2011, 369). Keynes abandoned the Liberal Party after the 1929 general election, and he proclaimed, “England must break sharply with the Liberal tradition” (quoted in Martin 1970a, 198). He became an important economic advisor to Britain’s first socialist prime minister, Ramsay MacDonald, after the 1929 election. At a meeting with MacDonald on June 1, 1930, Keynes described himself as “the only socialist present” (quoted in Dalton 1986, 115). His first major work on economic theory, A Treatise on Money (1930), imagines “socialistic action by which some official body steps into the shoes which the feet of the entrepreneurs are too cold to occupy” (CW 6, 335).
Keynes began meeting with the socialist politician Oswald Mosley frequently in late 1930 (Mosley 1968, 238; Smith 1996, 244). That year, Mosley produced his famous Mosley Manifesto, a socialist proposal calling for “industrial reorganisation in the form of the big merger involving standardisation and the pooling of resources” (Mosley 1930, 11). Keynes thought the socialist proposal was “a very able document and illuminating,” and “I do not see what practical socialism can mean for our generation in England, unless it makes much of [Oswald Mosley’s] manifesto its own—this peculiar British socialism” (Henderson 1930; CW 20, 475). Mosley founded a socialist political party in early 1931 called the New Party, which later became the British Union of Fascists and National Socialists. Harold Nicolson, another leader of the party, reported to Mosley:
Dined with Clive Bell and Keynes. Keynes is very helpful about the economics of the New Party. He says that he would, without question, vote for it.… He feels that our Party may really do an immense amount of good and that our Programme is more sound and certainly more daring than that which any other party can advance. (Nicolson [1931] 2004, 79; Mosley 1968, 237–38)Mosely recalled, “I had the massive support of Keynes, not only in his theory but as already noted in his personal intervention” (1968, 253). Mosley says, “The background of my economic thinking was first developed by a study of Keynes—more in conversation with him than in reading his early writings” (1968, 178).
In early 1931, Keynes became the chairman of Britain’s leading socialist newspaper, New Statesman and Nation, and he maintained that position until his death in 1946. He described the paper as “an independent organ of the Left,” and the paper’s historian acknowledges it was an “unequivocally socialist weekly” (Smith 1996, 249, 156).Harrod and Skidelsky argue the editor Kingsley Martin was responsible for the newspaper’s socialist policy. Skidelsky notes the paper’s “sympathy for Soviet communism” and says “the New Statesman was unmistakably Kingsley Martin’s” (1992, 389). However, Martin refutes this notion: “Maynard was the only active director of the N.S.&N.… His biographer, Sir Roy Harrod, mentions his intimate connection with the Nation and then says that as the years went by he fell out of sympathy with the N.S.&N. policy. This does not tell the story” (1970b, 41). Also see Hyams (1963, 125) and Martin (1970a, 198). On December 13, 1931, he gave a speech to the Society for Socialist Inquiry and Propaganda called “A Survey of the Present Position of Socialism.” He declares, “I should like to define the socialist programme as aiming at political power,” and he discusses the “grand experiment of the ideal [socialist] republic,” (CW 21, 34; Moggridge 2012, 58). Around this time, he joined the New Fabian Research Bureau, Britain’s leading socialist think tank (Cole 1961, 235). The New Fabian Research Bureau was the sister organization of the Society for Socialist Inquiry and Propaganda (Cole 1961, 230), and it amalgamated with the Fabian Society in November 1938.
Keynes lived with members of the socialist Bloomsbury group throughout his adult life.On Bloomsbury’s socialism, see Marler (1993, xviii) and Rosenbaum (2003, 85). Skidelsky writes, “The Bloomsbury group [was] a commune of Cambridge-connected writers and painters” (2015, xvii). The Bloomsbury “communal household” was conceived by Virginia Woolf in late 1911, and Keynes was one of the first residents (Delany 2015, 147, 156). Woolf’s biographer reports, “Virginia looked back on this communal household as one of her pioneering achievements,” and Virginia referred to the residents as “inmates” (Lee 1997, 301, 288). Virginia nicknamed Keynes “dear old Hitler” ([1938] 1984, 163; Lee 1997, 680, 715), and she recorded in 1933: “We are going over to Tilton [Keynes’s country home], to be converted by Maynard to what I suspect of being a form of Fascism [national socialism]” ([1933] 1979, 222). That same year, “Mosley wrote to him [Keynes] congratulating him on his ‘fascist’ economics” (Skidelsky 1975, 306).Although Skidelsky denies Keynes’s socialism, he admits that “Keynesianism was [Mosley’s] great contribution to fascism. It was Keynesianism which in the last resort made Mosley’s fascism distinctively English” ([1975] 1990, 302). Murray N. Rothbard notes “Keynes’s strong fascist bent,” and states “Keynes was a fascist” ([1992] 2010, 51, 56).
Keynes supported the socialist Labour Party in the 1930s, and he declared in October 1935, “I do not really agree with … maintaining the separate identity of the Liberal Party” (CW 21, 373).Moggridge agrees, “In the course of the 1930s [Keynes] frequently commented on Labour policy proposals, more often than not sympathetically.… He was more inclined to support individual Labour candidates” (1992, 465). O’Donnell writes, “Keynes identified three main political ‘parties’ or groupings—the Socialists, Liberals and Conservatives. It was with the ‘Socialist’ grouping that his general sympathies lay” (1999, 158; Clarke 1988, 221). As Scott Newton recognizes, “Harrod concealed the drift of Keynes’s sympathies from the Liberal Party to Labour in the 1930s” and “felt it his duty to protect the public name of Keynes from association with the socialists” (2001, 15–16, 24). Like Harrod, Skidelsky conceals Keynes’s support of Labour after 1929. In the general election of 1935, he voted for Britain’s Labour Party just three months before The General Theory was published. Notably, the Labour platform was entitled For Socialism and Peace, and it called for “creating a new social order and a British Socialist Commonwealth” (Labour Party 1934, 29). He wrote, “I scarcely know where I stand. Somewhere, I suppose, between Liberal and Labour, though in some respects to the left of the latter [Labour]” (CW 21, 372–73).
He praised the Soviet experiment just four months after The General Theory was published: “Until recently events in [Stalin’s] Russia were moving too fast and the gap between the paper professions and the actual achievements was too wide for a proper account to be possible. But the new system is now sufficiently crystallised to be reviewed. The result is impressive” (CW 28, 333). Keynes’s engagement diaries show that he met with the Webbs at least twenty-two times between 1931 and 1937. And just five months after The General Theory was published, Beatrice Webb recorded that he desired “a modified socialism” ([1936] 1985, 371). The novelist John Buchan dined with Keynes regularly for over a decade, and Buchan reported Keynes was a “gentlemanly Communist” and “His line is that he despises capitalism” (1936, 105–06). Keynes confirmed, “Private capitalism is an out-of-date institution incapable of meeting the requirements of the twentieth century” (CW 21, 491).
In 1939, he praised “the splendid material of the young amateur communists” and applauded the socialist Left Book Club as “one of the finest and most living movements of our time” (CW 21, 496). That year, Stafford Cripps attempted to unify the Labour and Communist Parties, and Keynes announced, “I am all for Sir Stafford Cripps, and I would join his movement” (CW 21, 496). He congratulated Cripps: “I am in full sympathy with what you are doing” (CW 21, 502). Critically, Keynes proclaimed in 1939, “The question is whether we are prepared to move out of the nineteenth century laissez-faire into an era of liberal socialism” (CW 21, 500). In the early 1940s, he described Beatrice Webb as “the greatest woman of the generation,” and she reported that he was still “going ‘left’” (Keynes 1943; Webb [1942] 1985, 488). In 1944, Keynes was running the British Treasury and planning the new world monetary system at Bretton Woods. Still, he remained vice president of the socialist Society for Cultural Relations with the USSR, an arm of the Soviet propaganda agency VOKS (SCR 1944, document 6).
KEYNES AND SOCIALIST POLICY Keynes aligned himself with socialism throughout his entire adult life, and he described himself as a socialist. But can he actually be defined as a socialist? Did he actually advocate socialist policy? Traditionally, socialism is defined as a system of social organization based on government ownership of the means of production. Many Keynes interpreters have used the traditional definition of socialism to argue that Keynes was not a socialist. For example, Skidelsky writes, “He had no time for public ownership” and “His demand in the General Theory for a somewhat comprehensive socialisation of investment was a demand not for greater public ownership—which he always opposed” (1990, 52; 2000, 274). The traditional definition of socialism leads many interpreters to conclude that “He never embraced socialism” (Skidelsky 1992, 437).
The traditional definition of socialism can lead to error, for it is misleading if ownership is not properly defined. In economics, ownership is defined as ultimate control over a scarce good. Murray Rothbard writes, “Ownership is the ultimate control and direction of a resource” ([1962] 2004, 1277, 91–92, 959, 1273–74). Rather than using the proper economic definition, interpreters who argue Keynes was not a socialist must rely on a purely legal definition of ownership. But as Ludwig von Mises warns, “It is a mistake to deal with economic problems according to legal criteria” ([1957] 2005, 73).
Ownership is power of disposal, and when this power of disposal is divorced from its traditional name and handed over to a legal institution which bears a new name, the old terminology is essentially unimportant in the matter. Not the word but the thing must be considered. Limitation of the rights of owners as well as formal transference is a means of socialization. If the State takes the power of disposal from the owner piecemeal, by extending its influence over production; if its power to determine what direction production shall take and what kind of production there shall be, is increased, then the owner is left at last with nothing except the empty name of ownership, and property has passed into the hands of the State. (Mises [1922] 1981, 45)
Again,
Ownership means full control.... This catallactic [economic] notion of ownership and property rights is not to be confused with the legal definition of ownership and property rights as stated in the laws of various countries…. nowadays there are tendencies to abolish the institution of private property by a change in the laws determining the scope of the actions which the proprietor is entitled to undertake with regard to the things which are his property. While retaining the term private property, these reforms aim at the substitution of public ownership for private ownership…. In dealing with private property, catallactics [economics] deals with control, not with legal terms, concepts and definitions. Private ownership means that the proprietors determine the employment of the factors of production, while public ownership means that the government controls their employment. (Mises [1949] 1998, 678–79, emphasis added; Rothbard [1962] 2004, 1273).
There is no economic difference between government ownership and government control of the means of production. To avoid error, it is best to define socialism with the term control rather than the term ownership. Specifically, socialism is a system of social organization based on government control over the means of production. Although Mises used the term ownership to define socialism, he also frequently used the more precise term control: “Socialism is a social system based on public control of the means of production” ([1922] 1981, 505).For examples of Mises using the term control to define socialism, see Mises ([1922] 1981, 211; [1927] 2005, 35; 1944 [2011], 201, 203; 1949 [1998], 701; [1956] 2006, 38). For examples of Mises using the term ownership to define socialism, see Mises ([1919] 2006, 142; [1920] 2008, 3; [1922] 1981, 22, 498; [1940] 2011, 1, 71; [1944] 2011, 60; [1949] 1998, 183, 712). Still, he stressed, “To avoid any misunderstanding we will henceforth use the words, ‘ownership of the means of production’ in the generally accepted sense, i.e. to signify the immediate power of disposal [control]” ([1922] 1981, 32). Keynes’s friend Sidney Webb, the leader of Fabian socialism, defines socialism as “control by the community of the means of production” (1890, 4). Joseph Schumpeter writes, “By socialist society we shall designate an institutional pattern in which the control over means of production and over production itself is vested with a central authority” ([1943] 2006, 167).Murray Rothbard writes, “When government ownership or control extends to the entire productive system, then economics system is called socialism” ([1962] 2004, 958). According to Milton Friedman, “Socialism means government control of the means of production. That’s the old-fashioned definition and a good one” (1993, 4). In fact, Skidelsky admits that socialism means “control and direction of human resources” ([1975] 1990, 136, 145).
To determine whether Keynes was a socialist, it is necessary to examine whether he advocated government control over the means of production. As it turns out, Keynes’s main policy recommendation was government control, or socialization, of investment. To him, socializing investment is the only way to permanently solve cyclical and secular unemployment: “A somewhat comprehensive socialisation of investment will prove the only means of securing an approximation of full employment” (CW 7, 378, emphasis added). It must be remembered that in economic theory, investment refers to real investment, not financial investment. Investment goods refers to property, plant, and equipment—that is, the means of production (Garrison 2001, 37). Thus, Keynes’s call to socialize investment is a call for government control over the means of production. Therefore, Keynes fits the definition of a socialist.
It is important to emphasize that Keynes advocated government control over investment long before The General Theory. In February 1910, he already expressed the cynical view of private investment contained in The General Theory: “[The investor] will be affected, as is obvious, not by the net income which he will actually receive from his investment in the long run, but by his expectations. These will often depend upon fashion, upon advertisement, or upon purely irrational waves of optimism or, depression” (CW 15, 46). Like the other Cambridge business cycle theorists, he did not believe private businessmen can make good investment decisions: “There are still a good many perfect fools amongst our business men” (1910).
He stated in 1923, “The present organisation of investment is not such as to maximise the individual investor’s self interest, even in so far as it does this, it does not follow that it maximises the national income” (1923b, 252). He said the day before drafting Prolegomena to a New Socialism, “The state encouragement of new capital undertakings… is becoming an inevitable policy” (CW 19, 229). He verifies government control of investment is a socialist policy in Prolegomena to a New Socialism: “Investment of Fixed Capital” is one of the “Chief preoccupations of the State” (1924d, document 4). He says, “A great deal of money was being invested by those who had no special knowledge” (1924e, 313). On December 12, 1924, he said that private investors could not “direct the new savings of the community into ideal channels” and government must “improve our organisation for employing our capital” (1924f, 315, 318).
He exclaimed in his 1925 speech to the Soviet politburo, “I direct all my mind and attention to the development of new methods and new ideas for effecting the transition from the economic anarchy of the individualistic capitalism which rules today in Western Europe towards a regime which will deliberately aim at controlling and directing economic forces” (CW 19, 439). He continues, “I believe that there are many other matters, left hitherto to individuals or to chance, which must become in future the subject of deliberate state policy and centralised state control. Let me mention two—(1) the size and quality of the population and (2) the magnitude and direction of employment of the new national savings year by year” (CW 19, 441).
He wrote during 1926, “I do not think that these matters [investment] should be left entirely to the chances of private judgment and private profits” (CW 9, 292). It was Keynes who inspired the socialist Labour Party to include “centrally planned investment” in its 1926 program, Socialism in Our Time (Walker 1988, 84). Beatrice Webb penned after Keynes attended the Socialist Summer School in 1926: “Keynes seems such a treasure!…. I see no other man that might discover how to control the wealth of nations in the public interest” ([1926b] 1985, 93–94).
During 1928, he devised a National Investment Board “to mobilise and to maintain the supply of capital and the stream of savings” (1928c, 69). In “Social Reform as the New Socialism,” he states, “Modern economic organisation is liable to produce unintended and undesired results unless it is controlled from the centre” (1929, 187). Again, “I conceive that the greatest contribution that the politically minded can now make to Social progress is by thinking out the central controls scientifically sound” (1929, 191).
In A Treatise on Money, he wants to “control the rate of investment,” and “perhaps the ultimate solution lies in the rate of capital development becoming more largely an affair of the state, determined by collective wisdom and long views” (CW 5, 151–52, 190; CW 6, 145). He declared, “I am in favor of an admixture of public works, but my feeling is that unless you socialize the country to a degree that is unlikely, you get to the end of the public works program…. You have shot your bolt, and you are no better off.… I should be afraid of that as the sole remedy” (1931, 494). He declared during his 1931 speech to the Society of Socialist Inquiry and Propaganda, “The central control of investment” is “urgently called for on practical grounds” (CW 21, 36). Clearly, Keynes advocated the socialist policy of controlling investment many years before he started developing his general theory in late 1931.
In September 1932, he advocated “a large measure of control over the volume of new investment” (CW 21, 130). Importantly, Keynes conceived socialism as government control over investment: “The chief problem would be to maintain the level of investment at a high enough rate to ensure the optimum level of employment…. The grappling with these central controls [on investment] is the rightly conceived socialism of the future” (CW 21, 137). This passage shows that Keynes viewed socialism as government control over investment, and he can be identified with socialism because he advocated this policy.
Keynes developed his general theory by mid-1933, and it must be stressed that he invented the theory to serve as an economic justification for his previously held political and policy views.This is not controversial. Don Patinkin writes, “the purpose of the theory is to provide a rigorous underpinning for a policy” (1976, 18, xxiii, 9; Meltzer 1988, 5, 303). According to Gilles Dostaler, “The economic theory he developed, known more appropriately as ‘political economy’, was subordinate to politics” (2007, 80). In short, Keynes was not a value-free economist: “economic theory was seen by Keynes as being scope-dependent. It had lost all presumptions of neutrality from values” (Carabelli 1988, 159; Fitzgibbons 1988, 43–44). He wrote, “I am not one of those who believe that the business cycle can be controlled solely by manipulation of the short-term rate of interest, that I am indeed a strong critic of this view.… My proposals for the control of the business cycle are based on the control of investment” (1933a, 675). Under capitalism, “there should be on the average a tendency to severe unemployment” (KL, L9); but there is “no unemployment [in a] Socialist or Communist state” (KL, I3).The Keynesian economist Paul Davidson realizes, “There is never involuntary unemployment of slaves” (2007, 192n3). According to Mises, “total enslavement of all members of society is not a merely accidental attendant phenomenon of the socialist management. It is rather the essential feature of the socialist system…. Either man is free to live according to his own plan or he is forced to submit unconditionally to the plan of the great god state” ([1968] 2007, 44). Hayek writes, “Socialism means slavery” ([1944] 1994, 16). He declared in November 1934, “Private capitalism is in this matter [i.e., investment] an open scandal and grossly inefficient. There may be no remedy except the direction of long-term investment by the State” (KL, H32). The Labour Party put Keynes’s National Investment Board in its 1935 program, For Socialism and Peace, and thereby certified that he advocated socialist policy (Walker 1988, 123). Labour leader Hugh Dalton recognized, “Such a board will, I believe, be one of our most effective instruments of Socialist planning” (quoted in Pimlott 1985, 218).
In The General Theory, he asserts that the “functionless investor” has “uncontrollable and disobedient psychology” (CW 7, 376, 317). Investors’ “animal spirits” mean “the mass psychology of a large number of ignorant individuals is liable to change violently” (CW 7, 161–62, 154). For Keynes, “The weakness of the inducement to invest has been at all times the key to the economic problem” (CW 7, 347–48). Therefore, “I expect to see the State, which is in a position to calculate the marginal efficiency of capital-goods on long views and on the basis of the general social advantage, taking an ever greater responsibility for directly organizing investment” (CW 7, 164). He declares, “I conclude that the duty of ordering the current volume of investment cannot safely be left in private hands” (CW 7, 320; CW 29, 232).
He writes in a 1938 letter to President Roosevelt, “Durable investment must come increasingly under state direction” and investors should be treated like “domestic animals” because they have “delusions” (CW 21, 438). For Keynes, “The Board of National Investment would in one way or another control by far the greater part of investment” (CW 14, 49, emphasis added). He warned in 1943, “Public works at short notice is a clumsy form of cure and not likely to be completely successful” (CW 27, 326). Instead, he demanded “the bulk of investment … under public or semi-public control” (CW 27, 322). Three months before his death in 1946, he boasted that the idea of a “National Investment Board … is a very ancient one with me” (1946). In summary, Keynes must be defined as a socialist because he wanted to transfer ultimate control over investment from private investors to government.
Keynes realized that government control over investment leads to government control over virtually all economic activity. As Mises writes, “People can consume only what has been produced” ([1955] 2007, 53). Comprehensive government control of investment means government determines what is produced and, consequently, what is eventually consumed. Keynes admits, “It is not possible to control production without controlling consumption in an equally drastic manner” (CW 16, 114). But investment and consumption are the only components of aggregate demand in the Keynesian framework. Keynes knew that socializing investment gives the government control over both components of aggregate demand. In short, Keynes’s call for government control of investment was a call for government control over the entire economy.
In addition to the non-human factors, Keynes advocated government control over the human means of production. If the government controls investment goods, it must also control the workers that work with those goods. The government must control each person’s occupation, meaning it must control where each person lives and works. Simply put, government control of investment requires extensive government control over the population. Actually, Keynes went beyond simple control of the workforce. In addition, he advocated systematic government control over the quantity and quality of the population.
Keynes was a lifelong eugenicist. He became treasurer of the Cambridge University Eugenics Society in 1911 (Marshall 1911, 284; Toye 2000, 141), and he was vice president of the British Eugenics Society from 1937 to 1944. Just sixty-seven days before his death, he endorsed “the most important, significant and, I would add, genuine branch of sociology which exists, namely eugenics” (1946b, 40). In Prolegomena to a New Socialism, he confirmed a direct link between his socialism and ideas on population by listing “Population, Eugenics” as “Chief preoccupations of the State” (1924d, document 4). He proclaimed to the Soviets in 1925, “There is no more important object of deliberate state policy than to secure a balanced budget of population” (CW 19, 437). Keynes declared in another speech,
In the light of present knowledge I am unable to see any possible method of materially improving the average human lot which does not include a plan for restricting the increase in numbers [of population]…. It may prove sufficient to render the restriction of offspring safe and easy … Perhaps a more positive policy may be required…. [I] would like to substitute schemes conceived by the mind in place of the undesigned outcome of instinct and individual advantage playing within the pattern of existing institutions. (CW 17, 453, emphasis added)
Beyond quantity, Keynes wanted government to control the quality of the population: “the community as a whole must pay attention to the innate quality as well as to the mere numbers of its future members” (CW 9, 292). He was chairman of the Malthusian league, and that organization’s motto was non quantitas sed qualitas (not quantity but quality). He declared in his 1927 address, “We of this society are neo-Malthusians,” and “I believe that for the future the problem of population will emerge in the much greater problem of Hereditary and Eugenics. Quality must become the preoccupation” (1927, 114). These passages show that Keynes called for comprehensive government control over all aspects of production, including the human beings who comprise the labor force.Other than O’Donnell (1992, 779–80), influential Keynes historians, including Harrod, Patinkin, Skidelsky, and Moggridge, never mention his views on population and eugenics. But such views are inevitable given his socialism. Mises explains, “Without coercive regulation of the growth of population, a socialist community is inconceivable. A socialist community must be in a position to prevent the size of the population from mounting above or falling below certain definite limits” ([1922] 1981, 174). Also see Mises ([1922] 1981, 531; [1949] 1998, 224).
Keynes and Marx had similar visions, and Keynes had far more sympathy for the Soviet experiment than is commonly recognized. However, Keynes was a non-Marxist socialist. First, he rejected Marx’s revolutionary approach to socialism. Opposed to Marx, he wanted to implement socialism gradually: “Socialisation can be introduced gradually,” and “We have everything to lose by the methods of violent change” (CW 7, 378; CW 9, 267). Second, Keynes was an elitist, and his elitism made him allergic to Marx’s proletarian class analysis: “The Class war will find me on the side of the educated bourgeoisie,” and “The right solution will involve intellectual and scientific elements which must be above the heads of the vast mass of more or less illiterate voters” (CW 9, 297, 295). Opposed to Marx’s proletarian socialism, he advocated elitist socialism. Keynes was a non-Marxist socialist, and he viewed his brand of “anti-Marxian socialism” as “the true socialism of the future” (CW 7, 355; CW 19, 222).
THE ETHICS OF CAPITALISM AND SOCIALISM Although the significance of Keynes’s ethical theory is often emphasized, its extreme radicalism is not. Keynes’s categorical rejection of general rules is radical to the extreme. General rules make society possible. Hayek writes, “Life of man in society, or even of the social animals in groups, is made possible by the individuals acting according to certain rules” (Hayek [1960] 2011, 216). In fact, “Rules of conduct [are] the basis of a prescriptive science of ethics” (Hayek [1982] 2013, 24). By overthrowing general rules, Keynes seems to overthrow the basis of society and ethics. Thus, from an ethical standpoint, he was certainly correct to describe himself as a “radical” and “heretic” (CW 20, 265, 527; CW 13, 489). How is Keynes’s radical ethical thought related to his views on capitalism and socialism?
Traditionally, capitalism is defined as a social system based on private property in the means of production. As this definition indicates, capitalism is a social system based on rules—precisely, the general rules of private property. Fundamentally, free market capitalism is a social system based on one supreme ethical rule: never use violence against the person or property of another human being, unless defending person and property from aggressive violence. This general rule of conduct is called the non-aggression principle.Murray N. Rothbard was the twentieth century’s most consistent champion of the non-aggression principle ([1962] 2004, 1053n4; [1973] 2006, 27, 55, 282; [1982] 1998, 24, 42, 52, 82, 131). Among economists, similar ideas are found in Friedman ([1962] 2002, 14, 22, 39), Hayek ([1982] 2013, 221), and Knight (1939, 5). Pure capitalism is a social system in which the non-aggression principle is universally obeyed. Rothbard writes, “the free market is a society in which all exchange is voluntary [non-violent]. It may most easily be conceived as a situation in which no one aggresses against person or property” ([1962] 2004, 1067).This idea is not unique to Rothbard. Mises writes, “In the market economy the individual is free [from violence] in his actions as far as private property and the market extend … no force is used unless for the protection of private property and of the market against violence” ([1940] 2011, 14). Rothbard writes, “A society formed solely by the market has an unhampered market, or free market, a market not burdened by the interference of violent action” (Rothbard [1962] 2004, 90–1; 1982 [1998] 40). Free market capitalism is predicated on an ethical position that accepts a general rule of conduct—the non-aggression principle.
For Moore, it is impossible to prove the general rules of private property are universally correct. Still, he insists they should never be broken: “The common legal rules for the protection of property must serve greatly to facilitate the best possible expenditure of energy…. A general observance of them would be good as a means” (1903, 157). In sharp contrast, Keynes’s ethical system is an attack on rules and, by extension, the rules of private property. The Keynesian ethical theory is utterly incompatible with the non-aggression principle. He wrote, “I am afraid of principle” and “What a very odd, and sometimes terrible, thing are strict principles!” (CW 20, 379; CW 10, 234). Actually, Keynes emphatically rejected capitalism’s non-aggression principle, and ridiculed it as “dogma” and the “political economist’s religion” (CW 9, 280–81).Keynes’s rejection of non-aggression explodes the claim that he was liberal. Mises writes, “For the liberal, any system which does not exclude every violent interruption of peaceful development is, from the very outset, out of the question” ([1927] 2005, 134). Frank Knight notes, “The essential social-ethical principle of liberalism … is that all relations between men ought ideally to rest on mutual free consent, and not on coercion” (1939, 5). In contrast to liberalism, “Socialism is the expression of the principle of violence” (Mises [1922] 1918, 320). Capitalism is a rule-based social system, and Keynes categorically rejected all rules. Therefore, Keynes’s ethical theory is incompatible with capitalism.
Keynes’s rejection of general rules is consistent with socialism. As Hayek writes, “Socialism lacks any principles of individual conduct” ([1982] 2013, 484).From a legal perspective, Keynes’s ethical theory means he was a legal positivist. But as Hayek wrote, “Legal positivism is … the ideology of socialism” (Hayek [1960] 2011, 353; [1982] 2013, 211). Also, Keynes’s rejection of rules means he rejected the rule of law: “The rule of law and socialism are incompatible” (Hayek [1960] 2011, 357n64). In distinct contrast to capitalism, socialism is always based on an ethical position that rejects the rules of private property. George Bernard Shaw, the man who converted Keynes to socialism in 1907, wrote, “Socialism, reduced to its simplest legal and practical expression, means the complete discarding of the institution of private property.… In Socialism, private property is anathema.… In Capitalism, private property is cardinal” (1929, 3).Kingsley Martin recalled, “Maynard Keynes wrote that they [H.G. Wells and G.B. Shaw] were our two schoolmasters; Wells was the stinks master, while Shaw taught divinity” (1970b, 94). Also see note 8. Keynes’s categorical rejection of general rules means he categorically rejected the rules of private property: “There is no ‘compact’ conferring perpetual rights on those who Have or on those who Acquire [property]” (CW 9, 287). On the spectrum of ethical thought that runs from pure socialism to pure capitalism, Keynes’s radical ethical theory is one of pure socialism. Although his ethical theory by itself does not make him a socialist, the Keynesian ethical theory is compatible with socialism.
Indeed, Keynes was a non-Marxist socialist, and his ethical theory was central to his socialism. Socializing investment requires government to systematically break the general rules of private property; it requires government to systematically violate capitalism’s non-aggression principle. However, Keynes does not view this as an ethical problem, for there is no need to obey general rules in his ethical theory. To him, “It is not true that individuals possess a prescriptive natural liberty…. Individuals acting separately to promote their own ends are too ignorant or too weak” (CW 9, 287–88). He argues socializing investment will benefit everyone, including the victims of government’s aggressive violence:
Whilst, therefore, the enlargement of the functions of government … would seem to [advocates of rules] to be a terrific encroachment on individualism, I defend it, on the contrary, both as the only practicable means of avoiding the destruction of existing economic forms in their entirety and as the condition of the successful functioning of individual initiative. (CW 7, 380)
A CRITIQUE OF KEYNES’S ETHICAL THEORY Importantly, Keynes maintained his early ethical theory throughout his entire life. As noted above, he boasted in his 1938 speech “My Early Beliefs,” “I remain, and always will remain, an immoralist” (CW 10, 447).Bateman (1987), Davis (1994, 70–71, 98, 139, 176), and Gillies (2006, 204–16) argue Keynes abandoned the logical theory around 1931. After 1931, however, Keynes confirmed his conceptual framework never changed (CW 7, 148n1; CW 16, 113; CW 29, 289). Those who agree he maintained the logical theory include Carabelli (1988, 151, 155, 173, 176), Lawson (1985, 914), Meltzer (1988, 120, 139, 199, 182–83), Moggridge (1992, 623), O’Donnell (1989, 141–48, 248), Runde (1994), and Skidelsky (1992, 83, 87, 543). Keynes’s logical theory of probability is the lynchpin of his ethical attack on general rules. However, if the logical theory is flawed, then his ethical theory cannot justify violating general rules, including the general rules of private property. Is the logical theory of probability viable?
Since the very beginning, Keynes’s logical theory of probability has been almost universally rejected by philosophers of probability. As noted, he wrote his fellowship dissertation on the logical theory, and it was rejected in March 1908. One dissertation examiner, Alfred North Whitehead, reported his theory was “muddled and of very mediocre value” and parts of the theory were “very perfunctory,” “poor in quality,” and a “hopeless fog” (1908, 2). The other examiner, William Ernest Johnson, wrote that facets of Keynes’s theory were “essentially unsound” and he had “not fully understood the arguments of his opponents” (1908, 3). Even Lytton Strachey, Keynes’s lover and confidant, described the logical theory as “a mass of muddled facetiousness” ([1908] 2005, 138). Lawrence Klein, a Keynesian economist and later Nobel laureate, noted in 1951, “Keynes’s ideas on probability represent a minority position among current workers on the subject and are not those for which we shall long remember his work … He did not make a sensational advance in probability theory” (1951, 446; Runde 1994, 97).
There are several technical problems with Keynes’s logical theory of probability. First, on the logical theory, numerical probability is only possible when all outcomes are equally probable. Keynes writes, “In order that numerical measurement may be possible, we must be given a number of equally probable alternatives” (CW 8, 44, 70). This is an extremely strict requirement for numerical probability. It essentially means probability mathematics can only be applied to games of chance. Keynes’s requirement of equal probability means his logical theory cannot explain a loaded die (Mises [1928] 1981, 69; Gillies 2000, 18). Furthermore, the equal probability requirement means the logical theory can only explain the uniform probability distribution. It cannot explain other distributions, such as the normal distribution. The normal distribution is perhaps the most important concept in statistics, and any theory of probability that is incompatible with the normal distribution must be problematic.
Moreover, the logical theory of probability cannot explain the continuous probability distribution. Keynes writes, “A rule can be given for numerical measurement when the conclusion is one of a number of equiprobable, exclusive, and exhaustive alternatives, but not otherwise” (CW 8, 122). For Keynes, numerical probability requires exhaustive and “indivisible alternatives” (CW 8, 65). However, the continuous probability distribution means the alternatives are not indivisible; the alternatives are in a continuous interval with an infinite number of values. This means the logical theory can only explain the discrete distribution, and not the continuous distribution (Gordon 1992, 155; Gillies 2000, 43, 48). But many important and successful applications of probability mathematics involve the continuous case. A theory of probability that cannot explain the continuous probability distribution must be inadequate.
Beyond all this, the entire program of the logical theory is problematic. For Keynes, probability is a logical relation between the premises and the conclusion of a logical argument: “Let our premises consist of any set of propositions h, and our conclusion consist of any set of propositions a, then if a knowledge of h justifies a rational belief in a of degree α, we say that there is a probability-relation of degree α between a and h” (CW 8, 4; 1908, 139, 142). To demonstrate, consider the following logical argument:
h1. All men are mortalh2. Socrates is a man∴ a. Socrates is mortal
Given the premises that all men are mortal (h1) and Socrates is a man (h2), the conclusion that Socrates is mortal (a) is logically certain, so the probability α = 100 percent. On the other hand, the conclusion that Socrates is immortal (-a) is logically impossible, so the probability is 0 percent. In the logical theory, the extreme of logical certainty is the maximum probability 100 percent, and the extreme of logical impossibility is the minimum probability 0 percent. But for Keynes, logical certainty is not achievable in most practical situations. In most cases, the conclusion only partially follows from the premises, so the probability will usually fall in a range between 0 and 100 percent. For example, consider the case of rolling a three spot on a die:
h1. The die has six sidesh2. The die has a single three spoth3. The die is fair∴ a. The outcome is three
The conclusion of rolling a three spot is not logically certain and is not logically impossible. Given the premises, the conclusion only partially follows, so the probability falls somewhere between the logical extremes of 0 and 100 percent. In the case of rolling a three spot, logical intuition tells us that the probability α = 16.67 percent. When dealing with a syllogism, the logical structure of the human mind intuitively perceives that the probability is 100 percent. Similarly, when rolling a die, the logical structure of the human mind intuitively perceives that the probability of rolling a three spot is 16.67 percent. Since the logical theory extends logic beyond the syllogism, Keynes viewed his theory as a more “general theory” of logic (CW 8, 106).
In logic, however, the conclusion is true only if the premises are true. This means logical probabilities can only successfully guide action if the premises are true. But how can we know whether the premises are true? How can we know the die has six sides and a single three spot? Moreover, how can we know whether the die is fair and not loaded? Since these premises are not self-evidently true, the only way to confirm the truth of these premises is to empirically examine the die. But this introduces an empirical requirement into the logical theory. The only way to confirm the die is fair and not loaded is to roll the die numerous times in the real world, and evaluate the empirical outcomes. This example illustrates that logical probability can only describe the real world if the premises are confirmed with the frequency theory: “Without the complement of the frequency definition, probability theory cannot yield results that are applicable to real events” (Mises [1928] 1981, 221–22, 70). Contrary to Keynes, it is impossible for probability to be “purely logical” (CW 8, 4).
Keynes’s entire ethical justification for violating general rules depends on his logical theory of probability. The logical theory amplifies the human ability to understand the probable consequences of action, and thereby frees actors to violate general rules like the non-aggression principle. Keynes’s ethical justification for violating general rules is central to his politico-economic thought, because his brand of non-Marxism socialism requires government to systematically break the general rules of private property. However, since the logical theory of probability is flawed, Keynes’s ethical theory is not viable. In the end, the ethical foundation of Keynes’s non-Marxist socialism is flawed.
CONCLUSION Not all ethical theories are compatible with capitalism or socialism. Instead, capitalism and socialism are based on irreconcilable ethical views about private property. Specifically, capitalism accepts and socialism rejects the general rules of private property. Keynes rejected all rules, and he invented his ethical theory as an intellectual justification for violating general rules. As Robert Skidelsky writes, “He invented theory to justify what he wanted to do” (1992, 344). Keynes’s categorical rejection of all rules means his ethical thought is incompatible with capitalism and consistent with socialism. He embraced the ethic of pure socialism by January 1904, and the evidence confirms he was a non-Marxist socialist from no later than October 1907 until his death in April 1946. However, the logical theory of probability, the key to his ethical justification for non-Marxist socialism, is flawed. Therefore, Keynes’s radical ethical theory is not a successful ethical justification for any brand of socialism, including his own.
APPENDIX Document 1. The Principles of Probability (1905)
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Document 2. Keynes to Lytton Strachey (1907)
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Document 3. John Neville Keynes (1911)
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Document 4. Prolegomena to a New Socialism (1924)
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Document 5. Society for Cultural Relations with the USSR (1924)
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Document 6. Society for Cultural Relations with the USSR (1944)
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Beyond the usual arguments about incentives and taxes, a Universal Basic Income is a dangerous policy that supercharges the state and threatens to heighten tensions between different groups in society.
Original Article: "4 Reasons to Oppose a Universal Basic Income"
Mises Fellow Vytautas Žukauskas discusses the experience of Lithuania transitioning to a market economy after independence from the USSR.
Recorded at the Auburn University Economics Club on March 21, 2019.
Compiled by Edward W. FullerEdited with an Introduction by David Gordon
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Prolific and radical hardly begin to describe him — but his important work has never been brought together like this, a reference guide and a fun book you can open at random for the best “Murrayisms” on any topic!
Here are just a few teasers:
Deflation, far from being a catastrophe, is the hallmark of sound and dynamic economic growth. Deflation — Making Economic Sense, p. 16 ...throughout history, despots and ruling elites of States have had far more need of the services of intellectuals than have peaceful citizens in a free society. For States have always needed opinion-moulding intellectuals to con the public into believing that its rule is wise, good, and inevitable; into believing that the “emperor has clothes.” Intellectuals — For a New Liberty, p. 14 Integration cannot be achieved by law and coercion; it must first come willingly into the hearts of men. Racism — Left and Right, p. 491 Professor Mises has keenly pointed out the paradox of interventionists who insist that consumers are too ignorant or incompetent to buy products intelligently, while at the same time proclaiming the virtues of democracy, where the same people vote for or against politicians whom they do not know and on policies which they scarcely understand. To put it another way, the partisans of intervention assume that individuals are not competent to run their own affairs or to hire experts to advise them, but also assume that these same individuals are competent to vote for these experts at the ballot box. Democracy — Man, Economy, and State, p. 886 Secession is a crucial part of the libertarian philosophy: that every state be allowed to secede from the nation, every sub-state from the state, every neighborhood from the city, and logically, every individual or group from the neighborhood. Secession — Libertarian Forum v. 1, p. 17
ABSTRACT: This article discusses the influence of the initiation of the Second Socialist Calculation Debate on my own subsequent research and contributions to that debate, and briefly summarizes that research presented in articles on arguments made by Plato, Karl Marx, Friedrich von Wieser, Friedrich Hayek, Lionel Robbins, Joseph Schumpeter, and Israel Kirzner. It also mentions some of the changes in Austrian economics understanding stimulated by the Second Socialist Calculation Debate, and suggests a direction for future research.
KEYWORDS: Friedrich Hayek, Karl Marx, Lionel Robbins, Friedrich von Wieser, calculation, socialism, sociology JEL CLASSIFICATION: B1, B2, P2, P5 Sam Bostaph (bostaph@udallas.edu) is Emeritus Professor of Economics at the University of Dallas.
Quarterly Journal of Austrian Economics 21, no. 3 (Fall 2018) full issue, click here.
It is a pleasure to be here at this prestigious conference, and to be on this panel concerned with the most important economic issue of the past two centuries—that of economic calculation. After all, to economize is to calculate; it is to seek the lowest expected opportunity cost of the means to achieve the end for which one is economizing. That is why Mises argued that the socialist planned economy is in reality no economy. It cannot by definition calculate the expected opportunity costs of higher order goods in order to assess their relative scarcity, and thus enable a decision of how they are to be efficiently used in the production of lower order goods. It cannot do so because without private property in higher order goods, there cannot be market-determined prices for those goods to reveal their current relative scarcities and thus allow economic calculation.
Joe Salerno asked each of us to discuss our respective contributions to the second socialist calculation debate, how this most recent debate influenced our later research, and how we think Austrian economics has changed as a result of that debate.
My own interest in this topic stems from my interest in imagined, as well as attempted, historical utopias. As a scholar in the Austrian school tradition, I cannot help being in part a sociologist. Albion Small recognized this aspect of the Austrian school in his book Origins of Sociology (1924) where he devoted considerable space to a discussion of Carl Menger’s contribution to the discipline. Of course, I use the term “sociology” in the sense that Ludwig von Mises used it in his early scholarship. Later, Mises would substitute the term “praxeology” for “sociology” as the latter term came to mean a sort of philosophy of history, rather than a science of human action.
At one time, I intended to write a history of various theories of communism. In researching the topic, I came across a comment by Karl Marx in his inaugural article as editor of the Rheinische Zeitung. Marx identified Plato as an early communist theorist. “That can’t be true,” I thought. The research that falsified any such claim led to my 1994 contribution to David Reisman’s edited collection Economic Thought and Political Theory. Of course I argued against such a simple-minded assessment of Plato’s Republic and Laws. I also became aware of Friedrich von Wieser’s attempt at rationalizing a socialist utopia in his Natural Value during the preliminary research I did on communist theories.
At one time, I intended to write a history of various theories of communism. In researching the topic, I came across a comment by Karl Marx in his inaugural article as editor of the Rheinische Zeitung. Marx identified Plato as an early communist theorist. “That can’t be true,” I thought. The research that falsified any such claim led to my 1994 contribution to David Reisman’s edited collection Economic Thought and Political Theory. Of course I argued against such a simple-minded assessment of Plato’s Republic and Laws. I also became aware of Friedrich von Wieser’s attempt at rationalizing a socialist utopia in his Natural Value during the preliminary research I did on communist theories.
Meanwhile, Joe Salerno had attracted my interest back to Austrian school theory with his 1990 article “Ludwig von Mises as Social Rationalist.” There Joe began the process of dehomogenizing Mises and Hayek and initiated the second socialist calculation debate, which has occupied some of us Austrians for the past thirty years. When I read Joe’s 1993 contribution to that debate, it struck me that his reference to Hayek as strongly influenced by his teacher and mentor, Wieser, deserved a firm grounding. That caused me to go back and intensively read Wieser. The result was my summer 2003 QJAE article “Wieser on Economic Calculation under Socialism.” After having exhaustively studied Wieser’s published writings on the socialist planned society, I not only placed him in the general equilibrium tradition of Walras, but also explained the total emptiness of his theory of planning. I found his concept of a unit of “natural value” as the basic unit of economic calculation to be nothing but a faux “util” and thus a fantasy, and his explanation of “imputation” as the method of deriving the values of higher order goods from the “natural values” of first order goods to be spurious. The terms in his equations are ambiguous, and his conception of imputation appears to be an attempt at a mere static theory of distribution.
I concluded that Hayek’s attempt to use Wieser’s “simple economy” of socialism as an analytical device as late as 1941 in his Pure Theory of Capital, as well as a number of his other laudatory references to Wieser over the years, to be telling. Also, Hayek’s use of a general equilibrium context for most of his own theoretical work places him pretty firmly in the Walras/Wieser tradition. This may explain Hayek’s emphasis on knowledge problems in his critique of the planned socialist society, rather than on its inability to use economic calculation.
To my surprise and delight, my article won the 2005 Lawrence A. Fertig prize. For that I remain greatly thankful to the prize committee. I was stimulated to continue my research on Wieser and that had two results. While a visiting professor at the University of Economics in Prague, Czech Republic, in 2005 I had the honor of delivering the inaugural Wieser lecture. This later appeared as an article titled “Friedrich von Wieser’s Theory of Socialism: A Magnificent Failure” in the university’s journal Politicka Ekonomie. There I argued that the views that became the backbone of Wieser’s last book, The Law of Power (1926), actually lay behind many of his expressed criticisms of the market economy and his desire to rescue the theory of the planned economy.
Perhaps those previous two articles explain why I was later invited to contribute the Wieser chapter in a book collection on Austrian school economists. Unfortunately, after I had completed my 55-page contribution, publication apparently fell through and the book was never published. I hope to be able to harvest something from that manuscript at some point in the future.
At any rate, articles in the second calculation debate continued to stimulate my research and one result was a QJAE article arguing that Mises’s methodology was not an extension of that of Lionel Robbins. Rather, the influence actually ran the other way, although significant differences between the two approaches remain.
Another project that stemmed from arguments presented during the recent calculation debate was a result of references to Joseph Schumpeter as another of Wieser’s students. Schumpeter is known particularly for his theory of economic development and his concept of the entrepreneur as a force for “creative destruction.” I was intrigued to look for signs of Wieser’s influence on Schumpeter and I found them while reading through Schumpeter’s various publications. More importantly, I was astonished at the generally ad hoc nature, classical school roots, and Walrasian general equilibrium context of Schumpeter’s work. Schumpeter’s entrepreneurial theory stands in stark contrast to that of Mises, as well as to Israel Kirzner’s extension of Mises’s concept of functional entrepreneurship.
The result was my 2013 QJAE article unfavorably contrasting Schumpeter’s theory of entrepreneurship with that of Kirzner. The research on Kirzner’s theory had a further result. I decided to use it in a historical study of the steel magnate and entrepreneur, Andrew Carnegie. After obtaining a publisher, I read through the major biographies of Carnegie and discovered that none of them really explained why Carnegie was successful. They detailed his success, but only historically. Historical explanation needs more than bare facts, however obtained. It needs the application of theory to identify historical cause and effect relations. What was missing from what I read was the grasp of economic understanding that is only provided by Austrian school theory. So, I used an Austrian school context and Kirzner’s entrepreneurial theory as key elements of my economic biography of Carnegie.
Now that I am done with that project, I plan to return to writing my book on the early Austrian school trio of Menger, Böhm-Bawerk, and, of course, Wieser. So far, I only have about a couple of hundred pages and I am stuck on Böhm-Bawerk’s capital theory, but hope to dislodge myself. I particularly want to understand why Menger viewed Böhm-Bawerk’s capital theory as a big mistake.
How has Austrian economics changed as a result of the second economic calculation debate? Well, it certainly opened my eyes concerning the development of the Misesian paradigm, as compared to that of Hayek. And, it greatly increased our understanding of the theoretical failures of the various planned socialist society models. In addition, it has produced a refinement of our understanding of what Misesian economic calculation assumes as necessary for the market process to take place. Most particularly, it has highlighted the radical importance of private property rights, subjective aspects of ownership that affect relative scarcity, and accurate cost accounting.
Added to that is the additional understanding of the underwhelming arguments for what is now called “market socialism.” I find it ironical that when pressed to explain how market socialism could solve each of the successive problems identified with their successive models, advocates of market socialism step-by-step adopted features of the private property, free market model. And they have done this while still trying to keep an iron grip on their wish for an economy with no private property rights in higher order goods.
This started with the Lange/Taylor early attempts to adopt a surrogate perfect competition, general equilibrium model, with no private property in higher order goods. After this was exposed as a fantasy, then came Lange’s use of a Walrasian auction model of price determination. After that was knocked down, market socialism’s defenders proposed to turn firm managers into pretend entrepreneurs, without giving them the discretion over all of the firm’s physical and financial resources that exists in a private property regime. This infects the market socialist financial sector with a fatal weakness. The administrators have no financial skin in the game—kind of like the Board of Governors of our Federal Reserve System. And we all know the recent consequences of that morbid fact.Of course, there is a sense of “skin in the game” for administrators in a Stalinist system. See Simon Sebag Montefiori (2004), for detailed descriptions of the arrest, imprisonment, sentencing to forced labor, or execution of soviet administrators, as well as their families, who failed to achieve the goals set for their production units during the Stalin era of the USSR. This even extended down to the local level of agricultural production. In his Memoirs (1996, pp. 24–27), former General Secretary, then President of the USSR, Mikhail Gorbachev relates how his grandfathers were arrested, tortured, and accused of being Trotskyite counterrevolutionaries for their loss of grain, destruction of livestock, and repression of local Stakhanovites during the 1930s. One was exonerated and the other sent to a forced labor camp.
One is left with the question of why some perfectly intelligent people still lust for a society without private property rights in potentially productive resources. Is it simply the result of a personal lust for power? Or does it stem from the envy of those who are more materially successful in a free market context? I leave the question for future research. Particularly, I hope that young Austrian school economists will turn their interest to China. Under Xi Jinping, it looks like we have an emerging Stalinist regime. If so, it will function no better than its original, as the socialist calculation debate has taught us.
ABSTRACT: In exalting the subjectivity of value, the marginalist revolution posed a fundamental problem for economic theory. Each person chooses how to allocate his means and thereby, economize his actions by rank ordering the value of alternatives. Being interpersonally incomparable, ordinal ranks cannot serve directly to economize means within a division of labor. Neoclassical economists solved this problem by foregoing an explanation of the division of labor grounded in the reality of human persons and instead, constructed formal, mathematical models. F.A. Hayek’s subjectivist response to the neoclassical project was to augment formal, mathematical models with select characteristics of human persons. In contrast, Ludwig von Mises grounded economic theory in the reality of human persons. He demonstrated how voluntary exchange of goods for and against money generate cardinal numbers from ordinal ranks. Actual money prices emerging from actual human choices constitute the necessary condition for economizing resources across the division of labor. Unlike subjective valuations, which cannot be compared interpersonally, and barter exchange ratios which are incommensurate, money prices can be compared. Economic calculations of net income and net worth, furthermore, are a phenomenon of the market economy alone. Mises’s approach not only solved the problem of economizing resources in a division of labor, but provides a robust framework for economic research.
KEYWORDS: economic calculation, subjectivism, economizing, general equilibrium, socialism JEL CLASSIFICATION: B13, B14, B24, B25, P11, P21, P51 Jeffrey Herbener (jmherbener@gcc.edu) is chair of the Department of Economics and Sociology at Grove City College.
Quarterly Journal of Austrian Economics 21, no. 3 (Fall 2018) full issue, click here.
It is probably no exaggeration to say that every important advance in economic theory during the last hundred years was a further step in the consistent application of subjectivism (Hayek, 1955, p. 52).
INTRODUCTION F.A. Hayek (1955, pp. 52–53) appended the following footnote to his famous maxim concerning subjectivism quoted above:
This is a development which has probably been carried out most consistently by Ludwig von Mises, and I believe that most peculiarities of his view which at first strike many readers as strange and unacceptable trace to the fact that in the consistent development of the subjectivist approach he has for a long time moved ahead of his contemporaries. Probably all the characteristic features of his theories—from his theory of money (so much ahead of the time in 1912) to what he calls his a priorism—his views about mathematical economics in general and the measurement of economic phenomena in particular, and his criticism of planning all follow directly (although, perhaps, not all with the same necessity) from this central position. See particularly his Grundprobleme der Nationalökonomie (1933) and Human Action (1949).
One achievement of the Salerno camp in the second calculation debate was to demonstrate that Hayek, at least, leaves the wrong impression of the relationship between Mises’s work and his own. By referring to “the subjectivist approach,” Hayek seems to imply that his approach and that of Mises are fundamentally the same. Although Hayek admits to some differences in particulars, since Mises’s views, as he puts it, “all follow directly (although, perhaps, not all with the same necessity) from this central position.”
Mises, however, did not accept the subjectivist approach of Friedrich von Wieser, on which Hayek patterned his own framework, but instead worked within the causal-realist approach of Carl Menger and Eugen von Böhm-Bawerk.On Wieser’s approach, see Bostaph (2003). In discussing the two traditions in Austrian economics, Joseph Salerno (1999, p. 37) wrote:
It is important to note that even at this early stage, the Austrian school was deeply divided on a crucial issue of basic theory. On the one hand, Böhm-Bawerk fully absorbed Menger’s causal-realist approach to price theory and endeavored to develop it further and apply it to new areas. Wieser, on the other hand, seized narrowly on Menger’s “subjectivism” as embodied in the principle of marginal utility and, while usefully elaborating some of the implications of this principle, completely ignored the structure of reality-based price theory that Menger had labored to build upon it. Wieser’s purpose was to construct his own peculiar ideal of social welfare based on a state of general equilibrium that he called “natural value,” and to link it through the concept of marginal utility to foundations in human psychology.
With his acceptance of general equilibrium and emphasis on human psychology, Hayek belongs to the Wieserian wing of the Austrian school. Hayek attempted to graft onto the neoclassical general equilibrium conception his own insights into human learning, knowledge, and other “subjectivist” elements. In discussing the main contributions to modern price theory for an entry in The New Palgrave: A Dictionary of Economics in the early 1980s, which remained unpublished at the time, he wrote (Hayek, 1992, pp. 53–54):
Equally important is what may well be regarded as the final formulation of the marginal utility analysis by J.R. Hicks of the marginal utility analysis of value in the concept of the marginal rate of substitution, based on the indifference curve technique introduced by Irving Fisher and F. Y. Edgeworth. This conception of varying rates of substitution or equivalence, wholly independent of any conception of measurable utility, may well be regarded as the ultimate statement of more than half a century’s discussion in the tradition of the Austrian school….
Arguably, Hayek’s claim about Mises leading the advance of subjectivism may not be mistaken per se, however, Mises’s approach to grounding economic theory on a proper subjectivist foundation differed dramatically from that of Wieser and his followers.
ECONOMIC CALCULATION AND SUBJECTIVISM IN HUMAN ACTION In his magnum opus, Human Action, Mises subsumes subjectivist aspects of catallactics within the concept of economic calculation. The book is organized into seven parts containing 39 chapters. He devotes one entire part of the book, part 3, to economic calculation. It contains three chapters. In one of those chapters, Valuation without Calculation, we find Mises’s discussion of the subjectivity of value. He did not offer insights about how the advance of the concept of subjectivity can make the general equilibrium framework more suitable to economic theorizing. Instead Mises focused on two fundamental principles concerning the subjectivity of value.
First, he juxtaposed the ordinal ranking inherent in valuation with cardinal numbers in which the goods being ranked are measured. He did this to demonstrate a principle of economic calculation. He wrote (Mises, 1998, p. 201):
The immediate goal of acting is frequently the acquisition of countable and measurable supplies of tangible things. Then acting man has to choose between countable quantities; he prefers, for example, 15 r to 7 p; but if he had to choose between 15 r and 8 p, he might prefer 8 p…. This is tantamount to the statement that he prefers a to b and b to c…. It certainly does not render reckoning with cardinal numbers possible. It does not open a field for economic calculation and the mental operations based upon such calculation.
Second, he referenced the principle he (Mises, 1998, p. 699) would call in his critique of socialist schemes to provide a method of economic calculation, “the fundamental theorem of modern economics,” namely diminishing marginal utility. His purpose was, again, to make a fundamental point about economic calculation. Mises (1998, p. 206) wrote:
There is no method available to construct a unit of value. Let us remember that two units of a homogeneous supply are necessarily valued differently. The value attached to the nth unit is lower than that attached to the (n–1)th unit.
Mises (1998, p. 206) concluded this line of argument with the following words:
It is a fictitious assumption that an isolated self-sufficient individuals or the general manager of a socialist system, i.e., a system in which there is no market for the means of production, could calculate. There is no way which could lead one from the monetary computation of a market economy to any kind of computation in a nonmarket system.
In the subsection that closes out this section of the book, which Mises titled, “The Theory of Value and Socialism,” Mises (1998, p. 207) wrote the following about subjectivism:
The illusion that a rational order of economic management is possible in a society based on public ownership of the means of production owed its origin to the value theory of the classical economists and its tenacity to the failure of many modern economists to think through consistently to its ultimate conclusion the fundamental theorem of the subjectivist theory.
ECONOMIC CALCULATION AND THE PROBLEM OF ECONOMIZING As noted above, Mises considered the “fundamental theorem of modern economics” diminishing marginal utility, which can be deduced from a person economizing with homogeneous units of a good. Although diminishing marginal utility is accepted by all modern economists, Mises was the first to perceive the implication of its reasoning for making economizing decisions about the use of resources in society and its application to this problem in socialism. Concerning the proposal of mathematical economists to solve the problem of economizing in socialism, Mises (1978, p. 112) wrote:
They failed to see the very first challenge: How can economic action that always consists of preferring and setting aside; that is, of making unequal valuations, be transformed into equal valuations, and the use of equations? Thus the socialist came up with the absurd recommendation of substituting equations of mathematical catallactics, depicting an image from which human action is eliminated for the monetary calculation in the market economy.Quoted in Salerno (1999, p. 58).
The deficiency in economic theory that needed correcting, according to Mises, was a fallacy economists held concerning economic calculation. Mises (1998, p. 202) wrote:
The elaboration of economic theory is heuristically dependent on the logical processes of reckoning to such an extent that the economists failed to realize the fundamental problem involved in the methods of economic calculation…. They misconstrued economic calculation. They took it for a category of all human action and ignored the fact that it is only a category inherent in acting under special conditions…. But they did not comprehend that money prices are the only vehicle of economic calculation. Thus most of their studies are of little use. Even the writings of the most eminent economists are vitiated to some extent by the fallacies implied in their ideas about economic calculation.
Contrary to Hayek, who thought that general equilibrium theory could be corrected by grafting subjectivist insights onto it, Mises perceived that the deficiency of the general equilibrium construct stemmed from its fallacious treatment of money. He identified two mistakes. First, the general equilibrium construct conceived of a market economy with only direct exchange and concomitantly asserted the neutrality of money. He wrote (Mises, 1998, pp. 203–204):
A serious blunder that owes its origin and its tenacity to a misinterpretation of this imaginary construction [a market with direct exchange] was the assumption that the medium of exchange is a neutral factor only…. This is, of course, what the fable of money’s neutrality implies. The whole theory of catallactics, it was held, can be elaborated under the assumption that there is direct trade only. If this is once achieved, the only thing to be added is the “simple” insertion of money terms into the complex of theorems concerning direct exchange. However, this final completion of the catallactic system was considered of minor importance only. It was not believe that it could alter anything essential in the structure of economic teachings. The main task of economics was the study of indirect exchange.
Only later economists realized that some of the most important and most intricate problems of catallactics are to be found in the field of indirect exchange and that an economic theory which does not pay full regard to them is lamentably defective.
Second, Mises noted a more momentous error drawn from the imaginary construct of a fictitious barter world, namely, that value is objective and can be measured by money.Mises (1998, pp. 697–699) repeats his indictment of the general-equilibrium framework in chapter 26 in which he criticizes mathematical economists for perpetuating the fallacy that economic calculation was possible in socialism. He wrote (Mises, 1998, p. 205):
Even Friedrich von Wieser and Irving Fisher took it for granted that there must be something like measurement of value and that economics must be able to indicate and to explain the method by which such measurement is effected. Most of the lesser economists simply maintained that money serves as “a measure of values.”
Mises’s corrective of the deficiencies of general equilibrium theory was based on his integration of money into subjective-value theory. He demonstrated (Mises, 1953) in 1912 how ordinal ranks are transformed into cardinal numbers suitable for economic calculation in a market economy. Buyers and sellers have preferences for a good they intend to exchange relative to money. They exchange to acquire the mutual benefit latent in the reverse ordering of their preferences. Competitive bidding by the buyers and competitive offering by the sellers results in a market-clearing price. As Rothbard (1991, p. 65) recounts it:
In the course of that notable integration of monetary theory and “micro” marginal utility theory, Mises was one of the very first to realize that subjective valuations of the consumer (and of laborers) on the market are purely ordinal, and are in no way measurable. But market prices are cardinal and measurable in terms of money, and market prices bring goods into cardinal comparability and calculation (e.g., a $10 hat is “worth” five times as much as a $2 loaf of bread).
Mises did not fully work out this integration and its implications until the German-language predecessor of his magnum opus, Human Action.See Rothbard (1991, p. 65) and Salerno (1999, p. 56). In that work, he demonstrated that the market economy is the only solution to transforming rank orders of value into cardinal numbers suitable for making economizing decisions in a division of labor. Only three alternatives to the market solution of monetary prices exist, according to Mises.
One is inter-personal value comparisons among the participants in the division of labor. Yet, modern economists all agree that inter-personal comparisons of value are impossible and therefore, this alternative is not entertained by modern economists as a solution to the economizing problem. A second alternative is imputation of value across the division of labor by a single person. Valuation, Mises argued, can be applied only to a self-sufficient economy, i.e., an economy in which a person is the producer of everything he consumes.As Mises (1998, p. 210) concedes, valuation is adequate to economizing resources within a family economy or that of a small tribe as well as a single person. In this case, a single mind can integrate the use of its resources across the entire array of producer goods with which it acts. It does this by imputing the value of lower-order goods to those of higher order. According to Mises, however, a single mind cannot decompose the value of the end achieved into the value of each factor’s contribution. He wrote (Mises, 1998, p. 332):
Valuation as it can be practiced by an isolated actor (Robinson Crusoe or a socialist board of production management) can never result in a determination of such a thing as quotas of value…. It is permissible to declare that, due allowance being made for time preference, the value attached to a product is equal to the value of the total complex of complementary factors of production. But it would be nonsensical to assert that the value attached to a product is equal to the “sum” of the values attached to the various complementary factors of production. One cannot add up values or valuations. One can add up prices expressed in terms of money, but not scales of preference…. The process of value imputation does not result in derivation of the value of the single productive agents from the value of their joint product. It does not bring about results which could serve as elements of economic calculation.
Mises insisted that in making economizing decisions about the use of resources in an extended division of labor, it is necessary to disentangle the contribution of each complementary factor of production used in producing each good. The necessity arises because factors of production are neither perfectly specific to each good nor perfectly non-specific among all goods. Absent either of those extreme conditions, economic calculation cannot be done by knowing only the value of goods of first order and the technical conditions of production of these goods. Which raises the third alternative: using the cardinal numbers of production possibilities as the basis for economic calculation. Although technical consideration allow the decomposition of the physical contribution to output made by each factor, these numbers have no connection to value of the ends attained. Mises wrote (1998, p. 208):
[The fact that] the various means allow for various uses, set man the tasks of allocating them to those employments in which they can render the best service. Here the computation in kind as applied by technology is of no avail. Technology operates with countable and measurable quantities of external things and effects; it knows causal relations between them, but it is foreign to their relevance for human wants and desires…. [Technology] ignores the economic problem: to employ the available means in such a way that no want more urgently felt should remain unsatisfied because the means suitable for its attainment were employed—wasted—for the attainment of a want less urgently felt.
In an extended division of labor, individual factors of production can be shifted from one line of production to another and configured in various combinations with other complementary factors of production in each production process. Therefore, to know whether or not a particular configuration of complementary factors of production will be more economizing for society than another configuration, prices of individual factors of production must exist. Mises (1998, pp. 209–210) wrote:
[The practical man] must know whether what he wants to achieve will be an improvement when compared with the present state of affairs and with the realizable projects which cannot be put into execution if the project he has in mind absorbs the available means. Such comparisons can only be made by the use of money prices…. Where there are no money prices, there are no such things as economic quantities. There are only various quantitative relations between various causes and effects in the external world. There is no means for man to find out what kind of action would best serve his endeavors to remove uneasiness as far as possible.
Mises concluded this line of inquiry by returning to the starting point in Robinson Crusoe, i.e., production in self-sufficiency instead of a division of labor. Crusoe could compare the value of output with the value of the complementary factors used because the possible combinations he can exploit are simple enough for him to impute value adequately for economizing.All of the combinations of factors of production can be valued by Crusoe through his own experience. Such cannot be done by a single person in a division of labor, especially the extended division of labor in a modern, capitalist economy. He wrote (Mises, 1998, p. 210):
There is no need to dwell upon the primitive conditions of the household economy of self-sufficient farmers. These people performed only very simple processes of production. For them no calculation was needed, as they could directly compare input and output. If they wanted shirts, they grew hemp, they spun, wove, and sewed. They could, without any calculation, easily make up their minds whether or not the toil and trouble expended were compensated by the product. But for civilized mankind a return to such a life is out of the question.
ECONOMIC CALCULATION AND THE SCHEMES OF SOCIALISM With his theory of economic calculation in hand, Mises critiqued the schemes of socialists to rationally allocate resources in chapter 26 in Human Action. Both the title of the chapter, “The Impossibility of Economics Calculation under Socialism,” and the summary list of schemes indicate Mises’s emphasis on economic calculation. He wrote (Mises, 1998, pp. 699–700):
The various schemes proposed can be classified in the following way:
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Calculation in kind is to be substituted for calculation in terms of money....
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Starting from the ideas of the labor theory of value the labor-hour is recommended as the unit of calculation….
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The unit is to be a “quantity” of utility….
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Calculation is to be made possible by the establishment of an artificial quasi-market….
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Calculation is to be made with the aid of the differential equations of mathematical catallactics….
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Calculation is to be made superfluous by resorting to the method of trial and error….
All of these socialist schemes, except number 6, are attempts to have economic calculation under socialism. And Mises’s critique of the socialist director using the method of trial and error to make economizing production and investment decisions relies on his views of economic calculation. He argued (Mises, 1998, p. 700) that economizing decisions fall into a category of trial and error in which “the only mark of the correct solution is that it has been reached by the application of a method considered appropriate for the solution of the problem.” His example is solving a multiplication problem. He wrote (Mises, 1998, p. 700):
One may try to guess the correct result by trial and error. But here the method of trial and error is no substitute for the arithmetical process. It would be quite futile if the arithmetical process did not provide a yardstick for discriminating what is incorrect from what is correct.
In the case of economizing decisions, the only way to discover if trial and error has succeeded is by a computation of profit and loss. Mises wrote (1998, p. 701):
The problem of socialist economic calculation is precisely this: that in the absence of market prices for the factors of production, a computation of profit and loss is not feasible.
We may assume that in the socialist commonwealth there is a market for consumers’ goods and that money prices for consumers’ goods are determined on this market…. But the characteristic mark of the socialist system is that the producers’ goods are controlled by one agency only in whose name the director acts, that they are neither bought nor sold, and that there are no prices for them. Thus there cannot be any question of comparing input and output by the methods of arithmetic.
Concerning the socialist scheme for a quasi-market, Mises noted that it represents the triumph of his approach to economics. He wrote (Mises, 1998, p. 702):
It is therefore nothing short of a full acknowledgement of the correctness and irrefutability of the economists’ analysis and devastating critique of the socialists’ plans that the intellectual leaders of socialism are now busy designing schemes for a socialist system in which the market, market prices for the factors of production, and catallactic competition are to be preserved. The overwhelmingly rapid triumph of the demonstration that no economic calculation is possible under a socialist system is without precedent in the history of human thought. The socialist cannot help but admitting their crushing final defeat.
Finally, Mises made it perfectly clear that the defeat of socialism owed nothing to the mathematical economics of general equilibrium. The problem of directing the use of resources in an economizing manner must start with existing conditions, which are not those of equilibrium but have been brought about by both successes and failures of the past. Even if the final equilibrium configuration of resource allocation is known, the economizing problem remains: how to move step-by-step from existing conditions to those of final equilibrium. For the solution to this problem, the mathematical expression of the state of final equilibrium is of no use. Mises wrote (1998, p. 709):
Even if, for the sake of argument, we assume that a miraculous inspiration has enabled the director without economic calculation to solve all problems concerning the most advantageous arrangement of all production activities and that the precise image of the final goal he must aim at is present to his mind, there remain essential problems which cannot be dealt with without economic calculation. For the director’s task is not to begin from the very bottom of civilization and to start economic history from scratch. The elements with the aid of which he must operate are not only natural resources untouched by previous utilization. There are also the capital goods produced in the past and not convertible or not perfectly convertible for new projects. It is precisely in these artifacts... that our wealth is embodied. Their structure, quality, quantity, and location is of primary importance in the choice of all further economic operations…. [The director] must try to take advantage of every piece of the already available capital goods in the best possible way.
CONCLUSION Mises’s integration of money into the subjective theory of value did more than put monetary theory on solid ground. It set the entire body of economic theory on the causal-realist foundation laid by Carl Menger. Doing so required a reconstruction of price and production theory. Not merely grafting subjectivist elements onto general equilibrium theory, but rebuilding this theory from the bottom up. No better evidence of the soundness of this approach exists than Mises’s demonstration that central planners cannot allocate resources in an economizing manner in socialism for lack of economic calculation.
Since the second calculation debate made apparent Mises’s achievement in providing a truly general theory of economics, the causal-realist approach has been advancing on several fronts. To mention just a few: business cycle theory has been refined (Salerno, 2012); the theory of entrepreneurship and organizational theory has been developed (Klein, 2010); the theory of cost has been reconsidered (McCaffrey, 2018); the theory of interest has been further considered (Herbener, 2011); and Mises’s concept of entrepreneurial appraisement has been extended (Herbener and Rapp, 2016).
The Virtue of NationalismYoram HazonyBasic Books, 2018285 + vii pages
Yoram Hazony is a thinker of great originality, and in The Virtue of Nationalism, he enables us to see nationalism in a new way. He is not a libertarian, but his way of looking at nationalism can be of great value to libertarians in understanding how our views should be applied to the world in practice.
Hazony is not only a political theorist but a theologian as well, and it is his understanding of the Hebrew Bible that provides the key to how he sees nationalism. Many people today, having in mind the wars of the twentieth century, think of nationalism as aggressive and expansionist. In contrast to this common account, nationalism to Hazony is not aggressive but defensive. It reflects a desire by a people to live in accord with its own laws and customs, unmolested by others. It seeks not to force its ways on others but rather to secure a space for a particular people.
Hazony puts the matter in this way: “The nationalism I grew up with is a principled standpoint that regards the world as governed best when nations are able to chart their own independent course, cultivating their own traditions and pursuing their own interests without interference.”
Nationalism in this sense is not a modern development. “By nation, I mean a number of tribes with a common language or religion, and a past history of acting as a body for the common defense and other large-scale enterprises. The Bible systematically promotes the idea that the members of a nation should regard one another as ‘brothers,’ and Mosaic law offered the Israelites a constitution that would bring them together in what today would be called a national state. ... Throughout the Bible, we find that the political aspiration of the prophets of Israel is not empire but a free and unified nation living in justice and peace among other free nations.” In viewing the origin of nationalism in this way, Hazony has been influenced by Steven Grosby, “whose own work on nationalism and its relationship with the Jewish Bible has long been an inspiration to me.” Grosby was a close associate of the great sociologist Edward Shils and is the author of the important work Biblical Ideas of Nationality.
To forestall an objection, Hazony is immune to challenges to the justice of the conquest of Canaan. (For an example of such objections, see Nicholas Wolterstorff, “Reading Joshua” in Michael Bergmann et al., eds., Divine Evil? The Moral Character of the God of Abraham, Eerdmans, 2013) He is concerned with what a state does once it is established, not how it came about.Hazony’s depiction of the Biblical ideal is not merely of antiquarian interest. He holds that this ideal has been influential in the development of modern nationalism, especially since the Protestant Reformation. “Especially under the influence of the Old Testament-oriented thinkers such as Ulrich Zwingli and John Calvin, Protestantism embraced and quickly became tied to the unique national traditions of peoples chafing against ideas and institutions that they regarded as foreign to them.” After the Treaty of Westphalia in 1648, the “political life of Europe was rebuilt upon two principles” based on the Old Testament: a moral minimum required for legitimate government and the right of national self-determination. With characteristic erudition, Hazony notes that despite the changes of the Westphalian settlement, the three treaties preserve the old language of the respublica Christiana [“world Christian republic”].
Hazony sharply contrasts nationalism with imperialism: “For centuries, the politics of western nations have been characterized by a struggle between two antithetical visions of world order: an order of free and independent nations, each pursuing the political good in accordance with its own traditions and understanding: and an order of peoples united under a single regime of law, promulgated and maintained by a single supranational authority.”
Why should we favor nationalism rather than imperialism? Hazony maintains that “small institutions like the family or the squad, consisting of individuals bound together by mutual loyalties developed over long years of shared hardship and triumph, are the bedrock of all political order. It is out of such small units that larger-scale political institutions of every kind are built. ... The mutual loyalty of individuals to one another is the most powerful force operative in the political realm. Feelings of mutual loyalty pull individuals tightly together, forming them into families, clans, tribes, and nations.” Given these facts, it is not surprising that people resent being brought under the domination of empire, however benevolent its professed intentions.
Is Hazony here vulnerable to an objection? He has characterized nationalism as self-determination and imperialism as rule over others. Is he guilty of an argument from definition, in that a country that aggresses against other nations is at once transferred from the national to imperial camp? He has the resources to counter this objection. He argues that European nationalism was in fact based on mutual respect for other nationalities, rather than on a drive for domination. His contention, then, is not a matter of definition but rather one of fact. He points out, e.g., that the great eighteenth-century theorist of nationalism J.G. Herder “describes the imperial state as nothing other than a ‘curse’ to all involved.”
In his criticism of imperialism, Hazony comments with great insight on the origins of World War I: “The astonishingly aggressive expansion of the British and French empires led many — especially in Germany — to conclude that the era of the European national-state system had in effect come to an end. ... This seems to have been Kaiser Wilhelm’s view.”
It is fundamental to Hazony’s perspective that a nation ought for the most part not to interfere with the policies of other nations, even if these policies violate its own ideals. Hazony does not exempt from this stricture his own ideal of national self-determination. Woodrow Wilson ignored this vital point: “The best political order that is known to us is an order of independent national states. This is not to say, however, that every nation has a right to be independent. In suggesting that national aspirations would be respected, and that no people would be governed against its will, Wilson ... was asserting a right of peoples not to be governed against their will, and therefore an obligation, to be borne by others, to guarantee this outcome. ... But the world of nations is not so clear-cut. Nor are there remotely sufficient resources available for granting such a universal right in every case where a plausible case can be made.”
Hazony’s argument has a very direct implication for libertarians. We have no duty to force other nations to adopt libertarian principles, however desirable it would be were they freely to choose to do so. Libertarianism depends on persuasion: it is not a patent medicine to be forced down the throat of others. Contrary to its critics, e.g., Quinn Slobodian, whose Globalists we reviewed in an earlier issue of The Austrian, libertarianism is not a program of compulsory globalization.
Unfortunately, Hazony fails to see this. He takes the classical liberalism of Mises and Hayek to be a prime example of the universalizing ideologies he deplores. He quotes Mises to this effect: “liberal thinking must permeate all nations, liberal principles must pervade all political institutions, if the prerequisites of peace are to be created and the causes of war eliminated.” He comments: “Although Mises states the demand for an ‘unqualified acceptance of liberalism’ by every nation and every political institution in the world in stark terms, the aspiration he expresses represents what is by now an entirely conventional liberal standpoint.”
Mises did indeed think that all nations should favor the free market, but he by no means favored imposing classical liberal policies on nations that disdained his advice. He did not, like Rousseau, wish to force people to be free. To the contrary, he speaks favorably of a primary text of nineteenth-century nationalism, Renan’s essay What Is a Nation? It is clear from what he says that he supports Renan’s brand of voluntary nationalism. “When Renan asks: What is a nation? he means: What should determine the boundaries of the various states? And his answer is: Not the linguistic community, not the racial kinship founded on parentage from common ancestors, not religious congeniality, not the harmony of economic interests, not geographical or strategical considerations, but — the right of the population to determine its own destiny. The nation is the outcome of the will of human beings to live together in one state. The greater part of the lecture is devoted to showing how this spirit of nationality originates.
The nation is a soul, a moral principle (‘une âme, un principe spirituel’). A nation, says Renan, daily confirms its existence by manifesting its will to political coöperation within the same state; a daily repeated plebiscite, as it were.” (Mises, Omnipotent Government)
It is unlikely that Hazony would accept this response. Even if he were to acknowledge that Mises did not support globalization at gunpoint, he would claim that the claim of liberalism to universally valid principles is false. Rights depend on particular historical circumstances. Hazony, who is philosophically an empiricist, traces the error of classical liberalism to the moral rationalism of its seventeenth-century progenitor John Locke.
In moral theory, Locke wrongly abandoned empiricism for rationalism: “Locke is known as an empiricist ... [but] his Second Treatise on Government is not, however, an ... effort to bring an empirical standpoint to the theory of the state. Locke was one of the few political writers of his time who did not argue on the basis of historical experience.”
It would be superficial to reply that Mises founded his defense of the market on its good consequences; he did not believe in rationalistically derived rights any more than Hazony does. A deeper response requires attention to the details of arguments for libertarian rights. What exactly is wrong with them? It does not suffice to dismiss them because they are not in accord with one’s favored philosophical methodology, in Hazony’s case empiricism in the style of David Hume.Even where one disagrees, though, Hazony’s discussion is instructive. He tells us, e.g., that Edmund Burke declared “on the floor of Parliament that of all books ever written, the Second Treatise [by Locke] was ‘one of the worst.’” The Virtue of Nationalism is filled with striking details that display Hazony’s learning to full advantage.
[Excerpted from chapter 13 of Guido Hülsmann's The Ethics of Money Production (2008).]
- Some Spiritual Casualties of Fiat Inflation Fiat inflation constantly reduces the purchasing power of money. To some extent, it is possible for people to protect their savings against this trend, but this requires thorough financial knowledge, the time to constantly supervise one’s investments, and a good dose of luck. People who lack one of these ingredients are likely to lose a substantial part of their assets. The savings of a lifetime often vanish into thin air during the last few years spent in retirement. The consequence is despair and the eradication of moral and social standards. But it would be wrong to infer that inflation produces this effect mainly among the elderly. As one writer observed:
These effects are “especially strong among the youth. They learn to live in the present and scorn those who try to teach them 'old-fashioned' morality and thrift” [emphasis added]. Inflation thereby encourages a mentality of immediate gratification that is plainly at variance with the discipline and eternal perspective required to exercise principles of biblical stewardship — such as long-term investment for the benefit of future generations.Thomas Woods, “Money and Morality: The Christian Moral Tradition and the Best Monetary Regime,” Religion & Liberty 13, no. 5 (September/October 2003). The author quotes Ludwig von Mises. See also William Gouge, A Short History of Paper Money and Banking in the United States, to which is prefixed an Inquiry into the Principles of the System (Reprint, New York: Augustus M. Kelley, [1833] 1968), pp. 94–101.
Even those citizens who are blessed with the knowledge, time, and luck to protect the substance of their savings cannot evade inflation’s harmful impact, because they have to adopt habits that are at odds with moral and spiritual health. Inflation forces them to spend much more time thinking about their money than they otherwise would. We have noticed already that the old way for ordinary citizens to make savings was the accumulation of cash. Under fiat inflation this strategy is suicidal. They must invest in assets the value of which grows during the inflation; the most practical way to do this is to buy stocks and bonds. But this entails many hours spent on comparing and selecting appropriate issues. And it compels them to be ever watchful and concerned about their money for the rest of their lives. They need to follow the financial news and monitor the price quotations on the financial markets.
Similarly, people will tend to prolong the phase of their life in which they strive to earn money. And they will place relatively greater emphasis on monetary returns than on any other criterion for choosing their profession. For example, some of those who would rather be inclined to gardening will nevertheless seek an industrial employment if the latter offers greater long-run monetary returns. And more people will accept employment far from home, if it allows them to earn a little additional money, than under a natural monetary system.
The spiritual dimension of these inflation-induced habits seems obvious. Money and financial questions come to play an exaggerated role in the life of man. Inflation makes society materialistic. More and more people strive for money income at the expense of other things important for personal happiness. Inflation-induced geographical mobility artificially weakens family bonds and patriotic loyalty. Many of those who tend to be greedy, envious, and niggardly anyway fall prey to sin. Even those who are not so inclined by their natures will be exposed to temptations they would not otherwise have felt. And because the vagaries of the financial markets also provide a ready excuse for an excessively parsimonious use of one’s money, donations for charitable institutions decline.
Then there is the fact that perennial inflation tends to deteriorate product quality. Every seller knows that it is difficult to sell the same physical product at higher prices than in previous years. But increasing money prices are unavoidable when the money supply is subject to relentless growth. So what do sellers do? In many cases the rescue comes through technological innovation, which allows a cheaper production of the product, thus neutralizing or even overcompensating the countervailing influence of inflation. This is for example the case with personal computers and other products made with large inputs of information technology. But in other industries, technological progress plays a much smaller role. Here the sellers confront the above-mentioned problem. They then fabricate an inferior product and sell it under the same name, along with the euphemisms that have become customary in commercial marketing. For example, they might offer their customers “light” coffee and “non-spicy” vegetables — which translates into thin coffee and vegetables that have lost any trace of flavor. Similar product deterioration can be observed in the construction business. Countries plagued by perennial inflation seem to have a greater share of houses and streets that are in constant need of repair than other countries.
In such an environment, people develop a more than sloppy attitude toward their language. If everything is whatever it is called, then it is difficult to explain the difference between truth and lie. Inflation tempts people to lie about their products, and perennial inflation encourages the habit of routine lying. We have already pointed out that routine lying plays a great role in fractional-reserve banking, the basic institution of the fiat money system. Fiat inflation seems to spread this habit like a cancer over the rest of the economy.The relationship between fiat inflation on the one hand, and misperceptions and misrepresentations of reality on the other hand has been brilliantly discussed in Paul Cantor's case study on “Hyperinflation and Hyperreality: Thomas Mann in Light of Austrian Economics,” Review of Austrian Economics 7, no. 1 (1994).
- Suffocating the Flame In most countries, the growth of the welfare state has been financed through the accumulation of public debt on a scale that would have been unthinkable without fiat inflation. A cursory glance at the historical record shows that the exponential growth of the welfare state, which in Europe started in the early 1970s, went hand in hand with the explosion of public debt. It is widely known that this development has been a major factor in the decline of the family. But it is commonly overlooked that the ultimate cause of this decline is fiat inflation. Perennial inflation slowly but assuredly destroys the family, thus suffocating the earthly flame of morals. Indeed, the family is the most important “producer” of a certain type of morals.
Family life is possible only if all members endorse norms such as the legitimacy of authority, and the prohibition of incest. And Christian families are based on additional precepts such as the heterosexual union between man and woman, love of the spouses for one another and for their offspring, the respect of children for their parents, as well as belief in the reality of the Triune God and of the truth of the Christian faith, etc. Parents constantly repeat, emphasize, and live these norms and precepts. Thus all family members come to accept them as the normal state of affairs. In the wider social sphere, then, these persons act as advocates of the same norms in business associations, clubs, and politics.
Friends and foes of the traditional family agree on these facts. It is among other things because they recognize the family’s effectiveness in establishing social norms that Christians seek to protect it. And it is precisely for the same reason that advocates of moral license seek to undermine it. The welfare state has been their preferred tool in the past thirty years. Today, the welfare state provides a great number of services that in former times have been provided by families (and which would, we may assume, still be provided to a large extent by families if the welfare state ceased to exist). Education of the young, care for the elderly and the sick, assistance in times of emergencies — all of these services are today effectively “outsourced” to the state. The families have been degraded into small production units that share utility bills, cars, refrigerators, and of course the tax bill. The tax-financed welfare state then provides them with education and care.In many countries it is today possible for families to deduct expenses for private care and private education from the annual tax bill. But iron-ically (or maybe not quite so ironically) this trend has reinforced the ero-sion of the family. For example, recent provisions of the U.S. tax code allow family budgets to increase through such deductions — but only if the deductible services are not provided by family members, but bought from other people.
From an economic point of view, this arrangement is a pure waste of money. The fact is that the welfare state is inefficient; it provides comparatively lousy services at comparatively high costs. We need not dwell on the inability of government welfare agencies to provide the emotional and spiritual assistance that only springs from charity. Compassion cannot be bought. But the welfare state is also inefficient in purely economic terms. It operates through large bureaucracies and is therefore liable to lack incentives and economic criteria that would prevent wasting money. In the words of Pope John Paul II:
By intervening directly and depriving society of its responsibility, the Social Assistance State leads to a loss of human energies and an inordinate increase of public agencies, which are dominated more by bureaucratic ways of thinking than by concern for serving their clients, and which are accompanied by an enormous increase in spending. In fact, it would appear that needs are best understood and satisfied by people who are closest to them and who act as neighbors to those in need. It should be added that certain kinds of demands often call for a response which is not simply material but which is capable of perceiving the deeper human need.John Paul II, Centesimus Annus, §48.
Everyone knows this from first-hand experience, and a great number of scientific studies drive home the same point. It is precisely because the welfare state is an inefficient economic arrangement that it must rely on taxes. If it had to compete with families on equal terms, it could not stay in business for any length of time. It has driven the family and private charities out of the “welfare market” because people are forced to pay for it anyway. They are forced to pay taxes, and they cannot prevent the government from floating ever-new loans, which absorb the capital that otherwise would be used for the production of different goods and services.
The excessive welfare state of our day is an all-out direct attack on the producers of morals. But it weakens these morals also in indirect ways, most notably by subsidizing bad moral examples. The fact is that libertine “lifestyles” carry great economic risks. The welfare state socializes the costs of morally reckless behavior and therefore gives it far greater prominence than it would have in a free society. Rather than carrying an economic penalty, licentiousness might then actually go hand in hand with economic advantages, because it frees the protagonists from the costs of family life (for example, the costs associated with raising children). With the backing of the welfare state, these protagonists may mock conservative morals as some sort of superstition that has no real-life impact. The welfare state systematically exposes people to the temptation of believing that there are no time-tested moral precepts at all.
Let us emphasize that the point of the preceding observations was not to attack welfare services, which are in fact an essential component of society. Neither is it here our intention to attack the notion that welfare services should be provided through government. The point is, rather, that fiat inflation destroys the democratic control over the provision of these services; that this invariably leads to excessive growth of the aggregate welfare system and to excessive forms of welfare; and that this in turn is not without consequences for the moral and spiritual character of the population.
The considerations presented in this chapter are by no means an exhaustive account of the cultural and spiritual legacy of fiat inflation. But they should suffice to substantiate the main point: that fiat inflation is a juggernaut of social, economic, cultural, and spiritual destruction.Our study seems to suggest that there is definitely something diabol-ical in fiat inflation. But we feel incompetent to deal with this question and leave its analysis for another time, or for other scholars. It is cer-tainly significant that a great poet such as Goethe would portray paper money as a creation of the devil. See Faust, part II, Lustgartenszene. Let us now turn to complement our analysis with a look at the historical evolution of monetary systems.
The World is locked today in a fierce war of ideologies, in some ways strangely resembling the wars of religion in the Middle Ages. The doctrinal points at issue in those wars have become unintelligible to most of us today, and there are some equally strange paradoxes in the present ideological war.
The Communists, who started it, not only know precisely what they are against — Capitalism — but precisely what they are for. On both questions the party line is laid down for them from the top. There can be no deviation, on pain of ostracism, penal servitude, torture, or death. But on the other side, most of those who do not accept Communism did not realize, until belatedly, that there even was an ideological war going on; and that no appeasement, no conciliation, no mutual attitude of live-and-let-live, was possible, because the Communists were determined from the start not to permit it. The non-Communists had no idea that they were engaged in a life-or-death struggle.
But this brings us to other paradoxes. The non-Communists are still not even united as anti-Communists. For there is still an influential group who say: "True, we should not allow the Russians to impose Communism on us, but neither should we try to impose our system on the Russians. Capitalism (or Democracy) is probably the best system for us, and Communism for them. If we stop arming against the Communists and talking against them, their suspicions will gradually dissolve, and each of us can live peaceably in his own way." This view persists, in spite of its untenability, mainly because it is a wish-fulfillment.
Disunited Anti-communists Moreover, even the anti-Communists are not united. They are all "against Communism." But they have no common definition or concept of Communism. Few of them realize that Communism is primarily an economic doctrine. Most of them regard it primarily as a political or a cultural system. What they hate about it is the despotism, the total suppression of freedom — political, religious, or artistic; the cruelties, the forced confessions, the systematic lying, spying, and plotting, the relentless campaigns of calumny, the existence or threat of military aggression.
All these things are indeed hateful. But what most anti-Communists still fail to see is that they are merely the inevitable consequences of the basic economic doctrine of Communism. These are what Karl Marx, writing of Capitalism, would have called the "superstructure."
The anti-Communists are also deeply divided in their ideas of the economic system they would prefer to Communism. They range from champions of the free market to left-wing Socialists, with every variety of New Dealer, planner, and statist in between. The New Dealers seem as eager to repudiate "laissez faire Capitalism" as they do Communism. And when it comes to the basic economic organization they propose, the Socialists are actually at one with the Communists against Capitalism.
These violent divisions within the ranks of the anti-Communists have led to conflicting ideas concerning the proper "strategy" against Communism. There are those who think that "anti-Communism" is itself a sufficient ground for unity. Communism, they say, is not a doctrine that needs to be dissected, but a conspiracy that needs to be suppressed. What we must do is to ferret out the Communists — in the government, in the armed forces, in the U.N., in the schools and colleges — expose them and get rid of them. Anything else, they contend, is either unimportant or a diversion.
Is "Democracy" Enough? There is another group that is not satisfied merely with being against Communism, which concedes that the opponents of Communism must have a common positive philosophy, but which thinks that belief in "Democracy" is enough. This has been substantially the position of the State Department and the Voice of America under Truman. It is the position of the major part of the American press.
What Is Democracy? It does not stand up under serious analysis. "Democracy" is one of those sweepingly vague words that mean too many things to different minds. It can be stretched or compressed, like an accordion, to meet the controversial needs of the moment. "Democracy" as a unifying concept has come to be, in fact, little better than a semantic evasion. To some it means a political system under which the government depends upon the uncoerced will of the people in such a way that it can be peaceably changed whenever the will of the people changes. To others it means anything down to a system of unrestrained mob rule in which everyone is declared by fiat to be equal in merit and influence to everyone else; in which a minority has no rights that a majority is bound to respect; in which anyone's property can be confiscated at will, and distributed to those who did nothing to earn it; in which incomes are to be equalized in spite of glaring inequalities in ability, effort, and contribution. This second concept of Democracy must lead inevitably into a Communist system and not toward a free one.
"Democracy," therefore, has not only come to be so vague as to be almost meaningless; it has lost nearly all its value even as a semantic weapon. The enemy has taken it over and used it for his own purposes. The Communists call their own system (tautologically but beguilingly) a "people's democracy," and argue that capitalist democracy is a contradiction in terms.
Even if the concept of "Democracy" did not suffer from a fatal ambiguity, it would still refer primarily to a political system. But Communism stands primarily for an economic system, of which the political accompaniment is mainly a consequent or superstructure. Therefore "Democracy" is in any case a false antithesis to Communism. It is like declaring west to be the opposite of north, or cold to be the opposite of black.
Communism vs. Capitalism The true opposite of Communism is Capitalism. The Communists know it, but most of the rest of us don't.
This is the real reason for the ideological weakness of the opposition to Communism, and for the ineffectiveness of most of the propaganda against it — particularly the official propaganda, up to now, of the State Department and the Voice of America, and of the Western governments generally. All these set up "Democracy" as the antithesis of Communism, partly because they are confused enough to believe it is, and partly because they have neither the will nor the courage to defend Capitalism.
There are several reasons behind this reluctance. To begin with, the very word "Capitalism" was coined and given currency by Marx and Engels. It was deliberately devised as a smear word. It was meant to suggest what it probably still does suggest to most minds — a system developed by and for the capitalists.
The overwhelming majority of bureaucrats in the Western countries do not really believe in the basic principles of Capitalism. The economic freedom it involves is alien to their minds. It is not natural for the people in power in government to believe in less governmental power. Moreover, they do not really understand what makes Capitalism work, or what measures are conformable with it. Their natural tendency is to favor the incompatible system of the government handout. Hence they plump for huge foreign aid programs, Point Four, the International Monetary Fund, and interminable United Nations meddling. They do not realize that these measures and institutions actually retard or prevent the freedom of trade and the free international flow of private investment upon which real recovery, economic growth and productivity depend.
Finally, even when an American official understands and favors Capitalism, he is embarrassed by the fact that several of our most important European allies are addicted to Socialism. Therefore he does not dare to praise Capitalism in specific terms for fear of offending our Socialist allies by implication. The real case against Communism hardly even gets itself officially stated.
What Freedom Does It is in large part because of the connotations built into the smear word "Capitalism" that, while millions are willing to die for Communist delusions, nobody has been willing to die for Capitalism — certainly not under that name. But Capitalism is merely the Marxist epithet for the system of the free market, for competitive private enterprise, for the system under which each is permitted to earn and keep the product of his labor — in brief, for economic freedom.
It is because of its freedoms and securities that Capitalism is incomparably the most productive system in the world. It does not have to "prove" its superiority to Socialism or Communism. It has already proved that a thousand times over, whether the standard of comparison is productivity or personal freedom. Capitalism is not the best system because it is best for the employer or for the rich. It is the best system precisely for the worker and for the poor. Under it the status, wages, and welfare of the worker have improved historically at a rate and to an extent that before the Industrial Revolution would have been considered incredible. They are still improving, at, if anything, an accelerative rate.
The answer to Communism, in brief, is Capitalism. And once we understand this, the problems of "ideological strategy" which we have been confusedly debating begin to melt away. We do not have to discuss whether we have been "merely talking to ourselves" or not. The very question is based on a false analogy — the analogy of the lawsuit, of "our side" versus "their side." This analogy unconsciously swallows the Marxist theory of a real clash of interest between economic "classes" — employers versus workers or rich versus poor. But once we recognize that the system of Capitalism is the only workable one, the only one that promotes the interest of both employers and workers, while it provides the maximum of opportunity for the poor to conquer their poverty, then the real distinction is between those who understand the system and those who do not. A man who is known to understand a problem is never merely talking to himself; all those who sincerely wish to understand it can be counted on to listen.
Another problem which melts away is whether we should confine ourselves to combating Communism, because it is a conspiracy and a military menace, or whether we can disregard Communism, on the ground that it has been sufficiently exposed, and concentrate on combating socialist measures because there is so much more real likelihood of their being adopted at home.
The solution is simple. There is only one right answer to the sum of 2 and 2, and an infinite number of wrong answers. Once we have shown that 2 and 2 make 4, we do not have to provide separate proof that every other answer is wrong. Communism is just one wrong answer to the basic social problem — though the worst and most dangerous. Socialism (which proposes the same basic economic measures as Communism) is merely another wrong answer, in the long run only a little less bad and a little less dangerous. "Planning," price control, inflation, Keynesianism, are still other wrong answers. As in arithmetic, there are an infinite number of such wrong answers. But once we have found the right answer, we can explain what is wrong with the other solutions from that basis.
In the social and economic realm, we must base our criticisms on a positive program. That program is the improvement and purification of Capitalism.
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 of orthodox Marxist socialism and has spurred the emergence and development of modern social-democratic socialism.
Both types of socialism, to be sure, derive from the same ideological sources.Cf. L. Kolakowski, Main Currents of Marxism (Oxford, 1978), 3 vols.; also W. Leonhard, Sovietideologie heute. Die politischen Lehren (Frankfurt/M., 1963). Both are egalitarian in motivation, at least in theory,Cf. note 16 below on the assessment of the somewhat different practice. and both have essentially the same ultimate goal: the abolishment of capitalism as a social system based on private ownership and the establishment of a new society, characterized by brotherly solidarity and the eradication of scarcity; a society in which everyone is paid “according to his needs.”
From the very beginnings of the socialist movement in the mid-nineteenth century, though, there have been conflicting ideas on the methods best suited for achieving these goals. While generally there was agreement on the necessity of socializing the means of production, there were always diverging opinions on how to proceed. On the one hand, within the socialist movement there were the advocates of a revolutionary course of action. They propagated the violent overthrow of the existing governments, the complete expropriation of all capitalists in one stroke, and the temporary (i.e., until scarcity would indeed, as promised, be eradicated) dictatorship of the proletariat, i.e., of those who were not capitalists but who had to sell their labor services, in order to stabilize the new order.
On the other hand there were the reformists who advocated a gradualist approach. They reasoned that with the enlargement of the franchise, and ultimately with a system of universal suffrage, socialism’s victory could be attained through democratic, parliamentary action. This would be so because capitalism, according to common socialist doctrine, would bring about a tendency toward the proletarization of society, i.e., a tendency for fewer people to be self-employed and more to become employees instead. And in accordance with common socialist beliefs, this tendency would in turn produce an increasingly uniform proletarian class consciousness which then would lead to a swelling voter turnout for the socialist party. And, so they reasoned, as this strategy was much more in line with public opinion (more appealing to the mostly peacefully-minded workers and at the same time less frightening to the capitalists), by adopting it, socialism’s ultimate success would only become more assured.
Both of these forces co-existed within the socialist movement, though their relationship was at times quite strained, until the Bolshevik Revolution of October 1917, in Russia. In practice, the socialist movement generally took the reformist path, while in the field of ideological debate the revolutionaries dominated.Cf. E. Bernstein, Die Voraussetzungen des Sozialismus und die Aufgaben der Sozialdemokratie (Bonn, 1975), as a major expositor of the reformist-revisionist course; K. Kautsky, Bernstein und das sozialdemokratische Programm (Bonn, 1976), as exponent of the Marxist orthodoxy. The Russian events changed this.
With Lenin in the lead, for the first time the revolutionary socialists realized their program and the socialist movement as a whole had to take a stand vis-à-vis the Russian experiment. As a consequence, the socialist movement split into two branches with two separate parties: a communist party either more or less in favor of the Russian events, and a socialist or social-democratic party with reservations, or against them. Still, the split was not over the issue of socialization; both were in favor of that. It was an open split over the issue of revolutionary vs. democratic parliamentary change.
Faced with the actual experience of the Russian revolution — the violence, the bloodshed, the practice of uncontrolled expropriation, the fact that thousands of new leaders, very often of questionable reputation or simply shady, inferior characters, were being swept to the political helm — the social democrats, in their attempt to gain public support, felt they had to abandon their revolutionary image and become, not only in practice but in theory as well, a decidedly reformist, democratic party. And even some of the communist parties of the West, dedicated as they were to a theory of revolutionary change, but just as much in need of public support, felt they had to find some fault, at least, with the peculiar Bolshevik way of implementing the revolution. They, too, increasingly thought it necessary to play the reformist, democratic game, if only in practice.
However, this was only the first step in the transformation of the socialist movement effected by the experience of the Russian revolution. The next step, as indicated, was forced upon it by the dim experience with Soviet Russia’s economic performance. Regardless of their differing views on the desirability of revolutionary changes and equally unfamiliar with or unable or unwilling to grasp abstract economic reasoning, socialists and communists alike could still, during a sort of honeymoon period which they felt the new experiment deserved, entertain the most illusory hopes about the economic achievements of a policy of socialization. But this period could not last forever, and the facts had to be faced and the results evaluated after some time had elapsed.
For every decently neutral observer of things, and later for every alert visitor and traveler, it became evident that socialism Russian-style did not mean more but rather less wealth and that it was a system above all, that in having to allow even small niches of private capital formation, had in fact already admitted its own economic inferiority, if only implicitly.
As this experience became more widely known, and in particular when after World War II the Soviet experiment was repeated in the East European countries, producing the very same dim results and thus disproving the thesis that the Soviet mess was only due to a special Asian mentality of the people, in their race for public support the socialist, i.e., the social-democratic and communist, parties of the West were forced to modify their programs further. The communists now saw various flaws in the Russian implementation of the socialization program as well, and increasingly toyed with the idea of more decentralized planning and decision-making and of partial socialization, i.e., socialization only of major firms and industries, although they never entirely abandoned the idea of socialized production.On the idea of a “market-socialism” cf. one of its leading representatives, O. Lange, “On the Economic Theory of Socialism,” in M. I. Goldman, ed., Comparative Economic Systems (New York, 1971).
The socialist or social-democratic parties, on the other hand, less sympathetic from the beginning toward the Russian model of socialism and through their decidedly reformist-democratic policy already inclined to accept compromises such as partial socialization, had to make a further adaptive move. These parties, in response to the Russian and East European experiences, increasingly gave up the notion of socialized production altogether and instead put more and more emphasis on the idea of income taxation and equalization, and, in another move, on equalization of opportunity, as being the true cornerstones of socialism.
While this shift from Russian-type socialism toward a social-democratic one took place, and still is taking place in all Western societies, it was not equally strong everywhere. Roughly speaking and only looking at Europe, the displacement of the old by the new kind of socialism has been more pronounced, the more immediate and direct the experience with Russian-type socialism for the population in which the socialist and/or communist parties had to find supporters and voters.
Of all the major countries, in West Germany, where the contact with this type of socialism is the most direct, where millions of people still have ample opportunities to see with their own eyes the mischief that has been done to the people in East Germany, this displacement was the most complete. Here, in 1959, the social democrats adopted (or rather were forced by public opinion to adopt) a new party program in which all obvious traces of a Marxist past were conspicuously absent, that rather explicitly mentioned the importance of private ownership and markets, that talked about socialization only as a mere possibility, and that instead heavily stressed the importance of redistributive measures. Here, the protagonists of a policy of socialization of the means of production within the social-democratic party have been considerably outnumbered ever since; and here the communist parties, even when they are only in favor of peaceful and partial socialization, have been reduced to insignificance.On the ideology of the German Social Democrats cf. T. Meyer, ed., Demokratischer Sozialismus (Muenchen, 1980); G. Schwan, ed., Demokratischer Sozialismus fuer Industriegesellschaften (Frankfurt/M., 1979).
In countries further removed from the iron curtain, like France, Italy, Spain, and also Great Britain, this change has been less dramatic. Nonetheless, it is safe to say that today only social-democratic socialism, as represented most typically by the German social-democrats, can claim widespread popularity in the West. As a matter of fact, due partly to the influence of the Socialist International — the association of socialist and social-democratic parties — social-democratic socialism can now be said to be one of the most widespread ideologies of our age, increasingly shaping the political programs and actual policies not only of explicitly socialist parties, and to a lesser degree those of the western communists, but also of groups and parties who would not even in their most far-fetched dreams call themselves socialists, like the east coast “liberal” Democrats in the United States.Indicators for the social-democratization of the socialist movement are the rise of the socialist party and the corresponding decline of the orthodox communist party in France; the emergence of a social-democratic party as a rival to the more orthodox labor party in Great Britain; the moderation of the communists in Italy as the only remaining powerful communist party in Western Europe toward an increasingly social-democratic policy; and the growth of the socialist-social-democratic parties in Spain and Portugal under Gonzales and Soares, both with close ties to the German SPD. Furthermore, the socialist parties of Scandinavia, which traditionally had closely followed the German path and which later provided safe haven to a number of prominent socialists during the Nazi persecution (most notably W. Brandt and B. Kreisky), have long given credence to the revisionist beliefs. And in the field of international politics the ideas of social-democratic socialism, in particular of a redistributive approach toward these-called North-South conflict, have almost become something like the official position among all “well-informed” and “well-intentioned” men; a consensus extending far beyond those who think of themselves as socialists.On the social-democratic position regarding the North-South conflict cf. North-South: A Programme for Survival, Independent Commission on International Development Issues (Chair: W. Brandt), 1980. What are the central features of socialism social-democratic-style?
There are basically two characteristics. First, in positive contradistinction to the traditional Marxist-style socialism, social-democratic socialism does not outlaw private ownership in the means of production and it even accepts the idea of all means of production being privately owned — with the exception only of education, traffic and communication, central banking, and the police and courts. In principle, everyone has the right to privately appropriate and own means of production, to sell, buy, or newly produce them, to give them away as a present, or to rent them out to someone else under a contractual arrangement. But secondly, no owner of means of production rightfully owns all of the income that can be derived from the usage of his means of production and no owner is left to decide how much of the total income from production to allocate to consumption and investment. Instead, part of the income from production rightfully belongs to society, has to be handed over to it, and is then, according to ideas of egalitarianism or distributive justice, redistributed to its individual members. Furthermore, though the respective income-shares that go to the producer and to society might be fixed at any given point in time, the share that rightfully belongs to the producer is in principle flexible and the determination of its size, as well as that of society’s share, is not up to the producer, but rightfully belongs to society.Note again that this characterization of social-democratic socialism has the status of an “ideal type” (cf. chapter 3, n. 2). It is not to be taken as a description of the policy or ideology of any actual party. Rather, it should be understood as the attempt to reconstruct what has become the essence of modern social-democratic style socialism, underlying a much more diverse reality of programs and policies of various parties or movements of different names as the ideologically unifying core.
Seen from the point of view of the natural theory of property — the theory underlying capitalism — the adoption of these rules implies that the rights of the natural owner have been aggressively invaded. According to this theory of property, it should be recalled, the user-owner of the means of production can do whatever he wants with them; and whatever the outcome of his usage, it is his own private income, which he can use again as he pleases, as long as he does not change the physical integrity of someone else’s property and exclusively relies on contractual exchanges.
From the standpoint of the natural theory of property, there are not two separate processes — the production of income and then, after income is produced, its distribution. There is only one process: in producing income it is automatically distributed; the producer is the owner. As compared with this, socialism social-democratic style advocates the partial expropriation of the natural owner by redistributing part of the income from production to people who, whatever their merits otherwise, definitely did not produce the income in question and definitely did not have any contractual claims to it, and who, in addition, have the right to determine unilaterally, i.e., without having to wait for the affected producer’s consent, how far this partial expropriation can go.
It should be clear from this description that, contrary to the impression which socialism social-democratic style is intended to generate among the public, the difference between both types of socialism is not of a categorical nature. Rather, it is only a matter of degree. Certainly, the first mentioned rule seems to inaugurate a fundamental difference in that it allows private ownership. But then the second rule in principle allows the expropriation of all of the producer’s income from production and thus reduces his ownership right to a purely nominal one. Of course, social-democratic socialism does not have to go as far as reducing private ownership to one in name only. And admittedly, as the income-share that the producer is forced to hand over to society can in fact be quite moderate, this, in practice, can make a tremendous difference as regards economic performance. But still, it must be realized that from the standpoint of the nonproducing fellowmen, the degree of expropriation of private producers’ income is a matter of expediency, which suffices to reduce the difference between both types of socialism — Russian and social-democratic style — once and for all to a difference only of degree.
It should be apparent what this important fact implies for a producer. It means that however low the presently fixed degree of expropriation might be, his productive efforts take place under the ever-present threat that in the future the income-share which must be handed over to society will be raised unilaterally. It does not need much comment to see how this increases the risk, or the cost of producing, and hence lowers the rate of investment.
With this statement a first step in the analysis that follows has already been taken. What are the economic, in the colloquial sense of the term, consequences of adopting a system of social-democratic socialism? After what has just been said, it is probably no longer altogether surprising to hear that at least as regards the general direction of the effects, they are quite similar to those of traditional Marxist-type socialism. Still, to the extent that social-democratic socialism settles for partial expropriation and the redistribution of producer incomes, some of the impoverishment effects that result from a policy of fully socializing means of production can be circumvented.
Since these resources can still be bought and sold, the problem most typical of a caretaker economy — that no market prices for means of production exist and hence neither monetary calculation nor accounting are possible, with ensuing misallocations and the waste of scarce resources in usages that are at best of only secondary importance — is avoided. In addition, the problem of overutilization is at least reduced. Also, since private investment and capital formation is still possible to the extent that some portion of income from production is left with the producer to use at his discretion, under socialism social-democratic style there is a relatively higher incentive to work, to save, and to invest.
Nonetheless, by no means can all impoverishment effects be avoided. Socialism social-democratic style, however good it might look in comparison with Russian-type socialism, still necessarily leads to a reduction in investment and thus in future wealth as compared with that under capitalism.On the following cf. L. v. Mises, Socialism (Indianapolis, 1981), esp. part V; Human Action (Auburn, Ala., 2008), esp. part 6. By taking part of the income from production away from the owner-producer, however small that part may be, and giving it to people who did not produce the income in question, the costs of production (which are never zero, as producing, appropriating, contracting always imply at least the use of time, which could be used otherwise, for leisure, consumption, or underground work, for instance) rise, and, mutatis mutandis, the costs of non-producing and/or underground production fall, however slightly.
As a consequence there will be relatively less production and investment, even though, for reasons to be discussed shortly, the absolute level of production and wealth might still rise. There will be relatively more leisure, more consumption, and more moonlighting, and hence, all in all, relative impoverishment. And this tendency will be more pronounced the higher the income from production that is redistributed, and the more imminent the likelihood that it will be raised in the future by unilateral, noncontractual societal decision.
For a long time by far the most popular idea for implementing the general policy goal of social-democratic socialism was to redistribute monetary income by means of income taxation or a general sales tax levied on producers. A look at this particular technique shall further clarify our point and avoid some frequently encountered misunderstandings and misconceptions about the general effect of relative impoverishment.
What is the economic effect of introducing income or sales taxation where there has been none before, or of raising an existing level of taxation to a new height?Cf. M. N. Rothbard, Man, Economy, and State with Power and Market (Auburn, Ala., 2009). In answering this, I will further ignore the complications that result from the different possible ways of redistributing tax money to different individuals or groups of individuals — these shall be discussed later.
Here we will only take into account the general fact, true by definition for all redistributive systems, that any redistribution of tax money is a transfer from monetary income producers and contractual money recipients to people in their capacity as nonproducers and nonrecipients of contractual money incomes. Introducing or raising taxation thus implies that monetary income flowing from production is reduced for the producer and increased for people in their roles as nonproducers and noncontractors. This changes the relative costs of production for monetary return versus nonproduction and production for nonmonetary returns.
Accordingly, insofar as this change is perceived by people, they will increasingly resort to leisurely consumption and/or production for the purpose of barter, simultaneously reducing their productive efforts undertaken for monetary rewards. In any case, the output of goods to be purchased with money will fall, which is to say the purchasing power of money decreases, and hence the general standard of living will decline.
Against this reasoning it is sometimes argued that it has been frequently observed empirically that a rise in the level of taxation was actually accompanied by a rise (not a fall) in the gross national product (GNP), and that the above reasoning, however plausible, must thus be considered empirically invalid. This alleged counterargument exhibits a simple misunderstanding: a confusion between absolute and relative reduction.
In the above analysis the conclusion is reached that the effect of higher taxes is a relative reduction in production for monetary returns; a reduction, that is, as compared with the level of production that would have been attained had the degree of taxation not been altered. It does not say or imply anything with respect to the absolute level of output produced.
As a matter of fact, absolute growth of GNP is not only compatible with our analysis but can be seen as a perfectly normal phenomenon to the extent that advances in productivity are possible and actually take place. If it has become possible, through improvement in the technology of production, to produce a higher output with an identical input (in terms of costs), or a physically identical output with a reduced input, then the coincidence of increased taxation and increased output is anything but surprising. But, to be sure, this does not at all affect the validity of what has been stated about relative impoverishment resulting from taxation.
Another objection that enjoys some popularity is that raising taxes leads to a reduction in monetary income, and that this reduction raises the marginal utility of money as compared with other forms of income (like leisure) and thus, instead of lowering it, actually helps to increase the tendency to work for monetary return.
This observation, to be sure, is perfectly true. But it is a misconception to believe that it does anything to invalidate the relative impoverishment thesis. First of all, in order to get the full picture it should be noted that through taxation, not only the monetary income for some people (the producers) is reduced but simultaneously monetary income for other people (nonproducers) is increased, and for these people the marginal utility of money and hence their inclination to work for monetary return would be reduced. But this is by no means all that need be said, as this might still leave the impression that taxation simply does not affect the output of exchangeable goods at all — since it will reduce the marginal utility of money income for some and increase it for others, with both effects cancelling each other out. But this impression would be wrong.
As a matter of fact, this would be a denial of what has been assumed at the outset: that a tax hike, i.e., a higher monetary contribution forced upon disapproving income producers, has actually taken place and has been perceived as such — and would hence involve a logical contradiction. Intuitively, the flaw in the belief that taxation is “neutral” as regards output becomes apparent as soon as the argument is carried to its ultimate extreme.
It would then amount to the statement that even complete expropriation of all of the producers’ monetary income and the transfer of it to a group of nonproducers would not make any difference, since the increased laziness of the nonproducers resulting from this redistribution would be fully compensated by an increased workaholism on the part of the producers (which is certainly absurd).
What is overlooked in this sort of reasoning is that the introduction of taxation or the rise in any given level of taxation does not only imply favoring nonproducers at the expense of producers, it also simultaneously changes, for producers and nonproducers of monetary income alike, the cost attached to different methods of achieving an (increasing) monetary income. For it is now relatively less costly to attain additional monetary income through nonproductive means, i.e., not through actually producing more goods but by participating in the process of noncontractual acquisitions of goods already produced. Even if producers are indeed more intent upon attaining additional money as a consequence of a higher tax, they will increasingly do so not by intensifying their productive efforts but rather through exploitative methods.
This explains why taxation is not, and never can be, neutral.
With (increased) taxation a different legal incentive structure is institutionalized: one that changes the relative costs of production for monetary income versus nonproduction, including nonproduction for leisurely purposes and nonproduction for monetary return, and also versus production for nonmonetary return (barter). And if such a different incentive structure is applied to one and the same population, then, and necessarily so, a decrease in the output of goods produced for monetary return must result.In addition, it should not be overlooked that even if it led to increased work by those taxed, a higher degree of taxation would in any case reduce the amount of leisure available to them and thereby reduce their standard of living. Cf. M.N. Rothbard, Man, Economy, and State with Power and Market (Auburn, Ala., 2009), pp. 1164 f. While income and sales taxation are the most common techniques, they do not exhaust social-democratic socialism’s repertoire of redistributive methods.
No matter how the taxes are redistributed to the individuals composing a given society, no matter, for instance, to what extent monetary income is equalized, since these individuals can and do lead different lifestyles and since they allocate different portions of the monetary income assigned to them to consumption or to the formation of nonproductively used private wealth, sooner or later significant differences between people will again emerge, if not with respect to their monetary income, then with respect to private wealth. And not surprisingly, these differences will steadily become more pronounced if a purely contractual inheritance law exists. Hence, social-democratic socialism, motivated as it is by egalitarian zeal, includes private wealth in its policy schemes and imposes a tax on it, too, and in particular imposes an inheritance tax in order to satisfy the popular outcry over “unearned riches” falling upon heirs.
Economically, these measures immediately reduce the amount of private wealth formation. As the enjoyment of private wealth is made relatively more costly by the tax, less wealth will be newly created, increased consumption will ensue — including that of existing stocks of nonproductively used riches — and the overall standard of living, which of course also depends on the comforts derived from private wealth, will sink.
Similar conclusions about impoverishment effects are reached when the third major field of tax policies — that of “natural assets” — is analyzed. For reasons to be discussed below, this field, next to the two traditional fields of monetary income and private wealth taxation, has gained more prominence over time under the heading of opportunity equalization. It did not take much to discover that a person’s position in life does not depend exclusively on monetary income or the wealth of nonproductively used goods. There are other things that are important in life and which bring additional income, even though it may not be in the form of money or other exchange goods: a nice family, an education, health, good looks, etc. I will call these nonexchangeable goods from which (psychic) income can be derived “natural assets.”
Redistributive socialism, led by egalitarian ideals, is also irritated by existing differences in such assets, and tries, if not to eradicate, then at least to moderate them. But these assets, being nonexchangeable goods, cannot be easily expropriated and the proceeds then redistributed. It is also not very practical, to say the least, to achieve this goal by directly reducing the nonmonetary income from natural assets of higher income people to the level of lower income people by, for instance, ruining the health of the healthy and so making them equal to the sick, or by smashing the good-looking people’s faces to make them look like their less fortunate bad-looking fellows.A fictional account of the implementation of such a policy, supervised by “The unceasing vigilance of agents of the United States Handicapper General” has been given by K. Vonnegut in “Harrison Bergeron,” in K. Vonnegut, Welcome to the Monkey House (New York, 1970).
Thus, the common method social-democratic socialism advocates in order to create “equality of opportunity” is taxation of natural assets. Those people who are thought to receive a relatively higher nonmonetary income from some asset, like health, are subject to an additional tax, to be paid in money. This tax is then redistributed to those people whose respective income is relatively low to help compensate them for this fact.
An additional tax, for instance, is levied on the healthy to help the unhealthy pay their doctor bills, or on the good looking to help the ugly pay for plastic surgery or to buy themselves a drink so that they can forget about their lot.
The economic consequences of such redistributive schemes should be clear.
Insofar as the psychic income, represented by health, for instance, requires some productive, time and cost-consuming effort, and as people can, in principle, shift from productive roles into nonproductive ones, or channel their productive efforts into different, non- or less heavily taxed lines of nonexchangeable or exchangeable goods production, they will do so because of the increased costs involved in the production of personal health.
The overall production of the wealth in question will fall, the general standard of health, that is, will be reduced. And even with truly natural assets, like intelligence, about which people can admittedly do little or nothing, consequences of the same kind will result, though only with a time lag of one generation. Realizing that it has become relatively more costly to be intelligent and less so to be nonintelligent, and wanting as much income (of all sorts) as possible for one’s offspring, the incentive for intelligent people to produce offspring has been lowered and for nonintelligent ones raised.
Given the laws of genetics, the result will be a population that is all in all less intelligent. And besides, in any case of taxation of natural assets, true for the example of health as well as for that of intelligence, because monetary income is taxed, a tendency similar to the one resulting from income taxation will set in, i.e., a tendency to reduce one’s efforts for monetary return and instead increasingly engage in productive activity for nonmonetary return or in all sorts of nonproductive enterprises. And, of course, all this once again reduces the general standard of living.
But this is still not all that has to be said about the consequences of socialism social-democratic-style, as it will also have remote yet nonetheless highly important effects on the social-moral structure of society, which will become visible when one considers the long-term effects of introducing redistributive policies. It probably no longer comes as a surprise that in this regard, too, the difference between Russian-type socialism and socialism social-democratic style, while highly interesting in some details, is not of a principal kind.
As should be recalled, the effect of the former on the formation of personality types was twofold, reducing the incentive to develop productive skills, and favoring at the same time the development of political talents. This precisely is also the overall consequence of social-democratic socialism.
As social-democratic socialism favors nonproductive roles as well as productive ones that escape public notice and so cannot be reached by taxation, the character of the population changes accordingly. This process might be slow, but as long as the peculiar incentive structure established by redistributive policies lasts, it is constantly operative.
Less investment in the development and improvement of one’s productive skills will take place and, as a consequence, people will become increasingly unable to secure their income on their own, by producing or contracting. And as the degree of taxation rises and the circle of taxed income widens, people will increasingly develop personalities as inconspicuous, as uniform, and as mediocre as is possible — at least as far as public appearance is concerned.
At the same time, as a person’s income simultaneously becomes dependent on Politics, i.e., on society’s decision on how to redistribute taxes (which is reached, to be sure, not by contracting, but rather by superimposing one person’s will on another’s recalcitrant one!), the more dependent it becomes, the more people will have to politicalize, i.e., the more time and energy they will have to invest in the development of their special talents for achieving personal advantages at the expense (i.e., in a noncontractual way) of others or of preventing such exploitation from occurring.
The difference between both types of socialism lies (only) in the following: under Russian-type socialism society’s control over the means of production, and hence over the income produced with them, is complete, and so far there seems to be no more room to engage in political debate about the proper degree of politicalization of society. The issue is settled — just as it is settled at the other end of the spectrum, under pure capitalism, where there is no room for politics at all and all relations are exclusively contractual.
Under social-democratic socialism, on the other hand, social control over income produced privately is actually only partial, and increased or full control exists only as society’s not yet actualized right, making only for a potential threat hanging over the heads of private producers. But living with the threat of being fully taxed rather than actually being so taxed explains an interesting feature of social-democratic socialism as regards the general development toward increasingly politicalized characters.
It explains why under a system of social-democratic socialism the sort of politicalization is different from that under Russian-type socialism. Under the latter, time and effort is spent nonproductively, discussing how to distribute the socially owned income; under the former, to be sure, this is also done, but time and effort are also used for political quarrels over the issue of how large or small the socially administered income-shares should actually be. Under a system of socialized means of production where this issue is settled once and for all, there is then relatively more withdrawal from public life, resignation, and cynicism to be observed.
Social-democratic socialism, on the other hand, where the question is still open, and where producers and nonproducers alike can still entertain some hope of improving their position by decreasing or increasing taxation, has less of such privatization and, instead, more often has people actively engaged in political agitation either in favor of increasing society’s control of privately produced incomes, or against it.On the phenomenon of politicalization cf. also K. S. Templeton, ed., The Politicalization of Society (Indianapolis, 1977). With the general similarity as well as this specific difference between both types of socialism explained, the task remains of presenting a brief analysis of some modifying forces influencing the general development toward unproductive politicalized personalities.
These are effected by differing approaches to the desirable pattern of income distribution.
Russian and social-democratic socialism alike are faced with the question of how to distribute income that happens to be socially controlled. For Russian-type socialism it is a matter of what salaries to pay to individuals who have been assigned to various positions in the caretaker economy. For redistributive socialism it is the question of how much tax to allocate to whom. While there are in principle innumerable ways to do this, the egalitarian philosophy of both kinds of socialism effectively reduces the available options to three general types.On the concern of orthodox and social-democratic socialism for equality cf. S. Lukes, “Socialism and Equality,” in: L. Kolakowski and S. Hampshire, eds., The Socialist Idea (New York, 1974); also B. Williams, “The Idea of Equality,” in P. Laslett and W. G. Runciman, eds., Philosophy, Politics, and Society, 2nd series (Oxford, 1962). For a critique of the socialist concept of equality cf. M. N. Rothbard, “Freedom, Inequality, Primitivism and the Division of Labor,” in K. S. Templeton, ed., The Politicalization of Society (Indianapolis, 1977); and Egalitarianism as a Revolt Against Nature and Other Essays, 2nd ed. (title essay; Auburn, Ala., 2000); H. Schoeck, Envy (New York, 1966); and 1st Leistung unanstaendig? (Osnabrueck, 1971); A. Flew, The Politics of Procrustes (London, 1980); and Sociology, Equality and Education (New York, 1976).
The first one is the method of more or less equalizing everybody’s monetary income (and possibly also private, nonproductively used wealth).
Teachers, doctors, construction workers and miners, factory managers and cleaning ladies all earn pretty much the same salary, or the difference between them is at least considerably reduced.Traditionally, this approach has been favored, at least in theory, by orthodox Marxist socialism — in line with Marx’s famous dictum in his “Critique of the Gotha Programme” (K. Marx, Selected Works, vol. 2 [London, 1942], p. 566), “from each according to his ability, to each according to his needs.” Economic reality, however, has forced the Russian-style countries to make considerable concessions in practice. Generally speaking, an effort has indeed been made to equalize the (assumedly highly visible) monetary income for various occupations, but in order to keep the economy going, considerable difference 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 Systems [Boston, 1985]), state: “… earnings are more equally distributed in Eastern Europe, Yugoslavia and the Soviet Union than in the United States. For the USSR, this appears to be a relatively new phenomenon, for as late as 1957, Soviet earnings were more unequal than the United States.” However, in Soviet-style countries “a relatively larger volume of resources … is provided on an extra market bases …” (p. 502). In conclusion: “Income is distributed more unequally in the capitalist countries in which the state plays a relatively minor redistributive role … (United States, Italy, Canada). Yet even where the state plays a major redistributive role (United Kingdom, Sweden), the distribution of incomes appears to be slightly more unequal than in the planned socialist countries (Hungary, Czechoslovakia, Bulgaria). The Soviet Union in 1966 appears to have a less egalitarian distribution of income than its East European counterparts” (p. 504). Cf. also, F. Parkin, Class Inequality and Political Order (New York, 1971), esp. chap. 6. It does not need much comment to realize that this approach reduces the incentive to work most drastically, for it no longer makes much difference — salary-wise — if one works diligently all day or fools around most of the time. Hence, disutility of labor being a fact of life, people will increasingly fool around, with the average income that everyone seems to be guaranteed constantly falling, in relative terms. Thus, this approach relatively strengthens the tendency toward withdrawal, disillusionment, cynicism, and mutatis mutandis, contributes to a relative reduction in the general atmosphere of politicalization.
The second approach has the more moderate aim of guaranteeing a minimum income which, though normally somehow linked to average income, falls well below it.This approach is traditionally most typical for social-democratic socialism. In recent years it has been given much publicized support — from the side of the economics profession — by M. Friedman with his proposal for a “negative income tax” (Friedman, Capitalism and Freedom, Chicago, 1962, chap. 12); and by J. Rawls — from the philosophical side — with his “difference principle” (Rawls, A Theory of Justice [Cambridge, 1971], pp. 60, 75 ff., 83). Accordingly, both authors have received much attention from social-democratic party intellectuals. Generally, Friedman was only found “guilty” of not wanting to set the minimum income high enough — but then, he had no principled criterion for setting it at any specific point anyway. Rawls, who wants to coerce the “most advantaged person” into letting the “least advantaged one” share in his fortune whenever he happens to improve his own position, was at times even found to have gone too far with his egalitarianism. Cf. G. Schwan, Sozialismus in der Demokratie. Theorie eine konsequent sozialdemokratischen Politik (Stuttgart, 1982), chap. 3.
This, too, reduces the incentive to work, since, to the extent that they are only marginal income producers with incomes from production only slightly above the minimum, people will now be more inclined to reduce or even stop their work, enjoy leisure instead, and settle for the minimum income. Thus more people than otherwise will fall below the minimum line, or more people than otherwise will keep or acquire those characteristics on whose existence payment of minimum salaries is bound, and as a consequence, again, the average income to which the minimum salary is linked will fall below the level that it otherwise would have reached. But, of course, the incentive to work is reduced to a smaller degree under the second than the first scheme.
On the other hand, the second approach will lead to a relatively higher degree of active politicalization (and less of resigned withdrawal), because, unlike average income, which can be objectively ascertained, the level at which the minimum income is fixed is a completely subjective, arbitrary affair, which is thus particularly prone to becoming a permanent political issue.
Undoubtedly, the highest degree of active politicalization is reached when the third distributional approach is chosen. Its goal, gaining more and more prominence for social democracy, is to achieve equality of opportunity.A representative example of social-democratically inclined research on equality of opportunity, in particular regarding education, is C. Jencks, and others, Inequality (London, 1973); the increasing prominence of the idea of equalizing opportunity also explains the flood of sociological studies on “quality of life” and “social indicators” that has appeared since the late 1960s. Cf. for instance, A. Szalai and F. Andrews, eds., The Quality of Life (London, 1980).
The idea is to create, through redistributional measures, a situation in which everyone’s chance of achieving any possible (income) position in life is equal — very much as in a lottery where each ticket has the same chance of being a winner or a loser — and, in addition, to have a corrective mechanism which helps rectify situations of “undeserved bad luck” (whatever that may be) which might occur in the course of the ongoing game of chance. Taken literally, of course, this idea is absurd: there is no way of equalizing the opportunity of someone living in the Alps and someone residing at the seaside.
In addition, it seems quite clear that the idea of a corrective mechanism is simply incompatible with the lottery idea. Yet it is precisely this high degree of vagueness and confusion which contributes to the popular appeal of this concept.
What constitutes an opportunity, what makes an opportunity different or the same, worse or better, how much and what kind of compensation is needed to equalize opportunities which admittedly cannot be equalized in physical terms (as in the Alps/seaside example), what is undeserved bad luck and what a rectification, are all completely subjective matters. They are dependent on subjective evaluations, changing as they do, and there is then — if one indeed applies the equality of opportunity concept — an unlimited reservoir of all sorts of distributional demands, for all sorts of reasons and for all sorts of people.
This is so, in particular, because equalizing opportunity is compatible with demands for differences in monetary income or private wealth. A 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 a resident of Texas, or may have ten children, or no husband, or be over 65, whereas B might be none of these but something else, and hence A might argue that his opportunities to attain everything possible in life are different, or rather worse, than B’s, and that he should somehow be compensated for this, thus making their monetary incomes, which were the same before, now different. And B, of course, could argue in exactly the same way by simply reversing the implied evaluation of opportunities. As a consequence, an unheard of degree of politicalization will ensue.
Everything seems fair now, and producers and nonproducers alike, the former for defensive and the latter for aggressive purposes, will be driven into spending more and more time in the role of raising, destroying, and countering distributional demands. And to be sure, this activity, like the engagement in leisurely activities, is not only nonproductive but in clear contrast to the role of enjoying leisure, implies spending time for the very purpose of actually disrupting the undisturbed enjoyment of wealth produced, as well as its new production.
But not only is increased politicalization stimulated (above and beyond the level implied by socialism generally) by promoting the idea of equalizing opportunity. There is once more, and this is perhaps one of the most interesting features of new social-democratic-socialism as compared with its traditional Marxist form, a new and different character to the kind of politicalization implied by it. Under any policy of distribution, there must be people who support and promote it. And normally, though not exclusively so, this is done by those who profit most from it.
Thus, under a system of income and wealth-equalization and also under that of a minimum income policy, it is mainly the “have-nots” who are the supporters of the politicalization of social life. Given the fact that on the average they happen to be those with relatively lower intellectual, in particular verbal capabilities, this makes for politics which appears to lack much intellectual sophistication, to say the least. Put more bluntly, politics tends to be outright dull, dumb, and appalling, even to a considerable number of the have-nots themselves.
On the other hand, in adopting the idea of equalizing opportunity, differences in monetary income and wealth are not only allowed to exist but even become quite pronounced, provided that this is justifiable by some underlying discrepancies in the opportunity structure for which the former differences help compensate. Now in this sort of politics the haves can participate, too.
As a matter of fact, being the ones who on the average command superior verbal skills, and the task of defining opportunities as better or worse being essentially one of persuasive rhetorical powers, this is exactly their sort of game. Thus the haves will now become the dominant force in sustaining the process of politicalization. Increasingly it will be people from their ranks that move to the top of the socialist party organization, and accordingly the appearance and rhetoric of socialist politics will take on a different shape, becoming more and more intellectualized, changing its appeal and attracting a new class of supporters.
With this I have reached the stage in the analysis of social-democratic socialism where only a few remarks and observations are needed which will help illustrate the validity of the above theoretical considerations.
Though it does not at all affect the validity of the conclusions reached above, depending as they do exclusively on the truth of the premises and the correctness of the deductions, there unfortunately exists no nearly perfect, quasi-experimental case to illustrate the workings of social-democratic socialism as compared with capitalism, as there was in the case of East and West Germany regarding Russian-type socialism. Illustrating the point would involve a comparison of manifestly different societies where the ceteris are clearly not paribus, and thus it would no longer be possible to neatly match certain causes with certain effects.
Often, experiments in social-democratic socialism simply have not lasted long enough, or have been interrupted repeatedly by policies that could not definitely be classified as social-democratic socialism. Or else from the very beginning, they have been mixed with such different — and even inconsistent — policies as a result of political compromising, that in reality different causes and effects are so entangled that no striking illustrative evidence can be produced for any thesis of some degree of specificity. The task of disentangling causes and effects then becomes a genuinely theoretical one again, lacking the peculiar persuasiveness that characterizes experimentally produced evidence.
Nonetheless some evidence exists, if only of a more dubious quality. First, on the level of highly global observations, the general thesis about relative impoverishment brought about by redistributive socialism is illustrated by the fact that the standard of living is relatively higher and has become more so over time in the United States of America than in Western Europe, or, more specifically, than in the countries of the European Community (EC).
Both regions are roughly comparable with respect to population size, ethnic and cultural diversity, tradition and heritage, and also with respect to natural endowments, but the United States is comparatively more capitalist and Europe more socialist. Every neutral observer will hardly fail to notice this point, as indicated also by such global measures as state expenditure as percent of GNP, which is roughly 35 percent in the United States as compared to about 50 percent or more in Western Europe.
It also fits into the picture that the European countries (in particular Great Britain) exhibited more impressive rates of economic growth in the nineteenth century, which has been described repeatedly by historians as the period of classical liberalism, than in the twentieth, which, in contrast, has been termed that of socialism and statism. In the same way the validity of the theory is illustrated by the fact that Western Europe has been increasingly surpassed in rates of economic growth by some of the Pacific countries, such as Japan, Hong Kong, Singapore, and Malaysia; and that the latter, in adopting a relatively more capitalist course, have meanwhile achieved a much higher standard of living than socialistically inclined countries which started at about the same time with roughly the same basis of economic development, such as India.
Coming then to more specific observations, there are the recent experiences of Portugal, where in 1974 the autocratic Salazar regime of conservative socialism (another type of socialism), which had kept Portugal one of the poorest countries in Europe, was supplanted in an upheaval by redistributive socialism (with elements of nationalization) and where since then the standard of living has fallen even further, literally turning the country into a third world region.
There is also the socialist experiment of Mitterand’s France, which produced an immediate deterioration of the economic situation, so noticeable — most conspicuous being a drastic rise in unemployment and repeated currency devaluations — that after less than two years, sharply reduced public support for the government forced a reversal in policy, which was almost comic in that it amounted to a complete denial of what only a few weeks before had been advocated as its dearest convictions.
The most instructive case, though, might again be provided by Germany and, this time, West Germany.On the following cf. also R. Merklein, Griff in die eigene Tasche (Hamburg, 1980); and Die Deutschen werden aermer (Hamburg, 1982).
From 1949 to 1966 a liberal-conservative government which showed a remarkable commitment to the principles of a market economy existed, even though from the very beginning there was a considerable degree of conservative-socialist elements mixed in and these elements gained more importance over time. In any case, of all the major European nations, during this period West Germany was, in relative terms, definitely the most capitalist country, and the result of this was that it became Europe’s most prosperous society, with growth rates that surpassed those of all its neighbors.
Until 1961, millions of German refugees, and afterward millions of foreign workers from southern European countries became integrated into its expanding economy, and unemployment and inflation were almost unknown. Then, after a brief transition period, from 1969 to 1982 (almost an equal time span) a social-democratically led socialist-liberal government took over. It raised taxes and social security contributions considerably, increased the number of public employees, poured additional tax funds into existing social programs and created new ones, and significantly increased spending on all sorts of so-called “public goods,” thereby allegedly equalizing opportunities and enhancing the overall “quality of life.”
By resorting to a Keynesian policy of deficit spending and unanticipated inflation, the effects of raising the socially guaranteed minimum provisions for nonproducers at the expense of more heavily taxed producers could be delayed for a few years (the motto of the economic policy of former West German Chancellor Helmut Schmidt was “rather 5% inflation than 5% unemployment”). They were only to become more drastic somewhat later, however, as unanticipated inflation and credit expansion had created and prolonged the over- or rather malinvestment typical of a boom.
As a result, not only was there much more than 5 percent inflation, but unemployment also rose steadily and approached 10 percent; the growth of GNP became slower and slower until it actually fell in absolute terms during the last few years of the period. Instead of being an expanding economy, the absolute number of people employed decreased; more and more pressure was generated on foreign workers to leave the country and the immigration barriers were simultaneously raised to ever higher levels. All of this happened while the importance of the underground economy grew steadily.
But these were only the more evident effects of a narrowly defined economic kind. There were other effects of a different sort, which were actually of more lasting importance. With the new socialist-liberal government the idea of equalizing opportunity came to the ideological forefront. And as has been predicted theoretically, it was in particular the official spreading of the idea mehr Demokratie wagen (“risk more Democracy”) — initially one of the most popular slogans of the new (Willy Brandt) era — that led to a degree of politicalization unheard of before.
All sorts of demands were raised in the name of equality of opportunity; and there was hardly any sphere of life, from childhood to old age, from leisure to work conditions, that was not examined intensely for possible differences that it offered to different people with regard to opportunities defined as relevant. Not surprisingly, such opportunities and such differences were found constantly,Cf. as a representative example, W. Zapf, ed., Lebensbedingungen in der Bundesrepublik (Frankfurt/M., 1978). and, accordingly, the realm of politics seemed to expand almost daily. “There is no question that is not a political one” could be heard more and more often.
In order to stay ahead of this development the parties in power had to change, too. In particular the Social Democrats, traditionally a blue-collar workers’ party, had to develop a new image.
With the idea of equalizing opportunity gaining ground, it increasingly became, as could be predicted, the party of the (verbal) intelligentsia, of social scientists and of teachers. And this “new” party, almost as if to prove the point that a process of politicalization will be sustained mainly by those who can profit from its distributional schemes and that the job of defining opportunities is essentially arbitrary and a matter of rhetorical power, then made it one of its central concerns to channel the most diverse political energies set in motion into the field of equalizing, above all, educational opportunities.
In particular, they “equalized” the opportunities for a high school and university education, by offering the respective services not only free of charge but by literally paying large groups of students to take advantage of them. This not only increased the demand for educators, teachers, and social scientists, whose payment naturally had to come from taxes. It also amounted, somewhat ironically for a socialist party which argued that equalizing educational opportunities would imply an income transfer from the rich to the poor, in effect to a subsidy paid to the more intelligent at the expense of a complementary income reduction for the less intelligent, and, to the extent that there are higher numbers of intelligent people among the middle and upper social classes than among the lower, a subsidy to the haves paid by the have-nots.Cf. on this A. Alchian, “The Economic and Social Impact of Free Tuition” in A. Alchian, Economic Forces at Work (Indianapolis, 1977).
As a result of this process of politicalization led by increased numbers of tax-paid educators gaining influence over increased numbers of students, there emerged (as could be predicted) a change in the mentality of the people. It was increasingly considered completely normal to satisfy all sorts of demands through political means, and to claim all sorts of alleged rights against other supposedly better-situated people and their property; and for a whole generation of people raised during this period, it became less and less natural to think of improving one’s lot by productive effort or by contracting. Thus, when the actual economic crisis, necessitated by the redistributionist policy, arose, the people were less equipped than ever to overcome it, because over time the same policy had weakened precisely those skills and talents which were now most urgently required.
Revealingly enough, when the socialist-liberal government was ousted in 1982, mainly because of its obviously miserable economic performance, it was still the prevalent opinion that the crisis should be resolved not by eliminating the causes, i.e., the swollen minimum provisions for nonproducers or noncontractors, but rather by another redistributive measure: by forcibly equalizing the available work — time for employed and unemployed people.
And in line with this spirit the new conservative-liberal government in fact did no more than slow down the rate of growth of taxation.
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 of orthodox Marxist socialism and has spurred the emergence and development of modern social-democratic socialism.
Both types of socialism, to be sure, derive from the same ideological sources.Cf. L. Kolakowski, Main Currents of Marxism (Oxford, 1978), 3 vols.; also W. Leonhard, Sovietideologie heute. Die politischen Lehren (Frankfurt/M., 1963). Both are egalitarian in motivation, at least in theory,Cf. note 16 below on the assessment of the somewhat different practice. and both have essentially the same ultimate goal: the abolishment of capitalism as a social system based on private ownership and the establishment of a new society, characterized by brotherly solidarity and the eradication of scarcity; a society in which everyone is paid “according to his needs.”
From the very beginnings of the socialist movement in the mid-nineteenth century, though, there have been conflicting ideas on the methods best suited for achieving these goals. While generally there was agreement on the necessity of socializing the means of production, there were always diverging opinions on how to proceed. On the one hand, within the socialist movement there were the advocates of a revolutionary course of action. They propagated the violent overthrow of the existing governments, the complete expropriation of all capitalists in one stroke, and the temporary (i.e., until scarcity would indeed, as promised, be eradicated) dictatorship of the proletariat, i.e., of those who were not capitalists but who had to sell their labor services, in order to stabilize the new order.
On the other hand there were the reformists who advocated a gradualist approach. They reasoned that with the enlargement of the franchise, and ultimately with a system of universal suffrage, socialism’s victory could be attained through democratic, parliamentary action. This would be so because capitalism, according to common socialist doctrine, would bring about a tendency toward the proletarization of society, i.e., a tendency for fewer people to be self-employed and more to become employees instead. And in accordance with common socialist beliefs, this tendency would in turn produce an increasingly uniform proletarian class consciousness which then would lead to a swelling voter turnout for the socialist party. And, so they reasoned, as this strategy was much more in line with public opinion (more appealing to the mostly peacefully-minded workers and at the same time less frightening to the capitalists), by adopting it, socialism’s ultimate success would only become more assured.
Both of these forces co-existed within the socialist movement, though their relationship was at times quite strained, until the Bolshevik Revolution of October 1917, in Russia. In practice, the socialist movement generally took the reformist path, while in the field of ideological debate the revolutionaries dominated.Cf. E. Bernstein, Die Voraussetzungen des Sozialismus und die Aufgaben der Sozialdemokratie (Bonn, 1975), as a major expositor of the reformist-revisionist course; K. Kautsky, Bernstein und das sozialdemokratische Programm (Bonn, 1976), as exponent of the Marxist orthodoxy. The Russian events changed this.
With Lenin in the lead, for the first time the revolutionary socialists realized their program and the socialist movement as a whole had to take a stand vis-à-vis the Russian experiment. As a consequence, the socialist movement split into two branches with two separate parties: a communist party either more or less in favor of the Russian events, and a socialist or social-democratic party with reservations, or against them. Still, the split was not over the issue of socialization; both were in favor of that. It was an open split over the issue of revolutionary vs. democratic parliamentary change.
Faced with the actual experience of the Russian revolution — the violence, the bloodshed, the practice of uncontrolled expropriation, the fact that thousands of new leaders, very often of questionable reputation or simply shady, inferior characters, were being swept to the political helm — the social democrats, in their attempt to gain public support, felt they had to abandon their revolutionary image and become, not only in practice but in theory as well, a decidedly reformist, democratic party. And even some of the communist parties of the West, dedicated as they were to a theory of revolutionary change, but just as much in need of public support, felt they had to find some fault, at least, with the peculiar Bolshevik way of implementing the revolution. They, too, increasingly thought it necessary to play the reformist, democratic game, if only in practice.
However, this was only the first step in the transformation of the socialist movement effected by the experience of the Russian revolution. The next step, as indicated, was forced upon it by the dim experience with Soviet Russia’s economic performance. Regardless of their differing views on the desirability of revolutionary changes and equally unfamiliar with or unable or unwilling to grasp abstract economic reasoning, socialists and communists alike could still, during a sort of honeymoon period which they felt the new experiment deserved, entertain the most illusory hopes about the economic achievements of a policy of socialization. But this period could not last forever, and the facts had to be faced and the results evaluated after some time had elapsed.
For every decently neutral observer of things, and later for every alert visitor and traveler, it became evident that socialism Russian-style did not mean more but rather less wealth and that it was a system above all, that in having to allow even small niches of private capital formation, had in fact already admitted its own economic inferiority, if only implicitly.
As this experience became more widely known, and in particular when after World War II the Soviet experiment was repeated in the East European countries, producing the very same dim results and thus disproving the thesis that the Soviet mess was only due to a special Asian mentality of the people, in their race for public support the socialist, i.e., the social-democratic and communist, parties of the West were forced to modify their programs further. The communists now saw various flaws in the Russian implementation of the socialization program as well, and increasingly toyed with the idea of more decentralized planning and decision-making and of partial socialization, i.e., socialization only of major firms and industries, although they never entirely abandoned the idea of socialized production.On the idea of a “market-socialism” cf. one of its leading representatives, O. Lange, “On the Economic Theory of Socialism,” in M. I. Goldman, ed., Comparative Economic Systems (New York, 1971).
The socialist or social-democratic parties, on the other hand, less sympathetic from the beginning toward the Russian model of socialism and through their decidedly reformist-democratic policy already inclined to accept compromises such as partial socialization, had to make a further adaptive move. These parties, in response to the Russian and East European experiences, increasingly gave up the notion of socialized production altogether and instead put more and more emphasis on the idea of income taxation and equalization, and, in another move, on equalization of opportunity, as being the true cornerstones of socialism.
While this shift from Russian-type socialism toward a social-democratic one took place, and still is taking place in all Western societies, it was not equally strong everywhere. Roughly speaking and only looking at Europe, the displacement of the old by the new kind of socialism has been more pronounced, the more immediate and direct the experience with Russian-type socialism for the population in which the socialist and/or communist parties had to find supporters and voters.
Of all the major countries, in West Germany, where the contact with this type of socialism is the most direct, where millions of people still have ample opportunities to see with their own eyes the mischief that has been done to the people in East Germany, this displacement was the most complete. Here, in 1959, the social democrats adopted (or rather were forced by public opinion to adopt) a new party program in which all obvious traces of a Marxist past were conspicuously absent, that rather explicitly mentioned the importance of private ownership and markets, that talked about socialization only as a mere possibility, and that instead heavily stressed the importance of redistributive measures. Here, the protagonists of a policy of socialization of the means of production within the social-democratic party have been considerably outnumbered ever since; and here the communist parties, even when they are only in favor of peaceful and partial socialization, have been reduced to insignificance.On the ideology of the German Social Democrats cf. T. Meyer, ed., Demokratischer Sozialismus (Muenchen, 1980); G. Schwan, ed., Demokratischer Sozialismus fuer Industriegesellschaften (Frankfurt/M., 1979).
In countries further removed from the iron curtain, like France, Italy, Spain, and also Great Britain, this change has been less dramatic. Nonetheless, it is safe to say that today only social-democratic socialism, as represented most typically by the German social-democrats, can claim widespread popularity in the West. As a matter of fact, due partly to the influence of the Socialist International — the association of socialist and social-democratic parties — social-democratic socialism can now be said to be one of the most widespread ideologies of our age, increasingly shaping the political programs and actual policies not only of explicitly socialist parties, and to a lesser degree those of the western communists, but also of groups and parties who would not even in their most far-fetched dreams call themselves socialists, like the east coast “liberal” Democrats in the United States.Indicators for the social-democratization of the socialist movement are the rise of the socialist party and the corresponding decline of the orthodox communist party in France; the emergence of a social-democratic party as a rival to the more orthodox labor party in Great Britain; the moderation of the communists in Italy as the only remaining powerful communist party in Western Europe toward an increasingly social-democratic policy; and the growth of the socialist-social-democratic parties in Spain and Portugal under Gonzales and Soares, both with close ties to the German SPD. Furthermore, the socialist parties of Scandinavia, which traditionally had closely followed the German path and which later provided safe haven to a number of prominent socialists during the Nazi persecution (most notably W. Brandt and B. Kreisky), have long given credence to the revisionist beliefs. And in the field of international politics the ideas of social-democratic socialism, in particular of a redistributive approach toward these-called North-South conflict, have almost become something like the official position among all “well-informed” and “well-intentioned” men; a consensus extending far beyond those who think of themselves as socialists.On the social-democratic position regarding the North-South conflict cf. North-South: A Programme for Survival, Independent Commission on International Development Issues (Chair: W. Brandt), 1980. What are the central features of socialism social-democratic-style?
There are basically two characteristics. First, in positive contradistinction to the traditional Marxist-style socialism, social-democratic socialism does not outlaw private ownership in the means of production and it even accepts the idea of all means of production being privately owned — with the exception only of education, traffic and communication, central banking, and the police and courts. In principle, everyone has the right to privately appropriate and own means of production, to sell, buy, or newly produce them, to give them away as a present, or to rent them out to someone else under a contractual arrangement. But secondly, no owner of means of production rightfully owns all of the income that can be derived from the usage of his means of production and no owner is left to decide how much of the total income from production to allocate to consumption and investment. Instead, part of the income from production rightfully belongs to society, has to be handed over to it, and is then, according to ideas of egalitarianism or distributive justice, redistributed to its individual members. Furthermore, though the respective income-shares that go to the producer and to society might be fixed at any given point in time, the share that rightfully belongs to the producer is in principle flexible and the determination of its size, as well as that of society’s share, is not up to the producer, but rightfully belongs to society.Note again that this characterization of social-democratic socialism has the status of an “ideal type” (cf. chapter 3, n. 2). It is not to be taken as a description of the policy or ideology of any actual party. Rather, it should be understood as the attempt to reconstruct what has become the essence of modern social-democratic style socialism, underlying a much more diverse reality of programs and policies of various parties or movements of different names as the ideologically unifying core.
Seen from the point of view of the natural theory of property — the theory underlying capitalism — the adoption of these rules implies that the rights of the natural owner have been aggressively invaded. According to this theory of property, it should be recalled, the user-owner of the means of production can do whatever he wants with them; and whatever the outcome of his usage, it is his own private income, which he can use again as he pleases, as long as he does not change the physical integrity of someone else’s property and exclusively relies on contractual exchanges.
From the standpoint of the natural theory of property, there are not two separate processes — the production of income and then, after income is produced, its distribution. There is only one process: in producing income it is automatically distributed; the producer is the owner. As compared with this, socialism social-democratic style advocates the partial expropriation of the natural owner by redistributing part of the income from production to people who, whatever their merits otherwise, definitely did not produce the income in question and definitely did not have any contractual claims to it, and who, in addition, have the right to determine unilaterally, i.e., without having to wait for the affected producer’s consent, how far this partial expropriation can go.
It should be clear from this description that, contrary to the impression which socialism social-democratic style is intended to generate among the public, the difference between both types of socialism is not of a categorical nature. Rather, it is only a matter of degree. Certainly, the first mentioned rule seems to inaugurate a fundamental difference in that it allows private ownership. But then the second rule in principle allows the expropriation of all of the producer’s income from production and thus reduces his ownership right to a purely nominal one. Of course, social-democratic socialism does not have to go as far as reducing private ownership to one in name only. And admittedly, as the income-share that the producer is forced to hand over to society can in fact be quite moderate, this, in practice, can make a tremendous difference as regards economic performance. But still, it must be realized that from the standpoint of the nonproducing fellowmen, the degree of expropriation of private producers’ income is a matter of expediency, which suffices to reduce the difference between both types of socialism — Russian and social-democratic style — once and for all to a difference only of degree.
It should be apparent what this important fact implies for a producer. It means that however low the presently fixed degree of expropriation might be, his productive efforts take place under the ever-present threat that in the future the income-share which must be handed over to society will be raised unilaterally. It does not need much comment to see how this increases the risk, or the cost of producing, and hence lowers the rate of investment.
With this statement a first step in the analysis that follows has already been taken. What are the economic, in the colloquial sense of the term, consequences of adopting a system of social-democratic socialism? After what has just been said, it is probably no longer altogether surprising to hear that at least as regards the general direction of the effects, they are quite similar to those of traditional Marxist-type socialism. Still, to the extent that social-democratic socialism settles for partial expropriation and the redistribution of producer incomes, some of the impoverishment effects that result from a policy of fully socializing means of production can be circumvented.
Since these resources can still be bought and sold, the problem most typical of a caretaker economy — that no market prices for means of production exist and hence neither monetary calculation nor accounting are possible, with ensuing misallocations and the waste of scarce resources in usages that are at best of only secondary importance — is avoided. In addition, the problem of overutilization is at least reduced. Also, since private investment and capital formation is still possible to the extent that some portion of income from production is left with the producer to use at his discretion, under socialism social-democratic style there is a relatively higher incentive to work, to save, and to invest.
Nonetheless, by no means can all impoverishment effects be avoided. Socialism social-democratic style, however good it might look in comparison with Russian-type socialism, still necessarily leads to a reduction in investment and thus in future wealth as compared with that under capitalism.On the following cf. L. v. Mises, Socialism (Indianapolis, 1981), esp. part V; Human Action (Auburn, Ala., 2008), esp. part 6. By taking part of the income from production away from the owner-producer, however small that part may be, and giving it to people who did not produce the income in question, the costs of production (which are never zero, as producing, appropriating, contracting always imply at least the use of time, which could be used otherwise, for leisure, consumption, or underground work, for instance) rise, and, mutatis mutandis, the costs of non-producing and/or underground production fall, however slightly.
As a consequence there will be relatively less production and investment, even though, for reasons to be discussed shortly, the absolute level of production and wealth might still rise. There will be relatively more leisure, more consumption, and more moonlighting, and hence, all in all, relative impoverishment. And this tendency will be more pronounced the higher the income from production that is redistributed, and the more imminent the likelihood that it will be raised in the future by unilateral, noncontractual societal decision.
For a long time by far the most popular idea for implementing the general policy goal of social-democratic socialism was to redistribute monetary income by means of income taxation or a general sales tax levied on producers. A look at this particular technique shall further clarify our point and avoid some frequently encountered misunderstandings and misconceptions about the general effect of relative impoverishment.
What is the economic effect of introducing income or sales taxation where there has been none before, or of raising an existing level of taxation to a new height?Cf. M. N. Rothbard, Man, Economy, and State with Power and Market (Auburn, Ala., 2009). In answering this, I will further ignore the complications that result from the different possible ways of redistributing tax money to different individuals or groups of individuals — these shall be discussed later.
Here we will only take into account the general fact, true by definition for all redistributive systems, that any redistribution of tax money is a transfer from monetary income producers and contractual money recipients to people in their capacity as nonproducers and nonrecipients of contractual money incomes. Introducing or raising taxation thus implies that monetary income flowing from production is reduced for the producer and increased for people in their roles as nonproducers and noncontractors. This changes the relative costs of production for monetary return versus nonproduction and production for nonmonetary returns.
Accordingly, insofar as this change is perceived by people, they will increasingly resort to leisurely consumption and/or production for the purpose of barter, simultaneously reducing their productive efforts undertaken for monetary rewards. In any case, the output of goods to be purchased with money will fall, which is to say the purchasing power of money decreases, and hence the general standard of living will decline.
Against this reasoning it is sometimes argued that it has been frequently observed empirically that a rise in the level of taxation was actually accompanied by a rise (not a fall) in the gross national product (GNP), and that the above reasoning, however plausible, must thus be considered empirically invalid. This alleged counterargument exhibits a simple misunderstanding: a confusion between absolute and relative reduction.
In the above analysis the conclusion is reached that the effect of higher taxes is a relative reduction in production for monetary returns; a reduction, that is, as compared with the level of production that would have been attained had the degree of taxation not been altered. It does not say or imply anything with respect to the absolute level of output produced.
As a matter of fact, absolute growth of GNP is not only compatible with our analysis but can be seen as a perfectly normal phenomenon to the extent that advances in productivity are possible and actually take place. If it has become possible, through improvement in the technology of production, to produce a higher output with an identical input (in terms of costs), or a physically identical output with a reduced input, then the coincidence of increased taxation and increased output is anything but surprising. But, to be sure, this does not at all affect the validity of what has been stated about relative impoverishment resulting from taxation.
Another objection that enjoys some popularity is that raising taxes leads to a reduction in monetary income, and that this reduction raises the marginal utility of money as compared with other forms of income (like leisure) and thus, instead of lowering it, actually helps to increase the tendency to work for monetary return.
This observation, to be sure, is perfectly true. But it is a misconception to believe that it does anything to invalidate the relative impoverishment thesis. First of all, in order to get the full picture it should be noted that through taxation, not only the monetary income for some people (the producers) is reduced but simultaneously monetary income for other people (nonproducers) is increased, and for these people the marginal utility of money and hence their inclination to work for monetary return would be reduced. But this is by no means all that need be said, as this might still leave the impression that taxation simply does not affect the output of exchangeable goods at all — since it will reduce the marginal utility of money income for some and increase it for others, with both effects cancelling each other out. But this impression would be wrong.
As a matter of fact, this would be a denial of what has been assumed at the outset: that a tax hike, i.e., a higher monetary contribution forced upon disapproving income producers, has actually taken place and has been perceived as such — and would hence involve a logical contradiction. Intuitively, the flaw in the belief that taxation is “neutral” as regards output becomes apparent as soon as the argument is carried to its ultimate extreme.
It would then amount to the statement that even complete expropriation of all of the producers’ monetary income and the transfer of it to a group of nonproducers would not make any difference, since the increased laziness of the nonproducers resulting from this redistribution would be fully compensated by an increased workaholism on the part of the producers (which is certainly absurd).
What is overlooked in this sort of reasoning is that the introduction of taxation or the rise in any given level of taxation does not only imply favoring nonproducers at the expense of producers, it also simultaneously changes, for producers and nonproducers of monetary income alike, the cost attached to different methods of achieving an (increasing) monetary income. For it is now relatively less costly to attain additional monetary income through nonproductive means, i.e., not through actually producing more goods but by participating in the process of noncontractual acquisitions of goods already produced. Even if producers are indeed more intent upon attaining additional money as a consequence of a higher tax, they will increasingly do so not by intensifying their productive efforts but rather through exploitative methods.
This explains why taxation is not, and never can be, neutral.
With (increased) taxation a different legal incentive structure is institutionalized: one that changes the relative costs of production for monetary income versus nonproduction, including nonproduction for leisurely purposes and nonproduction for monetary return, and also versus production for nonmonetary return (barter). And if such a different incentive structure is applied to one and the same population, then, and necessarily so, a decrease in the output of goods produced for monetary return must result.In addition, it should not be overlooked that even if it led to increased work by those taxed, a higher degree of taxation would in any case reduce the amount of leisure available to them and thereby reduce their standard of living. Cf. M.N. Rothbard, Man, Economy, and State with Power and Market (Auburn, Ala., 2009), pp. 1164 f. While income and sales taxation are the most common techniques, they do not exhaust social-democratic socialism’s repertoire of redistributive methods.
No matter how the taxes are redistributed to the individuals composing a given society, no matter, for instance, to what extent monetary income is equalized, since these individuals can and do lead different lifestyles and since they allocate different portions of the monetary income assigned to them to consumption or to the formation of nonproductively used private wealth, sooner or later significant differences between people will again emerge, if not with respect to their monetary income, then with respect to private wealth. And not surprisingly, these differences will steadily become more pronounced if a purely contractual inheritance law exists. Hence, social-democratic socialism, motivated as it is by egalitarian zeal, includes private wealth in its policy schemes and imposes a tax on it, too, and in particular imposes an inheritance tax in order to satisfy the popular outcry over “unearned riches” falling upon heirs.
Economically, these measures immediately reduce the amount of private wealth formation. As the enjoyment of private wealth is made relatively more costly by the tax, less wealth will be newly created, increased consumption will ensue — including that of existing stocks of nonproductively used riches — and the overall standard of living, which of course also depends on the comforts derived from private wealth, will sink.
Similar conclusions about impoverishment effects are reached when the third major field of tax policies — that of “natural assets” — is analyzed. For reasons to be discussed below, this field, next to the two traditional fields of monetary income and private wealth taxation, has gained more prominence over time under the heading of opportunity equalization. It did not take much to discover that a person’s position in life does not depend exclusively on monetary income or the wealth of nonproductively used goods. There are other things that are important in life and which bring additional income, even though it may not be in the form of money or other exchange goods: a nice family, an education, health, good looks, etc. I will call these nonexchangeable goods from which (psychic) income can be derived “natural assets.”
Redistributive socialism, led by egalitarian ideals, is also irritated by existing differences in such assets, and tries, if not to eradicate, then at least to moderate them. But these assets, being nonexchangeable goods, cannot be easily expropriated and the proceeds then redistributed. It is also not very practical, to say the least, to achieve this goal by directly reducing the nonmonetary income from natural assets of higher income people to the level of lower income people by, for instance, ruining the health of the healthy and so making them equal to the sick, or by smashing the good-looking people’s faces to make them look like their less fortunate bad-looking fellows.A fictional account of the implementation of such a policy, supervised by “The unceasing vigilance of agents of the United States Handicapper General” has been given by K. Vonnegut in “Harrison Bergeron,” in K. Vonnegut, Welcome to the Monkey House (New York, 1970).
Thus, the common method social-democratic socialism advocates in order to create “equality of opportunity” is taxation of natural assets. Those people who are thought to receive a relatively higher nonmonetary income from some asset, like health, are subject to an additional tax, to be paid in money. This tax is then redistributed to those people whose respective income is relatively low to help compensate them for this fact.
An additional tax, for instance, is levied on the healthy to help the unhealthy pay their doctor bills, or on the good looking to help the ugly pay for plastic surgery or to buy themselves a drink so that they can forget about their lot.
The economic consequences of such redistributive schemes should be clear.
Insofar as the psychic income, represented by health, for instance, requires some productive, time and cost-consuming effort, and as people can, in principle, shift from productive roles into nonproductive ones, or channel their productive efforts into different, non- or less heavily taxed lines of nonexchangeable or exchangeable goods production, they will do so because of the increased costs involved in the production of personal health.
The overall production of the wealth in question will fall, the general standard of health, that is, will be reduced. And even with truly natural assets, like intelligence, about which people can admittedly do little or nothing, consequences of the same kind will result, though only with a time lag of one generation. Realizing that it has become relatively more costly to be intelligent and less so to be nonintelligent, and wanting as much income (of all sorts) as possible for one’s offspring, the incentive for intelligent people to produce offspring has been lowered and for nonintelligent ones raised.
Given the laws of genetics, the result will be a population that is all in all less intelligent. And besides, in any case of taxation of natural assets, true for the example of health as well as for that of intelligence, because monetary income is taxed, a tendency similar to the one resulting from income taxation will set in, i.e., a tendency to reduce one’s efforts for monetary return and instead increasingly engage in productive activity for nonmonetary return or in all sorts of nonproductive enterprises. And, of course, all this once again reduces the general standard of living.
But this is still not all that has to be said about the consequences of socialism social-democratic-style, as it will also have remote yet nonetheless highly important effects on the social-moral structure of society, which will become visible when one considers the long-term effects of introducing redistributive policies. It probably no longer comes as a surprise that in this regard, too, the difference between Russian-type socialism and socialism social-democratic style, while highly interesting in some details, is not of a principal kind.
As should be recalled, the effect of the former on the formation of personality types was twofold, reducing the incentive to develop productive skills, and favoring at the same time the development of political talents. This precisely is also the overall consequence of social-democratic socialism.
As social-democratic socialism favors nonproductive roles as well as productive ones that escape public notice and so cannot be reached by taxation, the character of the population changes accordingly. This process might be slow, but as long as the peculiar incentive structure established by redistributive policies lasts, it is constantly operative.
Less investment in the development and improvement of one’s productive skills will take place and, as a consequence, people will become increasingly unable to secure their income on their own, by producing or contracting. And as the degree of taxation rises and the circle of taxed income widens, people will increasingly develop personalities as inconspicuous, as uniform, and as mediocre as is possible — at least as far as public appearance is concerned.
At the same time, as a person’s income simultaneously becomes dependent on Politics, i.e., on society’s decision on how to redistribute taxes (which is reached, to be sure, not by contracting, but rather by superimposing one person’s will on another’s recalcitrant one!), the more dependent it becomes, the more people will have to politicalize, i.e., the more time and energy they will have to invest in the development of their special talents for achieving personal advantages at the expense (i.e., in a noncontractual way) of others or of preventing such exploitation from occurring.
The difference between both types of socialism lies (only) in the following: under Russian-type socialism society’s control over the means of production, and hence over the income produced with them, is complete, and so far there seems to be no more room to engage in political debate about the proper degree of politicalization of society. The issue is settled — just as it is settled at the other end of the spectrum, under pure capitalism, where there is no room for politics at all and all relations are exclusively contractual.
Under social-democratic socialism, on the other hand, social control over income produced privately is actually only partial, and increased or full control exists only as society’s not yet actualized right, making only for a potential threat hanging over the heads of private producers. But living with the threat of being fully taxed rather than actually being so taxed explains an interesting feature of social-democratic socialism as regards the general development toward increasingly politicalized characters.
It explains why under a system of social-democratic socialism the sort of politicalization is different from that under Russian-type socialism. Under the latter, time and effort is spent nonproductively, discussing how to distribute the socially owned income; under the former, to be sure, this is also done, but time and effort are also used for political quarrels over the issue of how large or small the socially administered income-shares should actually be. Under a system of socialized means of production where this issue is settled once and for all, there is then relatively more withdrawal from public life, resignation, and cynicism to be observed.
Social-democratic socialism, on the other hand, where the question is still open, and where producers and nonproducers alike can still entertain some hope of improving their position by decreasing or increasing taxation, has less of such privatization and, instead, more often has people actively engaged in political agitation either in favor of increasing society’s control of privately produced incomes, or against it.On the phenomenon of politicalization cf. also K. S. Templeton, ed., The Politicalization of Society (Indianapolis, 1977). With the general similarity as well as this specific difference between both types of socialism explained, the task remains of presenting a brief analysis of some modifying forces influencing the general development toward unproductive politicalized personalities.
These are effected by differing approaches to the desirable pattern of income distribution.
Russian and social-democratic socialism alike are faced with the question of how to distribute income that happens to be socially controlled. For Russian-type socialism it is a matter of what salaries to pay to individuals who have been assigned to various positions in the caretaker economy. For redistributive socialism it is the question of how much tax to allocate to whom. While there are in principle innumerable ways to do this, the egalitarian philosophy of both kinds of socialism effectively reduces the available options to three general types.On the concern of orthodox and social-democratic socialism for equality cf. S. Lukes, “Socialism and Equality,” in: L. Kolakowski and S. Hampshire, eds., The Socialist Idea (New York, 1974); also B. Williams, “The Idea of Equality,” in P. Laslett and W. G. Runciman, eds., Philosophy, Politics, and Society, 2nd series (Oxford, 1962). For a critique of the socialist concept of equality cf. M. N. Rothbard, “Freedom, Inequality, Primitivism and the Division of Labor,” in K. S. Templeton, ed., The Politicalization of Society (Indianapolis, 1977); and Egalitarianism as a Revolt Against Nature and Other Essays, 2nd ed. (title essay; Auburn, Ala., 2000); H. Schoeck, Envy (New York, 1966); and 1st Leistung unanstaendig? (Osnabrueck, 1971); A. Flew, The Politics of Procrustes (London, 1980); and Sociology, Equality and Education (New York, 1976).
The first one is the method of more or less equalizing everybody’s monetary income (and possibly also private, nonproductively used wealth).
Teachers, doctors, construction workers and miners, factory managers and cleaning ladies all earn pretty much the same salary, or the difference between them is at least considerably reduced.Traditionally, this approach has been favored, at least in theory, by orthodox Marxist socialism — in line with Marx’s famous dictum in his “Critique of the Gotha Programme” (K. Marx, Selected Works, vol. 2 [London, 1942], p. 566), “from each according to his ability, to each according to his needs.” Economic reality, however, has forced the Russian-style countries to make considerable concessions in practice. Generally speaking, an effort has indeed been made to equalize the (assumedly highly visible) monetary income for various occupations, but in order to keep the economy going, considerable difference 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 Systems [Boston, 1985]), state: “… earnings are more equally distributed in Eastern Europe, Yugoslavia and the Soviet Union than in the United States. For the USSR, this appears to be a relatively new phenomenon, for as late as 1957, Soviet earnings were more unequal than the United States.” However, in Soviet-style countries “a relatively larger volume of resources … is provided on an extra market bases …” (p. 502). In conclusion: “Income is distributed more unequally in the capitalist countries in which the state plays a relatively minor redistributive role … (United States, Italy, Canada). Yet even where the state plays a major redistributive role (United Kingdom, Sweden), the distribution of incomes appears to be slightly more unequal than in the planned socialist countries (Hungary, Czechoslovakia, Bulgaria). The Soviet Union in 1966 appears to have a less egalitarian distribution of income than its East European counterparts” (p. 504). Cf. also, F. Parkin, Class Inequality and Political Order (New York, 1971), esp. chap. 6. It does not need much comment to realize that this approach reduces the incentive to work most drastically, for it no longer makes much difference — salary-wise — if one works diligently all day or fools around most of the time. Hence, disutility of labor being a fact of life, people will increasingly fool around, with the average income that everyone seems to be guaranteed constantly falling, in relative terms. Thus, this approach relatively strengthens the tendency toward withdrawal, disillusionment, cynicism, and mutatis mutandis, contributes to a relative reduction in the general atmosphere of politicalization.
The second approach has the more moderate aim of guaranteeing a minimum income which, though normally somehow linked to average income, falls well below it.This approach is traditionally most typical for social-democratic socialism. In recent years it has been given much publicized support — from the side of the economics profession — by M. Friedman with his proposal for a “negative income tax” (Friedman, Capitalism and Freedom, Chicago, 1962, chap. 12); and by J. Rawls — from the philosophical side — with his “difference principle” (Rawls, A Theory of Justice [Cambridge, 1971], pp. 60, 75 ff., 83). Accordingly, both authors have received much attention from social-democratic party intellectuals. Generally, Friedman was only found “guilty” of not wanting to set the minimum income high enough — but then, he had no principled criterion for setting it at any specific point anyway. Rawls, who wants to coerce the “most advantaged person” into letting the “least advantaged one” share in his fortune whenever he happens to improve his own position, was at times even found to have gone too far with his egalitarianism. Cf. G. Schwan, Sozialismus in der Demokratie. Theorie eine konsequent sozialdemokratischen Politik (Stuttgart, 1982), chap. 3.
This, too, reduces the incentive to work, since, to the extent that they are only marginal income producers with incomes from production only slightly above the minimum, people will now be more inclined to reduce or even stop their work, enjoy leisure instead, and settle for the minimum income. Thus more people than otherwise will fall below the minimum line, or more people than otherwise will keep or acquire those characteristics on whose existence payment of minimum salaries is bound, and as a consequence, again, the average income to which the minimum salary is linked will fall below the level that it otherwise would have reached. But, of course, the incentive to work is reduced to a smaller degree under the second than the first scheme.
On the other hand, the second approach will lead to a relatively higher degree of active politicalization (and less of resigned withdrawal), because, unlike average income, which can be objectively ascertained, the level at which the minimum income is fixed is a completely subjective, arbitrary affair, which is thus particularly prone to becoming a permanent political issue.
Undoubtedly, the highest degree of active politicalization is reached when the third distributional approach is chosen. Its goal, gaining more and more prominence for social democracy, is to achieve equality of opportunity.A representative example of social-democratically inclined research on equality of opportunity, in particular regarding education, is C. Jencks, and others, Inequality (London, 1973); the increasing prominence of the idea of equalizing opportunity also explains the flood of sociological studies on “quality of life” and “social indicators” that has appeared since the late 1960s. Cf. for instance, A. Szalai and F. Andrews, eds., The Quality of Life (London, 1980).
The idea is to create, through redistributional measures, a situation in which everyone’s chance of achieving any possible (income) position in life is equal — very much as in a lottery where each ticket has the same chance of being a winner or a loser — and, in addition, to have a corrective mechanism which helps rectify situations of “undeserved bad luck” (whatever that may be) which might occur in the course of the ongoing game of chance. Taken literally, of course, this idea is absurd: there is no way of equalizing the opportunity of someone living in the Alps and someone residing at the seaside.
In addition, it seems quite clear that the idea of a corrective mechanism is simply incompatible with the lottery idea. Yet it is precisely this high degree of vagueness and confusion which contributes to the popular appeal of this concept.
What constitutes an opportunity, what makes an opportunity different or the same, worse or better, how much and what kind of compensation is needed to equalize opportunities which admittedly cannot be equalized in physical terms (as in the Alps/seaside example), what is undeserved bad luck and what a rectification, are all completely subjective matters. They are dependent on subjective evaluations, changing as they do, and there is then — if one indeed applies the equality of opportunity concept — an unlimited reservoir of all sorts of distributional demands, for all sorts of reasons and for all sorts of people.
This is so, in particular, because equalizing opportunity is compatible with demands for differences in monetary income or private wealth. A 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 a resident of Texas, or may have ten children, or no husband, or be over 65, whereas B might be none of these but something else, and hence A might argue that his opportunities to attain everything possible in life are different, or rather worse, than B’s, and that he should somehow be compensated for this, thus making their monetary incomes, which were the same before, now different. And B, of course, could argue in exactly the same way by simply reversing the implied evaluation of opportunities. As a consequence, an unheard of degree of politicalization will ensue.
Everything seems fair now, and producers and nonproducers alike, the former for defensive and the latter for aggressive purposes, will be driven into spending more and more time in the role of raising, destroying, and countering distributional demands. And to be sure, this activity, like the engagement in leisurely activities, is not only nonproductive but in clear contrast to the role of enjoying leisure, implies spending time for the very purpose of actually disrupting the undisturbed enjoyment of wealth produced, as well as its new production.
But not only is increased politicalization stimulated (above and beyond the level implied by socialism generally) by promoting the idea of equalizing opportunity. There is once more, and this is perhaps one of the most interesting features of new social-democratic-socialism as compared with its traditional Marxist form, a new and different character to the kind of politicalization implied by it. Under any policy of distribution, there must be people who support and promote it. And normally, though not exclusively so, this is done by those who profit most from it.
Thus, under a system of income and wealth-equalization and also under that of a minimum income policy, it is mainly the “have-nots” who are the supporters of the politicalization of social life. Given the fact that on the average they happen to be those with relatively lower intellectual, in particular verbal capabilities, this makes for politics which appears to lack much intellectual sophistication, to say the least. Put more bluntly, politics tends to be outright dull, dumb, and appalling, even to a considerable number of the have-nots themselves.
On the other hand, in adopting the idea of equalizing opportunity, differences in monetary income and wealth are not only allowed to exist but even become quite pronounced, provided that this is justifiable by some underlying discrepancies in the opportunity structure for which the former differences help compensate. Now in this sort of politics the haves can participate, too.
As a matter of fact, being the ones who on the average command superior verbal skills, and the task of defining opportunities as better or worse being essentially one of persuasive rhetorical powers, this is exactly their sort of game. Thus the haves will now become the dominant force in sustaining the process of politicalization. Increasingly it will be people from their ranks that move to the top of the socialist party organization, and accordingly the appearance and rhetoric of socialist politics will take on a different shape, becoming more and more intellectualized, changing its appeal and attracting a new class of supporters.
With this I have reached the stage in the analysis of social-democratic socialism where only a few remarks and observations are needed which will help illustrate the validity of the above theoretical considerations.
Though it does not at all affect the validity of the conclusions reached above, depending as they do exclusively on the truth of the premises and the correctness of the deductions, there unfortunately exists no nearly perfect, quasi-experimental case to illustrate the workings of social-democratic socialism as compared with capitalism, as there was in the case of East and West Germany regarding Russian-type socialism. Illustrating the point would involve a comparison of manifestly different societies where the ceteris are clearly not paribus, and thus it would no longer be possible to neatly match certain causes with certain effects.
Often, experiments in social-democratic socialism simply have not lasted long enough, or have been interrupted repeatedly by policies that could not definitely be classified as social-democratic socialism. Or else from the very beginning, they have been mixed with such different — and even inconsistent — policies as a result of political compromising, that in reality different causes and effects are so entangled that no striking illustrative evidence can be produced for any thesis of some degree of specificity. The task of disentangling causes and effects then becomes a genuinely theoretical one again, lacking the peculiar persuasiveness that characterizes experimentally produced evidence.
Nonetheless some evidence exists, if only of a more dubious quality. First, on the level of highly global observations, the general thesis about relative impoverishment brought about by redistributive socialism is illustrated by the fact that the standard of living is relatively higher and has become more so over time in the United States of America than in Western Europe, or, more specifically, than in the countries of the European Community (EC).
Both regions are roughly comparable with respect to population size, ethnic and cultural diversity, tradition and heritage, and also with respect to natural endowments, but the United States is comparatively more capitalist and Europe more socialist. Every neutral observer will hardly fail to notice this point, as indicated also by such global measures as state expenditure as percent of GNP, which is roughly 35 percent in the United States as compared to about 50 percent or more in Western Europe.
It also fits into the picture that the European countries (in particular Great Britain) exhibited more impressive rates of economic growth in the nineteenth century, which has been described repeatedly by historians as the period of classical liberalism, than in the twentieth, which, in contrast, has been termed that of socialism and statism. In the same way the validity of the theory is illustrated by the fact that Western Europe has been increasingly surpassed in rates of economic growth by some of the Pacific countries, such as Japan, Hong Kong, Singapore, and Malaysia; and that the latter, in adopting a relatively more capitalist course, have meanwhile achieved a much higher standard of living than socialistically inclined countries which started at about the same time with roughly the same basis of economic development, such as India.
Coming then to more specific observations, there are the recent experiences of Portugal, where in 1974 the autocratic Salazar regime of conservative socialism (another type of socialism), which had kept Portugal one of the poorest countries in Europe, was supplanted in an upheaval by redistributive socialism (with elements of nationalization) and where since then the standard of living has fallen even further, literally turning the country into a third world region.
There is also the socialist experiment of Mitterand’s France, which produced an immediate deterioration of the economic situation, so noticeable — most conspicuous being a drastic rise in unemployment and repeated currency devaluations — that after less than two years, sharply reduced public support for the government forced a reversal in policy, which was almost comic in that it amounted to a complete denial of what only a few weeks before had been advocated as its dearest convictions.
The most instructive case, though, might again be provided by Germany and, this time, West Germany.On the following cf. also R. Merklein, Griff in die eigene Tasche (Hamburg, 1980); and Die Deutschen werden aermer (Hamburg, 1982).
From 1949 to 1966 a liberal-conservative government which showed a remarkable commitment to the principles of a market economy existed, even though from the very beginning there was a considerable degree of conservative-socialist elements mixed in and these elements gained more importance over time. In any case, of all the major European nations, during this period West Germany was, in relative terms, definitely the most capitalist country, and the result of this was that it became Europe’s most prosperous society, with growth rates that surpassed those of all its neighbors.
Until 1961, millions of German refugees, and afterward millions of foreign workers from southern European countries became integrated into its expanding economy, and unemployment and inflation were almost unknown. Then, after a brief transition period, from 1969 to 1982 (almost an equal time span) a social-democratically led socialist-liberal government took over. It raised taxes and social security contributions considerably, increased the number of public employees, poured additional tax funds into existing social programs and created new ones, and significantly increased spending on all sorts of so-called “public goods,” thereby allegedly equalizing opportunities and enhancing the overall “quality of life.”
By resorting to a Keynesian policy of deficit spending and unanticipated inflation, the effects of raising the socially guaranteed minimum provisions for nonproducers at the expense of more heavily taxed producers could be delayed for a few years (the motto of the economic policy of former West German Chancellor Helmut Schmidt was “rather 5% inflation than 5% unemployment”). They were only to become more drastic somewhat later, however, as unanticipated inflation and credit expansion had created and prolonged the over- or rather malinvestment typical of a boom.
As a result, not only was there much more than 5 percent inflation, but unemployment also rose steadily and approached 10 percent; the growth of GNP became slower and slower until it actually fell in absolute terms during the last few years of the period. Instead of being an expanding economy, the absolute number of people employed decreased; more and more pressure was generated on foreign workers to leave the country and the immigration barriers were simultaneously raised to ever higher levels. All of this happened while the importance of the underground economy grew steadily.
But these were only the more evident effects of a narrowly defined economic kind. There were other effects of a different sort, which were actually of more lasting importance. With the new socialist-liberal government the idea of equalizing opportunity came to the ideological forefront. And as has been predicted theoretically, it was in particular the official spreading of the idea mehr Demokratie wagen (“risk more Democracy”) — initially one of the most popular slogans of the new (Willy Brandt) era — that led to a degree of politicalization unheard of before.
All sorts of demands were raised in the name of equality of opportunity; and there was hardly any sphere of life, from childhood to old age, from leisure to work conditions, that was not examined intensely for possible differences that it offered to different people with regard to opportunities defined as relevant. Not surprisingly, such opportunities and such differences were found constantly,Cf. as a representative example, W. Zapf, ed., Lebensbedingungen in der Bundesrepublik (Frankfurt/M., 1978). and, accordingly, the realm of politics seemed to expand almost daily. “There is no question that is not a political one” could be heard more and more often.
In order to stay ahead of this development the parties in power had to change, too. In particular the Social Democrats, traditionally a blue-collar workers’ party, had to develop a new image.
With the idea of equalizing opportunity gaining ground, it increasingly became, as could be predicted, the party of the (verbal) intelligentsia, of social scientists and of teachers. And this “new” party, almost as if to prove the point that a process of politicalization will be sustained mainly by those who can profit from its distributional schemes and that the job of defining opportunities is essentially arbitrary and a matter of rhetorical power, then made it one of its central concerns to channel the most diverse political energies set in motion into the field of equalizing, above all, educational opportunities.
In particular, they “equalized” the opportunities for a high school and university education, by offering the respective services not only free of charge but by literally paying large groups of students to take advantage of them. This not only increased the demand for educators, teachers, and social scientists, whose payment naturally had to come from taxes. It also amounted, somewhat ironically for a socialist party which argued that equalizing educational opportunities would imply an income transfer from the rich to the poor, in effect to a subsidy paid to the more intelligent at the expense of a complementary income reduction for the less intelligent, and, to the extent that there are higher numbers of intelligent people among the middle and upper social classes than among the lower, a subsidy to the haves paid by the have-nots.Cf. on this A. Alchian, “The Economic and Social Impact of Free Tuition” in A. Alchian, Economic Forces at Work (Indianapolis, 1977).
As a result of this process of politicalization led by increased numbers of tax-paid educators gaining influence over increased numbers of students, there emerged (as could be predicted) a change in the mentality of the people. It was increasingly considered completely normal to satisfy all sorts of demands through political means, and to claim all sorts of alleged rights against other supposedly better-situated people and their property; and for a whole generation of people raised during this period, it became less and less natural to think of improving one’s lot by productive effort or by contracting. Thus, when the actual economic crisis, necessitated by the redistributionist policy, arose, the people were less equipped than ever to overcome it, because over time the same policy had weakened precisely those skills and talents which were now most urgently required.
Revealingly enough, when the socialist-liberal government was ousted in 1982, mainly because of its obviously miserable economic performance, it was still the prevalent opinion that the crisis should be resolved not by eliminating the causes, i.e., the swollen minimum provisions for nonproducers or noncontractors, but rather by another redistributive measure: by forcibly equalizing the available work — time for employed and unemployed people.
And in line with this spirit the new conservative-liberal government in fact did no more than slow down the rate of growth of taxation.
Globalists: The End of Empire and the Birth of Neoliberalismby Quinn SlobodianHarvard University Press, 2018x+381 pages
Quinn Slobodian, a historian at Wellesley College, tells us that Globalists “is a long-simmering product of the Seattle protests against the World Trade organization in 1999. I was part of a generation that ... became adolescents in the midst of talk of globalization and the End of History ... we were made to think that nations were over and the one indisputable bond uniting humanity was the global economy. Seattle was a moment when we started to make collective sense of what was going on and take back the story line. ... This book is an apology for not being there and an attempt to rediscover in words what the concept was that they went there to fight.”
Slobodian discloses here a confusion that mars his book. He sees little difference between the free market and a governmentally imposed regime of globalization. Rule over the European economy by Brussels bureaucrats and attempts to control world trade by the WTO and the World Bank stem from a “Geneva School” that includes Ludwig von Mises. His view must at once confront an objection. Mises supported a complete free market, with a minimal state; how then can he have helped bring about a globally directed economy? Slobodian’s answer is this: Mises wished to use force to compel people to accept a system of private property, run in the interests of business. He professed to favor freedom but in fact supported coercion. The distance between Mises and global governance of the economy, which likewise imposes its plans on people, is not far.
Friedrich Hayek counts even more than Mises as a supporter of this line of thought, and many contemporary neoliberals have been influenced by him. Like Mises, he wanted to limit democracy to promote private property and the market. Hayek, though, countenanced more government intervention than Mises. Slobodian, by the way, cites Hans Hoppe’s criticism of Hayek for this, though he has missed Mises’s review of Hayek’s The Constitution of Liberty, dealing with the same issue.
As Slobodian sees matters, the rise of colonial peoples to independence in the twentieth century posed a problem for those, like Mises and Hayek, committed to capitalism. What would happen if the new countries, dissatisfied with what they viewed as exploitation by the developed countries, enacted restrictions on trade? Combined with this was a threat to business interests by anti-capitalist classes and parties in the developed world. What if, e.g., socialists won power in a democratic election?
To prevent these dire developments, Mises and Hayek promoted world federalism. The power of national governments to control the free market would be strictly limited. Property rules would be a matter of international law, enforced by a central authority.
Slobodian merits great credit for his detailed account of Mises and Hayek’s interest in world federalism, but he fails to grasp the fundamental issue motivating what they said. For Mises, the free market was the only viable system of social cooperation. Accepting it fully would bring peace and prosperity. Government interferences with the economy would necessarily fail to achieve their purpose. Price controls would not make goods available to the poor but would instead cause shortages. Socialism would collapse into chaos.
For Mises, these were incontrovertible truths established by economic science. The issue for him was not imposing economic freedom on people by force, but rather persuading them that freedom was the best course of action. Constitutional limits to democracy, including federalist plans, were strictly subordinate to promoting the free market. Mises does not say that he favored forcing people to accept these limits, if they were to vote freely against them. Violent attempts to overthrow a legal system of private property are an altogether different matter. It is hardly “undemocratic” to oppose them.
Slobodian does not agree. For him, to suppress violence against property is undemocratic. Mises claimed that the free market was controlled by the monetary votes of consumers, but Slobodian finds this freedom lacking: “[D]emocracy was not an absolute value for Mises ... a crucial complement to voters’ democracy was what he would later call a ‘consumer’s democracy,’ expressed by purchases and investments in the marketplace. ... Wealth, he wrote, was ‘always the result of a consumer’s plebiscite.’” But when the Social Democrats called a general strike in Vienna in 1927, Mises supported its violent suppression. Does this not show his commitment to democracy was limited? “In 1927, democracy had ceased to fulfill its primary function. It did not prevent revolution. In that case, Mises believed, it was perfectly legitimate to suspend it and enforce order by other means.”
Contrary to Slobodian, Mises’s position was perfectly consistent. Mises supported peaceful cooperation through the free market. Political democracy, in his view, promoted peace. But it is not undemocratic to use emergency powers to suppress violence.
For Mises, schemes for international organization were intended only as means to promote the free market. When Mises realized that in the statist climate of the day, these plans could not work, he for the most part abandoned them. In Omnipotent Government, e.g., he says: “Under present conditions an international body for foreign trade planning would be an assembly of the delegates of governments attached to the ideas of hyper-protectionism. It is an illusion to assume that such an authority would be in a position to contribute anything genuine or lasting to the promotion of foreign trade.”
Slobodian does not see what is at stake in the dispute over the free market because, for him, economic arguments for the market are mere business propaganda. He does not grasp that the argument for free exchange follows from elementary economic theory. People would not willingly engage in trade if they did not expect to benefit. This consideration by itself strikes a fatal blow at tariffs and other trade restrictions.
Slobodian ignores this and, displaying both his fascination with Hayek’s thought and his repulsion from it, he takes the case for the free market to be complex and mystifying. “Yet even as he [Hayek] disparaged the fallacy of computer-aided models, he drew inspiration from the same source of system theory. From the language of ‘pattern predictions’ to his citation of Warren Weaver, Hayek did not argue against system theory in his Nobel speech but with it.”
In trying to establish a line of continuity between the “Geneva School” and today’s global bureaucrats, Slobodian places great stress on the “Ordo liberals.” This group, which included Franz Böhm and Walter Eucken, favored a very active government to promote the social institutions for a “social market economy.” Many of these authors were influenced by Hayek, but in his erudite discussion, Slobodian has missed the fact that Mises had little use for them. As Guido Hülsmann points out in Mises: The Last Knight of Liberalism, “And the prospect of cooperating with the fashionable Ordo School, be it in the Mont Pèlerin Society or elsewhere, did not exactly warm his heart either. He believed the Ordo people were hardly better than the socialists he had fought all his life. In fact, he eventually called them the ‘Ordo-interventionists.’”
The book contains many strengths. The discussion of the activities of Michael Heilperin, an outstanding supporter of free trade, is especially well done. Slobodian displays a fine eye for architectural detail, evident, e.g., in his description of the Chamber of Commerce building on Vienna’s Ringstrasse.
That said, the book also has its share of errors. Harold Laski was a political scientist, not an economist. Garrett Hardin was a biologist, not a philosopher. Hans Kelsen was not among the Austrian elite who moved in the 1930s in the same circles as the British elite. Arthur Balfour is given the wrong title.
The book’s main failing, though, does not lie in these minor errors. It lies rather in Slobodian’s refusal to take seriously arguments for the free market. Limits on government control of property are for him simply ideological efforts by business to limit the popular will. He here adopts exactly the viewpoint of Nancy MacLean’s Democracy in Chains, a disaster for scholarship. Slobodian operates on a much higher level than she does, though he does not scruple to cite her book.
Some inequality arises naturally from freedom of choice. Some comes from government meddling. One is good and the other is bad. Original article: Yes, Inequality Is a Problem — When Caused by the Government.
Why is it that starving Venezuelans are eating dogs while Americans are rescuing dogs from hurricanes? Original article: Capitalism Makes Us More Humane.
Presented at the Mises Institute's 2018 Supporters Summit in Auburn, Alabama. Recorded on September 28, 2018.
Silicon Valley used to be a hotbed of libertarian thought, a place where innovation mattered more than government. Today, companies like Twitter and Facebook serve as de facto editors, banning users like Alex Jones for "wrong-think." Google dominates search, but may steer search results. And Amazon serves nefarious clients like the NSA with its cloud infrastructure. And all of them employ plenty of lobbyists to avoid the kind of government anti-trust suit Microsoft faced nearly 20 years ago.
Libertarians oppose regulation, but also oppose censorship and politically correct culling of opinion. Dr. Peter Klein recently addressed these topics and more, in a talk illustrating how the technology sector has drastically changed in recent years—and how tech firms evolved into media companies focused on influence instead of innovation. He argues that social-media companies put on a public facade of being private and free of government influence, but behind the scenes they really lobby for protection against competition.
Whether racially motivated or not, land expropriation in South Africa is just another episode of state-forced wealth redistribution — with disastrous effects. Narrated by George Pickering.
Read the original article.
The Left makes excuses for Venezuela, college students wear Che Guevara shirts, and polls show growing support for socialism among millennials. Our friend Yuri Maltsev, a Soviet expat with no illusions about the real nature of state planning, joins the show to explain why (deluded and rich) western progressives, academics, elites, and media won't let go of their socialist project.
Capitalism doesn't have to be implemented in a "pure" form for its benefits to be realized. Meanwhile, socialists must make excuses for repeated failures. Original text: "Real Socialism" Has Indeed Been Tried — And It's Been a Disaster.
[Full issue of the Quarterly Journal of Austrian Economics 20, no. 4 (2017)]
Scandinavian Unexceptionalism: Culture, Markets, and the Failure of Third-Way Socialismby Nima SanandajiLondon: Institute for Economic Affairs, 2015, 132 pp.
The Scandinavian countries, and primary among them Sweden, are commonly referred to as anomalies or inspirations, depending on one’s political point of view. The reason is that the countries do not appear to fit the general pattern: they are enormously successful whereas they “shouldn’t” be. Indeed, Scandinavians enjoy very high living standards despite having very large, progressive welfare states for which they pay the world’s highest taxes.
As a result, a large and growing literature, both propagandist and scholarly, has emerged that tries to identify the reasons for this Scandinavian exceptionalism—especially as pertains to their welfare states. I have myself contributed to this literature (e.g., Bylund, 2010) and have previously reviewed others’ contributions to it in this journal (Bylund, 2015). But what has been missing is a summary analysis that is accessible to non-scholars. It was therefore a delight to read Nima Sanandaji’s Scandinavian Unexceptionalism: Culture, Markets, and the Failure of Third-Way Socialism, published by British Institute for Economic Affairs.
Dr. Sanandaji is a political-economy analyst and writer, well known in both Sweden and Europe, and as expected does an excellent job summarizing the state of scholarship. He also uses examples and quotes from articles published in Scandinavian news media to illustrate the narrative. The result is a short and informative but easy to read answer to both how and why the Scandinavian welfare states seem to work so well.
The short book provides the reader with insight into Scandinavian culture, an explanation of the causes of the nations’ exceptional rise from poverty, an overview of their recent political-economic history, the distinct structure and evolution of the Scandinavian welfare state, the origins of their egalitarianism and gender equality, and the effect of immigration. I will briefly touch on three of these areas.
First, Sanandaji makes clear that the rosy story of the Scandinavian welfare state, as it is usually told, is at best incomplete. The Scandinavian countries were among the European continent’s poorest by the end of the 19th century and were largely unaffected by the industrialization that had started centuries earlier in the United Kingdom. A combination of classical liberal reform and the adoption of industrialized production created a century-long “golden age,” as Bergh (2014) denotes the period approximately 1870–1970 in Sweden, of economic growth and rapidly rising standards of living.
This growth was partly also made possible by a distinct Scandinavian culture, with is characterized by the “[h]igh levels of trust, a strong work ethic and social cohesion [that] are the perfect starting point for successful economies” (p. 7). As Sanandaji points out, the market-aligned virtues of Scandinavian culture also explain the limited impact of the welfare state as it was erected and ballooned in the 1930s and beyond. Cultural change takes time, and thus old values lag in the face of political change. So it took time for the Scandinavian virtues to give way to the destructive incentives of the welfare state.
It should also be noted, though Sanandaji fails to make this point clearly, that after the welfare state was established, and during its several decades of expansion, it’s growth rate tended to be lower than that of the overall economy. The increasing burden was therefore, in relative terms, marginal. That is, until the radical 1960s and 1970s when Scandinavian governments, and the Swedish government in particular, adopted very expansionist welfare policies. (This political shift is analyzed in detail in, e.g., Bergh [2014]).
Sanandaji also presents interesting data with respect to Scandinavian gender equality. His discussion begins with the internationally enviable women’s labor market participation rate in Scandinavian countries, and especially Sweden. The background, however, is that Sweden’s government had adopted a radical agenda for population control formulated by Gunnar and Alva Myrdal (yes, the same Gunnar Myrdal who shared the 1974 economics prize with Hayek). The gist of this reform was to enforce a shared responsibility between parents and “the community” for children’s upbringing. By raising taxes on income while offering government-run daycare services, families were incentivized (if not “forced,” economically speaking) to secure two full-time incomes.
Interestingly, while this indeed rapidly increased women’s participation in the labor market, Sanandaji notes that “few women in the Nordic nations reach the position of business leaders, and even fewer manage to climb to the very top positions of directors and chief executives” (p. 102). Part of the reason is that jobs that women typically choose, including education and healthcare, are monopolized in the vast public sectors. As a result, women at trapped in careers where employers do not compete for their competence and many leadership positions are political.
This development is indirectly illustrated in a terrifying statistic from Sweden’s labor market: “Between 1950 and 2000, the Swedish population grew from seven to almost nine million. But astonishingly the net job creation in the private sector was close to zero” (p. 33).
Finally, Sanandaji addresses the issue of immigration and shows that the Scandinavian nations were exceptionally good at integration, with greater labor participation for immigrants than other Western nations, prior to the radicalization of the welfare state. Thereafter, due to rigid labor regulations and vast welfare benefits, immigrants were more or less kept out of Scandinavian job markets.
The literature identifies two potential explanations. First, the anti-business and job-protection policies practically exclude anyone with lacking work experience, highly sought-after skills, or those with lacking proficiency in the language or limited network. This keeps immigrants as well as young people unemployed (the very high youth unemployment rates in Scandinavia illustrate this problem). Second, the promises of the universal welfare state tend to attract people who are less interested in working their way to the top and thus have a lacking work ethic.
This explains the recent problems in Scandinavia with respect to immigration, which is essentially an integration and policy problem—not a foreign-people problem.
Overall, Sanandaji’s book provides plenty of insights and a coherent explanation for the rise of the Scandinavian nations and their welfare states. Their impressive standard of living is a free-market story, which is rooted in an economically sound culture. This culture also supported the welfare state, until decades of destructive incentives eroded the nations’ sound values. The welfare state, after its radicalization, was soon crushed under its own weight, and Scandinavia has since undergone vast free-market reforms that again have contributed to economic growth and prosperity.
Considering the full story, Sanandaji summarizes the example of the Northern European welfare states simply and bluntly: “Scandinavia is entirely unexceptional” (p. 10).
[Full issue of the Quarterly Journal of Austrian Economics 20, no. 4 (2017)]
Anti-Piketty: Capital for the 21st CenturyEdited by Jean-Philippe Delsol, Nicholas Lecaussin, and Emmanuel MartinWashington, D.C.: Cato Institute, 2017, xxvii + 272 pp.
When Thomas Piketty’s Capital in the 21st Century was published in 2014 (the French edition had appeared the preceding year), it suffered an unexpected fate for a treatise of 700 pages, filled with statistics and equations. It became a best-seller. Proclaimed a masterpiece by Paul Krugman and worthy of a Nobel Prize for its author by Larry Summers, it perfectly encapsulated and extended a familiar narrative of anti-capitalist propaganda, found in cruder form in the speeches of Bernie Sanders.
According to Piketty, capitalism over time widens the gap between the rich and the poor. In recent years, complaints have abounded that only the rich, and especially the superrich, gain from economic growth. In Piketty’s view, this fact is no happenstance of present conditions but reflects a law of capitalist development. This law is the famous r > g, i.e., the rate of return on capital exceeds the rate of economic growth. Capitalists who get interest payments will take over a greater and greater share of the gains from economic growth, and the gap between rich and poor will widen. At times this distressing trend can be halted; wars and revolutions slow capital accumulation and increase equality. But the overall trend toward inequality is clear and needs to be contained by high taxes on income and wealth.
Piketty’s portrayal of capitalism has not gone unchallenged, and Anti-Piketty collects a number of the most important criticisms of it. One of the most telling of these criticisms is obvious. If capitalism has been so bad for the poor, how can it be that the standard of living for the poor has vastly increased? As Jean-Philippe Delsol, a French economic journalist, notes,
People who focus on inequality often seem to forget a historical fact: market economies have allowed a great many people to get rich and to get out of poverty. This effect is unprecedented in history.... The speed at which the market economy allows sections of humanity to get us out of poverty should make us marvel. (pp. 5–7)
The well-known demographer and economist Nicholas Eberstadt makes a related point.
Whatever may be said about economic inequalities in our epoch, material forces are quite obviously not working relentlessly and universally to increase differences in living standards across humanity today. From the standpoint of length of life and years of education, indeed, the human condition is incontestably more equal today than it has ever been before. (p. 27)
How might Piketty respond? It is apparent from his book that what concerns him is the gap between rich and poor, more than the quality of life enjoyed by the poor. He would be likely to say, “Granted that the poor today do not for the most part live in abject circumstances. Still, the superrich have enormously more wealth than anyone else. That by itself suffices to justify corrective action by the government.”
But this would open Piketty to a further objection. Why is inequality bad? If you lead a good life but others are much better off, why do you have any cause for complaint, just because of the inequality? That is a fundamental question, but unfortunately it is not addressed in Anti-Piketty. In a densely written essay, Daron Acemoglu and James A. Robinson say, “It may be difficult to maintain political institutions that create a dispersed distribution of political power for a wide cross section of people in a society in which a small number of families and individuals have become disproportionately rich.” (p. 174)
Taking their comment on its own terms, would not a better solution to the problem it poses be to reduce the power of the state rather than to confiscate wealth? But this is not the issue I wish now to address. This is the failure of the contributors to address the intrinsic justice of equality. Is equality good or bad in itself? Why or why not? The contributors leave this vital issue to the side.
Before we can deal with whether Piketty’s r > g accounts for rising inequality, we must ask another question. Has he shown that inequality is in fact rising? If it is not, there is nothing for his formula to explain.
The historian Phillip W. Magness and the economist Robert P. Murphy in a joint paper analyze to devastating effect Piketty’s statistical evidence for inequality. They come close to charging Piketty with fraud and deception:
The discrepancies we identify are pervasive in the book, beginning with misstatements of basic historical fact and extending to an abundance of political distortion and confirmation bias in his data selection and methodological choices. In his use of communist data assumptions to accentuate the shape of a desired trend line, ostensibly explaining a hypothesized characteristic of capitalism, for example, it is difficult to maintain a noble opinion of the scholarship involved. (p. 138)
Piketty’s signature tune, the r > g formula, fares no better at the hands of the contributors to this book. The economist Randall Holcombe uses a point much stressed by Austrian economists to dismember Piketty’s entire approach to capital theory. Piketty writes as if the return to capital were automatic: all a capitalist needs to do is invest his money and rewards will flow to him at a fixed rate. Precisely the opposite is the case:
The general idea—that capital does not just earn a rate of return, but has to be employed in productive activity by its owner—plays no role in the way Piketty analyzes his extensive data set on inequality. Piketty makes it appear that earning a return on capital is a passive activity…. But capital has value only because it provides a flow of income to its owners, and it only provides that flow if the owners employ it productively. (p. 209)
Piketty misconceives the nature of economic growth. He bemoans the gains of capitalists, but without their investments growth would not take place. He follows a famous model of Robert Solow, in which changes in technology, not additions to capital, are the primary drivers of growth. But as Mises long ago noted, knowledge of technology in poor countries far exceeds the ability of these countries to put this knowledge into practice. What these countries need is more capital; and if economic growth is to continue in well-off countries, they need increases in investment also. Piketty’s confiscatory policies would choke off growth and prosperity in the name of equality. (This basic point against Piketty has been made most effectively in a short book not included in this collection, George Reisman’s Piketty’s Capital [2014].)
Does Piketty have a response? He might claim that even if capitalist investment does promote economic growth, the capitalists will seize the benefits for themselves, leaving others no better off. The economist Hans-Werner Sinn shows the error of this line of thought:
[Piketty’s] formula does not imply that wealth grows faster than economic output. Such a conclusion would only be warranted if the savings of an economy could be set equal to the economy’s capital income, so the rate of economic growth is the same as the interest rate. But this is not the case. Rather, savings are consistently smaller than the sum of all capital income. The wealthy consume substantial parts of their income…. Thus, the growth rate of wealth lies significantly below the interest rate; the fact that the interest rate exceeds the rate of economic growth in no way implies that wealth grows faster than the economy. (pp. 215–216)
So much for r > g.
Suppose, though, that one accepted Piketty’s analysis and was accordingly concerned with capitalists’ having too much. As Michael Tanner aptly remarks, Piketty’s solution to this alleged problem would not work. “He seems to believe that ’confiscatory taxes’ (his term) can be imposed without changing incentives or discouraging innovation and wealth creation. Piketty’s solutions would undoubtedly yield a more equal society, but also a remarkably poorer society.” (p. 58) Instead, Tanner suggests, why not encourage the emergence of more capitalists by making Social Security private? “No policy proposed in recent years would have done more to expand capital ownership than allowing younger workers to invest a portion of their Social Security taxes through personal accounts.” (p. 59) Piketty has no use for pro-market proposals of this sort.
The essays in Anti-Piketty make Nicolas Lecaussin’s claim inescapable. Piketty is one of those “intellectuals” who, as Ludwig von Mises and Robert Nozick have noted, resent the free market because “it does not recognize them at—what they think is---their ‘fair value.’” (p. 48) Readers of this book will be inoculated against Piketty’s ill-considered analysis and policies.
[Full issue of the Quarterly Journal of Austrian Economics 20, no. 4 (2017)]
The Captured Economy: How the Powerful Enrich Themselves, Slow Economic Growth, and Increase Inequalityby Brink Lindsey and Steven M. TelesOxford: Oxford University Press, 2017, viii+ 221 pp.
During the late nineteenth and early twentieth centuries, the Progressives claimed that the American political system was corrupt. Large financial and business interests dominated the government. What should be done to end their noxious influence and to promote the public good? Guidance from intellectuals, not wheeling and dealing by corrupt politicians, should set the political agenda. Nonpartisan scientific experts should take over much of the day-to-day work of government.
In his definitive The Progressive Era (2017), Murray Rothbard had little use for these would be intellectual autocrats: Behind the Progressive program were “newly burgeoning groups of intellectuals, technocrats, and professionals: economists, writers, engineers, planners, physicians, etc., anxious for power and lucrative employment at the hands of the State.” (p. 37)
Brink Lindsey is by his own lights, though not by mine, a libertarian; and Steven Teles is a modern liberal. They have together devised a new “liberaltarian” outlook. (The word combines elements of “libertarian” and “egalitarian”) It is a new name for an old way of thinking, and students of the Progressives will find little to surprise them.
Experts, the authors tell us, must be in charge:
Making Congress more deliberative, and less subject to undue influence, is a matter of making it smarter and more independent of the interests trying to bend it to their will. The way to do that... is to finally bring the civil service system to Congress.... The first best option would be to reconstruct committee staff on the model of the Congressional Budget Office and the Government Accountability Office, which provide stable long-term employment to highly trained policy experts in a context of strict non-partisanship. (pp. 161–162)
The Federal Trade Commission should extend its expert guidance to the states:
If an anti-rent organization in a state can generate enough energy to request the FTC to issue an advisory opinion, it can introduce a very powerful, authoritative counterweight into a normally insulated decision-making process. The FTC could be doing even more in this area by providing more resources to pay for research and participate in state deliberations. (p. 166) (The authors usually mean by “rent” an artificially created scarcity.)
The authors worry that these suggestions do not go far enough. Perhaps the power of Congress should be reduced and that of the president—of course guided by expert intellectuals—increased:
We should at least consider the possibility that Congress, and legislatures in general, is unavoidably tilted toward upward redistribution…. [William] Howell and [Terry] Moe suggest that the best way to counter Congress’s rent-friendly provincialism is to require Congress to give an up-or-down vote to legislation proposed by the president…. This admittedly dramatic procedural reform would give presidents much more power to shape the policy alternatives considered by Congress. (pp. 169–170)
Contrary to what I have claimed, though, are the Progressives and our self-styled liberaltarians really that similar? Libertarianism—in however attenuated a form—and Progressivism are after all two very different ideas. But finding the difference in this instance proves elusive.
The influence of special interest groups on legislation, highlighted by the authors, is indeed a serious problem; and the natural libertarian response would call for the power of the state to be curtailed, if not done away with altogether.
Conservatives and libertarians have failed by insisting that the baby be thrown out with the bath water. Once government assumes any responsibility to regulate in a given area, they argue, it is inevitable that rent-seeking will corrupt policy-making. Accordingly, the only way to solve the problem is to dramatically shrink the scope of the state…. This is a dead end. The modern regulatory and welfare state isn’t going anywhere, and the reason is simple: the vast majority of Americans, conservatives and liberals alike, think it’s a good idea. Although one of us wishes it were otherwise, there is no significant political support for a dramatic rollback of government’s functions. (p. 10).
Lindsey is the one who “wishes it were otherwise,” but he too supports the welfare state. Here the authors ally with the Progressives, not libertarians. They do not propose to reduce the scope of the state.
The authors rightly decry government programs that bring about “upward redistribution” of money to well-off special interests. But so did the Progressives; there is nothing distinctively libertarian about it. The libertarian objection is to redistribution, not just “upward” redistribution; libertarians do not object to inequality in itself. Lindsey and Teles clearly position themselves in the egalitarian camp; you will find nothing in the book opposing downward redistribution. They begin by bemoaning “the rise of income and wealth inequality, driven especially by rapid gains at the top.” (p. 1) In doing so, they accept without question the dubious statistics of Thomas Piketty. They do not so much as mention any of the criticisms of Piketty by Philip Magness, Robert Murphy, and others. Our liberaltarian authors would do well to acquaint themselves with the compilation Anti-Piketty. (Delsol et al., 2017). To their credit, though, they reject Piketty’s claim that “there is a fundamental tendency in capitalism toward ever-greater concentration of wealth” (p. 123).
They do not wish to replace capitalism but rather to curtail government programs that benefit the well-off. Here they make a real contribution, and the individual chapters on the programs they question are far better than the overall framework of the book. They note, for example, that “the government’s efforts to reduce the harm caused when financial firms fail ends up subsidizing the heavy reliance on debt that makes firm failure more likely. . .It is no surprise, then, that the creation of a formal safety net for banks led to a higher level of indebtedness. In addition to these explicit subsidies, an implicit subsidy created by a string of ad hoc bailouts has further incentivized financial institutions to ramp up their leverage.” (p. 52)
They next turn to intellectual property and find little good in it.
Notwithstanding the flimsy evidence that intellectual property laws actually fulfill their constitutional mandate “to promote progress in science and the useful arts,” these laws have steadily expanded their scope and reach over the years, with explosive growth occurring during the past few decades. The combined effect of those recent expansions has been to throw sand in the wheels of the sectors of the economy with the greatest potential for growth and innovation. (p. 75)
In their discussion of this topic, they fall prey to a common error, though this fortunately leaves their analysis unscathed. After their discussion of the deleterious consequences of IP, they say,
[I]ntellectual property protection is not justified solely on utilitarian grounds, any more than freedom of religion or speech are. The expansion of intellectual property protection has been justified because, like these other rights, its advocates could make a moral claim on its behalf. (p. 84)
The contrast between “utilitarian” and “moral” is spurious; good and bad consequences are part of morality, if not, as many believe, the whole of it.
Occupational licensing, the authors point out, hurts the poor.
Licensing has well-hidden negative impacts on the economically less advantaged, increasing the prices they pay for services, closing them out entirely from whole sectors of the economy, and increasing the costs they pay to move up economically. (p. 108)
Zoning fares no better in their eyes.
The overriding purpose of land-use regulation has been to protect homeowners’ property values at the expense of housing for everybody else. In other words, zoning exists to transfer wealth from new buyers to existing owners.
The book on the whole is written clearly, but disaster has struck between pages 132 and 140. Solecisms abound on these pages: the authors misuse the words “enervated,” “disinterest” and “reticent.”
The Captured Economy contains valuable accounts of a number of harmful government programs. The attempt to construct a watered-down libertarianism that will attract the left, though, fails completely.
Anti-Piketty: Capital for the 21st Century, Jean-Philippe Delsol, Nicolas Lecaussin, and Emmanuel Martin, eds. Cato Institute, 2017
When Thomas Piketty’s Capital in the 21st Century was published in 2015, it suffered an unexpected fate for a treatise of 700 pages, filled with statistics and equations. It became a bestseller. Proclaimed a masterpiece by Paul Krugman and worthy of a Nobel Prize for its author by Larry Summers, it perfectly encapsulated and extended a familiar narrative of anti-capitalist propaganda, found in cruder form in the speeches of Bernie Sanders.
According to Piketty, capitalism over time widens the gap between the rich and the poor. In recent years, complaints have abounded that only the rich, and especially the superrich, gain from economic growth. In Piketty’s view, this fact is no happenstance of present conditions but reflects a law of capitalist development. This law is the famous r > g, i.e., the rate of return on capital exceeds the rate of economic growth. Capitalists who get interest payments will take over a greater and greater share of the gains from economic growth, and the gap between rich and poor will widen. At times this distressing trend can be halted; wars and revolutions slow capital accumulation and increase equality. But the overall trend toward inequality is clear and needs to be contained by high taxes on income and wealth.
Piketty’s portrayal of capitalism has not gone unchallenged, and Anti-Piketty collects a number of the most important criticisms of it. One of the most telling of these criticisms is obvious. If capitalism has been so bad for the poor, how can it be that the standard of living for the poor has vastly increased? As Jean-Philippe Delsol, a French economic journalist, notes, “People who focus on inequality often seem to forget a historical fact: market economies have allowed a great many people to get rich and to get out of poverty. This effect is unprecedented in history. ... The speed at which the market economy allows sections of humanity to get us out of poverty should make us marvel.”
The well-known demographer and economist Nicholas Eberstadt makes a related point. “Whatever may be said about economic inequalities in our epoch, material forces are quite obviously not working relentlessly and universally to increase differences in living standards across humanity today. From the standpoint of length of life and years of education, indeed, the human condition is incontestably more equal today than it has ever been before.”
How might Piketty respond? It is apparent from his book that what concerns him is the gap between rich and poor, more than the quality of life enjoyed by the poor. He would be likely to say, “Granted that the poor today do not for the most part live in abject circumstances. Still, the superrich have enormously more wealth than anyone else. That by itself suffices to justify corrective action by the government.”
But this would open Piketty to a further objection. Why is inequality bad? If you lead a good life but others are much better off, why do you have any cause for complaint, just because of the inequality? That is a fundamental question, but unfortunately it is not addressed in Anti-Piketty. In a densely written essay, Daron Acemoglu and James A. Robinson say, “It may be difficult to maintain political institutions that create a dispersed distribution of political power for a wide cross section of people in a society in which a small number of families and individuals have become disproportionately rich.”
Taking their comment on its own terms, would not a better solution to the problem it poses be to reduce the power of the state rather than to confiscate wealth? But this is not the issue I wish now to address. This is the failure of the contributors to address the intrinsic justice of equality. Is equality good or bad in itself? Why or why not? The contributors leave this vital issue to the side.
Before we can deal with whether Piketty’s r > g accounts for rising inequality, we must ask another question. Has he shown that inequality is in fact rising? If it is not, there is nothing for his formula to explain.
The historian Phillip W. Magness and the economist Robert P. Murphy (a name well-known to readers of The Austrian) in a joint contribution, analyze to devastating effect Piketty’s statistical evidence for inequality. They come close to charging Piketty with fraud and deception: “The discrepancies we identify are pervasive in the book, beginning with misstatements of basic historical fact and extending to an abundance of political distortion and confirmation bias in his data selection and methodological choices. In his use of communist data assumptions to accentuate the shape of a desired trend line, ostensibly explaining a hypothesized characteristic of capitalism, for example, it is difficult to maintain a noble opinion of the scholarship involved.”
Piketty’s signature tune, the r > g formula, fares no better at the hands of the contributors to this book. The economist Randall Holcombe uses a point much stressed by Austrian economists to dismember Piketty’s entire approach to capital theory. Piketty writes as if the return to capital were automatic: all a capitalist needs to do is invest his money and rewards will flow to him at a fixed rate. Precisely the opposite is the case: “The general idea — that capital does not just earn a rate of return, but has to be employed in productive activity by its owner — plays no role in the way Piketty analyzes his extensive data set on inequality. Piketty makes it appear that earning a return on capital is a passive activity. ... But capital has value only because it provides a flow of income to its owners, and it only provides that flow if the owners employ it productively.”
Piketty misconceives the nature of economic growth. He bemoans the gains of capitalists, but without their investments growth would not take place. He follows a famous model of Robert Solow, in which changes in technology, not additions to capital, are the primary drivers of growth. But as Mises long ago noted, knowledge of technology in poor countries far exceeds the ability of these countries to put this knowledge into practice. What these countries need is more capital; and if economic growth is to continue in well-off countries, they need increases in investment also. Piketty’s confiscatory policies would choke off growth and prosperity in the name of equality. (This basic point against Piketty has been made most effectively in a short book not included in this collection, George Reisman’s Piketty’s Capital.)
Does Piketty have a response? He might claim that even if capitalist investment does promote economic growth, the capitalists will seize the benefits for themselves, leaving others no better off. The economist Hans-Werner Sinn shows the error of this line of thought: “[Piketty’s] formula does not imply that wealth grows faster than economic output. Such a conclusion would only be warranted if the savings of an economy could be set equal to the economy’s capital income, so the rate of economic growth is the same as the interest rate. But this is not the case. Rather, savings are consistently smaller than the sum of all capital income. The wealthy consume substantial parts of their income. ... Thus, the growth rateof wealth lies significantly below the interest rate; the fact that the interest rate exceeds the rate of economic growth in no way implies that wealth grows faster than the economy. ” So much for r > g.
Suppose, though, that one accepted Piketty’s analysis and was accordingly concerned with capitalists’ having too much. As Michael Tanner aptly remarks, Piketty’s solution to this alleged problem would not work. “He seems to believe that ‘confiscatory taxes’ (his term) can be imposed without changing incentives or discouraging innovation and wealth creation. Piketty’s solutions would undoubtedly yield a more equal society, but also a remarkably poorer society.” Instead, Tanner suggests, why not encourage the emergence of more capitalists by making Social Security private? “No policy proposed in recent years would have done more to expand capital ownership than allowing younger workers to invest a portion of their Social Security taxes through personal accounts.” Piketty has no use for pro-market proposals of this sort.
The essays in Anti-Piketty make Nicolas Lecaussin’s claim inescapable. Piketty is one of those “intellectuals” who, as Ludwig von Mises and Robert Nozick have noted, resent the free market because “it does not recognize them at — what they think is — their ‘fair value.’” Readers of this book will be inoculated against Piketty’s ill-considered analysis and policies.
The fundamental dogma of all brands of socialism and communism is that the market economy or capitalism is a system that hurts the vital interests of the immense majority of people for the sole benefit of a small minority of rugged individualists. It condemns the masses to progressing impoverishment. It brings about misery, slavery, oppression, degradation and exploitation of the working men, while it enriches a class of idle and useless parasites.
This doctrine was not the work of Karl Marx. It had been developed long before Marx entered the scene. Its most successful propagators were not the Marxian authors, but such men as Carlyle and Ruskin, the British Fabians, the German professors, and the American Institutionalists. And it is a very significant fact that the correctness of this dogma was contested only by a few economists who were very soon silenced and barred from access to the universities, the press, the leadership of political parties and, first of all, public office. Public opinion by and large accepted the condemnation of capitalism without any reservation.
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Socialism But, of course, the practical political conclusions which people drew from this dogma were not uniform. One group declared that there is but one way to wipe out these evils, namely to abolish capitalism entirely. They advocate the substitution of public control of the means of production for private control. They aim at the establishment of what is called socialism, communism, planning, or state capitalism. All these terms signify the same thing. No longer should the consumers, by their buying and abstention from buying, determine what should be produced, in what quantity and of what quality. Henceforth a central authority alone should direct all production activities.
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Interventionism, Allegedly a Middle-of-the-Road Policy A second group seems to be less radical. They reject socialism no less than capitalism. They recommend a third system, which, as they say, is as far from capitalism as it is from socialism, which as a third system of society’s economic organization, stands midway between the two other systems, and while retaining the advantages of both, avoids the disadvantages inherent in each. This third system is known as the system of interventionism. In the terminology of American politics it is often referred to as the middle-of-the-road policy.
What makes this third system popular with many people is the particular way they choose to look upon the problems involved. As they see it, two classes, the capitalists and entrepreneurs on the one hand and the wage earners on the other hand, are arguing about the distribution of the yield of capital and entrepreneurial activities. Both parties are claiming the whole cake for themselves. Now, suggest these mediators, let us make peace by splitting the disputed value equally between the two classes. The State as an impartial arbiter should interfere, and should curb the greed of the capitalists and assign a part of the profits to the working classes. Thus it will be possible to dethrone the moloch capitalism without enthroning the moloch of totalitarian socialism.
Yet this mode of judging the issue is entirely fallacious. The antagonism between capitalism and socialism is not a dispute about the distribution of booty. It is a controversy about which two schemes for society’s economic organization, capitalism or socialism, is conducive to the better attainment of those ends which all people consider as the ultimate aim of activities commonly called economic, viz., the best possible supply of useful commodities and services. Capitalism wants to attain these ends by private enterprise and initiative, subject to the supremacy of the public’s buying and abstention from buying on the market. The socialists want to substitute the unique plan of a central authority for the plans of the various individuals. They want to put in place of what Marx called the “anarchy of production” the exclusive monopoly of the government. The antagonism does not refer to the mode of distributing a fixed amount of amenities. It refers to the mode of producing all those goods which people want to enjoy.
The conflict of the two principles is irreconcilable and does not allow for any compromise. Control is indivisible. Either the consumers’ demand as manifested on the market decides for what purposes and how the factors of production should be employed, or the government takes care of these matters. There is nothing that could mitigate the opposition between these two contradictory principles. They preclude each other. Interventionism is not a golden mean between capitalism and socialism. It is the design of a third system of society’s economic organization and must be appreciated as such.
- How Interventionism Works It is not the task of today’s discussion to raise any questions about the merits either of capitalism or of socialism. I am dealing today with interventionism alone. And I do not intend to enter into an arbitrary evaluation of interventionism from any preconceived point of view. My only concern is to show how interventionism works and whether or not it can be considered as a pattern of a permanent system for society’s economic organization.
The interventionists emphasize that they plan to retain private ownership of the means of production, entrepreneurship and market exchange. But, they go on to say, it is peremptory to prevent these capitalist institutions from spreading havoc and unfairly exploiting the majority of people. It is the duty of government to restrain, by orders and prohibitions, the greed of the propertied classes lest their acquisitiveness harm the poorer classes. Unhampered or laissez-faire capitalism is an evil. But in order to eliminate its evils, there is no need to abolish capitalism entirely. It is possible to improve the capitalist system by government interference with the actions of the capitalists and entrepreneurs. Such government regulation and regimentation of business is the only method to keep off totalitarian socialism and to salvage those features of capitalism which are worth preserving. On the ground of this philosophy, the interventionists advocate a galaxy of various measures. Let us pick out one of them, the very popular scheme of price control.
- How Price Control Leads to Socialism The government believes that the price of a definite commodity, e.g., milk, is too high. It wants to make it possible for the poor to give their children more milk. Thus it resorts to a price ceiling and fixes the price of milk at a lower rate than that prevailing on the free market. The result is that the marginal producers of milk, those producing at the highest cost, now incur losses. As no individual farmer or businessman can go on producing at a loss, these marginal producers stop producing and selling milk on the market. They will use their cows and their skill for other more profitable purposes. They will, for example, produce butter, cheese or meat. There will be less milk available for the consumers, not more. This, or course, is contrary to the intentions of the government. It wanted to make it easier for some people to buy more milk. But, as an outcome of its interference, the supply available drops. The measure proves abortive from the very point of view of the government and the groups it was eager to favor. It brings about a state of affairs, which — again from the point of view of the government — is even less desirable than the previous state of affairs which it was designed to improve.
Now, the government is faced with an alternative. It can abrogate its decree and refrain from any further endeavors to control the price of milk. But if it insists upon its intention to keep the price of milk below the rate the unhampered market would have determined and wants nonetheless to avoid a drop in the supply of milk, it must try to eliminate the causes that render the marginal producers’ business unremunerative. It must add to the first decree concerning only the price of milk a second decree fixing the prices of the factors of production necessary for the production of milk at such a low rate that the marginal producers of milk will no longer suffer losses and will therefore abstain from restricting output. But then the same story repeats itself on a remoter plane. The supply of the factors of production required for the production of milk drops, and again the government is back where it started. If it does not want to admit defeat and to abstain from any meddling with prices, it must push further and fix the prices of those factors of production which are needed for the production of the factors necessary for the production of milk. Thus the government is forced to go further and further, fixing step by step the prices of all consumers’ goods and of all factors of production — both human, i.e., labor, and material — and to order every entrepreneur and every worker to continue work at these prices and wages. No branch of industry can be omitted from this all-around fixing of prices and wages and from this obligation to produce those quantities which the government wants to see produced. If some branches were to be left free out of regard for the fact that they produce only goods qualified as non-vital or even as luxuries, capital and labor would tend to flow into them and the result would be a drop in the supply of those goods, the prices of which government has fixed precisely because it considers them as indispensable for the satisfaction of the needs of the masses.
But when this state of all-around control of business is attained, there can no longer be any question of a market economy. No longer do the citizens by their buying and abstention from buying determine what should be produced and how. The power to decide these matters has devolved upon the government. This is no longer capitalism; it is all-around planning by the government, it is socialism.
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The Zwangswirtschaft Type of Socialism It is, of course, true that this type of socialism preserves some of the labels and the outward appearance of capitalism. It maintains, seemingly and nominally, private ownership of the means of production, prices, wages, interest rates and profits. In fact, however, nothing counts but the government’s unrestricted autocracy. The government tells the entrepreneurs and capitalists what to produce and in what quantity and quality, at what prices to buy and from whom, at what prices to sell and to whom. It decrees at what wages and where the workers must work. Market exchange is but a sham. All the prices, wages, and interest rates are determined by the authority. They are prices, wages, and interest rates in appearance only; in fact they are merely quantity relations in the government’s orders. The government, not the consumers, directs production. The government determines each citizen’s income, it assigns to everybody the position in which he has to work. This is socialism in the outward guise of capitalism. It is the Zwangswirtschaft of Hitler’s German Reich and the planned economy of Great Britain.
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German and British Experience For the scheme of social transformation which I have depicted is not merely a theoretical construction. It is a realistic portrayal of the succession of events that brought about socialism in Germany, in Great Britain, and in some other countries.
The Germans, in the First World War, began with price ceilings for a small group of consumers’ goods considered as vital necessities. It was the inevitable failure of these measures that impelled them to go further and further until, in the second period of the war, they designed the Hindenburg plan. In the context of the Hindenburg plan no room whatever was left for a free choice on the part of the consumers and for initiative action on the part of business. All economic activities were unconditionally subordinated to the exclusive jurisdiction of the authorities. The total defeat of the Kaiser swept the whole imperial apparatus of administration away and with it went also the grandiose plan. But when in 1931 Chancellor Brüning embarked anew on a policy of price control and his successors, first of all Hitler, obstinately clung to it, the same story repeated itself.
Great Britain and all the other countries which in the First World War adopted measures of price control, had to experience the same failure. They too were pushed further and further in their attempts to make the initial decrees work. But they were still at a rudimentary stage of this development when the victory and the opposition of the public brushed away all schemes for controlling prices.
It was different in the Second World War. Then Great Britain again resorted to price ceilings for a few vital commodities and had to run the whole gamut proceeding further and further until it had substituted all-around planning of the country’s whole economy for economic freedom. When the war came to an end, Great Britain was a socialist commonwealth.
It is noteworthy to remember that British socialism was not an achievement of Mr. Attlee’s Labor Government, but of the war cabinet of Mr. Winston Churchill. What the Labor Party did was not the establishment of socialism in a free country, but retaining socialism as it had developed during the war and in the post-war period. The fact has been obscured by the great sensation made about the nationalization of the Bank of England, the coal mines, and other branches of business. However, Great Britain is to be called a socialist country not because certain enterprises have been formally expropriated and nationalized, but because all the economic activities of all citizens are subject to full control of the government and its agencies. The authorities direct the allocation of capital and of manpower to the various branches of business. They determine what should be produced. Supremacy in all business activities is exclusively vested in the government. The people are reduced to the status of wards, unconditionally bound to obey orders. To the businessmen, the former entrepreneurs, merely ancillary functions are left. All that they are free to do is to carry into effect, within a nearly circumscribed narrow field, the decisions of the government departments.
What we have to realize is that price ceilings affecting only a few commodities fail to attain the ends sought. On the contrary. They produce effects which from the point of view of the government are even worse than the previous state of affairs which the government wanted to alter. If the government, in order to eliminate these inevitable but unwelcome consequences, pursues its course further and further, it finally transforms the system of capitalism and free enterprise into socialism of the Hindenburg pattern.
- Crises and Unemployment The same is true of all other types of meddling with the market phenomena. Minimum wage rates, whether decreed and enforced by the government or by labor union pressure and violence, result in mass unemployment prolonged year after year as soon as they try to raise wage rates above the height of the unhampered market. The attempts to lower interest rates by credit expansion generate, it is true, a period of booming business. But the prosperity thus created is only an artificial hot-house product and must inexorably lead to the slump and to the depression. People must pay heavily for the easy-money orgy of a few years of credit expansion and inflation.
The recurrence of periods of depression and mass unemployment has discredited capitalism in the opinion of injudicious people. Yet these events are not the outcome of the operation of the free market. They are on the contrary the result of well-intentioned but ill-advised government interference with the market. There are no means by which the height of wage rates and the general standard of living can be raised other than by accelerating the increase of capital as compared with population. The only means to raise wage rates permanently for all those seeking jobs and eager to earn wages is to raise the productivity of the industrial effort by increasing the per-head quota of capital invested. What makes American wage rates by far exceed the wage rates of Europe and Asia is the fact that the American worker’s toil and trouble is aided by more and better tools. All that good government can do to improve the material well-being of the people is to establish and to preserve an institutional order in which there are no obstacles to the progressing accumulation of new capital required for the improvement of technological methods of production. This is what capitalism did achieve in the past and will achieve in the future too if not sabotaged by a bad policy.
- Two Roads to Socialism Interventionism cannot be considered as an economic system destined to stay. It is a method for the transformation of capitalism into socialism by a series of successive steps. It is as such different from the endeavors of the communists to bring about socialism at one stroke. The difference does not refer to the ultimate end of the political movement; it refers mainly to the tactics to be resorted to for the attainment of an end that both groups are aiming at.
Karl Marx and Friedrich Engels recommended successively each of these two ways for the realization of socialism. In 1848, in the Communist Manifesto, they outlined a plan for the step-by-step transformation of capitalism into socialism. The proletariat should be raised to the position of the ruling class and use its political supremacy “to wrest, by degrees, all capital from the bourgeoisie.” This, they declare, “cannot be effected except by means of despotic inroads on the rights of property and on the conditions of bourgeois production; by means of measures, therefore, which appear economically insufficient and untenable, but which in the course of the movement outstrip themselves, necessitate further inroads upon the old social order, and are unavoidable as a means of entirely revolutionizing the mode of production.” In this vein they enumerate by way of example ten measures.
In later years Marx and Engels changed their minds. In his main treatise, Das Capital, first published in 1867, Marx saw things in a different way. Socialism is bound to come “with the inexorability of a law of nature.” But it cannot appear before capitalism has reached its full maturity. There is but one road to the collapse of capitalism, namely the progressive evolution of capitalism itself. Then only will the great final revolt of the working class give it the finishing stroke and inaugurate the everlasting age of abundance.
From the point of view of this later doctrine Marx and the school of orthodox Marxism reject all policies that pretend to restrain, to regulate and to improve capitalism. Such policies, they declare, are not only futile, but outright harmful. For they rather delay the coming of age of capitalism, its maturity, and thereby also its collapse. They are therefore not progressive, but reactionary. It was this idea that led the German Social Democratic party to vote against Bismarck’s social security legislation and to frustrate Bismarck’s plan to nationalize the German tobacco industry. From the point of view of the same doctrine, the communists branded the American New Deal as a reactionary plot extremely detrimental to the true interests of the working people.
What we must realize is that the antagonism between the interventionists and the communists is a manifestation of the conflict between the two doctrines of the early Marxism and of the late Marxism. It is the conflict between the Marx of 1848, the author of the Communist Manifesto, and the Marx of 1867, the author of Das Capital. And it is paradoxical indeed that the document in which Marx endorsed the policies of the present-day self-styled anti-communists is called the Communist Manifesto.
There are two methods available for the transformation of capitalism into socialism. One is to expropriate all farms, plants, and shops and to operate them by a bureaucratic apparatus as departments of the government. The whole of society, says Lenin, becomes “one office and one factory, with equal work and equal pay,”Cf. V.I. Lenin, State and Revolution (Little Lenin Library No. 14, New York, 1932), p. 84. the whole economy will be organized “like the postal system.”Ibid., p. 44. The second method is the method of the Hindenburg plan, the originally German pattern of the welfare state and of planning. It forces every firm and every individual to comply strictly with the orders issued by the government’s central board of production management. Such was the intention of the National Industrial Recovery Act of 1933 which the resistance of business frustrated and the Supreme Court declared unconstitutional. Such is the idea implied in the endeavors to substitute planning for private enterprise.
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Foreign Exchange Control The foremost vehicle for the realization of this second type of socialism in industrial countries like Germany and Great Britain is foreign exchange control. These countries cannot feed and clothe their people out of domestic resources. They must import large quantities of food and raw materials. In order to pay for these badly needed imports, they must export manufactures, most of them produced out of imported raw material. In such countries almost every business transaction directly or indirectly is conditioned either by exporting or importing or by both exporting and importing. Hence the government’s monopoly of buying and selling foreign exchange makes every kind of business activity depend on the discretion of the agency entrusted with foreign exchange control. In this country matters are different. The volume of foreign trade is rather small when compared with the total volume of the nation’s trade. Foreign exchange control would only slightly affect the much greater part of American business. This is the reason why in the schemes of our planners there is hardly any question of foreign exchange control. Their pursuits are directed toward the control of prices, wages, and interest rates, toward the control of investment and the limitation of profits and incomes.
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Progressive Taxation Looking backward on the evolution of income tax rates from the beginning of the Federal income tax in 1913 until the present day, one can hardly expect that the tax will not one day absorb 100 percent of all surplus above the income of the average voter. It is this that Marx and Engels had in mind when in the Communist Manifesto they recommended “a heavy progressive or graduated income tax.”
Another of the suggestions of the Communist Manifesto was “abolition of all right of inheritance.” Now, neither in Great Britain nor in this country have the laws gone up to this point. But again, looking backward upon the past history of the estate taxes, we have to realize that they more and more have approached the goal set by Marx. Estate taxes of the height they have already attained for the upper brackets are no longer to be qualified as taxes. They are measures of expropriation.
The philosophy underlying the system of progressive taxation is that the income and the wealth of the well-to-do classes can be freely tapped. What the advocates of these tax rates fail to realize is that the greater part of the income taxed away would not have been consumed but saved and invested. In fact, this fiscal policy does not only prevent the further accumulation of new capital. It brings about capital decumulation. This is certainly today the state of affairs in Great Britain.
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The Trend Toward Socialism The course of events in the past thirty years shows a continuous, although sometimes interrupted progress toward the establishment in this country of socialism of the British and German pattern. The United States embarked later than these two other countries upon this decline and is today still farther away from its end. But if the trend of this policy will not change, the final result will only in accidental and negligible points differ from what happened in the England of Attlee and in the Germany of Hitler. The middle-of-the-road policy is not an economic system that can last. It is a method for the realization of socialism by installments.
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Loopholes Capitalism Many people object. They stress the fact that most of the laws which aim at planning or at expropriation by means of progressive taxation have left some loopholes which offer to private enterprise a margin within which it can go on. That such loopholes still exist and that thanks to them this country is still a free country is certainly true. But this “loopholes capitalism” is not a lasting system. It is a respite. Powerful forces are at work to close these loopholes. From day to day the field in which private enterprise is free to operate is narrowed down.
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The Coming of Socialism is Not Inevitable Of course, this outcome is not inevitable. The trend can be reversed as was the case with many other trends in history. The Marxian dogma according to which socialism is bound to come “with the inexorability of a law of nature” is just an arbitrary surmise devoid of any proof.
But the prestige which this vain prognostic enjoys not only with the Marxians, but with many self-styled non-Marxians, is the main instrument of the progress of socialism. It spreads defeatism among those who otherwise would gallantly fight the socialist menace. The most powerful ally of Soviet Russia is the doctrine that the “wave of the future” carries us toward socialism and that it is therefore “progressive” to sympathize with all measures that restrict more and more the operation of the market economy.
Even in this country which owes to a century of “rugged individualism” the highest standard of living ever attained by any nation, public opinion condemns laissez-faire. In the last fifty years, thousands of books have been published to indict capitalism and to advocate radical interventionism, the welfare state, and socialism. The few books which tried to explain adequately the working of the free-market economy were hardly noticed by the public. Their authors remained obscure, while such authors as Veblen, Commons, John Dewey, and Laski were exuberantly praised. It is a well-known fact that the legitimate stage as well as the Hollywood industry are no less radically critical of free enterprise than are many novels. There are in this country many periodicals which in every issue furiously attack economic freedom. There is hardly any magazine of opinion that would plead for the system that supplied the immense majority of the people with good food and shelter, with cars, refrigerators, radio sets, and other things which the subjects of other countries call luxuries.
The impact of this state of affairs is that practically very little is done to preserve the system of private enterprise. There are only middle-of-the-roaders who think they have been successful when they have delayed for some time an especially ruinous measure. They are always in retreat. They put up today with measures which only ten or twenty years ago they would have considered as undiscussable. They will in a few years acquiesce in other measures which they today consider as simply out of the question. What can prevent the coming of totalitarian socialism is only a thorough change in ideologies.
What we need is neither anti-socialism nor anti-communism but an open positive endorsement of that system to which we owe all the wealth that distinguishes our age from the comparatively straitened conditions of ages gone by.
[This address was delivered before the University Club of New York, April 18, 1950. First printed by Commercial and Financial Chronicle, May 4, 1950; reprinted as a chapter in Planning for Freedom.]
Dr. Liliana Stern, associate professor of economics at Auburn University, joins Jeff Deist in studio to discuss the realities of life under communism. Growing up in Ukraine, Dr. Stern experienced privations that would be unthinkable to her undergraduate students. Even today, hot running water remains a rationed luxury in the region.
But if recent polls are correct, many of her students don't understand at all the horrors of collectivism. And they sometimes scoff at her terrifying depiction of what "single-payer" healthcare really means. Dr. Stern considers it her life's work to make Americans understand how good they've got it under (relative) capitalism, and to save young people from profound ahistorical ignorance.
You don't want to miss this show—and be sure to listen for her description of Ukrainian dentistry without anesthesia.
In order to understand the disaster that is unfolding in Venezuela, we need to journey through the most recent century of our history and look at how our institutions have changed over time. What we will find is that Venezuela once enjoyed relatively high levels of economic freedom, although this occurred under dictatorial regimes.
But, when Venezuela finally embraced democracy, we began to kill economic freedom. This was not all at once, of course. It was a gradual process. But it happened at the expense of the welfare of millions of people.
And, ultimately, the lesson we learned is that socialism never, ever works, no matter what Paul Krugman, or Joseph Stiglitz, or guys in Spain like Pablo Iglesias say.
It was very common during the years we suffered under Hugo Chávez to hear these pundits and economists on TV saying that this time, socialism is being done right. This time, the Venezuelans figured it out.
They were, and are wrong.
On the other hand, there was a time when this country was quite prosperous and wealthy, and for a time Venezuela was even referred to as an “economic miracle” in many books and articles.
However, during those years, out of the five presidents we had, four were dictators and generals of the army. Our civil and political rights were restricted. We didn’t have freedom of the press, for example; we didn’t have universal suffrage. But, while we lived under a dictatorship, we could at least enjoy high levels of economic freedom.
A Brief Economic History of VenezuelaThe economic miracle began a century ago, when from 1914 to 1922, Venezuela entered the international oil race. In 1914, Venezuela opened its first oil well. Fortunately, the government did not make the mistake of attempting to manage the oil business, or own the wells. The oil wells were privately owned, and in many cases were owned by private international companies that operated in Venezuela. It wasn’t totally laissez-faire, of course. There were tax incentives and other so-called concessions employed to promote exploration and exploitation of oil. But most industries — including the oil industry — remained privatized.
Moreover, during this period, tax rates in the country were relatively low.
In 1957, the marginal tax rate for individuals was 12 percent. There was certainly a state presence, and the public sector absorbed 20 percent of GDP. But, government spending was used mainly to build the country’s basic infrastructure.
The area of international trade was relatively free as well — and very free compared to today. There were tariffs that were relatively high, but there were no other major barriers to trade such as quotas, anti-dumping laws, or safeguards.
Other economic controls were few as well. There were just a few state-owned companies and virtually no price controls, no rent controls, no interest-rate controls, and no exchange-rate controls.
Of course, we weren’t free from the problems of a central bank, either. In 1939, Venezuela created its own central bank. But, the bank was largely inactive and functioned primarily defending a fixed exchange rate with the US dollar.
Moving Toward More InterventionismDespite the high levels of economic freedom that existed during those years, government legislation started to chip away at that freedom. Changes included the nationalization of the telephone company, the creation of numerous state-owned companies, and state-owned banks. That happened in 1950. The Venezuelan government thus began sowing the seeds of destruction, and you can see the continued deterioration in the level of economic freedom in the decade of the 1950s.
In 1958, Venezuela became a democracy when the dictatorship was overthrown. With that came all the usual benefits of democracy such as freedom of the press, universal suffrage, and other civil rights. Unfortunately, these reforms came along with continued destruction of our economic freedom.
The first democratically elected president was Rómulo Betancourt. He was a communist-turned-social democrat. In fact, while he was in exile, he founded the Communist Party in Costa Rica and helped found the Communist Party in Colombia as well. Not surprisingly, as president, he started destroying the economic institutions we had by implementing price controls, rent controls, and other regulations we hadn’t had before. On top of that, he and his allies created a new constitution that was hostile to private property.
In spite of this — or perhaps because of it — Betancourt is almost universally revered in Venezuela as “the father of our democracy.” This remains true even today as Venezuela collapses.
Of course, compared to today, we had far greater economic freedom under Betancourt than we do in today’s Venezuela. But, all of the presidents — with one exception — who came after Betancourt took similar positions and continued to chip away at economic freedom. The only exception was Carlos Andrés Pérez who in his second term attempted some free market reforms. But, he executed these later reforms so badly and haphazardly that markets ended up being blamed for the resulting crises.
The Rise of Hugo ChávezOver time, the destruction of economic freedom led to more and more impoverishment and crisis. This in turn set the stage for the rise of a political outsider with a populist message. This, of course, was Hugo Chávez. He was elected in 1998 and promised to replace our light socialism with more radical socialism. This only accelerated the problems we had been facing for decades. Nevertheless, he was able to pass through an even more anti-private-property constitution. Since Chávez’s death in 2013, the attacks on private property have continued, and Chávez’s successor, Nicolás Maduro, promises only more of the same. Except now, the government is turning toward outright authoritarian socialism, and Maduro is seeking a new constitution in which private property is almost totally abolished, and Maduro will be allowed to remain in power for life.
A Legacy of PovertySo, what are the results of socialism in Venezuela? Well, we have experienced hyperinflation. We have people eating garbage, schools that do not teach, hospitals that do not heal, long and humiliating lines to buy flour, bread, and basic medicines. We endure the militarization of practically every aspect of life.
The cost of living has skyrocketed in recent years.
Let’s look at the cost of goods in services in terms of a salary earned by a full college professor. In the 1980s, our “full professor” needed to pay almost 15 minutes of his salary to buy one kilogram of beef. Today, in July 2017, our full professor needs to pay the equivalent of 18 hours to buy the same amount of beef. During the 1980s, our full professor needed to pay almost one year’s salary for a new sedan. Today, he must pay the equivalent of 25 years of his salary. In the 1980s, a full professor with his monthly salary could buy 17 basic baskets of essential goods. Today, he can buy just one-quarter of a basicbasket.
And what about the value of our money? Well, in March 2007, the largest denomination of paper money in Venezuela was the 100 bolivar bill. With it, you could buy 28 US dollars, 288 eggs, or 56 kilograms of rice. Today, you can buy .01 dollars, 0.2 eggs, and 0.08 kilograms of rice. In July 2017, you need five 100-bolivar bills to buy just one egg.
So, socialism is the cause of the Venezuelan misery. Venezuelans are starving, eating garbage, losing weight. Children are malnourished. Anyone in Venezuela would be happy to eat out of America’s trashcans. It would be considered gourmet.
So, what’s the response of our society? Well, it’s the young people who are leading the fight for freedom in Venezuela in spite of what the current political leaders tell them to do. They don’t want to be called “the opposition.” They are the resistance, in Spanish, “la resistencia.” They are the real heroes of freedom in our country, but the world needs to know that they have often been killed by a tyrannical government, and all members of the resistance are persecuted daily.
Nevertheless, a new pro-market leadership must emerge before we can expect many major changes. Our current political opposition parties also hate free markets. They don’t like Maduro, but they still want their version of socialism.
This is not surprising. As Venezuelans, our poor understanding of the importance of freedom and free markets has created our current disaster. We Venezuelans never really understood freedom in its broader dimension because when we enjoyed high levels of economic freedom, we allowed the destruction of political and civil rights, and when we finally established a democracy, we allowed the destruction of economic freedom.
But there is reason for hope. Along with the Mises Institute we do believe that a revolution in ideas can really bring a new era to Venezuela. On behalf of the resistance and millions of people in our country, we thank the Mises Institute for this opportunity to briefly tell the full history of Venezuela. Thank you very much.
Our guests are Luis Cirocco and Dr. Rafael Acevedo, two Venezuelans who attended Mises University, last week. Their report from that troubled country is chilling and depressing: food shortages, a lack of medical care and prescription drugs, soldiers and police running black markets, and an entrenched elite made rich after decades of crony socialism under Hugo Chavez and Nicolas Maduro. Oil prices remain very low, and the country's economy is so bad that civil war looms.
But our guests remind us that the opposition, pushed by the US CIA, is hardly better—"socialist lite," as they term it. Intellectuals in Venezuelan universities, many of them (badly) trained at Ivy League social science departments, offer nothing more than support for price controls and currency pegs. Horrific hyperinflation is the result.
What Venezuela needs is a wholesale intellectual revolution, toward markets and away from deeply ingrained socialism. Listen to this interview and better understand just how quickly Venezuela is unraveling—and how it could happen here.
See also "Hugo Chávez Against the Backdrop of Venezuelan Economic and Political History" (PDF) by Hugo J. Faria (The Independent Review, Spring 2008).
Featuring Rafael Acevedo and Luis B. Cirocco, this presentation was recorded at the Mises Institute in Auburn, Alabama, on 29 July 2017.
[This article is excerpted from volume 2, chapter 11 of An Austrian Perspective on the History of Economic Thought (1995).]
Hegel's death in 1831 inevitably ushered in a new and very different era in the history of Hegelianism. Hegel was supposed to bring about the end of history, but now Hegel was dead, and history continued to march on. So if Hegel himself was not the final culmination of history, then perhaps the Prussian state of Friedrich Wilhelm III was not the final stage of history either. But if it was not the final phase of history, then mightn't the dialectic of history be getting ready for yet another twist, another Aufhebung?
So reasoned groups of radical youth, who, during the last of the 1830s and 1840s in Germany and elsewhere, formed the movement of Young, or Left, Hegelians. Disillusioned in the Prussian state, the Young Hegelians proclaimed the inevitable coming apocalyptic revolution to destroy and transcend that state, a revolution that would really bring about the end of history in the form of national, or world, communism.
One of the first and most influential of the Left Hegelians was a Pole, Count August Cieszkowski (1814–94), who wrote in German and published in 1838 his Prolegomena to a Historiosophy. Cieszkowski brought to Hegelianism a new dialectic of history, a new variant of the three ages of man. The first age, the age of antiquity, was, for some reason, the age of emotion, the epoch of pure feeling, of no reflective thought, of elemental immediacy and unity with nature. The "spirit" was "in itself" (an sich). The second age of mankind, the Christian era, stretching from the birth of Jesus to the death of the great Hegel, was the age of thought, of reflection, in which the "spirit" moved "toward itself," in the direction of abstraction and universality. But Christianity, the age of thought, was also an era of intolerable duality, of man separated from God, of spirit separated from matter, and thought from action. Finally, the third and culminating age, the coming age, heralded by Count Cieszkowski, was to be the age of action. In short, the third, post-Hegelian age would be an age of practical action, in which the thought of both Christianity and of Hegel would be transcended and embodied into an act of will, a final revolution to overthrow and transcend existing institutions. For the term "practical action," Cieszkowski borrowed the Greek word praxis to summarize the new age, a term that would soon come to acquire virtually talismanic influence in Marxism. This final age of action would bring about, at long last, a blessed unity of thought and action, theory and praxis, spirit and matter, God and earth, and total "freedom." Along with Hegel and the mystics, Cieszkowski stressed that all past events, even those seemingly evil, were necessary to the ultimate and culminating salvation.
In a work published in French in Paris in 1844, Cieszkowski also heralded the new class destined to become the leaders of the revolutionary society: the intelligentsia, a word that had recently been coined by a German-educated Pole, B. F. Trentowski, who had published his work in Prussian-occupied Poznan.B. F. Trentowski, The Relationship of Philosophy to Cybernetics (Poznan, 1843), in which the author also coined the word "cybernetics" for the new, emerging form of rational social technology which would transform mankind. See James H. Billington, Fire in the Minds of Men: Origins of the Revolutionary Faith (New York: Basic Books, 1980), p. 231. Cieszkowski thus heralded and glorified a development that would at least be implicit in the Marxist movement (after all, the great Marxists, including Marx, Engels, and Lenin, were all bourgeois intellectuals rather than children of the proletariat). If not in theory, this dominance of Marxist movements and governments by a "new class" of intelligentsia has certainly been the history of Marxism in "praxis." This dominance by a new class has been noted and attacked from the beginnings of Marxism on to the present day: notably by the anarcho-communist Bakunin, and by the Polish revolutionary Jan Waclaw Machajski (1866–1926), during and after the 1890s.On Machajski, see Paul Avrich, The Russian Anarchists (Princeton, NJ: Princeton University Press, 1967), pp. 102–6. Machajski's preferred solution to the problem of domination by the intellectuals was scarcely convincing. Machajski called for a secret organization of revolutionary workers, The Workers' Conspiracy, presumably headed by himself, which would lead the proletarian revolution, and establish a "classless" society shorn of the evil distinctions between mental and manual labor. It was also a similar insight into the German Social Democratic Party that prompted Robert Michels to abandon Marxism and develop his famous "iron law of oligarchy" — that all organizations, whether private, governmental, or Marxist parties, will inevitably end up being dominated by a power elite.
Cieszkowski, however, was not destined to ride the wave of the future of revolutionary socialism. For he took the Christian messianic, rather than atheistic, path to the new society. In his massive unfinished work of 1848, Our Father (Ojcze nasz), Cieszkowski maintained that the new age of revolutionary communism would be a third age, an age of the Holy Spirit (shades of Joachism!), an era that would bring a Kingdom of God on earth "as it is in heaven." Thus, the final Kingdom of God on earth would reintegrate all of "organic humanity," and would erase all national identities, with the world governed by a Central Government of All Mankind, headed by a Universal Council of the People.
But at the time, the path of Christian messianism was not clearly destined to be a loser in the intra-socialist debate. Thus, Alexander Ivanovich Herzen (1812–70), a founder of the Russian revolutionary tradition, was entranced by Cieszkowski's brand of Left Hegelianism, writing that "the future society is to be the work not of the heart, but of the concrete. Hegel is the new Christ bringing the word of truth to men."Billington, op. cit, note 20, p. 225. And soon, Bruno Bauer, friend and mentor of Karl Marx and the leader of the Doktorklub of Young Hegelians at the University of Berlin, hailed the new philosophy of action in late 1841 as "The Trumpet Call of the Last Judgment."It is to Bauer that the world owes the terms "critical" and "criticism," which Marxists have long employed as endlessly repeated slogans ever since; e.g., "Critique of Critical Theory," "Critical Legal Studies," etc.
But the winning strand in the European socialist movement, as we have indicated, was eventually to be Karl Marx's atheism. If Hegel had pantheized and elaborated the dialectic of Christian messianics, Marx now "stood Hegel on his head" by atheizing the dialectic, and resting it, not on mysticism or religion or "spirit" or the absolute idea or the world-mind, but on the supposedly solid and "scientific" foundation of philosophical materialism. Marx adopted his materialism from the Left Hegelian Ludwig Feuerbach, particularly his work on The Essence of Christianity (1843). In contrast to the Hegelian emphasis on "spirit," Marx would study the allegedly scientific laws of matter in some way operating through history. Marx, in short, took the dialectic and made it what we can call a "materialist dialectic of history."
A lot of unnecessary pother has been made about terminology here. Many Marxist apologists have fiercely maintained that Marx himself never used the term "dialectical materialism" — as if mere nonuse of the terms lets Marx off the hook — and also that the concept only appeared in such later works of Engels as the Anti-Dühring. But the Anti-Dühring, published before Marx's death, was, like all other such writings of Engels, cleared with Marx first, and so we have to assume that Marx approved.According to Schumpeter, moreover, Marx was virtually a coauthor of the Anti-Dühring. Joseph A. Schumpeter, Capitalism, Socialism, and Democracy (New York: Harper & Bros., 1942), p. 39n.
The fuss stems from the fact that the term "dialectical materialism" was widely stressed by the Marxist-Leninist movement of the 1930s and 1940s, these days generally discredited. The concept was applied by Engels, who of the two founders was particularly interested in the natural sciences, to biology. Applied to biology, as Engels did in the Anti-Dühring, dialectical materialism has an unmistakably crazy air. In an ultra-Hegelian manner, logic and logical contradictions, or "negations," are hopelessly confused with the processes of reality. Thus: butterflies "come into existence from the egg through negation [or transcendence] of the egg … they are negated again as they die." And "the barley corn … is negated and is supplanted by the barley plant, the negation of the corn. … The plant grows … is fructified and produces again barleycorns and as soon as these are ripe, the ear withers away, is negated. As a result of this negation of the negation we have gained the original barley corn … in a quantity ten, twenty, or thirty times larger."Engels, Anti-Dühring, cited in Ludwig von Mises, Theory and History, 3d ed. (Auburn, AL: Ludwig von Mises Institute, 1985), p. 105. Also see the sardonic commentary on this passage by Alexander Gray, The Socialist Tradition (London: Longmans, Green, 1946), p. 300n. Gray also notes Marx's summary of the dialectic in the Poverty of Philosophy, which he comments is "not without entertainment value": "The yes becomes no, the no becomes yes, the yes becomes at the same time yes and no, the no becomes at the same time no and yes, the contraries balance, neutralize, and paralyze each other." (My own translation from Gray's French quote.)
Furthermore, Marx himself, and not only Engels, was also very interested in Darwin and in biological science. Marx wrote to Engels that Darwin's work "serves me as a basis in natural science for the class struggle in history" and that "this is the book which contains the basis in natural history for our view."Marx to Engels, 16 Jan. 1861 and 19 Dec. 1860. See Gary North, Marx's Religion of Revolution: Regeneration Through Chaos, 2d ed. (Tyler, TX: Institute for Christian Economics, 1989), pp. 89n–90n.
By recasting the dialectic in materialist and atheist terms, however, Marx gave up the powerful motor of the dialectic as it operated throughout history: either Christian messianism or providence or the growing self-consciousness of the world spirit. How could Marx find a "scientific" materialist replacement, newly grounded in the ineluctable "laws of history" that would explain the inevitability of the imminent apocalyptic transformation of the world into communism? It is one thing to base the prediction of a forthcoming Armageddon upon the Bible; it is quite another to deduce this event from allegedly scientific laws. Setting forth the specifics of this engine of history was to occupy Karl Marx for the rest of his life.
Although Marx found Feuerbach indispensable for adopting a thoroughgoing atheist and materialist position, Marx soon found that Feuerbach had not gone nearly far enough. Even though Feuerbach was a philosophical communist, he basically believed that if man forswore religion, then his alienation from his self would be over. To Marx, religion was only one of the problems. The entire world of man (the Menschenwelt) was alienating, and had to be radically overthrown, root and branch. Only apocalyptic destruction of this world of man would permit true human nature to be realized. Only then would the existing "un-man" (Unmensch) truly become man (Mensch). As Marx thundered in the fourth of his "theses on Feuerbach," "one must proceed to destroy [the] earthly family [as it is] "both in theory and in practice."Tucker, op. cit., note 3, p. 101.
In particular, declared Marx, true man, as Feuerbach had argued, is a "communal being" (Gemeinwesen) or "species being" (Gattungswesen). Although the state as it exists must be negated or transcended, man's participation in the state operates as such a communal being. The main problem comes in the private sphere, the market, or "civil society," in which un-man acts as an egoist, as a private person, treating others as means, and not collectively as masters of their fate. And in existing society, unfortunately, civil society is primary, while the state, or "political community," is secondary. What must be done to realize the full nature of mankind is to transcend the state and civil society by politicizing all of life, by making all of man's actions collective. Then real individual man will become a true and full "species being."Ibid., p. 105.
But only a revolution, an orgy of destruction, can accomplish this task. And here, Marx harkened back to the call for total destruction that had animated his vision of the world in poems of his youth. Indeed, in a speech in London in 1856, Marx was to give graphic and loving expression to this goal of his "praxis." He mentioned that in Germany in the Middle Ages there existed a secret tribunal called the Vehmgericht. He then explained: "If a red cross was seen marked on a house, people knew that its owner was doomed by the Vehm. All the houses of Europe are now marked with the mysterious red cross. History is the judge — its executioner the proletarian."Ibid., p. 15.
Marx, in fact, was not satisfied with the philosophical communism to which he and Engels had separately been converted by the slightly older Left Hegelian Moses Hess (1812–75) in the early 1840s. To Hess's communism, Marx, by the end of 1843, added the crucial emphasis on the proletariat, not simply as an economic class, but as destined to become the "universal class" when communism was achieved. As we have indicated above, Marx actually acquired his vision of the proletariat as the key to the communist revolution from the 1842 work of Lorenz von Stein, an enemy of socialism, who interpreted the socialist and communist movements as rationalizations of the class interests of the proletariat. Marx discovered in Stein's attack the "scientific" engine for the inevitable coming of the communist revolution. The proletariat, the most "alienated" and allegedly "propertyless" class, would be the key.
Marx had now worked out the outline of his secular messianic vision: a material dialectic of history, with the final apocalyptic revolution to be achieved by the proletariat. But how specifically was this to be accomplished? Vision was not enough. What scientific laws of history could bring about this cherished goal? Fortunately, Marx had a crucial ingredient for his attempted solution close at hand: in the Saint-Simonian concept of human history as driven by an inherent struggle among economic classes. The class struggle along with historical materialism was to be an essential ingredient for the Marxian material dialectic.
In a series of recent articles in The Review of Austrian Economics, Joseph Salerno began to de-homogenize the often conflated economic and social theories of Ludwig von Mises and Friedrich A. Hayek. In particular, he has shown that their views on socialism are distinctly different, and he has argued in effect that Mises's original argument in the so-called socialist calculation debate was correct all along and was also the final word, whereas Hayek's distinct contribution to the debate was fallacious from the outset, and merely added confusion. The following note will provide additional support to Salerno's thesis.
Mises's well-known calculation argument states this: If there is no private property in land and other production factors, then there can also be no market prices for them. Hence, economic calculation, i.e., the comparison, in light of current prices, of anticipated revenue, and expected cost expressed in terms of a common medium of exchange—money—(thus permitting cardinal accounting operations), is literally impossible. Therefore, socialism's fatal error is the absence of private property in land and production factors, and, by implication, the absence of economic calculation.
For Hayek, socialism's problem is not a lack of property but a lack of knowledge. His distinctly own thesis is altogether different from Mises's.See in particular the widely acclaimed 1945 article on "The Use of Knowledge in Society," reprinted in F. A. Hayek, Individualism and Economic Order (Chicago: University of Chicago Press, 1948). The Review of Austrian Economics Vol. 9, No. 1 (1996): 143-49 ISSN 0889-3047 For Hayek, the ultimate flaw of socialism is the fact that knowledge, in particular "the knowledge of the particular circumstances of time and place," exists only in a widely dispersed form as the personal possession of various individuals; hence, it is practically impossible to assemble and process all the actually existing knowledge within the mind of a single socialist central planner. Hayek's solution is not private property, but the decentralization of the use of knowledge.
Yet this is surely an absurd thesis. First, if the centralized use of knowledge is the problem, then it is difficult to explain why there are families, clubs, and firms, or why they do not face the very same problems as socialism. Families and firms also involve central planning. The family head and the owner of the firm also make plans which bind the use other people can make of their private knowledge, yet families and firms are not known to share the problems of socialism. For Mises, this observation poses no difficulty: under socialism private property is absent, whereas individual families and private firms are based on the very institution of private property. But for Hayek the smooth operation of families and firms is puzzling, because his idea of a fully decentralized society is one in which each person makes his own decisions based on his own unique knowledge of the circumstances, unconstrained by any central plan or supraindividual (social) norm (such as the institution of private property).
Second, if the desideratum is merely the decentralized use of knowledge in society, then it is difficult to explain why the problems of socialism are fundamentally different from those encountered by any other form of social organization. Every human organization, composed as it is of distinct individuals, constantly and unavoidably makes use of decentralized knowledge. In socialism, decentralized knowledge is utilized no less than in private firms or households. As in a firm, a central plan exists under socialism; and within the constraints of this plan, the socialist workers and the firm's employees utilize their own decentralized knowledge of circumstances of time and place to implement and execute the plan. For Mises, all of this is completely beside the point. But within Hayek's analytical framework, no difference between socialism and a private corporation exists. Hence, there can also be no more wrong with the former than with the latter.
Clearly, Hayek's thesis regarding the central problem of socialism is nonsensical. What categorically distinguishes socialism from firms and families is not the existence of centralized knowledge or the lack of the use of decentralized knowledge, but rather the absence of private property, and hence, of prices. In fact, in occasional references to Mises and his original calculation argument, Hayek at times appears to realize this, too. But his attempt to integrate his very own thesis with Mises's and thereby provide a new and higher theoretical synthesis fails.
The Hayekian synthesis consists of the following propositional conjunction: "Fundamentally, in a system in which the knowledge of the relevant facts is dispersed among many people, prices can act to coordinate the separate actions of different people" and "the price system" can serve as "a mechanism for communicating information."Ibid., pp. 85-86. While the second part of this proposition strikes one as vaguely Misesian, it is anything but clear how it is logically related to the first, except through Hayek's elusive association of "prices" with "information" and "knowledge." However, this association is more of a semantic trick than rigorous argumentation. On the one hand, it is harmless to speak of prices as conveying information. They inform about past exchange ratios. But it is a non-sequitur to conclude that socialism's central problem is a lack of knowledge. This would only follow if prices actually were information. However, this is not the case. Prices convey knowledge, but they are the exchange ratios of various goods, which result from the voluntary interactions of distinct individuals based on the institution of private property. Without the institution of private property, the information conveyed by prices simply does not exist. Private property is the necessary condition—die Bedingung der Moglichkeit—of the knowledge communicated through prices. But then it is correct only to conclude, as Mises does, that it is the absence of the institution of private property which constitutes socialism's problem. To claim that the problem is a lack of knowledge, as Hayek does, is to confuse cause and effect, or premise and consequence.
On the other hand, Hayek's identification of "prices" and "knowledge" involves a deceptive equivocation. Not only does Hayek fail to distinguish between what one might call institutional knowledge-information that requires for its existence an institution (such as the knowledge of prices requires private property)—and raw or extra-institutional knowledge—like this is an oak tree, I like peanuts, or birds can fly. Moreover, Hayek also fails to notice that the knowledge of prices is not at all the same sort of knowledge whose existence he believes to be responsible for the "practical impossibility" of socialism and central planning. What makes central planning impossible, according to Hayek, is the fact that part of human knowledge exists only as essentially private information:
practically every individual has some advantage over all others because he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active cooperation.Ibid., p. 80.
While it is certainly true that such knowledge exists, and while it is also true that uniquely private knowledge can of course never be centralized (without information losses), it is just as certainly not true that the knowledge of prices falls into this category of uniquely private information. To be sure, prices are "prices paid at specific times and places," but this does not make them private information in the Hayekian sense. To the contrary, the information conveyed by prices is public information, because prices—qua objective exchange ratios—are real events. It may be difficult to know all of the prices paid at a specified date and location, just as it may be difficult to know every person's physical location at any given time. Yet it is hardly impossible to know either one, and with current computer technology it is probably easy. In any case, while I may never know everything that you know, and vice versa, it is no more problematic to assume that both of us can simultaneously possess the same price information than that we can both simultaneously know the same baseball results. Hence, the knowledge conveyed by prices actually can be centralized. But if price information is public information and thus can be centralized, then, according to Hayek's thesis that socialism's problem stems from the inefficiency of trying to centralize genuinely uncentralizable private knowledge, it would follow that the absence of prices, and hence of private property, has nothing to do with the plight of socialism. Otherwise, if one insists with Mises that the absence of private property and prices does have something to do with the plight of socialism. Hayek's contribution to the socialism debate must be thrown out as false, confusing, and irrelevant.
Hayek's misconception of the nature of socialism is symptomatic of a fundamental flaw in his thinking, pervading not only his economics but in particular also his political philosophy: his ultra-subjectivism. Hayek, as noted and quoted ad nauseam by his numerous followers, was convinced that "it is probably no exaggeration to say that every important advance in economic theory during the last hundred years was a further step in the consistent application of subjectivism."The Counterrevolution of Science (New York: Free Press. 1955). p. 31 While this may well be true, it does not logically follow that every further advance toward subjectivism must also lead to an advance in economic theory. However, Hayek seems to have drawn this conclusion and has thus become a prime example illustrating its falsehood.
Mises, and in his steps even more clearly Murray N. Rothbard, conceives of economics as the science of human action. Action has two inseparable aspects: a subjective aspect (action is rational, intelligible action) and an objective aspect (acting is always acting with real things and physical stuff). Accordingly, Mises's and Rothbard's economics and political philosophy is never anything but robust, and their categories and theories invariably possess real, operational meaning: private property, division of labor based on private property, production, direct and indirect exchange, and also compulsory interference with private property and production and exchange such as taxation, counterfeiting, legislation, and regulation.
In distinct contrast, Hayek —and misled by him to different degrees also Israel Kirzner and Ludwig Lachmann— views economics as some sort of science of human knowledge. Accordingly, Hayek's categories and theories refer to purely subjective phenomena and are invariably elusive or even illusory. He is not concerned about acting with things, but about knowledge and ignorance, the division, dispersion, and diffusion of knowledge, alertness, discovery, learning, and the coordination and divergence of plans and expectations. The external—physical—world and real—material—events have almost completely disappeared from his view. Hayek's categories refer to mental states of affairs and relationships, completely detached from and compatible with any real physical state of affairs and events.
Most notable and disturbing is the ultra-subjectivist turn in Hayek's political philosophy. According to a long-standing tradition of political philosophy shared by Mises and Rothbard, freedom is defined as the freedom to privately own—and control—real property, and coercion is the initiation of physical damage—harm—upon the private property of others. In distinct contrast, Hayek defines freedom as "a state in which each can use his own knowledge and for his own purposes,"Law, Legislation, and Liberty, Vol. 1 (Chicago: University of Chicago Press, 1973), pp. 55-56. and coercion means "such control of the environment or circumstances of a person by another that, in order to avoid greater evil, he is forced to act not according to a coherent plan of his own but to serve the ends of another,"Constitution of Liberty (Chicago: University of Chicago Press, 19601, pp. 20-21. or alternatively, "coercion occurs when one man's actions are made to serve another man's will, not for his own but for the other's purpose"Ibid.,p. 133. (all emphases are mine). Clearly, Hayek's definition contains nothing regarding scarce goods and real tangible property, and his provides no physical criterion or indicator whatsoever for the existence or non-existence of either state of affairs. Rather, coercion and freedom refer to specific configurations of subjective wills, plans, thoughts, or expectations. As mental predicates, Hayek's definitions of freedom and coercion are compatible with every real, physical state of affairs. They possess no power to make any real distinctions.See also Hans-Hermann Hoppe, "Hayek on Government and Social Evolution," Review of Austrian Economics 7, no. 1 (1994): esp. 70f.
It is beyond the scope of this note to offer a detailed critique and refutation of Hayek's ultra-subjectivism. However, beside the fundamental question whether a science of knowledge as envisioned by Hayek is even possible, i.e., whether there can be any other science of knowledge apart from logic and epistemology on the one hand and the history of ideas on the other,For some serious doubts on this see Hans-Hermann Hoppe, Kritik der kausalwissenschaftlichen Sozialforschung (Opladen: Westdeutscher Verlag, 1983). two conclusions are painfully clear. Even if Hayek's science of knowledge is possible, it appears at best irrelevant because it is praxeologically—operationally—meaningless. At worst it is intellectually pernicious in promoting relativism.
As for the real world of acting with physical property, of production and exchange, of money and markets, profits and losses, capital accumulation and bankruptcies, there can be no lasting doubt about the existence of laws and the ceaseless operation of a tendency toward general equilibrium-action-coordination. Likewise, there can be no doubt about the existence of laws and the constant operation of dis-equilibrating tendencies within the world of actual taxation, counterfeiting, legislation, and regulation. Indeed, it would be extremely costly—prohibitive—to not recognize such laws and tendencies and to adopt relativistic views. In contrast, in surreptitiously shifting attention from the tangible world of action and property to the ethereal world of knowledge, ideas, plans and expectations, relativistic views become attractive (and cheap). There are no apparent regularities and tendencies in Hayek's knowledge world. In fact, it is difficult to even imagine what "law" and "equilibrium" could possibly mean in the context of purely subjective phenomena. Instead there exists seemingly nothing but constant kaleidoscopic change.
It is hardly surprising, then, that Hayek and his followers could proclaim such relativistic slogans as that we cannot do anything to improve our condition except rely on spontaneous evolution, that our future is completely unknowable, or that we cannot but participate in an endless and open-ended stream of conversation. As far as the realm of purely subjective phenomena is concerned, and as addressed to a purely spiritual—disembodied—being, this may well be good advice. Actually possessing physical—bodily—existence, however, why would anyone even care to know it? As applied to the world of bodily action and property, such advice is self-destructive nonsense.
The Review of Austrian Economics 5, no. 2 1991 At the root of the dazzling revolutionary implosion and collapse of socialism and central planning in the "socialist bloc" is what everyone concedes to be a disastrous economic failure. The peoples and the intellectuals of Eastern Europe and the Soviet Union are crying out not only for free speech, democratic assembly, and glasnost, but also for private property and free markets. And yet, if I may be pardoned a moment of nostalgia, four-and-a-half-decades ago, when I entered graduate school, the economics Establishment of that era was closing the book on what had been for two decades the famed "socialist calculation debate." And they had all decided, left, right, and center, that there was not a thing economically wrong with socialism: that socialism's only problems, such as they might be, were political. Economically, socialism could work just as well as capitalism.
Mises and the Challenge of Calculation Before Ludwig von Mises raised the calculation problem in his celebrated article in 1920,Mises's article, published in 1920 in German, "Die Wirtschaftsrechnung im sozialistischen Gemeinwesen," was only made available in English in 1935: Mises, "Economic Calculation in the Socialist Commonwealth," in F. A. Hayek, ed., Collectivist Economic Planning (London: Routledge and Sons, 1935), pp. 87–130. The article was republished as a monograph by the Mises Institute with a notable postscript by Professor Joseph T. Salerno (Ludwig von Mises, Economic Calculation in the Socialist Commonwealth [Auburn, Ala.: Ludwig von Mises Institute, 1990]). everyone, socialists and non-socialists alike, had long realized that socialism suffered from an incentive problem. If, for example, everyone under socialism were to receive an equal income, or, in another variant, everyone was supposed to produce "according to his ability" but receive "according to his needs," then, to sum it up in the famous question: Who, under socialism, will take out the garbage? That is, what will be the incentive to do the grubby jobs, and, furthermore, to do them well? Or, to put it another way, what would be the incentive to work hard and be productive at any job?
The traditional socialist answer held that the socialist society would transform human nature, would purge it of selfishness, and remold it to create a New Socialist Man. That new man would be devoid of any selfish, or indeed any self-determined, goals; his only wish would be to work as hard and as eagerly as possible to achieve the goals and obey the orders of the socialist State. Throughout the history of socialism, socialist ultras, such as the early Lenin and Bukharin under "War Communism," and later Mao Tse-tung and Che Guevara, have sought to replace material by so-called "moral" incentives. This notion was properly and wittily ridiculed by Alexander Gray as "the idea that the world may find its driving force in a Birthday Honours List (giving to the King, if necessary, 165 birthdays a year)."Alexander Gray, The Socialist Tradition (London: Longmans, Green, 1946),p. 90. At any rate, the socialists soon found that voluntary methods could hardly yield them the New Socialist Man. But even the most determined and bloodthirsty methods could not avail to create this robotic New Socialist Man. And it is a testament to the spirit of freedom that cannot be extinguished in the human breast that the socialists continued to fail dismally, despite decades of systemic terror.
But the uniqueness and the crucial importance of Mises's challenge to socialism is that it was totally unrelated to the well-known incentive problem. Mises in effect said: All right, suppose that the socialists have been able to create a mighty army of citizens all eager to do the bidding of their masters, the socialist planners. What exactly would those planners tell this army to do? How would they know what products to order their eager slaves to produce, at what stage of production, how much of the product at each stage, what techniques or raw materials to use in that production and how much of each, and where specifically to locate all this production? How would they know their costs, or what process of production is or is not efficient?
Mises demonstrated that, in any economy more complex than the Crusoe or primitive family level, the socialist planning board would simply not know what to do, or how to answer any of these vital questions. Developing the momentous concept of calculation, Mises pointed out that the planning board could not answer these questions because socialism would lack the indispensable tool that private entrepreneurs use to appraise and calculate: the existence of a market in the means of production, a market that brings about money prices based on genuine profit-seeking exchanges by private owners of these means of production. Since the very essence of socialism is collective ownership of the means of production, the planning board would not be able to plan, or to make any sort of rational economic decisions. Its decisions would necessarily be completely arbitrary and chaotic, and therefore the existence of a socialist planned economy is literally "impossible" (to use a term long ridiculed by Mises's critics).
The Lange-Lerner "Solution" In the course of intense discussion throughout the 1920s and 1930s, the socialist economists were honest enough to take Mises's criticism seriously, and to throw in the towel on most traditional socialist programs: in particular, the original communist vision that workers, not needing such institutions as bourgeois money fetishism, would simply produce and place their products on some vast socialist heap, with everyone simply taking from that heap "according to his needs."
The socialist economists also abandoned the Marxian variant that everyone should be paid according to the labor time embodied into his product. In contrast, what came to be known as the Lange-Lerner solution (or, less commonly but more accurately, the Lange-Lerner-Taylor solution), acclaimed by virtually all economists, asserted that the socialist planning board could easily resolve the calculation problem by ordering its various managers to fix accounting prices. Then, according to the contribution of Professor Fred M. Taylor, the central planning board could find the proper prices in much the same way as the capitalist market: trial and error. Thus, given a stock of consumer goods, if the accounting prices are set too low, there will be a shortage, and the planners will raise prices until the shortage disappears and the market is cleared. If, on the other hand, prices are set too high, there will be a surplus on the shelves, and the planners will lower the price, until the markets are cleared. The solution is simplicity itself!Oskar Lange's well-known article was originally in two parts: "On the Economic Theory of Socialism," Review of Economic Studies 4 (October 1936): 53–71, and ibid. 5 (February 1937): 132–42; Fred M. Taylor's article was "The Guidance of Production in a Socialist State," American Economic Review 19 (March 1929); Taylor was reprinted and Lange revised and published in Oskar Lange and Fred M. Taylor, On the Economic Theory of Socialism, B. Lippincott, ed. (Minneapolis: University of Minnesota Press, 1938).
In the course of his two-part article and subsequent book, Lange concocted what could only be called the Mythology of the Socialist Calculation Debate, a mythology which, aided and abetted by Joseph Schumpeter, was accepted by virtually all economists of whatever ideological stripe. It was this mythology I found handed down as the Orthodox Line when I entered Columbia University's graduate school at the end of World War II — a line promulgated in lectures by no less an expert on the Soviet economy than Professor Abram Bergson, then at Columbia. In 1948, indeed, Professor Bergson was selected to hand down the Received Opinion on the subject by a committee of the American Economic Association, and Bergson interred the socialist calculation question with the Orthodox Line as its burial rite.Abram Bergson, "Socialist Economics," in H.S. Ellls, ed., A Survey of Contemporary Economics (Philadelphia: Blakiston, 1948), pp. 412–48.
The Lange-Bergson Orthodox Line went about as follows: Mises, in 1920, had done an inestimable service to socialism by raising the problem of economic calculation, a problem of which socialists had not generally been aware. Then Pareto and his Italian disciple Enrico Barone had shown that Mises's charge, that socialist calculation was impossible, was incorrect, since the requisite number of supply, demand, and price equations existed under socialism as under a capitalist system. At that point, F.A. Hayek and Lionel Robbins, abandoning Mises's extreme position, fell back on a second line of defense: that, while the calculation problem could be solved theoretically, in practice it would be too difficult. Thereby Hayek and Robbins fell back on a practical problem, or one of degree of efficiency rather than of a drastic difference in kind. But now, happily, the day has been saved for socialism, since Taylor-Lange-Lerner have shown that, by jettisoning utopian ideas of a money-less or price-less socialism, or of pricing according to a labor theory of value, the socialist planning board can solve these pesky equations simply by the good old capitalist method of trial and error.Lange was aided in this construction by being able to use Hayek's collection of articles on the subject, which had just been published the year before his first article, as a useful foil. Hayek's volume included the seminal article by Mises, other contributions by Pierson and Halm, two articles by Hayek himself, and the alleged refutation of Mises by Barone. See Hayek, Collectivist Economic Planning.
Bergson, attempting to be magisterial in his view of the debate, summed up Mises as contending that "without private ownership of, or (what comes to the same thing for Mises) a free market for the means of production, the rational evaluation of these goods for the purposes of calculating costs is ruled out…" Bergson correctly adds that to put Mises's point
somewhat more sharply than is customary, let us imagine a Board of Supermen, with unlimited logical faculties, with a complete scale of values for the different consumers goods', and present and future consumption, and detailed knowledge of production techniques. Even such a Board would be unable to evaluate rationally the means of production. In the absence of a free market for these goods, decisions on resource allocation in Mises' view necessarily would be on a haphazard basis.
Bergson sharply comments that this "argument is easily disposed of." Lange and Schumpeter both point out that, as Pareto and Barone had shown,
once tastes and techniques are given, the values of the means of production can be determined unambiguously by imputation without the intervention of a market process. The Board of Supermen could decide readily how to allocate resources so as to assure the optimum welfare. It would simply have to solve the equations of Pareto and Barone.Bergson, "Socialist Economics," p. 446.
So much for Mises. As for the Hayek-Robbins problem of practicality, Bergson adds, that can be settled by the Lange-Taylor trial-and-error method; any remaining problems are only a matter of degree of efficiency, and political choices. The Mises problem has been satisfactorily solved.
Some Fallacies of the Lange-Lerner Solution The breathtaking naiveté of the Orthodox Line should have been evident even in the 1940s. As Hayek later chided Schumpeter on the assumption of "imputation" outside the market, this formulation "presumably means … that the valuation of the factors of production is implied in, or follows necessarily from, the valuation of consumers' goods. But … implication is a logical relationship which can be meaningfully asserted only of propositions simultaneously present to one and the same mind."F.A. Hayek, "The Use of Knowledge in Society" (1945), in Hayek, Individualism and Economic Order (Chicago: University of Chicago Press, 1948),p. 90.
Economists were convinced of the Lange solution because they had already come under the sway of the Walrasian general equilibrium model; Schumpeter, for example, was an ardent Walrasian. In this model, the economy is always in static general equilibrium, a changeless world in which all "data" — tastes or value scales, alternative technologies, and lists of resources — are known to everyone, and where costs are known and always equal to price. The Walrasian world is also one of "perfect" competition, where prices are given to all managers. Indeed, both Taylor and Lange make the point that the socialist planning board will be better able to calculate than capitalist markets, since the socialist planners can ensure "perfect competition," whereas the real world of capitalism is shot through with various sorts of "monopolies"! The socialist planners can act like the absurdly fictional Walrasian "auctioneer," bringing about equilibrium rapidly by trial and error.
Set aside the obvious absurdity of trusting a coercive governmental monopoly to act somehow as if it were in "perfect competition" with parts of itself. Another grievous flaw in the Lange model is thinking that general equilibrium, a world of certainty where there is no room for the driving force of entrepreneurship, can somehow be used to depict the real world. The actual world is one not of changeless "givens" but of incessant change and systemic uncertainty. Because of this uncertainty, the capitalist entrepreneur, who stakes assets and resources in attempting to achieve profits and avoid losses, becomes the crucial actor in the economic system, an actor who can in no way be portrayed by a world of general equilibrium. Furthermore, it is ludicrous, as Hayek pointed out, to think of general equilibrium as the only legitimate "theory," with all other areas or problems dismissed as mere matters of practicality and degree. No economic theory worth its salt can be worthwhile if it omits the role of the entrepreneur in an uncertain world. The Pareto-Barone-Lange, etc. "equations" is not simply excellent theory that faces problems in practice; for in order to be "good," a theory must be useful in explaining real life.The silliness of hailing Barone's essay as a refutation of Mises is highlighted by the fact that Barone's article was published in 1908, twelve years before Mises's article which it is supposed to have refuted. The date was well known to, and made no impression upon, Ludwig von Mises. Moreover, Barone and Pareto themselves had only scorn for any notion that their equations could aid socialist planning. See Trygve J. B. Hoff, Economic Calculation in the Socialist Society (1949; Indianapolis, Ind.: Liberty Press, 1981), pp. 222–23.
Another grave flaw in the Lange-Taylor trial-and-error approach is that it concentrates on consumer goods pricing. It is true that retailers, given the stock of a certain type of good, can clear the market by adjusting the prices of that good upward or downward. But, as Mises pointed out in his original 1920 article, consumers goods are not the real problem. Consumers, these "market socialists" are postulating, are free to express their values by using money they had earned on a range of consumers' goods. Even the labor market — at least in principleHere, as in other parts of his argument — as we shall see further below — Mises is leaning over backward to concede the market socialists their best case, and is not considering whether such free consumer or labor markets are really likely in a world where the state is the only seller, as well as the only purchaser, of labor. — can be treated as a market with self-owning suppliers who are free to accept or reject bids for their labor and to move to different occupations. The real problem, as Mises has insisted from the beginning, is in all the intermediate markets for land and capital goods. Producers have to use land and capital resources to decide what the stocks of the various consumer goods should be. Here there are a huge number of markets where the State monopoly can only be both buyer and seller for each transaction, and these intra-monopoly, intra-state transactions permeate the most vital markets of an advanced economy — the complex lattice-work of the capital markets. And here is precisely where calculational chaos necessarily reigns, and there is no way for rationality to intrude on the immense number of decisions on the allocation of prices and factors of production in the structure of capital goods.
Mises's Rebuttal: The Entrepreneur Moreover, Mises's brilliant and devastating rebuttal to his Lange-Lerner-"market socialism" critics has virtually never been considered-neither by the economics establishment nor by the post–World War II Hayekians. In both cases, the writers were eager to dispose of Mises as having safely made his pioneering contribution in 1920, but being superseded later, either by Lange-Lerner or by Hayek, as the case may be. In both cases, it was inconvenient to ponder that Mises continued to elaborate his position with a penetrating critique of his critics, or that Mises's "extreme" formulation may, after all, have been correct.Mises's later rebuttal is in his Human Action (New Haven: Yale University Press, 1949), pp. 694–711. For the establishment, the debate was supposed to be over by 1938. For an example of a Hayekian survey of the debate that does not bother to so much as mention Human Action, see Karen I. Vaughn, "Introduction," in Hoff, Economic Calculation, pp. ix-xxxvii. Indeed, in an earlier paper, Vaughn had sneered that "Mises' so-called final refutation in Human Action is mostly polemic and glosses over the real problems…." Vaughn, "Critical Discussion of the Four Papers," in Lawrence Moss, ed. The Economics of Ludwig von Mises (Kansas City: Sheed and Ward, 1976), p. 107. The Hayekian doctrine will be treated further below. For a refreshing example of an outstanding Misesian contribution to the debate that does not neglect or deprecate Human Action but rather builds upon it, see Joseph T. Salerno, "Ludwig von Mises as Social Rationalist," Review of Austrian Economics 4 (1990): 36–48. Also see Salerno, "Why Socialist Economy is Impossible," a Postscript to Mises, Economic Calculation in the Socialist Commonwealth (Auburn, Ala.: Ludwig von Mises Institute, 1990).
Mises began his rebuttal in Human Action by discussing the "trial-and-error" method, and pointing out that this process only works in the capitalist market. There the entrepreneurs are strongly motivated to make greater profits and to avoid losses, and further, such a criterion does not apply to the capital goods or land market under socialism where all resources are controlled by one entity, the government.
Continuing his reply, Mises pressed on to a brilliant critique, not only of socialism, but of the entire Walrasian general equilibrium model. The major fallacy of the "market socialists," Mises pointed out, is that they look at the economic problem from the point of view of the manager of the individual firm, who seeks to make profits or avoid losses within a rigid framework of a given, external allocation of capital to each of the various branches of industry and indeed to the firm itself. In other words, the "market socialist" manager is akin, not to the real driving force of the capitalist market, the capitalist entrepreneur, but rather to the relatively economically insignificant manager of the corporate firm under capitalism. As Mises brilliantly puts it:
the cardinal fallacy implied in [market socialist] proposals is that they look at the economic problem from the perspective of the subaltern clerk whose intellectual horizon does not extend beyond subordinate tasks. They consider the structure of industrial production and the allocation of capital to the various branches and production aggregates as rigid, and do not take into account the necessity of altering this structure in order to adjust it to changes in conditions…. They fail to realize that the operations of the corporate officers consist merely in the loyal execution of the tasks entrusted to them by their bosses, the shareholders…. The operations of the managers, their buying and selling, are only a small segment of the totality of market operations. The market of the capitalist society also performs those operations which allocate the capital goods to the various branches of industry. The entrepreneurs and capitalists establish corporations and other firms, enlarge or reduce their size, dissolve them or merge them with other enterprises; they buy and sell the shares and bonds of already existing and of new corporations; they grant, withdraw, and recover credits; in short they perform all those acts the totality of which is called the capital and money market. It is these financial transactions of promoters and speculators that direct production into those channels in which it satisfies the most urgent wants of the consumers in the best possible way.Mises, Human Action, pp. 703–04.
Mises goes on to remind the reader that the corporate manager performs only a "managerial function," a subsidiary service that "can never become a substitute for the entrepreneurial function." Who are the capitalist-entrepreneurs? They are "the speculators, promoters, investors and moneylenders, [who] in determining the structure of the stock and commodity exchanges and of the money market, circumscribe the orbit within which definite tasks can be entrusted to the manager's discretion." The crucial question, Mises continues, is not managerial activities, but: "In which branches should production be increased or restricted, in which branches should the objective of production be altered, what new branches should be inaugurated?" In short, the crucial decisions in the capitalist economy are the allocation of capital to firms and industries. "With regard to these issues," Mises adds, "it is vain to cite the honest corporation manager and his well-tried efficiency. Those who confuse entrepreneurship and management close their eyes to the economic problem … The capitalist system is not a managerial system; it is an entrepreneurial system."
But here, Mises triumphantly concludes, no "market socialist" has ever suggested preserving or carrying over, much less understood the importance of, the specifically entrepreneurial functions of capitalism:
Nobody has ever suggested that the socialist commonwealth could invite the promoters and speculators to continue their speculations and then deliver their profits to the common chest. Those suggesting a quasi-market for the socialist system have never wanted to preserve the stock and commodity exchanges, the trading in futures, and the bankers and money-lenders as quasi-institutions.Ibid., pp. 704–05
Mises has been cited as stating, in Human Action, that it is absurd for the socialist planning board to tell their managers to "play market," to act as if they are owners of their firms in trying to maximize profits and avoid losses. But it is important to stress that Mises was focusing, not so much on the individual managers of socialist "firms," but on the speculators and investors who decide the crucial allocations of capital throughout the structure of industry. It is at least conceivable that one can order a manager to play market and act as if he were enjoying the profits and suffering losses; but it is clearly ludicrous to ask investors and capital speculators to act as if their fortunes were at stake. As Mises adds:
one cannot play speculation and investment. The speculators and investors expose their own wealth, their own destiny. This fact makes them responsible to the consumers, the ultimate bosses of the capitalist economy. If one relieves them of this responsibility, one deprives them of their very character.Ibid., p. 705.
One time, during Mises's seminar at New York University, I asked him whether, considering the broad spectrum of economies from a purely free market economy to pure totalitarianism, he could single out one criterion according to which he could say that an economy was essentially "socialist" or whether it was a market economy. Somewhat to my surprise, he replied readily: "Yes, the key is whether the economy has a stock market." That is, if the economy has a full-scale market in titles to land and capital goods. In short: Is the allocation of capital basically determined by government or by private owners? At the time, I did not fully understand the vital importance of Mises's answer, which I realized recently when poring over the great merits of the Misesian, as compared to the Hayekian, analysis of the socialist calculation problem.
For Mises, in short, the key to the capitalist market economy and its successful functioning is the entrepreneurial forecasting and decision-making of private owners and investors. The key is emphatically not the more minor decisions made by corporate managers within a framework already set by entrepreneurs and the capital markets. And it is obvious that Lange, Lerner, and the other market socialists merely envisioned the relatively lesser managerial decisions. These economists, who had never grasped the function of speculation or capital markets, therefore had no idea that they would need to be or could be replicated in a socialist system.The fact that some socialist bloc countries, such as Hungary, now permit a stock market, albeit small and truncated, and that other ex-communist countries are seriously considering introducing such capital markets, demonstrates the enormous importance of the de-socialization now under way in Eastern Europe. And this is not surprising, since in the Walrasian general micro-equilibrium model, there is no capital structure, there is no role for capital, and capital theory has become totally submerged into "growth theory," that is, growth of a homogeneous "level," or blob, of aggregate macro-capital. The allocation of capital is considered external and given, and receives no consideration.
The Structure of Capital Joseph Schumpeter and Frank H. Knight are interesting examples of two eminent economists who were personally anti-socialist but were seduced by their Walrasian devotion to general equilibrium and their lack of a genuine capital theory into strongly endorsing the orthodox view that there is no economic calculation problem under socialism. In particular, in capital theory, both Schumpeter and Knight were disciples of J.B. Clark, who denied any role at all for time in the process of production. For Schumpeter, production takes no time because production and consumption are somehow always "synchronized." Time is erased from the picture, even to assuming away the existence of any accumulated stocks of capital goods, and therefore of any age structure of such goods. Since production is magically synchronized, there is then no necessity for land or labor to receive advances in payment from capitalists out of accumulated savings. Schumpeter achieves this feat by sundering capital completely from its embodiment in capital goods, and limiting the concept to a money fund used to purchase such goods.See Murray N. Rothbard, "Breaking Out of the Walrasian Box: The Cases of Schumpeter and Hansen," Review of Austrian Economics 1 (1987): 98–100, 107.
Frank Knight, the doyen of the Chicago School, was also an ardent believer in the Clarkian view that time preference has no influence on interest paid by producers, and that production is synchronized so that time plays no role in the production structure. Hence, Knight believed, along with modern orthodoxy, that capital is a homogeneous, self-perpetuating blob that has no lattice-like, time-oriented structure. Knight's fiercely anti–Böhm-Bawerkian, anti-Austrian views on capital and interest led him to a then-famous war of journal articles over capital theory during the 1930s, a war he won by default when Austrianism disappeared because of the Keynesian evolution.On Knight vs. Hayek, Machlup, and Boulding in the 1930s. see F. A. Hayek, "The Mythology of Capital," in W. Fellner and B. Haley, eds., Readings in the Theory of lncome Distribution (Philadelphia: Blakiston, 1946), pp. 355–83. For a Knightian attack on the Austrian discounted marginal productivity theory on behalf of what is now the orthodox undiscounted (by time-preference) marginal productivity theory, see Earl Rolph, "The Discounted Marginal Productivity Doctrine," ibid., pp. 278–93. For an Austrian rebuttal, see Murray N. Rothbard, Man, Economy, and State, vol. 1 (Los Angeles: Nash, 1970), pp. 431–33; and Walter Block, "The DMVP-MVP Controversy: A Note," Review of Austrian Economics 4 (1990): 199–207.
In his negative review of Mises's Socialism, Frank Knight, after hailing Lange's "excellent" 1936 article, brusquely dismisses the socialist calculation debate as "largely sound and fury." To Knight, it is simply "truistical" that the "technical basis of economic life" would continue as before under socialism, and that therefore "the managers of various technical units in production — farms, factories, railways, stores, etc. — would carry on in essentially the same way." Note, there is no reference whatever to the crucial capital market, or to the allocation of capital to various branches of production. If capital is an automatically renewing homogeneous blob, all one need worry about is growth in the amount of that blob. Hence, Knight concludes that "socialism is a political problem, to be discussed in terms of social and political psychology, and economic theory has relatively little to say about it."Frank H. Knight, "Review of Ludwig von Mises, Socialism," Journal of Political Economy 46 (April 1938): 267–68. In another review in the same issue of the journal, Knight claims that there would be a "capital market" under socialism, but it is clear that he is referring only to a market for loans, and not to a genuine market in equities throughout the production structure. Here again, Mises has a devastating critique of this sort of scheme in Human Action, pointing out that managers bidding for governmental planning board funds would not be bidding for or staking their own property, and hence they would "not be restrained by any financial dangers they themselves run in promising too high a rate of interest for the funds borrowed…. All the hazards of this insecurity fall only upon society, the exclusive owner of all resources available. If the director were without hesitation to allocate the funds available to those who bid most, he would simply … abdicate in favor of the least scrupulous visionaries and scoundrels." See Knight, "Two Economists on Socialism," Journal of Political Economy 46 (April 1938): 248; and Mises, Human Action, p. 705.
Certainly, that is true of Knight's orthodox-Chicagoite brand of economic theory!It is instructive to compare the naiveté and the brusque dismissal of the problem by Schumpeter and Knight with the penetrating Misesian critique of socialism by Professor Georg Halm:
Because capital is no longer owned by many private persons, but by the community, which itself disposes of it directly, a rate of interest can no longer be determined. A pricing process is always possible only when demand and supply meet in a market…. In the socialist economy … there can be no demand and no supply when the capital from the outset is in the possession of its intending user, in this case the socialistic central authority.
Now it might perhaps be suggested that, since the rate of interest cannot be determined automatically, it should be fixed by the central authority. But this likewise would be quite impossible. It is true that the central authority would know quite well how many capital goods of a given kind it possessed or could procure…; it would know the capacity of the existing plant in the various branches of production; but it would not know how scarce capital was. For the scarcity of means of production must always be related to the demand for them, whose fluctuations give rise to variations in the value of the good in question…
If it should be objected that a price for consumption-goods would be established, and that in consequence the intensity of the demand and so the value of the means of production would be determinate, this would be a further serious mistake…. The demand for means of production, labor and capital goods, is only indirect.
Halm goes on to add that if there were only one single factor of production in making consumers' goods, the socialist "market" might be able to determine its proper price. But this can not be true in the real world where several factors of production take part in the production of goods in various markets.
Halm then adds that the central authority, contrary to his above concession, would not even be able to find out how much capital it is employing. For capital goods are heterogeneous, and therefore how "can the total plant of one factory be compared with that of another? How can a comparison be made between the values of even only two capital-goods?" In short, while under capitalism such comparisons can be made by means of money prices set on the market for every good, in the socialist economy the absence of genuine money prices arising out of a market precludes any such value comparisons. Hence, there is also no way for a socialist system to rationally estimate the costs (which are dependent on prices in factor markets) of any process of productionGeorg Halm, "Further Considerations on the Possibility of Adequate Calculation in a Socialist Community," in Hayek, Collectivist Economic Planning, pp. 162–65. Also see ibid., pp. 13–200.
Mises's Rebuttal: Valuation and Monetary Appraisement In his original 1920 article, Mises emphasized that "as soon as one gives up the conception of a freely established monetary price for goods of a higher order, rational production becomes completely impossible." Mises then states, prophetically:
One may anticipate the nature of the future socialist society. There will be hundreds and thousands of factories in operation. Very few of these will be producing wares ready for use; in the majority of cases what will be manufactured will be unfinished goods and production goods. All these concerns will be interrelated. Every good will go through a whole series of stages before it is ready for use. In the ceaseless toil and moil of this process, however, the administration will be without any means of testing their bearings. It will never be able to determine whether a given good has not been kept for a superfluous length of time in the necessary processes of production, or whether work and material have not been wasted in its completion. How will it be able to decide whether this or that method of production is the more profitable? At best it will only be able to compare the quality and quantity of the consumable end-product produced, but will in the rarest cases be in a position to compare the expenses entailed in production.
Mises points out that while the government may be able to know what ends it is trying to achieve, and what goods are most urgently needed, it will have no way of knowing the other crucial element required for rational economic calculation: valuation of the various means of production, which the capitalist market can achieve by the determination of money prices for all products and their factors.Mises, "Economic Calculation in the Socialist Commonwealth," pp. 106–08.
Mises concludes that, in the socialist economy "in place of the economy of the 'anarchic' method of production, recourse will be had to the senseless output of an absurd apparatus. The wheels will turn, but will run to no effect."Ibid., p. 106. This conclusion of 1920 is strikingly close to the quip common in the Poland of 1989, as reported by Professor Krzyztof Ostazewski of the University of Louisville: that the socialist planned economy is "a value-shredding machine run by an imbecile."
Moreover, in his later rebuttal to the champions of the Pareto-Barone equations, Mises points out that the crucial problem is not simply that the economy is not and can never be in the general equilibrium state described by these differential equations. In addition to other grave problems with the equilibrium model (e.g.: that the socialist planners do not now know their value scales in future equilibrium; that money and monetary exchange cannot fit into the model; that units of productive factors are neither perfectly divisible nor infinitesimal-and that marginal utilities ,of different people cannot be equated-on the market or anywhere else), the equations "do not provide any information about the human actions by means of which the hypothetical state of equilibrium" has been or can be reached. In short, the equations offer no information whatever on how to get from the existing disequilibrium state to the general equilibrium goal.
In particular, Mises points out, "even if, for the sake of argument, we assume that a miraculous inspiration has enabled the director without economic calculation to solve all problems concerning the most advantageous arrangement of all production activities and that the price image of the final goal he must aim at is present to his mind," there remain crucial problems on the path from here to there. For the socialist planner does not start from scratch and then build a capital goods structure most perfectly designed to meet his goals. He necessarily starts with a capital goods structure produced at many stages of the past and determined by past consumer values and past technological methods of production. There are different degrees of such past determinants built into the existing capital structure, and anyone starting today must use these resources as best he can to meet present and expected future goals. For these heterogeneous choices, no mathematical equations can be of the slightest use.Mises, Human Action, pp. 706–09: As Mises puts it: "socialists of all shades of opinion, repeat again and again that what makes the achievement of their ambitious plans realizable is the enormous wealth hitherto accumulated. But in the same breath, they disregard the fact that this wealth consists to a great extent in capital goods produced in the past and more or less antiquated from the point of view of our present valuations and technologica1 knowledge." Ibid. p. 710.
Finally, the unique root of Mises's position, and one that distinguishes him and his "socialist impossibility" thesis from Hayek and the Hayekians, has been neglected until the present day. And this neglect has persisted despite Mises's own explicit avowal in his memoirs of the root, and groundwork of his calculation thesis.In Mises's Notes and Recollections (Spring Mills, Penn.: Libertarian Press, 1978), p. 112. Also see the discussion in Murray N. Rothbard, Ludwig von Mises: Scholar, Creator, Hero (Auburn, Ala.: Ludwig von Mises Institute, 1988), pp. 35–38. For Mises was not, like Hayek and his followers, concentrating on the flaws in the general equilibrium model when he arrived at his position; nor was he led to his discussion solely by the triumph of the socialist revolution in the Soviet Union.
For Mises records that his position on socialist calculation emerged out of his first great work, The Theory of Money and Credit (1912). In the course of that notable integration of monetary theory and "micro" marginal utility theory, Mises was one of the very first to realize that subjective valuations of the consumers (and of laborers) on the market are purely ordinal, and are in no way measurable. But market prices are cardinal and measurable in terms of money, and market money prices bring goods into cardinal comparability and calculation (e.g., a $10 hat is "worth" five times as much as a $2 loaf of bread).On the market, then, consumers evaluate goods and services ordinally, whereas entrepreneurs appraise (estimate and forecast future prices) cardinally. On valuation and appraisement, see Mises, Human Action, pp. 327–330; Salerno, "Mises as Social Rationalist," pp. 39–49; and Salerno, "Socialist Economy is Impossible." But Mises realized that this insight meant it was absurd to say (as Schumpeter would) that the market "imputes" the values of consumer goods back to the factors of production. Values are not directly "imputed"; the imputation process works only indirectly, by means of money prices on the market. Therefore socialism, necessarily devoid of a market in land and capital goods, must lack the ability to calculate and compare goods and services, and therefore any rational allocation of productive resources under socialism is indeed impossible.Mises says in his memoirs: "They [the socialists] failed to see the very first challenge: How can economic action that always consists of preferring and setting aside, that is, of making unequal valuations, be transformed into equal valuations, by the use of equations? Thus the advocates of socialism came up with the absurd recommendation of substituting equations of mathematical catallactics, depicting an image from which human action is eliminated, for the monetary calculation in the market economy." Mises, Notes and Recollections, p. 112.
For Mises, then, his work on socialist calculation was part and parcel of his expanded integration of direct and monetary exchange — of "micro" and "macro" — that he had begun but not yet completed in The Theory of Money and Credit.This integration was later completed by his business-cycle theory in the 1920s, and then in his monumental treatise Human Action.
Fallacies of Hayek and Kirzner The orthodox line of the 1930s and '40s was wrong in claiming that Hayek and his followers (such as Lionel Robbins) abandoned Mises's "theoretical" approach by bowing down to the Pareto-Barone equations, falling back on "practical" objections to socialist planning.Except for the unfortunate emphasis of Hayek and Robbins on the alleged socialist difficulty of computing or "counting" the equations. See below. As we have already seen, Hayek scarcely ceded to mathematical equations of general equilibrium the monopoly of correct economic theory. But it is also true that Hayek and his followers fatally and radically changed the entire focus of their "Austrian" position, either by misconstruing Mises's argument or by consciously though silently shifting the crucial terms of the debate.
It is no accident, in short, that Hayek and the Hayekians dropped Mises's term "impossible" as embarrassingly extreme and imprecise. For Hayek, the major problem for the socialist planning board is its lack of knowledge. Without a market, the socialist planning board has no means of knowing the value-scales of the consumers, or the supply of resources or available technologies. The capitalist economy is, for Hayek, a valuable means of disseminating knowledge from one individual to another through the pricing "signals" of the free market. A static, general equilibrium economy would be able to overcome the Hayekian problem of dispersed knowledge, since eventually all data would come to be known by all, but the ever-changing, uncertain data of the real world prevents the socialist planning board from acquiring such knowledge. Hence, as is usual for Hayek, the argument for the free economy and against statism rests on an argument from ignorance.
But to Mises the central problem is not "knowledge." He explicitly points out that even if the socialist planners knew perfectly, and eagerly wished to satisfy, the value priorities of the consumers, and even if the planners enjoyed a perfect knowledge of all resources and all technologies, they still would not be able to calculate, for lack of a price system of the means of production. The problem is not knowledge, then, but calculability. As Professor Salerno points out, the knowledge conveyed by present-or immediate "past"-prices is consumer valuations, technologies, supplies, etc. of the immediate or recent past. But what acting man is interested in, in committing resources into production and sale, is future prices, and the present committing of resources is accomplished by the entrepreneur, whose function is to appraise — to anticipate — future prices, and to allocate resources accordingly. It is precisely this central and vital role of the appraising entrepreneur, driven by the quest for profits and the avoidance of losses, that cannot be fulfilled by the socialist planning board, for lack of a market in the means of production. Without such a market, there are no genuine money prices and therefore no means for the entrepreneur to calculate and appraise in cardinal monetary terms.
More philosophically, the entire Hayekian emphasis on "knowledge" is misplaced and misconceived. The purpose of human action is not to "know" but to employ means to satisfy goals. As Salerno perceptively summarizes Mises's position:
The price system is not — and praxeologically cannot be — a mechanism for economizing and communicating the knowledge relevant to production plans [the Hayekian position]. The realized prices of history are an accessory of appraisement, the mental operation in which the faculty of understanding is used to assess the quantitative structure of price relationships which corresponds to an anticipated constellation of economic data. Nor are anticipated future prices tools of knowledge; they are instruments of economic calculation. And economic calculation itself is not the means of acquiring knowledge, but the very prerequisite of rational action within the setting of the social division of labor. It provides individuals, whatever their endowment of knowledge, the indispensable tool for attaining a mental grasp and comparison of the means and ends of social action.Salerno, "Mises as Social Rationalist," p. 44.
In a recent article, Professor Israel Kirzner argues for the Hayekian position. For Hayek and for Kirzner, the market is a "discovery procedure," that is, an unfolding of knowledge. There is, in this view of the market and of the world, no genuine recognition of the entrepreneur, not as a "discoverer," but as a dynamic risk taker, risking losses if his appraisal and forecast go awry. Kirzner's commitment to the "discovery process" fits all too well with his own original concept of the entrepreneurial function as being that of "alertness," and of different entrepreneurs as being variously alert to the opportunities that they see and discover. But this outlook totally misconceives the role of the entrepreneur. The entrepreneur is not simply "alert"; he forecasts; he appraises; he meets and bears risk and uncertainty by questing for profits and risking losses. As Salerno points out, for all their talk of dynamism and uncertainty, the Hayek-Kirzner "entrepreneur" is curiously bloodless and passive, receiving and passively imbibing knowledge imparted to him by the market. The Hayek-Kirzner entrepreneur is far closer than they like to think to the Walrasian automaton — to the fictional "auctioneer" who avoids all real trades in the marketplace.Israel M. Kirzner, "The Economic Calculation Debate: Lessons for Austrians," Review of Austrian Economics 2 (1988): 1–18 [PDF]. Hayek coined the term "discovery procedure" in F. A. Hayek, "Competition as a Discovery Procedure," in New Studies in Philosophy, Politics, Economics and the History of Ideas (Chicago: University of Chicago Press, 1978), pp. 179–90. For a critique of Kirzner's concept of entrepreneurship, see Murray N. Rothbard, "Professor Hébert on Entrepreneurship," Journal of Libertarian Studies 7 (Fall 1985): 281–85 [PDF]. For Hayek's own contributions to the socialist calculation debate after Lange-Lerner, see F.A. Hayek, "Socialist Calculation 111: The Competitive 'Solution'" (1940), and "The Use of Knowledge in Society," (1945), in Individualism and Economic Order, pp. 181–208; 77–91.
Unfortunately, while lucidly expounding the Hayekian position, Kirzner obfuscates the history of the debate by claiming that the later Mises, along with Hayek, changed his position (or, at the least, "elaborated" it) from his original, "static" view of 1920. But on the contrary, as Salerno points out, the "later" Mises explicitly spurned uncertainty of the future as the key to the calculation problem. The key to the calculation question, stated Mises in Human Action, is not that "all human action points to the future and the future is always uncertain." No, socialism has
quite a different problem. Today we calculate from the point of view of our present knowledge and of our present anticipation of future conditions. We do not deal with the problem of whether or not the [socialist] director will be able to anticipate future conditions. What we have in mind is that the director cannot calculate from the point of view of his own present value judgments and his own present anticipation of future conditions, whatever they may be. If he invests today in the canning industry, it may happen that a change in consumers' tastes or in the hygienic opinions concerning the wholesomeness of canned food will one day turn his investment into a malinvestment. But how can he find out today how to build and equip a cannery most economically?
Some railroad lines constructed at the turn of the century would not have been built if the people had at that time anticipated the impending advance of motoring and aviation. But those who at the time built railroads knew which of the various possible alternatives for the realization of their plans they had to choose from the point of view of their appraisements and anticipations and of the market prices of their day in which the valuations of the consumers were reflected. It is precisely this insight that the director will lack. He will be like a sailor on the high seas unfamiliar with the methods of navigation…Mises, Human Action, p. 696. Also see Salerno, "Mises as social Rationalist," pp. 46–47ff.,Kirzner apparently believes that Mises's concentration on entrepreneurship in his Human Action discussion of socialism demonstrates that Mises had gone over to the Hayek position. Kirzner seems to overlook the vast difference between Mises's forecasting and appraisement view of entrepreneurship and his own "alertness" doctrine, which totally leaves out the possibility of entrepreneurial loss.
Solving Equations and Lange's Last Word One of the unfortunate formulations of Hayek and the Hayekians in the 1930s, giving rise to the general misunderstanding that the only problems of socialist planning are "practical" not "theoretical," was their stress on the alleged difficulty of socialist planners in computing or solving all the demand and supply functions, all the "simultaneous differential equations" needed to plan prices and the allocation of resources. If socialistic planning is to rely on the Pareto-Barone equations, then how will all of them be known, especially in a world of necessarily changing data of values, resources, and technology?
Lionel Robbins began this equation-difficulty approach in his study of the 1929 depression, The Great Depression. Conceding, with Mises, that the planners could determine consumer preferences by allowing a market in consumer goods, Robbins correctly added that the socialist planners would also have to "know the relative efficiencies of the factors of production in producing all the possible alternatives." Robbins then unfortunately added:
On paper we can conceive this problem to be solved by a series of mathematical calculations. We can imagine tables to be drawn up expressing the consumers demands … And we can conceive technical information giving us the productivity … which could be produced by each of the various possible combinations of the factors of production. On such a basis a system of simultaneous equations could be constructed whose solution would show the equilibrium distribution of factors and the equilibrium production of commodities.
But in practice this solution is quite unworkable. It would necessitate the drawing up of millions of equations on the basis of millions of statistical tables based on many more millions of individual computations. By the time the equations were solved, the information on which they were based would have become obsolete and they would need to be calculated anew.Lionel Robbins, The Great Depression (New York: Macmillan, 1934).p. 151.
While Robbins's strictures about changes in data were and still are true enough, they helped divert the emphasis from Mises's even-if-static and full-knowledge calculation approach, to Hayek's emphasis on uncertainty and change. More important, they gave rise to the general myth that Robbins's strictures against socialism, unlike Mises's, were only "practical" in the sense of not being able to calculate all these simultaneous equations. Furthermore, in the concluding essay in his Collectivist Economic Planning, Hayek set forth all the reasons why the planners could not know essential data, one of which is that they would have to solve "hundreds of thousands" of unknowns. But
this means that, at each successive moment, every one of the decisions would have to be based on the solution of an equal number of simultaneous differential equations, a task which, with any of the means known at present, could not be carried out in a lifetime. And yet these decisions would … have to be made continuously…F.A. Hayek, The Present State of the Debate," in Hayek, Collectivist Economic Planning, p. 212.
It is fascinating to note the twists and turns in Oskar Lange's reaction to the equation-solving argument. In his 1936 article, which was long considered the last word on the subject, Lange ridiculed the very terms of the problem. Adopting his "quasi-market" socialist approach, and ignoring the crucial Misesian problem of the necessary absence of any market in land or capital, Lange simply stated that there is no need for planners to worry about these equations, since they would be "solved" by the socialist market:
Neither would the Central Planning Board have to solve hundreds of thousands … or millions … of equations. The only "equations" which would have to be "solved" would be those of the consumers and the managers of production plants. These are exactly the same "equations" which are solved in the present economic system and the persons who do the "solving" are the same also. Consumers … and managers … "solve" them by a method of trial and error… And only few of them have been graduated in higher mathematics. Professor Hayek and Professor Robbins themselves "solve" at least hundreds of equations daily, for instance, in buying a newspaper or in deciding to take a meal in a restaurant, and presumably they do not use determinants or Jacobians for that purpose.Oskar Lange, "On the Economic Theory of Socialism, Part One," p. 67. The Norwegian economist and defender of Mises's position, Trygve Hoff, commented that "Quite apart from the fact that the equations the central authority would have to solve are of quite a different nature to those of the private individual, the latter tend to solve themselves automatically, which Dr. Lange must admit the former do not." Hoff, Economic Calculation in the Socialist Society, pp. 221–22. This excellent book on the socialist calculation controversy was originally published in Norwegian in 1938. In contrast to Bergson's almost contemporaneous survey article, Hoff's English-language translation, published in 1949 in Britain but not in the United States, sank without a trace.
Thus, the orthodox neoclassical economic establishment had settled the calculation dispute with Lange-Lerner the acclaimed winner. Accordingly, when the end of World War II brought communism/socialism to his native Poland, Professor Oskar Lange left the plush confines of the University of Chicago to play a major role in bringing his theories to bear on the brave new world of socialist Poland. Lange became Polish ambassador to the United States, then Polish delegate to the United Nations Security Council, and finally chairman of the Polish Economic Council. And yet not once in this entire period or later, did Poland — or any other communist government, for that matter — attempt to put into practice anything remotely like Lange's fictive accounting-type, play-at-market socialism. Instead, they all put into effect the good old Stalinist command-economy model.
It did not take long for Oskar Lange to adjust to the persistence of the Stalinist Model. Indeed, it turns out that Lange, in post-war Poland, argued strongly for the historical necessity of the persistence of the Stalinist model as opposed to his own market socialism. Arguing against his own quasi-decentralized market-socialist solution, Lange, in 1958, revealed that "in Poland, we had some discussions whether such a period of highly centralized planning and management was historical necessity or a great political mistake. Personally, I hold the view that it was a historical necessity."
Why? Lange now claimed:
that the "very process of the social revolution which liquidates one social system and establishes another requires centralized disposal of resources by the new revolutionary state, and consequently centralized management and planning."second, in underdeveloped countries — and which socialist country was not underdeveloped? — "Socialist industrialization, and particularly very rapid industrialization, which was necessary in the first socialist countries, particularly in the Soviet Union … requires centralized disposal of resources." Soon, however, Lange promised, the dialectic of history will require the socialist government to organize quasi-market, decentralized decision-making within the overall plan.Oskar Lange, "The Role of Planning in Socialist Economy," in The Political Economy of Socialism (1958) in M. Bornstein, ed., Comparative Economic Systems, rev. ed. (Homewood, Ill.: Richard D. Irwin, 1969), pp. 170–71. Shortly before his death in 1965, however, Oskar Lange, in his neglected last word on the socialist calculation debate, implicitly revealed that his socialist-market "solution" had been little more than a hoax, to be jettisoned quickly when he indeed saw a way for the planning board to solve all those hundreds of thousands or millions of simultaneous equations! Strangely gone was his gibe that everyone "solves equations" every day without having to do so formally. Instead, technology had now supposedly come to the rescue of the planning board! As Lange put it:
Were I to rewrite my essay ["On the Economic Theory of Socialism"] today my task would be much simpler. My answer to Hayek and Robbins would be: so what's the trouble? Let us put the simultaneous equations on an electronic computer and we shall obtain the solution in less than a second. The market process with its cumbersome tâtonnements appears old-fashioned. Indeed, it may be considered as a computing device of the pre-electronic age.Oskar Lange, "The Computer and the Market," in A. Nove and D. Nuti, eds. Socialist Economics (London: Penguin Books, 1972), pp. 401–02.
Indeed, Lange claims that the computer is superior to the market, because the computer can perform long-range planning far better, since it somehow already knows "future shadow prices" which markets cannot seem to obtain.
Lange's naive enthusiasm for the magical planning qualities of the computer in its early days can only be considered a grisly joke to the economists and the people in the socialist countries who have seen their economies go inexorably from bad to far worse despite the use of computers. Lange apparently never became familiar with the computer adage, GIGO ("garbage in, garbage out"). Nor could he have become familiar with the recent estimate of a top Soviet economist that, even assuming that the planning board and its computers could learn the correct data, it would take even the current generation of computers 30,000 years to process the information and allocate the resources.Yuri M. Maltsev, "Soviet Economic Reforms: An Inside Perspective," The Freeman (March 1990).
But there is a more important flaw in Lange's last article than his naiveté about the magical powers of the then-new technology of the computer. His eagerness to embrace a way of solving those equations he earlier had claimed didn't need conscious solving demonstrates that he had been disingenuous in claiming that his pseudomarket trial-and-error method would provide a facile way for the socialist society to solve the calculation problem.
Socialist Impossibility and the Argument from Existence Ever since 1917, or at least since Stalin's great leap forward into socialism in the early 1930s, the defenders of the possibility of socialism against Mises's strictures had one final, clinching, fallback argument. When all the arguments over general equilibrium or equations or entrepreneurship or Walrasian tâtonnenents or the command economy or pseudo-markets had been hashed over, the defenders of socialism could simply fall back on one point: Well, socialism exists, doesn't it? When all is said and done, it exists, and therefore it must be, for one reason or another, possible. Mises must clearly be wrong, even if the "practical" arguments of Hayek or Robbins, arguments of mere degrees of efficiency, need to be soberly considered. At the end of his celebrated survey essay on socialist economics Professor Abram Bergson put the point starkly:
there can hardly be any room for debate: of course, socialism can work. On this, Lange certainly is convincing. If this is the sole issue, however, one wonders whether at this stage such an elaborate theoretic demonstration is in order. After all, the Soviet planned economy has been operating for thirty years. Whatever else may be said of it, it has not broken down.Bergson, "Socialist Economics," p. 447.
In the first place, this triumphal conclusion now rings hollow, since the economies of the Soviet Union and the other socialist bloc countries have now manifestly broken down. And now it also turns out that the Soviet GNP and production figures that Bergson, the CIA, and other Sovietologists have been taking at face value for decades have been nothing but a pack of lies, designed to deceive not the United States, but the Soviet managers' own ruling elite. Even now, Western Sovietologists are reluctant to believe the Soviet economists who are finally trying to tell them the truth about these alleged and much revered data.
But apart from all that, this sort of seemingly decisive empiricist counter to the Misesian critique reveals the perils of using allegedly simple and brute "facts" to rebut theory in the sciences of human action. For why must we assume that the Soviet Union and the Eastern European countries ever really enjoyed full and complete socialism? There are many reasons to believe that, try as they might, the communist rulers were never able to impose total socialism and central planning. For one thing, it is now known that the entire Soviet economy and society has been shot through with a vast network of black markets and evasions of controls, fueled by a pervasive system of bribery known as blat to allow escape from those controls. Managers who could not meet their annual production quotas were approached by illegal entrepreneurs and labor teams to help them meet the quotas and get paid off the books. And black markets in foreign exchange have long been familiar to every tourist. Long before the Eastern European collapse of communism, these countries stopped trying to stamp out their black markets in hard currency, even though they were blatantly visible in the streets of Warsaw, Budapest, and Prague. Without uncontrolled black markets fueled by bribery, the communist economies may well have collapsed long ago.One source on this pervasive system in the Soviet Union is Konstantin M. Simis, USSR: The Corrupt Society (New York: Simon & Schuster, 1982). This historical point has also been bolstered by Michael Polanyi's "span of control" theory, which denies the possibility of effective central planning from a rather different viewpoint than Mises's.Michael Polanyi, The Logic of Liberty (Chicago: University of Chicago Press, 1951), pp. 111–37 and passim.
But the decisive rebuttal has, once again, been leveled by Mises in Human Action: the Soviet Union and Eastern European economies were not fully socialist because they were, after all, islands in a world capitalist market. The communist planners were therefore able, albeit clumsily and imperfectly, to use prices set by world markets as indispensable guidelines for the pricing and allocation of capital resources. As Mises pointed out:
People do not realize that these were not isolated social systems. They were operating in an environment in which the price system still worked. They could resort to economic calculation on the ground of the prices established abroad. Without the aid of these prices their actions would have been aimless and planless. Only because they were able to refer to these foreign prices were they able to calculate, to keep books, and to prepare their much talked about plans.Mises, Human Action, pp. 698–99.
Mises's insight was confirmed as early as the mid-1950s, when the British economist Peter Wiles visited Poland, where Oskar Lange was helping to plan Polish socialism. Wiles asked the Polish economists how they planned the economic system. As Wiles reported:
What actually happens is that "world prices", i.e. capitalist world prices, are used in all intra-[Soviet] bloc trade. They are translated into rubles … entered into bilateral clearing accounts.
Wiles then asked the Polish communist planners the crucial question. Since the Poles were, as good Marxist-Leninists, presumably committed to the triumph, as soon as possible, of world-wide socialism, Wiles asked: "What would you do if there were no capitalist world" from which you could obtain all those crucial prices? The Polish planners' rather cynical answer: "We'll cross that bridge when we come to it." Wiles added that "In the case of electricity the bridge is already under their feet: there has been great difficulty in pricing it since there is no world market."Peter J. D. Wiles, "Changing Economic Thought in Poland," Oxford Economic Papers 9 (June 1957): 202–03. Also see Murray N. Rothbard, "Ludwig von Mises and Economic Calculation Under Socialism," in Lawrence Moss, The Economics of Ludwig won Mises, pp. 67–77.
But fortunately for the world and for the Polish planners themselves, they were never truly forced to cross that bridge.
Epilogue: The End of Socialism and Mises's Statue In his supposedly definitive article of 1936 vindicating economic calculation under socialism, Oskar Lange delivered a once-famous gibe at Ludwig von Mises. Lange began his essay by ironically hailing Mises's services to socialism: "Socialists have certainly good reason to be grateful to Professor Mises, the great advocatus diaboli of their cause. For it was his powerful challenge that forced the socialists to recognize the importance of an adequate system of economic accounting … the merit of having caused the socialists to approach this problem systematically belongs entirely to Professor Mises." Lange then went on to taunt Mises:
Both as an expression of recognition for the great service rendered by him and as a memento of the prime importance of sound economic accounting, a statue of Professor Mises ought to occupy an honorable place in the great hall of the Ministry of Socialization or of the Central Planning Board of the socialist state.
Lange went on to say that "I am afraid that Professor Mises would scarcely enjoy what seemed the only adequate way to repay the debt of recognition incurred by the socialists … " For one thing, Lange concluded, to complete Mises's discomfiture
a socialist teacher might invite his students in a class on dialectical materialism to go and look at the statue, in order to exemplify the Hegelian List der Vernuft [cunning of Reason] which made even the staunchest of bourgeois economists unwittingly serve the proletarian cause.Lange, "The Economic Theory of Socialism," p. 53.
Curiously enough, Lange, during his years as socialist planner in Poland, never got around to erecting the statue to Mises at the Ministry of Socialization in Warsaw. Perhaps socialist planning was not successful enough to accord Mises that honor — or perhaps there were not enough resources to build the statue. In any case, the opportunity has been lost. The countries of Eastern Europe now stand in the rubble wrought by what used to be called in the 1930s "the great socialist experiment." Emerging gloriously out of the rubble of the collapse of socialism are a myriad of Misesian economists, to whom socialism is little more than a grisly joke. Even as early as the 1960s it was a common quip among economists that, at international economic conferences, "the Western economists talk about the glories of planning while the Eastern economists talk about the virtues of the free market." Now Misesian economists are springing out of the ruins of socialism in Poland, Lithuania, Czechoslovakia, Hungary, Yugoslavia (especially Croatia and Slovenia) and the Soviet Union. Neither socialist planning nor Marxism-Leninism hold any charms for the economists of the once-socialist nations.
In all of these countries, the giant statues of Lenin are being unceremoniously toppled from the public squares. Whether or not the coming free societies of Eastern Europe choose to replace them with statues of Ludwig von Mises, as the prophet of their liberation, one thing seems certain: there will be no statues erected to Oskar Lange in Cracow or Warsaw. It is hard to see how even the cunning of Reason and the Hegelian dialectic can make Lange out to be a prophet or an important contributor to the laissez-faire Polish economy of the future. Perhaps the closet approach was a bitter quip pervading Eastern Europe during the revolutionary year of 1989: "Communism can be defined as the longest route from capitalism to capitalism.
After over three years of following the disastrous effects of socialism unfolding in Venezuela I can confidently say that 99% of the articles I’ve read on the issue will sooner or later point out that Venezuela’s crisis is not only surprisingly dire, but rather counterintuitive given that it is one of the most oil rich countries in the world, with probably the largest proven reserves. As a result, most analyses will conclude that it is the current president’s incompetence on the one hand, and the fall in oil prices in the last 5 years on the other, that have brought about the collapse of the once-prosperous South American economy. The latest example is the short video posted by The Economist, which, in summarizing Venezuela’s recent history, explains that “after Mr Chavez—who had spent generously when oil prices were booming—died in 2013, oil prices crashed and… Maduro inherited an economic crisis which he made worse with his ineptness. The country plunged into chaos.”
That the gravity of the situation is still surprising to most commentators when it should have been expected long ago is something I’ve discussed before. I would like now to focus on the implicit economic fallacy that underlines the assumption that a country is bound to be inherently prosperous if it owns significant natural resources, particularly oil.
First of all, it is merely an impression that Venezuela was indeed prosperous in a healthy way at some point in the past. The large-scale exploitation of its rich oil reserves, first discovered before the Spanish conquest, began only in 1910. Before, Simon Bolivar’s 1811 decree stated national ownership of all domestic mines and production was minimal at first. The beginning of the Venezuelan oil industry was also still plagued by government intervention, as drilling and refining were still only permitted via governmental concessions—usually offered to close friends of the 1920s Gómez administration. Later in 1975-76, a monopoly of oil production was handed to the state-owned enterprise Petroleos de Venezuela (PDVSA), then the world’s third largest refiner after Royal Dutch Shell and Exxon, as the Venezuelan oil industry was fully nationalized.See Alvarez, J. and J. Fiorito (2005) Venezuelan Oil Unifying Latin-America, Stanford University, available at https://web.stanford.edu/class/e297a/Venezuelan%20Oil%20Unifying%20Latin%20America.doc Although foreign companies were allowed minority partnerships, the taxes they had to pay were significantly increased during the Chavez administration.
During this turbulent history, oil production waxed and waned, following state directives rather than market incentives, yet booming oil prices in the early 2000s allowed for large cash windfalls. But eventually after 2005 all revenues from it began to be rerouted by the government into Chavez’s lavish social missions, which covered everything from free health clinics to neighborhood basketball courts.
It is this period that most commentators see as one of great Venezuelan prosperity. But this prosperity was illusory, a mere veneer for the consumption of capital that was occurring. Capital goods—especially those in the oil industry—were being misused and depleted through central planning. For a while, this created an apparent wave of prosperity and development that Joseph Stiglitz called “impressive” at the time and that Mises had long before likened to burning one’s own furniture to heat up the room. But as soon as capital wore out, the façade collapsed and the centrally planned mismanagement of the resources was revealed. No matter how rich in resources the country still is, those resources were and still are used inefficiently and wastefully. Alternatively, Switzerland is very poor in mineral resources—or any natural resources, mind—and has not been plunged into an inflationary crisis.
Chavez not only failed to eradicate poverty, as he claimed, but he laid the country squarely down the path of socialism and all its disastrous effects were merely magnified by Maduro. The latter is, contrary to its Western critics, not inept, but rather a committed and consistent socialist dictator, who only escalated and tightened, in good socialist fashion, government control over everything from currency and prices to political dissent and free speech. This, and falling world oil prices, certainly sped up the disintegration of the Venezuelan economy, but did not cause it.
What originally caused the Venezuelan crisis was not oil, nor can oil now be inherently its cure. The cause of Venezuela’s collapse is the stunting of domestic capital accumulation that began with monetary and social policies of the preceding century and whose effects are now fully felt. And it is the same brand of poor economic policies and government spending (albeit not in the same degree) that is sought after and implemented in the U.S. or Europe, where it is touted either as innovative, stimulating, or anti-cyclical.
In 1952, in The Plight of Underdeveloped Nations, Mises was discussing Iran’s plans to nationalize their oil industry and was pointing out the precise—and since unchanged—hypocrisy of the West in criticizing socialist policies they were themselves implementing at home:
If it is right for the British to nationalize the British coal mines, it cannot be wrong for the Iranians to nationalize the Iranian oil industry. If Mr. Attlee [Labour Party leader and prime minister of England from 1945–1951] were consistent, he would have congratulated the Iranians on their great socialist achievement. But no socialist can be or ever was consistent.
Mises’s further analysis in that essay—quoted below at length—can be used not only to cut through to the heart of the current Venezuelan problems, but to lay out the only solution for overcoming the crisis and allow for true prosperity. And as you might have guessed, it does not involve mentioning the large oil reserves at all:
What the underdeveloped nations must do if they sincerely want to eradicate penury and to improve the economic conditions of their destitute masses is to adopt those policies of “rugged individualism” which have created the welfare of Western Europe and the United States. They must resort to laissez faire; they must remove all obstacles fettering the spirit of enterprise and stunting domestic capital accumulation and the inflow of capital from abroad.
But what the governments of these countries are really doing today is just the contrary. Instead of emulating the polices that created the comparative wealth and welfare of the capitalistic nations, they are choosing those contemporary policies of the West which slow down the further accumulation of capital and lay stress on what they consider to be a fairer distribution of wealth and income. Leaving aside the problem whether or not these policies are beneficial to the economically advanced nations, it must be emphasized that they are patently nonsensical when resorted to in the economically backward countries. Where there is very little to be distributed, a policy of an allegedly “fairer” redistribution is of no use at all. […]
The problem of rendering the underdeveloped nations more prosperous cannot be solved by material aid. It is a spiritual and intellectual problem. Prosperity is not simply a matter of capital investment. It is an ideological issue. What the underdeveloped countries need first is the ideology of economic freedom and private enterprise and initiative that makes for the accumulation and maintenance of capital as well as for the employment of the available capital for the best possible and cheapest satisfaction of the most urgent wants of the consumers.
The country once named Gaul has produced some of the greatest writers such as Hugo and Balzac; some of the most-skilled generals such as Napoleon and De Gaulle; and many other remarkable historic figures. Yet regardless of such achievements, the French economy has long been impeded by collectivist policies. Despite being the 10th largest economy, its level of economic freedom is behind former communist countries such Albania and Bulgaria. What is ironic is that France produced some of the greatest proponents for freedom — such as Bastiat, Say and Tocqueville, yet French leaders, both historical and contemporary, have failed to heed the pleas of their fellow statesmen.
Neither countries nor cultures are built overnight; the United States had the foundation of both the British and the Roman Empires before it cemented the foundation of relative freedom its citizens enjoy still to this day. Similarly, France did not adopt collectivism overnight. Rather, it has seen key periods that have made France fertile soil for a certain brand of aggressive socialism. Below I will discuss three such periods: The French Revolution, the Paris Commune and post-World War II France.
The French Revolution Despite the modern portrayals of the events that succeeded the storming of the Bastille in 1789 as cries for liberty, the reality of the French Revolution is wholly different. If one were to read Burke’s Reflections on the Revolution in France, it would be evident that the policies adopted by the revolutionaries were much similar to those adopted by communist revolutionaries two centuries later. Burke noted the abstractness of French ideals of liberty, namely liberty for the sake of liberty, rather than the practical nature of it. Behind the philosophies of Rousseau and de Mably, France sought to shape human nature as seen fit by the new leaders, while disregarding all of its past history as being that of oppressor vs the oppressed. It essentially gave way for people to instruct others how to act, rather than allowing individuals to do as they themselves see fit. The newly anointed class of revolutionaries killed and jailed all those opposed to their ideas, while confiscating land and property en masse, from both the clergy and the nobility. The land was, among other things, used to back the newly introduced currency — the Assignat, whose purpose was to finance all government expenses. As such it naturally reached an abnormal rate of inflation, causing it to be discontinued soon thereafter. Organizations such as the Cult of Reason were founded to curb religious thought with churches and the clergy being constant victims of reprisals. More men had lost their lives during this turbulent period than during the reign of the supposedly draconian French dynasty. A myriad of other instances of injustice that were more akin to the October Revolution of 1917 rather than the fight for liberty were introduced, but are beyond the scope of this paper.
The Paris Commune It is sufficient to note that the events of the Paris Commune were described as a “dictatorship of the Proletariat” by Karl Marx to understand their nature. As Prussians troops besieged Paris during the 1871 war, the French were forced to flee to Bordeaux and eventually accepted the terms of surrender, giving Alsace and Lorraine to Bismarck. The war was a foolish act embarked on by Napoleon Bonaparte’s nephew Louis Napoleon and was opposed most notably by Adolphe Tiers, a prominent politician during the Second Republic. Following the war and capture of Louis Napoleon, that same Tiers sought to create a new, republican government, but the people of Paris feared how “republican” such a government would actually be. Ironically, the Parisians decided to form one that surely would not be republican — a separate, communist one in Paris. Guarded by the French militia, known as the National Guard, this new government stayed in power for two months, but nonetheless, did not fail to leave its mark during that short amount of time. The Commune’s leaders sought reprisals against the wealthy with mass looting throughout the city, as well as reprisals against its political enemies such as Tiers, whose house they burned down. A hostile relationship was also established with the Catholic Church, as it accused it of being part of the monarchy’s supposed crimes. More than 200 members of the clergy were arrested and more than 20 churches were shut down. Paris was eventually re-captured by the actual French Army, but upon retreating the Communards set ablaze a great part of the city, causing irreversible damage and completely ruining historic buildings such as the Tuileries Palace. The whole event left between 10 and 20 thousand men dead altogether and a lasting political impact on France.
Post-WWII France Following World War II, collectivist sentiment in France grew. Some of the biggest cities, such as Toulouse, were run by SFIO — the direct arm of the Soviet Union in France. The same party captured over a third of the votes in the 1965 presidential election. One of the most important events from this period were perhaps the 1968 protests that engulfed Paris and the whole of France. Although protesters were marching the streets under the banners of liberty and equality, the reality is that their purpose was to install communist rule in France. Students began protesting against capitalism, consumerism, American imperialism, and tradition. The protests then spread to factories with strikes involving over 10 million workers, more than a fifth of the total population for two continuous weeks. The protests were so detrimental that the French economy was put on halt throughout their time and de Gaulle even secretly left the country. The protests were detrimental in another form, as France with perhaps the strongest army in Europe at the time, was dangerously close to becoming communist, at the height of the Cold War. Another, equally important event was the election of Francois Mitterrand in 1981. Policies introduced under his regime from 1981-1995 were nothing short of socialism. They included mass nationalization of key firms and industries, mandatory 39-work weeks, a 10% increase in the minimum wage, increases in taxes and a myriad of other government infringements of liberty. Perhaps the most detrimental of his policies were the nationalization of all remaining banks, as the country’s largest banks, namely, BNP Paribas, Société Générale and Crédit Lyonnaiswere were already nationalized following the end of World War II . This effectively left no leeway for any competition, as everything was run by the state. Some of these policies introduced by Mitterrand and policies of similar nature still hamper the French economy today, as it has, for example, among the shortest work weeks in Europe, which is effectively mandated by the state.
Conclusion France needs to go back to its roots — to the philosophies of Bastiat rather than Rousseau, to the principles of Western individualism rather than Russian-inspired socialism. But, as we have seen, French history is punctuated by numerous attempts to truly embrace socialism, and the weight of history is no small obstacle. Even an abrupt turn toward markets could not turn the ship around over night, and France will need time to heal the wounds inflicted by centuries of collectivist thought.
I met Daniel Lahoud in Rosario (Argentina) in 2008. He had submitted a very interesting paper to the International Conference I organize every two years – “The Austrian School of Economics in the 21st Century.” From then on he had participated in every Austrian Conference with the exception of 2014. That year the economic situation in Venezuela was so awful that he could not make it. Unfortunately, it is not that things have improved since but both in 2016 and 2018 the Red Liberal de América Latina (Relial) has granted him a scholarship to attend the conference.
Dr. Lahoud was born in 1959 in Venezuela and he has a Lebanese backgorund on his father’s side. He posses an economic degree, a Masters in Economics and History, and a Doctorate of History. He is currently taking a second Doctorate in Economics. He has worked as an economist at the Central Bank and in the private sector. He was also an entrepreneur.
Since 1988 he has been a professor at the Universidad Católica Andrés Bello Catholic University (UCAB), and starting in 2008 at the Universidad Central de Venezuela (UCV).
Recently on Twitter Dr. Lahoud posted a very beautiful picture of himself and his Austrian Economics students.
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That picture originated the interview that follows. It is a small token of appreciation to a heroic scholar who is promoting the ideas of the Austrian School of Economics in one of the harshest environments. And he is doing it both effectively and courageously.
Federico N. Fernández – How did you start with your Austrian Economics Program in Caracas?
Daniel Lahoud – Today in Venezuela there is not much work for an economist like me, who is devoted to the financial sector and to be an advisor to companies. So I spend a lot of my time teaching at the University and doing research for classes. I have always been a professor of finance and slowly I have ventured into economic history and the history of economic thought.
Since 2008 with the deepening of the socialist model in Venezuela, I decided to offer an Introduction to the Austrian School of Economics as an elective subject both at the Universidad Católica Andrés Bello (UCAB) and at the Universidad Central de Venezuela (UCV).
FF – What can you tell us about those universities?
DL – It is worth mentioning that the UCAB is originally a Keynesian university and the UCV since the mid-twentieth century has been a Marxist university, and although the core of the curriculum has that ideology, the trend toward Keynesian thinking is growing more and more.
The most curious thing is that at UCAB, which is private, the subject is offered every semester, but it is held sporadically. While at UCV, which is a university supported by public money, the subject is held every semester. Students are more motivated, it seems.
I have heard that they believe the subject will enrich their views. “Enrol,” they say, “because you are going to hear things that are never told anywhere else in the career plan, and will have different explanations to the problems you see in other subjects.”
FF – How many students have you reached?
DL – At UCV it has been held without interruptions for 8 semesters and has been attended by more than 300 students. In the UCAB, it has been held less, and 80 students have participated.
FF – And what do you teach in regular courses?
DL – In all my subjects I make explanations that involve Austrian knowledge. For example in Financial Economics I explain the importance of the entrepreneur in the company and in the economy, and I always refer them to the cycle theory of the Austrian School.
In History of Economic Thought at UCAB, I also emphasize on the theory of value. The subject is taught during the 6th semester but for the students it is usually the first time they are introduced to this notion. My course ranges from the Scholastics to 20th Century authors, so I touch topics related to the Austrian School of Economics, and use for example Murray Rothbard’s and Mark Skousen’s books.
FF – Do you work with Think Tanks as well?
DL – With the Centro de Divulgación del Conomicimiento Económico para la Libertad (CEDICE) I regularly teach seminars for journalists and give lectures for those interested in subjects of Austrian economics. Moreover, this year they are developing a diploma course that includes lessons in Austrian Economics, too.
The Mises Venezuela organizes a celebration every year about Mises’s thought in September and they always invite me, so I give a talk about some aspect of Mises and Praxeology.
FF – What is it like to promote libertarian ideas in Venezuela?
DL – Venezuela is a complex country. In the early 20th century we had a long dictatorship, which everyone calls liberal… In reality, it was very akin to Positivism and Historicism. This was followed by military governments that included a lot of economic intervention. However, again, many analysts call these experiences “liberal and pro-capitalist.”
Since then, we have had civilian governments elected, dictatorships by coup d’etat, and dictatorships by election. In any case, all of them have always been governments with an ideology of economic intervention, therefore socialist. Many Venezuelans are fed up with all these interventionism/socialism. For that reason today it is very easy to talk about freedom in my classes and in some public places.
I believe people in general want to hear and students in particular want to hear about liberty and free markets. But Venezuela, as we all know, is not a free country. So spreading the message can be difficult.
For example, until last year I was regularly invited to speak on a TV channel. But they stopped doing so when I said the first measure to be taken in order to solve our economic crisis should be to liberate the exchange rate. On the other hand, there are radio programs to which they invite me and allow me to say those things that are forbidden in certain TV channels.
FF – Is there a strong Austrian tradition in your country?
DL – In Venezuela there is no Austrian tradition. There have been people with a liberal vocation. Perhaps the first Austrian was Henrique Pérez Dupuy (1881–1974), who was also a member of the Mont Pelerin Society. He wrote many articles in which he disseminated Austrian ideas. But he was a lonely banker who was not given much attention.
Today, it is still a matter of individuals. I could mention Oscar Torrealba, Willians Ruiz, Guillermo Rodríguez, Rafael Avila, Hugo Bravo, and myself, of course. We are — in a very disperse manner — trying to spread the Austrian School of Economics in Venezuela.
Nevertheless, there are currently few people in Venezuela who are a interested in Austrian ideas. But I believe our ideas are growing and slowly becoming more popular and we will see this growth in the next generation. That is my hope.
FF – And how did you find the Austrian School of Economics?
DL – That is a long story. I graduated as an economist in 1987 and was trained as a Keynesian. What is more, my first job outside my family business (my dad was an entrepreneur and technically my first boss) was in the Central Bank. I was even a supporter of a social democratic party (called Acción Democrática).
But the failure of governments since 1983 made me search tirelessly for new answers. First I looked for them at the Chicago School and I was somewhat disappointed. This led me to find answers in history. So I decided to study that discipline.
Since I am an economist at heart, I devoted myself to economic history and for my doctorate I decided to study the thinking of Henrique Pérez Dupuy. I found surprising the level of affinity between what I thought economics should be and what this man wrote. There is a bibliography of 15 books which gather the articles he published in the Venezuelan press.
Thanks to Pérez Dupuy I became acquainted with Ludwing von Mises and Friedrich von Hayek. Wilhelm Röpke was also quoted by Pérez Dupuy. So at one point I bought Human Action, by Mises. When I started reading it I felt a deep affinity with the book and discovered that I had naturally come to that way of understanding the economy.
In the beginning of the 21st century, I found the Mises Institute website. There was a Test called How Austrian Are You? I took the test and the answer I received by mail was fabulous. According to Mises Institute I was 96% Austrian and 4% Monetarist. I was not Keynesian anymore and I finally understood why I had such a problematic relationship with my colleagues at the university.
Today I take it, but I still keep studying and trying to learn more and more about the Austrian School. I want to transmit this knowledge to my students, and maybe form a group of people interested in these topics.
FF – How does the Austrian School relate to your History background?
DL – I feel like Mises in socialist Vienna (after the Great War and) before Nazism. I have known the reality of the failure of socialism in my own flesh. And as I live in Venezuela, I want to show that this is an absolute failure always and everywhere. Socialism, whatever form it may take, only brings economic destruction and worsening of the conditions of humans life.
We must insist that all the governments we have had, regardless of whether they are civilian or military, whether they are Left or Right, have had as a common sign that they have not allowed economic freedom and that is why Venezuela is in this terrible crisis.
The Austrian School is the school of economic thought with the most explanatory power. That is why I have come to the awareness that I am a tropical Austrian.
FF – What are the key insights of Austrian Economics for Latin America?
DL – Latin America as a whole is victim the same disease as Venezuela. Venezuela has the most bloated state and public sector, that is why it is the one who suffers the most. But this should be a lesson for the rest of the Latin American countries.
The solution to this disease should be to reduce the size of governments, reduce public spending and taxes, and minimize the degree of economic intervention.
Before 1973 our government did not own any companies and Venezuela grew 6.5 percent year-on-year. In contrast, between 1974 and 1998 we experimented with democratic socialism and brought GDP growth to 1.9 percent year-on-year. Since 1999 we are experimenting with scientific socialism and the rhythm is 0.0 percent or negative.
Venezuela was never a country of economic freedoms. But when we had less public spending, we grew more. I show that to my students with the hope that they will reconsider and think about what we have done with our country.
Besides public spending and the size of the state, the most important thing is to maintain property rights and create a justice system that provides trust. Limiting regulations and legislation is also a must.
FF – Venezuela seems to be a case of Anti-Austrian Economics…
DL – Venezuela is on the contrary path to Austrian ideas and the result is atrocious. We seem to have forgotten that, between 1940 and 1973, with a partially private central bank which did not have an active monetary policy, an oil industry in the hands of transnational corporations that exploited the resource and paid taxes and royalties, a relatively small size government, and fiscal discipline the result was that growth of 6.5% year-on-year that I indicated before.
Since 1974, on the contrary, we have been consistent with socialism in its different forms. At the beginning with a Keynesian approach. Now with something similar to the USSR and Cuba.
A true breaking point was the second presidency of Carlos Andrés Pérez (1989–1993). This is because he promised to privatize and solve the fiscal problem. But the privatizations did not come and, on top of that, public spending grew and a fiscal reform which raised taxes was implemented. Nonetheless, these sorts of policies are labeled as “neoliberal.”
That is why it comes as no surprise that today one never hears about reduction in public spending or taxes. On the contrary, technocrats and politicians want to maintain the current level of spending and just raise taxes to get more revenue… as if that would not affect the development and accumulation of wealth!
FF – Before we wrap up, tell us a few words about another great Venezuelan – Carlos Rangel.
DL – In Venezuela we all have a socialist past. I was a social democrat and something similar happened with Carlos Rangel.
He was a social democrat and evolved due to reading the liberals. Thus, he arrived to the conclusion that Venezuela and Latin America was doing badly. He reached his conclusion in the 70s, precisely when Venezuela was mutating because of the Keynesian experiment.
His words were not understood. There is a famous anecdote to show this. As Rangel was trying to hold a lecture at the Central University, there were huge demonstrations and riots outside. Someone even threw a gas grenade to force people to abandon the auditorium.
Rangel identified many of the errors that I referred to throughout this interview. Unfortunately, his life ended abruptly, when he probably had much to offer. His intellectual production was thus limited to two books. Namely, Del buen salvaje al buen revolucionario and El Tercermundismo. Both are sociological analysis of the Latin American reality and specifically of the Venezuelan one.
Originally published at The Austrian Economics Center
[Also available to listen to as an Audio Mises Daily] A superficial observer of present-day ideologies could easily fail to recognize the prevailing bigotry of the molders of public opinion and the machinations which render inaudible the voice of dissenters. There seems to be disagreement with regard to issues considered as important. Communists, socialists and interventionists and the various sects and schools of these parties are fighting each other with such zeal that attention is diverted from the fundamental dogmas with regard to which there is full accord among them. On the other hand, the few independent thinkers who have the courage to question these dogmas are virtually outlawed, and their ideas cannot reach the reading public. The tremendous machine of “progressive” propaganda and indoctrination has well succeeded in enforcing its taboos. The intolerant orthodoxy of the self-styled “unorthodox” schools dominates the scene.
This “unorthodox” dogmatism is a self-contradictory and confused mixture of various doctrines incompatible with one another. It is eclecticism at its worst, a garbled collection of surmises borrowed from fallacies and misconceptions long since exploded. It includes scraps from many socialist authors, both “utopian” and “scientific Marxian,” from the German Historical School, the Fabians, the American Institutionalists, the French Syndicalists, the Technocrats. It repeats errors of Godwin, Carlyle, Ruskin, Bismarck, Sorel, Veblen and a host of less well-known men.
The fundamental dogma of this creed declares that poverty is an outcome of iniquitous social institutions. The original sin that deprived mankind of the blissful life in the Garden of Eden was the establishment of private property and enterprise. Capitalism serves only the selfish interests of rugged exploiters. It dooms the masses of righteous men to progressing impoverishment and degradation. What is needed to make all people prosperous is the taming of the greedy exploiters by the great god called State. The “service” motive must be substituted for the “profit” motive. Fortunately, they say, no intrigues and no brutality on the part of the infernal “economic royalists” can quell the reform movement. The coming of an age of central planning is inevitable.
Then there will be plenty and abundance for all. Those eager to accelerate this great transformation call themselves “progressives” precisely because they pretend that they are working for the realization of what is both desirable and in accordance with the inexorable laws of historical evolution. They disparage as reactionaries all those who are committed to the vain effort of stopping what they call “progress.”
From the point of view of these dogmas the “progressives” advocate certain policies which, as they pretend, could alleviate immediately the lot of the suffering masses. They recommend, e.g., credit expansion and increasing the amount of money in circulation, minimum wage rates to be decreed and enforced either by the government or by labor union pressure and violence, control of commodity prices and rents and other interventionist measures. But the economists have demonstrated that all such nostrums fail to bring about those results which their advocates want to attain. Their outcome is, from the very point of view of those recommending them and resorting to their execution, even more unsatisfactory than the previous state of affairs which they were designed to alter. Credit expansion results in the recurrence of economic crisis and periods of depression. Inflation makes the prices of all commodities and services soar. The attempts to enforce wage rates higher than those the unhampered market would have determined produce mass unemployment prolonged year after year. Price ceilings result in a drop in the supply of commodities affected. The economists have proved these theorems in an irrefutable way. No “progressive” pseudo-economist ever tried to refute them.
The essential charge brought by the “progressives” against capitalism is that the recurrence of crisis and depressions and mass unemployment are its inherent features. The demonstration that these phenomena are, on the contrary, the result of the interventionist attempts to regulate capitalism and to improve the conditions of the common man give the “progressive” ideology the finishing stroke. As the “progressives” are not in a position to advance any tenable objections to the teachings of the economists, they try to conceal them from the people and especially also from the intellectuals and the university students. Any mentioning of these heresies is strictly forbidden. Their authors are called names, and the students are dissuaded from reading their “crazy stuff.”
As the “progressive” dogmatist sees things, there are two groups of men quarreling about how much of the “national income” each of them should take for themselves. The propertied class, the entrepreneurs and the capitalists, to whom they often refer as “management,” is not prepared to leave to “labor”—i.e., the wage earners and employees—more than a trifle, just a little bit more than bare sustenance. Labor, as may easily be understood, annoyed by management’s greed, is inclined to lend an ear to the radicals, to the communists, who want to expropriate management entirely. However, the majority of the working class is moderate enough not to indulge in excessive radicalism. They reject communism and are ready to content themselves with less than the total confiscation of “unearned” income. They aim at a middle-of-the-road solution, at planning, the welfare state, socialism. In this controversy the intellectuals who allegedly do not belong to either of the two opposite camps are called to act as arbiters.
They—the professors, the representatives of science, and the writers, the representatives of literature—must shun the extremists of each group, those who recommend capitalism as well as those who endorse communism. They must side with the moderates. They must stand for planning, the welfare state, socialism, and they must support all measures designed to curb the greed of management and to prevent it from abusing its economic power.There is no need to enter anew into a detailed analysis of all the fallacies and contradictions implied in this way of thinking. It is enough to single out three fundamental errors.
First: The great ideological conflict of our age is not a struggle about the distribution of the “national income.” It is not a quarrel between two classes each of which is eager to appropriate to itself the greatest possible portion of a total sum available for distribution. It is a dissension concerning the choice of the most adequate system of society’s economic organization. The question is, which of the two systems, capitalism or socialism, warrants a higher productivity of human efforts to improve people’s standard of living. The question is, also, whether socialism can be considered as a substitute for capitalism, whether any rational conduct of production activities, i.e., conduct based on economic calculation, can be accomplished under socialist conditions.
The bigotry and the dogmatism of the socialists manifest themselves in the fact that they stubbornly refuse to enter into an examination of these problems. With them it is a foregone conclusion that capitalism is the worst of all evils and socialism the incarnation of everything that is good. Every attempt to analyze the economic problems of a socialist commonwealth is considered as a crime of lèse majesté. As the conditions prevailing in the Western countries do not yet permit the liquidation of such offenders in the Russian way, they insult and vilify them, cast suspicion upon their motives and boycott them.These last two sentences do not refer to three or four socialist authors of our time who-very late indeed and in a very unsatisfactory way-began to examine the economic problems of socialism. But they are literally true for all other socialists from the early origins of the socialist ideas down to our day .
Second: There is no economic difference between socialism and communism. Both terms, socialism and communism, denote the same system of society’s economic organization, i.e., public control of all the means of production as distinct from private control of the means of production, namely capitalism. The two terms, socialism and communism, are synonyms. The document which all Marxian socialists consider as the unshakable foundation of their creed is called the Communist Manifesto. On the other hand, the official name of the communist Russian empire is Union of the Socialist Soviet Republics (U.S.S.R.).About attempts of Stalin to make a spurious distinction between socialism and communism, d. Mises. Planned Chaos.
The antagonism between the present-day communist and socialist parties does not concern the ultimate goal of their policies. It refers mainly to the attitude of the Russian dictators to subjugate as many countries as possible, first of all the United States. It refers, furthermore, to the question of whether the realization of public control of the means of production should be achieved by constitutional methods or by a violent overthrow of the government in power.
Neither do the terms “planning” and “welfare state” as they are used in the language of economists, statesmen, politicians and all other people signify something different from the final goal of socialism and communism. Planning means that the plan of the government should be substituted for the plans of the individual citizens. It means that the entrepreneurs and capitalists should be deprived of the discretion to employ their capital according to their own designs and should be obliged to comply unconditionally with the orders issued by a central planning board or office. This amounts to the transfer of control from the entrepreneurs and capitalists to the government.
It is, therefore, a serious blunder to consider socialism, planning or the welfare state as solutions to the problem of society’s economic organization which would differ from that of communism and which would have to be estimated as “less absolute” or “less radical.” Socialism and planning are not antidotes for communism as many people seem to believe. A socialist is more moderate than a communist insofar as he does not hand out secret documents of his own country to Russian agents and does not plot to assassinate anticommunist bourgeois. This is, of course, a very important difference. But it has no reference whatever to the ultimate goal of political action.
Third: Capitalism and socialism are two distinct patterns of social organization. Private control of the means of production and public control are contradictory notions and not merely contrary notions. There is no such thing as a mixed economy, a system that would stand midway between capitalism and socialism. Those advocating what is erroneously believed to be a middle-of-the-road solution do not recommend a compromise between capitalism and socialism, but a third pattern which has its own particular features and must be judged according to its own merits. This third system that the economists call interventionism does not combine, as its champions claim, some of the features of capitalism with some of socialism. It is something entirely different from each of them. The economists who declare that interventionism does not attain those ends which its supporters want to attain but makes things worse—not from the economists’ own point of view, but from the very point of view of the advocates of interventionism—are not intransigent and extremists. They merely describe the inevitable consequences of interventionism.
When Marx and Engels in the Communist Manifesto advocated definite interventionist measures, they did not mean to recommend a compromise between socialism and capitalism. They considered these measures—incidentally, the same measures which are today the essence of the New Deal and Fair Deal policies—as first steps on the way toward the establishment of full communism. They themselves described these measures as “economically insufficient and untenable,” and they asked for them only because they “in the course of the movement outstrip themselves, necessitate further inroads upon the old social order, and are unavoidable as a means of entirely revolutionizing the mode of production.”
Thus the social and economic philosophy of the “progressives” is a plea for socialism and communism.
Excerpted from The Anti-Capitalist Mentality
The abject practical failure of the Marxist revolutionaries in the post-WWI period had done much harm to their image as the vanguard of social progress.
The explanation for this failure in the writings of Mises, Max Weber, and Boris Brutzkus had led many economists to revise their views about the suitable scope of government within society. But others remained unrepentant advocates of the total state. They merely rejected the specifically egalitarian agenda of the socialists.
The uncontested leader of this group was Werner Sombart, the greatest star among the interwar economists in Germany. Sombart had started his career popularizing Marxism in academic circles with his 1896 book Sozialismus und soziale Bewegung im 19. Jahrhundert (Socialism and Social Action in the Nineteenth Century).Before Sombart’s appearance, the German universities received Marx’s writings very critically. In the United States, too, the rise of Marxism encountered the same reservations in academic circles until, some forty-five years after Sombart, Joseph Schumpeter popularized Marx as an important thinker in his Capitalism, Socialism, and Democracy (New York: Harper & Row, 1942). Later editions testified to Sombart’s increasing estrangement with his initial Marxist ideals. The tenth edition, which appeared under a new title in 1924, featured an outright demolition of Marxist socialism.Werner Sombart, Der proletarische Sozialismus (“Marxismus”), 10th ed., 2 vols. (Jena: Gustav Fischer, 1924). Sombart had turned back to the mainstream Schmollerite socialism, which advocated the total state without an egalitarian agenda.Here is the most favorable thing Mises had to say about Sombart: “He was highly gifted, but at no time did he endeavor to think and work seriously. ... And yet, it was more stimulating to talk to Sombart than to most other professors. At least he was not stupid and obtuse.” Mises, Erinnerungen (Stuttgart: Gustav Fischer Verlag, 1978), p. 68; Notes and Recollections (Spring Mills, Penn.: Libertarian Press, 1978), p. 103.
Sombart’s intellectual qualities had gained him a place of preeminence. Where most Marxist intellectuals held dogmatically to the tenets of Marx and Engels, Sombart sought to analyze and develop their doctrines with a critical mind in quest of objectivity. This made his work the perfect target for a thorough criticism of the intellectual current of anti-Marxist socialism, and Mises provided such a criticism in an article with the title “Antimarxismus” (Anti-Marxism).Mises, “Antimarxismus,” Weltwirtschaftliches Archiv 21 (1925) reprinted in Mises, Kritik des Interventionismus, pp. 91–122; translated as “Anti-Marxism,” in A Critique of Interventionism, pp. 107–38.
Already in his article on price controls, Mises had pointed out that the shortcomings of interventionism did not result from the egalitarian agenda that some governments pursued, but from the very nature of government intervention itself, namely, the infringement of private property rights. Socialism and interventionism were destructive economic systems whether explicitly egalitarian or not. They would be unsuitable forms of social organization even if they pursued some other ideal of distribution—even meritocracy. There might be certain superficial similarities between a free society and a non-egalitarian one controlled by a total state, but these two would still be essentially different:
On the surface the social ideal of etatism does not differ from the social order of capitalism. Etatism does not seek to overthrow the traditional legal order and formally convert all private property in production to public property. . . . But in substance all enterprises are to become government operations. Under this practice, the owners will keep their names and trademarks on the property and the right to an “appropriate” income or one “befitting their ranks.” Every business becomes an office and every occupation a civil service. . . . Prices are set by government, and government determines what is to be produced, how it is to be produced, and in what quantities. There is no speculation, no “extraordinary” profits, no losses. There is no innovation, except for that ordered by government. Government guides and supervises everything.Mises, Kritik des Interventionismus, pp. 124f.; A Critique of Interventionism, pp. 140f.
Mises showed that the error in the idea of the omnipotent state has nothing to do with the state’s particular agenda. The government is not omnipotent if its goal is to improve “collective life” (as opposed to that of mere aggregates of individuals). But neither is it omnipotent if it seeks to enhance the welfare of the totality of individual citizens. In both cases, government intervention is counterproductive. It follows that the time-honored and seemingly significant distinction between individualism and collectivism is of only secondary importance. The primary distinction is between policies that work and policies that do not work, which leads in turn to the distinction between a social order based on private property (which works) and those social orders that depend on infringements of private property rights (and do not work). It is therefore beside the point whether individuals or collectives run the economy—provided only that the property rights of all individual members of the collectives are preserved. It also follows that the size of the firmis of no importance. As long as private property is respected, the buying decisions of the consumers reward only those companies that offer the best products. If these companies are larger than others, so be it.Keynes was convinced that, in attacking and criticizing individualism, he had destroyed the case for laissez-faire. See John Maynard Keynes, The End of Laissez-Faire (London: Hogarth Press, 1926), pp. 39f. The postulate of a dichotomy between individualism and collectivism led Keynes to anticipate the now-famous Coasean view on the problem of optimal social organization. Thus Keynes surmised that the “ideal size for the unit of control and organization lies somewhere between the individual and the modern State” (ibid., p. 41). The Coasean theory is best expressed in Ronald Coase, The Firm, the Market, and the Law (Chicago: University of Chicago Press, 1988).
Mises emphasized this fact against the doctrines of Dietzel, Karl Pribram, and Spann, which had a great influence on interwar political thought in Germany and, after World War II, in the wider western world. Dietzel and Pribram sided with individualism, whereas Spann championed collectivism, but they all agreed that these were the ultimate categories and that all political points of view derived from them.Heinrich Dietzel, “Individualismus,” Handwörterbuch der Staaswissenschaften, 4th ed. (1923), vol. 5; Alfred Pribram, Die Entstehung der individualistischen Sozialphilosophie (Leipzig: Hirschfeld, 1912); Othmar Spann, Der Wahre Staat (Leipzig: Quelle & Meyer, 1921). Mises disagreed.
He argued that there was a point of view that was derived from neither individualism nor collectivism, namely, the utilitarian method of social analysis.Mises, Kritik des Interventionismus, pp. 95f., 111. He stated:In the final analysis, there is no conflict of interest between society and the individual, as everyone can pursue his interests more efficiently in society than in isolation. The sacrifices the individual makes to society are merely temporary, surrendering a small advantage in order to attain a greater one. This is the essence of the often cited doctrine of the harmony of interests. (A Critique of Interventionism, pp. 112f.) He had already proved how successful this method was in analyzing the static and dynamic problems of social “wholes” such as language communities, and he emphasized that the analysis of such wholes is the very point of theoretical social science.“What society is, how it originates, how it changes—these alone can be the problems which scientific sociology sets itself.” Mises, Socialism: An Economic and Sociological Analysis (Indianapolis: Liberty Fund, 1981). To be perfectly clear, Mises believed that the positive analysis of the emergence and transformation of social wholes had to rely on methodological individualism. Based on this analysis, one could apply the utilitarian method, that is, raise the question whether any given policy was suitable to attain its goals. Othmar Spann rejected not only individualism as a political orientation, but also as a methodological device. It was fallacious to believe that individual action could be understood out of its wider social context, just as it was false that the proper understanding of social wholes required that the social analysis itself be holistic.
The utilitarian method alone was a truly scientific one because it traced all social phenomena back to facts of experience:
The utilitarian social doctrine does not engage in metaphysics, but takes as its point of departure the established fact that all living beings affirm their will to live and grow. The higher productivity of labor performed in division of labor, when compared with isolated action, is ever more uniting individuals to association. Society is division and association of labor.Mises, Kritik des Interventionismus, p. 96; A Critique of Interventionism, p. 112.
Each person seeks to enhance his welfare, and cooperative labor is more productive than isolated labor. Therefore, insofar as the growth of a person’s welfare presupposes greater quantities of material goods, the person can best attain his ends by engaging in a division of labor. This is how society comes into being.
All elements in this economic explanation of society are ascertainable facts. In contrast, the doctrines of individualism and collectivism do not lend themselves to any such causal explanation of the origin of society because they are based on postulates rather than on analysis of fact. And Mises proceeded to show that the same criticism also applied to the Marxist theory of proletarian class struggle. He did not deny that human history featured many group conflicts and that they often had great importance for the course of events. Rather, he argued that the fashionable struggle theories—of which the Marxist theory of class struggle was but one particular instance—purported to be much more than they really were. Group conflicts were not, and could not possibly be, the basic elements of human life. The real question was how any group could come into existence in the first place. One first had to explain the formation of groups before one could explain the struggle between them. But all struggle theorists, Marx included, failed on this front.
The reason for this negligence is not difficult to detect. It is impossible to demonstrate a principle of association that exists within a collective group only, and that is inoperative beyond it. If war and strife are the driving forces of all social development, why should this be true for classes, races, and nations only, and not for war among all individuals? If we take this warfare sociology to its logical conclusion we arrive at no social doctrine at all, but at “a theory of unsociability.”Mises, Kritik des Interventionismus, p. 100; A Critique of Interventionism, p. 116. Mises quotes here Paul Barth, Die Philosophie der Geschichte als Soziologie, 3rd ed. (Leipzig: Reisland, 1922), p. 260.
Mises pointed out that Marx’s theory of class struggle even failed to give an empirical account of its most basic concept. What is a “class” in the Marxist sense? Marx had never defined it. “And it is significant that the posthumous manuscript of the third volume of Das Kapital halts abruptly at the very place that was to deal with classes.” Mises went on:
Since his death more than forty years have passed, and the class struggle has become the cornerstone of modern German sociology. And yet we continue to await its scientific definition and delineation. No less vague are the concepts of class interests, class condition, and class war, and the ideas on the relationship between conditions, class interests, and class ideology.Mises, Kritik des Interventionismus, pp. 101f.; A Critique of Interventionism, pp. 117f.
Werner Sombart, along with the great majority of German sociologists of whom he was the undisputed leader, had adopted the Marxist view that proletarian class struggle was the ultimate driving force in modern societies. He was now an opponent of Marxist ideology, but his analyses still remained Marxian. He merely refrained from drawing all the practical conclusions, which Marx and the Marxists had consistently deduced, from the theory of class struggle. He did not and could not provide an alternative to the Marxist scenario of social evolution. His only objection came in the form of a postulate: things should not happen as they would happen according to the theory of class struggle, therefore government should resist such developments. Yet with this admission, Sombart and the bulk of the German sociologists had again left the realm of science and entered that of religion and ethics. Sombart in fact championed a return to medieval forms of social organization—the guilds—just as Keynes in England proposed “a return, it may be said, towards medieval conceptions of separate autonomies.”Keynes, The End of Laissez-Faire, pp. 42f. Similarly, the few theorists who had thoroughly criticized Marx’s concept of class struggle, like Othmar Spann, marveled at the alleged blessings of national socialism in the middle ages.
Mises concluded:
for every scientific thinker the objectionable point of Marxism is its theory, which seems to cause no offence to the Anti-Marxist. . . . The Anti-Marxist merely objects to the political symptoms of the Marxian system, not to its scientific content. He regrets the harm done by Marxian policies to the German people, but is blind to the harm done to German intellectual life by the platitudes and deficiencies of Marxian problems and solutions. Above all, he fails to perceive that political and economic troubles are consequences of this intellectual calamity. He does not appreciate the importance of science for everyday living, and, under the influence of Marxism, believes that “real” power instead of ideas is shaping history.Mises, Kritik des Interventionismus, p. 121; A Critique of Interventionism, p. 137.
“Anti-Marxism” caused outrage among the Marxists. What was Mises’s sin? First, he had dared criticize the great master with a penetrating analysis of the incurable shortcomings of Marx’s theory of class struggle. Second, he had again contended that from an economic point of view Marxist socialism was not essentially different from the various new brands of national socialism that had begun to spring up in the 1920s, mostly in reaction against Marxist movements. Thus a fraction of Italian socialists, who rejected the teachings of Marx and called themselves “Fascists,” rose to power under the leadership of Benito Mussolini. There was also a movement of non-Marxist “National Socialists” in Germany. The father of this movement was Friedrich Naumann who, by a strange coincidence, later came to be regarded as the godfather of twentieth-century German liberalism.See Ralph Raico, Die Partei der Freiheit (Stuttgart: Lucius & Lucius, 1999), chap. 6. The leader of the National Socialists from the 1920s until their bitter end was, of course, Adolf Hitler.
Marxist socialists vociferously object to being classified under the same heading that includes Fascist Socialists and National Socialists. But as Mises showed, all distinctions between these groups are on the surface. Economically, they are united.
Excerpted with minor revision from Mises: Last Knight of Liberalism
Ludwig von Mises's Nation, State, and Economy is a rationalist-utilitarian analysis of the three manifestations of German imperialism:
past German imperialism for the sake of national greatness,economic central planning in World War I (war socialism), which accelerated the introduction of full-blown socialism, andthe blossoming imperialism of the social democrats under the banner of syndicalism and the dictatorship of the proletariat. Although Mises does not define imperialism explicitly, he understands it to be the exact opposite of “self-determination, self-administration, self-rule.”Mises, Nation, Staat und Wirtschaft, p. 37; Nation, State, and Economy, p. 46. Liberal democracy was historically embodied in “the ideas of 1789,” which demanded “the most exact and complete application” of the principles of “full freedom of movement of persons and goods, the most comprehensive protection of the property and freedom of each individual,” and “removal of all state compulsion in the school system.”Mises, Nation, Staat und Wirtschaft, p. 79; Nation, State, and Economy, p. 96. In contrast, the majority principle was in his eyes merely a means, rather than a constituent part of democracy; see Nation, Staat und Wirtschaft, p. 36.
He explained that war socialism, far from supporting the German war effort, was one of five disastrous errors that had led the Central Powers to such a crushing defeat.The other errors were military and political. The military errors were, (1) to expect the war to be short, and (2) to expect miracles from unceasing offensives. The political errors were (3) not to anticipate a war on all fronts, and (4) to make the interests of the East-Elbian Junkers supreme in German politics. See Mises, Nation, Staat und Wirtschaft, pp. 111ff. To its advocates, the emergency situation that confronted the German economy at the outset of the war, or the great tasks that it now confronted, were sufficient justification for compulsory central planning on all levels. But such a justification is based in logical fallacy. It was true, Mises granted, that there was an emergency and that the structure of production had to be adjusted as quickly as possible from peacetime to wartime conditions. But it does not follow that the government should then run the economy. The correct question was whether central planning would be better than the free market at achieving the necessary adjustments. Mises proceeded to demonstrate that this was not the case.His views on war finance had an impact on young free-market oriented economists of the interwar period such as Stefan Possony (Die Wehrwirtschaft des totalen Krieges [Vienna: Gerold, 1938]) and Georg Holzbauer (Barzahlung und Zahlungsmittelversorgung in militärisch besetzten Gebieten [Jena: Gustav Fischer, 1939]), but also on interventionists like Adolf Lampe (Allgemeine Wehrwirtschaft [Jena: Gustav Fischer, 1938]). Lampe had a preference for “playing markets” though. He suggested that entrepreneurial activities be centrally guided.
He also showed that the apparent blessings of wartime socialism were a dangerous illusion, created by the accompany inginflation. The increase of all prices had falsified the economic calculations of the entrepreneurs. The higher entries in their books falsified their profit-and-loss accounting, to the point that they believed they were making profits when in fact they were consuming their capital. Similarly, he debunked the widespread myth that war finance through government debts was a way of making future generations pay for the war effort. This view, he said, was “completely wrong”:
War can be waged only with present goods. One can fight only with weapons that are already on hand; one can take everything needed for war only from wealth already on hand. From the economic point of view, the present generation wages war, and it must also bear all material costs of war.Mises, Nation, Staat und Wirtschaft, p. 137; Nation, State, and Economy, p. 168. He went on to explain that war finance through debts (rather than through taxation or inflation) merely modifies the future distribution of resources.
General misunderstanding of the economic nature and consequences of wartime central planning was instrumental in reducing resistance to the accelerated introduction of full socialism.
The socialists themselves denounced the wartime economic regime, partly because they did not welcome an association in the minds of the general public between socialism and war, but also in part from their own intellectual confusion. Mises objected:
[S]ocialism means the transfer of the means of production out of the private ownership of individuals into the ownership of society. That alone and nothing else is socialism. All the rest is unimportant. It is a matter of complete indifference for deciding our question, for example, who holds power in a socialized community, whether a hereditary emperor, a Caesar, or the democratically organized whole of the people.Mises, Nation, Staat und Wirtschaft, p. 140; Nation, State, and Economy, p. 172.
In the third chapter of Nation, State, and Economy, Mises explained that the confusion about the nature of socialism resulted from the fact that the program of the socialist parties in Germany and Austria integrated three distinct elements: Marxist centralist socialism, syndicalism (radical labor-unionism), and democratic government.
The socialists had championed democracy because Karl Marx’s theory predicted that socialism would be the rule of the proletarian majority.Mises observes that the German socialists had stuck to the tenet of democracy only because until 1914 they had always been in the opposition and therefore bore no responsibility for their co-nationals in the eastern territories. With the onset of World War I, when they came to power in Germany and Austria, they slowly changed their minds and would have followed in the footsteps of the German liberals, but with the loss of the eastern provinces the problem of mixed nations disappeared as well. See Mises, Nation, Staat und Wirtschaft, pp. 105f. This part of their program, in which they continued the old classical-liberal agenda that German liberals themselves had abandoned, had created widespread sympathy for the socialist cause even in bourgeois circles. But majority rule was not a central tenet of socialism. The only essential element was central control of all means of production through a dictatorship of the proletariat. And it was this precept of the socialist creed that would have to stand up to rational scrutiny, or else socialism would have to be discarded: is the compulsory central control of production more efficient than private ownership of the means of production? See Mises, Nation, Staat und Wirtschaft, p. 152f.; Nation, State, and Economy, p. 185f. All other considerations were secondary. For example, Mises observed that there was no necessity, in 1919, to wait for the proletarians to become a majority in Germany and Austria, because the majority of the general population was already socialist. But if the socialist case for central planning was invalid, then no power on earth could maintain a socialist order.
The dictatorship of the proletariat wants to use terror to nip any stirring up of opposition in the bud. Socialism is believed established for all eternity once its property has been taken away from the bourgeoisie and all possibility of public criticism has been abolished. It cannot be denied, of course, that much can be done in this way, that, above all, all European civilization can thus be destroyed; but one does not thereby build a socialist order of society. If the communist social order is less suited than one resting on private ownership of the means of production to bring about “the greatest happiness of the greatest number,” then the ideas of liberalism cannot be killed even by terrorist measures.Mises, Nation, Staat und Wirtschaft, p. 169; Nation, State, and Economy, p. 206.
Mises pointed out that the socialist case crucially relied on the conviction that once the socialized society is realized, its members would be guided by entirely different motivations than from those of their former lives. Rather than pursuing their own interests, they would now think only of serving their community. But if one is skeptical of the feasibility of such a New Socialist Man—if one seeks instead a system that will reconcile the private interests of real-world human beings with those of the larger community, then liberalism had already found such a system: private property.See Mises, Nation, Staat und Wirtschaft, pp. 157ff. In his later work, based on the socialist-calculation argument, he would show that the problem is the impossibility of identifying what the interests of the commonwealth are.
In their daily politics, the socialists had long since turned away from Marxist orthodoxy to become the political branch of the labor unions, which Marx had despised as “petty bourgeois.” They espoused the down-to-earth agenda of their constituency and trumpeted their Marxist heritage only in election speeches.But from both a theoretical and practical point of view, the labor-unionist program was even worse than Marxist socialism. It destroyed the division of labor and the spirit of cooperation:
Syndicalism deliberately places the producer interest of the workers in the foreground. In making worker groups owners of the means of production (not in so many words but in substance), it does not abolish private property. It also does not assure equality. It does remove the existing inequality of distribution but introduces a new one, for the value of the capital invested in individual enterprises or sectors of production does not correspond at all to the number of workers employed in them. The income of each single worker will be all the greater, the smaller the number of fellow workers employed in his enterprise or sector of production and the greater the value of the material means of production employed in it. The syndicalistically organized state would be no socialist state but a state of worker capitalism, since the individual worker groups would be owners of the capital.
Syndicalism would make all repatterning of production impossible; it leaves no room free for economic progress. In its entire intellectual character it suits the age of peasants and craftsmen, in which economic relations are rather stationary.Mises, Nation, Staat und Wirtschaft, pp. 163f.; Nation, State, and Economy, p. 199.
Labor-unionism is therefore purely destructive. It is locally organized robbery elevated to a general principle. Mises’s criticism did not focus on its moral reprehensibility, however, but on its inability to sustain the large-scale division of labor characteristic of modern civilization. Labor-unionism was an utterly unsuitable means to pursue the greatest happiness of the greatest number.
Excerpted from Chapter 8 of Mises: The Last Knight of Liberalism
A common criticism levied at the capitalist system is that resources are prioritized on the ability to pay. The wealthy are able to better compete for resources when compared to the poor, creating an inequitable distribution of resources in favor of the rich. A common solution presented to this perceived problem is to convert to a socialist society, where the State is responsible for provisioning and distributing goods. As the argument goes, if the government is responsible for this provisioning, the issue of inequitable distribution will be solved and everyone will have access. For example, this was the justification behind the formation of Canada’s Universal Care System and other such systems around the globe. By eliminating the profit motive, so goes the argument, medical services will no longer be sold to the highest bidder but to those with the greatest need, as is the common mantra of Communism.
However, reality is a harsh mistress. Because of the concept of scarce resources, even idealized communism will have to discriminate on who gets first use of available resources. Before discussing this, it is important to understand how an economic system distributes goods.
Time and Opportunity Cost Regardless of the economic system, all systems engage in a system of exchange. What is exchanged may be material in nature, as is common in barter systems, monetary, such as modern capitalist-leaning systems or, under socialist and communist structures, the most base asset, time.
Time is itself the base component in all resource production. At any moment in the day, time is expended on activity and cannot be refunded. An hour used is forever gone. This is the key driver behind the concept of opportunity costs. Whatever you elect to do with that hour of time, you give up a multitude of other options you can realistically perform with that same hour. An hour spent at the office is an hour no longer available to paint your house or hike in the woods (though not an hour lost traveling to Mars since that is currently not possible, so lost options are not infinite).
When evaluating the different economic systems, this opportunity cost must always be forefront in the mind. All systems mix land, labor, and capital within this opportunity cost framework. Even a hypothetical pure communist society will have to use up time accumulating capital as it is not possible to produce extensive resources without first constructing support structures, such as a factory, to do so.
Under modern capitalism, this time contribution is able to be stored and saved in the form of money. Money — with exceptions such as cronyist systems and salaries to involuntary bureaucrats (think a senator’s salary) — usually represents an individual’s contribution to society. Money allows individuals to produce a good or service and then bank that exchange for some future, unspecified good or service in return. The more units of this money an individual possesses, the greater contribution to society that individual provided.
How capitalism discriminates depends on the quality of the time of the individual bidding on assets in the market. If two individuals are willing to give up an hour of their time in exchange for a particular good, the individual who is able to earn $30 in a given hour has a distinct advantage over the individual who earns $7. In different terms, the $7 earner needs a full hour to purchase a $7 item while the $30 earner only needs 14 minutes. What this means is that the opportunity cost of spending a unit of currency is lower for the $30/hour earner than it is for the $7/hour earner. What this means is that the $30 earner is willing and able to engage in higher bids than the $7 earner.
To improve the ability to bid for goods in a capitalist economy, an individual has to increase the quality of an hour of labor. If the $7 earner wants to compete on equal footing with the $30 earner, he has to increase his own productivity value up to $30 per hour. This is done through various channels — training, education, and entrepreneurship being major avenues. Under this system, competing for new resources creates a self-reinforcing benefit for other actors on the market. When the $7 earner increases his productive value to $30, all the other actors in the market benefit from this as well. This is because a more productive worker produces more goods more cheaply, thus reducing everyone's cost of living and increasing the quality of life. Now the net pool of resources between the two actors has increased from $37 in an hour to $60 in an hour. If the original $30 actor wants to maintain his position, he must further increase his productivity in the market, further driving up the net resources available. This is why competitive capitalist economies continue to become wealthier as time goes on.
Under a socialist economy, all units of time become equal. The hour of one individual who provides a great deal to society is equal to someone who provides nothing. What a system where items are given away “free” does is now favors those with the most hours available to trade. In other words, the less valuable time is to the individual actor, the greater this actor’s competitive advantage becomes in attaining goods and services. If, for example, food is provisioned by the State, bread lines naturally form. To ensure access to resources under a socialist system, those who are able to pay more in hours, i.e., those who can stand the longest in line, will be the ones who have the greatest guarantee to receive the scarce resources. As time goes on, the available goods approach infinity, making what can be attained with an hour ever greater, benefiting all actors, even those whom have less productivity.
Under this system, the motivations and self-reinforcing element are the opposite of the capitalist structure. To increase resource competitiveness, an individual must reduce all other obligations. The hour spent at the bakery making the bread is an hour that is lost to someone else getting in line before them to get the bread. So the baker has to choose between either contributing materially to society or giving up this productivity to avoid losing out on resource distribution. The more individuals that drop out of productive activity increases the amount of time required to obtain even scarcer goods, further convincing more individuals to drop out of the factory and stand in distribution lines. This cycle eventually leads to total economic collapse, as is seen in just about every nation that attempts to move toward pure communism. As time goes on, the available resources approach zero, requiring ever greater amounts of time standing in lines to attain.
The Socialized-Medicine Example Even in hybrid systems like the United Kingdom still see these issues and from a different angle. In the NHS, time is the key currency to obtaining services. Individuals who are able to get in line early, tying up hospital beds well in advance of obtaining services, are better positioned to obtain those services. What this has done is favored low-urgency services over higher urgency ones. Seekers of low urgency operations are willing to wait lengthy amounts of time standing in line to obtain services while someone with a higher urgency medical need does not have the time available to wait in line. Low urgency and young are, therefore, “time wealthy” compared to the sick and elderly, who are time impoverished.
For example, the NHS has abysmal survival rates for cancer, which requires quick identification and treatment to survive, while tying up GPs, surgeons, and hospital beds for surgical virginity restoration who were able to get their slot in line early. One normally does not plan on getting cancer 18 weeks in advance while one can do so with a hymen repair procedure. A capitalist system would have the individual seeking cancer treatment able to outbid the individual seeking virginity restoration since the urgency of cancer treatment would price it well above virginity restoration.
No economic system is able to escape the realities of scarce resources and resource allocation must be made on some discriminatory level. Because of this, the choice of economic system must take into consideration motivations of resource attainment. If a system rewards productivity and value, as a hypothetical pure free market would, then the motivation is to produce greater value. If the system rewards the ability to stand in a long line for hours or weeks at a time, then the system will motivate people waiting in line and being unproductive, thus producing less value.
In any system, whatever good you consume must be paid for. Even under the hypothetical communist utopia, nothing is free.
The socialist policies of the Venezuela government continue to impose a living hell on its people. Hyperinflation has turned its currency to literal garbage. Mortality rates have skyrocketed for groups such as infants, pregnant mothers, and the elderly as clinics have shut down and medicine grown scarce. Food has disappeared from store shelves forcing the population to consume pets and zoo animals. A recent poll found that 78% of Venezuelans “reported trouble keeping themselves fed.”
Of course, this is not true for all Venezuelans.
Earlier this week President Nicolas Maduro was seen in a plush Istanbul restaurant lavishly dining on expensive steaks while smoking fine cigars, the check paid for by the wealth his regime has drained from his people. Once again we see that under socialism “all animals are equal, but some animals are more equal than others.”
While the outrage over Maduro’s obtuse opulence is well deserved, it serves as only a gaudy reminder of how socialism actually operates in the real world. The more controlled an economy becomes, the more it benefits those with power.
While less obvious than Maduro’s dinner prepared by celebrity chefs, we’ve seen this play out throughout the country. The regime understands that its survival depends upon keeping the guns of government pointed at the people, and not at themselves. As such, the country has fallen into rule by corruption, with the police and military being offered access to food and supplies in exchange for their loyalty.
Maduro’s government is able to benefit from the trade in a variety of ways. As a South American businessman told an AP reporter last year, a bribe to the right official allows him to sell his goods to the Venezuelan government. He can afford to pay it because the government pays him a higher price than international markets do. The government then takes the food and gives it to the military, who is then able to feed their families and sell the rest — and for dollars as opposed to increasingly worthless bolivars.
It’s been noted that in Venezuela today, black markets in food are “a better business than drugs.” As is the case with any other black market, the business is even better if it comes with the protection of a government badge. Not only is Maduro’s regime active in supplying the black markets of government officers, but they also unleash the police on the bachaqueros — illegal vendors — that compete with them.
This is not the only way that those with state privilege are able to profit from the horrors of socialism.
As the Miami Herald reported recently, those close to Maduro — including his stepsons — have been able to exploit the government’s currency exchanges at rates that don’t take into consideration the hyperinflation going on within the country. It has resulted in $1.2 billion money-laundering case filed in Miami:
In the Miami federal case, prosecutors charge that a network of Venezuelan businessmen and executives with the national oil company PDVSA managed to quickly turn $42 million worth of bolivars into $600 million in U.S. dollars by simply making a “loan” to the state-owned firm. PDVSA tapped into the government exchange to pay off the loan in a few months and, according to federal court records, funneled the windfall back to the ring. Its members then hid the money in Europe and the U.S. and bought up mansions from Cocoplum to Wellington in South Florida.
Russell Dallen, a Miami businessman who manages a capital investment company and formerly owned a newspaper in Venezuela, dubbed the government currency scheme a “perpetual money machine.”
“That’s one of the reasons why Venezuela has not changed this [government exchange] system,” said Dallen, a financial investor who has closely followed the money-laundering case.
This corruption, of course, is not unique to Maduro's regime — but simply a byproduct of the socialist system he inherited. Hugo Chavez may still remain popular among many within the country, but his own corruption has enabled his daughter to enjoy a life of luxury. Her wealth has been estimated in the billions, so she can even afford more houses than Bernie Sanders and nicer outfits than Alexandria Ocasio-Cortez.
Socialism is sold to the idealistic and naïve as a way to end the inequality that exists in a free market. In reality, it only changes the way in which power and privilege is consolidated. On the market, wealth is acquired through voluntary exchange and serving the desires of consumers — one of the many ways it makes us more humane. In socialism it’s acquired through force and brutality. As F.A. Hayek explained in The Road to Serfdom, the result is the worst rising to the top.
For the people in Venezuela, their future will not be improved by simply replacing Maduro for a more modest socialist leader. It can only come by rejecting the very ideology that has eroded away the country’s wealth for decades. Until then, those with political power will continue to live at the expense of their neighbors.
Paul Krugman has butchered numbers when writing about fiscal policy in nations such as France, Estonia, Germany, and the United Kingdom.
Today, we’re going to peruse his writings on Denmark.
Here’s some of what he wrote earlier this month.
Denmark can teach us…about the possibilities of creating a decent society. …Denmark, where tax receipts are 46 percent of GDP compared with 26 percent in the U.S., is arguably the most social-democratic country in the world. According to conservative doctrine, the combination of high taxes and aid to “takers” must really destroy incentives both to create jobs and to take them in any case. …what Denmark shows is that you can run a welfare state far more generous than we do – beyond the wildest dreams of U.S. progressives – and still have a highly successful economy. Indeed, while GDP per capita in Denmark is lower than in the U.S. – basically because of shorter work hours.
And here’s what he wrote a couple of days ago.
American politics has been dominated by a crusade against big government; Denmark has embraced an expansive government role, with public spending more than half of G.D.P. American politicians fear talk about redistribution of income from the rich to the less well-off; Denmark engages in such redistribution on a scale unimaginable here. …Conservative ideology says that Denmark’s policy choices should be disastrous, that grass should be growing in the streets of Copenhagen. …But if Denmark is a hellhole, it’s doing a very good job of hiding that fact: I was just there, and it looks awfully prosperous. …The simple fact is that life is better for most Danes than it is for their U.S. counterparts.
Interestingly, Krugman acknowledges that Denmark isn’t really socialist. Instead, it simply has a big welfare state.
But is Denmark socialist? …Denmark doesn’t at all fit the classic definition of socialism, which involves government ownership of the means of production. It is, instead, social-democratic: a market economy where the downsides of capitalism are mitigated by government action, including a very strong social safety net. …The simple fact is that there is far more misery in America than there needs to be. Every other advanced country has universal health care and a much stronger social safety net than we do.
He thinks that is a good thing, of course, and was making the same argument(using the same headline) in 2015.
…the Danes get a lot of things right, and in so doing refute just about everything U.S. conservatives say about economics. …Denmark maintains a welfare state — a set of government programs designed to provide economic security — that is beyond the wildest dreams of American liberals. …working-age families receive more than three times as much aid, as a share of G.D.P., as their U.S. counterparts. To pay for these programs, Denmark collects a lot of taxes. …Overall, Denmark’s tax take is almost half of national income, compared with 25 percent in the United States. …It’s hard to imagine a better refutation of anti-tax, anti-government economic doctrine, which insists that a system like Denmark’s would be completely unworkable.
As far as I can tell, all his numbers about Denmark are accurate, but his analysis is wrong.
He wants readers to believe that the lesson from Denmark is that there are no adverse economic consequences when nations impose a big welfare state and high taxes.
But that’s not what Danish economic history tells us. As with other Nordic nations, Denmark became a rich nation when government was relatively smalland taxes were modest.
And we know from historical data that economic performance significantly weakened after the fiscal burden of government was increased.
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Moreover, lawmakers are now trying to restrain government spending.
A Danish economist, Otto Brøns-Petersen, has a superb description of Denmark’s economic history.
The first thing to realize is that Denmark, as are the other Nordic countries, quite free markets, apart from their welfare state transfers and high government consumption. They tend to get rather high rankings on measures of the most free economies in the World. …Protection of property rights and the integrity of the legal system are very high by international standards, as is the soundness of the monetary system… Denmark has a long tradition for free trade… Credit markets are among the less regulated internationally. During the recent financial crisis, tax payers did not have to subsidize banks, and some banks were allowed to fail. The Danish labor market is very flexible: There is no legislated minimum wage, and there are few restrictions on hiring and firing.
Here’s the part that is a must-read.
Denmark did not become a rich country recently. …Danish per capita GDP relative to other countries reached a maximum 40-60 years ago… Denmark caught up to and overtook “old Europe” in the fifties, while it narrowed its gap to the US and other Western offsprings until the early 1970s, when the process of catching up came to a hold. …At the time Denmark became rich relative to the rest of the World, it was not a welfare state. In fact, Denmark has historically been a low tax country by international standards. Until the 1960s, the Danish tax revenue to GDP ratio was at the same level as the US, and lower than the British.
Unfortunately, policy veered in the wrong direction in the late 1960s, with very adverse consequences.
The sharp divergence in the Danish tax level really occurred in the second half of the 1960s, when first a left wing coalition government and then a right wing one increased the tax to GDP ratio by some ten percentage points. …government spending was to a large extent driven by increases in tax revenue stemming from the introduction of VAT and withholding taxes on wage income. …the welfare state attracted new clients and new programs were added, the economic crisis lead to increasing unemployment… By the early 1980s the economy was in very bad shape, with high unemployment, an inflationary deflation spiral, a huge and widening government deficit.
I can’t help but call you attention to Otto’s observation about how the VAT enabled a far larger burden of government.
But let’s not get sidetracked.
This chart shows how the tax burden in Denmark diverged from the United States.
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So what’s the bottom line?
Denmark first became rich, and then introduced the programs, which make up the welfare state. The huge increase in government spending has been accompanied by deep structural problems, which has made it necessary to reform the Danish economy and welfare state ever since. It can hardly be claimed that introducing the welfare state made Denmark rich; rather it was the other way around. Denmark first became rich, and then authorities began to redistribute some of the wealth.
Amen. I made the same point back in 2011.
Writing for PJ Media, Tyler O’Neil reviews the good and bad in Denmark and also echoes Otto’s analysis.
A deeper look at the history and current affairs of Denmark and the surrounding countries tells a different story, however. These countries’ benefits arguably spring from their free-market pasts, not their brief dalliance with big government. …During the early 1900s and following the Great Depression, Scandinavia’s small government and free markets fostered a culture of hard work that paid huge dividends in terms of prosperity.
Unfortunately, starting about 50 years ago, Denmark (like many other nations in the region) adopted an expensive welfare state. With bad results.
…the 1960s – 1990s expansion of welfare states actually held the Nordic countries back. After their experiment with socialistic welfare states, “Nordic citizens now have unusually high levels of sickness absence (despite being healthy societies), high youth unemployment and a poor record for integrating migrants into the labour force,” Sanandaji explains. Big government has weakened the strong culture which enabled welfare states in the first place… In 2013, roughly 240,000 people — nine percent of the potential work force — were receiving disability checks, and about 33,500 of them were under 40.
I fully agree. Denmark’s welfare state has created a problem. Simply stated, there are too many people who depend on government compared to the number of taxpayers who finance government.
I sometimes use the example of how many people are pulling the wagon compared to the number of people riding in the wagon. The Danish version uses Viking ships.
Fortunately, now there’s an effort to move back in the right direction.
Denmark now outranks even the United States as a good place to do business. …In 2013, it reduced early-retirement plans, and cut the term for unemployment benefits from four years to two. …In recent years, all the Nordic countries have decreased their corporate tax rates — each one is lower than in the United States. They also support free trade, unlike American Socialists.
Let’s look at some specific examples of how Denmark is trying to undo the damage of excessive government.
Bloomberg reported last year about the ongoing effort to reduce the nation’s fiscal burden.
When a European government raises the pension age and makes cuts to welfare programs, it’s usually because of dire finances. In Denmark’s case, it’s because of ideology. …Driving the new government’s push is a desire to finance a major round of income tax cuts. “We want to promote a society in which it is easier to support yourself and your family before you hand over a large share of your income to fund the costs of society,” the government of Prime Minister Lars Lokke Rasmussen wrote in its manifesto. It’s all part of a Danish drift toward the political right… Reforms introduced by successive governments over the years have already ensured that Denmark’s expensive welfare state is sustainable for years to come, says Torben M. Andersen, a professor of economics at the University of Aarhus and a former government adviser. These include raising the retirement age to 67 years from 65 years by 2025.
Denmark is also cutting back on college subsidies.
As one of a handful of countries that offers free tuition to college students, Denmark grants students enormous freedom… But some Danes, especially older citizens already in the labor force, say the extra freedom can eliminate a crucial sense of urgency for 20-somethings to become adults. The country now deals with “eternity students” — people who stick around at college for six years or more without any plans of graduating, solely because they don’t have any financial incentive to leave. …The country has made some headway to counter eternity students. In 2015, the Danish government proposed and passed an amendment to the Study Progress Reform… Jakobsen said the amendment has definitely reduced the trend of eternity students.
Now let’s get to my contribution to this discussion.
A few years ago, I created a “statism spectrum” to show how countries differ when looking at total economic freedom (fiscal policy, trade policy, regulatory policy, monetary policy, and quality of governance).
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And I pointed out that nations with onerous fiscal burdens can still rank relatively high if they have a very pro-market approach in other areas.
But I have to confess that my spectrum was a back-of-the-envelope exercise. I simply drew a line and then added six countries.
Time for some rigor. I downloaded the latest scores from the Fraser Institute’s Economic Freedom of the World and created this chart showing the relative ranking of all the countries (divided by category). As you can see, the United States and Denmark are both in the top category and they both have very similar levels of overall economic liberty.
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And to put those numbers in context, here’s the same chart, but also showing France, Greece, and Venezuela.
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In other words, there’s a lot to admire about Denmark. Yes, taxes are onerousand the burden of spending is still too high, but it’s nonetheless one of the most market-oriented countries in the world because of laissez-faire policies in other areas.
My bottom line is that Paul Krugman is right to praise Denmark.
My only gripe is that he likes the one thing that they’re doing wrong and overlooks all the things that make the country a relative success.
Moreover, he ignores all the recent efforts to reduce the fiscal burden of government, probably because that would require him to acknowledge that large public sectors are bad for growth.
Originally published at International Liberty
The debate on socialism has surfaced yet again with the recent congressional primary election victory of 28-year-old Alexandria Ocasio-Cortez, a member of the Democratic Socialists of America, to New York’s 14th Congressional District. Socialism is often held in contempt over its many failures, yet it still maintains support from young and old minds for being “great in theory, but not in practice.” This old quip is represented by the generations of thinkers that have tried to improve the economic system, but it ignores the undeniable truth: that socialism, in all of its manifestations, is untenable both in theory and in practice.
In recent history we have seen the rise and fall of many socialist states. Although the existing self-declared socialist states are kept alive by meager market reforms or neighboring-nation support, they maintain despotic control and low standards of living. We must ask what caused these nations to develop and then devolve so rapidly. Specifically, what does each state have in common? Each nation varies within their political and economic organization, but they all share centralized decision making, also known as central planning.
This fundamental attribute of the large industrial and agricultural states is best represented by a simple thought experiment, one that highlights the conflict that exists between government and society.
No Individualism Allowed To show this relationship, let us create our own imaginary planned society. Imagine you are the head of your own country. You are in charge of making decisions that will lead to the greatest benefit of your nation. This may be simple to do with only a few people, but real nations do not consist of just a few like-minded people. In reality they contain several million individuals with objectives and desires that may not reflect those of your central authority. When decisions are centralized, you will lack meaningful participation and input from those who stand to be affected by any policies created. This will lead to widespread disagreement and dissatisfaction among the citizenry. Due to the lack of information and ability to satisfy all conditions, you will find it virtually impossible to centrally plan successfully, as has been the fate of every country that has tried.
This most inherent and observable failure in socialist theory pertains to the abolition of private property. The most attractive aspect of socialism to many is the claim that under socialism, private property will be abolished, or collectively owned in order to attain an equitable distribution of resources. This proposition is famously quoted from Karl Marx that resources are to be distributed by a central planner “to each according to his needs.” This raises the question: how will the central planner effectively achieve this equitable distribution with the abolition of private property? When private property ceases to exist, there becomes nothing to buy and sell. When there is nothing to buy and sell, the universal means to make bids or offers of exchange necessarily goes with it. Money will be rendered obsolete in this vision of society and because of it, society will have no agreed upon terms of trade. When there is no agreed upon terms of trade, there will be no prices to relay the relative value of goods and services.
This is where socialist theory breaks down in all practical applications. Prices are the means of reflecting all available information within the market. Prices are the signal from each individual producer and consumer to inform each other of the relative preference or scarcity of any and all available goods and services. When the abolition of private property leads to the abolition of prices, every actor within the market, including the supposed omniscient central planner loses a vital calculative device that dictates how to efficiently apply the means of production to alternative uses in order to achieve maximum efficiency and welfare within the society. This in turn renders the central planners objective to economically plan with maximum efficiency and regard for well-being an impossibility.
With this error in socialist theory, the process to even begin making decisions for a nation with so many conflicting opinions you must first set a goal which you can direct society toward. With that goal in mind you must then assign merit to each of the citizens’ many needs and wants, granting merit only to those who advance the “society's” interests. These merits may take the form of increased pay for desirable industries, special privileges, and even punishment for those who act in opposition to this goal. No goal has a chance of success unless the entire society is mobilized to achieve it; for example, outlawing murder can only yield desirable outcomes if the law is enforced everywhere. Such mobilization, like laws to prevent murder, are only viable when wielded with the threat of force behind them.
Do It for "Society" The fundamental error within this method of governance is that when society is organized by force rather than free choice, leaders must necessarily sacrifice the needs, wants, and freedoms of those who deviate from its direction. This fate of all socialist societies is the result of the misallocation of resources that occurs in the absence of decentralized decision making. This inefficiency will promote leaders to attempt to correct it by redirecting those objectives to ends that would have otherwise been no part of the individual's intention and desire. This means that each citizen will be subject to sacrifice their own objectives in order to promote those of the central planners. If you want to create an industrial society, you must sacrifice the product of the painters, musicians, and sculptors. If you want society based on the merits and benefits of agriculture, you must be prepared to sacrifice the opulence derived from industry.
No matter how virtuous a goal or objective might be, you will never be able to fully rally a society behind you for any length of time with the use of force, as force will create an offset toward any authority, and you will only end up with many objectives and goals sacrificed. It is only by the destruction of individuality that any predetermined objective can hope to be achieved.
The most popular misconception today is that these infringements on civil liberties cannot happen under socialism because it is supposed to be democratically based. This is absurd as socialism must ultimately be fundamentally undemocratic. The purpose of any advocated socialist society is to reach some assumed optimum of which society can function. This is the “goal” that is established. Whether it be equality, industry, or leisure, it does not change the system that will be installed to reach that goal. Besides the obvious and documented danger of majority rule, any democratic decision would have to be enforced by some central authority; without one there would be no chance to achieve such a goal. When the central authority is realized, the individuality of each citizen will be usurped by the collective society and central planning will ensue. Democracy can only serve as a means to socialism, an otherwise undemocratic end.
The just society is not some game of chess where we can move around each person like they exist to carry out the will of "the people." We must not forget that in real life, these “pawns” move with their own objectives. If we depart from the notion that each person is an individual with their own unique attributes and objectives, we can guarantee ourselves that only misery and despotism will quickly follow.
This October-November 2017 marks the 100th anniversary of the launch of the Bolshevik Revolution in Russia — the bloody communist state that would produce a political-ideological killing spree unlike any the world has ever seen.
And yet, communism continues to find supporters. Here are three personal anecdotes:
I did a conference this past week on the legacies of communism. One liberal professor complained that no pro-communist speakers were included. I wasn’t surprised.
Another case: a former student of mine this week told me of his professor (at a local college in Pittsburgh) who was hailing Karl Marx for his “brilliance.” Again, no surprise.
One more: A student from the University of Wisconsin called in to a talk-show I did last week insisting that capitalism is just as lethal as communism.
That all happened just this past week, and it’s not unusual in my world.
Anecdotes aside, an October 2016 poll by the Victims of Communism Memorial Foundation generated a stunning finding: almost one-third of Millennials “believe more people were killed under George W. Bush than under Joseph Stalin.” And it isn’t only those silly Millennials. More than one in four Americans generally believe Bush was the bigger killer.
That same report found that the vast majority of Americans (75 percent) underestimate the number of people killed by communist regimes, and a large majority (68 percent) believe Hitler killed more people than Stalin.
This begs the question: how many people did these ideological gangsters kill?
Well, here at the centenary of communism, the number “100” is fitting, given that 100 million is a good stab at the number of people annihilated by the Marxist-Leninist pathology the Bolsheviks sought to spread worldwide.
The Harvard University Press classic, The Black Book of Communism, endeavored to tabulate a communist death toll in the 20th century. It came up with a figure of 100 million. The Victims of Communism Memorial Foundation also arrives at that figure. Cal-Berkeley professor Martin Malia aptly noted that the communist record offers the “most colossal case of political carnage in history.”
And even then, this frightening number — 100 million dead — is actually quite conservative.
Take the figure relating to the Soviet Union, for instance, where the Black Book recorded merely 20 million dead. Alexander Yakovlev, a high-level Soviet official who became one of Mikhail Gorbachev’s chief reformers, and who was given the post-Cold War task of trying to tally the victims, estimates that Stalin alone “annihilated … sixty to seventy million people.”
Similar levels of bloodshed was wrought by China’s Mao Tse-tung, who was responsible for the deaths of at least 60 million (according to the Black Book), but more likely over 70 million, according to the latest research. And then there were the killing fields of North Korea, Cambodia, Cuba, Ethiopia, Eastern Europe, Africa, and more.
Among these, the North Korea butcher’s bill is close to 5-6 million. And we can hope and pray that the North Korea nightmare doesn’t take on a hideous nuclear dimension under Kim. Who knows how that one could end?
Really, the death generated by communist governments in the 20th century is closer to 140 million.
By comparison, Hitler’s genocide against Jews, Gypsies, the mentally disabled, and others he deemed “misfits,” was approximately 10 million.
Finally, another chilling figure for comparison: The combined dead from World Wars I and II — the most destructive conflicts in human history — was approximately 50-60 million. One must combine and then double the tolls of the two world wars to begin approaching communism’s mass slaughter.
Ronald Reagan called communism a “disease.” Actually, it’s hard to find a 20th century disease that killed as many people as this ideological pathology. Reagan put it better when he described communism as “evil” and “a form of insanity.”
And yet, so much of this evil insanity isn’t known, nor is it being taught, especially in our universities.
A frustrated James Kirchick of the liberal Daily Beast recently asked his readers, “How many times have you heard some formulation of this viewpoint? ‘Communism is an excellent idea in theory, it just hasn’t worked in practice.’ I wish that was the sort of sentiment I only remembered from college dorm room bull sessions.”
Kirchick responded, “OK. How many more millions of people have to die before we get it right?”
Good question.
And so, as communism marks its centennial, we should remember it for what it did best: death.
Nicolás Maduro may have received more votes in Venezuela’s recent presidential election, but the record-low voter turnout is widely seen as its own form of protest against his increasingly oppressive socialist regime. So as long as Maduro’s government controls the voting process, his opponents will continue to advocate elections boycotts to try to erode the legitimacy of his government. Once again we see democracy being wielded as a weapon by tyrants, rather than an answer for political victims.
The true challenge to Maduro’s regime will not come from elections, but rather the growing threat of a coup. While the political heir to Chavez has managed to keep the military loyal by allowing them to profit from cartelizing vital supplies, the continuing deterioration of the nation’s economy has sparked growing rebellion and desertion among the ranks. As Maduro’s government has continued to doubled-down on the same failed socialist policies that created one of the world’s gravest humanitarian crises, action by the military is increasingly seen as inevitable – including by the leaders of neighboring countries.
Of course the destruction of Venezuela is not the result of a single man, and the issues plaguing the country will not simply disappear with his removal. So the question is what options realistically exist for a post-Maduro Venezuela, and what would those ramifications be for both its people and the rest of the world?
A few years ago I looked at what Ludwig von Mises would recommend Venezuela do, drawing inspiration from his writings on post-World War I Austria. Policy recommendations included condemning the socialist ideology that destroyed the country, mass-privatization of the economy, abandoning the bolivar, and abandoning all trade restrictions. While these would still be the ideal tonic for what ills the country, even in the face of socialist ruin the intellectual climate of Venezuela is still far from the classical liberalism of Mises.
This is demonstrated by the sad reality that the leading opposition parties, including Justice First, Popular Will, Democratic Unity Roundtable, and Democratic Action are a reaction to the violent crackdown and growing unconstitutional authoritarianism of Maduro’s government, rather than socialist ideology itself. In fact, all but Justice First still explicitly make socialist appeals in their political campaigns. The continued appeal of socialism among the public is so great that Henrique Capriles, a leading oppositional figure, called for a socialist-coalition as the best strategy to take down Maduro.
So if the public will does not exist to embrace true market reforms, what options exist for the country?
The first issue Venezuela faces is transitioning away from the bolivar that has become worth less than World of Warcraft currency thanks to Maduro’s hyperinflationary policies.
The best recent example of transitioning away from such monetary chaos is Zimbabwe, which stopped printing its own worthless currency in 2009 and transitioned to using the US dollar at an exchange rate of $1 for Z$35,000,000,000,000,000. It’s possible that Venezuela could make a similar move – especially as US dollars are already circulating in what few markets still function in the country.
Unfortunately this may not work quite as well in today’s Venezuela.
If the Venezuelan people are not prepared to completely discard the personality cult of the late-Hugo Chavez, a full embrace of the American dollar may face complications – in part due to the US’s militarization of financial markets in recent years. While the pros may still outweigh the cons to formally adopting the dollar, there may be another option with unique appeal to Venezuela: the Chinese yuan.
Will China Bailout Venezuela? Even during the peaks of the oil boom, the Venezuela’s socialist economy relied greatly on the Chinese government. China is already Venezuela's biggest lender, and has already been forced to restructure payments with its largest investment in Latin America. Of course Venezuela is going to need more than debt restructuring to stabilize its financial situation. Given its aggressive desire to expand its global economic footprint, China may see potential in a broad Venezuelan bailout package – one that could include the country formally adopting the yuan.
In 2015, the Mugabe government of Zimbabwe tried to make a big deal out of adopting the yuan as a legal currency in exchange for debt cancelation. The problem is that the announcement ignored that the yuan had already been legal currency dating back to 2009, and the debt forgiveness package was largely “a mirage.” This is understandable. Zimbabwe is of modest value to China outside of its use in projecting a growing global Chinese influence – with its tobacco industry the most lucrative trade the African nation has with its Eastern benefactor.
Venezuela’s oil reserves, on the other hand, have long interested China’s Communist Party – and Maduro’s government already prices it in renminbi as a way to get around the US dollar. What if China offers a bailout package – including perhaps skilled workers to replace those that have fled the government-operated PDVSA – dependent on Venezuela receiving oil payments made in the yuan? Given how vital the oil economy is to Venezuela’s economy – making up 50% of GDP - renminbi would likely begin to quickly circulate through the Venezuelan economy in a way that hasn’t happened in Zimbabwe markets.
China would benefit from this arrangement in ways beyond its own energy consumption. A formal adoption of the yuan would give the country its strongest foothold in Latin America to date, a new partner to its “One Belt, One Road” initative, and would offer the most significant challenge yet to the dollars' hegemony in energy markets due to the sheer size of Venezuela’s reserves. Since Chinese officials have made it clear that they want to reduce global dependence on the dollar in the future, this could be a strong power play – particularly given the back and forth on trade we’ve seen between Xi and the Trump Administration (which could possibly see this as a 21st Century violation of the Monroe Doctrine.)
Of course Venezuela’s hyperinflation is really a consequence of the country's larger economic evils: the destruction of economic productivity due to the nationalization of industry and an expensive welfare state.
The rise of China is itself a testament to what even modest steps to market liberalization can do for a previously socialist economy. If Chinese support comes with stronger property rights than we see under Maduro – whose government recently nationalized a Kellogg’s plant – then this too would represent a positive step forward for Venezuelan citizens, even if it would reduce the country to more of a vassal state of China.
China Can’t Save Venezuela While a Chinese bailout of Venezuela could offer desperately needed relief to the country, this third-way approach can’t go on forever – and China itself may end up being an illustration of this. For all the talk of China’s economic strength, the country has been forced to resort to overstating its own economic growth in recent years, and is very likely still doing so today.
Even more troubling is China’s own reliance on debt to keep its economy growing. While lacking the massive welfare programs of Chavez and Maduro, China has been indulging in a decade-long debt binge with massive government spending on everything from infrastructure, industry, and island creation. While the strength of China’s government gives it significant power in kicking the can down the road, global officials – such as the Reserve Bank of Australia - are starting to get alarmed.
The threat to China stems from the same reason that could make it attractive to a future Venezuelan government: their shared socialist ideology and belief in central planning. While China has long departed from the communist policies in Mao – even if Xi aspires for his degree of power – its continued reliance on government-centric five year plans and bloated state-run firms has created its own form of Keynesian nightmare.
In the words of Per Bylund:
The Chinese economy obviously relies very heavily on state-sponsored, state-planned projects such as these constructions of buildings. It probably wouldn’t be much of an exaggeration to say that the Chinese economy is a Keynesian jobs project of outrageous scale, which also means that is as removed from real value creation as any Keynesian undertaking....
What China teaches us about economics and economic policy is the lesson that is generally not provided in college classrooms: the important distinction within production between value creation and capital consumption. The story of China’s economic development is to a great extent one of unsustainable, centrally planned growth specifically in terms of GDP — but a lack of sustainable value creation, capital accumulation, and entrepreneurship.
In conclusion, while my wish is to see the Venezuelan people be rid of the vile Maduro government as quickly as possible, the country is haunted far more by its continued loyalty to socialism than it is the actions of a particular government leader. While the realities of modern Venezuela – combined with the global ambitions of China – could make a deal between the two countries a logical outcome, the Chinese model is not one that will bring prolonged prosperity.
True hope for Venezuela, and the rest of Latin America, must come from rejecting the inevitable failures of Marxism and embracing a Misesian understanding of economics and classical liberalism.
In other words, Menos Marx, Mas Mises.
In the mid-nineteenth century debates over the virtues and evils of slavery, the arguments from the pro-slavery southerners evolved from a claim that slavery was a “necessary evil” to arguments that it was a “positive moral good.” A large part of this evolution in perspective was a reaction to the growing moral antipathy toward slavery by the North, breeding the need — from the southern perspective — to find a defense of slavery that they could counter on moral grounds.
But George Fitzhugh’s defense of slavery was unique. He accepted the paternalist argument that the southerners were increasingly adopting — specifically, that slavery bettered the position of the slave — but he rejected the racial division that they necessarily included in their argument. In his infamous 1954 publication, Sociology of the South, he wrote:
We abhor the doctrine of the “Types of Mankind;” first, because it is at war with scripture, which teaches us that the whole human race is descended from a common parentage; and, secondly, because it encourages and incites brutal masters to treat negroes, not as weak, ignorant and dependent brethren, but as wicked beasts, without the pale of humanity.
True to the racist views of the day, Fitzhugh did believe that blacks were “weak, ignorant and dependent” on the superior class of whites, but his racism was part of a class analysis common to socialists. In other words, the benefits that he believed blacks gained from slavery should also be applied to poor, less capable whites.
Fitzhugh was concerned with the labor questions that were becoming a more prominent concern in European and US political discourse, and like many people, he believed socialism to be the solution to labor concerns. Slavery was good, Fitzhugh made clear, because “slavery is a form, and the very best form, of socialism.”
Fitzhugh, unlike others on both sides of the slavery debate, offered no pretended love for liberty. “The dissociation of labor and disintegration of society,” he wrote, “which liberty and free competition occasion, is especially injurious to the poorer class.” The burdens of the poor, in Fitzhugh’s eyes, were imposed by a system of free trade, in which “the poor man is burdened with the care of finding a home, and procuring employment, and attending to all domestic wants and concerns.” The South held the solution for the poor, white and black alike: “Slavery relieves our slaves of these cares altogether.”
Like many anti-socialists of then and now, Fitzhugh drew the connection between a command economy and a slave plantation, but instead of seeing both as evil, he considered both to be good:
The association of labor properly carried out under a common head or ruler, would render labor more efficient, relieve the laborer of many of the cares of household affairs, and protect and support him in sickness and old age, besides preventing the too great reduction of wages by redundancy of labor and free competition. Slavery attains all these results. What else will?
Fitzhugh knew that slavery was the antithesis of capitalism, and he directly attacked the ideas of a free market system in his defense of slavery. “The ink was hardly dry with which Adam Smith wrote his Wealth of Nations, lauding the benign influences of a free society” Fitzhugh argued, “ere the hunger and want and nakedness of that society engendered a revolutionary explosion that shook the world to its centre.” Assuming, as he seems to, that the failures of free trade are self-evident, he cites the many revolutions of Europe from only a few years prior as evidence that slavery is what the revolutionaries wanted. He points to the “starving artisans and laborers and fish-women and needle-women of Paris,” the “serfs of Russia” and the Ukraine who “fought for lares and penates, their homes, their country, and their God” because “they had been set free to starve, without a place to rest their dying heads or to inter their dead bodies.”
After noting the failure of the Paris Commune — a failure that he implies is due to the lack of central direction in the form of a regal authority — he points out that “Louis Napoleon is made Emperor,” who he praises for understanding “the disease of society,” and for having “nerve enough for any surgical operation that may be required to cure it.”
“He is a socialist” Fitzhugh writes of Louis Napoleon, “and socialism is the new fashionable name of slavery.”
“His first step in socialism,” Fitzhugh continues his laudations, “was to take the money of the rich to buy wheat for all,” an act that was “well-timed and just.” Napoleon “is now building houses on the social plan for working men, and his Queen is providing nurseries and nurses for the children of the working women, just as we Southerners do for our negro women and children.”
“It is a great economy,” Fitzhugh declares, and “Fourier suggested it long after Southerners had practiced it.”
In a frank and honest summation of his views, Fitzhugh wrote:
Socialism proposes to do away with free competition; to afford protection and support at all times to the laboring class; to bring about, at least, a qualified community or property, and to associate labor. All these purposes, slavery fully and perfectly attains.
In works of history, Fitzhugh is noted as an interesting outlier among the pro-slavery adherents. Historians point out that he, uniquely, posits that slavery is a moral good and — contrary to other southerners — this moral good should beneficently be extended to whites as well as blacks. Fitzhugh, to most historians, is unique in the manner in which he defends slavery.
But most historians dance around or outright omit Fitzhugh’s very logical reasoning behind his belief: socialism and slavery are one and the same; they are logically inseparable. This argument is hardly unique, and it has been made by advocates of the free market since the beginnings of socialist movements. The only thing unique about Fitzhugh, was that he erroneously believed socialism — and by logical extension, slavery — to be a moral and practical good. One might say that Fitzhugh, in acknowledging that slavery and socialism were logically identically, was the only truly honest socialist.
"Freedom from want” is one of the most frequently invoked notions of freedom in our time. However, it is a bogus freedom that politicians and socialists offer to lull people into accepting policies that destroy true freedom. Freedom from want has been most loudly advocated in this century by those who favored removing almost all limits from government power.
For example, Sidney and Beatrice Webb, two of the founders of British socialism and authors of The Soviet Union: A New Civilization?, asserted in 1936: “Personal freedom means, in effect, the power of the individual to buy sufficient food, shelter and clothing.”Quoted in Fritz Machlup, “Liberalism and the Choice of Freedoms,” in Roads to Freedom: Essays in Honour of Friedrich A. von Hayek, Erich Streissler, ed. (London: Routledge & K. Paul, 1969), p. 126.
The Webbs did not specify how many millions of people government should be permitted to kill in the name of “freedom from want.” But during Stalin’s bloodiest decade, they asserted that for government economic planning to succeed, “public discussion must be suspended between the promulgation of the decision and the accomplishment of the task” and that any criticisms of the master plan should be treated as “an act of disloyalty, or even of treachery.”Sidney and Beatrice Webb, Soviet Communism: A New Civilization?, vol. 2 (New York: Charles Scribner’s Sons, 1936), pp. 1038–39.
For government to be able to liberate people with food and clothing, it must have the power to execute anyone who criticizes the official economic plan. After visiting the Ukraine, the Webbs endorsed Stalin’s war on the kulaks (the least impoverished peasants), commenting that “it must be recognized that the liquidation of the individual capitalist in agriculture had necessarily to be faced if the required increase of output was to be obtained.”
(Output plummeted.)
Equating liberty with satisfactory living standards became far more common as the twentieth century went on. “Real freedom means good wages, short hours, security in employment, good homes, opportunity for leisure and recreation with family and friends,” wrote Sir Oswald Mosley, the most prominent British supporter of Nazi Germany, in his 1936 book, Fascism.Quoted in Dorothy Fosdick, What is Liberty? A Study in Political Theory (New York: Harper and Brothers, 1939), p. 28.
James Gregor noted in his book The Ideology of Fascism that fascism aimed at “restraints which foster the increased effective freedom of the individual.”James Gregor, The Ideology of Fascism (New York: Free Press, 1969), p. 212.
President Franklin Delano Roosevelt noted in 1937 that “even some of our own people may wonder whether democracy can match dictatorship in giving this generation the things it wants from government.”The Public Papers and Addresses of Franklin D. Roosevelt, 1937 (New York: Macmillan, 1941), p. 361.
University of Chicago professor Leslie Pape noted in 1941 that “democracies readily admit the claims of totalitarian states to great achievements in the cause of positive freedom.”Leslie M. Pape, “Some Notes on Democratic Freedom,” Ethics, April 1941, p. 26.
British historian E.H. Carr, writing in 1951, observed that, for the modern era, “freedom from the economic constraint of want was clearly just as important as freedom from the political constraint of kings and tyrants.”Edward Hallett Carr, The New Society (London: Macmillan, 1951), p. 107.
Carr justified the array of economic controls in postwar Britain: “The price of liberty is the restriction of liberty. The price of some liberty for all is the restriction of the greater liberty of some.”Ibid., p. 108.
However, with this standard, there is no limit to the amount of freedom that government can destroy in the name of creating “greater liberty for some.” The British Labour government that Carr championed advanced freedom by conscripting labor for the coal mines and empowering the Ministry of Labour to direct workers to whatever employment was considered in the national interest—empowering over 10,000 government officials to carry out searches (including of private homes) without warrants—prohibiting restaurants from serving customer meals costing more than 5 shillings (less than $2 in 1947)—and fining farmers who refused to plant the specific crops government demanded.John Jewkes, The New Ordeal by Planning (New York: St. Martin’s, 1968; based on his 1948 book), p. 213.
The government also “nationalized all potential land uses in the United Kingdom, permitting only continuation of existing ones and requiring ‘planning permission’ for any others,” as law professor Gideon Kanner noted.Gideon Kanner, “Tennis Anyone?,” California Political Review, March-April 1998, p. 17.
The Labour government offered freedom via the solidarity of standing in the same rationing line—liberation via deprivation. (A 1998 New York Times article cited the Labour government’s postwar food rationing, which continued into the 1950s, as a contributing factor to the long-term decline of British cuisine.William Grimes, “History Explains Disparity Between English and French Cuisine,” New York Times, May 9, 1998.
The more politicians promise to give, the more they entitle themselves to take. Carr, serving in 1945 as chairman of the UNESCO Committee on the Principles of the Rights of Man, declared that “no society can guarantee the enjoyment of such rights [to government handouts] unless it in turn has the right to call upon and direct the productive capacities of the individuals enjoying them.”Quoted in F.A. Hayek, Law, Legislation and Liberty, vol. 2, The Mirage of Social Justice (Chicago: University of Chicago Press, 1976), p. 184.
Thus, the price of government benefits is unlimited political control over people’s paychecks and work lives.
Once freedom is equated with a certain material standard of living, confiscation becomes the path to liberation. Thus, the more avidly a politician raises taxes, the greater his apparent love for liberty. In the name of providing “freedom from want,” the politician acquires a pretext to destroy the basis of private citizens’ independence. “Freedom from want” becomes a license for politicians, rather than a declaration of rights of citizens.
Anyone who does not have certain possessions is assumed not to be free—and in need of political rescue. President Johnson, justifying a vast expansion of government social programs, declared in 1965, “Negroes are trapped—as many whites are trapped—in inherited, gateless poverty. . . . Public and private poverty combine to cripple their capacities.”Quoted in Marvin Gettleman and David Mermelstein, eds., The Great Society Reader (New York: Random House, 1967), p. 256.
Vice President Hubert Humphrey defined a poor person as “the man who for reasons beyond his control cannot help himself.” This perspective on poverty and self-help mocks all of American history. It implies that any individual who earns less than $7,890 a year (the official poverty line for a single person) is incapable of any discipline or resolution.
While advocates of positive freedom insist that government must intervene so that each person “can be all that they can be,” government aid programs are notorious for rewarding people for making the least of themselves. President Roosevelt warned in 1935 that “continued dependence on relief induces a spiritual and moral disintegration fundamentally destructive to the national fiber.”Quoted in “The Welfare Bill: Excerpts from Debate in the Senate on the Welfare Measure,” New York Times, August 2, 1996.
President Clinton declared in 1996: “For decades now, welfare has too often been a trap, consigning generation after generation to a cycle of dependency. The children of welfare are more likely to drop out of school, to run afoul of the law, to become teen parents, to raise their own children on welfare.”“Radio Address of the President,” Office of the Press Secretary, White House, December 7, 1996.
A rising tide no longer lifts all boats when the government rewards people for scuttling their own ships.
Faith in freedom from want depends on a political myopia that focuses devoutly on only one side of the ledger of government action. This is measuring freedom according to how much government does for people, and totally disregarding what government does to people. Government provides “freedom” for the welfare recipient by imposing tax servitude on the worker. In an age of unprecedented prosperity, government tax policies have turned the average citizen’s life into a financial struggle and insured that he will likely become a ward of the state in his last decades.
Some statists insist that taxation is irrelevant to freedom. According to sociologist Robert Goodin,
If what the rich man loses when his property is redistributed is described as a loss of freedom, then the gain to the poor must similarly be described as a gain of freedom. . . . No net loss of freedom for society as a whole, as distinct from individuals within it, is involved in redistributive taxation. Thus, there is no basis in terms of freedom . . . for objecting to it.“Total Tax Collections to Reach $2.667 Trillion in 1998, Tax Foundation Says,” Tax Notes Today, June 11, 1998.
What does Goodin mean by “freedom for society as a whole”? By this standard, slavery would not reduce a society’s freedom, since the slave’s loss of freedom would be equaled by the slave owner’s gain. Nor is there any difference, vis-à-vis freedom, between permitting people to retain their earnings and spend them as they choose, and government confiscating their money to hire more regulators, inspectors, and informants to better repress the citizenry.
What are the practical results of the modern “freedom from want”? Economist Edgar Browning, writing in 1993, examined the marginal cost of redistribution—defined as “the ratio of the aggregate loss to the top four quintiles of households to the aggregate gain to the bottom quintile of households.”Robert Goodin, Reasons for Welfare (Princeton: Princeton University Press, 1988), p. 313.
Browning estimated that the marginal cost to the most affluent 80 percent of households of increasing the income of the poorest 20 percent by $1 was $7.82.Edgar Browning, “The Marginal Cost of Redistribution,” Public Finance Quarterly, January 1993, p. 3.
The marginal costs of redistribution are much larger than people might presume because of reduced incentives to work, both among the taxpayers and recipients. Also, as Browning noted, “marginal tax rates must be increased very sharply relative to the amount of income that is redistributed.” Combining Browning’s analysis and Goodin’s definition, confiscatory redistribution destroys almost eight times as much “freedom” as it creates.
Once the notion of “freedom from want” is accepted as the pre-eminent freedom, it becomes a wish list justifying endless political forays deeper and deeper into people’s lives. Princeton professor Amy Gutmann, in her 1980 book, Liberal Equality, declared: “Liberal egalitarians want to say that freedom of choice is not very meaningful without a right to those goods necessary to life itself.”Amy Gutmann, Liberal Equality (Cambridge: Cambridge University Press, 1980), p. 8.
Gutmann’s elaboration of “necessary goods” reveals how government would be obliged to control almost everything: “Supplying the poorest with more primary goods will be insufficient if their sense of self-worth or their very desire to pursue their conceptions of the good is undercut by self-doubt.”Ibid., p. 123.
By this standard, freedom is violated when people suffer self-doubt, and the government is obliged to forcibly intervene to guarantee that all people think well of themselves.
Political scientist Alan Wolfe, a self-described “welfare liberal,” asserted in 1995 that “people need a modicum of security and income maintenance, underwritten by government, in order to fulfill the ideal of negative liberty, which is self-sufficiency.”Alan Wolfe, Review of Passions and Constraint: On the Theory of Liberal Democracy, by Stephen Holmes, New Republic, May 1, 1995.
Government dependency is the new, improved form of self-reliance: dependency on government doesn’t count because government is a better friend to you than you are yourself. But the more dependent people become on government, the more susceptible they are to political and bureaucratic abuse. Freedom from want is conceivable only so long as people are allowed to want only what the government thinks they should have.
Freedom from want supposedly results from government taking away what a person owns so that it can give him back what it thinks he deserves. The welfare state is either a way to force people to finance their own benefits via political-bureaucratic bagmen, or it is a way to force some people to labor for other people’s benefit. In the first case, government sacrifices the person’s freedom to the fraud that government must tax him to subsidize him; in the second, government sacrifices the person’s freedom in order to “liberate” someone else—often someone who chooses not to work. If someone pays the taxes that finance the government benefits he receives, he is less free than he would otherwise have been.
Some “freedom from want” advocates imply that government is a great benefactor when it promises citizens “three hots and a cot”—the old-time recruiting slogan of the Marine Corps. But trading freedom for a full belly is a worse bargain now than ever before. As economist F.A. Hayek observed, “As the result of the growth of free markets, the reward of manual labor has during the past hundred and fifty years experienced an increase unknown in any earlier period in history.”Friedrich Hayek, Law, Legislation and Liberty, vol. 1, Rules and Order (Chicago: University of Chicago Press, 1973), p. 24.
The average worker in industrialized countries can purchase the bare necessities of life with fewer hours of labor than ever before. Comparing current wages and prices with those of 1800, economist Julian Simon found that the average American worker today needs to labor less than one-tenth the time to earn enough to purchase a bushel of wheat than his predecessors did two centuries ago.Julian Simon, “What the Starvation Lobby Eschews,” Wall Street Journal, November 18, 1996.
While the real price of food has plummeted (in spite of government farm policies), the “real price” of political servitude has not diminished.
It is understandable that some well-intentioned people assume that “freedom from want” is the most important freedom. It is difficult for many people to conceive of enjoying anything (much less their freedom) if they lack food, clothing, or shelter. However, freedom is not a guarantee of prosperity for every citizen; the fact that some people have meager incomes does not prove that they are shackled. It is a cardinal error to confuse freedom with the things that free individuals can achieve or produce, and then to sacrifice the reality of freedom in a deluded shortcut to the bounty of freedom. Freedom is not measured by how much a person possesses, but by the restrictions and shackles under which he lives.
Throughout history, politicians have used other people’s property to buy themselves power. That is the primary achievement of the welfare state. The danger of government handouts to freedom was clear to some political writers hundreds of years ago. The French writer Etienne de la Boétie, in his 1577 Discourse of Voluntary Servitude, noted of ancient Rome: “Tyrants would distribute largess, a bushel of wheat, a gallon of wine . . . and then everybody would shamelessly cry, ‘Long live the King!’ The fools did not realize that they were merely recovering a portion of their own property, and that their ruler could not have given them what they were receiving without having first taken it from them.”Etienne de la Boétie, The Discourse of Voluntary Servitude, Murray Rothbard, ed. (New York: Free Life Editions, 1975), p. 70.
“Freedom from want” is not possible unless the government is allowed to control all things people want. Americans must beware of Trojan-horse definitions of freedom—definitions that, once accepted, allow bureaucrats to take over everyone’s life. Government handouts insinuate political power into the deepest recesses of a person’s life. And when the time is ripe, politicians take command where they previously lavished their gifts.
Originally published as "Bogus Freedom" in The Freeman May, 1999
A specter continues to haunt the world, the specter of Karl Marx. Two hundred years ago, on May 5, 1818, the father of twentieth century totalitarian communism, the guidebook writer of revolutionary mass-murdering dictatorship, and the inspirer of disastrous socialist central planning was born in Trier, Germany.
Looking over the political and economic landscape of what Karl Marx’s ideas wrought, over especially the last one hundred years, one might think that his name and his legacy would be held in the same hatred, contempt and disgust as Adolph Hitler, the fashioner of German National Socialism (Nazism). But, instead, now at a time when we are marking the two hundredth anniversary of Karl Marx’s birth, we see his ideas continuing to have their perverse affect, including in the transmuted form of tribalist “identity politics.” (See my article, “Collectivism’s Progress: From Marxism to Race and Gender Intersectionality”.)
An opinion piece appeared on the editorial page of The New York Times (May 1, 2018) that admitted that the reality of communism-in-practice may have been a bit rough around the edges; but what still stands out today as Marx’s enduring relevancy for our own time is the correctness of, “Marx’s basic thesis — that capitalism is driven by a deeply divisive class struggle in which the ruling‐class minority appropriates the surplus labor of the working‐class majority as profit.” And that “Marx provided, the critical weapons for undermining capitalism’s ideological claim to be the only game in town.” That is, that we can remake the social and economic order to create a world not subject to such capitalist exploitation.
At the same time, European newspapers highlighted that European Union commissioner, Jean-Claude Juncker, attended a celebration of Marx’s birthday in Germany at which a 18-foot bronze statue of Marx was unveiled that was donated by China’s Communist Party. Juncker’s office released a statement justifying his attendance under the rationale that while Marx was a bit controversial, he nonetheless was a “figure that shaped history.” The same, of course, could be said about many past tyrants and proselytizers of dictatorship, but few would generate rationalizations for celebrating their birthdays or bigger-than-life statues of them.
In China, the country’s president, Xi Jinping, said in a public address that, “Today, we commemorate Marx in order to pay tribute to the greatest thinker in the history of mankind and also to declare our firm belief in the scientific truth of Marxism.” The Financial Times reported that television and other media in China are being bombarded with songs, stories, and documentaries about the profundity and importance of Karl Marx’s ideas and influence, and his especial centrality to the ideology of that communist nation.
Ad hominem is never a substitute for criticizing a person’s ideas rather than the individual. But as historian, Paul Johnson, pointed out in his book, Intellectuals (1988), it is sometimes useful to know something about the man who has espoused a set of ideas, the content of which, of course, still must be judged on its own merits.
Marx the Man In this instance, one can only say that Karl Marx was a despicable scoundrel as a human being. Born into a middle class family in the German Rhineland, Marx’s father was a Prussian civil servant, who had converted from Judaism to Christianity to overcome the legal restrictions then in place against governmental employment of Jews. Marx attended the University of Berlin and imbibed the dialectical determinist philosophy of Georg Hegel, who had passed away a few years before Marx began his university education. Not finishing his degree at Berlin, he finally earned his PhD through a form of correspondence course offered by the University of Jena.
He spent a good part of his younger life erratically earning a living as a writer and editor of short-lived newspapers and journals. Moving to Paris in 1843, he soon began his lifelong friendship and collaboration with Frederick Engels, a wealthy German textile manufacturer and radical socialist, which resulted in their most famous joint work, The Communist Manifesto (1848).
Marx and his family settled in London in 1849, and he continued to live there until his death on March 14, 1883, at the age of 64. It was during those years that Marx researched and published the first volume of his treatise on Capital, (1867), the additional two volumes of which were edited and published posthumously by Engels. From his home in England, Marx devoted a good part of his energy to radical socialist politics on the European continent that included intrigues and conflicts with many other prominent socialists of that time.
A petty, vindictive and vengeful man, Karl Marx cheated on his wife with the family housekeeper, fathered an illegitimate child with her, and refused to recognize the existence of this son. His personal habits and hygiene were deplorable. Some of his articles as a correspondent for the New York Herald Tribune were plagiarized, having been written by Engels, but with his own name on them. He would backstab and badmouth other members of the socialist movement to further his own political purposes, and would attempt to undermine any influence by them that challenged his own attempt to direct and guide the ideas and policies of various European socialist groups. He was racist in his views of Slavs, Asians and Africans, and indulged in anti-Semitic rhetoric and rancor. In other words, Karl Marx was an altogether a disgusting, cruel, and power-lusting person. (See my article, “Karl Marx: The Man Behind the Communist Revolution”.)
Man’s Destiny Dictated by “History” and Social Class Marx was convinced that he had discovered the inescapable “laws of history” that determined the inevitable demise of capitalism and the triumph of socialism. He saw every uprising, revolt, or revolution in Europe during his lifetime as the opening shots in the coming of the collectivist paradise. And every failure in its arrival was proof for him that it was still just around the corner.
In Marx’s conception of the social world, the individual was reduced to and submerged within “social classes” of the exploiters and the exploited who were in mortal combat for control of the physical means of production. Human beings had no real ability to shape and guide their own personal destinies. Your personal, beliefs, dreams, attitudes and values were both meaningless and irrelevant. Your outlooks and the outcomes of your life were products of one’s “class status.” You were a captive and a consequence of whether you were a owner of those means of production or a victim without such ownership, who had to beg and gravel before “the capitalists” to have access to the resources and machines owned by those exploiters, and who demanded a share of what your labor had produced to be able to make a living and preserve the well-being of yourself and your family. The capitalist’s profit was the portion of the productive efforts of the workers that was taken from them merely due to the arbitrary and artificial ability of a few in society to manipulate others to work for them at less than the full value of what that labor had produced. (See my article, “The Austrian Economists Who Refuted Marx (and Obama”.)”
The capitalist system was sustained, Marx said, by the power of the state to maintain the ill-gotten material gains of the handful of property owners – the “one percent” – against revolution; the sustainability of the system also relied upon those capitalists perpetrating a “false consciousness” on the mass of the workers through their control of the media and education that indoctrinated them to accept their exploitation as both “just” and in the “natural order” of things.
The Socialist Revolution and Dictatorship But all bad things will come to an end, Marx assured those who listened to him, when the inescapable “progressive” development of the material forces of production matured to a point at which their further improvement required the overthrow of the capitalist system of private property and its replacement with the “socialization” of those means of production through communal ownership and control by “the workers.”
This stage of the coming socialist revolution would be preceded by the growing immiseration of the workers, as capitalists replaced more and more workers with cost-saving machinery. This throws those workers into unemployment with lower and lower wages as they compete for the decreasing number of jobs left for laborers to perform. Intensified competition among the capitalists drives the less efficient of them into bankruptcy and into the growing “reserve army of the unemployed.” This reduces the number of capitalist exploiters until they represent a smaller and smaller “ruling class” over an expanding propertyless “proletarian” class.
Finally, the exploitation becomes too much to bear, and the reality of their servility and abuse at the hands of the capitalists eliminates the illusion of the “false consciousness” under which the workers have accepted their lot in life. The revolution is at hand, “the masses” rise up, the capitalists are overthrown, and “the expropriators are expropriated.”
However, the workers, now liberated from their capitalist masters, are not ready for freedom and control of the means of the production. No, Karl Marx insisted that before the stateless bliss of a communist post-scarcity paradise without exploitation and an end to material want, there must be a socialist transition period of the “dictatorship of the proletariat.”
The workers may be freed from the capitalists’ direct control, but their minds, beliefs and attitudes are still under the yoke of the capitalist mentality. They still believe in self-interested behavior and personal gain. Their consciousness has not been “raised” to transcend to a higher plain of altruistic collectivism under which the group’s interests take precedence over the mere selfish desires of the individual.
The “revolutionary vanguard” – read: Karl Marx, Friedrich Engels, and other ideologically right-thinking individuals – have the duty and responsibility to act for the workers who do not fully understand what their true interests are and require. The revolutionary elite has the historically necessary task of “reeducating” the people into that higher collectivist consciousness; they must seize the reins of power and control in the new socialist state, and design and direct the new system of socialist central planning; the workers must be disciplined to labor for the society as a whole.
At the same time, the revolutionary vanguard has to vigilantly protect the socialist society from any attempt by foreign capitalists and the remnants of the former domestic capitalist class from once again imposing the unjust system of “wage slavery.” If those former capitalists and their heirs refuse the process of reeducation, then they will have to be “eliminated” by violent means. To protect the workers from the seductions of capitalist ideas, censorship would be necessary along with pro-socialist propaganda, and the prohibition of any anti-socialist movement or political parties. (See my articles, “Karl Marx and the Presumption of a ‘Right Side’ to History,” Part I and Part II.)
The Tyrannies and Corruptions of Socialism-in-Practice In a handful of Marx’s writings one finds, therefore, the template of tyranny that then was followed, developed and intensified by every Marxian inspired revolution of the twentieth century, starting with Vladimir Lenin and his Bolshevik party in Russia in 1917, through Chairman Mao’s conquest of China in 1949, to Ho Chi Minh’s regime in Vietnam in 1954, Fidel Castro’s victory in Cuba in 1959, the Sandinistas’ control in Nicaragua starting in the 1980s and Hugo Chavez and Nicolas Maduro in Venezuela beginning in the 1990s
It has been estimated that at least 150 million people may have died at the hands of Marxist regimes around the world. The vast majority of these victims have been unarmed and innocent men, women and children. They were executed, tortured, or starved or worked to death. Every communist regime in the twentieth century attempted or succeeded in imposing brutal and comprehensive dictatorial control over the societies under their power. Mind control through propaganda, censorship, and indoctrination were rigorously put into affect to inculcate “socialist values” and eradicate bourgeois, capitalist thinking. (See, my articles, “Socialism: Making a Century of Death and Destruction” and “The Twenty-Fifth Anniversary of the End of the Soviet Union”.)
Socialist central planning placed every human being in the “workers’ paradise” under absolute dependency on the State: for an education, a job, a place to live, any opportunities for economic and social advancement, and selected perks and privileges that could and would be bestowed on those loyal and obedient to the State. The socialist “classless society,” in reality, was an intricate hierarchical labyrinth of status, position and degrees of power depending upon the individual’s place within the vast bureaucratic network of government planning that directed production, employed every member of society, and determined the distribution of all that the giant central planning machine produced.
Not that the central planning systems of communist societies generated any degree of prosperity equal to market-based economies on the other side of the Iron and Bamboo Curtains that separated the Marxist-controlled parts of the world from the rest of humanity. In the 1920s and 1930s, Austrian economists, Ludwig von Mises and Friedrich A. Hayek, had already cogently demonstrated why socialist societies implementing comprehensive central planning would create systems of “planned chaos.” The abolition of private property in the means of production, the suppression of market competition, and the end to a price system through which profit and loss could be calculated for a rational direction of the economic activities of any society meant that socialist systems would be poor, wasteful, and “irrational” in their use of the scarce resources under government central direction.
Thus, every member of a socialist society had to have connections, relationships, and “position” in the system to have any chance to gain access to the necessities, conveniences and meager amenities in their countries, since (except through the pervasive and expensive black markets) little of material value could be obtained through the formal and official channels of State distribution of all goods and services without privilege, position and power.
Marx’s Ideas Led to the Dictatorship of Paranoia By its very ideology, Marxist regimes were tyrannies of paranoia. If individuals do not matter and only their assignment to a social class does; if the world is reduced to a life and death struggle between two irreconcilable social classes; if ideas and political philosophies are all rhetorical tools for manipulation and propaganda for power and control by one social class over another; if anyone and everyone who is not a member of the “proletariat” – the oppressed working class – or a convert to the socialist revolutionary cause, is by definition a “class enemy” attempting to prevent or slow down “history’s” inevitable march into socialism and communism; then, every word, every idea, every action, every event not considered to be a step on the road to Marxian collectivism is a threat and a danger to the success of the socialist revolution and the preservation of the Communist Party’s “enlightened” and “progressive” dictatorship wherever it may have come to power.
“Vigilance” against ever-present “counter-revolutionary” plots, conspiracies, and attempts to undermine the achievements and further advancements of the socialist State, is the never-ending watchword of the day – until the final victory when the world will be joined in one socialist people’s republic. How can the revolution be protected and preserved if the Communist Party’s power is not complete and comprehensive – for the Party is that revolutionary vanguard that Karl Marx called for in the name of “the people.” The borders of the socialist State must be sealed against anti-socialist penetrations by people and pro-capitalist propaganda. A secret police must be ever-present and watchful to squelch domestic opposition to the Party and the system, and its powers must be unlimited to surveillance everything and everyone; after all, the enemies of socialism are crafty and conniving in their intrigues against the just cause of “the people.”
The socialist State is surrounded by capitalist countries waiting for any opportunity to weaken and overthrow the communist system. The mere existence and growing strength of such a socialist State, grounded in the “laws of history” that Marx discerned in ways others did not, stands as the death-knell warning that the time of capitalist rule is coming to an end.
The premises and logic of Marx’s ideas led, not by mistake or unique circumstances, to the communist totalitarian State in the twentieth century, by the very way that Marxism insisted upon looking at the world and the relationships between human beings. The rationale for absolute Communist Party power followed from the idea that whoever is not with the Party is against “the people” and the inevitable future-to-come when socialism triumphs. With enemies all around, ideological paranoia justified every control, every arrest, every interrogation and torture, every execution to eliminate a class enemy, or every one-way ticket to a forced labor camp to compel anti-socialists to be worked to death to build the system they opposed. In communist countries, the latter was often labeled “reeducation through labor.”
The apologists and rationalizers for still taking Marx and his ideas “seriously” choose to ignore or downplay the world that socialist revolutions created and horrifically imposed on hundreds of millions of people around the globe with such disastrous consequences. They opine that what still stands are Marx’s criticisms of modern capitalist society. Yet, everyone of Marx’s predictions about where, when and how socialism would come about have been proven wrong.
Every element of his critique of capitalist, or competitive market-based, societies has been incorrect. Wealth, not misery, has come with relatively free market capitalist systems, a wealth that has lifted much of humanity out of poverty and into amazing degrees of prosperity – and continues to do so in many more corners of the world. Personal freedom and civil liberties have gone hand-in-hand with respect for and preservation of private property and the rule of law. And human reality in society has nothing to do with the illusionary conception of a world engulfed to the death in “class conflicts,” of the type constructed by Marx. (See my article, “Karl Marx’s Misconceptions about Man and Markets”.)
Yes, let us mark that two hundred years have passed since the birth of Karl Marx. But let us this anniversary to look at the man, his ideas, and their consequences with open and clear eyes. We should use this to remember and reflect on the tragic harm done to humanity through the destructive influence of Karl Marx.
Originally published The Future of Freedom Foundation
Listen to Ryan McMaken's commentary on the Radio Rothbard podcast.
May 5th marks the 200th Anniversary of Karl Marx's birth, and in spite of inspiring a wide variety of political movements that have caused countless human rights disasters, Marx continues to be an object of admiration among many intellectuals and artists. One such example can be seen in Raoul Peck's new film The Young Karl Marx which portrays Marx as a principled radical with a laudable thirst for justice.
Fortunately for Marx the man and his reputation, he never personally gained control of the machinery of any state. Thus, the dirty work of actually implementing the necessary "dictatorship of the proletariat" was left up to others. And those who attempted to bring Marxism into the light of practical reality, quickly found that applied Marxism brings impoverishment and the destruction of human freedom.
Nevertheless, after a century marked by brutal socialist regimes based on various interpretations of Marx's ideas, Marx's rehabilitation often rests on the idea that "real socialism" has "never been tried." That is, a truly "pure" socialist experience — as Marx presumably wanted — has always been tainted by the presence of bourgeois ideas or lingering capitalistic habits present in the state apparatus.
A typical example of this sort of thinking can be found in Noam Chomsky's insistence that the obviously socialist regime in Venezuela is really "quite remote from socialism." And it's also notable in philosopher Slavoj Zizek's 2017 article " The problem with Venezuela’s revolution is that it didn’t go far enough" at The Guardian.
In Zizek's view, it seems, socialism can work if the habits and customs of the status quo are destroyed utterly and replaced by entirely new ways of thinking. Or, as Zizek describes it, old proverbs (i.e., modes of thought) must be totally replaced by new proverbs. For example:
Radical revolutionaries like Robespierre fail because they just enact a break with the past without succeeding in their effort to enforce a new set of customs (recall the utmost failure of Robespierre’s idea to replace religion with the new cult of a Supreme Being). The leaders like Lenin and Mao succeeded (for some time, at least) because they invented new proverbs, which means that they imposed new customs that regulated daily lives.
Thus, the problem in Venezuela is not that countless private business have been seized, property rights been destroyed, and countless citizens deprived of basic freedoms. No, the problem is that the Venezuelan regime was too conservative and failed to implement a total break with the past.
But how is that break from the past to be brought about? The truth lies in the language used by Zizek himself. It involves "enforc[ing] a set of customs" and "impos[ing] new customs." This, of course, is the language of coercion and violence. These new "customs" wouldn't have to be imposed, of course, if people wanted to adopt them voluntarily.
From the point of view of the socialist purist, if only a new Lenin or a new Mao were to come along and try harder, well, then socialism might finally succeed. After all, as the satirical publication The Onion recently suggested, "Stalin Was Just One Great Purge Away From Creating Communist Utopia."
As hyperbolic as such a statement may seem, this idea nevertheless fundamentally describes the mindset of those who claim "socialism has never really been tried"; if socialism is to be implemented, something must be done to relieve people of their attachment to private property and all the other customs and ideas that get in the way of utopia.
In practice, this has always meant using the power of the state to force a new way of life on people. Moreover, thanks to economic realities, it has also meant that the more socialism is applied, the lower the standard of living sinks. But — the thinking goes — so long as the socialist planners keep forging ahead, and refuse to be sabotaged by capitalist thought, then utopia can be reached. Yes, there will be a lot of suffering in the interim, but the ultimate payoff will be incalculably great.
Represented graphically, the idea looks like this:
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Both Marx and Stalin admitted this unfortunate "interim stage" was a problem. As Ludwig von Mises notes, Marx even had to invent a two-tiered evolution of socialism:
In a letter, Karl Marx distinguished between two stages of socialism — the lower preliminary stage and the higher stage. But Marx didn’t give different names to these two stages. At the higher stage, he said, there will be such an abundance of everything that it will be possible to establish the principle “to everybody according to his needs.” Because foreign critics noticed differences in the standards of living of various members of the Russian Soviets, Stalin made a distinction. At the end of the 1920s he declared that the lower stage was “socialism” and the higher stage was “communism.” The difference was that at the lower socialist stage there was inequality in the rations of the various members of the Russian Soviets; equality will be attained only in the later, communist, stage.
Partial Capitalism Works Better Than Partial Socialism Note, however, that capitalism doesn't suffer from this problem. If we take a middle-of-the road interventionist economy and start introducing partial, half-way free-market liberal reforms, does this cause the economy to collapse?
Certainly not. Indeed, everywhere we look and find a relatively less socialistic economy, the less poverty and more prosperity we find.
RELATED: "Why Do Half-Measures Work for Markets, But Not for Socialism?"
Historically, this is obvious. The countries that embraced free trade, industrialization, and the trappings of market economies early on are the wealthiest economies today. We also find this to be the case in post-war Europe where the relatively pro-market economies such as those in Germany and the UK are wealthier and have higher standards of living than the more socialistic economies of southern Europe — such as Greece and Spain. This is even true of the Scandinavian countries like Sweden, which, as Per Bylund has noted, historically built its wealth with a relatively laissez-faire regime.
We see this phenomenon at work in comparisons between West Germany and East Germany. In West Germany after World War II pro-market reforms helped usher in a period of immense economic growth — with only half-way reforms. By abolishing price controls and other government-imposed restraints on the economy, the Germany economy took off while more socialistic economies — like that found in the UK at the time — were more stagnant.
Obviously, in the case of Germany, the West German state did not adopt "pure" capitalism. They merely adopted relatively more laissez-faire. And the economy expanded. In fact, according to Hans Sennholz, the West German state rather accidentally stumbled upon its free market reforms. And yet, we call the results "the German economic miracle."
Other examples can be found across Eastern Europe and Latin America. Where markets are more relatively free, the higher the standard of living, and the greater the economic growth. Capitalists aren't forced to make excuses about how "real capitalism has never been tried" — even though purely free markets have never existed anywhere.
200 years after Marx, though, every new Marx-inspired failure causes his defenders to resort to this same excuse again and again. One can only hope that 200 years from now, they've given up.
Lenin’s main book[V.I. Lenin, Materialism and Empirio-criticism: Critical Comments on a Reactionary Philosophy (Moscow: Zveno Publishers, 1909).—Ed.], or at least his most voluminous book (now available in the Collected Works of Lenin), led some people to call him a philosopher. Most of Lenin’s critique of the ideas of his adversaries consists of calling them “bourgeois.” Lenin’s philosophy is merely a restatement of the philosophical ideas of Marx; to some extent it is not even up to the level of other Russian writers on Marxism.
Marxist theory or philosophy had no development in countries where there were Communist parties. Persons whom we call Marxians consider themselves merely interpreters of Marx; they never tried to change anything in Marx. However, there are contradictions in Marx. So it is possible to quote passages from his writings from all points of view. The influence of Marx on all authors and writers who have lived since Marx died has been considerable, even though it is not usually admitted that these authors were influenced by Marx.
Although Marxians considered themselves solely interpreters of Marx, one Marxian, one writer, added something and had a strong influence, not only on the small group of his followers, but also on other authors. Georges Sorel [1847–1922]—not to be confused with Albert Sorel [1842–1906]—an important historian, developed a philosophy in many respects different from the Marxian philosophy. And it influenced political action and philosophic thinking. Sorel was a timid bourgeois intellectual, an engineer. He retired to discuss these things with his friends at a bookshop owned by Charles Péguy [1873–1914], a revolutionary socialist. In the course of the years, Péguy changed his opinions and at the end of his life he was a very ardent Catholic author. Péguy had serious conflicts with his family. Péguy was remarkable for his intercourse with Sorel. Péguy was a man of action; he died in action in 1914 in the first weeks of the war.
Sorel belonged psychologically to the group of people who dream of action but never act; he didn’t fight. As a writer, however, Sorel was very aggressive. He praised cruelty and deplored the fact that cruelty is more and more disappearing from our life. In one of his books, Reflections on Violence, he considered it a manifestation of decay that Marxian parties, calling themselves revolutionary, had degenerated into parliamentary parties. Where is the revolution if you are in Parliament? He also didn’t like labor unions. He thought the labor unions should abandon the hopeless venture of seeking higher wage rates and should adopt, instead of this conservative pattern, the revolutionary process.
Sorel saw clearly the contradiction in the system of Marx who spoke of revolution on the one hand and then said, “The coming of socialism is inevitable, and you cannot accelerate its coming because socialism cannot come before the material productive forces have achieved all that is possible within the frame of the old society.” Sorel saw that this idea of inevitability was contradictory to the idea of revolution. This is the contradiction all socialists ask themselves about—Kautsky, for one. Sorel completely adopted the idea of revolution.
Sorel asked of the labor unions a new tactic, action directe — attack, destroy, sabotage. He considered these aggressive policies only preliminary to the great day when the unions would declare a “general strike.” That is the day when the unions will declare “Now we don’t work at all. We want to destroy the life of the nation completely.” General strike is only a synonym for the live revolution. The idea of action directe is called “syndicalism.”
Syndicalism can mean ownership of the industry by the workers. Socialists mean by this term ownership by the state and operation for the account of the people. Sorel wanted to attain this by revolution. He didn’t question the idea that history leads toward socialism. There is a kind of instinct that pushes men toward socialism, but Sorel accepted this as superstition, an inner urge that cannot be analyzed. For this reason his philosophy has been compared with that of Henri Bergson’s élan vital (myths, fairy stories, fables, legends). However, in the doctrine of Sorel, “myth” means something else — a statement which cannot be criticized by reason.
Socialism is an end.The general strike is the great means. Most of Sorel’s writings date from 1890 to 1910. They had an enormous influence on the world, not only on the revolutionary socialists, but also on the royalists, supporters of the restoration of the House of Orange, the “Action française,” and in other countries the “Action nationale.” But all these parties gradually became a little bit more “civilized” than Sorel thought they should be.
It was the idea of French Syndicalism that influenced the most important movement of the twentieth century. Lenin, Mussolini, and Hitler were all influenced by Sorel, by the idea of action, by the idea not to talk but to kill. Sorel’s influence on Mussolini and Lenin has not been questioned. For his influence on Nazism, see the book by Alfred Rosenberg[Rosenberg [1893–1946] was a Nazi ideologist condemned to death for war crimes at Nuremberg on October 1, 1946. He was executed on October 16, 1946.—Ed.] titled The Myth of the 20th Century. The fundamental idea of racism was borrowed from Frenchmen. The only man who really contributed something to the Marxian idea was Sorel, along with a group of syndicalists — a comparatively small group composed exclusively of intellectuals and even of idle rich and intellectuals, like the “penthouse Bolshevists” of New York. They repeated again and again that only the workers have enough vigor and enough class consciousness in order to search out and to destroy the bourgeois system.
The center of Marxian activity shifted from Germany to France. The greatest portion of Marxian writings are in French. Sorel’s work was done in France. Outside of Russia, there are more Marxians in France than in any other country; there is, however, more discussion of communism in France than in Russia. The École Normale Supérieure in Paris was an important center of Marxian teachings. Lucien Herr [1864–1926], the librarian, had a great deal of influence. He was the father of French Marxism. As former students of École Normale Supérieure became more and more important, the school spread Marxism all over France.
By and large, the same condition prevailed in most European countries. When the universities seemed slow to accept Marxism, special schools were endowed to educate the rising generations in orthodox socialism. This was the goal of the London School of Economics, a Fabian institution founded by the Webbs. But it couldn’t avoid being invaded by persons of other ideas. For instance, [Friedrich A.] Hayek [1899–1992] taught for some years at the London School of Economics. This was the case in all countries — European countries had state universities. People generally ignored the fact that Marxians, not free traders, were appointed by the Tsar at the imperial universities in Russia. These professors were called legal, or better “loyal,” Marxians. When the Bolshevists came to power in Russia, it was not necessary to fire the professors.
Marx didn’t see any differences between the various parts of the world. One of his doctrines was that capitalism is one stage in the development of socialism. In this regard, there are some nations that are more backward than others. But capitalism was destroying the trade barriers and migration barriers that once prevented the unification of the world. Therefore, the differences in the evolution of the various countries with regard to their maturity toward socialism will disappear.
In the Communist Manifesto in 1848, Marx declared that capitalism was destroying all national peculiarities and unifying into one economic system all the countries of the world. The cheap prices of products were the means capitalism used to destroy nationalism. But in 1848, the average person didn’t know anything about Asia or Africa. Marx was even less informed than the average English businessman who knew something about business relations with China and India. The only attention Marx gave to this problem was his remark, later published by Vera Zasulich, to the effect that it might be possible for a country to skip the capitalist stage and proceed directly to socialism. Marx saw no distinction between various nations. Capitalism, feudalism, brings about progressive impoverishment everywhere. Everywhere there will be mature economies. And when the age of mature capitalism comes, the whole world will have reached socialism.
Marx lacked the ability to learn by observing political events and the political literature being published around him. For him practically nothing existed but the books of the classical economists, which he found in the library of the British Museum, and the hearings of the British Parliamentary Commissions. He didn’t even see what was going on in his own neighborhood. He didn’t see that many people were fighting, not for the interests of the proletariat, but for the principles of nationality.
Marx completely ignored this principle of nationality. The principle of nationality asked that every linguistic group form an independent state and that all the members of such a group should be recognized and unified. This was the principle which brought about the European conflicts, led to the complete destruction of the European system, and created the present-day chaos in Europe. The principle of nationality doesn’t take into account that there are large territories in which linguistic populations are mixed. Consequently there were struggles between the various linguistic groups which finally resulted in the situation we have today in Europe. I mention this because it is a principle of government which was unknown up to now.
According to this principle there is no such nation as India. It is possible that this principle of nationality will break India up into many independent states fighting one another. The Indian Parliament uses the English language. The members of the various states cannot communicate with one another, other than by employing the language of the government, a language which they have practically expelled from their country. But this situation will not last forever.
In 1848, when the Slavs of Europe met for a Panslavist Congress in Moscow, they had to speak with one another in German. But this didn’t prevent later developments in a different way.
Karl Marx and Engels didn’t like the nationalistic movement and never took notice of it. It didn’t fit into their plans or schemes. If, on account of the unfriendly remarks Marx and Engels made about various linguistic groups of Austria-Hungary and the Balkans, some authors, especially French authors, think Marx was a forerunner of National Socialism—Nazism—they are wrong. Marx said that what he wanted was to create a one-world state. And that was Lenin’s idea too.
By 1848 Marx had already assumed that socialism was just around the corner. Given such a theory, there was no reason to form a separate linguistic state. Such a state could only be very temporary. Marx simply assumed that the age of nationalities would come to an end, and that we were on the eve of an age in which there would no longer be differences between various types, classes, nations, linguistic groups, etc. Marx absolutely denied any differences among men. Men would all be of the same type. There was never any answer in Marx as to what language the people in his one-world state would use, or what the nationality of the dictator would be.
Marx was furious when someone said there were differences between men in the same nation, the same city, the same branch of business, just as all Marxists became furious when someone told them there were differences between Englishmen and Eskimos. According to Marx, the only difference was due to education. If an idiot and Dante had been educated in the same way, there would have been no difference between them. This idea influenced Marx’s followers, and it is still one of the guiding principles of American education. Why is not everybody equally intelligent? Many Marxians assume that in the future socialist commonwealth the average person will be equal in talents, gifts, intelligence, artistic attainments, to the greatest men of the past, such as Trotsky, Aristotle, Marx, and Goethe, although there will still be some more gifted people.
It never occurred to Marx that, in the best case, education can only transfer to the pupil what the teacher already knows. In the case of Marx, it wouldn’t have been enough for him to have been educated in a school by perfect Hegelian teachers because then everything he would have produced would have only been Hegelianism again. By educating people in the knowledge of the generation preceding motor cars, it wouldn’t have been possible to produce motor cars. Education can never bring about progress as such. That some people, thanks to their positions, inheritance, education, and so on, have the gift to go one step farther than preceding generations cannot be explained simply by education.
Similarly, it is impossible to explain great things and the great acts of some men simply by referring to their national affiliation. The problem is, why were these people different from their brothers and sisters? Marx simply assumed, without any reason, that we are now living in the age of internationalism and that all national traits will disappear. In the same way that he assumed that specialization would disappear, because machines can be operated by unskilled workers, he assumed there would no longer be any differences between various parts of the world and various nations. Every kind of conflict between nations was interpreted as the consequence of the machinations of the bourgeoisie. Why do Frenchmen and Germans fight? Why did they fight in 1870? Because the ruling classes of Prussia and the ruling classes of France wanted to fight. But this had nothing to do with the interests of nations.
In regard to his attitude toward war, Marx was, of course, influenced by the idea of the Manchester laissez-faire liberals. In using the term “Manchester liberalism” always as an insult, we tend to forget the essential statement in that famous declaration of the Manchester Congress where the term originated. It was said there that in the world of free trade there is no longer any reason for nations to fight one another. If there is free trade and every nation can enjoy the products of every other nation, the most important cause of war disappears. The princes are interested in increasing the territorial size of their princely province to get greater income and power, but nations as such are not interested, because it doesn’t make any difference under free trade. And in the absence of immigration barriers it doesn’t matter to the individual citizen whether his country is large or small. Therefore, according to the Manchester Liberals, war will disappear under popular democratic rule. The people will not then be in favor of war because they have nothing to win — they have only to pay and to die in the war.
It was this idea that was in the mind of President [Woodrow] Wilson [1856–1924] when he went to war against Germany. What President Wilson didn’t see was that all this about the uselessness of war is true only in a world when there is free trade between the nations. It is not true in a world of interventionism.
Sir Norman Angell [1872–1967] still argues in the same way. What did the individual Germans gain in 1870? This was almost true then, because there was comparatively free trade. But today the situation is different. Italy’s own policies made it impossible for Italians, in the world of interventionism, to get the raw materials they needed. It is not true in today’s interventionist world that the individual person does not gain something from war.
The League of Nations is one of the great failures in world history — and there have been many failures in world history. During the League’s 20 years the trade barriers had been more and more intensified. Tariffs became unimportant as trade barriers because embargoes were established.
Because the liberals said war was no longer economically advantageous because the people will not gain anything from it, therefore, a democratic nation will no longer be eager to fight wars. Marx assumed that this was true even in the interventionist world which was developing under his very eyes. This was one of the fundamental errors of Marxism. Marx was not a pacifist. He didn’t say war was bad. He only said — because the liberals said so — that war between nations had no importance or meaning at all. He said war — i.e., revolution, by which he meant civil war — was necessary. Nor was Friedrich Engels a pacifist; he studied military science day in and day out in order to prepare himself for the position he had assigned himself as commander-in-chief of all nations, as commander-in-chief for the proletarians of all countries united. Remember that he participated in fox hunting in a red coat, which he told Marx this was the best exercise for a future general.
Because of this idea of revolution — civil war, not international war — the Marxian International began to discuss peace. In 1864 Marx founded in London the First International. A group of persons who had very little to do with the people and the masses met together. There was a secretary for every country. The secretary for Italy was Friedrich Engels and many of the other countries were represented by persons who only knew the countries they represented as tourists. Arguments between the members disrupted the whole International. Finally it was moved to the United States and then fell apart in 1876.
The Second International was formed in Paris in 1869. But this Second International didn’t know what to deal with. The unions had arisen and the unions were opposed to free trade and free migration. Under such conditions, how could you find subjects to be discussed at an international congress? Then they decided to discuss peace and war, but only on a national level. They said they were all proletarians and they agreed they would never fight the wars of the bourgeoisie. The Germans included Engels and Karl Kautsky. There were some “bad” Frenchmen in the group who asked, “What do you mean when you say we can’t defend our own country? We don’t like the Hohenzollerns.” The French at this time made an agreement with the Russians and the Germans didn’t like that. Every few years there was such an international congress and each time the newspapers said it heralded the end of war. But these “nice fellows” didn’t discuss the real causes of friction, migration barriers, etc. The outbreak of World War I disrupted the International Congresses.
What Marx planned was a revolution. But what really happened was that he created a bureaucratic organization in the European countries which was, by and large, innocent because it lacked the power to execute its theories. Then there developed in the East a Communist organization that unfortunately has the power to execute people and to threaten the whole world. And all this was started in the Reading Room of the British Museum in London by a man, who was not in this regard a man of action, but who was able to bring about violent action. It was the timid bourgeois characters, Karl Marx and Georges Sorel, who created all this mischief. Most of the violent ideas of our times have come from men who themselves wouldn’t have been able to resist any aggression.
Wilson accepted the doctrine of the Manchester Liberals, namely that so far as war was concerned, democracies don’t like to fight wars; democracies fight only wars of defense because the individual citizen cannot expect any improvement of his conditions from war, not even if his country is victorious. But Wilson didn’t see that this was true only in a world of free trade. He didn’t see that this was quite different already in the age in which he lived, which was an age of interventionism. He didn’t realize that an enormous change in economic policies had deprived this theory of the Manchester Liberals of its practicability. Trade barriers were comparatively innocent in 1914. But they were very much worsened during the years of the League of Nations. While free traders were meeting with the League in Geneva and talking about reducing trade barriers, people at home were increasing them. In 1933, there was a meeting in London to bring about cooperation among the nations. And precisely at this time the richest country, the United States, nullified the whole thing with monetary and financial regulations. After this the whole apparatus was absolutely useless.
Ricardo’s theory of comparative advantage is that it is to the advantage to a nation to have free trade even if all other nations cling to their trade barriers. If the United States alone today adopted free trade there would be certain changes. But if all other countries clung to protectionism with import barriers, it would not be possible for the United States to buy more goods from other countries.
There are isolationists not only in this country; there are also isolationists in other countries. Imports must be paid for by exports and exports have no other purpose than to pay for imports. Thus the establishment of free trade by the richest and most powerful nation only would not change the situation for the Italians, for instance, if they retained their trade barriers. It would not make any difference for other countries either. It is advantageous for any country to have free trade even if all other countries do not, but the problem is to remove the barriers of the other countries.
The term “socialism,” when it was new in the second part of the 1830s, meant exactly the same as “communism” — i.e., the nationalization of the means of production. “Communism” was the more popular term in the beginning. Slowly the term “communism” fell into oblivion and the term “socialism” came into use almost exclusively.
Socialist parties, social democratic parties, were formed and their fundamental dogma was the Communist Manifesto. In 1918, Lenin needed a new term to distinguish his group of socialists from those groups which he called “social traitors.” So he gave to the term “communism” a new meaning; he used it to refer, not to the final goal of socialism and communism, but only to the tactical means for attaining them. Until Stalin, communist meant simply a better method — the revolutionary method — as against the peaceful, socialist, method of the “socialist traitors.” At the end of the 1920s, without great success, Stalin in the Third International tried to give a different meaning to the term “communism.” However, Russia is still called the Union of the Soviet Socialist Republics (USSR).
In a letter, Karl Marx distinguished between two stages of socialism — the lower preliminary stage and the higher stage. But Marx didn’t give different names to these two stages. At the higher stage, he said, there will be such an abundance of everything that it will be possible to establish the principle “to everybody according to his needs.” Because foreign critics noticed differences in the standards of living of various members of the Russian Soviets, Stalin made a distinction. At the end of the 1920s he declared that the lower stage was “socialism” and the higher stage was “communism.” The difference was that at the lower socialist stage there was inequality in the rations of the various members of the Russian Soviets; equality will be attained only in the later, communist, stage.
Originally delivered as a lecture in 1952. Published as Nationalism, Socialism, and Violent Revolution in Marxism Unmasked.
Liberals stressed the importance of the invidual. The nineteenth-century liberals already considered the development of the individual the most important thing. “Individual and individualism” was the progressive and liberal slogan. Reactionaries had already attacked this position at the beginning of the nineteenth century.
The rationalists and liberals of the eighteenth century pointed out that what was needed was good laws. Ancient customs that could not be justified by rationality should be abandoned.The only justification for a law was whether or not it was liable to promote the public social welfare. In many countries the liberals and rationalists asked for written constitutions, the codification of laws, and for new laws which would permit the development of the faculties of every individual.
A reaction to this idea developed, especially in Germany where the jurist and legal historian Friedrich Karl von Savigny [1779–1861] was active. Savigny declared that laws cannot be written by men; laws are developed in some mystical way by the soul of the whole unit. It isn’t the individual that thinks—it is the nation or a social entity which uses the individual only for the expression of its own thoughts.This idea was very much emphasized by Marx and the Marxists. In this regard the Marxists were not followers of Hegel, whose main idea of historical evolution was an evolution toward freedom of the individual.
From the viewpoint of Marx and Engels, the individual was a negligible thing in the eyes of the nation. Marx and Engels denied that the individual played a role in historical evolution. According to them, history goes its own way. The material productive forces go their own way, developing independently of the wills of individuals. And historical events come with the inevitability of a law of nature. The material productive forces work like a director in an opera; they must have a substitute available in case of a problem, as the opera director must have a substitute if the singer gets sick. According to this idea, Napoleon and Dante, for instance, were unimportant—if they had not appeared to take their own special place in history, someone else would have appeared on stage to fill their shoes.
To understand certain words, you must understand the German language. From the seventeenth century on, considerable effort was spent in fighting the use of Latin words and in eliminating them from the German language. In many cases a foreign word remained although there was also a German expression with the same meaning. The two words began as synonyms, but in the course of history, they acquired different meanings. For instance, take the word Umwälzung, the literal German translation of the Latin word revolution. In the Latin word there was no sense of fighting.Thus, there evolved two meanings for the word “revolution”—one by violence, and the other meaning a gradual revolution like the “Industrial Revolution.” However, Marx uses the German word Revolution not only for violent revolutions such as the French or Russian revolutions, but also for the gradual Industrial Revolution.
Incidentally, the term Industrial Revolution was introduced by Arnold Toynbee [1852–1883]. Marxists say that “What furthers the overthrow of capitalism is not revolution—look at the Industrial Revolution.”
Marx assigned a special meaning to slavery, serfdom, and other systems of bondage. It was necessary, he said, for the workers to be free in order for the exploiter to exploit them.This idea came from the interpretation he gave to the situation of the feudal lord who had to care for his workers even when they weren’t working. Marx interpreted the liberal changes that developed as freeing the exploiter of the responsibility for the lives of the workers. Marx didn’t see that the liberal movement was directed at the abolition of inequality under law, as between serf and lord.
Karl Marx believed that capital accumulation was an obstacle. In his eyes, the only explanation for wealth accumulation was that somebody had robbed somebody else. For Karl Marx the whole Industrial Revolution simply consisted of the exploitation of the workers by the capitalists. According to him, the situation of the workers became worse with the coming of capitalism. The difference between their situation and that of slaves and serfs was only that the capitalist had no obligation to care for workers who were no longer exploitable, while the lord was bound to care for slaves and serfs. This is another of the insoluble contradictions in the Marxian system. Yet it is accepted by many economists today without realizing of what this contradiction consists.
According to Marx, capitalism is a necessary and inevitable stage in the history of mankind leading men from primitive conditions to the millennium of socialism. If capitalism is a necessary and inevitable step on the road to socialism, then one cannot consistently claim, from the point of view of Marx, that what the capitalist does is ethically and morally bad.Therefore, why does Marx attack the capitalists?
Marx says part of production is appropriated by the capitalists and withheld from the workers. According to Marx, this is very bad. The consequence is that the workers are no longer in a position to consume the whole production produced. A part of what they have produced, therefore, remains unconsumed; there is “underconsumption.” For this reason, because there is underconsumption, economic depressions occur regularly. This is the Marxian underconsumption theory of depressions. Yet Marx contradicts this theory elsewhere.
Marxian writers do not explain why production proceeds from simpler to more and more complicated methods.
Nor did Marx mention the following fact: About 1700, the population of Great Britain was about five and a half million; by the middle of 1700, the population was six and a half million, about 500,000 of whom were simply destitute. The whole economic system had produced a “surplus” population. The surplus population problem appeared earlier in Great Britain than on continental Europe. This happened, first of all, because Great Britain was an island and so was not subject to invasion by foreign armies, which helped to reduce the populations in Europe.The wars in Great Britain were civil wars, which were bad, but they stopped. And then this outlet for the surplus population disappeared, so the numbers of surplus people grew. In Europe the situation was different; for one thing, the opportunity to work in agriculture was more favorable than in England.
The old economic system in England couldn’t cope with the surplus population. The surplus people were mostly very bad people—beggars and robbers and thieves and prostitutes.They were supported by various institutions, the poor lawsEnglish legislation relating to public assistance for the poor, dating from the Elizabethan era and amended in 1834 in order to institute nationally supervised uniform relief.—Ed.] , and the charity of the communities. Some were impressed into the army and navy for service abroad. There were also superfluous people in agriculture. The existing system of guilds and other monopolies in the processing industries made the expansion of industry impossible. In those pre-capitalist ages, there was a sharp division between the classes of society who could afford new shoes and new clothes, and those who could not. The processing industries produced by and large for the upper classes. Those who could not afford new clothes wore hand-me-downs. There was then a very considerable trade in secondhand clothes—a trade which disappeared almost completely when modern industry began to produce also for the lower classes. If capitalism had not provided the means of sustenance for these “surplus” people, they would have died from starvation. Smallpox accounted for many deaths in pre-capitalist times; it has now been practically wiped out. Improvements in medicine are also a product of capitalism.
What Marx called the great catastrophe of the Industrial Revolution was not a catastrophe at all; it brought about a tremendous improvement in the conditions of the people. Many survived who wouldn’t have survived otherwise. It is not true, as Marx said, that the improvements in technology are available only to the exploiters and that the masses are living in a state much worse than on the eve of the Industrial Revolution. Everything the Marxists say about exploitation is absolutely wrong! Lies! In fact, capitalism made it possible for many persons to survive who wouldn’t have otherwise. And today many people, or most people, live at a much higher standard of living than that at which their ancestors lived 100 or 200 years ago.
During the eighteenth century, there appeared a number of eminent authors—the best known was Adam Smith [1723–1790]—who pleaded for freedom of trade. And they argued against monopoly, against the guilds, and against privileges given by the king and Parliament. Secondly, some ingenious individuals, almost without any savings and capital, began to organize starving paupers for production, not in factories but outside the factories, and not for the upper classes only. These newly organized producers began to make simple goods precisely for the great masses. This was the great change that took place; this was the Industrial Revolution. And this Industrial Revolution made more food and other goods available so that the population rose. Nobody saw less of what really was going on than Karl Marx. By the eve of the Second World War, the population had increased so much that there were 60 million Englishmen.
You can’t compare the United States with England. The United States began almost as a country of modern capitalism. But we may say by and large that out of eight people living today in the countries of Western civilization, seven are alive only because of the Industrial Revolution. Are you personally sure that you are the one out of eight who would have lived even in the absence of the Industrial Revolution? If you are not sure, stop and consider the consequences of the Industrial Revolution.
The interpretation given by Marx to the Industrial Revolution is applied also to the interpretation of the “superstructure.” Marx said the “material productive forces,” the tools and machines, produce the “production relations,” the social structure, property rights, and so forth, which produce the “superstructure,” the philosophy, art, and religion. The “superstructure,” said Marx, depends on the class situation of the individuals, i.e., whether he is a poet, painter, and so on. Marx interpreted everything that happened in the spiritual life of the nation from this point of view. Arthur Schopenhauer [1788–1860] was called a philosopher of the owners of common stock and bonds. Friedrich Nietzsche [1844–1900] was called the philosopher of big business. For every change in ideology, for every change in music, art, novel writing, play writing, the Marxians had an immediate interpretation. Every new book was explained by the “superstructure” of that particular day. Every book was assigned an adjective—“bourgeois” or “proletarian.” The bourgeoisie were considered an undifferentiated reactionary mass.
Don’t think it is possible for a man to practice all his life a certain ideology without believing in it.The use of the term “mature capitalism” shows how fully persons, who don’t think of themselves as Marxian in any way, have been influenced by Marx. Mr. and Mrs. Hammond, in fact almost all historians, have accepted the Marxian interpretation of the Industrial Revolution. [J. L. and Barbara Hammond, authors of the trilogy The Village Labourer (1911), The Town Labourer (1917), and The Skilled Labourer (1919)—Ed.] The one exception is Ashton.[T.S. Ashton, The Industrial Revolution 1760-1830 (London: Oxford University Press, 1998 [1948, 1961])—Ed.]
Karl Marx, in the second part of his career, was not an interventionist; he was in favor of laissez faire. Because he expected the breakdown of capitalism and the substitution of socialism to come from the full maturity of capitalism, he was in favor of letting capitalism develop. In this regard he was, in his writings and in his books, a supporter of economic freedom.
Marx believed that interventionist measures were unfavorable because they delayed the coming of socialism. Labor unions recommended interventions and, therefore, Marx was opposed to them. Labor unions don’t produce anything anyway and it would have been impossible to raise wage rates if producers had not actually produced more.
Marx claimed interventions hurt the interests of the workers. The German socialists voted against [Otto von] Bismarck’s social reforms that he instituted circa 1881 (Marx died in 1883). And in this country the Communists were against the New Deal. Of course, the real reason for their opposition to the government in power was very different. No opposition party wants to assign so much power to another party. In drafting socialist programs, everybody assumes tacitly that he himself will be the planner or the dictator, or that the planner or dictator will be intellectually completely dependent on him and that the planner or dictator will be his handyman. No one wants to be a single member in the planning scheme of somebody else.
These ideas of planning go back to Plato’s treatise on the form of the commonwealth. Plato was very outspoken. He planned a system ruled exclusively by philosophers. He wanted to eliminate all individual rights and decisions. Nobody should go anywhere, rest, sleep, eat, drink, wash, unless he was told to do so. Plato wanted to reduce persons to the status of pawns in his plan. What is needed is a dictator who appoints a philosopher as a kind of prime minister or president of the central board of production management. The program of all such consistent socialists—Plato and Hitler, for instance—planned also for the production of future socialists, the breeding and education of future members of society.
During the 2300 years since Plato, very little opposition has been registered to his ideas. Not even by Kant.The psychological bias in favor of socialism must be taken into consideration in discussing Marxian ideas.This is not limited to those who call themselves Marxian. Marxians deny that there is such a thing as the search for knowledge for the sake of knowledge alone. But they are not consistent in this case either, for they say one of the purposes of the socialist state is to eliminate such a search for knowledge. It is an insult, they say, for persons to study things that are useless.
Now I want to discuss the meaning of the ideological distortion of truths. Class consciousness is not developed in the beginning, but it must inevitably come. Marx developed his doctrine of ideology because he realized he couldn’t answer the criticisms raised against socialism. His answer was, “What you say is not true. It is only ideology. What a man thinks, so long as we do not have a classless society, is necessarily a class ideology—that is, it is based on a false consciousness.” Without any further explanation, Marx assumed that such an ideology was useful to the class and to the members of the class that developed it. Such ideas had for their goal the pursuit of the aims of their class.
Marx and Engels appeared and developed the class ideas of the proletariat.Therefore, from this time on the doctrine of the bourgeoisie is absolutely useless. Perhaps one may say that the bourgeoisie needed this explanation to solve a bad conscience. But why should they have a bad conscience if their existence is necessary? And it is necessary, according to Marxian doctrine, for without the bourgeoisie, capitalism cannot develop. And until capitalism is “mature,” there cannot be any socialism.
According to Marx, bourgeois economics, sometimes called “apologetics for bourgeois production,” aided them, the bourgeoisie.The Marxians could have said that the thought the bourgeoisie gave to this bad bourgeois theory justified, in their eyes, as well as in the eyes of the exploited, the capitalist mode of production, thus making it possible for the system to exist. But this would have been a very un-Marxist explanation. First of all, according to Marxian doctrine, no justification is needed for the bourgeois system of production; the bourgeoisie exploit because it is their business to exploit, just as it is the business of the microbes to exploit. The bourgeoisie don’t need any justification. Their class consciousness shows them that they have to do this; it is the capitalist’s nature to exploit.
A Russian friend of Marx wrote him that the task of the socialists must be to help the bourgeoisie exploit better and Marx replied that that was not necessary. Marx then wrote a short note saying that Russia could reach socialism without going through the capitalist stage. The next morning he must have realized that, if he admitted that one country could skip one of the inevitable stages, this would destroy his whole theory. So he didn’t send the note. Engels, who was not so bright, discovered this piece of paper in the desk of Karl Marx, copied it in his own handwriting, and sent his copy to Vera Zasulich [1849–1919], who was famous in Russia because she had attempted to assassinate the Police Commissioner in St. Petersburg and been acquitted by the jury—she had a good defense counsel. This woman published Marx’s note, and it became one of the great assets of the Bolshevik Party.
The capitalist system is a system in which promotion is precisely according to merit. If people do not get ahead, there is bitterness in their minds.They are reluctant to admit that they do not advance because of their lack of intelligence. They take their lack of advancement out on society. Many blame society and turn to socialism. This tendency is especially strong in the ranks of intellectuals. Because professionals treat each other as equals, the less capable professionals consider themselves “superior” to non-professionals and feel they deserve more recognition than they receive. Envy plays an important role.There is a philosophical predisposition among persons to be dissatisfied with the existing state of affairs. There is dissatisfaction, also, with political conditions. If you are dissatisfied, you ask what other kind of state can be considered.
Marx had “anti-talent”—i.e., a lack of talent. He was influenced by Hegel and Feuerbach, especially by Feuerbach’s critique of Christianity.
Marx admitted that the exploitation doctrine was taken from an anonymous pamphlet published in the 1820s. His economics were distortions taken over from [David] Ricardo [1772–1823]. [On the Principles of Political Economy and Taxation (London: John Murray, 1821 [1817]).] Marx was economically ignorant; he didn’t realize that there can be doubts concerning the best means of production to be applied.The big question is, how shall we use the available scarce factors of production. Marx assumed that what has to be done is obvious. He didn’t realize that the future is always uncertain, that it is the job of every businessman to provide for the unknown future. In the capitalist system, the workers and technologists obey the entrepreneur. Under socialism, they will obey the socialist official. Marx didn’t take into consideration the fact that there is a difference between saying what has to be done and doing what somebody else has said must be done. The socialist state is necessarily a police state.
The withering away of the state was just Marx’s attempt to avoid answering the question about what would happen under socialism. Under socialism, the convicts will know that they are being punished for the benefit of the whole society.
The third volume of Das Kapital was filled with lengthy quotations from the hearings of British Parliamentary Committees on money and banking, and they don’t make any sense at all. For instance, “The monetary system is essentially Catholic, the credit system essentially Protestant. . . . But the credit system does not emancipate itself from the basis of the monetary system any more than Protestantism emancipates itself from the foundations of Catholicism.”[Ibid., p. 696.]
Utterly nonsensical!
Excerpted from Marxism Unmasked: From Delusion to Destruction
[Excerpted from Murray Rothbard, The Progressive Era, Patrick Newman, ed. (Auburn, Al.: Mises Institute, 2016), chap. 11.]
The Rockefellers and their intellectual and technocratic entourage were, indeed, central to the New Deal. In a deep sense, in fact, the New Deal itself constituted a radical displacement of the Morgans, who had dominated the financial and economic politics of the 1920s, by a coalition led by the Rockefellers, the Harrimans, Kuhn-Loeb, and the Lehman Brothers investment banking firms.35 The Business Advisory Committee of the Department of Commerce, for example, which proved highly influential in drawing up New Deal measures, was dominated by the scion of the Harriman family, W. Averill Harriman, and by such Rockefeller satraps as Walter Teagle, head of Standard Oil of New Jersey. Here we have space to trace only the influence of the Rockefellers, allied with the Wisconsin progressives and the graduates of the settlement houses, in creating and imposing on America the Social Security System. Here, too, was the end product of a gradual but sure process of secularization of the messianic ideal of the postmillennial pietists. Perhaps it is only fitting that a movement that began with postmillennial Yankee harridans going out into the streets and trying to destroy saloons would conclude with Wisconsin social scientists, technocrats, and Rockefeller-driven experts manipulating the levers of political power to bring about a top-down revolution in the form of the welfare state.The Rockefellers were originally ardent postmillennialist Baptists, John D. Sr., hailing originally from upstate New York. John D. Jr., headed the moral as well as philanthropic wing of the Rockefeller Empire, heading a grand jury in New York City in 1920 dedicated to stamping out vice in that city. After World War I, however, the Rockefeller family’s handpicked personal minister, the Reverend Harry Emerson Fosdick, spearheaded the drive of “liberal Protestantism,” a secularized version of postmillennialism, in order to repel a rising tide of premillennialist “fundamentalism” in the church. Harry Fosdick became head of the Federal Council of Churches of Christ, the mainstream liberal Protestant organization. In the meanwhile, John D., Jr. made Fosdick’s brother, Raymond Blaine Fosdick, head of the Rockefeller Foundation and eventually John D., Jr’s official biographer. Fosdick had been a settlement house worker. The Fosdicks were born in Buffalo to a New England Yankee family. On the Fosdicks, see Murray N. Rothbard, “World War I as Fulfillment: Power and the Intellectuals,” Journal of Libertarian Studies 9, no. 1 (Winter 1989): 92–93, 120. [Editor’s remarks] See Chapter 13 below, pp. 414–19.
Social Security began in 1934 when President Franklin Roosevelt commissioned a triad of his top officials to select the membership of a Committee on Economic Security (CES), which would draw up the legislation for the Social Security system. The three officials were Secretary of Labor Frances Perkins, Director of the Federal Emergency Relief Administration Harry Hopkins, and Secretary of Agriculture Henry A. Wallace. The most important of this triad was Perkins, whose department came closest to jurisdiction over social security, and who presented the administration’s viewpoints at Congressional hearings. Perkins and the others decided to entrust the all-important task to Arthur Altmeyer, a Commons disciple at Wisconsin who had been secretary of the Wisconsin Industrial Commission and had administered Wisconsin’s system of unemployment relief. When Roosevelt imposed the corporatist collectivist National Recovery Administration (NRA) in 1933, Altmeyer was made director of the NRA Labor Compliance Division. Corporatist businessmen heartily approved of Altmeyer’s performance on the task, notably Marion Folsom, head of Eastman Kodak, and one of the leading members of the Business Advisory Council.
Altmeyer’s first choice to become chairman of the CES was none other than Dr. Bryce Stewart, director of research for the Industrial Relations Councilors (IRC). The IRC had been set up in the early 1920s by the Rockefellers, specifically John D., Jr., in charge of ideology and philanthropy for the Rockefeller empire. The IRC was the flagship scholarly and activist outfit to promote a new form of corporatist labor-management cooperation, as well as promoting pro-union and pro-welfare-state policies in industry and government. The IRC also set up influential Industrial Relations departments in Ivy League universities, notably Princeton.
Bryce Stewart, however, was hesitant about so openly taking charge of the Social Security effort on behalf of the IRC and the Rockefellers. He preferred to remain behind the scenes, do advisory consulting to the CES, and co-direct a study of unemployment insurance for the Council.
Turned down by Stewart, Altmeyer turned to his successor as secretary of the Wisconsin Industrial Commission, Commons disciple Edwin E. Witte. Witte became Executive Secretary of the CES, with the task of appointing the other members. At the suggestion of FDR, Altmeyer consulted with powerful members of the BAC, namely Swope, Teagle, and John Raskob of DuPont and General Motors, about the makeup and policies of the CES.
Altmeyer and Witte also prepared names for FDR to select an Advisory Council to the CES, consisting of employer, union, and “citizen” members. In addition to Swope, Folsom, and Teagle, the Advisory Council included two other powerful corporatist businessmen. The first, Morris Leeds, was president of Leeds & Northrup, and a member of the corporate, pro-union, pro-welfare-state American Association for Labor Legislation. The second, Sam Lewisohn, was vice president of Miami Copper Company, and former president of the AALL. Selected to head the Advisory Council was an academic front man, the much beloved Southern liberal, Frank Graham, president of the University of North Carolina.
Altmeyer and Witte appointed as the members of the key Technical Board of the CES three distinguished experts, Murray Webb Latimer, J. Douglas Brown, and Barbara Nachtried Armstrong, who was the first female law professor at the University of California at Berkeley. All three were IRC affiliates, and Latimer and Brown were, indeed, eminent members of the Rockefeller-IRC network. Latimer, chairman of the Railroad Retirement Board, was a long-time employee of the IRC, and had compiled the IRC’s study of industrial pensions, as well as having hammered out the details of the Railroad Retirement Act. Latimer was a member of the AALL and helped administer insurance and pension plans for Standard Oil of New Jersey, Standard Oil of Ohio, and Standard Oil of California.
J. Douglas Brown was head of Princeton’s IRC-created Industrial Relations Department and was the point man for the CES in designing the old-age pension plan for Social Security. Brown, along with the big-business members of the Advisory Council, was particularly adamant that no employers escape the taxes for the old-age pension scheme. Brown was frankly concerned that small business not escape the cost-raising consequences of these social security tax obligations. In this way, big businesses, who were already voluntarily providing costly old-age pensions to their employees, could use the federal government to force their small-business competitors into paying for similar, costly, programs. Thus, Brown explained, in his testimony before the Senate Finance Committee in 1935, that the great boon of the employer “contribution” to old-age pensions is that
it makes uniform throughout industry a minimum cost of providing old-age security and protects the more liberal employer now providing pensions from the competition of the employer who otherwise fires the old person without a pension when superannuated. It levels up cost of old-age protection on both the progressive employer and the unprogressive employer.Jill Quadagno, The Transformation of Old Age Security: Class and Politics in the American Welfare State (Chicago: University of Chicago Press, 1988), p. 112; Jill Quadagno, “Welfare Capitalism and the Social Security Act of 1935,” American Sociological Review 49 (October, 1984): 641. Also see G. William Domhoff, The Power Elite and the State: How Policy is Made in America (New York: Aldine de Gruyter, 1990).
In other words, the legislation deliberately penalizes the lower cost, “unprogressive,” employer and cripples him by artificially raising his costs compared to the larger employer. Also injured, of course, are the consumers and the taxpayers who are forced to pay for this largess.
It is no wonder, then, that the bigger businesses almost all backed the Social Security scheme to the hilt, while it was attacked by such associations of small business as the National Metal Trades Association, the Illinois Manufacturing Association, and the National Association of Manufacturers. By 1939, only 17% of American businesses favored repeal of the Social Security Act, while not one big business firm supported repeal.
Big business, indeed, collaborated enthusiastically with social security. When the Social Security Board faced the formidable task of establishing 26 million accounts for individuals, it consulted with the BAC, and Marion Folsom helped plan the creation of regional SSB centers. The BAC got the Board to hire the director of the Industrial Bureau of the Philadelphia Chamber of Commerce to serve as head registrar, and J. Douglas Brown was rewarded for his services by becoming chairman of the new, expanded Advisory Council for the Social Security Administration.
J. Douglas Brown was head of Princeton’s IRC-created Industrial Relations Department and was the point man for the CES in designing the old-age pension plan for Social Security. Brown, along with the big-business members of the Advisory Council, was particularly adamant that no employers escape the taxes for the old-age pension scheme. Brown was frankly concerned that small business not escape the cost-raising consequences of these social security tax obligations. In this way, big businesses, who were already voluntarily providing costly old-age pensions to their employees, could use the federal government to force their small-business competitors into paying for similar, costly, programs. Thus, Brown explained, in his testimony before the Senate Finance Committee in 1935, that the great boon of the employer “contribution” to old-age pensions is that
it makes uniform throughout industry a minimum cost of providing old-age security and protects the more liberal employer now providing pensions from the competition of the employer who otherwise fires the old person without a pension when superannuated. It levels up cost of old-age protection on both the progressive employer and the unprogressive employer.37
In other words, the legislation deliberately penalizes the lower cost, “unprogressive,” employer and cripples him by artificially raising his costs compared to the larger employer. Also injured, of course, are the consumers and the taxpayers who are forced to pay for this largess.
It is no wonder, then, that the bigger businesses almost all backed the Social Security scheme to the hilt, while it was attacked by such associations of small business as the National Metal Trades Association, the Illinois Manufacturing Association, and the National Association of Manufacturers. By 1939, only 17% of American businesses favored repeal of the Social Security Act, while not one big business firm supported repeal.
Big business, indeed, collaborated enthusiastically with social security. When the Social Security Board faced the formidable task of establishing 26 million accounts for individuals, it consulted with the BAC, and Marion Folsom helped plan the creation of regional SSB centers. The BAC got the Board to hire the director of the Industrial Bureau of the Philadelphia Chamber of Commerce to serve as head registrar, and J. Douglas Brown was rewarded for his services by becoming chairman of the new, expanded Advisory Council for the Social Security Administration.
The American Association for Labor Legislation was particularly important in developing the Social Security system. This leftist social-welfare outfit, founded by Commons and headed for decades by his student John B. Andrews, was financed by Rockefeller, Morgan, and other wealthy
corporate liberal financial and industrial interests. The AALL was the major developer of disability and health insurance proposals during the 1920s, and then in 1930 turned to work on model state bills for unemployment insurance. In 1932, Wisconsin adopted the AALL’s plan and, under the force of AALL lobbying, the Democratic Party incorporated it into its platform. In developing Social Security, key CES Technical Board and Advisory Council posts were staffed with AALL members. Not only that, but in early 1934, Secretary Perkins asked none other than Paul Rauschenbush, the AALL’s Washington lobbyist, to draft a bill for Social Security which became the basis for further discussions in the CES. The AALL was also closely associated with Florence Kelley’s National Consumers League.
Paul Rauschenbusch had a fascinating pedigree in his own right. Paul was the son of the leading Social-Gospel Baptist minister Walter Rauschenbusch. Paul studied under John R. Commons and was the principle author of the Wisconsin unemployment insurance law. There was even more of a progressive cast to Rauschenbusch, for he married none other than Elizabeth Brandeis, daughter of the famed progressive jurist. Elizabeth also studied under Commons and received a Ph.D. from Wisconsin. What’s more, she was also a close friend of the Marxist Florence Kelley and helped edit her aunt Josephine Goldmark’s loving biography of Kelley. Elizabeth also helped write the Wisconsin unemployment compensation law. She taught economics at Wisconsin, rising to the post of full professor.
We can conclude by noting, with historian Irwin Yellowitz, that all these reform organizations were dominated and funded by “a small group of wealthy patricians, professional men, and social workers. Wealthy women, including some from New York society, were indispensable to the financing and staffing.”Irwin Yellowitz, Labor and the Progressive Movement in New York State, 1897–1916 (Ithaca, NY: Cornell University Press, 1965), p. 71. See in particular J. Craig Jenkins and Barbara G. Brents, “Social Protest, Hegemonic Competition, and Social Reform: A Political Struggle Interpretation of the American Welfare State,” American Sociological Review 54 (December, 1989): 891–909; and J. Craig Jenkins and Barbara Brents, “Capitalists and Social Security: What Did They Really Want?” American Sociological Review 56 (February, 1991): 129–32.
In all democratic countries, in the United States even more than elsewhere, a strong belief prevails that the influence of the intellectuals on politics is negligible. This is no doubt true of the power of intellectuals to make their peculiar opinions of the moment influence decisions, of the extent to which they can sway the popular vote on questions on which they differ from the current views of the masses. Yet over somewhat longer periods they have probably never exercised so great an influence as they do today in those countries. This power they wield by shaping public opinion.
In the light of recent history it is somewhat curious that this decisive power of the professional secondhand dealers in ideas should not yet be more generally recognized. The political development of the Western World during the last hundred years furnishes the clearest demonstration. Socialism has never and nowhere been at first a working-class movement. It is by no means an obvious remedy for the obvious evil which the interests of that class will necessarily demand. It is a construction of theorists, deriving from certain tendencies of abstract thought with which for a long time only the intellectuals were familiar; and it required long efforts by the intellectuals before the working classes could be persuaded to adopt it as their program.
In every country that has moved toward socialism, the phase of the development in which socialism becomes a determining influence on politics has been preceded for many years by a period during which socialist ideals governed the thinking of the more active intellectuals. In Germany this stage had been reached toward the end of the last century; in England and France, about the time of the first World War. To the casual observer it would seem as if the United States had reached this phase after World War II and that the attraction of a planned and directed economic system is now as strong among the American intellectuals as it ever was among their German or English fellows. Experience suggests that, once this phase has been reached, it is merely a question of time until the views now held by the intellectuals become the governing force of politics.
The character of the process by which the views of the intellectuals influence the politics of tomorrow is therefore of much more than academic interest. Whether we merely wish to foresee or attempt to influence the course of events, it is a factor of much greater importance than is generally understood. What to the contemporary observer appears as the battle of conflicting interests has indeed often been decided long before in a clash of ideas confined to narrow circles. Paradoxically enough, however, in general only the parties of the Left have done most to spread the belief that it was the numerical strength of the opposing material interests which decided political issues, whereas in practice these same parties have regularly and successfully acted as if they understood the key position of the intellectuals. Whether by design or driven by the force of circumstances, they have always directed their main effort toward gaining the support of this "elite," while the more conservative groups have acted, as regularly but unsuccessfully, on a more naive view of mass democracy and have usually vainly tried directly to reach and to persuade the individual voter.
The term "intellectuals," however, does not at once convey a true picture of the large class to which we refer, and the fact that we have no better name by which to describe what we have called the secondhand dealers in ideas is not the least of the reasons why their power is not understood. Even persons who use the word "intellectual" mainly as a term of abuse are still inclined to withhold it from many who undoubtedly perform that characteristic function. This is neither that of the original thinker nor that of the scholar or expert in a particular field of thought. The typical intellectual need be neither: he need not possess special knowledge of anything in particular, nor need he even be particularly intelligent, to perform his role as intermediary in the spreading of ideas. What qualifies him for his job is the wide range of subjects on which he can readily talk and write, and a position or habits through which he becomes acquainted with new ideas sooner than those to whom he addresses himself.
Until one begins to list all the professions and activities which belong to the class, it is difficult to realize how numerous it is, how the scope for activities constantly increases in modern society, and how dependent on it we all have become. The class does not consist of only journalists, teachers, ministers, lecturers, publicists, radio commentators, writers of fiction, cartoonists, and artists all of whom may be masters of the technique of conveying ideas but are usually amateurs so far as the substance of what they convey is concerned. The class also includes many professional men and technicians, such as scientists and doctors, who through their habitual intercourse with the printed word become carriers of new ideas outside their own fields and who, because of their expert knowledge of their own subjects, are listened with respect on most others. There is little that the ordinary man of today learns about events or ideas except through the medium of this class; and outside our special fields of work we are in this respect almost all ordinary men, dependent for our information and instruction on those who make it their job to keep abreast of opinion. It is the intellectuals in this sense who decide what views and opinions are to reach us, which facts are important enough to be told to us, and in what form and from what angle they are to be presented. Whether we shall ever learn of the results of the work of the expert and the original thinker depends mainly on their decision.
The layman, perhaps, is not fully aware to what extent even the popular reputations of scientists and scholars are made by that class and are inevitably affected by its views on subjects which have little to do with the merits of the real achievements. And it is specially significant for our problem that every scholar can probably name several instances from his field of men who have undeservedly achieved a popular reputation as great scientists solely because they hold what the intellectuals regard as "progressive" political views; but I have yet to come across a single instance where such a scientific pseudo-reputation has been bestowed for political reason on a scholar of more conservative leanings. This creation of reputations by the intellectuals is particularly important in the fields where the results of expert studies are not used by other specialists but depend on the political decision of the public at large. There is indeed scarcely a better illustration of this than the attitude which professional economists have taken to the growth of such doctrines as socialism or protectionism. There was probably at no time a majority of economists, who were recognized as such by their peers, favorable to socialism (or, for that matter, to protection). In all probability it is even true to say that no other similar group of students contains so high a proportion of its members decidedly opposed to socialism (or protection). This is the more significant as in recent times it is as likely as not that it was an early interest in socialist schemes for reform which led a man to choose economics for his profession. Yet it is not the predominant views of the experts but the views of a minority, mostly of rather doubtful standing in their profession, which are taken up and spread by the intellectuals.
The all-pervasive influence of the intellectuals in contemporary society is still further strengthened by the growing importance of "organization." It is a common but probably mistaken belief that the increase of organization increases the influence of the expert or specialist. This may be true of the expert administrator and organizer, if there are such people, but hardly of the expert in any particular field of knowledge. It is rather the person whose general knowledge is supposed to qualify him to appreciate expert testimony, and to judge between the experts from different fields, whose power is enhanced. The point which is important for us, however, is that the scholar who becomes a university president, the scientist who takes charge of an institute or foundation, the scholar who becomes an editor or the active promoter of an organization serving a particular cause, all rapidly cease to be scholars or experts and become intellectuals, solely in the light of certain fashionable general ideas. The number of such institutions which breed intellectuals and increase their number and powers grows every day. Almost all the "experts" in the mere technique of getting knowledge over are, with respect to the subject matter which they handle, intellectuals and not experts.
In the sense in which we are using the term, the intellectuals are in fact a fairly new phenomenon of history. Though nobody will regret that education has ceased to be a privilege of the propertied classes, the fact that the propertied classes are no longer the best educated and the fact that the large number of people who owe their position solely to the their general education do not possess that experience of the working of the economic system which the administration of property gives, are important for understanding the role of the intellectual. Professor Schumpeter, who has devoted an illuminating chapter of his Capitalism, Socialism, and Democracy to some aspects of our problem, has not unfairly stressed that it is the absence of direct responsibility for practical affairs and the consequent absence of first hand knowledge of them which distinguishes the typical intellectual from other people who also wield the power of the spoken and written word. It would lead too far, however, to examine here further the development of this class and the curious claim which has recently been advanced by one of its theorists that it was the only one whose views were not decidedly influenced by its own economic interests. One of the important points that would have to be examined in such a discussion would be how far the growth of this class has been artificially stimulated by the law of copyright.
It is not surprising that the real scholar or expert and the practical man of affairs often feel contemptuous about the intellectual, are disinclined to recognize his power, and are resentful when they discover it. Individually they find the intellectuals mostly to be people who understand nothing in particular especially well and whose judgement on matters they themselves understand shows little sign of special wisdom. But it would be a fatal mistake to underestimate their power for this reason. Even though their knowledge may often be superficial and their intelligence limited, this does not alter the fact that it is their judgement which mainly determines the views on which society will act in the not too distant future. It is no exaggeration to say that, once the more active part of the intellectuals has been converted to a set of beliefs, the process by which these become generally accepted is almost automatic and irresistible. These intellectuals are the organs which modern society has developed for spreading knowledge and ideas, and it is their convictions and opinions which operate as the sieve through which all new conceptions must pass before they can reach the masses.
It is of the nature of the intellectual's job that he must use his own knowledge and convictions in performing his daily task. He occupies his position because he possesses, or has had to deal from day to day with, knowledge which his employer in general does not possess, and his activities can therefore be directed by others only to a limited extent. And just because the intellectuals are mostly intellectually honest, it is inevitable that they should follow their own conviction whenever they have discretion and that they should give a corresponding slant to everything that passes through their hands. Even where the direction of policy is in the hands of men of affairs of different views, the execution of policy will in general be in the hands of intellectuals, and it is frequently the decision on the detail which determines the net effect. We find this illustrated in almost all fields of contemporary society. Newspapers in "capitalist" ownership, universities presided over by "reactionary" governing bodies, broadcasting systems owned by conservative governments, have all been known to influence public opinion in the direction of socialism, because this was the conviction of the personnel. This has often happened not only in spite of, but perhaps even because of, the attempts of those at the top to control opinion and to impose principles of orthodoxy.
The effect of this filtering of ideas through the convictions of a class which is constitutionally disposed to certain views is by no means confined to the masses. Outside his special field the expert is generally no less dependent on this class and scarcely less influenced by their selection. The result of this is that today in most parts of the Western World even the most determined opponents of socialism derive from socialist sources their knowledge on most subjects on which they have no firsthand information. With many of the more general preconceptions of socialist thought, the connection of their more practical proposals is by no means at once obvious; in consequence of that system of thought become in fact effective spreaders of its ideas. Who does not know the practical man who in his own field denounces socialism as "pernicious rot" but, when he steps outside his subject, spouts socialism like any left journalist? In no other field has the predominant influence of the socialist intellectuals been felt more strongly during the last hundred years than in the contacts between different national civilizations. It would go far beyond the limits of this article to trace the causes and significance of the highly important fact that in the modern world the intellectuals provide almost the only approach to an international community. It is this which mainly accounts for the extraordinary spectacle that for generations the supposedly "capitalist" West has been lending its moral and material support almost exclusively to those ideological movements in countries father east which aimed at undermining Western civilization and that, at the same time, the information which the Western public has obtained about events in Central and Eastern Europe has almost inevitably been colored by a socialist bias. Many of the "educational" activities of the American forces of occupation of Germany have furnished clear and recent examples of this tendency.
A proper understanding of the reasons which tend to incline so many of the intellectuals toward socialism is thus most important. The first point here which those who do not share this bias ought to face frankly is that it is neither selfish interests nor evil intentions but mostly honest convictions and good intentions which determine the intellectual's views. In fact, it is necessary to recognize that on the whole the typical intellectual is today more likely to be a socialist the more he his guided by good will and intelligence, and that on the plane of purely intellectual argument he will generally be able to make out a better case than the majority of his opponents within his class. If we still think him wrong, we must recognize that it may be genuine error which leads the well-meaning and intelligent people who occupy those key positions in our society to spread views which to us appear a threat to our civilization.It was therefore not (as has been suggested by one reviewer of The Road to Serfdom, Professor J. Schumpeter), "politeness to a fault" but profound conviction of the importance of this which made me, in Professor Schumpeter's words, "hardly ever attribute to opponents anything beyond intellectual error." Nothing could be more important than to try to understand the sources of this error in order that we should be able to counter it. Yet those who are generally regarded as the representatives of the existing order and who believe that they comprehend the dangers of socialism are usually very far from such understanding. They tend to regard the socialist intellectuals as nothing more than a pernicious bunch of highbrow radicals without appreciating their influence and, by their whole attitude to them, tend to drive them even further into opposition to the existing order.
If we are to understand this peculiar bias of a large section of intellectuals, we must be clear about two points. The first is that they generally judge all particular issues exclusively in the light of certain general ideas; the second, that the characteristic errors of any age are frequently derived from some genuine new truths it has discovered, and they are erroneous applications of new generalizations which have proved their value in other fields. The conclusion to which we shall be led by a full consideration of these facts will be that the effective refutation of such errors will frequently require further intellectual advance, and often advance on points which are very abstract and may seem very remote from the practical issues.
It is perhaps the most characteristic feature of the intellectual that he judges new ideas not by their specific merits but by the readiness with which they fit into his general conceptions, into the picture of the world which he regards as modern or advanced. It is through their influence on him and on his choice of opinions on particular issues that the power of ideas for good and evil grows in proportion to their generality, abstractness, and even vagueness. As he knows little about the particular issues, his criterion must be consistency with his other views and suitability for combining into a coherent picture of the world. Yet this selection from the multitude of new ideas presenting themselves at every moment creates the characteristic climate of opinion, the dominant Weltanschauung of a period, which will be favorable to the reception of some opinions and unfavorable to others and which will make the intellectual readily accept one conclusion and reject another without a real understanding of the issues.
In some respects the intellectual is indeed closer to the philosopher than to any specialist, and the philosopher is in more than one sense a sort of prince among the intellectuals. Although his influence is farther removed from practical affairs and correspondingly slower and more difficult to trace than that of the ordinary intellectual, it is of the same kind and in the long run even more powerful than that of the latter. It is the same endeavor toward a synthesis, pursued more methodically, the same judgement of particular views in so far as they fit into a general system of thought rather than by their specific merits, the same striving after a consistent world view, which for both forms the main basis for accepting or rejecting ideas. For this reason the philosopher has probably a greater influence over the intellectuals than any other scholar or scientist and, more than anyone else, determines the manner in which the intellectuals exercise their censorship function. The popular influence of the scientific specialist begins to rival that of the philosopher only when he ceases to be a specialist and commences to philosophize about the progress of his subject and usually only after he has been taken up by the intellectuals for reasons which have little to do with his scientific eminence.
The "climate of opinion" of any period is thus essentially a set of very general preconceptions by which the intellectual judges the importance of new facts and opinions. These preconceptions are mainly applications to what seem to him the most significant aspects of scientific achievements, a transfer to other fields of what has particularly impressed him in the work of the specialists. One could give a long list of such intellectual fashions and catchwords which in the course of two or three generations have in turn dominated the thinking of the intellectuals. Whether it was the "historical approach" or the theory of evolution, nineteenth century determinism and the belief in the predominant influence of environment as against heredity, the theory of relativity or the belief in the power of the unconscious- every one of these general conceptions has been made the touchstone by which innovations in different fields have been tested. It seems as if the less specific or precise (or the less understood) these ideas are, the wider may be their influence. Sometimes it is no more than a vague impression rarely put into words which thus wields a profound influence. Such beliefs as that deliberate control or conscious organization is also in social affairs always superior to the results of spontaneous processes which are not directed by a human mind, or that any order based on a plan laid down beforehand must be better than one formed by the balancing of opposing forces, have in this way profoundly affected political development.
Only apparently different is the role of the intellectuals where the development of more properly social ideas is concerned. Here their peculiar propensities manifest themselves in making shibboleths of abstractions, in rationalizing and carrying to extremes certain ambitions which spring from the normal intercourse of men. Since democracy is a good thing, the further the democratic principle can be carried, the better it appears to them. The most powerful of these general ideas which have shaped political development in recent times is of course the ideal of material equality. It is, characteristically, not one of the spontaneously grown moral convictions, first applied in the relations between particular individuals, but an intellectual construction originally conceived in the abstract and of doubtful meaning or application in particular instances. Nevertheless, it has operated strongly as a principle of selection among the alternative courses of social policy, exercising a persistent pressure toward an arrangement of social affairs which nobody clearly conceives. That a particular measure tends to bring about greater equality has come to be regarded as so strong a recommendation that little else will be considered. Since on each particular issue it is this one aspect on which those who guide opinion have a definite conviction, equality has determined social change even more strongly than its advocates intended.
Not only moral ideals act in this manner, however. Sometimes the attitudes of the intellectuals toward the problems of social order may be the consequence of advances in purely scientific knowledge, and it is in these instances that their erroneous views on particular issues may for a time seem to have all the prestige of the latest scientific achievements behind them. It is not in itself surprising that a genuine advance of knowledge should in this manner become on occasion a source of new error. If no false conclusions followed from new generalizations, they would be final truths which would never need revision. Although as a rule such a new generalization will merely share the false consequences which can be drawn from it with the views which were held before, and thus not lead to new error, it is quite likely that a new theory, just as its value is shown by the valid new conclusions to which it leads, will produce other new conclusions to which further advance will show to have been erroneous. But in such an instance a false belief will appear with all the prestige of the latest scientific knowledge supporting it. Although in the particular field to which this belief applies all the scientific evidence may be against it, it will nevertheless, before the tribunal of the intellectuals and in the light of the ideas which govern their thinking, be selected as the view which is best in accord with the spirit of the time. The specialists who will thus achieve public fame and wide influence will thus not be those who have gained recognition by their peers but will often be men whom the other experts regard as cranks, amateurs, or even frauds, but who in the eyes of the general public nevertheless become the best known exponents of their subject.
In particular, there can be little doubt that the manner in which during the last hundred years man has learned to organize the forces of nature has contributed a great deal toward the creation of the belief that a similar control of the forces of society would bring comparable improvements in human conditions. That, with the application of engineering techniques, the direction of all forms of human activity according to a single coherent plan should prove to be as successful in society as it has been in innumerable engineering tasks, is too plausible a conclusion not to seduce most of those who are elated by the achievement of the natural sciences. It must indeed be admitted both that it would require powerful arguments to counter the strong presumption in favor of such a conclusion and that these arguments have not yet been adequately stated. It is not sufficient to point out the defects of particular proposals based on this kind of reasoning. The argument will not lose its force until it has been conclusively shown why what has proved so eminently successful in producing advances in so many fields should have limits to its usefulness and become positively harmful if extended beyond these limits. This is a task which has not yet been satisfactorily performed and which will have to be achieved before this particular impulse toward socialism can be removed.
This, of course, is only one of many instances where further intellectual advance is needed if the harmful ideas at present current are to be refuted and where the course which we shall travel will ultimately be decided by the discussion of very abstract issues. It is not enough for the man of affairs to be sure, from his intimate knowledge of a particular field, that the theories of socialism which are derived from more general ideas will prove impracticable. He may be perfectly right, and yet his resistance will be overwhelmed and all the sorry consequences which he foresees will follow if his is not supported by an effective refutation of the idees meres. So long as the intellectual gets the better of the general argument, the most valid objections of the specific issue will be brushed aside.
This is not the whole story, however. The forces which influence recruitment to the ranks of the intellectuals operate in the same direction and help to explain why so many of the most able among them lean toward socialism. There are of course as many differences of opinion among intellectuals as among other groups of people; but it seems to be true that it is on the whole the more active, intelligent, and original men among the intellectuals who most frequently incline toward socialism, while its opponents are often of an inferior caliber. This is true particularly during the early stages of the infiltration of socialist ideas; later, although outside intellectual circles it may still be an act of courage to profess socialist convictions, the pressure of opinion among intellectuals will often be so strongly in favor of socialism that it requires more strength and independence for a man to resist it than to join in what his fellows regard as modern views. Nobody, for instance, who is familiar with large numbers of university faculties (and from this point of view the majority of university teachers probably have to be classed as intellectuals rather than as experts) can remain oblivious to the fact that the most brilliant and successful teachers are today more likely than not to be socialists, while those who hold more conservative political views are as frequently mediocrities. This is of course by itself an important factor leading the younger generation into the socialist camp.
The socialist will, of course, see in this merely a proof that the more intelligent person is today bound to become a socialist. But this is far from being the necessary or even the most likely explanation. The main reason for this state of affairs is probably that, for the exceptionally able man who accepts the present order of society, a multitude of other avenues to influence and power are open, while to the disaffected and dissatisfied an intellectual career is the most promising path to both influence and the power to contribute to the achievement of his ideals. Even more than that: the more conservatively inclined man of first class ability will in general choose intellectual work (and the sacrifice in material reward which this choice usually entails) only if he enjoys it for its own sake. He is in consequence more likely to become an expert scholar rather than an intellectual in the specific sense of the word; while to the more radically minded the intellectual pursuit is more often than not a means rather than an end, a path to exactly that kind of wide influence which the professional intellectual exercises. It is therefore probably the fact, not that the more intelligent people are generally socialists but that a much higher proportion of socialists among the best minds devote themselves to those intellectual pursuits which in modern society give them a decisive influence on public opinion.Related to this is another familiar phenomenon: there is little reason to believe that really first class intellectual ability for original work is any rarer among Gentiles than among Jews. Yet there can be little doubt that men of Jewish stock almost everywhere constitute a disproportionately large number of the intellectuals in our sense, that is of the ranks of the professional interpreters of ideas. This may be their special gift and certainly is their main opportunity in countries where prejudice puts obstacles in their way in other fields. It is probably more because they constitute so large a proportion of the intellectuals than for any other reason that they seem to be so much more receptive of socialist ideas than people of different stocks.
The selection of the personnel of the intellectuals is also closely connected with the predominant interest which they show in general and abstract ideas. Speculations about the possible entire reconstruction of society give the intellectual a fare much more to his taste than the more practical and short-run considerations of those who aim at a piecemeal improvement of the existing order. In particular, socialist thought owes its appeal to the young largely to its visionary character; the very courage to indulge in Utopian thought is in this respect a source of strength to the socialists which traditional liberalism sadly lacks. This difference operates in favor of socialism, not only because speculation about general principles provides an opportunity for the play of the imagination of those who are unencumbered by much knowledge of the facts of present-day life, but also because it satisfies a legitimate desire for the understanding of the rational basis of any social order and gives scope for the exercise of that constructive urge for which liberalism, after it had won its great victories, left few outlets. The intellectual, by his whole disposition, is uninterested in technical details or practical difficulties. What appeal to him are the broad visions, the spacious comprehension of the social order as a whole which a planned system promises.
This fact that the tastes of the intellectual were better satisfied by the speculations of the socialists proved fatal to the influence of the liberal tradition. Once the basic demands of the liberal programs seemed satisfied, the liberal thinkers turned to problems of detail and tended to neglect the development of the general philosophy of liberalism, which in consequence ceased to be a live issue offering scope for general speculation. Thus for something over half a century it has been only the socialists who have offered anything like an explicit program of social development, a picture of the future society at which they were aiming, and a set of general principles to guide decisions on particular issues. Even though, if I am right, their ideals suffer from inherent contradictions, and any attempt to put them into practice must produce something utterly different from what they expect, this does not alter the fact that their program for change is the only one which has actually influenced the development of social institutions. It is because theirs has become the only explicit general philosophy of social policy held by a large group, the only system or theory which raises new problems and opens new horizons, that they have succeeded in inspiring the imagination of the intellectuals.
The actual developments of society during this period were determined, not by a battle of conflicting ideals, but by the contrast between an existing state of affairs and that one ideal of a possible future society which the socialists alone held up before the public. Very few of the other programs which offered themselves provided genuine alternatives. Most of them were mere compromises or half-way houses between the more extreme types of socialism and the existing order. All that was needed to make almost any socialist proposal appear reasonable to these "judicious" minds who were constitutionally convinced that the truth must always lie in the middle between the extremes, was for someone to advocate a sufficiently more extreme proposal. There seemed to exist only one direction in which we could move, and the only question seemed to be how fast and how far the movement should proceed.
The significance of the special appeal to the intellectuals which socialism derives from its speculative character will become clearer if we further contrast the position of the socialist theorist with that of his counterpart who is a liberal in the old sense of the word. This comparison will also lead us to whatever lesson we can draw from an adequate appreciation of the intellectual forces which are undermining the foundations of a free society.
Paradoxically enough, one of the main handicaps which deprives the liberal thinker of popular influence is closely connected with the fact that, until socialism has actually arrived, he has more opportunity of directly influencing decisions on current policy and that in consequence he is not only not tempted into that long-run speculation which is the strength of the socialists, but is actually discouraged from it because any effort of this kind is likely to reduce the immediate good he can do. Whatever power he has to influence practical decisions he owes to his standing with the representatives of the existing order, and this standing he would endanger if he devoted himself to the kind of speculation which would appeal to the intellectuals and which through them could influence developments over longer periods. In order to carry weight with the powers that be, he has to be "practical," "sensible," and "realistic." So long as he concerns himself with the immediate issues, he is rewarded with influence, material success, and popularity with those who up to a point share his general outlook. But these men have little respect for those speculations on general principles which shape the intellectual climate. Indeed, if he seriously indulges in such long-run speculation, he is apt to acquire the reputation of being "unsound" or even half a socialist, because he is unwilling to identify the existing order with the free system at which he aims.The most glaring recent example of such condemnation of a somewhat unorthodox liberal work as "socialist" has been provided by some comments on the late Henry Simons' Economic Policy for a Free Society (1948). One need not agree with the whole of this work and one may even regard some of the suggestions made in it as incompatible with a free society, and yet recognize it as one of the most important contributions made in recent times to our problem and as just the kind of work which is required to get discussion started on the fundamental issues. Even those who violently disagree with some of its suggestions should welcome it as a contribution which clearly and courageously raises the central problems of our time.
If, in spite of this, his efforts continue in the direction of general speculation, he soon discovers that it is unsafe to associate too closely with those who seem to share most of his convictions, and he is soon driven into isolation. Indeed there can be few more thankless tasks at present than the essential one of developing the philosophical foundation on which the further development of a free society must be based. Since the man who undertakes it must accept much of the framework of the existing order, he will appear to many of the more speculatively minded intellectuals merely as a timid apologist of things as they are; at the same time he will be dismissed by the men of affairs as an impractical theorist. He is not radical enough for those who know only the world where "with ease together dwell the thoughts" and much too radical for those who see only how "hard in space together clash the things." If he takes advantage of such support as he can get from the men of affairs, he will almost certainly discredit himself with those on whom he depends for the spreading of his ideas. At the same time he will need most carefully to avoid anything resembling extravagance or overstatement. While no socialist theorist has ever been known to discredit himself with his fellows even by the silliest of proposals, the old-fashioned liberal will damn himself by an impracticable suggestion. Yet for the intellectuals he will still not be speculative or adventurous enough, and the changes and improvements in the social structure he will have to offer will seem limited in comparison with what their less restrained imagination conceives.
At least in a society in which the main requisites of freedom have already been won and further improvements must concern points of comparative detail, the liberal program can have none of the glamour of a new invention. The appreciation of the improvements it has to offer requires more knowledge of the working of the existing society than the average intellectual possesses. The discussion of these improvements must proceed on a more practical level than that of the more revolutionary programs, thus giving a complexion which has little appeal for the intellectual and tending to bring in elements to whom he feels directly antagonistic. Those who are most familiar with the working of the present society are also usually interested in the preservation of particular features of that society which may not be defensible on general principles. Unlike the person who looks for an entirely new future order and who naturally turns for guidance to the theorist, the men who believe in the existing order also usually think that they understand it much better than any theorist and in consequence are likely to reject whatever is unfamiliar and theoretical.
The difficulty of finding genuine and disinterested support for a systematic policy for freedom is not new. In a passage of which the reception of a recent book of mine has often reminded me, Lord Acton long ago described how "at all times sincere friends of freedom have been rare, and its triumphs have been due to minorities, that have prevailed by associating themselves with auxiliaries whose objects differed from their own; and this association, which is always dangerous, has been sometimes disastrous, by giving to opponents just grounds of opposition...."Acton, The History of Freedom, I (1922). More recently, one of the most distinguished living American economists has complained in a similar vein that the main task of those who believe in the basic principles of the capitalist system must frequently be to defend this system against the capitalists--indeed the great liberal economists, from Adam Smith to the present, have always known this.
The most serious obstacle which separates the practical men who have the cause of freedom genuinely at heart from those forces which in the realm of ideas decide the course of development is their deep distrust of theoretical speculation and their tendency to orthodoxy; this, more than anything else, creates an almost impassable barrier between them and those intellectuals who are devoted to the same cause and whose assistance is indispensable if the cause is to prevail. Although this tendency is perhaps natural among men who defend a system because it has justified itself in practice, and to whom its intellectual justification seems immaterial, it is fatal to its survival because it deprives it of the support it most needs. Orthodoxy of any kind, any pretense that a system of ideas is final and must be unquestioningly accepted as a whole, is the one view which of necessity antagonizes all intellectuals, whatever their views on particular issues. Any system which judges men by the completeness of their conformity to a fixed set of opinions, by their "soundness" or the extent to which they can be relied upon to hold approved views on all points, deprives itself of a support without which no set of ideas can maintain its influence in modern society. The ability to criticize accepted views, to explore new vistas and to experience with new conceptions, provides the atmosphere without which the intellectual cannot breathe.
A cause which offers no scope for these traits can have no support from him and is thereby doomed in any society which, like ours, rests on his services. It may be that as a free society as we have known it carries in itself the forces of its own destruction, that once freedom has been achieved it is taken for granted and ceases to be valued, and that the free growth of ideas which is the essence of a free society will bring about the destruction of the foundations on which it depends. There can be little doubt that in countries like the United States the ideal of freedom today has less real appeal for the young than it has in countries where they have learned what its loss means. On the other hand, there is every sign that in Germany and elsewhere, to the young men who have never known a free society, the task of constructing one can become as exciting and fascinating as any socialist scheme which has appeared during the last hundred years. It is an extraordinary fact, though one which many visitors have experienced, that in speaking to German students about the principles of a liberal society one finds a more responsive and even enthusiastic audience than one can hope to find in any of the Western democracies. In Britain also there is already appearing among the young a new interest in the principles of true liberalism which certainly did not exist a few years ago.
Does this mean that freedom is valued only when it is lost, that the world must everywhere go through a dark phase of socialist totalitarianism before the forces of freedom can gather strength anew? It may be so, but I hope it need not be. Yet, so long as the people who over longer periods determine public opinion continue to be attracted by the ideals of socialism, the trend will continue. If we are to avoid such a development, we must be able to offer a new liberal program which appeals to the imagination. We must make the building of a free society once more an intellectual adventure, a deed of courage.
What we lack is a liberal Utopia, a program which seems neither a mere defense of things as they are nor a diluted kind of socialism, but a truly liberal radicalism which does not spare the susceptibilities of the mighty (including the trade unions), which is not too severely practical, and which does not confine itself to what appears today as politically possible. We need intellectual leaders who are willing to work for an ideal, however small may be the prospects of its early realization. They must be men who are willing to stick to principles and to fight for their full realization, however remote. The practical compromises they must leave to the politicians. Free trade and freedom of opportunity are ideals which still may arouse the imaginations of large numbers, but a mere "reasonable freedom of trade" or a mere "relaxation of controls" is neither intellectually respectable nor likely to inspire any enthusiasm. The main lesson which the true liberal must learn from the success of the socialists is that it was their courage to be Utopian which gained them the support of the intellectuals and therefore an influence on public opinion which is daily making possible what only recently seemed utterly remote. Those who have concerned themselves exclusively with what seemed practicable in the existing state of opinion have constantly found that even this had rapidly become politically impossible as the result of changes in a public opinion which they have done nothing to guide. Unless we can make the philosophic foundations of a free society once more a living intellectual issue, and its implementation a task which challenges the ingenuity and imagination of our liveliest minds. But if we can regain that belief in the power of ideas which was the mark of liberalism at its best, the battle is not lost. The intellectual revival of liberalism is already underway in many parts of the world. Will it be in time?
Originally published as The Intellectuals and Socialism
To “commemorate” the 100th anniversary of the Bolshevik revolution in Russian, I’ve been sharing a series of columns on the evil of communism.
On October 30, I looked at the death toll resulting from communist tyranny.On November 5, I discussed the shameful actions of communist apologists.On November 7, I shared some amusing mockery of totalitarian communism.Today, I’m going to target my profession.
But I’m going to bend over backwards to be fair. I’m not going to condemn the economists back in the 1920s and 1930s who were sympathetic to central planning. They were horribly wrong, but that was before economists from the Austrian School prevailed in the “Socialist Calculation Debate.” So we’ll give them an undeserved pass.
And we’ll even excuse the wrongheaded thinking of economists who sympathized with communism in the first couple of decades after World War II. After all, maybe they were just naive when they blindly accepted and regurgitated statistics from the Soviet Union (just as I think some people today are being somewhat gullible when they accept stats today from Beijing).
But there’s no excuse for any sentient being – especially an economist – to have praised the decrepit communist economic model by the time we got to the 1980s.
Yet some very prominent economists were guilty of whitewashing the sins of communism. I condemned Paul Samuelson two years ago (albeit only in a postscript) for his Pollyannish assessment of the Soviet economy. There was absolutely no excuse for him to write that, “…the Soviet economy is proof that…a socialist command economy can function and even thrive.”
Especially since he made that claim shortly before the Berlin Wall collapsed. That takes a special type of ignorance.
But Samuelson wasn’t the only academic economist to disseminate nonsense. Alex Tabarrok of Marginal Revolution shares some additional examples of mal-education.
…an even more off-course analysis can also be found in another mega-selling textbook, McConnell’s Economics (still a huge seller today). Like Samuelson, McConnell estimated Soviet GNP as half that of the United States in 1963 but he showed that the Soviets were investing a much larger share of GNP and thus growing at rates “two to three times” higher than the U.S. Indeed, through at least ten (!) editions, the Soviets continued to grow faster than the U.S. and yet in McConnell’s 1990 edition Soviet GNP was still half that of the United States!
Professor Tabarrok speculates on why some economists were so wrong.
To make their predictions, Samuelson and McConnell relied heavily on the production possibilities frontier (PPF), the idea that the fundamental tradeoff for any society was between “guns and butter.”
To be sure, the production possibilities frontier is a useful analytical tool for economists.
But these economists erred in assuming that central planners could allocate resources efficiently. More specifically, they looked at high levels of supposed investment in communist nations and assumed that would mean faster rates of growth.
That theory is correct, but only if capital is being allocated by the private sector in a system governed by market prices. Government investment, by contrast, is a recipe for pork, inefficiency, corruption, and waste.
If we were constructing an Economist Hall of Shame, we’d also want to include Lester Thurow, who was basically the Paul Krugman of the 1980s. As recounted in this Hoover Institution interview, he also pimped for the Soviet Union right up until the point it collapsed.
ZINSMEISTER But why have persons proven to have been calamitously mistaken been allowed to wriggle away? For instance, here’s a quote from Lester Thurow—dean of MIT’s business school, for heaven’s sake—writing in 1989: “Can economic command significantly accelerate the growth process? The remarkable performance of the Soviet Union suggests it can. Today it is a country whose economic achievements bear comparison with those of the United States.” Why isn’t this fellow laughed out of court?
CONQUEST These people were had for suckers. They believed figures and images and statements about the Soviet Union that did not accord with reality. This was also enforced in the Soviet Union. You had to believe the place was happy, well fed, and so forth. …there were two different Soviet Unions, the real one and the one put forward in the West. Often the unreal one was backed by huge amounts of impressive, phony statistics. It takes two to sell the Brooklyn Bridge; you need both a crook and a sucker. The apologists in this country swallowed the rubbish about communism because they didn’t like the people putting forth the opposite view.
Let’s close with an amazing – and depressing – observation.
An article by Professor Bryan Caplan for the Foundation for Economic Education looks at Princeton Review‘s AP Economics and notes that there are still some economists suffering from moral blindness.
When I was first learning economics, I was surprised by how pro-communist many economics textbooks were. …textbooks were very positive relative to communism’s historical record. …Many textbook authors were, in a phrase, communist dupes.
Sadly, some communist dupes still exist and they work at Princeton Review. Caplan highlights this excerpt from the book.
Communism is a system designed to minimize imbalance in wealth via the collective ownership of property. Legislators from a single political party – the communist party – divide the available wealth for equal advantage among citizens. The problems with communism include a lack of incentives for extra effort, risk taking, and innovation. The critical role of the central government in allocating resources and setting production levels makes this system particularly vulnerable to corruption.
Bryan then explains why AP Economics is nonsense.
The official communist line was that collective ownership would lead to high economic growth – and ultimately cornucopia. And in practice, communist regimes made collective ownership an end in itself. Just look at their repeated farm collectivizations that caused horrifying famines in the short-run, and low agricultural productivity in the long-run. …Communist regimes began with the mass murder of their political enemies, businessmen, and their families. Next, they seized the peasants’ land, leading to hellish famines. …And no communist regime has ever tried to “divide wealth for equal advantage.” Bloodbaths aside, communist regimes always put Party members’ comfort above the very lives of ordinary citizens.
I don’t know whether to laugh or cry.
Good people rejected communism from its inception because it was based on the immoral notion that individuals should be subjugated to the state (the same ideology in fascism and other collectivist movements).
As I noted above, I’m willing to forgive others (at least in the early decades) for thinking that communism might be economically successful.
But I have nothing but scorn for those who were pimping for totalitarianism in the 1980s (or still today). Economists already are the subject of derision and it’s easy to understand why after seeing how some of them excused an evil system.
Originally published at Dan Mitchell's blog Liberty – Restraining Government in America and Around the World
In these last days science has retrograded and been driven back. It has been bent and twisted under the obligation imposed upon it, if I may so speak, of denying the existence of Evil under pain of being convicted of denying the existence of God.
Writers whose business it is to display exquisite sensibility, unbounded philanthropy, and unrivaled devotion to religion, have got into the way of saying, “Evil cannot enter into the providential plan. Suffering is no ordinance of God and nature, but comes from human institutions.”
As this doctrine falls in with the passions that they desire to cherish, it soon becomes popular. Books and journals have been filled with declamations against society. Science is no longer permitted to study facts impartially. Whoever dares to warn men that a certain vice, a certain habit, leads necessarily to certain hurtful consequences is marked down as a man devoid of human feelings, without religion, an Atheist, a Malthusian, an Economist.Socialism has carried its folly so far as to announce the termination of all social suffering, but not of all individual suffering. It has not ventured to predict that a day will come when man willno longer suffer, grow old, and die.Now, I would ask, is it easier to reconcile with the infinite goodness of God, evil that assails individually every man who comes into the world, than evil that is extended over society at large? And then is it not a contradiction so transparent as to be puerile to deny the existence of suffering in the masses, when we admit its existence in individuals?
Man suffers, and will always suffer. Society, then, also suffers, and will always suffer. Those who address mankind should have the courage to tell it this. Humanity is not a fine lady, with delicate nerves, and an irritable temperament, from whom we must conceal the coming storm, more especially when to foresee it is the only way to ensure our getting out of it safely. In this respect, all the books with which France has been inundated, from Sismondi and Buret downward, appear to me to be wanting in virility. Their authors dare not tell the truth; nay, they dare not investigate it, for fear of discovering that absolute poverty is the necessary starting point of the human race, and that, consequently, so far are we from being in a position to attribute that poverty to the social order, it is to the social order that we must attribute all the triumphs we have already achieved over our original destitution. But, then, after such an avowal, they could no longer constitute themselves tribunes of the people, and the avengers of the masses oppressed by civilization.
After all, science merely establishes, combines, and deduces facts; she does not create them; she does not produce them, nor is she responsible for them. Is it not strange that men should have gone to the length of announcing and disseminating the paradox that if mankind suffers, its sufferings are due to Political Economy? Thus, after being blamed for investigating the sufferings of society, Political Economy is accused of engendering those sufferings by that same investigation.
I assert that science can do nothing more than observe and establish facts. Prove to us that humanity, instead of being progressive, is retrograde; and that inevitable and insurmountable laws urge mankind on to irremediable deterioration. Show us that the law of Malthus and that of Ricardo are true in their worst and most pernicious sense, and that it is impossible to deny the tyranny of capital, or the incompatibility between machinery and labor, or any of the other contradictory alternatives in which Chateaubriand and Tocqueville have placed the human race; then I maintain that science ought to proclaim this, and proclaim it aloud. Why should we shut our eyes to a gulf that is gaping before us? Do we require the naturalist or the physiologist to reason upon individual man on the assumption that his organs are exempt from pain or not liable to destruction? Pulvis es, et in pulverem reverteris; such is the declaration of anatomical science backed by universal experience. No doubt this is a hard truth for us to receive—not less hard than the contested propositions of Malthus and Ricardo. But are we for this reason to spare the delicate sensibility that has sprung up all at once among our modern publicists, and has given existence to Socialism? Is medical science for the same reason, to affirm audaciously that we are constantly renewing our youth and are immortal? Or if medical science refuse to stoop to such juggling, are we to foam at the mouth and cry out, as has been done in the case of the social sciences— “Medical science admits the existence of pain and death; it is misanthropical; it is cruel; it accuses God of being malevolent or powerless; it is impious; it is atheistical; nay, more, it creates the evil the existence of which it refuses to deny”?
I have never doubted that the Socialist schools have led away many generous hearts and earnest minds, and I have no wish to humiliate anyone. But the general character of Socialism is very whimsical, and I cannot help asking myself how long such a tissue of puerilities can continue in vogue.
In Socialism all is affectation.
It affects scientific forms and scientific language, and we have seen what sort of science it teaches.
In its writings it affects a delicacy of nerve so feminine as to be unable to listen to a tale of social sufferings; and while it has introduced into literature this insipid and mawkish sensibility, it has established in the arts a taste for the trivial and the horrible; in ordinary life, a sort of scarecrow fashion in dress, appearance, and deportment—the long beard, the grim and sullen countenance, the vulgar airs of a village Titan or Prometheus. In politics (where such puerilities are less innocent), Socialism has introduced the doctrine of energetic means of transition, the violence of revolutionary practices, life and material interests sacrificed en masse to what is ideal and chimerical. But what Socialism affects, above all, is a certain show and appearance of religion! This is only one of the Socialist tactics, it is true—such tactics are always disgraceful to a school when they lead to hypocrisy.These Socialists are perpetually talking to us of Christ; but I would ask them, how it is that while they acknowledge that Christ, the innocent par excellence, prayed in His agony that “the cup might pass from Him,” adding, “Nevertheless, not my will but Thine be done,” they should think it strange that mankind at large should be called upon to exercise resignation also.
No doubt, had God willed it, He might have so arranged His almighty plans that just as the individual advances toward inevitable death, the human race might have advanced toward inevitable destruction. In that case, we should have had no choice but to submit, and science, whether she liked it or not, would have to have admitted the somber social denouement, just as she now admits the melancholy individual denouement.
But happily it is not so.
There is redemption for man, and for humanity.
The one is endowed with an immortal soul; the other with indefinite perfectibility.
Excerpted from The Bastiat Collection
Listen to the Audio Mises Wire version of this article.
[This article is excerpted from Socialism: An Economic and Sociological Analysis.]
As political tactics Syndicalism presents a particular method of attack by organized labour for the attainment of their political ends. This end may also be the establishment of the true Socialism, that is to say, the socialization of the means of production. But the term Syndicalism is also used in a second sense, in which it means a sociopolitical aim of a special kind. In that sense Syndicalism is to be understood as a movement whose object is to bring about a state of society in which the workers are the owners of the means of production. We are concerned here with Syndicalism only as an aim; with Syndicalism as a movement, as political tactics, we need not deal.
Syndicalism as an aim and Syndicalism as political tactics do not always go hand in hand. Many groups which have adopted the syndicalist "direct action" as the basis of their proceedings are striving for a genuinely socialist community. On the other hand the attempt to realize Syndicalism as an end can be carried on by methods other than those of violence recommended by Sorel.
In the minds of the great bulk of workers who call themselves socialists or communists, Syndicalism presents itself, at least as vividly as Socialism, as the aim of the great revolution. The "petty bourgeois" ideas which Marx thought to overcome are very widespread—even in the ranks of the Marxian socialists. The great mass desire not the genuine Socialism, that is, centralized Socialism but Syndicalism. The worker wishes to be the lord of the means of production which are employed in his particular undertaking. The social movement round about us shows more clearly every day that this and nothing else is what the worker desires. In contradistinction to Socialism which is the result of armchair study, syndicalist ideas spring direct from the mind of the ordinary man, who is always hostile to "unearned" income obtained by someone else. Syndicalism like Socialism aims at the abolition of the separation of worker from the means of production, only it proceeds by another method. Not all the workers will become the owners of all the means of production; those in a particular industry or undertaking or the workers engaged in a complete branch of production will obtain the means of production employed in it. The railways to the railway men, the mines to the miners, the factories to the factory hand—this is the slogan.
We must ignore every freak scheme for enacting Syndicalist ideas and take a thoroughly consistent application of the main principle to the whole economic order as the starting point of our examination. This is not difficult. Every measure which takes the ownership of all the means of production from the entrepreneurs, capitalists, and landlords without transferring it to the whole of the citizens of the economic area, is to be regarded as Syndicalism. It makes no difference in this case, whether in such a society more or less of these associations are formed. It is unimportant whether all branches of production are constituted as separate bodies or only single undertakings, just as they happen to have evolved historically, or single factories or even single workshops. In essence the scheme is hardly affected if the lines drawn through the society are more or less, horizontal or vertical. The only decisive point is that the citizen of such a community is the owner of a share of certain means of production and the non-owner of other means of production, and that in some cases, for example, when he is unable to work, he may own no property at all. The question whether the workers' incomes will, or will not, be noticeably increased, is unimportant here. Most workers have absolutely fantastic ideas about the increase of wealth they could expect under syndicalist arrangements of property. They believe that just the mere distribution of the share which landlords, capitalists, and entrepreneurs draw under capitalist industry must considerably increase the income of each of them. Apart from this they expect an important increase in the product of industry, because they, who regard themselves as particularly expert, will themselves conduct the enterprise, and because every worker will be personally interested in the prosperity of the undertaking. The worker will no longer work for a stranger but for himself. The liberal thinks quite differently about all this. He points out that the distribution of rent and profit incomes among the workers would bring them an insignificant increase in incomes. Above all he maintains that enterprises which are no longer directed by the self-interest of entrepreneurs working on their own account but by labour leaders unfitted for the task will yield less, so that the workers will not only earn no more than under a free economy, but considerably less.
If syndicalist reform merely handed over to the workers the ownership of the means of production and left the system of property of the capitalist order otherwise unchanged, the result would be no more than a primitive redistribution of wealth. The redistribution of goods with the object of restoring the equality of property and wealth is at the back of the mind of the ordinary man whenever he thinks of reforming social conditions, and it forms the basis for all popular proposals for socialization. This is not incomprehensible in the case of land workers, to whom the object of all ambition is to acquire a homestead and a piece of land large enough to support him and his family; in the village, redistribution, the popular solution of the social problem, is quite conceivable. In industry, in mining, in communications, in trade, and in banking where a physical redistribution of the means of production is quite inconceivable, we get instead a desire for the division of the property rights while preserving the unity of the industry or enterprise. To divide in this simple way would be, at best, a method of abolishing for the moment the inequality in the distribution of income and poverty. But after a short time, some would have squandered their shares, and others would have enriched themselves by acquiring the shares of the less economically efficient. Consequently there would have to be constant redistributions, which would simply serve to reward frivolity and waste—in short every form of uneconomic behaviour. There will be no stimulus to economy if the industrious and thrifty are constantly compelled to hand over the fruits of their industry and thrift to the lazy and extravagant.
Yet even this result—the temporary achievement of equality of income and property—could not be accomplished by syndicalization. For syndicalization is by no means the same for all workers. The value of the means of production in different branches of production is not proportional to the number of workers employed. It is unnecessary to elaborate the fact that there are products which involve more of the productive factor, labour, and less of the productive factor, Nature. Even a division of the means of production at the historical commencement of all human production would have led to inequality; much more so if these means are syndicalized at a highly progressive stage of capital accumulation in which not only natural factors of production but produced means of production are divided. The values of the share falling to individual workers in a redistribution of this kind would be very different: some would obtain more, others less, and as a result some would draw a larger income from property—unearned income—than others. Syndicalization is in no way a means of achieving equality of incomes. It abolishes the existing inequality of incomes and property and replaces it by another. It may be that this syndicalistic inequality is regarded as more just than that of the capitalistic order—but on this point science can give no judgment.
If syndicalist reform is to mean more than the mere redistribution of productive goods, then it cannot allow the property arrangements of Capitalism to persist in regard to the means of production. It must withdraw productive goods from the market. Individual citizens must not dispose of the shares in the means of production which are allotted to them; for under Syndicalism these are bound up with the person of the owner in a much closer way than is the case in the liberal society. How, in different circumstances, they may be separated from the person can be regulated in various ways.
The naïve logic of the advocates of Syndicalism assumes without any further ado a completely stationary condition of society, and pays no attention to the problem, how the system will adapt itself to changes of economic conditions. If we assume that no changes occur in the methods of production, in the relations of supply and demand, in technique, or in population, then everything seems to be quite in order. Each worker has only one child, and departs out of this world at the moment his successor and sole heir becomes capable of work; the son promptly steps into his place. We can perhaps assume that a change of occupation, a transfer from one branch of production to another or from one independent undertaking to another by a voluntary simultaneous exchange of positions and of shares in the means of production will be permitted. But for the rest the syndicalist state of society necessarily assumes a strictly imposed caste system and the complete end of all changes in industry and, therefore, in life. The mere death of a childless citizen disturbs it and opens up problems which are quite insoluble within the logic of the system.
In the syndicalist society the income of a citizen is made up of the yield from his portion of property and of the wages from his labour. If the shares in the property in the means of production can be freely inherited, then in a very short time differences in property holding will arise even if no changes occur among the living. Even if at the beginning of the syndicalist era the separation of the worker from the means of production is overcome, so that every citizen is an enterpreneur as well as a worker in his undertaking, it may so happen that later on citizens who do not belong to a particular undertaking inherit shares in it. This would very quickly drive the syndicalist society to a separation of labour and property, without the advantages of the capitalist order of society.lt is misleading, therefore, to call Syndicalism "workers' Capitalism," as I too have done in Nation, Staat und Wirtschaft, p. 164.
Every economic change immediately creates problems on which Syndicalism would inevitably be wrecked. If changes in the direction and extent of demand or in the technique of production cause changes in the organization of the industry, which require the transfer of workers from one concern to another or from one branch of production to another, the question immediately arises what is to be done with the shares of these workers in the means of production. Should the workers and their heirs keep the shares in those industries to which they happened to belong at the actual time of syndicalization and enter the new industries as simple workers earning wages, without being allowed to draw any part of the property income? Or should they lose their share on leaving an industry and in return receive a share per head equal to that possessed by the workers already occupied in the new industry? Either solution would quickly violate the principle of Syndicalism. If, in addition, men were permitted to dispose of their shares, conditions would gradually return to the state prevailing before the reform. But if the worker on his departure from an industry loses his share and on entering another industry acquires a share in that, those workers who stood to lose by the change would, naturally, oppose energetically every change in production. The introduction of a process making for greater productivity of labour would be resisted if it displaced workers or might displace them. On the other hand the workers in an undertaking or branch of industry would oppose any development by the introduction of new workers if it threatened to reduce their income from property. In short, Syndicalism would make every change in production practically impossible. Where it existed there could be no question of economic progress.
As an aim Syndicalism is so absurd, that speaking generally, it has not found any advocates who dared to write openly and clearly in its favour. Those who have dealt with it under the name of co-partnership have never thought out its problems. Syndicalism has never been anything else than the ideal of plundering hordes.
The socialist regimes of the 20th century that succeeded in comprehensively imposing their designs and central plans on the societies over which they ruled attempted to abolish any and all of the preceding institutions of civil society. Edward Shils noted this in his 1991 essay “The Virtue of Civil Society,” explaining how such regimes went to great lengths to replace civil society with the omnipotence of the state in all things. Indeed, as Shils said, “Marxist-Leninists declared themselves to be enemies of civil society.”
Today’s democratic socialists insist that they have nothing to do with those others in the 20th century who also called themselves “socialists.” Those others were not real, or true, or the right kind of socialists. Therefore, the “new” democratic socialism should not have to carry any of the baggage of guilt by association through connection with those “bad” or mislabeled socialists of the recent past.
But listen to what our new democratic socialists want and propose. Ask yourself, If successful in bringing their plans to fruition, what would remain of the existing institutions of civil society in America? Government already monopolizes most of education from kindergarten through to the Ph.D. level. By calling for “free” schooling for all levels up to the doctoral degree, this means, in fact, that the federal government would pay for everyone’s education, at taxpayer’s expense, of course.
The money would now fully and completely pass through the conduit of political and bureaucratic hands. Curriculum, hiring and firing of faculty and administration, entrance requirements, standards for student retention and graduation would be even more effectively and comprehensively overseen, influenced, and finally controlled by those possessing government budgetary power than is the case today.
If higher education is already heavily politicized in our current climate of political correctness, identity politics, and ideological bias and manipulation, this trend would be merely accelerated if there is nothing outside of the orbit and oversight of the government since everyone would have their “right” to “free” government-paid higher education.
How would this be any different in matters of medical treatment and health care? The federal and state governments already have an intrusive and highly heavy hand in the health care industry and how and what it provides. “Single payer” means a single provider that determines what medical treatment and health care services for whom, of what type, and to what extent, since the socialist state must focus on what is claimed to be the good of all the members of society as a whole.
Your health care quality and duration of life, and that of your family, will be in the hands of the government bureaucratic managers of the medical profession, hospital facilities, and other caregiving facilities. If you sometimes feel yourself nothing but an ignored or depersonalized number for health care treatment under the current politicized system, just wait for full government-socialized medicine under the “single payer” euphemism, and when you then become an even-smaller decimal with four zeros after the dot. (See my article “For Healthcare, the Best Government Plan Is No Plan.” )
Centrally planned social and “identity” political justice? Forget about how you want to live, how and what you’d like to say, with whom you’d like to peacefully and voluntarily associate for mutually desired purposes, or the way you would like to honestly and non-violently go about earning a living and spending the money you’ve received through free exchange. Overcoming the injustices of the past — real and imagined — will require the progressives and democratic socialists to plan the redesigning of everyone’s place, status, opportunities, and outcomes throughout society. Every claimed unearned income, unjust social status, unfair employment, undeserved “privilege” will have to be reshaped according to the notions of the good society as seen inside the heads of those in charge of the political machinery of government.
Think of all the other corners and aspects of society, whether it is the physical environment, or culture, arts, and sciences, or investment patterns, or job locations, or the quantities and varieties of goods produced and supplied; each will have to be politically decided upon and imposed to make it compatible with “climate planning,” racial and gender fairness, and social egalitarianism. What corner of your part of society would not be under the determination and control of the state?
Democracy, Liberty, Socialism, and Civil Society Analysts and advocates of the institutions of civil society have long emphasized what Shils pointed out, that they also serve as intermediaries, as buffers, between the state and the citizen. They are the societal associations, organizations, and arrangements outside and independent of the government so that the individual does not have to become a slave to the plans and purposes of those in political power. The individual person can live free of the state — a status that shrinks to nothing when that individual is dependent upon and receives virtually all the things needed and wanted for life from the government.
But it’s “democratic” socialism! It’s what the people want as shown by those they elect to political office with the campaign agenda that the citizen-voters have expressed their desire for. It is the “will of the people.” Who can be against that, other than enemies of freedom, and oppressors who do not want the victimized to be liberated from their lives of injustice and unfairness?
But democracy is not liberty. Democracy is a political institutional means to determine who holds political office and for what period of time through a peaceful voting procedure that makes violent means unnecessary to remove or substitute those in positions of political authority and decision-making. And it is usually based on some form of majority-determining procedure.
Democracy carries with it the high respect and deference that it normally holds in most people’s minds because in modern times it gained political prominence along with and more or less at the same time in the 18th and 19th centuries as the emergent classical liberal ideas and ideals of individual liberty, impartial rule of and equality before the law, economic freedom, and constitutionally limited government. Democracy, therefore, came to be considered as inseparable from and confused in many people’s minds with freedom. But it need not.
Democratic (classical) liberalism linked the two together because in the eyes of many of the liberals in those earlier centuries the role of democratic reform was to make those in political power more directly accountable to the people over whom they ruled. But simultaneously the liberal agenda was to restrain the responsibilities and prerogatives of the government because political control, planning, regulation, and redistribution were considered abridgements of the personal freedom of the individual to control, plan, and regulate his own life, partly through those voluntary associations and interconnecting relationships of the institutions of civil society.
Democratic socialism, on the other hand, remains socialism, a concept that insists and demands that the “political” is to replace the “social” as understood as meaning individual self-governing in conjunction with the voluntarism of the peaceful community of free human beings. In this understanding, socialism is inherently antisocial.
Democratic socialism coercively confines and constrains all those living within what a majority or a coalition of minorities making up a voting majority wish to have imposed on the entire society. Notice that come the political triumph of progressive, democratic socialism everyone will have to accept and be limited to a higher education funded by and therefore fully under the oversight of the federal government. No one will be able to break out of the government plan as the single payer or provider of medical and health care throughout the country. Each person’s income, wealth, position and status, and opportunities for personal betterment will be forcefully straitjacketed within what those in governmental power deem to be the politically correct, the identity politics right, and the socially just.
The pluralism and peaceful competitions of the institutions of civil society with the underlying individual freedom that it represents and helps to secure is replaced by political monopoly and coercion through the powers of government to insist upon one size fitting all for anything and everything that such a democratic socialist regime considers to be properly within its orbit and responsibility.
Democratic Despotism Comes in Many Varieties Some authors in the past have referred to democratic despotism or totalitarian democracy. Once the antisocial agenda of socialism is in power and implemented, it can, at the end of the day, be nothing but despotic and totalitarian because it is either individuals making their own plans and coordinating their plans with those of others through the voluntary agreements of the market and those institutions of civil society, or it is the plans of some imposed on others through the use or threat of political compulsion. It comes down to freedom or tyranny, whether or not that tyranny has come to power through the use of bullets or votes dropped into a ballot box.
While I have focused on democratic socialism, the others that I referred to, nationalism, protectionism, and political paternalism, are all variations on the same theme. The Swiss classical liberal economist and political scientist William E. Rappard (1883-1958) long ago explained in an insightful essay, “Economic Nationalism,” (1938) that “nationalism, then, is the doctrine which places the nation at the top of the scale of political values, that is above the three rival values of the individual, of regional units and of the international community.… The individual subordinate to the state” is the hallmark of political and economic nationalism.
All that socialists argue about against nationalists and other forms of collectivism is for what purposes shall the coercive powers of the state be used in making all in society conform to some single or network of governmental plans that all are expected to obey and follow, if negative consequences are not to befall any individuals who attempt to act outside of the socialist scheme for that politically engineered bright and beautiful future.
Free market liberalism is the social system of a civil society based on and protective of personal liberty and human betterment. Socialism is the antisocial system of politics over people, governmental power instead of peaceful and free association, and a handful of imposed political plans instead of a pluralism of as many plans as there are people in the world.
Where is the freedom when one political plan replaces our many personal plans? What is liberating when the state becomes the political master and we are expected to be the obedient citizen-servants? Which one of these worlds — democratic market liberalism or democratic-planning socialism — do you want to live in?
It has been often said that our future rests with the next generation. If that is true, then it is a scary prospect.
The millennial generation (ages 18-34) increasingly sees itself, politically, as socialist. I personally know a couple of young men who declare themselves Marxists! Although that is frightening enough, remember the context in which it occurs:
The United States already faces several daunting economic problem such as the national debt, the unfunded future liabilities (related to entitlement programs such as Social Security and Medicare), as well as the obvious potential for hyperinflation. You can set aside things like the possibility of nuclear war and killer robots. The economic problems are real and likely to happen and can only be avoided or dealt by returning America to a free market economy—not socialism.Moving our government and society towards socialism will only make matters worse. Worse yet, if socialists gain control—and some would likely argue that they already have—they are unlikely to relinquish power peacefully. You would think that events in socialist Venezuela would knock some sense into these young people, but a new survey from GenForward shows increasing support for socialism. The report looks at how the millennial population thinks about politics and offers us a look at how the next generation thinks. Support for socialism is strongest among African-Americans and capitalism is supported by a small majority of white Americans. Among Asians and Latinos there is marginally more support for socialism. Given the support for the Bernie Sanders campaign this result is not surprising.
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When asked questions about whether strong government or the free market is the key to solving social problems, respondents believed that government is the answer by two to one. The majority felt the government was doing a good job with the economy, especially those that identified as Republican.
How this can be is a mystery. The federal government deficit has averaged more than a $1 trillion over the last decade. Guess who will have to pay this bill? Every $1 trillion of increased government debt puts an approximate burden of $15,000 on every millennial. High government support among Republicans is probably just a reflection of the fact that their party is in power.
The millennial generation wants higher minimum wage laws, equal pay for equal pay, free tuition and for the government to pay off their student loans which indicates their Economic IQ is close to zero. I understand them not knowing that subsidies to higher education make a college degree even less attainable, but advocating a higher minimum wage is just stupid under all conditions.
Their gut feelings come from a variety of sources. Their education has brainwashed them about where our standard of living comes from. Lifestyle, for many of them, makes them feel guilty for the poor and downtrodden. Envy of the rich and famous also plays a role. They have been “successful” and “above average” all their lives. Why can’t they be rich and famous too?
I think a really big factor is that, under these conditions, they should feel betrayed and left out. Their generation, taken as a whole, is the first to take a step back economically since the Great Depression. Their real ire should be directed towards the Baby Boomers — their parents and grandparents. They are the generation which allowed the government debt and entitlement programs to grow into the deadly monster that they have become. Moreover, the Boomers are the generation that has benefited from all that waste and they are the generation that will hand over these problems to the millennial generation.
I have always felt uneasy with the idea of defaulting on the national debt and Social Security, because I believe strongly in carrying out your obligations. However, I also know that there are very strong ethical and economic cases that can be made for defaulting.
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According to one website, I myself come from the Generation Jones—which I had never previously heard of. Generation Jones comprises the late Baby Boomers born from 1954 to 1965.
However, this Jones Generation is also the generation that did much of the work while receiving shrinking benefits from things like Social Security. Meanwhile, it will only see greater attacks on its income and wealth, both in terms of rhetoric and in law. Therefore, I am now “jonesing” for default, which is slang for wanting — if not craving — for defaults.
If we consider economics to be an objective science, its rules should also have universal significance and use, despite differences in societal order. However, socialists of the materialist camp are committed to the idea that common ownership of the means of production would change the way economic laws unfold under socialism. Basically, they reject the notion of the universality and objectivity of economic rules by suggesting that the laws would change along with a change to the social formation.
Thus, communists adhered to the Marxian idea that socialism would rectify a "surplus value" law, end the "exploitation" of workers, and efficiently regulate the production, distribution, and consumption aspects of the economy. They sought to eliminate the market regulatory mechanism and replace it with directives of the central planning authority. Bolsheviks enthusiastically got down to business: they eradicated private property, collectivized everything and everyone, and implemented an official planned economy.
Did it effectively turn off market relations as they thought it would?
No. In contrast to the common perception, socialism has been unable to kill the market economy. The market went underground and turned into a black market. Black markets existed in capitalist countries as well, but they worked underground because they dealt in illegal commodities and services. The black market under socialism served the same purpose, but the list of commodities and services included mostly items of everyday and innocent consumption that people under capitalism could easily purchase in stores. Virtually all groups of personal consumption products found their way to the black market at some time and in some places. Everything from jar lids to toilet paper was subject to black-market relations.
Despite the proclaimed planned economy, people were engaged in market relations on all levels and trusted more the price of the goods and services that were established by the market and not dictated by the government. The official exchange rate of the ruble to the dollar was 0.66 to 1 in 1980. But nobody except party nomenclature was able to enjoy such a favorable exchange rate. At the same time, the black market offered 4 rubles for 1 American dollar.
There was no production of jeans in the Soviet Union, but like all their peers abroad, Soviet youth wore jeans. The price was 180–250 rubles for a pair depending on the brand, which was almost twice as much as the monthly wage of an entry-level engineer. A visiting nurse charged 1 ruble for one injection if a patient lived below the fifth floor. The price reached 1.5 rubles for patients who lived on the fifth floor and up. A plumber happily repaired a faucet for just a bottle of vodka.
Two Prices for Everything Therefore, in the Soviet Union, any significant goods had two price tags: one real and another virtual. The state set the first price through some obscure methods; the usual mechanism of supply and demand established the second price on the market. If you were lucky, after several hours of standing in a queue, you could purchase goods at the state price. However, due to the chronic lack of everything for everyone, the same product could be bought on the black market at a much higher price. The virtual price became real on the black market and reflected the actual value of the goods for the buyer. The presence of two price tags is a confirmation of the thesis of Ludwig von Mises regarding the impossibility of economic calculations under socialism. At the same time, this is proof of the immortality and immutability of the economic laws of the free market, even under a totalitarian regime. Therefore, two economic systems and two sets of prices co-exist under socialism.
People were forced to use the services of the black market, even under the penalty of severe punishment, including up to the death penalty. Almost the entire society was engaged in various corruption schemes to support a certain standard of living. There was a paradoxical situation when the shelves of the supermarkets were empty, but refrigerators at home were more or less full. The black market was filled with smuggled goods from abroad, as well as commodities produced in underground workshops. But more often, everyday products were specifically kept from retail to create a shortage and sell them on the black market at a speculative price. Socialism had undermined the normal flows of production, distribution, and consumption by ignoring the objective laws of economics. Nevertheless, an underground market and the intrinsic entrepreneurial spirit of the people helped them survive the socialist madness.
Regardless of the proclaimed successes of the Soviet economy reported by Communist party leaders, the socialist economy was unable to compete with its capitalist counterparts. Communists decided to create a system that somehow mimicked the work that a free market had successfully and automatically performed for centuries. Thus, they introduced socialist competition that was supposed to replace free market competition. Surely enough, it was an inadequate and unfortunate replacement. The rewards for winners in the capitalist competition were far higher than for the winners under socialism. For example, the capitalist winner enjoyed a significant increase in well-being.
Moreover, the principal winner of the free market competition was society as a whole. This is a natural feature of a free market economy and the main reason why the evolution of human societies selected this mode of production. A competition during socialism gave to the winners some publicity, a certificate of honor, maybe a trip to a "sanatorium" (that is, a health spa), and other bagatelles that people usually did not appreciate. But most importantly, society as a whole did not enjoy a significant improvement in well-being.
People were not sufficiently stimulated and were underpaid, which explained the lower labor productivity compared to capitalist countries. Moreover, this is despite the notion that the means of production, at last, belong to the workers themselves. People had a famous saying that can be considered the quintessence of Soviet-style socialism: "They [the government] pretend to pay, and we pretend to work."
Socialism is a set of systems that try to artificially inhibit the free flow of objective economic laws by creating subjective barriers in the form of specific legislation and punitive policies. Socialists mistakenly think that if they assault private property and market relations, the economic laws will also change. They have taken up the task which, in principle, has no rational solution. Nothing good comes from the idea of ignoring or violating the fundamental laws of economics. These laws still exist, regardless of opinions and neglect to recognize their real character and the impossibility of changing them.
Socialism disrupts the evolutionary process and leads society to a dead end. The desperate economic situation of ordinary folks in Venezuela, Cuba, and North Korea — the remnants of socialist undertakings — is a direct result of building a society in defiance of the natural action of the fundamental law of economics. As a rule, socialist regimes were buying time by employing slave labor, plunder, coercion, and everything else that an aggressive totalitarian regime could offer. However, in the end, the means of socialistic life support was exhausted, and than returning to the natural and healthy market relations, where the laws of economics work for the benefit of the human race.
The same laws of market economics have worked in different human societies: from pre-historic to post-industrial, but still socialists continue to entertain the idea of tampering with these forces of nature.
While it is fashionable to talk about Venezuela and its notorious shortage of basic goods such as toilet paper, flour, and milk Cuba is now implementing a rationing program to combat its very own shortages of basic goods. A CBC report indicates this program would cover basic items such as chicken, eggs, rice, beans, and soap.
What has caused these shortages has been a subject of debate. Cuban Minister of Commerce Betsy Diaz Velazquez blames the Trump administration’s stiffening of the trade embargo with the island nation. Others contend that decreasing aid from Venezuela has contributed to Cuba’s newly emerging rationing dilemma. Over the past few years, Venezuela has provided Cuba with subsidized fuel and other forms of aid in order to keep its basic infrastructure intact.
Although these explanations do have validity and will be touched upon later, there is another factor that is not being considered. The lowest common denominator in the Cuban economy during the past five decades is excessive government control.
Cuba: The Western Hemisphere’s Longest Lasting Socialist Experiment When Fidel Castro took control of Cuba in 1959, the Cuban state maintained an iron grip on the economy. For decades, the country has been a communist garrison state with very little respect for property rights and civil liberties such as free speech. More than 140,000 Cubans perished under the Castro regime, according to certain estimates, while millions of Cubans fled to the United States to start a new life.
During this timespan, economic stability was never really an option in Cuba. Because of the economic dislocations caused by state control of many industries, the government has had to provide citizens with Libretas de Abastecimiento (supply booklets) to ration out basic goods like rice, sugar, and matches. This system was established in 1962, in response to the economic sanctions the American government placed on Cuba which caused shortages of food, medicines, and supplies. From a free-market perspective, these sanctions should be condemned. They not only infringe on the rights of Americans who wish to do commerce and travel to Cuba, but they also do very little to topple tyrannical regimes.
But in the case of Cuba’s economic problems, there is a reason to believe they go beyond America’s embargo on the country. Jose Alvarez of the University of Florida does initially concede that “Cuba was forced to establish a rationing system for basic food and industrial products. This has brought serious limitations to consumers and their choice availability” after the initial blockade by the U.S government.
However, Alvarez adds that solely pinning the blame on sanctions is misguided:
“To blame US economic sanctions for the existence of a rationing system of basic food products is not a very sound argument to justify Cuba's socialist system. It is an admission that Cubans cannot even produce what grows very easily on Cuban soil. If one lists the food products that have been rationed since 1962, it becomes evident that almost all of them were in abundance before the 1959 revolution and were produced domestically.
Alvarez also notes that even with the Soviet Union effectively serving as Cuba’s sugar daddy, the country still had to ration goods and services:
It is interesting to recall that, when the Soviet bloc was subsidizing the Cuban economy to the tune of five billion dollars per year, food was still rationed in Cuba.
U.S. sanctions on Cuba have generally allowed exemptions for humanitarian aid and basic products. The Trade Sanction Reform and Export Enhancement Act of 2000 permitted the sale of certain foods and medicine, albeit to a limited extent. Even with sanctions in place, Cubans have found ways to bring goods to the market, but the Cuban state has remained an obstacle. This was most clear during Cuba’s Special Period , when the country could no longer rely on Soviet Union aid to prop it up. The country began to open up its markets to a limited degree by trading with other countries and making lukewarm attempts towards privatization. However, the government still stood in the way from allowing Cuba to have a functioning market, which Alvarez also points out:
Granted, some Cubans have been unable to consume a wide variety of food products because of the high prices under the rationing system, but there have been periods in which the abundance of several products have demonstrated the feasibility of returning to a stable and ample food supply. Examples include the proliferation of FrutiCuba (a chain of government stores) which was devoted exclusively to selling fruits and vegetables in the mid-1960s, free farmers' markets in the 1980s, the free agricultural markets after 1994, and the new food outlets. These testify to the ability of Cuban farmers to produce abundant food supplies despite US economic sanctions, that could do away with the food rationing system.”
The embargo on Cuba only affects current trade relations with America and the island nation. Cuba can still trade with other countries to acquire some of the rationed products. Indeed, Cuba does have a track record of not making debt payments. And when it’s no longer receiving aid from Moscow or Caracas, Cuba’s economic flaws stick out like a sore thumb, which generally makes it an unattractive trading partner.
In the 21st Century, Cuba Insists on Central Planning Cuba’s recent political behavior indicates that the country’s leadership still does not get basic economics. In the midst of Hurricanes Gustave and Ike in 2008, the Cuban government responded with price controls. On top of the damage that the hurricanes dealt with Cuba, these price controls created even larger shortages than expected according to Reuters.
But Cuba’s price control forays did not end there. According to Agencia EFE, Cuba enacted price controls in May 2016 with the aim of increasing the stockpile and sale of highly demanded agricultural products. Food staples such as plantains, beans, and mangos were covered under these price ceilings. Basic economics demonstrates that price controls cause shortages. When a price ceiling below the market rate is imposed, artificial demand ensues. In turn, suppliers, who look at the government-imposed price, act accordingly by not supplying as many goods to the market, which often causes shortages.
Based on its most recent actions, it’s clear that price controls are in the Cuban state’s toolbox of economic tricks and likely won’t be going away anytime soon. The Cuban people will continue to suffer as a result.
Why U.S. Sanctions Won’t Work The Cuban’s regime despotism is well-documented and merits private condemnation. However, this does not mean that top-down regime change nor sanctions are the best means of getting Cuba on the path towards markets.
Although Cuba’s economic ills are largely self-inflicted, U.S. sanctions aren’t making things better. There are some caveats to consider. Broad-based sanctions like the ones the U.S. has imposed on Cuba provide the regime political cover. They can now scapegoat the U.S. government for all of its problems. Ryan McMaken notes in an article dealing with Venezuela, that non-interventionism, both in terms of military action and economic sanctions, is the best approach to take for enhancing freedom. The same logic applies to Cuba. More meddling will embolden radicals within the regime and give them another boogieman to scapegoat.
When sanctions are taken out of the equation, it becomes clear to the populace and reform-minded figures within the government that their economic malaise is home brewed. Even China, which featured one of the most heinous cases of democide under Communism, made a decent transition to a nominally capitalist economy in the 1980s under the leadership of Deng Xiaoping. However, this would have never started if it wasn’t for Nixon’s visit to China in 1972, which normalized trade and diplomatic relations between the two nations.
America can have a role to play in Cuba’s economic revival, but it will do so by removing sanctions. This will cast any doubt whether it’s the U.S.’s punitive economic policies or Cuba’s own policies that are making the island nation impoverished. Getting rid of this confounding variable is key for the country to move forward. More punitive measures, like the “highest level” sanctions that Trump promised to impose on Cuba in April, will reduce the influence of reform-minded individuals within the regime. It’s simply too easy for demagogic leaders to turn to radicals within a government who are eager to scapegoat foreign countries and stoke up the nationalistic sentiment against America.
However, the ball is still in Cuba’s court. After more than 50 years of embracing socialist governance, Cuba will have to learn that it needs to stick to the basic economic principles if it wants to break free from its long-standing cycle of poverty.
Last week, the fall of Robert Mugabe’s regime made headlines across the world, and was greeted with relief and hope by international commentators as well as Zimbabweans. Overall, the general feeling was that of a new beginning, long awaited in a country that had been stuck for four decades under rampant inflation, corruption, and an oppressive rule. There seemed to be little doubt, given how the news was presented, that this is a pivotal and far-reaching transformation for this African nation.
And yet, if one looks closely, there are signs that, despite the current sense of hope in Zimbabwe, Mugabe’s removal will not bring the long awaited change. Mugabe "retired” with immunity, a $US 10 million severance check, and a promise to be paid a salary for the rest of his life. He has now been succeeded by his vice-president, who lead the coup d'état and capitalized on the year long public protests against his disputed predecessor. With the new president, the rule of the ZANU-Patriotic Front will continue, as will the party's Marxist-Leninist ideology and its politburo.
How can one know that things won’t change? There are many similarities between the recent history of Zimbabwe and the not too distant history of socialist republics, like Romania, from the decades of oppression and poverty to the overwhelming hope of a new start following the revolution. But one important common aspect of the two regimes—Ceausescu’s and Mugabe’s—is that neither or them were actual autocracies, or ‘personal’ states. A forty year totalitarian rule is not a one-man feat, but must be necessarily supported by an entire state apparatus for which the dictator himself often becomes no more than a mouthpiece.
This state apparatus is always wrought with internal conflicts and smaller groups of interest competing to capture the power. Sometimes this is accomplished through internal ‘purging’ mechanisms, but other times a popular revolution is necessary to bring about a change in the figurehead. Then, the state apparatus reinvents and re-brands itself, usually adopting a more democratic, freer stance than before.
For the people, the fall of the dictator may seem the end of the dictatorship with which he had been associated for so long. But while dictators fall, the state remains. The corrupt and oppressive network of political interest, skilled in plundering, keeps it tentacles firmly wrapped around the economy and the legal system. The octopus simply grows another head.
In Romania, the bloody ’89 revolution was followed by years of economic transition and market reforms which now still see the social democrat party capturing power and law to serve their own interests. The demise of the autocrat did little for the people on the economic and political front; while a change, it has not been a sweeping change. It has not changed the system, which continued—employing the same ideology and even using the same politicians—to hamper and mismanage the economy and to restrict the freedoms of the population. One often remembered Mises’s warning in this context, that “every socialist is a disguised dictator” (Human Action, p.693).
Given the current outlook, then, Zimbabwe may now call itself a liberated country or even a democracy, but its problems—inflation, corruption, poverty, lack of freedom—will only continue, and the difference between Zimbabwe’s past and its future will only be visible perhaps in the degree of the rulers’ oppression.
Real economic and political freedom requires a different air altogether; it will never be possible to breathe it as long as politicians control how and when windows can be open. It is in bringing this air around, and not in changing the face of the ruler, that popular revolutions must play a decisive role.
As our commuter train stopped at the Riga suburb of Tornakalns, we saw a small railroad boxcar standing by itself on the side. To the passenger from the train, it was a small memorial; to a Latvian nearly 80 years ago, it was at worst a death sentence and at best, transportation to exile in a Siberian labor camp.
Our train was taking us from an afternoon at Jurmala, the resort located by the Gulf of Riga, a place where leading Communist Party members from the old U.S.S.R. went to spend vacations, but today, just another place to enjoy the warm sunshine of the Latvian summer. The horrors of the Soviet invasion of Latvia, Estonia, and Lithuania in 1940 are long behind, surfacing only in the image of the boxcar and the Museum of the Occupation, now located in the former U.S. embassy in downtown Riga.
(The USA built a new embassy near the Riga International Airport, a beige, boxy construction that contrasts with the lovely embassies on the famed Embassy Row in Riga, featuring some of the world’s most prominent Art Nouveau facades. When the new embassy was being constructed, locals thought it was a new prison, which, given the USA’s penchant for imprisoning people, probably was not far off the mark.)
The three Baltic nations finally broke away from the U.S.S.R. in 1990 and 1991, but the Museum of the Occupation provides reminders of how the ancestors of people walking freely about the towns and cities of these countries suffered, and suffered greatly at the hands of those promoting the socialist ideology that even today won’t die. How thousands were summarily executed at the hands of the NKVD, the Soviet secret police. How thousands more were herded into those tiny boxcars and shipped to the hinterlands of Siberia, many to die brutal deaths in labor camps. All because they were people who worked in government or taught in schools and universities of the Baltic nations, or who owned businesses, or who were just inconvenient to Soviet authorities. All on the ultimate order of Josef Stalin, the Soviet dictator called “Uncle Joe” by American journalists and by presidents Franklin Roosevelt and, later, Harry Truman.
American publications like the New York Times were so in love with the ideals of the Bolshevik Revolution (and still are, given the NYT’s series last year lamenting the fall of the Soviet Union and its Eastern Europe satellites) that they could not be bothered to tell the truth about what the communists did in the Baltics, just as they denied that Stalin had created a famine that killed more Ukranians than Jews that were killed in the Holocaust . Even now, as one looks at photos of the Baltic people being shot, arrested, buried in mass graves, and forced into labor camps, one is reminded that the Soviet Union did not provide a new way of living, as socialist apologists and American journalists have claimed, but rather just another way of dying – and dying violently.
But that was then. Today, the Baltic nations are wealthier and freer than they were in the days of Soviet occupation. For that matter, Russia also is freer and wealthier than it was when the Hammer and Sickle flew over the Kremlin. After spending time in Riga and Tallinn, Estonia, along with Helsinki, Finland (we were there the day of the Trump-Putin summit), we drove into Russia.
Our first stop was at the border, which passed without incident and certainly was not the ordeal we would face a week later when re-entering the United States. Soon after entering Russia, we came to Vyborg, which once belonged to Finland before being seized by the U.S.S.R. in the brief 1939-40 war between Finland and the Soviet Union.
Although Russia has moved on from its days of communism, it is clear that Vyborg has been slower with the transition. The city reminded me of what I saw in East Germany in 1982, with its drab and hulking Soviet-era high-rise apartment buildings and general shabbiness. The famous castle that dominates the edge of town is in scaffolding and one wonders how long that has been the situation. At least the coffee we had at the small coffee shop near the castle was very good, something I doubt would have been the case in the days of Commieland.
So, we drove onto St. Petersburg mostly on a two-lane road cut through the boreal forest of the northern latitudes. It was here that I witnessed something that amazed all of us – how vehicle drivers cooperated to turn two lanes into de facto four lanes of traffic.
As faster drivers moved to pass slower vehicles, the slower vehicles would move onto the asphalt shoulder and even as our bus moved over the center line, the oncoming traffic would shift to the right, too. It all was spontaneously coordinated and everyone on the road was in on the scheme.
Entering St. Petersburg was an experience in itself. With five million people spread over a number of islands, we saw new high-rises standing alongside the old Soviet-era apartment buildings. No one, however, comes to St. Petersburg to see the relics of the U.S.S.R. Instead, they come to see the czarist palaces and the stunning 18th and 19th century architecture that dominates the city. It may be the birthplace of the Bolshevik Revolution, but people come to pay homage to the way of life the Bolsheviks wanted to destroy and to Czar Nicholas II and his family, infamously and brutally murdered on Lenin’s orders in 1918.
A century later, the bones of the last royal family of Russia lie safely in St. Peter and Paul Cathedral. Despite more than 70 years of communist rule, and despite all of the blood spilled to keep the likes of Lenin, Stalin, and the others in power, and despite the massive propaganda that ordinary people in the U.S.S.R. had to endure, St. Petersburg is the city of the czars, not the Bolsheviks.
Parts of St. Petersburg are run down – as nearly the entire city was during the days of communism – but other parts of it absolutely are amazing to see. Likewise, I enjoyed interacting with the locals and especially the young people that made up most of the workforce of our hotel, from running the desks to cleaning our rooms. The legendary dour Soviet worker was replaced by a competent employee who patiently answered our questions and took care of whatever we needed.
For all of the talk in the USA that Russia is a dictatorship under the iron thumb of Vladimir Putin, Russia did not seem like a dictatorship. Our Russian tour guide often would take a swipe at Putin (including likening his face to a painting of dogs at the Hermitage) and life itself there seemed to have the kind of normalcy that could not have been possible when people were compelled to inform on one another.
The St. Petersburg we visited was not the Leningrad that Logan Robinson described in his humorous 1982 book An American in Leningrad , which described life as a post-graduate student living among Russian students and developing friendships with local writers, artists, and musicians, people who often harassed, persecuted, and arrested by local authorities. That city was an armed camp full of soldiers and had been relegated to being a backwater by Joseph Stalin and his successors who made Moscow the Soviet “showplace,” leaving the city founded by Peter the Great to succumb to the northerly elements.
The citizens of the Baltic countries were not the only ones suffering under communism. No other city in the U.S.S.R. underwent the horror of a 900-day siege by German armies during World War II. Disease and starvation were rampant, but Leningrad held out. In “rewarding” the city for its courage and fortitude, Stalin reinstituted the infamous Purges shortly after the war ended, killing party members, writers, intellectuals, artists, and anyone else Stalin might have deemed even an imaginary threat. On top of that, the first Five-Year Plan after the war had Leningrad being the last city to be rebuilt.
Americans cannot fathom what it is like to have entire cities destroyed or badly-damaged by bombs and artillery and have ruthless armies fight each other over their territories. Nor can we imagine having governments carry out massive executions of people whose only “crime” was not being what the government leadership wanted them to be. We cannot imagine the starvation, the disease, and watching family and friends be shipped off to places like Siberia where they surely would die terrible deaths.
Yet, as I sat in the Old Town section of Riga eating and drinking and listening to live music, I strained to imagine the place as a battle zone with death and destruction all around where now I sat. I imagined the stores that now are full of goods and restaurants with food and drink being empty or stocked with subpar merchandise in the aftermath of the war as the Soviets imposed their primitive communist system and oppressed the people in the name of “liberating” them for many decades until they finally left in the early 1990s.
No, I cannot see people in our cities having experienced anything like what the people of the Baltics and St. Petersburg had to tolerate for decades. And, yet, there are people in high places in the USA, those at the New York Times and elsewhere in the media and in academe that believe that communism had brought in a superior civilization – if only those blinded by capitalism had the courage and foresight to see what these “intellectuals” were imagining they saw.
I recently saw a photograph of American Antifa protesters holding up a communist flag with the hammer-and-sickle and images of Mao, Lenin, and Marx. Perhaps they and the editors of the New York Times want to see the USA embrace a system that others that have lived under it now reject, and reject vehemently. Given that Antifa increasingly is providing shock troops for the causes espoused by prominent members of the Democratic Party like Bernie Sanders, the new drive for communism might not be as fringe as one might hope, and if a century of bloodshed, murder, vast prison systems, and starvation won’t convince the advocates of communism among American millennials, then perhaps nothing will.
Perhaps the ultimate irony will be that Americans of the future might have to travel to the former U.S.S.R. in order to see free people and see a relatively free economy. One hopes not, but the daily onslaught of socialism into our body politic says this no longer is an impossible scenario.
Sports are often defined as much by their controversies as they are their highlights. For college football, when debate is not focused on the proper way to crown national titles, the topic of player compensation is one of the most heated — and perhaps important — debates. It’s also one frequently plagued by bad economics, highlighting common misunderstandings about capital and labor.
College football is one of the most popular sports in the United States and, as such, is a very lucrative one. The average college team makes $29.5 million from its football program, while elite programs like the University of Georgia and University of Alabama, make over $80 million. This revenue is generated largely by lucrative television contracts, merchandise, and ticket sales, among other means. Since that amount of money tends to create headlines, it’s not surprising to see conversation turn to the players themselves, with some pundits putting the “fair-market value” of players at six-figures. They come to this figure by dividing the school’s football revenue by the number of scholarships each team is allowed to have.
Of course this chart actually demonstrates one of the most misunderstood truths about college football: the revenue for teams is driven more by the logo, than the player.
This explains why the University of Texas, a program that hasn’t challenged for a national title in over a decade, is more valuable than Nick Sabin’s Crimson Tide. It’s also why the University of Central Florida will be ranked far lower in a list of football revenue than they were in the College Football Playoff Ranking.
This is not to take away from the contributions athletes make for their school. Their achievements on the field are a large part of what keeps fans’ passion for their team alive (and the dollars that come with it). It is, however, the capital investments made by the university that has given the players such a prominent platform to perform on. While there are certainly some players and performances that transcend the tribal mentality of college sports and earn a player the admiration of fans throughout the country, the overwhelming majority of people who buy a college player’s jersey, or a ticket to go see them play, does so because of the emotional attachment they have to the school — more than the player.
Of course this same dynamic is at play throughout the economy. The output and value of labor is a product of combining the technical skill of the worker with the capital investments made by the employer. Just as a factory workers output is dependent upon the machines and technology he uses on a daily basis, so do college athletes rely on the equipment, facilities, and television contracts to be able to play at a high level and be able to leverage that into a future professional career.
This is also not a defense of the NCAA or the status quo. Many of the rules and regulations the NCAA places on players, as well as their basic handling of college sports matters as a whole, is often absurd. I’m also not necessarily opposed to increasing the compensation of college football athletes, though it’s unlikely we’re going to see the government allowing schools to pay the football team more while neglecting women’s equestrian. Further, given that the majority of college football programs do not make enough money to support their athletic departments — with some even failing to break even on their own — there would be significant consequences for the sport. A better world would see a complete separation between government and universities.
It would also be great to see a non-collegiate alternative for high school players looking for a chance to become professional athletes. Would, however, such a developmental league, divorced from the pageantry and tradition of college athletes, ever be able to draw the ratings and revenue of tonight’s national title game? Probably not.
Tickets for tonight’s game are selling for well over $2,000, and people aren’t paying just to see 20-something year old athletes play football. Especially for Georgia fans, this game is the payoff for years of investment — both financial and emotional — into a college program, and the special opportunity to see it rise to the top. It’s that investment that creates the value, in sports just as in the rest of the economy.
Historically, Thanksgiving has been a feast day during which Americans are called upon to thank the Lord for the many blessings he has bestowed upon us. Richard J. Maybury and Gary Galles both explain the economic lessons to glean from the experience of the Pilgrims and both note that the primary reason for God's blessing them with relative prosperity after years of famine and hunger was a shift away from socialism and toward private property. In their essays, both authors draw upon William Bradford's History of Plymouth Plantation to get the story straight from the source.
One misconception that is still with us is that the Pilgrims adopted socialism out of religious conviction, as if Christian ethics requires a Platonic communist utopia. Galles notes that this is a misconception, but it is beyond the scope of his essay to provide the full historical back drop to that initial fateful economic design.
In fact, as Bradford makes clear, the Pilgrims did not desire to establish Christian communism. The Pilgrims' original communal property arrangements were foisted upon them by their colonial sponsors. The sponsors did this after they learned that they would not be granted a monopoly of fishing rights in Cape Cod. The sponsors’ original agreement with the Pilgrims was such that the Pilgrims were to work for four days for the sponsoring company and then would have two days to work for themselves. The sponsors later changed their deal and told the Pilgrims that they would have to work all six days of the work week for the sponsors. At the end of seven years, the Pilgrims would be granted title to the property they worked. The Pilgrims were not happy with the change, several of them recognizing that the new arrangement would make them virtual slaves of the sponsors, but they went along with the deal because many had already made large investments toward the move and they were convinced that emigrating to the New World is what God wanted them to do.
Bradford’s establishing private property was not a repudiation of any belief they had that Christian charity requires communism. They had no intention of implementing such a system. The Pilgrims’ move to private property was, in fact, a move to a properly Christian ethic as it regards property.
Historically, the majority report from Christians embraces private property as required by Christian ethics. The morality of private property was recognized by many of the patriarchs in the early church and the broader Scholastic tradition. Alas, what is not always recognized by contemporary evangelical Christians is that key thinkers in the Protestant tradition also argued for the legitimacy of private property.
One such figure was Francis Wayland, a Baptist minister and educator who was the president of Brown University for 28 years. An excellent introduction to Wayland and his social thought has been written by Laurence Vance, director of the Francis Wayland Institute. Wayland explained the Christian ethic of property in his treatise on ethics, The Elements of Moral Science. In his chapter on personal liberty, Wayland explains that everyone possesses a physical body, mental understanding, and will. He then argues that if a person uses them “in such manner as not to interfere with the use of the same powers which God has bestowed upon his neighbor, he is, as it respects his neighbor. . . to be held guiltless. So long has he uses them within this limit, he has a right, so far as his fellow-men are concerned, to use them, in the most unlimited sense, suo arbitrio, at his own discretion.”
Such a view of property has clear implications for economic policy. Wayland counseled against usury laws, government trade restrictions, government funded internal improvements, and government intervention in the banking industry. He also opposed confiscatory taxation, government granted monopolies, and government regulation of money. He did so because he believed that interventionist economic policy is not only economically destructive, it also violates Christian ethics.
Bradford’s and the Pilgrims’ move away from socialism and toward private property was not, therefore, a repudiation of their vision of the Christian ideal. It was a move toward obedience to their maker. Bradford interpreted the material plenty they enjoyed as they forsook their original socialist economic arrangement as a blessing from God for adopting a system more in agreement with Christian ethics.
There is no more recent example of the many theoretically apparent pitfalls of socialism coming to life than in Venezuela. The South American nation is but the latest example on the long list of countries to have fallen victim to the siren’s song of a socialist utopia. While over the past decade journalists like Michael Moore, politicians like Bernie Sanders and economists like Joseph Stiglitz have praised the so-called socialist “economic miracle” in Venezuela, with hyperinflation now leading to starvation and millions fleeing the country, it is inarguable that these praises were premature and wholly unwarranted.
Unfortunately, economist turned political hack Paul Krugman still to this day carries on the tired line that the Venezuelan government simply “mismanaged” and are corrupt, and will not admit that this situation arose from problems inherent to socialist ideals and policy. I aim to show how feeble this line of thinking is. What’s more, what may be the final months of the Maduro government are serving as a reminder of how even socialist regimes ironically rely heavily on the successes of capitalism to maintain the last vestiges of their socialist society.
Political Philosophy Has Consequences The Bolivarian Revolution, led by the late Venezuelan President Hugo Chavez, began in 1999 under the guise of snuffing out imperialism, corruption, and inequality. In practice, this meant implementing nationalist politics and a state-run socialist economy. With a slogan like, “Motherland, socialism, or death,” it would seem that the Bolivarian Revolution should have been seen for what it was from the very outset – the beginning of the end for the Venezuelan economy. The failure of the aforementioned journalists, politicians, and economists to foresee economic and political ruin as the necessary outcome of such a “revolution,” despite the long list of historical evidence that would make such optimism clearly undeserved, speaks not only to their ideological bias but also to their poor understanding of the very foundations of economic and institutional success.
Many still to this day will not admit that the devastation witnessed in Venezuela is a problem inherent to Socialism. They claim that Venezuela is not a model of “true socialism”, but of autocracy, and blame the ills of the government and economy on corruption. However, it has long been evident that the historical correlation between the rise of tyrannies and state-run socialist economies are actually causal relationships. As Mises stated, “The idea that political freedom can be preserved in the absence of economic freedom, and vice versa, is an illusion.” Decades before Venezuelan’s were planning their revolution Mises had already observed that, “Tyranny is the political corollary of socialism, as representative government is the political corollary of the market economy.” To suggest otherwise is to ignore economic and political history.
In lieu of capitalism, socialism puts the fate of individuals in the hands of bureaucracies. Bureaucracies cannot be managed by economic calculation like businesses in a capitalist economy and are therefore destined for bloat, inefficiency, and mismanagement. As Mises wrote, “Bureaucratic conduct… is conduct bound to comply with detailed rules and regulations fixed by the authority of a superior body. It is the only alternative to profit management. . . . Whenever the operation of a system is not directed by the profit motive, it must be directed by bureaucratic rules.”
The alternative philosophy of economic and political liberalism, which originated from the age of enlightenment and places the rights of the individual over that of society at large, has thus been in the crosshairs of socialist do-gooders and unabashed tyrants since its origins. The relationship between political philosophy and material wellbeing is not a mystery given that the political philosophy of a nation is the foremost determinant of its economic policies. A political philosophy rooted in foundational principles of private property rights and individualism promotes the market exchange and innovation that allows for an abundance of material comforts like food, shelter, and medicine. Only a legal framework built on the sovereignty of private property rights allows individual citizens to own the means of production, to negotiate and depend on enforceable contracts, and gives rise to the capital accumulation and investment that causes entrepreneurship and capitalism to flourish.
Ironically for the socialists, the absence of the very profit motive for which they vilify under capitalism leads to the perverse incentives and lack of accountability in socialist bureaucracies which sow the seeds of corruption and tyranny in government. Inefficiency, corruption, graft, and tyranny are therefore features of socialism, and are not something that can be avoided if only “true socialism” were tried once more. It’s not that “true socialism” – the socialist utopia of prosperity under shared ownership of the means of production – hasn’t been the goal of many failed states like Venezuela, it’s just that it’s an inherently impossible outcome from enacting socialist policy.
The Myth of the Venezuelan Resource Curse One such Venezuelan bureaucracy that plays a key role in the Venezuelan economy is Petróleos de Venezuela, S.A., which is more commonly referred to as PdVSA. PdVSA is Venezuela’s state-owned oil and natural gas company that serves as the largest source of government revenues due to its production and exportation of crude oil. Venezuela has the largest proven oil reserves in the world, accounting for nearly 300 billion barrels of oil. The nation is also rich in other precious natural resources such as gold. This may lead one to ask, why then does a country so rich in natural resources continue to suffer such economic hardship?
Beginning in the mid-1990’s academic literature began to hone in on a so called “resource curse,” wherein the relationship between natural resource abundance and economic growth was closely examined. Some researchers have concluded that many countries have not only squandered their natural resources, but that economic performance has actually suffered as a result of the rise of natural resource discovery and production. People are therefore quick to point to Venezuela as yet another example of the “resource curse” in action rather than attributing blame to socialism. Some recent research, however, has found evidence that it is not likely the fault of simply having an outsized natural resource industry that starves the economy of investment elsewhere. After all, there are many historical examples where this curse did not arise.
It is no accident that nations that have been largely immune to the resource curse despite their large natural resource sectors have been those that arose from foundations of property rights, individualism and capitalism. Property rights, which allow for the rise of private contracts and the private accumulation of the means of production, preclude the mass confiscation and government management of resources which is present under socialist control. As Mises so concisely stated, “Economic calculation can only take place by means of money prices established in the market for production goods in a society resting on private property in the means of production.” By nationalizing industries, and then making bloated government budgets dependent on the revenue of said industries, the government is then necessarily exposed financially to its largest industries. In a socialist state such as Venezuela, where government revenues are increasingly dependent on a single highly volatile commodity like oil that is priced in the global market, it is little wonder that the economy would be marred in instability.
The supposed resource curse in Venezuela, properly described, is then nothing more than another example of the failure of socialist bureaucracies in their effort to try and function like market economies. Placing resources in the hands of “the people,” really means placing it in the hands of the government and its cronies. Furthermore, in centrally planned socialist economies such as Venezuela, where many individuals obtain their incomes in groups that compete over government revenue, it would seem to necessarily follow that corruption, graft, and a class of politically connected elites would grow at the expense of the rest of society. In political science terms, it breeds clientelism, or the exchange of goods and services for implicit or explicit political support. In fact, recent research has suggested that not only may the resource curse not exist, but that a clientelist economy may actually be a prerequisite for supposed resource curse outcomes.
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It is not merely a coincidence that even as global oil demand and production has risen in recent decades, a nation so rich in oil reserves saw its oil production peak just before the nationalization of the oil and gas industry began in the early 1970’s. Venezuelan oil production rose once more throughout the 1990’s as PdVSA began to employ private contractors, but that all changed with the election of Hugo Chávez and the start of the Bolivarian Revolution. During the Venezuelan general strike of 2002–2003, Chávez fired 19,000 employees of PDVSA and replaced them with employees loyal to his government. Since then, Venezuelan oil production has plummeted by 70 percent. This is clearly not the result of a curse that naturally arises from the laws of economics, but one that follows from government trying to ignore those laws.
Monetary Policy and Hyperinflation A socialist economic meltdown would hardly be complete without a collapse of the currency. After all, like corruption and graft, inflation of the nation’s money supply under a socialist state should be expected. The collapse of the Venezuelan currency, the bolivar, is particularly tragic given that it was one of the strongest currencies in South America during the time of Venezuelan economic success from the 1950’s to 1970’s. Inflation began taking hold in the 1980’s following the Venezuelan government increasingly nationalizing industry and politicizing the central bank in the 1970’s.
Predictably, the expansion of government led to growth in spending, deficits, and debt. As has typically been the case throughout history, instead of admitting failure and reversing course, the government began fleecing the people of Venezuela through the initially hidden, but now obvious, tax of inflation – by printing more bolivars at the expense of the purchasing power of the currency. This policy allows governments to inflate away their debts as they drive the currency toward worthlessness. As Mises so aptly noted in The Theory of Money and Credit, “Inflation has always been an important resource of policies of war and revolution and why we also find it in the service of socialism.”
For consumers, a policy of monetary inflation has led to staggering price hikes throughout the economy. In a failed effort to compensate, Maduro ordered six minimum wage hikes in the country throughout 2018, and in 2019 has already issued an additional 300 percent increase. This brings the minimum wage to 18,000 bolivars per month, or less than 7 US dollars. Coupled with government price controls, this has led to mass shortages of basic goods like food, water, and toilet paper. At this point, the bolivar is literally not even worth the paper it is printed on. Indeed, it makes more financial sense to use the bolivar as toilet paper than to use it to try and buy toilet paper. Enormous stacks of cash are needed for basic goods given the currencies worthlessness. A cup of coffee, which a year ago cost 0.45 bolivars, now costs 1,700 bolivars.
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Best estimates show that Venezuelans saw prices rise at an annualized rate of 160,000% by the end of 2018. Venezuelans have no access to medical services, children and the elderly are starving to death, and millions of people are fleeing the country in mass as a result. The tragedy is that this suffering is the direct result of something that is completely avoidable. As Mises described in the 1950’s, “The most important thing to remember is that inflation is not an act of God, that inflation is not a catastrophe of the elements or a disease that comes like the plague. Inflation is a policy.” Indeed, as has been proven throughout history, it is a policy that follows from the growth of government under socialism.
Trade in the Final Days of the Revolution Last July, Major General Manuel Quevedo – the career military officer who had been made president of PdVSA – met with a Catholic priest and a gathering of PdVSA workers and officials at the PdVSA headquarters for a prayer ceremony in hopes that God would help boost Venezuelan oil output. But not even calls to God could reverse the economic misfortune that follows when you place industry in the hands of military officials and socialist sympathizers.
What followed was increasing economic and political disarray throughout 2018. With little choice left, the Venezuelan government quietly reversed the two-decade drive to nationalize the oil industry and began hiring outside firms to help maintain the last bit of operations at the state owned oil giant. This comes less than a year after Maduro was quoted saying, “I want a Socialist PDVSA. An ethical, sovereign and productive PDVSA. We must break this model of the rentier oil company.”
While it is true that the Venezuelan government and economy has grown dependent on loans from their more ideologically aligned geopolitical allies China, India, and Russia over the past decade, their ideological adversary – the US – has been by far the largest buyer of the oil that finances the Venezuelan government. The US imported nearly 500,000 barrels per day of Venezuelan crude in 2018, accounting for nearly 40 percent of total Venezuelan exports and up from 34 percent of total Venezuelan exports in 2017. Given that Venezuela is greatly indebted to many of its other largest buyers like China and India, exporting oil to these countries only pays down debts and does not help meet needs for additional funding. As such, the US is thought to account for 75 percent of the total cash that Venezuela receives for their crude exports.
What’s more, Venezuelan oil is far too heavy or thick to flow through pipeline and export infrastructure without having diluent - or refined light oil products like gasoline - to blend with its crude to reduce its viscosity. In the past, PdVSA created their own diluent at their own refineries. But with nearly the entire refining base going offline after years of bureaucratic mismanagement, in 2018 Venezuela increasingly turned to refiners in the US to supply the oil products that would allow them to continue to produce and export crude. The US supplied nearly 80 percent of the total diluent imported into Venezuela in 2018. While Venezuela can source this from elsewhere globally, it would come at a higher cost than procuring the geographically proximate US supply.
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So, what happened when socialist Venezuela ran up debts to their socialist allies globally and were starved of income and the inputs their industry depends on? Ironically, but not surprisingly, they turned to the supposed evil capitalist country that Maduro blames for their economic misfortune. As global pressure mounts against Maduro and his government, we can only hope for the people of Venezuela that the country will truly turn away from the anti-capitalistic mentality that led them to this point. The true problem in Venezuela will not simply resolve with a bail out by the IMF or World Bank. There must be a resolution from within the Venezuelan people to turn away from socialism. As Mises so astutely observed, “The problem of rendering the underdeveloped nations more prosperous cannot be solved by material aid. It is a spiritual and intellectual problem. Prosperity is not simply a matter of capital investment. It is an ideological issue.”
People are understandably upset about the coronavirus epidemic, but if we’re not careful, an even greater danger lies ahead. Sinister forces in American political life are using the crisis to incite war with China and to stir up bad feelings towards the Chinese people. The Chinese people are in fact heroic. They are our friends, not our enemies. But the forces of evil want you to think otherwise.
Concerning the coronavirus, the key fact to remember is that we know very little about it. The worst mistake we could make is to become jittery and panicked. As Bill Sardi, an outstanding expert on health issues, has pointed out,
There are two hotspots in the world for coronavirus infections: Wuhan, China (Hubei Province) and Italy. Both of these geographic areas were grappling with tuberculosis outbreaks prior to the eruption of the mutated COVID-19 coronavirus. Strangely, coronavirus appears to spread to the rest of the world from these hotspots via airplane travel. But the infection remains in those infected and may spread within a household, but not into the community. Other geographical outbreaks must be questioned as there are too many false positive tests to confirm COVID-19 coronavirus, which at this point in time may be nothing more than a passenger virus that accompanies tubercular infections.
If Sardi is right, the main thing we can do to keep safe is to close our borders to immigrants.
Unfortunately, people are using the epidemic to stir up bad feelings toward the Chinese people, because the epidemic began in Hubei Province there. Ironically, there is evidence that the virus was really sent to China from the US. Larry Romanoff, whose “Global Research” column often uncovers items that others miss, says:
Not only did the virus not originate at the seafood market, it did not originate in Wuhan at all, and it has now been proven that it did not originate in China but was brought to China from another country. Part of the proof of this assertion is that the genome varieties of the virus in Iran and Italy have been sequenced and declared to have no part of the variety that infected China and must, by definition, have originated elsewhere.
It would seem the only possibility for origination is the US because only that country has the “tree trunk” of all the varieties. And it may therefore be true that the original source of the COVID-19 virus was the US military bio-warfare lab at Fort Detrick. This would not be a surprise, given that the CDC completely shut down Fort Detrick, but also because, as I related in an earlier article, between 2005 and 2012 the US had experienced 1,059 events where pathogens had been either stolen or escaped from American bio-labs during the prior ten years—an average of one every three days.
But even if Romanoff is wrong, the epidemic was not the fault of the Chinese people. Rather, the responsibility lies with the Chinese government, which suppressed warnings by local doctors. Had these warnings been heeded, the disease could have been contained with little trouble.
Hate directed against the Chinese blocks efforts in the US to deal with the coronavirus problem. Chinese scientists have developed an efficient way to test for the virus that can process forty people in 130 minutes, instead of the 2–3-day wait for results from US tests. The US government has made no effort to get this test but instead keeps it out of the news. Instead, we hear ridiculous talk about supporting US pharmaceuticals instead of Chinese pharmaceuticals. We should be supporting free trade, so that we can get cheap drugs to US consumers. We should not help Big Pharma exploit American consumers.
Because the epidemic started in China and spread from there, hostility toward Chinese people living in the US has gone up. Chinese-owned stores have been threatened, and gun sales to Chinese who fear attacks have soared. Chinese restaurants are nearly empty.
The president’s talk about the “Chinese virus” fans the flame of ill feelings, and some fear that the government may provoke a war with China in order to distract attention from a tanking US economy. US government propaganda has spread false claims about predatory Chinese trade practices to get the American people ready for hostile action toward China. As David Stockman has observed,
Indeed, the entire intellectual property theft meme is just a scam under which the business lobbies have enlisted the FBI and other law enforcement branches to function as taxpayer-financed patent attorneys and litigants.
But that’s not the state’s job at all: Enforcement of intellectual property rights is a cost of doing business that should be borne by patent owners; and not, again, by the proverbial bus driver shopping at Walmart’s and finding the cost of his tariffed necessities rising because some company in China is allegedly stealing trade secrets. Of course, the ultimate case of Trade Nannyism is the perennial whining by the K-Street lobbies that nefarious trade abusers like China “subsidize” their exports.
Why, yes, they surely do….send foreign aid to American consumers, that is!
To the contrary, if you want to level the playing field for American producers and manufacturers, instruct the Fed to stop targeting 2% inflation, and, in fact, to get out of the way entirely so that the domestic economy can deflate its high prices, wages and costs and thereby become more competitive on the global markets.
Provoking war with China is an incredibly dangerous policy. Eric S. Margolis, an experienced foreign policy expert, has noted: “But in a US-China war, the Chinese would be fighting almost at home. The US would have to sustain a major conflict many thousands of miles from its home ports. America is the world’s genius when it comes to logistics and mass operations, but even so great distances are punishing. It would prove a bridge too far.” The US would be the aggressor in a war with China. The South China Sea belongs to them, not to us, yet we send our ships there and insist we have a right to control what happens there. Also, a great deal of China’s industry and agriculture is privately owned, so an attack on China would be an attack on private property. Both the neocons and the nationalist “Right” want war with China. We should aim at peace instead, as Murray Rothbard and Ron Paul have taught us.
If we ignore propaganda and look at the facts, we should recognize that the Chinese people are heroes. It’s a scandal, in fact, that few Westerners are even aware, or, if they are aware, that they are not conscious, of the bloody reality that prevailed in China between the years 1949 and 1976, the years of rule by Mao Zedong
How many died as a result of persecutions and the communist policies of Mao? Perhaps you care to guess? Many people over the years have attempted to guess. But they have always underestimated. As more data rolled in during the 1980s and 1990s, and as specialists have devoted themselves to investigations and estimates, the figures have become ever more reliable. And yet they remain imprecise. What kind of error term are we talking about? It could be as low as 40 million. It could be as high as 100 million—or more. In the Great Leap Forward from 1959 to 1961 alone, figures range between 20 million and 75 million. In the period before, 20 million. In the period after, tens of millions more.
As scholars in the area of mass death point out, most of us can’t imagine one hundred dead or one thousand. Above that, we are just talking about statistics: they have no conceptual meaning for us. And there is only so much ghastly information that our brains can absorb, only so much blood we can imagine. And yet there is more to why China’s communist experiment remains a hidden fact: it makes a decisive case against government power, one even more compelling than the cases of Russia or Germany in the twentieth century. Finally, in 1976, Mao died. Within a few months, his closest advisers were all imprisoned. And the reform began slowly at first and then gained breakneck speed. Civil liberties were restored (comparatively) and the rehabilitations began. Torturers were prosecuted. Economic controls were gradually relaxed. The economy, by virtue of human and private economic initiative, was transformed.
Having read the above, you are now in a tiny elite of people who know anything about the greatest death camp in the history of the world that China became between 1949 and 1976, an experiment in total control unlike anything other in history. Many more people today know more about China’s exploding cell phone batteries than the hundred million dead and the untold amount of suffering that occurred under communism.
When you hear complaints about the “Chinese virus” today, imagine millions in famine, with parents swapping children to eat in order to stay alive. Let’s have peace with China, not war, and let’s admire the hardworking, productive, and wonderful Chinese people.
Marxian doctrine doesn’t deny the possibility of absolute truth, but it maintains that absolute truth can be attained only in the classless society. Or in the proletarian class society.
Lenin’s main bookV.I. Lenin, Materialism and Empirio-criticism: Critical Comments on a Reactionary Philosophy (Moscow: Zveno Publishers, 1909).—Ed., or at least his most voluminous book (now available in the Collected Works of Lenin), led some people to call him a philosopher. Most of Lenin’s critique of the ideas of his adversaries consists of calling them “bourgeois.” Lenin’s philosophy is merely a restatement of the philosophical ideas of Marx; to some extent it is not even up to the level of other Russian writers on Marxism.
Marxist theory or philosophy had no development in countries where there were Communist parties. Persons whom we call Marxians consider themselves merely interpreters of Marx; they never tried to change anything in Marx. However, there are contradictions in Marx. So it is possible to quote passages from his writings from all points of view. The influence of Marx on all authors and writers who have lived since Marx died has been considerable, even though it is not usually admitted that these authors were influenced by Marx.
Although Marxians considered themselves solely interpreters of Marx, one Marxian, one writer, added something and had a strong influence, not only on the small group of his followers, but also on other authors. Georges Sorel [1847–1922]—not to be confused with Albert Sorel [1842–1906]—an important historian, developed a philosophy in many respects different from the Marxian philosophy. And it influenced political action and philosophic thinking. Sorel was a timid bourgeois intellectual, an engineer. He retired to discuss these things with his friends at a bookshop owned by Charles Péguy [1873–1914], a revolutionary socialist. In the course of the years, Péguy changed his opinions and at the end of his life he was a very ardent Catholic author. Péguy had serious conflicts with his family. Péguy was remarkable for his intercourse with Sorel. Péguy was a man of action; he died in action in 1914 in the first weeks of the war.
Sorel belonged psychologically to the group of people who dream of action but never act; he didn’t fight. As a writer, however, Sorel was very aggressive. He praised cruelty and deplored the fact that cruelty is more and more disappearing from our life. In one of his books, Reflections on Violence, he considered it a manifestation of decay that Marxian parties, calling themselves revolutionary, had degenerated into parliamentary parties. Where is the revolution if you are in Parliament? He also didn’t like labor unions. He thought the labor unions should abandon the hopeless venture of seeking higher wage rates and should adopt, instead of this conservative pattern, the revolutionary process.
Sorel saw clearly the contradiction in the system of Marx who spoke of revolution on the one hand and then said, “The coming of socialism is inevitable, and you cannot accelerate its coming because socialism cannot come before the material productive forces have achieved all that is possible within the frame of the old society.” Sorel saw that this idea of inevitability was contradictory to the idea of revolution. This is the contradiction all socialists ask themselves about—Kautsky, for one. Sorel completely adopted the idea of revolution.
Sorel asked of the labor unions a new tactic, action directe—attack, destroy, sabotage. He considered these aggressive policies only preliminary to the great day when the unions would declare a “general strike.” That is the day when the unions will declare “Now we don’t work at all. We want to destroy the life of the nation completely.” General strike is only a synonym for the live revolution. The idea of action directe is called “syndicalism.”
Syndicalism can mean ownership of the industry by the workers. Socialists mean by this term ownership by the state and operation for the account of the people. Sorel wanted to attain this by revolution. He didn’t question the idea that history leads toward socialism. There is a kind of instinct that pushes men toward socialism, but Sorel accepted this as superstition, an inner urge that cannot be analyzed. For this reason his philosophy has been compared with that of Henri Bergson’s élan vital (myths, fairy stories, fables, legends). However, in the doctrine of Sorel, “myth” means something else—a statement which cannot be criticized by reason.
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Socialism is an end.
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The general strike is the great means.
Most of Sorel’s writings date from 1890 to 1910. They had an enormous influence on the world, not only on the revolutionary socialists, but also on the royalists, supporters of the restoration of the House of Orange, the “Action française,” and in other countries the “Action nationale.” But all these parties gradually became a little bit more “civilized” than Sorel thought they should be.
It was the idea of French Syndicalism that influenced the most important movement of the twentieth century. Lenin, Mussolini, and Hitler were all influenced by Sorel, by the idea of action, by the idea not to talk but to kill. Sorel’s influence on Mussolini and Lenin has not been questioned. For his influence on Nazism, see the book by Alfred RosenbergRosenberg [1893–1946] was a Nazi ideologist condemned to death for war crimes at Nuremberg on October 1, 1946. He was executed on October 16, 1946.—Ed. titled The Myth of the 20th Century. The fundamental idea of racism was borrowed from Frenchmen. The only man who really contributed something to the Marxian idea was Sorel, along with a group of syndicalists—a comparatively small group composed exclusively of intellectuals and even of idle rich and intellectuals, like the “penthouse Bolshevists” of New York. They repeated again and again that only the workers have enough vigor and enough class consciousness in order to search out and to destroy the bourgeois system.
The center of Marxian activity shifted from Germany to France. The greatest portion of Marxian writings are in French. Sorel’s work was done in France. Outside of Russia, there are more Marxians in France than in any other country; there is, however, more discussion of communism in France than in Russia. The École Normale Supérieure in Paris was an important center of Marxian teachings. Lucien Herr [1864–1926], the librarian, had a great deal of influence. He was the father of French Marxism. As former students of École Normale Supérieure became more and more important, the school spread Marxism all over France.
By and large, the same condition prevailed in most European countries. When the universities seemed slow to accept Marxism, special schools were endowed to educate the rising generations in orthodox socialism. This was the goal of the London School of Economics, a Fabian institution founded by the Webbs. But it couldn’t avoid being invaded by persons of other ideas. For instance, [Friedrich A.] Hayek [1899–1992] taught for some years at the London School of Economics. This was the case in all countries—European countries had state universities. People generally ignored the fact that Marxians, not free traders, were appointed by the Tsar at the imperial universities in Russia. These professors were called legal, or better “loyal,” Marxians. When the Bolshevists came to power in Russia, it was not necessary to fire the professors.
Marx didn’t see any differences between the various parts of the world. One of his doctrines was that capitalism is one stage in the development of socialism. In this regard, there are some nations that are more backward than others. But capitalism was destroying the trade barriers and migration barriers that once prevented the unification of the world. Therefore, the differences in the evolution of the various countries with regard to their maturity toward socialism will disappear.
In the Communist Manifesto in 1848, Marx declared that capitalism was destroying all national peculiarities and unifying into one economic system all the countries of the world. The cheap prices of products were the means capitalism used to destroy nationalism. But in 1848, the average person didn’t know anything about Asia or Africa. Marx was even less informed than the average English businessman who knew something about business relations with China and India. The only attention Marx gave to this problem was his remark, later published by Vera Zasulich, to the effect that it might be possible for a country to skip the capitalist stage and proceed directly to socialism. Marx saw no distinction between various nations. Capitalism, feudalism, brings about progressive impoverishment everywhere. Everywhere there will be mature economies. And when the age of mature capitalism comes, the whole world will have reached socialism.
Marx lacked the ability to learn by observing political events and the political literature being published around him. For him practically nothing existed but the books of the classical economists, which he found in the library of the British Museum, and the hearings of the British Parliamentary Commissions. He didn’t even see what was going on in his own neighborhood. He didn’t see that many people were fighting, not for the interests of the proletariat, but for the principles of nationality.
Marx completely ignored this principle of nationality. The principle of nationality asked that every linguistic group form an independent state and that all the members of such a group should be recognized and unified. This was the principle which brought about the European conflicts, led to the complete destruction of the European system, and created the present-day chaos in Europe. The principle of nationality doesn’t take into account that there are large territories in which linguistic populations are mixed. Consequently there were struggles between the various linguistic groups which finally resulted in the situation we have today in Europe. I mention this because it is a principle of government which was unknown up to now.
According to this principle there is no such nation as India. It is possible that this principle of nationality will break India up into many independent states fighting one another. The Indian Parliament uses the English language. The members of the various states cannot communicate with one another, other than by employing the language of the government, a language which they have practically expelled from their country. But this situation will not last forever.
In 1848, when the Slavs of Europe met for a Panslavist Congress in Moscow, they had to speak with one another in German. But this didn’t prevent later developments in a different way.
Karl Marx and Engels didn’t like the nationalistic movement and never took notice of it. It didn’t fit into their plans or schemes. If, on account of the unfriendly remarks Marx and Engels made about various linguistic groups of Austria-Hungary and the Balkans, some authors, especially French authors, think Marx was a forerunner of National Socialism—Nazism—they are wrong. Marx said that what he wanted was to create a one-world state. And that was Lenin’s idea too.
By 1848 Marx had already assumed that socialism was just around the corner. Given such a theory, there was no reason to form a separate linguistic state. Such a state could only be very temporary. Marx simply assumed that the age of nationalities would come to an end, and that we were on the eve of an age in which there would no longer be differences between various types, classes, nations, linguistic groups, etc. Marx absolutely denied any differences among men. Men would all be of the same type. There was never any answer in Marx as to what language the people in his one-world state would use, or what the nationality of the dictator would be.
Marx was furious when someone said there were differences between men in the same nation, the same city, the same branch of business, just as all Marxists became furious when someone told them there were differences between Englishmen and Eskimos. According to Marx, the only difference was due to education. If an idiot and Dante had been educated in the same way, there would have been no difference between them. This idea influenced Marx’s followers, and it is still one of the guiding principles of American education. Why is not everybody equally intelligent? Many Marxians assume that in the future socialist commonwealth the average person will be equal in talents, gifts, intelligence, artistic attainments, to the greatest men of the past, such as Trotsky, Aristotle, Marx, and Goethe, although there will still be some more gifted people.
It never occurred to Marx that, in the best case, education can only transfer to the pupil what the teacher already knows. In the case of Marx, it wouldn’t have been enough for him to have been educated in a school by perfect Hegelian teachers because then everything he would have produced would have only been Hegelianism again. By educating people in the knowledge of the generation preceding motor cars, it wouldn’t have been possible to produce motor cars. Education can never bring about progress as such. That some people, thanks to their positions, inheritance, education, and so on, have the gift to go one step farther than preceding generations cannot be explained simply by education.
Similarly, it is impossible to explain great things and the great acts of some men simply by referring to their national affiliation. The problem is, why were these people different from their brothers and sisters? Marx simply assumed, without any reason, that we are now living in the age of internationalism and that all national traits will disappear. In the same way that he assumed that specialization would disappear, because machines can be operated by unskilled workers, he assumed there would no longer be any differences between various parts of the world and various nations. Every kind of conflict between nations was interpreted as the consequence of the machinations of the bourgeoisie. Why do Frenchmen and Germans fight? Why did they fight in 1870? Because the ruling classes of Prussia and the ruling classes of France wanted to fight. But this had nothing to do with the interests of nations.
In regard to his attitude toward war, Marx was, of course, influenced by the idea of the Manchester laissez-faire liberals. In using the term “Manchester liberalism” always as an insult, we tend to forget the essential statement in that famous declaration of the Manchester Congress where the term originated. It was said there that in the world of free trade there is no longer any reason for nations to fight one another. If there is free trade and every nation can enjoy the products of every other nation, the most important cause of war disappears. The princes are interested in increasing the territorial size of their princely province to get greater income and power, but nations as such are not interested, because it doesn’t make any difference under free trade. And in the absence of immigration barriers it doesn’t matter to the individual citizen whether his country is large or small. Therefore, according to the Manchester Liberals, war will disappear under popular democratic rule. The people will not then be in favor of war because they have nothing to win—they have only to pay and to die in the war.
It was this idea that was in the mind of President [Woodrow] Wilson [1856–1924] when he went to war against Germany. What President Wilson didn’t see was that all this about the uselessness of war is true only in a world when there is free trade between the nations. It is not true in a world of interventionism.
Sir Norman Angell [1872–1967] still argues in the same way. What did the individual Germans gain in 1870? This was almost true then, because there was comparatively free trade. But today the situation is different. Italy’s own policies made it impossible for Italians, in the world of interventionism, to get the raw materials they needed. It is not true in today’s interventionist world that the individual person does not gain something from war.
The League of Nations is one of the great failures in world history—and there have been many failures in world history. During the League’s 20 years the trade barriers had been more and more intensified. Tariffs became unimportant as trade barriers because embargoes were established.
Because the liberals said war was no longer economically advantageous because the people will not gain anything from it, therefore, a democratic nation will no longer be eager to fight wars. Marx assumed that this was true even in the interventionist world which was developing under his very eyes. This was one of the fundamental errors of Marxism. Marx was not a pacifist. He didn’t say war was bad. He only said—because the liberals said so—that war between nations had no importance or meaning at all. He said war—i.e., revolution, by which he meant civil war—was necessary. Nor was Friedrich Engels a pacifist; he studied military science day in and day out in order to prepare himself for the position he had assigned himself as commander-in-chief of all nations, as commander-in-chief for the proletarians of all countries united. Remember that he participated in fox hunting in a red coat, which he told Marx this was the best exercise for a future general.
Because of this idea of revolution—civil war, not international war—the Marxian International began to discuss peace. In 1864 Marx founded in London the First International. A group of persons who had very little to do with the people and the masses met together. There was a secretary for every country. The secretary for Italy was Friedrich Engels and many of the other countries were represented by persons who only knew the countries they represented as tourists. Arguments between the members disrupted the whole International. Finally it was moved to the United States and then fell apart in 1876.
The Second International was formed in Paris in 1869. But this Second International didn’t know what to deal with. The unions had arisen and the unions were opposed to free trade and free migration. Under such conditions, how could you find subjects to be discussed at an international congress? Then they decided to discuss peace and war, but only on a national level. They said they were all proletarians and they agreed they would never fight the wars of the bourgeoisie. The Germans included Engels and Karl Kautsky. There were some “bad” Frenchmen in the group who asked, “What do you mean when you say we can’t defend our own country? We don’t like the Hohenzollerns.” The French at this time made an agreement with the Russians and the Germans didn’t like that. Every few years there was such an international congress and each time the newspapers said it heralded the end of war. But these “nice fellows” didn’t discuss the real causes of friction, migration barriers, etc. The outbreak of World War I disrupted the International Congresses.
What Marx planned was a revolution. But what really happened was that he created a bureaucratic organization in the European countries which was, by and large, innocent because it lacked the power to execute its theories. Then there developed in the East a Communist organization that unfortunately has the power to execute people and to threaten the whole world. And all this was started in the Reading Room of the British Museum in London by a man, who was not in this regard a man of action, but who was able to bring about violent action. It was the timid bourgeois characters, Karl Marx and Georges Sorel, who created all this mischief. Most of the violent ideas of our times have come from men who themselves wouldn’t have been able to resist any aggression.
Wilson accepted the doctrine of the Manchester Liberals, namely that so far as war was concerned, democracies don’t like to fight wars; democracies fight only wars of defense because the individual citizen cannot expect any improvement of his conditions from war, not even if his country is victorious. But Wilson didn’t see that this was true only in a world of free trade. He didn’t see that this was quite different already in the age in which he lived, which was an age of interventionism. He didn’t realize that an enormous change in economic policies had deprived this theory of the Manchester Liberals of its practicability. Trade barriers were comparatively innocent in 1914. But they were very much worsened during the years of the League of Nations. While free traders were meeting with the League in Geneva and talking about reducing trade barriers, people at home were increasing them. In 1933, there was a meeting in London to bring about cooperation among the nations. And precisely at this time the richest country, the United States, nullified the whole thing with monetary and financial regulations. After this the whole apparatus was absolutely useless.
Ricardo’s theory of comparative advantage is that it is to the advantage to a nation to have free trade even if all other nations cling to their trade barriers. If the United States alone today adopted free trade there would be certain changes. But if all other countries clung to protectionism with import barriers, it would not be possible for the United States to buy more goods from other countries.
There are isolationists not only in this country; there are also isolationists in other countries. Imports must be paid for by exports and exports have no other purpose than to pay for imports. Thus the establishment of free trade by the richest and most powerful nation only would not change the situation for the Italians, for instance, if they retained their trade barriers. It would not make any difference for other countries either. It is advantageous for any country to have free trade even if all other countries do not, but the problem is to remove the barriers of the other countries.
The term “socialism,” when it was new in the second part of the 1830s, meant exactly the same as “communism”—i.e., the nationalization of the means of production. “Communism” was the more popular term in the beginning. Slowly the term “communism” fell into oblivion and the term “socialism” came into use almost exclusively.
Socialist parties, social democratic parties, were formed and their fundamental dogma was the Communist Manifesto. In 1918, Lenin needed a new term to distinguish his group of socialists from those groups which he called “social traitors.” So he gave to the term “communism” a new meaning; he used it to refer, not to the final goal of socialism and communism, but only to the tactical means for attaining them. Until Stalin, communist meant simply a better method—the revolutionary method—as against the peaceful, socialist, method of the “socialist traitors.” At the end of the 1920s, without great success, Stalin in the Third International tried to give a different meaning to the term “communism.” However, Russia is still called the Union of the Soviet Socialist Republics (USSR).
In a letter, Karl Marx distinguished between two stages of socialism—the lower preliminary stage and the higher stage. But Marx didn’t give different names to these two stages. At the higher stage, he said, there will be such an abundance of everything that it will be possible to establish the principle “to everybody according to his needs.” Because foreign critics noticed differences in the standards of living of various members of the Russian Soviets, Stalin made a distinction. At the end of the 1920s he declared that the lower stage was “socialism” and the higher stage was “communism.” The difference was that at the lower socialist stage there was inequality in the rations of the various members of the Russian Soviets; equality will be attained only in the later, communist, stage.
Excerpted from Marxism Unmasked
An audio version of this article is available here.
The UK's Express reports this week the South African government has begun seizing farms in the country following a failure to negotiate sales with the owners.
On July 31, President Cyril Ramaphosa, who had only been elected into office in February, confirmed his African National Congress (ANC) party would pass an amendment to the country’s constitution to allow the seizure of white-owned farmland without compensation.
Mr Ramaphosa claimed the new amendment was designed to “outline more clearly the conditions under which expropriation of land without compensation can be affected”.
Last week, ANC chairman Gwede Mantashe sparked panic among the farming community when he said that any farmers owning more than 25,000 acres of land would have it taken from them without compensation.
The South African government has now started seizing land from white farmers, initially targeting two game farmers in the northern province of Limpopo after talks with the owners Akkerland Boerdery broke down over a huge differences in its estimated value.
Technically, it appears the confiscation program targets farm owners based on the size of holdings, and not, strictly-speaking, based on their racial status.
In practice, however, the effect has been that the owners who face confiscations are overwhelmingly "white."
Thus, the policy has long had a racial component to it. Donald Trump tweeted this week that he has directed the State Department to look into the matter of confiscations of lands owned by "white farmers." Trump was condemned by the South African ruling party for invoking the racial issue, but the racial component of the controversy is evident.
After all, the French state-owned media company France24 states matter-of-factly that the policy "seeks to correct the legacy of decades of white minority rule that stripped blacks of their land."
Socialism Is Socialism It's easy to make far too much of the racial component, however. While racial animosity and the desire for reparation for past crimes that "stripped blacks of their land" appears to be the motivating factor for the ruling regime, the fact remains the farm confiscations are also just good politics from the ruling party's perspective. That is, the confiscations could be motivated by nothing more than a cynical desire to reward the party's political base with "free" stuff. Farm owners, after all, are a tiny percentage of the South African voting population.
And this is why it's important to not fixate on the racial aspect of the farm policy and see the policy for what it is at its core. It's just yet another ordinary, mundane policy designed to expropriate private property from one group and give it to another.
In this, the land confiscations are not fundamentally different from any other time a state has confiscated lands, industries, or businesses in any other part of the world.
In the past century, Marxist-inspired regimes have most commonly confiscated lands and farms based on the idea that the owners were too "bourgeois" or enemies of the "revolution" in some other respect. This has been the case in recent years in Venezuela where businesses are seized from alleged "class traitors."
Even more importantly, neither the stated motivation or the actual motivation mean much of anything when it comes to the effects of land confiscations and property expropriation of any kind.
Regardless of the motivation, state confiscation of property leads to economic fallout that can have disastrous effects on the local economy.
Most importantly, expropriations of property lead to serious problems of "regime uncertainty" (a term developed by Robert Higgs) in which uncertainty about the legal and political status of property can lead to significant declines in investment and production. In other words, if property owners are unsure if their property will be confiscated, they won't invest in the property or maintain it.
Thus, regime uncertainty leads to a withholding of investment and the destruction of capital thanks to lack of investment and maintenance.
We see this already at work in South Africa. As, according to Express, "A record number of white South African farmers have put their land up for sale amid fears the ruling party is considering confiscating properties bigger than 25,000 acres."
Owners are essentially plotting their escape from the South African economy, but it will be hard for them to find buyers. After all, what investor — one with actual means to buy and maintain the farms — will purchase these farms under the present circumstances? At least, no one will be buying at anything other than a drastically reduced price.
Given that it still remains quite uncertain as to how extensive or harsh the confiscations will be, most potential owners will wait and see how things go before investing anything more in the South African agricultural economy.
And this, as Higgs notes in his work on regime certainty, is one of the central aspects of regime uncertainty: it impels investors and owners to delay making investments until uncertainty abates. In the mean time, wages of workers will decline, owners will forgo needed repairs of machines and tools, and the economy overall will suffer. Higgs writes:
Private investment is the most important driver of economic progress. Entrepreneurs need new structures, equipment, and software to produce new products, to produce existing products at lower cost, and to make use of new technology that requires embodiment in machinery, plant layouts, and other aspects of the existing capital stock. When the rate of private investment declines, the rate of growth of real income per capita slackens, and if private investment drops quickly and substantially, a recession or depression occurs.
A larger effect in this case may also be that many of the most experienced, knowledgeable, and capital-rich residents of South Africa will flee the country, taking their know-how with them. The South African state will — as states often do — likely attempt to make it difficult for emigrants to take their capital with them. This will be relatively easy for owners whose wealth is tied up in land. Foreign investors, however, will have no such trouble. It will be relatively easy for foreign investors to pull their wealth out of South Africa as a result of the expropriations. That investment may never return.
So, while land confiscations make good political sense for the ruling party in South Africa, the fact remains the policy makes very bad economic sense. It's just the same sort of thing we've already been seeing in Venezuela in recent years, and the effects — proportional in size to the amount of expropriation effected — will be the same.
And perhaps this "proportionality" issue is what the regime is banking on. Even if the South African regime understands the economic implications of expropriation, the regime also recognizes that agriculture remains a relatively small part of the South African economy. Less than three percent of South Africa's GDP is currently driven by agriculture.
The regime may be hoping that it can get away with destroying investment in that sector if the resulting economic destruction remains fairly limited. After all, if the South African economy suffers — as it is already doing due to a variety of other factors — the regime can always blame some other group for the problem, such as foreign capitalists or domestic naysayers.
Economically speaking, though, we can be sure that — should expropriations continue — lands on the margins will fall out of use, farm workers on the margins will find themselves out of work, and regime uncertainty will lead to overall declines in both domestic and foreign investment.
The motivation for this latest move toward the destruction of property rights is immaterial to the economic outcome.
Three months ago, the CEO of Gravity Payments, a Seattle credit card processing firm, announced that all of the firm’s employees would be paid a minimum of $70,000 a year, according to this story. Now, the firm has fallen on hard times, and some of the firm’s “higher valued” employees have quit. One employee who quit said, “He gave raises to people who have the least skills and are the least equipped to do the job, and the ones who were taking on the most didn’t get much of a bump.” Another who quit said, “Now the people who were just clocking in and out were making the same as me. It shackles high performers to less motivated team members.”
The real-world Gravity Payments sounds a lot like the fictional Twentieth Century Motor Company from Ayn Rand’s novel, Atlas Shrugged, and while the quotations from the real-world employees who left Gravity Payments do not sound quite as passionate as the fictional John Galt, the message is the same.
Rand’s novel was first published in 1957 and has been continuously in print since. I am not the first to observe that many real-world events since the publication of Rand’s novel closely resemble events in the fictional world she described. Here is another example.
The title of this post — minus the reference to Finland — is shamelessly copped from a prescient essay that Ludwig von Mises wrote in 1953. In his article Mises pointed out that in Great Britain and Europe, the system of progressive taxation was already confiscating nearly the entire “surplus” incomes of the successful capitalists and entrepreneurs, meaning that higher tax rates would no longer produce additional funds to finance these countries’ ever-expanding welfare states. “Henceforth,” Mises foretold, “the funds of the beneficiaries themselves have to be tapped if more handouts are to be made to them.”
Today things have gotten far worse than even Mises foresaw. For now it is becoming evident that the “beneficiaries” of the most advanced welfare states are not reproducing rapidly enough to pay for the benefits that they are receiving and are therefore “endangering” the “long-term survival” of the “more generous” welfare states. A notable example is Finland, which faces a “massive baby problem.” Thus, in 2016, Finland recorded the lowest number of newborn babies in 148 years, or since the great famine of 1868. The Finnish fertility rate has fallen to 1.57 per woman and the number of people under 20 years of age as a percentage of the working age population is the lowest among Nordic countries at less than 40%, down from 60% in 1970.
The situation has left mainstream economists devoid of solutions and wringing their hands in despair. For Heidi Schauman, the Aktia Bank chief economist, the statistics are "frightening.” As Ms. Schauman explains:
They show how fast our society is changing, and we don't have solutions ready to stop the development. We have a large public sector and the system needs taxpayers in the future.
Schauman clearly does not appreciate the delicious irony of the modern welfare state revealed in the emphasized part of her statement. Without the ability to further expropriate wealthy capitalists and entrepreneurs, the welfare state has become a crazy machine with no purpose but to perpetuate its own existence by devouring massive quantities of taxes extracted from the people it ostensibly serves. If demographic trends threaten the existence of the machine, well then, more people must be produced to feed it. It reminds me of the wonderful Twilight Zone episode, “To Serve Man.”
Janet Yellen didn't make much news this week when she testified before the House and Senate banking committees. She continued to defend the Fed's low interest rate policy, painted a very optimistic picture of the American economy, and struggled to defend her opposition to Audit the Fed. Unfortunately for Yellen, while she can duck and dodge the questioning of the occasionally hostile legislator, she can't avoid the consequences of the policies of herself and her predecessor.
The Bernanke-Yellen bubble will lead to the Bernanke-Yellen depression.
On Mises Weekends, Dr. Mark Thornton joins Jeff to explain the "business cycle" for what it really is: a series of booms (credit expansion) and busts (debt deleveraging) engineered by central banks. Mark explains why there's nothing natural, real, or sustainable about the current Yellen boom.
And in case you missed them, here are this weeks Mises Wire articles, covering a wide array of topics including: Yellen's continued denial that anything is wrong, "free" education, Nancy MacLeans distorted view of America, and do we really need the ATF?
Will Trump Be Less of a Spendthrift than His Republican Predecessors? by Ryan McMakenMcCaffrey and Dorobat on the Economics of Game of Thrones by Matthew McCaffrey and Carmen Elena DorobatThe Part-Time Critics of Central Banks by Mark SpitznagelThe High Cost of "Free" College by Nathan KeebleFive Takeaways from the House's Yellen Hearing by Tho BishopWhat's Driving Global Populism? by David GordonThe Ancient Incas and the Collectivist State by Richard M. EbelingBank of Canada Raises Rates for First Time in 7 Years by Caleb McMillanToday Janet Yellen Explained (Yet Again) Why Interest Rates Should Stay Low by Ryan McMakenOn Borrowed Time by Tim PriceThe Tragedy of the Commons in the American Prison System by Chris CaltonThoughts on Nancy MacLean vs. GMU by Jeff DeistJanet Yellen: False Prophet of Prosperity by Ron PaulThe Bernanke-Yellen Bubble-Depression by Mark ThorntonMacLean on James Buchanan: Fake History for an Age of Fake News by David GordonAbolish the ATF by Ryan McMakenRick Perry — and His Critics — Still Don't Understand Say's Law by Per BylundThe "Science" of Liberty by Murray RothbardFor Libertarians, the British Monarchy Is the Least of Our Worries by George Pickering
Rafael Acevedo is a Research Associate in the Free Market Institute at Texas Tech University and Associate Professor at Universidad Centroccidental Lisandro Alvarado in Venezuela. He is the Political Director of Movimiento Libertad Venezuela, and Founder-Director of Econintech. Follow him on Twitter: @RAAcevedoR
The recent New York Democratic primary upset in which self-described “democratic socialist” Alexandria Ocasio-Cortez, age 28, defeated the high-ranking Congressman Joe Crowley is another example of socialism being pushed front-and-center into modern American politics. As usual, the pundits have it wrong when trying to explain what one means by “democratic socialism.”
Part of the reason for the upsurge in favorable views toward “democratic socialism” has been the perpetual presidential candidacy of Sen. Bernie Sanders of Vermont, who most likely would have been the Democratic Party candidate for president in 2016 had party insiders not rigged the process for Hillary Clinton. Although Sanders in his earlier years identified with the full-blown communism of the former Soviet Union (he called himself a “Trotskyite”), today he claims that socialism can be better organized through the electoral politics of a democracy, hence the name “democratic socialism.”
According to John Haltiwanger of Business Insider, “democratic socialism” differs from outright socialism in the level of state control of the economy, with socialists wanting the government to own almost all property and all means of economic production, while “democratic socialists” would allow for some private production (although it would be heavily regulated by government). He writes:
Democratic socialists also believe strongly in democracy and democratic principles. They are by no means proponents of authoritarian government systems many Americans associate socialism with.
As the DSA's (Democratic Socialists of America) website states: "At the root of our socialism is a profound commitment to democracy, as means and end. As we are unlikely to see an immediate end to capitalism tomorrow, DSA fights for reforms today that will weaken the power of corporations and increase the power of working people."
Seeking the Same Ends Through Different Means To be honest, we are looking at distinctions without real differences, as both socialists and their “democratic” counterparts differ only about the means by which to reach the same ends: total state control of the lives of everyone in a society. Furthermore, even Bernie Sanders has not fully renounced his allegiance to Leon Trotsky and his Bolsheviks, and that would have to include the infamous Red Terror:
At these times, there were numerous reports that Cheka interrogators utilized torture methods which were, according to Orlando Figes, “matched only by the Spanish Inquisition.” At Odessa the Cheka tied White officers to planks and slowly fed them into furnaces or tanks of boiling water; in Kharkiv, scalpings and hand-flayings were commonplace: the skin was peeled off victims’ hands to produce “gloves”; the Voronezh Cheka rolled naked people around in barrels studded internally with nails; victims were crucified or stoned to death at Dnipropetrovsk; the Cheka at Kremenchuk impaled members of the clergy and buried alive rebelling peasants; in Orel, water was poured on naked prisoners bound in the winter streets until they became living ice statues; in Kiev, Chinese Cheka detachments placed rats in iron tubes sealed at one end with wire netting and the other placed against the body of a prisoner, with the tubes being heated until the rats gnawed through the victim’s body in an effort to escape.
One should recall that prominent “democratic socialists” like the late John Kenneth Galbraith effusively praised both the communist economies of China during the Mao years and the USSR (the latter less than a decade before it collapsed), although there is no record of Galbraith having supported the mass executions of millions of people in order to make the socialist utopia a reality (and no record of Galbraith having condemned communist mass murder, either). Still, one can say unequivocally that Galbraith and others in the “social democracy” camps have lavished praise over the years of the communist system after it was put into place — and the main reason it was in place was because of outright terror and murder.
Likewise, in an interview with Sojourners Magazine in December, 1976, Dorothy Day, the so-called Catholic anarchist, laid unrestrained praise upon Chinese communism, claiming that China was a place with no hunger and a near-utopia. She added in an afterthought, however, that she disagreed with the violent means used to put that system into place, as though the implementation of the communist state she so adored could be done any other way.
That prominent “democratic socialists” have endorsed the ends of socialism without openly embracing violence and murder to install it into place does not mean that they should be left off the hook. We further can assume that employing an electoral process to vote socialist measures into place is going to make socialism work better than it has in the past, since the mechanics of socialism do not differ whether the socialist regime is installed via revolutionary violence or through the ballot box. After all, both Hugo Chavez and Nicolas Maduro were overwhelmingly elected to office in Venezuela in what generally are believed to be relatively free and fair elections, and now that the state-directed economy has collapsed, “democratic socialist” supporters in the USA either pretend that the government is not socialist or that the Maduro regime is not socialist enough. Declares The Nation:
If socialism is understood as a system in which workers and communities (rather than bureaucrats, politicians, and well-connected entrepreneurs) exercise effective democratic control over economic and political decision-making, it would appear that Venezuela is suffering not from too much socialism, but from too little.
This quote is significant in analyzing “social democracy” if only for the use of rhetoric as a tool of social organization. To put it in another way, “social democrats” promise all sorts of “free” goods and services from medical care to housing as part of their platform, yet want us to believe that rhetoric by itself also provides the means to provide these “free” items without creating economic havoc. For example, after her victory, Ocasio-Cortez told CBS late-night talk show host Stephen Colbert:
I believe that in a modern, moral, and wealthy society, no person in America should be too poor to live. What that means to me is health care as a human right, it means that every child no matter where you are born should have access to a college or trade-school education if they so choose it. I think that no person should be homeless if we have public structures or public policy to allow for people to have homes and food and lead a dignified life in the United States.
In the mind of “democratic socialists,” all that is lacking to provide massive amounts of “free” goods and services is political will. Things like “free” healthcare and “free” higher education and “free” housing do not exist because capitalists have kept people from massing together to vote these things for themselves. As the Democratic Socialists of America website proclaims:
Traditional left prescriptions have failed on both sides of the Communist/socialist divide. Global economic integration has rendered obsolete both the social democratic solution of independent national economies sustaining a strong social welfare state and the Communist solution of state-owned national economies fostering social development.The globalization of capital requires a renewed vision and tactics. But the essence of the socialist vision — that people can freely and democratically control their community and society — remains central to the movement for radical democracy.
The site goes on to claim (falsely) that poverty rates are increasing and that people around the world are poorer than they were a half-century ago. But even though poverty is increasing and everything in the world (due to capitalism) is worse than it ever was in history, “democratic socialists” through political organization and government takeover of commercial and social institutions — done through the ballot box, of course — will create the utopia that socialists a century ago only dreamed of crafting.
It is not as though socialists suddenly have discovered the word “democratic.” One recalls that the socialist nation we know as North Korea is actually the Democratic People's Republic of Korea. The country we knew as East Germany — famous for its wall preventing people from escaping over its borders — officially was named the German Democratic Republic, and so on. For that matter, the deadly Cambodian regime that murdered more than a third of the nation’s population from 1975 to 1979 ruled over the nation named Democratic Kampuchea.
While it is true that the DSA website calls for “market mechanisms” and does not call for elimination of all private property and business enterprises, it is clear that anything associated with “markets” would be heavily regulated — through “democratic” state planning, of course. Furthermore, the sheer volume of “free stuff” that socialists guarantee would require vast increases of government coercion just to obtain the resources needed to fulfill such campaign promises. One cannot have such large-scale changes in direction of resources without creating economic dislocations.
The “democratic” portion of “democratic socialism” also is troubling in itself. Does “democratic” mean that economic decisions that now are made by the various players in the market now will be subject to widespread voting? One cannot have both “market mechanisms” and an economic system in which major decisions on production and exchange carried out through a political voting mechanism that lacks what Mises would have called a method of economic calculation. Voters in winner-take-all elections are no more adept at creating a vibrant (or even functioning) economy than central planners, and the idea that a popular vote for nearly everything economic would produce anything but chaos is laughable.
Given that the United States has a representative democracy, it would seem that “democratic socialism” would be implemented by elected representatives that would direct factors of production and determine what should and should not be created. They would set up a system that would be highly confiscatory and order things like single-payer medical care to be put into place.
We have two major historical examples of this kind of “democratic socialism” in action. The first is well-known to readers of this page, the “democratic socialist” regime in Venezuela. Voters in that country freely elected Hugo Chavez, who promised — and delivered — a socialist regime in which government confiscated huge amounts of private property, nationalized the oil sector, and then spent the new windfall on things that socialists believe to be important. Such action garnered Chavez much admiration in the USA, Canada, and elsewhere in the West as the regime claimed to be improving the lives of Venezuela’s poor through medical and educational services.
Salvador Allende and Chilean Democracy The second example is that of Chile, in which voters in 1970 gave the legislative faction led by Salvador Allende, who was a committed communist (he insisted upon being called “Comrade President”) a slight plurality of votes. Once in power, Allende’s government did what socialists do: it seized private property, expropriated whole industries, tripled wages to some workers, and then touched off one of the worst hyperinflations in the 20th century. (Venezuela has the honor of creating the worst hyperinflation of the 21st century.) Allende died during a 1973 coup that brought a decade of dictatorship to Chile, but ultimately the new regime ended the socialist economy — and in return, Chile’s economy became the best in Latin America, and it also threw off the shackles of dictatorship.
Theoretically, if a “democratic socialist” regime can be voted in, then it should be able to be voted out. Socialists, however, see things differently, as they view the establishment of a socialist regime to be a social and political “triumph” that cannot be undone by the whim of voters. The view from socialists is that once a system of state ownership and control has been put into place, anything that would change those arrangements would be illegitimate, reactionary, and fought against at all costs.
Indeed, nowhere in the entire DSA website can one find any mention that voters can and should be free to vote out socialism after it is established in a society. So-called democratic socialists, it seems, believe that once socialism is put into place, that any attempt to remove it is a crime against progress itself. Whatever democratic processes remain after socialism becomes woven into the economic and political structures are to be directed toward the continuance of socialist “progress,” not away from it.
In a final plea, democratic socialists claim that they don’t want a totalitarian system; they just want us to be like Denmark. As the Occupy Democrats meme tells us, Denmark is the world’s “happiest country” because it has lots of free stuff, like healthcare, education, and childcare. Come to think of it, the old USSR had the same setup — and many American leftists like Galbraith claimed that the imagined cornucopia of “free stuff” legitimized the old Soviet regime.
Yes, Denmark has lots of government services paid for via very high marginal tax rates. However, would the followers of Sanders and Ocasio-Cortez be willing to put up with the relatively-low business taxes that exist in Denmark in order to ensure that private enterprise can produce enough wealth to fund the Danish welfare state? The recent political caterwauling over the reduction in corporation taxes in the USA from 35 to 21 percent tells us that democratic socialists in this country have no idea that the vast welfare state they want to create must be undergirded by someone, somewhere, producing all of that “free stuff.”
There is another point that few people make, but should be central to the “we-should-be-like-Denmark-and-Sweden” demands from American democratic socialists: the overarching demands for total social conformity. While much of the current call for socialism in the USA is coming from entrepreneurial billionaires, and especially those on the West Coast, there is no room for such people in Denmark. There are no Mark Zuckerbergs, Steven Jobses, or even a David Trone. (Trone is the billionaire wine distributor running as a Democrat in our Democrat-gerrymandered Western Maryland congressional district whose platform essentially is one of so-called democratic socialism.) The fact is that the society Trone wants to create would have no place for people like him who took an idea, purchased resources in the face of uncertainty, and built a thriving business, enabling him to become a billionaire.
The demand for utter conformity is something that neither Sanders nor his inarticulate acolyte Ocasio-Cortez can explain away. In order to create their utopias, they ultimately would have to respond to the normal resistance that comes when authorities are heavy-handed and when they try to expropriate one’s property to use it for political purposes. The government response almost always is the same: gratuitous violence. Once upon a time, Sanders understood the “need” for violence and even murder in the creation of the socialist state, and he tacitly approved it. Today, he and Ocasio-Cortez pretend that they peacefully can create that happy utopia where everyone is happy, and there is a coffee shop on every corner.
Tho is an assistant editor for the Mises Wire, and can assist with questions from the press. Prior to working for the Mises Institute, he served as Deputy Communications Director for the House Financial Services Committee. His articles have been featured in The Federalist, the Daily Caller, and Business Insider.
Matthew McCaffrey is a Fellow of the Mises Institute and assistant professor of enterprise in the Alliance Manchester Business School at the University of Manchester. He holds a PhD in economics from the University of Angers, an MS in economics from Auburn University where he was a Mises research fellow, and a BA in literature from Colorado State University. He is also the recipient of the 2012 Richard E. Fox Foundation Research Prize, the 2010 Lawrence W. Fertig Prize in Austrian Economics, and the 2017 Gary G. Schlarbaum Prize for Excellence in Research and Teaching. His research focuses on the social and economic role of entrepreneurship, and the influence of institutions on entrepreneurial behavior. His published work covers topics such as entrepreneurial decision making, judgement strategy, and the history of entrepreneurial ideas.
Dr. Carmen Elena Dorobăț is a Fellow of the Mises Institute and Senior Lecturer (Associate Professor) at Manchester Metropolitan Business School in the United Kingdom. She has a PhD in economics from the University of Angers, and is the recipient of the 2015 O.P. Alford III Prize in Political Economy and the 2017 Gary G. Schlarbaum Prize for Excellence in Research and Teaching. Her research interests include international trade, monetary theory and policy, and the history of economic thought.
David Gordon is a senior fellow at the Ludwig von Mises Institute. He was educated at UCLA, where he earned his PhD in intellectual history. He is the author of Resurrecting Marx: The Analytical Marxists on Exploitation, Freedom, and Justice, The Philosophical Origins of Austrian Economics, An Introduction to Economic Reasoning, and Critics of Marx. He is also editor of Secession, State, and Liberty and coeditor of H.B. Acton's Morals of Markets and Other Essays.
Dr. Gordon is the editor of the Mises Review, and a contributor to such journals as Analysis, the International Philosophic Quarterly, the Journal of Libertarian Studies, and the Quarterly Journal of Austrian Economics.
Marx assumed that “interests” were independent of human ideas and thoughts. He said that socialism was the ideal system for the proletariat. He said class interests determine the thinking of individuals and that this situation causes irreconcilable conflicts between the various classes. Marx then returned to the point at which he had started—namely, that socialism is the ideal state.
The fundamental concept of the Communist Manifesto (1848) was that of “class” and “class conflict.” But Marx didn’t say what a “class” was. Marx died in 1883, 35 years after the publication of the Communist Manifesto. In those 35 years he published many volumes, but in not one of them did he say what he meant by the term “class.” After Marx’s death, Friedrich Engels published the unfinished manuscript of the third volume of Marx’s Das Kapital. Engels said this manuscript, on which Marx had stopped work, many years before he died, had been found in Marx’s desk after his death. In one three-page chapter in that volume, Marx tells us what a “class” was not. But you may search through all his writings to learn what a “class” was without ever finding out. In fact, “classes” don’t exist in nature. It is our thinking—our arranging in categories—that constructs classes in our minds. The question is not whether social classes exist in the sense of Karl Marx; the question is whether we can use the concept of social classes in the way in which Karl Marx meant it. We can’t.
Marx did not see that the problem of the “interest” of an individual, or of a class, cannot be solved simply by referring to the fact that there is such an interest and that men must act according to their interests. Two questions must be asked: (1) Toward what ultimate ends do these “interests” lead people? (2) What methods do they want to apply in order to reach these ends?
The First International was a small group of people, a committee of a few men in London, friends and enemies of Karl Marx. Someone suggested that they cooperate with the British labor-union movement. In 1865, Karl Marx read at the meeting of the International Committee, a paper, Value, Price, and Profit, one of his few writings originally written in English. In this paper, he pointed out that the methods of the union movement were very bad and must be changed. Paraphrasing:“The unions want to improve the fate of the workers within the framework of the capitalist system—this is hopeless and useless. Within the framework of the capitalistsystem there is no possibility of improving the state of the workers. The best the union could achieve in this way would be some short-term success. The unions must abandon this ‘conservative’ policy; they must adopt the revolutionary policy. They must fight for the abolition of the wage society as such and work for the coming of socialism.” Marx didn’t have the courage to publish this paper during his lifetime; it was published only after his death by one of his daughters. He didn’t want to antagonize the labor unions; he still had hopes they would abandon their theory.
Here is an obvious conflict of opinions among the proletarians themselves concerning the right means to use.The proletarian unions and Marx disagreed as to what was in the “interest” of the proletarians. Marx said that the “interest” of a class was obvious—there could be no doubt about it—everyone would know it.Then here comes a man who doesn’t belong to this proletarian class at all, a writer and a lawyer who tells the unions they were wrong. “This is bad policy,” he said. “You must radically change your policy.” Here the whole idea of the class breaks down, the idea that an individual may sometimes err but that a class as a whole can never err.
Criticisms of Marxian doctrines have always been superficial. They haven’t pointed out how Marx contradicted himself and how he failed to explain his ideas. "The Unresolved Contradiction in the Economic Marxian System” in Shorter Classics of Eugen von Böhm-Bawerk, (South Holland, Ill.: Libertarian Press, 1962 [1896; Eng.Trans. 1898]), pp. 201–302.—Ed.]Böhm-Bawerk’s critique was good but he didn’t cover the entire system. Critics of Marx didn’t even discover Karl Marx’s most manifest contradictions.
Marx believed in the “iron law of wages.” He accepted that as the fundamental basis of his economic doctrine. He didn’t like the German term for this law, the “brazen” law of wages, about which Ferdinand Lassalle [1825–1864] had published a pamphlet. Karl Marx and Ferdinand Lassalle were not friends; they were competitors, very serious competitors. Marx said Lassalle’s only contribution was the term itself, the “brazen” law of wages. And what was more, the term, was borrowed, borrowed from the dictionary and from Goethe.[Marx also criticized Lassalle for using the term “Arbeiterstand” (state of work); Marx said Lassalle was confused, but Marx never explained how Lassalle was confused.—Ed.]
The “iron law of wages” still survives in many textbooks, in the minds of politicians, and consequently in many of our laws. According to the "iron law of wages,” the wage rate is determined by the amount of food and other necessities required for the preservation and reproduction of life to support the workers’ children until they can themselves work in the factories. If wage rates rise above this, the number of workers would increase and the increased number of workers would bring wage rates down again. Wages cannot drop below this point because there would then develop a shortage of labor. This law considers the worker to be some kind of microbe or rodent without free choice or free will.
If you think it is absolutely impossible under the capitalist system for wages to deviate from this rate, how then can you still talk, as Marx did, about the progressive impoverishment of the workers as being inevitable? There is an insoluble contradiction between the Marxian idea of the iron law of wage rates, according to which wages will remain at a point at which they are sufficient to support the progeny of workers until they can themselves become workers, and his philosophy of history, which maintains that the workers will be more and more impoverished until they are driven to open rebellion, thus bringing about socialism. Of course, both doctrines are untenable. Even 50 years ago the leading socialist writers were forced to resort to other elaborate schemes in the attempt to support their theories. What is amazing is that, during the century since Marx’s writings, no one has pointed out this contradiction. And this contradiction is not the only contradiction in Marx.
What really destroyed Marx was his idea of the progressive impoverishment of the workers. Marx didn’t see that the most important characteristic of capitalism was large-scale production for the needs of the masses; the main objective of capitalists is to produce for the broad masses. Nor did Marx see that under capitalism the customer is always right. In his capacity as a wage earner, the worker cannot determine what is to be made. But in his capacity as a customer, he is really the boss and tells his boss, the entrepreneur, what to do. His boss must obey the orders of the workers as they are members of the buying public. Mrs. Webb[Beatrice Webb (1858–1943), wife of Sidney Webb (1859–1947), later Lady and Lord Passfield, British Fabians.—Ed.] , like other socialists, was the daughter of a well-to-do businessman. Like other socialists, she thought her father was an autocrat who gave orders to everybody. She didn’t see that he was subject to the sovereignty of the orders of the customers on the market. The “great” Mrs. Webb was no smarter than the dumbest messenger boy who sees only that his boss gives orders.
Marx had no doubt as to what the ends were toward which men aim. Nor did he have any doubts as to the best way to attain these ends. How is it that a man who read so much and interrupted his reading only to write, didn’t realize the discrepancy in his ideas?
To answer that question, we must go back to the thinking of his time. That was the time of Charles Darwin’s Origin of the Species [1859]. It was the intellectual fashion of that day to look upon men merely from the point of view of their membership in the zoological class of mammals, which acted on the basis of instincts. Marx didn’t take into account the evolution of mankind above the level of very primitive men. He considered unskilled labor to be the normal type of labor and skilled labor as the exception. He wrote in one of his books that progress in the technological improvement of machines causes the disappearance of specialists because the machine can be operated by anyone; it takes no special skill to operate a machine. Therefore, the normal type of man in the future will be the non-specialist.
With regard to many of his ideas, Marx belonged to much earlier ages, especially in constructing his philosophy of history. Marx substituted for Hegel’s evolution of Geist the evolution of the material factors of production. He didn’t realize that the material factors of production, i.e., the tools and machines, are actually products of the human mind. He said these tools and machines, the material productive forces, inevitably bring about the coming of socialism. His theory has been called “dialectical materialism,” abbreviated by the socialists to “diamet.”
[In an aside, Dr. Mises told of visiting a school in Mexico, an “escuela socialista,” a “socialist school.” Mises asked the school’s Mexican dean what “socialist school” meant. The dean explained that Mexican law required schools to teach the Darwinian doctrine of evolution and dialectical materialism. Then he commented on the provision in the law making this requirement and on the school system itself: “There is a great difference between the letter of the law and the practice. Ninety percent of the teachers in our schools are female and most of them are practicing Catholics.”]
Marx reasoned from the thesis to the negation of the thesis to the negation of the negation. Private ownership of the means of production by every individual worker was the beginning, the thesis. This was the state of affairs in a society in which every worker was either an independent farmer or an artisan who owned the tools with which he was working. Negation of the thesis—ownership under capitalism—when the tools were no longer owned by the workers, but by the capitalists. Negation of the negation was ownership of the means of production by the whole society. Reasoning in this way, Marx said he had discovered the law of historical evolution. And that is why he called it “scientific socialism.”
Marx branded all previous socialists “utopian socialists” because they tried to point out why socialism was better. They wanted to convince their fellow citizens to their view because they expected people would adopt the socialist social system if they were convinced it was better. They were “utopians,” Marx said, because they tried to describe the future earthly paradise. Among the forerunners of Marx whom he considered “utopians” were Saint-Simon, a French aristocrat; Robert Owen [1757–1858], a British manufacturer; and Charles Fourier [1772–1837], a Frenchman who was without doubt a lunatic. (Fourier was called the “fou [fool] du Palais-Royal.” He used to make such statements as “In the age of socialism, the ocean will no longer be salt but lemonade.”) Marx considered these three as great forerunners. But, he said, they didn’t realize that what they were saying was just “utopian.” They expected the coming of socialism because of a change in the opinions of the people. But for Marx, the coming of socialism was inevitable; it would come with the inevitability of nature.
On the one hand, Karl Marx wrote of the inevitability of socialism. But on the other hand, he organized a socialist movement, a socialist party, declared again and again that his socialism was revolutionary, and that the violent overthrow of the government was necessary to bring about socialism.
Marx borrowed his metaphors from the field of gynecology. The socialist party is like obstetrics, Marx said; it makes the coming of socialism possible. When asked if you consider the whole process inevitable, why do you not favor evolution instead of revolution, the Marxists reply, “There are no evolutions in life. Is not birth itself a revolution?”
According to Marx, the goal of the socialist party was not to influence, but only to help the inevitable. But obstetrics itself influences and changes conditions. Obstetrics has actually brought about progress in this branch of medicine, and even saved lives. And by saving lives it could be said obstetrics has actually changed the course of history.
The term “scientific” acquired prestige during the course of the nineteenth century. Engels’ Anti-Dühring (1878) became one of the most successful books among the writings of philosophical Marxists. One chapter in this book was reprinted as a pamphlet under the title “The Development of Socialism from Utopia to Science,” and it had enormous success. Karl Radek [1885–1939], a Soviet Communist, later wrote a pamphlet called “The Development of Socialism, from Science to Action.”
Marx’s doctrine of ideology was concocted to discredit the writings of the bourgeoisie. [Tomás] Masaryk [1850–1937] of Czechoslovakia was born of poor people, farmers and workers, and he wrote about Marxism. Yet the Marxians called him a bourgeois. How could he be considered “bourgeois” if Marx and Engels called themselves “proletarian”?
If the proletarians must think according to the “interests” of their class, what does it mean if there are disagreements and dissent among them? The confusion makes the situation very difficult to explain. When there is dissent among proletarians, they call a dissenter a “social traitor.” After Marx and Engels, the great man of the Communists was a German, Karl Kautsky [1854-1938]. In 1917, when Lenin tried to revolutionize the whole world, Karl Kautsky was opposed to the idea. And because of this disagreement, the former great man of the party became overnight a “social traitor,” and he was called that as well as many other names.
This idea is like that of the racists. The German racists declared that a definite set of political ideas were German and every real German must necessarily think according to this particular set of ideas. This was the Nazi idea. According to the Nazis, the best situation was to be in a state of war. But some Germans—Kant, Goethe, and Beethoven, for instance—had different “un-German” ideas. If not every German must think in a certain way, who is to decide which ideas are German and which are un-German? The answer can only be that an “inner voice” is the ultimate standard, the ultimate yardstick. This position necessarily leads to conflicts that must result in civil, or even international, war.
There were two groups of Russians, both of whom considered themselves proletarians—the Bolsheviks and the Mensheviks. The only method to “settle” disagreements between them was to use force and liquidation. The Bolsheviks won. Then within the ranks of the Communist Bolsheviks there arose other differences of opinion—between Trotsky[Leon Trotsky (1879–1940)] and Stalin — and the only way to resolve their conflicts was a purge. Trotsky was forced into exile, trailed to Mexico, and there in 1940 he was hacked to death. Stalin originated nothing; he went back to the revolutionary Marx of 1859—not to the interventionist Marx of 1848.
Unfortunately, purges are not something which happen just because men are imperfect. Purges are the necessary consequences of the philosophical foundation of Marxian socialism. If you cannot discuss philosophical differences of opinion in the same way you discuss other problems, you must find another solution—through violence and power. This refers not only to dissent concerning policies, economic problems, sociology, law, and so on. It refers also to problems of the natural sciences. The Webbs, Lord and Lady Passfield, were shocked to learn that Russian magazines and papers dealt even with problems of the natural sciences from the point of view of the philosophy of Marxism-Leninism-Stalinism.
For instance, if there is a difference of opinion with regard to science or genetics, it must be decided by the “leader.” This is the necessary unavoidable consequence of the fact that, according to Marxist doctrine, you do not consider the possibility of dissent among honest people; either you think as I do, or you are a traitor and must be liquidated.
The Communist Manifesto appeared in 1848. In that document, Marx preached revolution; he believed the revolution was just around the corner.
He believed then that socialism was to be brought about by a series of interventionist measures. He listed ten interventionist measures—among them the progressive income tax, the abolition of the rights of inheritance, agricultural reform, and so on. These measures were untenable, he said, but necessary for socialism to come.
Thus, Karl Marx and Engels believed in 1848, that socialism could be attained by interventionism. By 1859, eleven years after the Communist Manifesto, Marx and Engels had abandoned the advocacy of interventions; they no longer expected socialism to come from legislative changes. They wanted to bring about socialism by a radical change overnight. From this point of view, followers of Marx and Engels considered later measures— the New Deal, the Fair Deal, and so forth—to be “petty bourgeois” policies. In the 1840s Engels had said British labor laws were a sign of progress and a sign of the breakdown of capitalism. Later they called such interventionist measures or interventionist policy (Sozialpolitik) very bad.
In 1888—40 years after the publication of the Communist Manifesto — a translation was made by an English writer. Engels added some comments to this translation. Referring to the ten interventionist measures advocated in the Manifesto, he said these measures were not only untenable, as the Manifesto claimed, but precisely because they were untenable, they would necessarily push further and further toward still more measures of this kind, until eventually these more advanced measures would lead to socialism.
Excerpted from Marxism Unmasked: From Delusion to Destruction
The following points of desocialization must necessarily be written or read sequentially, but they need not be carried out in that manner: all the following points could, and should, be instituted immediately and all at once.
Legalize the Black Market The first two planks are implicit in the previous part of this paper. One, is to legalize the black market, that is to make all markets free and legal. That means that the private property of all those engaging in such markets must, along with everyone else, be made secure from government depredation, secure as a right of ownership. It means also that all goods and services hitherto illegal are now to be legal, whether they are legal in the West or not, and that all transactions are to be engaged in freely, that is, that prices are to be set voluntarily by the exchanging parties. Thus, all government price control is to be abolished forthwith.
If such genuine prices for real transactions are to be higher than pseudo-"prices" set by the government for non-existent transactions, then so be it. Consumer griping should simply be ignored; any consumers who still prefer the previous regime of fixed prices for non-existent goods will, of course, be free to boycott the new prices and try to find cheaper sources of supply elsewhere. My hunch, however, is that consumers will adjust soon enough to these one-shot changes, especially since unprecedented abundance of consumer goods will quickly pour forth onto the markets.
By "legalizing," by the way, I mean simply abolishing a previous outlaw status; I do not propose to engage in semantic exercises trying to distinguish between "legalizing" and "decriminalizing."
Drastically Lower All Taxes Another implication of our previous analysis is that taxation should be cut drastically. There is, in the literature on taxation, far too much discussion about which types of taxes are to be imposed, and who is to pay them and why, and not nearly enough on the height or amount of taxes to be levied. If the tax rate is low enough, then the form or principles of tax distribution really makes very little difference.
To put it starkly, if all tax rates are kept below one percent, then it really does not matter much economically whether the taxes are on incomes, sales, excises, property, or capital gains. It is important instead to focus on how much of the social product is to be siphoned off to the unproductive maw of government, and to keep that burden ultra-minimal.
While the form of taxation would not then matter economically, it would still matter politically. An income tax, for example, however low, would still maintain an oppressive system of secret police ready and willing to investigate everyone's income and spending and hence his entire life. Economists' opinion to the contrary, there is no tax or system of taxes that could be neutral to the market.3
Whatever taxation that might exist after desocialization should, however, be as close to neutral as possible. This would mean, in addition to very low rates and amounts, that the taxation be as unobtrusive and harmless as possible, and imitate the market as closely as it can. Such imitation might include the voluntary sale of goods and services at a price, or setting a price for participating in voting. The sale of goods or services by the government would, of course, be drastically limited in our desocialized system, because of the enormous scope of privatization of government activities. Privatization will be treated below.
Abolish the Government's Ability to Create Money There are three parts to any government's ability to generate revenue: taxation, the creation of new money, and the sale of goods or services.4 There can be no genuine free market or desocialization so long as government is permitted to counterfeit money, that is create new money, whether it be paper tickets or bank deposits, out of thin air. Such money creation functions as a hidden and insidious form of taxation and expropriation of the property and resources of producers. Ending counterfeiting means getting the government out of the money business, which in turn implies eliminating both government paper money and central banking. It also means denationalizing currency units, such as the ruble, forint, zloty, etc., and returning them to private market hands.
Denationalizing currency can only be achieved by redefining paper currencies in terms of units of weight of a market metal, preferably gold. When the central banks are liquidated, they could disgorge their gold hoards; as their last act on earth they could redeem all their paper tickets at the redefined weight in gold coins.
While, given the will to desocialize, this monetary denationalizing process is not as complex or difficult as it may first seem, it might indeed take longer than the one day required for the other parts of our plan.5 There could then be transitional steps of a few days' length: that is, the ruble or forint could be allowed to fluctuate freely and be convertible at market exchange rates into other currencies.
It would still be imperative to take the money-creating power out of the hands of the national government; a possible way of doing that, and a second transitional step, would be to make the ruble convertible into harder currencies, such as the dollar, at some fixed rate. Pending return to a pure gold standard and liquidation of the central bank, it would also be important to curb the government's power to create money by freezing permanently all central bank activities including open market operations, loans, and note issues. It need hardly be added that a law or edict limiting or freezing the government itself is not an act of intervention into the economy or society. Quite the contrary.
Just as black markets and all private markets would be set free, so too private credit institutions, for the lending of savings or the channeling of the savings of others, would be set free to develop.
Fire the Bureaucracy A question may have occurred to the reader: If taxation is to be drastically lowered, and the government is to be deprived of its power to print or create money, then how is the government going to finance its expenditures and operations?
The answer is: It wouldn't have to, because there would be precious little left for government to do. (This will be explained further in the discussion of privatization below.)
The socialist economy is a command economy, staffed and run by a gigantic bureaucracy. That bureaucracy would immediately be fired, its members set free at long last to find productive jobs, and develop whatever productive abilities they might have, in the now rapidly expanding and flourishing private sector.
This brings us to a fascinating problem which, while resting long in the hearts and minds of the oppressed subjects of socialism, has now unexpectedly become a live political issue. What is to be done with and to the top Communist party cadre, to the nomenklatura, to the vast apparatus of the once all-powerful secret police? Should justice at last be meted out to them by a series of state-crime trials, followed by proper and condign punishment? Or should bygones be bygones, a general amnesty be declared, and ex-KGB men hired as private guards or detectives? I confess an ambivalence on this issue, in weighing the competing claims of justice and of social peace. Fortunately, the decision can be left to the peoples of the former Soviet Union and of Eastern Europe. There is not much that an economist, even a free-market economist, can say to resolve this issue.
Privatize or Abolish Government Operations This brings us to the final, but scarcely the least important, plank of our proposed desocialization platform: privatizing government operations. Since theoretically all, or in practice most, production in socialist countries has been in the hands of the State, the most important desideratum, the crucial route for attaining a system of private property and free market, must be to privatize government operations.
But simply to say "privatize" is not enough. In the first place, there are many government operations, especially in socialist states, that we don't want to privatize, but rather to abolish completely. For example, we would not, as libertarians and desocializers, wish to privatize concentration camps, or the Gulag, or the KGB. God forbid that we should ever have an efficient supply of concentration-camp or secret police "services"!
"We would not, as libertarians and desocializers, wish to privatize concentration camps, or the Gulag, or the KGB." Here is a point that needs to be underlined. The basic assumption of national income and GNP analysis is that all government operations are productive, that they contribute their expenses to the national output and the common weal. But if we truly believe in freedom and private property, we must conclude that many of these operations are not social "services" at all but disservices to the economy and society, "bads" rather than "goods."
This means that desocialization must involve the abolition, not the privatization, of such operations as (in addition to concentration camps and secret police facilities) all regulatory commissions, central banks, income tax bureaus, and, of course, all the bureaus administering those functions that are going to be privatized.6
Principles of Privatization Genuine goods and services, then, are to be privatized. How is this to be accomplished? In the first place, private competition with previous government monopolies is to be free and unhampered. This would legalize not only the black market, but all competition with existing government operations. But what about the massive accumulation of government firms and capital assets themselves? How are they to be privatized?
Several possible routes have been suggested, but they can be grouped into three basic types. One is egalitarian handouts. Every Soviet or Polish citizen receives in the mail one day an aliquot share of ownership of various previously state-owned properties. Thus, if the XYZ steel works is to be privately owned, then, if there are 300 million shares of XYZ steel company issues, and 300 million inhabitants, each citizen receives one share, which immediately becomes transferable or exchangeable at will. That this system would be impossibly unwieldy is evident. The number of people would be too much and shares too few to allow every person to have a share, and there would be shares of innumerably large numbers and varieties that would quickly descend upon the heads of the average citizen.
Much of this chaos would be eliminated in the suggestion of Czech finance minister Vaclav Klaus, who proposes that each citizen receive basic certificates, which could be exchanged for a certain number or variety of shares of ownership of various companies on the market. But even under the Klaus plan, there are grave philosophical problems with this solution. It would enshrine the principle of government handouts, and egalitarian handouts at that, to undeserving citizens. Thus would an unfortunate principle form the very base of a brand new system of libertarian property rights.
It would be far better to enshrine the venerable homesteading principle at the base of the new desocialized property system. Or, to revive the old Marxist slogan: "all land to the peasants, all factories to the workers!" This would establish the basic Lockean principle that ownership of owned property is to be acquired by "mixing one's labor with the soil" or with other unowned resources.
Desocialization is a process of depriving the government of its existing "ownership" or control, and devolving it upon private individuals. In a sense, abolishing government ownership of assets puts them immediately and implicitly into an unowned status, out of which previous homesteading can quickly convert them into private ownership. The homestead principle asserts that these assets are to devolve, not upon the general abstract public as in the handout principle, but upon those who have actually worked upon these resources: that is, their respective workers, peasants, and managers. Of course, these rights are to be genuinely private; that is, land to individual peasants, while capital goods or factories go to workers in the form of private, negotiable shares. Ownership is not to be granted to collectives or cooperatives or workers or peasants holistically, which would only bring back the ills of socialism in a decentralized and chaotic syndicalist form.
It should go without saying that these ownership shares, to be truly private property, must be transferable and exchangeable at will by their holders. Many current plans in the socialist countries envision "shares" which must be held by the worker or peasant and, for a term of years, could only be sold back to the government. This clearly violates the very point of desocialization. Other suggested plans impose severe restrictions upon the transfer of ownership to foreigners. Once again, genuine privatization requires complete private property, including sale to foreigners.
There is, furthermore, nothing wrong with "selling the country" to foreigners. In fact, the more that foreigners purchase "the country" the better, for it would mean rapid injections of foreign capital, and therefore more rapid prosperity and economic growth in the impoverished socialist bloc.
A problem immediately arises in granting shares to workers in the factories, a problem akin to the question what is to be done with the Communist cadres and the KGB: Should the managing nomenklatura be cut in on the shares of ownership?
In advising the Soviets in an address in Moscow in early 1990, the economist Paul Craig Roberts observed that the Soviet people could either cut the throats of the nomenklatura or cut them in on shares of ownership; for the sake of social peace and smooth transition to a free economy, he recommended the latter. As I wrote above, I would not be that quick to thwart the demands of justice; but I would like to point out again a third possible route: not doing either one, and freeing the nomenklatura to find productive jobs in the private sector. The philosophic point in contention is to what extent, if at all, the managers' activities in the old Soviet economy were productive, and therefore participant in homesteading-labor, and to what extent they were crippling and counter-productive, and therefore deserving of nothing better than a curt dismissal.7
A third commonly suggested route to privatization deserves to be rejected out of hand: that the government sell all its assets to the public at auction, to the highest bidder. One grave flaw in this approach is that since the government owns virtually all the assets, where would the public get the money to purchase them, except at a very low price that would be tantamount to free distribution?
But another, even more important flaw hasn't been sufficiently stressed: why does the government deserve to own the revenue from the sale of these assets? After all, one of the main reasons for desocialization is that the government does not deserve to own the productive assets of the country. But if it does not deserve to own the assets, why in the world does it deserve to own their monetary value? And we do not even consider the question: What is the government supposed to do with the funds after they have been received?8
A fourth principle of privatization should not be neglected; indeed, it should take priority. Unfortunately, by the nature of the case this fourth route cannot be made into a general principle. That would be for the government to return all stolen, confiscated property to its original owners, or to their heirs. While this can be done for many parcels of land, which are fixed in land area, or for particular jewels, in most cases, especially capital goods, there are no identifiable original owners to whom to restore property.9 In the nature of the case, finding original landowners is easier in Eastern Europe than in the Soviet Union, since far less time has elapsed since the original theft. In the case of capital goods built by the State, there are no owners to identify. The reason why this principle should take priority wherever it applies is because property rights imply above all restoring stolen property to original owners. Or to put it another way: an asset becomes philosophically unowned, and therefore available to be homesteaded, only where an original owner, if one had existed, cannot be found.
There is one nagging remaining problem: How large should the newly private firms be? Every industry in socialistic countries is generally locked into a monopoly firm, so that if each firm is privatized into an equivalent-sized firm, the size of each will be far larger than the optimum on the free market. A fundamental problem, of course, is that there is no way for anyone in a socialized economy to figure out what the optimum size or number of firms is going to be under freedom.
In a sense, of course, mistakes made in the shift to freedom will tend to iron themselves out after a free market is established, with tendencies to break up or to consolidate in the direction of optimum size and number. On the other hand, we must not make the mistake of blithely assuming that the costs or inefficiencies of this process may be disregarded. It would be preferable to come as close as possible to the optimum in the initial privatization.
Perhaps each plant, or each group of plants in an area, may be initially privatized as a separate firm. It goes without saying that a very important aspect of a free market and of this optimizing process is to allow the market complete freedom to work: e.g., to merge, combine, or dissolve firms as it proves profitable.
Conclusion The dimensions of the proffered Rothbard Plan for desocialization should now be clear:
Enormous and drastic reductions in taxes, government employment, and government spending.
Complete privatization of government assets: where possible to return them to the original expropriated owners or their heirs; failing that, granting shares to productive workers and peasants who had worked on these assets.
Honoring complete and secure property rights for all owners of private property. Since full property rights imply the complete freedom to make exchanges and transfer property, there must be no government interference in such exchanges.
Depriving the government of the power to create new money, best done by a fundamental reform that at one and the same time liquidates the central bank and uses its gold to redeem its notes and deposits at a newly defined unit of gold weight of existing currencies.
All this could and should be done in one day, although the monetary reform could be done in steps taking a few days.
One point we have not specified: precisely how low should taxes or government employment or spending be set, and how complete should be the privatization? The best answer is that of the great Jean-Baptiste Say, who should be known for many other things than Say's Law: "The best scheme of [public] finance is, to spend as little as possible; and the best tax is always the lightest."10 In short, that government is best that spends and taxes and employs the least, and privatizes the most.
A final point: I have been criticized by libertarian colleagues for proposals of this sort because they involve action by government. Isn't it inconsistent and statist for a libertarian to advocate any government action whatever? This seems to me a silly argument. If a thief has stolen someone's property, it is scarcely upholding "robber-action'' to advocate that the robber disgorge his stolen property and return it to its owners. In a socialist state, the government has arrogated to itself virtually all property and power of the country. Desocialization, and a move to a free society, necessarily involves the action of that government's surrendering its property to its private subjects, and freeing those individuals from the government's network of controls. In a deep sense, getting rid of the socialist state requires that state to perform one final, swift, glorious act of self-immolation, after which it vanishes from the scene. This is an act which can be applauded by any lover of freedom, act of government though it may be.
Excerpted from How and How Not to Desocialize, which appeared in The Review of Austrian Economics 6:1 (1992). It is available in PDF. n earlier version was delivered at the annual meeting of the Southwestern Social Science Association, at a panel on "The Downfall of Communism," at San Antonio, Texas, in March, 1991.
The Russian Revolution of November 1917, now being marked by its centenary, ushered in a hundred years of political tyranny and terror, economic suffering, exploitation and corruption, along with unimaginable mass murder, among the tens of millions of people who came under the control and command of Marxist inspired socialist regimes around the world. But before this tragic episode occurred in human history, indeed, decades before Vladimir Lenin and his cohort of communist revolutionaries seized power in Russia, there were clear and insightful critics of socialism who explained much of what was to be in store in any attempt to implement and impose a collectivist utopia on humanity.
One of the leading such anti-socialist voices in the second half of the nineteenth century was the French classical liberal and free market economist, Paul Leroy-Beaulieu (1843–1916). In 1870, Leroy-Beaulieu won several awards for his book on Colonialism and Modern Man. While not openly opposing the French government’s colonial occupation of countries such as Algeria in North Africa, he argued that any colonial power, including France, should follow a policy of free trade within the colonial territories and between those colonies and the rest of the world, since this was the economic policy most likely to benefit the people of France and all those under French colonial administration. He also stated the longer run goal of colonial policy should be eventual self-government by those initially under the control of those in power in faraway Paris.
In 1872, Leroy-Beaulieu was appointed professor of finance the Paris Institute of Political Studies, and in 1880 he was given a chair in political economy at the College of Paris, one of the oldest and most respected institutions of higher learning in France. True to the classical liberal ideals of the nineteenth century, Leroy-Beaulieu was a strong advocate of international peace, free trade and mutual prosperity among nations. In 1869, he published a study, Contemporary Wars, in which he dissected the financial and human cost of war in the middle decades of the nineteenth century.
The Myth of the State as a Thinking and Willing EntityIn 1889, Leroy-Beaulieu published, The Modern State in Relation to Society and the Individual. He argued against the Hegelian conception of the State as a higher and separate entity, more important that the individuals comprising it, and to which the individual was subservient. He emphasized that there is no such thing as “the State” in terms of actions demanded and undertaken. The State is a fiction that enables some to impose their control over others, and to bend the wills of the others to the wills of those in power.
“The State neither thinks nor wills of itself,” Leroy-Beaulieu said, “it thinks and wills only in and by the thought and will of the men who control” political power as agents of “the State.” Furthermore, those in political authority, “who control the State, who speak in its name, act in its name, and issue commands in its name, are not of an different physical or mental structure from that of other men. They do not rejoice in any natural superiority, either inborn or inoculated by the very profession they follow.”
The State, he insisted, was not the same as “society.” Society is the cumulative associations and networks of mutual relationships and actions undertaken by various individuals to further the common purposes and goals they have in mind. Said Leroy-Beaulieu:
Society and the State are two different things. ... Side by side with the political organization of collective force, proceeding by way of injunction and restraint, that is, the State, there arise on all sides other spontaneous forms of collective force, each created with a view to a precise and definite end, and acting with various degrees of energy, sometimes, very intense, but altogether without coercion. These are the various associations that answer to some sentiment or interest, some requirement or some illusion, the religious and philanthropic societies, civil, commercial, and financial companies. They simply swarm: the crop is inexhaustible.
Man is a being with a natural taste for association, not association of the fixed, immovable, rigid sort imposed from without [by the State] ... We shall then begin to realize how the life of each one of us is intertwined in this enormous network of combinations formed for various purposes which touch upon our profession, our fortune, our opinions, our tastes, our relaxations, our general conceptions of the world, and our particular conceptions of the arts, literature, the sciences, education, politics, the work of helping others, and so on. ... It is evident, therefore, that all kinds of collective requirements are not within the domain of the State. Let us hear no more from our philosophers of any such abstraction as the isolated individual.
Leroy-Beaulieu, however, warned that precisely due to the number and continuing growth of such intermediary institutions that separate the State from the individual, and through which individuals are able to better serve their ends and achieve their common goals and purposes through peaceful and voluntary association, “the State is at last beginning to feel jealous and to take alarm.” The continuing development and solving of social problems through these free associations raises the danger that people will come less and less to see any reason to rely on government for much of anything other than the securing of life and liberty. This is reinforced by the important moral consideration that all such institutions and associations of civil society have only one means of influencing people, “the force of persuasion,” while “what characterizes the State is its coercive power.”
Socialists Fail to Understand the Spontaneous Market OrderThe great counter-revolution against individual freedom, the voluntary associations of civil society, and the growing prosperity resulting form free enterprise and free trade is found in the modern demand for centralized control and command of all of social life under the banner of socialism. Analyzing and criticism this threat to human liberty was the theme of Paul Leroy-Beaulieu’s most important and profound work, Collectivism. Originally published in French in 1885, and translated into English in a slightly abridged edition in 1908, it is one of the most detailed and devastating studies of socialism and central planning before the First World War, and all explained more than thirty years before the great socialist “experiment” began in Russia.
A leading error in the socialist argument, insisted Leroy-Beaulieu, is the inability to appreciate the workings of the spontaneous order that emerges from the voluntary interactions of a multitude of people following their respective individual interests.
“A force is not necessarily unregulated because it acts automatically, on the contrary,” he pointed out, “it is most probably more regular, more uniform and more purposeful in its action, than a force which is entirely directed by volition — a fundamental truth which is quite disregarded by collectivists.” He reminded his readers that without State regulation or directed planning, great cities like Paris and London are daily provisioned with all the necessities and conveniences of everyday life.
“Persons who are absolutely ignorant of the general welfare, are nevertheless completely successful in supplying these great cities with the required quantities of all the innumerable commodities demanded by the inhabitants ... This wonderful automatic adjustment of supply and demand is far from being incoherent and anarchic, as asserted by the collectivists,” he explained.
Market prices are what integrate and coordinate all of the goings-on of the multitude of market participants. “‘Price’ is the sure guarantee of an adequate supply, and is thus the guardian of the subsistence of humanity ... ‘Price’ is the guide, and in response to its unerring directions, enterprise, spurred on by personal interest, acts with extreme rapidity and certainty” to assure adaptation to constantly changing circumstances.
Socialist Planning vs. the Market Price SystemBut all this would come to an end with the abolition of private property in the means of production, and central determination and direction of all economic activity in the hands of the State. How will those in charge of centrally planning the economy know what to do? The government planners will have to rely upon the collection of statistics about supply and demand conditions prepared by “committees of inquiry” for that purpose, he suggested.
Yet, statistics, Leroy-Beaulieu said, can never serve as an effective substitute for the fluctuations in prices that always are “more rapid and certain indication of the required amount of production than statistical abstractions.” Imbalances and mismatching between supplies and demands would constantly be open to occurring under socialism, “which would cause terrible disorder and confusion, with effects infinitely more serious than mistakes made by private enterprise, which, as a whole . . . shows a marvelous quickness of adoption; mistakes committed by the State would not only be more serious, but far more difficult to remedy.”
The introduction of socialist central planning, therefore, would threaten serious and dire consequences in any society following the collectivist path:
We see then, that the momentous problem of the adjustment of supply and demand under a collectivist regime, in all localities and in all industries, remains unsolved. The play of prices would vanish with the disappearance of private trade, as would that variation of profit that, although apparently unjust, is in reality the instrument by means of which harmonious interaction between production and [consumer] requirements is maintained.
In place of these potent and benign forces, the only safeguard against disaster would be infallibility on the part of the economic administration of the socialist state; but history and experience show that state administration, so far from being infallible, is, on the contrary, far inferior to private administration in respect of certainty and promptitude of conception and execution.
On the one side is private interest, always alert and active; on the other, officials hampered by rigid regulations imposed by a bureaucracy, slaves of red tape, capable of dealing with normal conditions only, and impotent when confronted with the exceptional difficulties and unexpected vicissitudes to which the economic world is always liable. Again, on the one side, we have the energies of millions of men freely and actively engaged in work which they understand, on which their living depends, and which, therefore, they perform with the greatest keenness; and on the other, the cool indifference of administrators, who would be quite as much benumbed as stimulated by the responsibilities thrown upon them.
The very distortions and failures of socialist central planning, Leroy-Beaulieu warned, would soon generate systemic corruption and black marketeering, as people throughout such a socialist system would try to find ways to better fulfill their needs and wants in the face of shortages of desired goods and superfluous amounts of unwanted commodities. “However severe the regulations might be, it would be impossible to suppress this [illegal] private commerce,” he anticipated.
Paul Leroy-Beaulieu, it can be seen, anticipated essential elements of the later “Austrian” critique of central planning developed by Ludwig von Mises and Friedrich A. Hayek. Collecting and collating statistical data about the types, quantities and qualities of the available means of production, and an attempt to survey the vast array of forms and varieties of consumer demands could not and would not in any way serve as an effective substitute for the market-based price system.
There was and is no alternative to a functioning price system that indicates easily and adaptively all and every change in market supplies and demands, which serves as the information and incentives for individuals to use their abilities and resources to orient their activities for the satisfaction of consumers’ demands, based upon the profit margin differentials offered by shifting production from one direction into another.
The Tyranny and Slavery of SocialismPaul Leroy-Beaulieu also understood that with government centralization and control over the means of production would come the greatest threat to human liberty ever experienced in modern history. He expressed astonishment that so many socialists insisted that their collectivist system would provide a greater degree of individual freedom and dignity than under the market system.
How could liberty exist in a society in which everyone would be an employee of the state brigaded into squadrons from which there would be no escape, dependent upon a system of official classification for promotion, and for the amenities of life. ... The employee (and all would be employees) would be the slave not of the state, which is merely an abstraction, but of the politicians who possessed themselves of power.
A heavy yoke would be imposed upon all, and since no free printing presses would exist, it would be impossible to obtain publicity for criticism or for grievances without the consent of the government. The press censure exercised in [Czarist] Russia would be liberty itself compared to that which would be the inevitable accompaniment of collectivism. However numerous the dissentients, they would be condemned to silence and subjected to injustice under the [socialist] regime, and a tyranny such has never been hitherto experienced would close all mouths and bend all necks ...
Intellectual liberty would suffer equally. ... The human mind would thus be subjected to a yoke more terrible than it has ever known — the practices of Torquemada and the Inquisition would be mild in comparison. ... Again, what would become of art when the work of the artists would be subject to the dictation of the directors of production and the state would be the only purchaser?
The destruction of individuality would be the inevitable result of such a system, and the position of the laborer under it would be worse than that of a serf in the middle ages. ... Again, what dignity could exist in a society when state obligations would be substituted for all moral duties? Parents would not longer direct the bringing up of their children ...
How can human progress continue in a society subject to universal constraint and authority? ... An immense bureaucracy would be established, and individuals who are exceptional in any way would be shouldered on one side and crushed by its complicated machinery.
Paul Leroy-Beaulieu’s Warnings About SocialismHow amazingly prescient was Paul Leroy-Beaulieu about the reality of socialism-in-practice as experienced in Soviet Russia and anywhere else where it was more or less fully implemented. The Soviet state determined your education and indoctrinated your mind through monopolization of all means of communication and information; determined your occupation and employment and therefore your life opportunities; commanded where you would work and live, down to an assigned apartment in government housing (and there was no other) from which you could not move without permission.
The socialist regime viewed all dissent as threats to the system, and therefore brought down the wrath of the State on anyone through those in the hierarchy of power having virtually total control over your fate — including sending you to a labor camp or simply killing you. Corrupt officials and bureaucrats abounded all through the socialist planned economy, with whom “connections” were needed, and to whom loyalties and bribes of many sorts had to be paid to survive in the society.
The creative men of the mind — writers, artists, musicians, scientists — all were commanded and coerced into applying their abilities and talents only in those ways useful and demanded by the State to further the aims and goals of the socialist leadership — all in the name, of course, of building the utopia of the future. To resist meant losing your government job, and being classified as an unemployed “social parasite,” which made you subject to arrest, imprisonment and removal to a forced labor camp in the frozen wastelands of Siberia or burning deserts of Soviet Central Asia.
And all the while, Soviet socialist reality, due to the unworkability of the central planning system, left the mass of the society waiting on long lines for poor, shoddy and highly limited quantities of everyday goods in the “people’s” retail stores, which were the only legal outlets to get any of the necessities of life.
How naïve and blind were so many people as to what was waiting in store from the great experiment in building socialism, when it began a hundred years ago in Soviet Russia. But it is not as if people had no warnings as to what socialist reality might look like if implemented. Paul Leroy-Beaulieu had anticipated and explained most of its worrisome and dangerous features and characteristics three decades before the Russian Revolution began. He also reminded any readers that might have picked up his great book on Collectivism in the years before 1917 that if freedom and prosperity were, indeed, desired, there was no institutional alternative to individual liberty, private property, free markets, and the competitive price system.
Reprinted with permission.
Examples of government control over social and economic life are as old as recorded history, and they always have features that are universal in their perverse effects regardless of time or place. One of the most famous of these collectivist episodes was that of the Incas and their empire in South America.
The Inca Empire emerged out of a small tribe in the Peruvian mountains in the twelfth and thirteenth centuries. Theirs was a military theocracy. The Inca kings rationalized their brutal rule on the basis of a myth that the Sun god, Inti, took pity on the people in those mountains and sent them his son and other relatives to teach them how to build homes and how to manufacture rudimentary products of everyday life. The later Inca rulers then claimed that they were the descendants of these divine beings and therefore were ordained to command and control all those who came under their power and authority
The Inca Empire of Conquest and CollectivismThe fourteenth and especially the fifteenth and early sixteenth centuries saw the expansion of the Incas into a great imperial power with control over a territory that ran along the west coast of South America and included much of present-day Peru, Ecuador, Bolivia, Chile, and parts of Argentina and Colombia. The Incas were brought down in the 1530s by the Spanish conquest under the leadership of Francisco Pizarro.
The Inca kings, asserting to be both sons and priests of the Sun god, held mastery of all the people and property in his domains. And like most socialist systems throughout history they combined both privilege and egalitarianism. When the invading Spaniards entered the Inca capital of Cuzco, they were amazed by the grandeur of the palaces, temples, and homes of the Inca elite, as well as the system of aqueducts and paved roads.
But having an economy based on slave labor, there had been few incentives or profitable gains from the development of machines and tools to raise the productivity of the work force or reduce the amount of labor needed to perform the tasks of farming and manufacturing. Methods of production were generally primitively labor-intensive. Thus, the Spaniards, in comparison, were far better equipped with more advanced instruments of war to defeat the Incas.
The Inca Elite and the “Communism” of the Common PeopleThe Inca society was rigidly constructed along hierarchical lines of power and privilege. The Incan ruling class, below the Inca Sun-god king, provided the membership for the bureaucratic administrators, the military officer corps, the priests and scholars. Beneath them were the Inca peasants, herdsmen and artisans; they also were used to settle newly conquered lands to assure Incan dominance over the defeated populations. And below them were the slaves, which according to Inca legend had originally been condemned to death, but out of mercy were reprieved from extermination to be lowly laborers in perpetual bondage.
The Inca rulers imposed on almost all in society a compulsory equalitarianism in virtually all things. In The Socialism Phenomena (1980), the Soviet-era dissident, Igor Shafarevich, (1923–2017) explained:
The complete subjugation of life to the prescriptions of the law and to officialdom led to extraordinary standardization: identical clothing, identical houses, identical roads. ... As a result of this spirit of standardization, anything the least bit different was looked upon as dangerous and hostile, whether it was the birth of twins or the discovery of a strangely shaped rock. Such things were believed to be manifestations of evil forces hostile to society.
To what extent is it possible to call the Inca state socialist? ... Socialist principles were clearly expressed in the structure of the Inca state: the almost complete absence of private property, in particular of private land; absence of money and trade; the complete elimination of private initiative from all economic activities; detailed regulation of private life; marriage by official decrees; state distribution of wives and concubines.
The Rigid and Detailed Planning of Everyday LifeAn especially detailed description of the nature and workings of the Inca state is found in the classic work, A Socialist Empire: The Incas of Peru (1927), by the French economist and historian Louis Baudin (1887–1964). The Incas ruled through a cruel and pervasive system of command and control over everyday life. Baudin explained:
Every socialist system must rest upon a powerful bureaucratic administration. In the Inca Empire, as soon as a province was conquered, its population would be organized on a hierarchical basis, and the [imperial] officials would immediately set to work. ... They were in general in charge of the preparation of the statistical tables, the requisitioning of the supplies and provisions needed by their group [over whom they ruled] (seeds, staple foods, wool, etc.), the distribution of the production of the products obtained, the solicitation of assistance and relief in case of need, the supervision of the conduct of their inferiors, and the rendering of complete reports and accounts to their superiors. These operations were facilitated by the fact that those under their supervision were obliged to admit them to their homes at any moment, and allow them to inspect everything in their homes, down to the cooking utensils, and even to eat with the doors open ...
The Inca bureaucracy cast its net over all those that it ruled and soon transformed them into docile and obedient subjects through a “slow and gradual absorption of the individual into the state ... until it brought about the loss of personality. Man was made for the state, and not the state for the man,” Baudin said. The Incas tried to banish “the two great causes of popular disaffection, poverty and idleness. ... But by the same token, they dried up the two springs of progress, initiative and provident concern for the future.” The Inca government did all the thinking and planning for their subjects, with the result that there was a “stagnation of commerce ... lack of vitality and the absence of originality in the arts, dogmatism in science, and the rareness of even the simplest inventions.”
The Inca Welfare State and Human InertiaThis inertia was fostered through the institutions of the welfare state. “As for the provident concern for the future,” Baudin asked,“ how could that have been developed among a people whose public granaries were crammed with provisions and whose public officials were authorized to distribute them in case of need? There was never a need to think beyond the necessities of the moment.”
In addition, the Inca welfare state undermined the motive for charity and any personal sense of responsibility for family or community:
But what is even more serious is that the substitution of the state for the individual in the economic domain destroyed the spirit of charity. The native Peruvian, expecting the state to do everything, no longer had to concern himself with his fellow man and had to come to his aid only if required by law. The members of a community were compelled to work on the land for the benefit of those who were incapacitated; but when this task had been performed, they were free from all further obligations. They had to help their neighbors if ordered to do so by their chiefs, but they were obliged to do nothing on their own initiative. That is why, by the time of the Spanish conquest, the most elementary humanitarian feelings were in danger of disappearing entirely.
Life was also reduced to a joyless existence of uniformity, security, and order that was imposed and guaranteed by the Inca bureaucracy. Baudin tried to answer the question: Was the average person happy under the rule of the Incan kings?
He labored contently for a master whom he held to be divine. He had only to obey, without going to the trouble of thinking. If his horizon was limited, he was unaware of it, since he knew no other; and if he could not raise himself socially, he in no way suffered on that account, for he did not conceive that such a rise was possible. His life followed its peaceful course, its monotony broken by periodic holiday festivals and by such events as marriages, military service, and compulsory labor service, all in strict accordance with regulations. The Indian had his joys and sorrows at fixed dates. Only illness and death persisted in escaping government regulation. It was a negative kind of happiness, with a few adversities and a few great joys. The empire produced what D’Argenson called the “menagerie of happy men.” ... In the Inca state only the members of the ruling class and more especially the chief, could live a full life; outside of him and his family, men were no longer men, but cogs in the economic machine or figures in the official statistics.
It is for this reason that in his own interpretation of the Incas, Igor Shafarevich concluded that, “The Inca state seems to have been one of the fullest incarnations of socialist ideals in human history.”
In our own time the plague of government control has been no different. The totalitarian collectivist states of the twentieth century certainly matched in intensity and pervasiveness the comprehensively planned society of the ancient Incas. The “democratic” collectivism under which we live in the twenty-first century no less has its marks of similarity.
Our Freedom Weakened under Political PaternalismThose who man the regulatory agencies in modern society supervise and oversee many, if not most, of our economic affairs from the processes of production to the stage at which we actually use the goods that are manufactured.
They pry into and then proceed to regulate our personal and family affairs. They take responsibility for our welfare and our happiness, and try to guard us against all the trials and tribulations of everyday life. They watch over our schooling, care for us when we are ill, find work for us if we are unemployed, and pay us when we are without a job. They are concerned with our mental health, and police what we ingest. They take an interest in the things we read and the amusements and leisure activities we indulge in.
One freedom after another has been incrementally abridged, weakened, and then taken away with the government now responsible for what had previously been in the domain of the individual and his own decision-making.
But in this, too, the process has been no different from what occurred under the Incas. Louis Baudin pointed out,
The poison [of growing political paternalism] was not given to the Indians in massive doses that would have provoked a reaction, but was administered drop by drop, until it brought about the loss of personality. ... And whoever has formed the habit of passive obedience ends by being no longer able to act for himself and comes to love the yoke that is laid upon him. Nothing is easier than to obey a master who is perhaps exacting, but who rules over all the details of life, assures one’s daily bread, and makes it possible to banish all concern from the mind.
In place of a king ruling in the name of a divine Sun god we have an arrogant intellectual and political “progressive” elite claiming to know what is the “right side of history” to which mankind under their guidance should be moving. In place of privileged Inca princes and priests fattened at the expense of slaves and obedient Inca commoners, we have networks of special interest groups using the power of political plunder to feed off the productive members of society. Instead of collectivized land and imposed compulsory work as under the Incas, we have a regulatory spider’s web of controls and commands and prohibitions constraining and dictating how each of us may go about our lives with the private property we supposedly own, but which has been increasingly placed at the decision-making discretion of those who administer the interventionist state.
Individual Self-Interest Denied, Collective Altruistic Sacrifice RequiredThe political planners and plunderers of today, like the ancient Inca collectivists of five hundred years ago, impose their rule and control through two essential means. As the French classical liberal economist, Yves Guyot (1843–1928), once observed: through “the suppression of private interest as the motive of human actions, and the substitution of altruism” as the rationale for men’s sacrifices and their loss of freedom to be compelled to serve the collective.
Many, if not most, modern day “progressives” and “democratic socialists” would, of course, deny any family resemblance to the cruelty, absolutism, and imperialist aggression of the Incas and their collectivist empire. Yet, the essence of the Inca system and the institutional prerequisites for achieving the goals of the social engineers nowadays remain essentially the same.
They both require the subservience of the individual and his life — with his dreams, desires, hopes and peaceful ambitions — to the dictates of others who possess the power of coercion to make him bend and obey the compulsory orders of the political authority. They both require the abrogation of an individual’s right to peacefully acquire and employ property as he thinks best to further his own interests and in free market associations with others.
They both require the presumption that the asserted interests of the group, collective or tribe come before and are superior to the purposes and goals of any one individual. The individual human being is made to seem small, far less than fully consequential, in comparison to the social mass whose imaginary interests come before his.
And in both the individual is indoctrinated with the belief that he must sacrifice for that presumed “greater good,” and about which he should feel guilty if he fails to surrender himself to the “general welfare.” Among the ancient Incas some were called upon to yield to their own execution as human sacrifices to placate the wishes and demands of the Sun god. In the modern social welfare state, individuals are expected to give up their personal choices to fully live, act and interact as they peacefully would want, while others in military service are sometimes required to sacrifice their lives in the name of the “national interest.”
Fortunately, the human spirit is not as easily and permanently broken as the Incas believed they had succeeded in doing in their empire centuries ago, or the modern collectivists continue to try today. There is something also inside the individual that cherishes self-expression and retains the wish to be free. This inner force, if awakened, assures that liberty will never be completely extinguished.
Originally published by the Future of Freedom Foundation.
Since the beginning of the centennial of World War I, I have been writing a series of essays about the war as the memory of events passes us by--a hundred years later. But as we approach the centennial of the Bolshevik Revolution, I find it nearly impossible to delimit my thoughts on this profound event in the history of the human race as if it were only a passage of the war, like the Somme, or American intervention, or the internment of enemy aliens.
There are so many narrations of the "event" itself. There are so many answers to the question "why." There are so many clashing depictions of tectonic shifts in Russia and the world at that time, of Lenin, Trotsky, Dzerzhinsky and the rest as actors, heroes, villains, and (to some modern day sycophants) secular saints.
The inhuman cruelty, the killing capacity of this Marxist-Leninist movement which styled itself occasionally as the champion of the "people" (though much more often and much more truthfully as the vanguard of the proletariat on the march toward a revolutionary conflagration that would produce the new man) truly tests the bounds of human comprehension. Even if we take into account a group of recent historians who minimize standard historical estimates of total non-combat, democidal totals of deaths (based in part on recently found archival materials, but in part on soft hearts still loyal to the Great Experiment), the median calculation of Communist mortality by historians and demographers credits the Soviet Union of Lenin and Stalin with somewhere between eighteen and sixty-two million deaths beyond technically military losses. If we add up the democidal killings of spin-off Communist regimes across the globe, the totals are astronomical, with the estimates by historians, sociologists, demographers, and other serious analysts hovering around a hundred million human beings.
Buzuluk in the Volga Region: Victims of the famine created by Bolshevik food confiscations, 1920-21
These deaths were, in the view of Communist elites from Lenin to Stalin to Mao to Pol Pot, necessary. The grist of History's mill, so to speak.
Still, many persist in wearing Che Guevara t-shirts and longing for the Great Experiment. In 2011, Rasmussen pollsters found that eleven percent of Americans thought that a Communist regime would be better than the current "system" of politics and economics in the United States.
Comrade Lenin sweeps away the kings, capitalists, priests
Such attitudes come in part from the lack of much serious study of history at any level in the schools in the United States and in other parts of the world. My own history students read Solzhenitsyn, or Yevgenia Ginzburg, or The Black Book of Communism and express surprise at the enormity of Communist mass murders and persecution they have hardly been aware of previously. But this phenomenon is by no means recent. In my own education, which took place, from first grade to Ph.D., during the Cold War, only one or two teachers dealt with Soviet and Communist mass murder in any way, and that was not until I was well into university historical studies. And of course Hollywood, that great shaper of popular historical awareness, has assiduously avoided all of this murder and misery. No doubt because it offers so little in the way of human drama.
In any case, the answer is not the schools, whose bureaucracy and whose ideological and even pedagogical limitations will never add to the curriculum a special chapter studying the bloody history of the Great Experiment. Rather, the solution will come through individual reading and learning among a growing subset of educated, and especially self-educated, persons committed to the exploration of the total state and its origins--outside and typically after the completion of formal schooling. The materials of this kind of guerrilla education takes the form these days of books, online seminars, special courses on economics and society, and myriad other forms of information that somehow escape from and flow around the historical narratives that avoid mentioning these profound crimes which took place in the name of the Marxist historical dialectic.
So as we come to this particular grim centennial, we do well to pay even more attention to the influence of the Bolshevik Revolution through the entirety of the last century. By any measure, World War I shaped the century after it by institutionalizing and to some extent normalizing mass violence, by unleashing the state in its aggressiveness, acquisitiveness, and power. But the "contributions" of the Bolshevik Revolution hold pride of place. As yet, the legacy of the Bolshevik takeover of the Russian Empire beginning in October/November 1917 represents the single historical fact from the Great War — of dreadfully many possible choices — that must be viewed as having visited the most misery and death on the human race in its time and over the century to come.
November 7, 2017, marks the one hundredth anniversary of the Russian (or Bolshevik) Revolution in Russia that happened on that date in November 1917, which lead to the communist “dictatorship of the proletariat” and ushered in an epoch of totalitarian tyranny and mass murder both in Russia and in every other country where socialism was put into practice.
Historians estimate that as many as 150 million people, if not more — innocent men, women and children — were killed in the name of building the collectivist utopia. They were shot, tortured, worked or starved to death in prison cells, in interrogation rooms, in labor camps, or just in the places where they lived. “Socialism-in-practice” created a chamber of horrors in which the individual was reduced to a mere expendable “cog in the wheel” to serve the collective good, or made into “enemies of the people” to be eliminated as the prelude to building the “bright, beautiful communist future.”
Power, Privilege, and Terror as Socialist RealityIn the name of a “classless society,” communism created the most minute and granulated system of privilege, favor, and power, depending upon where the individual stood in the hierarchies of the Communist Party and the management of the vast central planning bureaucracy. “Special” food and clothing stores, “special” clinics and hospitals, “special” apartments and country houses, “special” resort and recreational facilities and vacation sites, “special” opportunities (with Party permission) to visit the forbidden and decadent “West,” and to bring back some of the “bourgeois” goods unavailable in the “workers’ paradise.”
The Communist Party did all in their power to control and confine the minds of those over whom they ruled into narrow corridors of knowledge and belief so little or no doubt could arise that theirs was the best of all worlds, and far more “socially just” and materially better than anything existing in the reactionary and corrupted capitalist parts of the globe.
If for a younger generation born after 1991 — the year the Soviet Union disappeared from the face of the world map — this all seems like ancient history that has no relevance or meaning for their lives (and especially so since so little is told about that Soviet chamber of horrors in school history books, or the mainstream opinion magazines and newspapers), its significance is no less important to know and a lesson not to be forgotten.
Prophets of the Socialist Destruction and Dictatorship-to-ComeSix years before Karl Marx and Frederick Engels published their famous, The Communist Manifesto, in 1848, the renowned German poet, Heinrich Heine (1797–1856), wrote the following in 1842:
Communism is the secret name of the dread antagonist setting proletariat rule with all its consequences against the present bourgeois regime. It will be a frightful duel. How will it end? No one knows but the gods and goddesses acquainted with the future. We only know this much: Communism, though little discussed now and loitering in hidden garrets on miserable straw pallets, is the dark hero destined for a great, if temporary, role in the modern tragedy. ... Will the old absolutist traditions reenter the stage, though in a new costume and with new cues and slogans? How could that drama end?
Wild gloomy times are roaring toward us, and a prophet wishing to write a new apocalypse would have to invent entirely new beasts. ... The future smells of Russian leather, blood, godlessness, and many whippings. I would advise our grandchildren to be born with very thick skins on their backs.
Others gave warnings about what would be in store if the false fantasies of socialism were to be followed and introduced into any society. The nineteenth century French classical liberal economist, Paul Leroy-Beaulieu (1843-1916), gave warning in his important work, Collectivism (1885):
How can liberty exist in a society in which everyone would be an employee of the state brigaded in squadrons from which there would be no escape, dependent upon a system of official classification for promotion, and for all the amenities of life! . . . The employee (and all would be employees) would the slave, not of the state, which is merely an abstraction, but of the politicians who possessed themselves of power.
A heavy yoke would be imposed upon all, and since no free printing presses would exist, it would be impossible to obtain publicity for criticism or for grievances without consent of the government. The press censure exercised in [Imperial] Russia would be liberty itself compared to that which would be the inevitable accompaniment of collectivism. ... A tyranny such as has never been hitherto experienced, would close all mouths and bend all necks.
Never were there prophecies more prescient than Heine and Leroy-Beaulieu’s many decades before the Bolshevik Revolution. The stench of oppression and death surrounds the notion of how socialism views man and mankind. The noted Russian mathematician, Igor Shafarevich (1923–2017), who spent years in the GULAG labor camps for his opposition to the Soviet regime, concluded his study of The Socialist Phenomenon (1975) with this telling interpretation of the nature of the communist system:
To begin with, most socialist doctrines and movements are literally saturated with the mood of death, catastrophe and destruction. ... The death of mankind is not only a conceivable result of the triumph of socialism – it constitutes the goal of socialism. ...
Understanding socialism as one of the manifestations of the allure of death explains its hostility toward individuality, its desire to destroy those forces which support and strengthen human personality: religion, culture, family, individual property. It is consistent with the tendency to reduce man to the level of a cog in the state mechanism of non-individual features, such as production or class interest.
It is often rightly said, “Never Again,” when pointing to the madness and mass murders, especially against the European Jews, under German National Socialism (Nazism). This is equally as true when pointing out the horrors and mass murders of Marxian socialism and Soviet communism.
Indeed, one of the reasons why the Marxian variations on the socialist theme appealed to so many around the world was due to its more universal attraction compared to National Socialism. The Nazi ideal was reserved for a “racially pure” German people, with the rest of humanity viewed as genetic inferiors to be slaughtered or enslaved for the benefit of a “master race.”
Marxian-type socialism, on the other hand, claimed to be speaking for the large mass of humanity — against a handful of profit-oriented exploiting capitalists (the “one percent”). Thus, it called upon all people, everywhere, suffering under the minority of property owning capitalists, to rise up in the name of “social justice” and a collectivist utopia that promised a “better world” for all mankind (except for the minority of “exploiters” everywhere who were to be expropriated and liquidated).
National Socialism was never going to attract followers, fighters and fanatics outside of those who were classified and identified as among the chosen, based on “genes” and “blood” making them part of the German master race. But Marxian socialism called upon all people, everywhere, who were “the workers” forced to be “wage slaves” at the command of the narrow “social class” of capitalist owners of the means of production to rise up and throw off their “chains” in a revolution for a “workers’ state” of collective ownership and central planning for the benefit of “the masses.”
This is what made Marxian socialism in its manifestations of political states such as the Soviet Union a universal threat to individual liberty and economic freedom. Its followers could be and were everywhere. Their ideological fanaticism on behalf of totalitarian collectivism made them place no value on truth, humanity or individual life, even their own. Sacrifice for “the collective” made them and all others expendable for the utopia to come. This is what led to the willingness to kill tens of millions. If the group — the “social class” — is what really exists and has meaning and value, then the individual is the illusion and has no worth and significance. On to the ash heap of history go those who must be sacrificed for wonderful world to come.
Though Soviet communism came to an end slightly more than a quarter of a century ago, the ghost of the spirit of communism lives on around the world. It is not so much that many people intentionally want to be straightjacketed within the confines of a Soviet-style totalitarian state, or that they wish to wait on the tiring and unending lines at “people’s” retail stores for meager supplies of everyday necessities of life as was the case behind “the Iron Curtain,” or exist in fear that it could be tonight that the secret police might come to take you away to an unknown but frightfully imaginable fate.
Most people, especially in the United States, don’t see this as the inescapable future of a socialist system fully imposed and implemented because so few have any knowledge or awareness that this was how tens of millions, hundreds of millions lived under socialist regimes as the coerced and controlled worker bees in the collectivist hive commanded by the ruling Communist Party “vanguard of the revolution.”
The “specter” of communism, nonetheless, continues to haunt the world in the form of the Marxian critique of capitalist society: Workers are exploited by the capitalist employers; profits are ill-gotten gains at the expense of the rest of society; a handful of property owning capitalists rule over the mass of society with no benefit for “the people” from their manufactured and marketed goods; the capitalist property owners plunder the earth and spoil the environment; the capitalist system is inherently racist and sexist in its structure and methods. The list could go on and on.
The battle between the ideologies of freedom and individualism versus political planning and collectivism, therefore, continues in slightly different forms and permutations than those expressed in the communist slogans and ideological language of 1917 and after. But the combat is no less real and is no less the same at its foundational basis.
Originally published by the Future of Freedom Foundation.
Socialism will always encounter two big problems when regimes attempt to implement it: 1) the impossibility of economic calculation without true market prices, and 2) the lack of an incentive to produce only what consumers actually want.
The following simple example helps to illustrate the impossibility of economic calculation without market prices: a Cuban restaurant in Miami Beach sells a picadillo dish (ground beef, plantains, rice) for $8. Prices in general and thus the $8 price provide vital information. Perhaps $1, might be profit, and $7 will be spent in costs, in other words, in the necessary consumption of wealth needed to produce the meal/wealth, things like equipment/electricity/food/supplies, and everything employees and their families will consume at home (food, energy) thanks to their paychecks that came from the $7/meal. The businessman discovered two things that are impossible for a central planning body to discover regardless of the good intentions of its members or their intelligence, 1) that there are enough customers nearby willing to patronize the restaurant at the $8/meal price thus making their lives better, and 2) how to reorder $7 worth of stuff(labor/supplies/etc.) to profitably produce the meal.
If he sets prices too high, customers will choose other superior competing options. If he sets prices too low, He won't be able to cover costs and will go out of business. In other words, if he can't entice consumers to buy at a profitable price, the entrepreneur is failing to reorder the world in a way desired by the hundreds/thousands of people nearby who each value things differently. Therefore, Socialism/Communism can’t work because only businessmen dispersed throughout society are at the right time and place needed to discover people’s desires(1) and (2) how to properly set prices and thus create a profitable and competitive order ( i.e., one that produces more than it consumes while also providing a superior alternative to customers/society).
Nikita Khrushchev, who followed Stalin as head of the centrally planned (Socialist/Communist) Soviet Union, is credited with saying “When all the world is socialist, Switzerland will have to remain capitalist, so that it can tell us the price of everything." Unfortunately for Khrushchev, and the billions who suffered economic chaos and an inevitable decline in production under Socialist/Communist regimes all over the world, prices in Switzerland (or anywhere else) embody information about the costs/consumption of those particular places at specific times and are no good elsewhere.
With the Internet, pricing information all over the world can help customers find/nourish cheaper/better products/orders/companies and also help producers likewise thus greatly accelerating competitive knowledge/order-spreading but it will NEVER lead to the success of central economy-wide planning because no computers/system can get in the brains of entrepreneurs to predict what products/businesses they will create and thus alter society, and similarly, no computers can get in the minds of consumers and predict how they will choose to spend their money/wealth thus once again altering the social order’s numerous cycles of production and consumption. As Mises so eloquently explains:
The consumers, by their buying or abstention from buying, ultimately determine what should be produced and in what quantity and quality. They render profitable the affairs of those businessmen who best comply with their wishes and unprofitable the affairs of those who do not produce what they are asking for most urgently. Profits convey control of the factors of production into the hands of those who are employing them for the best possible satisfaction of the most urgent needs of the consumers, and losses withdraw them from the control of the inefficient businessmen. In a market economy not sabotaged by the government the owners of property are mandataries of the consumers as it were. On the market a daily repeated plebiscite determines who should own what and how much. It is the consumers who make some people rich and other people penniless. But who is in a position to determine what it is the consumers want and need? Only private entrepreneurs who daily are either rewarded or punished by the needs of consumers in the marketplace. Socialism, lacking a price system has no means of knowing the needs of consumers.
Incentives Socialist regimes in general also face an "incentive problem." In free societies, or the private sector in general, each entrepreneur is incentivized to be as productive as possible and keep inefficiencies to a minimum since he owns/keeps the additional wealth or losses. On the other hand, the government employee or bureaucrat gets the same pay (ability to then consume) whether his department did a good job (produced a lot) or not, and is also not risking his own wealth since that comes from the taxpayers. In other words, regimes are national monopolies that lack the innovative/competitive incentives in competitive systems.
Inefficiency Requires Coercion Central plans, of course, can’t work if people are free to not go along with them — so they inevitably require compulsion/slavery. For example, it is a criminal act in Communist countries to start a business. It is also a criminal act everywhere to not pay taxes that sustain public sector bureaucracies like "public education." So there is little incentive or wealth to sustain other, more desirable competitors when taxpayers are forced to sustain certain government "enterprises." For example, the NYC public(monopolistic) school bureaucracy consumes over 24,000 per year to “educate” a K-12 student. Refusing to pay a single dollar that goes to this bureaucracy comes with heavy sanctions from the state itself.
In his essay "Overlegislation" Herbert Spencer beautifully comments on the differences between governmental(law-made) orders and private/competitive ones:
How invariably officialism becomes corrupt every one knows. Exposed to no such antiseptic as free competition — not dependent for existence, as private unendowed organizations are, upon the maintenance of a vigorous vitality; all law-made agencies fall into an inert, over-fed state, from which to disease is a short step. Salaries flow in irrespective of the activity with which duty is performed; continue after duty wholly ceases; becomes rich prizes for the idle well born; and prompt to perjury, to bribery, to simony. ... Officialism is habitually slow. When non-governmental agencies are dilatory, the public has its remedy: it ceases to employ them, and soon finds quicker ones. Under this discipline all private bodies are taught promptness. But for delays in State-departments there is no such easy cure. ...
Consider first how immediately every private enterprise is dependent upon the need for it; and how impossible it is for it to continue if there be no need. Daily are new trades and new companies established. If they subserve some existing public want, they take root and grow. If they do not, they die of inanition. It needs no act of Parliament, to put them down. As with all natural organizations, if there is no function to them, no nutrient comes to them, and they dwindle away. Moreover, not only do the new agencies disappear if they are superfluous, but the old ones cease to be when they have done their work. Unlike law-made instrumentalities…these private instrumentalities dissolve when they become needless. ...
Again, officialism is stupid. Under the natural course of things each citizen tends towards his fittest function. Those who are competent to the kind of work they undertake, succeed, and, in the average of cases, are advanced in proportion to their efficiency; while the incompetent, society soon finds out, ceases to employ, forces to try something easier, and eventually turns to use. But it is quite otherwise in State-organizations. Here, as everyone knows, birth, age, back-stairs intrigue, and sycophancy, determine the selections, rather than merit. The “fool of the family” readily finds a place in the Church, if “the family” have good connections. A youth, too ill-educated for any active profession, does very well for an officer in the Army. Gray hair or a title, is a far better guarantee of naval promotion than genius is. Nay, indeed, the man of capacity often finds that, in government offices, superiority is a hindrance — that his chiefs hate to be pestered with his proposed improvements, and are offended by his implied criticism. Not only, therefore, is legislative machinery complex, but it is made of inferior materials.
2018 was the year when, yet again, the socialist model proved its inability to generate benefits for a population. The example most discussed by the media was that of Venezuela. In a humanitarian crisis unprecedented in the Americas, this South American country is deteriorating every day, but it is not the only one. Another country in Latin America that is suffering the consequences of socialist authoritarianism, and leaving its economy at the edge of the abyss and its people in collective misery, is Nicaragua.
The Reform That Caused the Crisis Daniel Ortega’s government tried to pass a reform to the Nicaraguan Institute of Social Security’s (INSS for its acronym in Spanish) pension system, allegedly for the purpose of “improving the financial balance of the pension system.” In order to heal a deficit of more than $76 million dollars, a plan was presented to increase employer’s contributions by 3.5 percent (bringing their total contributions to 22.5 percent), to increase workers’ contributions by 0.75 percent (bringing their total contributions to 7 percent), and to reduce retirees’ pensions by 5 percent. This triggered a wave of protests in which hundreds of people took to the streets to reject the reforms. The government made the terrible decision to repress the protestors by using force, which helped the demonstrators gain more followers. In little time the protests served to unite thousands of people against corruption, censorship, and the lack of democracy. People from different social sectors, socioeconomic contexts, and ideologies protested for a change in the system. However, the situation worsened when violence with the police escalated, leaving dozens of people dead or political prisoners.
In the wake of the political crisis, the Ortega regime reversed the reform. But the damage had been done. The violent protests continued, the number of political prisoners increased, and all the while the silent victim was the Nicaraguan economy. In this article, different facets of this crisis will be described in detail in order to show how badly the current year could end for Nicaragua.
The Economic Crisis of 2018 According to the World Bank and the International Monetary Fund, in 2018 the Nicaraguan economy fell by more than 4 percent in terms of GDP. According to the Nicaraguan Foundation for Economic and Social Development (FUNIDES for its acronym in Spanish), poverty increased by 9.3 percent in 2018, reaching 38.9 percent. More than 157,000 jobs were lost, another 300,000 were suspended, and more than 10,000 entrepreneurs had to close down their businesses. The environment of extreme insecurity, uncertainty, and fear brought on by the repression and violent protests gravely affected consumer and investor confidence, and growth figures of previous years (almost 5 percent over the GDP) became a thing of the past. The wave of murders, injuries, and imprisonments caused by Ortega’s repression resulted in a significant downturn in the economy that affected practically all of the productive sectors. In a domino effect, the crisis then went on to affect tax and social security income collection and also caused a massive outflow of Nicaraguan migrants.
The situation grew worse when United States congressmen began to take note of the disaster brewing in Central America. The “Nica Act,” or Nicaraguan Investment Conditionality Act, was proposed by some United States senators who wanted to press the Ortega government to hold free and transparent elections. After two failed attempts in the United States Congress, and following the outbreak of the political crisis, the law was approved. The law limited loans from international financial organizations to the Ortega government. It also imposed sanctions on Ortega regime officials, such as blocking their U.S. assets and prohibiting them from conducting transactions using the United States financial system.
This law touched on one of the fundamental pillars of Nicaragua’s economy: its dependence on the United States and its allies. This dependence is due as much to the large quantity of remittances that enter the country as it is to the quantity of public investment financed by loans from international cooperation aid agencies (more than 70 percent of public investment in 2017). This dependence is also due to the fact that, at the beginning of 2018, 65 percent of deposits in the country were in dollars.
The projections for 2019 are not at all encouraging. International entities and FUNIDES estimate an economic downturn of between 7 and 10 percent. The political situation is unclear in the short term. Uncertainty is rampant in business circles, and the contraction of economic activity is evident in the streets, where hundreds of businesses remain closed. But of all the affected industries, perhaps the most critical is the banking sector.
A Slow Death for the Banking System According to Professor Richard Feinberg and researcher Beatriz Miranda, in the essay “A Nicaraguan Tragedy: From Consensus to Coercion,” the IMF believed that the banking system in Nicaragua had liquidity and solvency standards that were much higher than international ones, and that its alliances with the government gave it a comfortable legal environment which made it possible to attain large profits. However, in the middle of the crisis, loans fell into default, profits disappeared, and banking capital was jeopardized.
The government’s violent actions provoked panic among savers and investors, resulting in massive withdrawals from the Nicaraguan banking system. The people making the withdrawals included everybody from small savers who withdrew money in case of emergencies, to large investors who took it out of the country. According to FUNIDES, between March 31 and December 31 of 2018, more than 28 percent of the banking system’s total deposits were withdrawn.
Situations like this place significant pressure on banks to comply with the cash demands of their account holders, which in turn creates pressure for the early recovery of credit portfolios or the acquisition of lines of credit from other financial institutions. And, indeed, credit was affected. The loan portfolio contracted by 13 percent in 2018. The contraction of credit is particularly important because it reduces the capacity of other agents in the economy to leverage and improve their returns, which in turn removes an important lifesaver from an economy in recession. Furthermore, the banks rushed to buy dollars from the Central Bank of Nicaragua in order to cover the demand for foreign currency for withdrawals or the conversion of córdobas.
Access to international lines of credit became complicated, since after the “Nica Act,” US banks that had done business with Nicaraguan banks decided to withdraw from the country. Towards the end of 2018, Wells Fargo, Bank of America, JP Morgan Chase and Citi, four of the most important banks in the United States, decided to end relations with Nicaraguan banks, complaining of significant risk increases in the country and the difficulties imposed by the restrictions of the Nica Act. International rating agencies have also punished the country, decreasing the country’s ranking because of socio-political risks and raising the country’s risk premium, making international credit more expensive. All of these problems caused the bank to take desperate savings measures such as closing branches, firing employees, and even pursuing clients with overdue loan payments.
Faced with a massive lack of foreign credit lines, the central bank tried to inject liquidity into the banks. However, with the amount of withdrawals from the system, and the lack of other lines of credit, this has only resulted in the loss of monetary reserves, jeopardizing the exchange rate stability. Between April and December of 2018, the reserves decreased by 30 percent. If this rate of withdrawals should continue, they could run out of reserves by this year or next.
Risk of a Bank Freeze, Risk of Devaluation As of right now, one of the greatest risks in Nicaragua is the loss of exchange-rate stability. The exchange rate in Nicaragua has been administered by the Central Bank of Nicaragua (BCN in Spanish) since the 1990s via a crawling peg exchange rate system, whereby the exchange rate of the córdoba against the US dollar depreciates by 5 percent per year and is adjusted daily so that the devaluation is linear. However, in recent months, the BCN has been making a series of erratic decisions that warn of future exchange problems.
One such decision was making the monthly rate of currency convertibility discretionary. This means that the president of the central bank will decide on a monthly basis how much he wishes to devalue the currency, which could break with the traditional 5 percent that has been in place for the last 25 years. At the time, this decision caused a wave of speculation about severe devaluations, but the BCN has respected the 5 percent rule since it was eliminated in October of 2018. It is not viable to modify it any time soon, because a large part of the Nicaraguan economy is dollarized (as are loans). However, even though the rule had been respected up until now, it is no longer a rule. This only increases uncertainty for economic agents that remain at the mercy of the will of the central bank, an institution that should be among the most stable and trustworthy in order for a country to develop at the macroeconomic level the way it should.
Significant withdrawals of dollar deposits and the consequent loss of reserves risk a de facto devaluation. The risk also derives from the lack of reserves available to the Central Bank of Nicaragua. The reserves were drastically affected by the demand in commercial banks for dollar withdrawals, with the BCN covering 74 percent of the dollars demanded by banks for this purpose. As mentioned earlier, an unsustainable decrease in reserves would force the central bank to choose one of two options:
Liberate the exchange rate at onceLimit the outflow of dollars in some way The first option, ideal for stabilizing the market, would be very painful for an economy that is already in recession and, as a result, is not politically feasible. Another solution suggested by economists is to eliminate the indexation of certain goods and services, so that the exchange rate hit does not affect interest rates or salaries. However, this measure would generate great uncertainty among economic agents, which would worsen the process of devaluation.
The second option, limiting the outflow of dollars, is an path well-known by Latin American governments facing currency crises. In some way, this option has already been put in motion with another decision by the BCN: to limit financial institutions’ ability to purchase dollars online. In October of 2018, the central bank notified the banks that, in order to cover their dollar needs, they needed to place a request in writing 48 hours in advance, indicating the amount, purpose, and the entities involved. This kind of “pre-corralito” (a bank freeze) in which the amount of dollars given to banks begins to be restricted, opens the door to rigid control of exchanges given to any person or institution in the future, resulting in the loss of free currency convertibility. From there, the BCN can decide to whom it will or will not sell dollars. Then, when reserves reach unsustainable lows, the BCN will begin to limit dollars to what the regime considers its priorities, thus hurting the rest of the economy.
One strategy adopted by the BCN in order to fight the reduction in reserves was to take national currency out of circulation. The idea was to limit the amount of córdobas in order to try to counteract the decrease of dollars, and to maintain the 2.8 ratio the central bank manages in order to stabilize its foreign exchange operations. The big problem with this measure is that intentionally reducing the amount of money in circulation slows the economy by leaving economic agents with less liquidity, as well as shrinking credit. In an economy in recession, decreasing money aggravates the recession even more, as evidenced by the Great Depression in the United States in the 1930s.
What is most likely is that the central bank will make a set of two joint strategies. On the one hand, given its discretionary power, it could change the crawling peg rate of the córdoba while maintaining control of the outflow of dollars. In 2019, the crisis will be aggravated by the INSS and tax reforms (see the following section), which will worsen the outflow of capital. Reducing the supply of money, deciding at their discretion to whom they will sell dollars, and controlling the outflow of currency from the economy will cause the already waning business confidence to disappear and create the worst crisis the Nicaraguans have seen since the time of the Sandinistas.
The Coup de Grace: Tax Reform and Social Security (INSS) Reform Nine months after the INSS reform could not be passed in 2018, Ortega and his congress approved modifications to social security. The reform increased employers’ contributions from 19 percent to 22.5 percent, and workers’ contributions from 6.25 percent to 7 percent. Additionally, according to FUNIDES, new retirees’ pensions were reduced by 35 percent on average.
Despite the private sector’s categorical rejection of the reform, the government turned a deaf ear. For employers, it will reduce hiring and cause more layoffs and higher unemployment. For workers, it will leave them with lower incomes, which will end up damaging their already decreased purchasing power. The businesses most affected will be those that mainly rely on manual labor, but in general unemployment is expected to increase.
It is true that the reform was vital, because if the income of the INSS had not been increased in some way, the program would have gone bankrupt. However, the abrupt way in which it was done less gradually than the reform proposed in 2018 will cause a reduction in the liquidity among businesses and families, thus aggravating the crisis.
However, the “coup de grace” for Nicaragua’s economy was the government’s tax reform. The reform was considered “confiscatory” by civil society, and sought only to improve the state finances that the same government had worsened by provoking the 2018 crisis. In the reform, many previously untaxed food products began to be taxed, the ISR (income tax) increased, certain specific taxes were raised, and there were many obstacles preventing a product from being exonerated from the IVA tax (value added tax, or VAT). However, the most outlandish feature was the 1.5 percent tax on exports.
The tax on food products will limit family consumption. It will also push businesses to decrease their productive activity, which leads to cutbacks, more unemployment, and a crisis on a downward spiral. According to the Nicaraguan Chamber of Industry, consumer prices could increase by 50 to 70 percent. If the government’s goal was to raise more money, the effect will be the exact opposite after reducing the economy and damaging public finances, because it will contract the economy further and diminish tax revenues.
It is absurd to increase costs in an economy that is already in recession because it ends up taking away the little liquidity left in the system, such that businesses are left with three options: fire employees and save to an extreme extent, decrease production to a minimum, or close down their businesses. Nicaragua’s potential for competitiveness has been lost with these damages to its industries, but it is mainly the ordinary people who suffer. Unemployment pushes people towards the informal market, illegal immigration, or crime, and any of the three options will decrease Nicaraguans’ quality of life. And, not satisfied with the damage it has already caused, the government has the power to raise taxes again in May if the tax collection does not meet expectations.
So, What to Expect in 2019? In 2019 it is sensible to expect a more accelerated reduction of the economy, with it falling possibly even more than 10 percent. The possibility of banking crises continues to rise if withdrawals continue as they are or if they increase. Also possible are a pronounced devaluation or a “corralito” (bank freeze) that limits the foreign currency that is available to people and businesses. The worst thing of all is that the political situation is the real cause of these evils, and it does not seem likely that it will change in the short term. According to The Economist, elections are not expected unless political conditions deteriorate drastically, since Ortega has the support of the army.
Businesses not only have to deal with less sales, fewer operations, lower international prices of raw materials, and a lack of access to financing, but now they also have to deal with higher taxes and higher labor costs. The uncertainty that the Ortega regime introduced into the economy, the crisis it created, and the economic collapse through which this small Central American country is suffering, are examples of the tremendous damage authoritarianism causes to economies that are institutionally weak. According to FUNIDES, businesses are already facing a shortage of supplies, credit is either scarce or too expensive, and providers do not want to give many credit days because of the exchange rate risk.
We do not know how many years it could take for Nicaragua to recover from this hit, but every day that Ortega stays in power, this period lengthens. If Maduro, with an even worse crisis, has been able to withstand international sanctions against Venezuela, Ortega seems likely to continue clinging to power. As if they were mirrors, Syria and Venezuela reflect cases of authoritarian regimes that have caused severe crises and who maintain power by controlling state institutions with the unconditional support of the military. But, unless Nicaragua wants to continue along the tortuous road that both of those countries have traveled, it should change its governing leadership or all efforts will be in vain.
Originally published by UFM Market Trends
In a recent editorial at Jacobin magazine, it is argued that a “planned economy can actually work.” They start with something I have written about at least a dozen times recently: the definition of socialism. Let me not mince words: our ability to argue against the rising left’s socialism is going to depend on what exactly is being argued. If they endorse traditional Marxist socialism, which has as its definition, “public ownership of the means of production,” then we get to use, of course, Mises’s socialist calculation argument.
But so often, this is not at all what is meant when they use the word. Mostly, this is because public ownership of the means of production, whether they admit it with his name or not, was already intellectually leveled by Mises. During the run up to the Soviet Union’s dominance, the intellectuals considered public ownership of productive factors to be the systematic structure of an economy that could avoid the “anarchy of production.” It was Mises more than anyone who swept the legs out from under this conception of socialism.
But besides Mises’s theoretical, a priori observations, the Soviet Union did, in fact, disintegrate for what were obviously economic reasons. It is only now that the rising socialist class can look back at this experience and blame “corruption” and other peripherals. In any case, socialism today has various other meanings and to the extent that socialists are tight-lipped about state ownership of the factors of production, to that extent we need to be aware that they are trying to avoid the mistakes pointed out by the socialist calculation argument. Hence, the DSA, Jacobin, and so many others define socialism differently now.
And as they define it differently, we need to adapt our arguments to their actual proposals. For instance, if Bernie Sanders is going to call himself a democratic socialist, and yet argues for a plethora of state interventions, but not social ownership of the means of production, then we ought not use Mises’s calculation argument. Instead, we ought to use Mises's arguments against interventionism; which, in my opinion, is actually easier anyway.
"Democratic Socialism" as Neo-Syndicalism But less often understood is a sort of “neo-syndicalism” that characterizes their case for socialism. I discuss this in writing here, and in a podcast here. Because I’m relatively alone in referencing syndicalism as a better way to understand modern “socialism,” I want to lean on other more qualified people. As I noted last week, Shawn Ritenour teased at this connection in his talk with Jeff Deist. To verify I interpreted him right, I asked him about this when I was at the Austrian Economics Research Conference in March. He confirmed: modern socialism in the AOC-type strain, is better thought of as syndicalism. Thus, in opposing it, we ought to be more careful about the arguments we use in opposing this great threat to a free market economy.
Hayek's Problem with Planning Now, why is all this relevant to the Jacobin piece? Because in that piece, they used Hayek as an example of someone who did not appreciate the “planning” that could be done at a firm level. They seek to argue that Hayek was wrong to make decentralized knowledge the pinpoint problem of planning. Hayek’s argument, to quote Hans-Hermann Hoppe, was as follows:
For Hayek, the ultimate flaw of socialism is the fact that knowledge, in particular “the knowledge of the particular circumstances of time and place,” exists only in a widely dispersed form as the personal possession of various individuals; hence, it is practically impossible to assemble and process all the actually existing knowledge within the mind of a single socialist central planner.
It is this argument against the practicality of planning in light of dispersed knowledge that both characterized Hayek’s case against socialism, and was challenged in the Jacobin article. But what is interesting to me, is that Hans Hoppe (and Joe Salerno and Jeff Herbener and others who participated in the effort to “dehomoginze” Mises and Hayek) blasted Hayek for essentially leaving the door open to socialists who could still argue for planning, albeit in a different form.
In other words, Hoppe warned that Hayek’s weak arguments couldn’t stop the tide of socialism, or at least efforts to undermine a private property order. And, lo and behold, the neo-socialist left has come to argue that planning can, indeed, work. Let me now elaborate on the Hayek connection using Hans Hoppe.
The reason I have been so dogmatic about the definition of socialism is because it was this original definition that Mises’ calculation argument was meant to destroy. And to lose sight of that is to render Mises less than prescient in his case against socialism. Because if socialism can mean a variety of other things, then it becomes easy to defend socialism by moving the goal posts, which is exactly what has been done in the revamped socialist movements around the world.
Mises Didn't Rely on the Knowledge-Problem Argument Rather than arguing that socialism suffered from a knowledge problem, Mises argued that because socialism means the public or government ownership of all factors of production, it does not exchange these factors with itself. A single-ownership economy does not have a need to exchange factors with itself. But without exchange, there can be no prices; that is, there is no objective means for the decision makers in a socialist economy to allocate in a way that is beneficial for consumers. For under a capitalist free market, the prices that arise inform the entrepreneur as to which allocations of scarce resources are productive, and which aren’t. He can calculate anticipated revenues minus costs and determine whether a given activity is profitable. Thus, not having any of this, socialism’s problem is sourced in its lack of private property ownership.
The Jacobin article failed to dehomogenize Mises and Hayek and used the Hayekian narrative to undermine the free market case against planning. And they did so by indicating that, contrary to capitalist theory, firms actually plan all the time! Contrary to Hayek, they argue, dispersed knowledge does not prevent the successful planning from the top down. While the Hayekian would no doubt counter that this is at the firm level, and therefore closer to the individual knowledge-holder than a large socialist system would imply, it should be pointed out that this criticism of Hayek is exactly the flaw Hoppe identified all those years ago. Hoppe:
First, if the centralized use of knowledge is the problem, then it is difficult to explain why there are families, clubs, and firms, or why they do not face the very same problems as socialism. Families and firms also involve central planning. The family head and the owner of the firm also make plans which bind the use other people can make of their private knowledge, yet families and firms are not known to share the problems of socialism. For Mises, this observation poses no difficulty: under socialism private property is absent, whereas individual families and private firms are based on the very institution of private property. But for Hayek the smooth operation of families and firms is puzzling, because his idea of a fully decentralized society is one in which each person makes his own decisions based on his own unique knowledge of the circumstances, unconstrained by any central plan or supraindividual (social) norm (such as the institution of private property).
Second, if the desideratum is merely the decentralized use of knowledge in society, then it is difficult to explain why the problems of socialism are fundamentally different from those encountered by any other form of social organization. Every human organization, composed as it is of distinct individuals, constantly and unavoidably makes use of decentralized knowledge. In socialism, decentralized knowledge is utilized no less than in private firms or households. As in a firm, a central plan exists under socialism; and within the constraints of this plan, the socialist workers and the firm’s employees utilize their own decentralized knowledge of circumstances of time and place to implement and execute the plan. For Mises, all of this is completely beside the point. But within Hayek’s analytical framework, no difference between socialism and a private corporation exists. Hence, there can also be no more wrong with the former than with the latter.
The Importance of Prices Now, it gets more interesting. For the Jacobin article finds its solution to Hayek’s knowledge problem to be in prices!
Walmart, of course, sells goods on the market. Under capitalism prices are still inputs into the planning process for corporations and states alike.
This is a huge capitulation. After all, the socialists learned that prices cannot actually be avoided, a socialist system wherein there is government ownership of the means of production would not have prices, therefore socialism is a failure. The fact that they are using prices to overcome Hayek’s knowledge problem is a tremendous vindication of Mises, who argued that the failure of socialism was its rejection of private property and therefore prices. Socialism failed and Mises won.
The fact that Jacobin must so weakly move the goalposts so that “planning works” is a testament to the magnificent insights of Ludwig von Mises. The answer is yes, Walmart can plan because there is a capitalist price mechanism. That’s the case for capitalism, not socialism. The capitalists have never opposed “plans.” Instead the capitalist recognizes that the plan must be informed by real-world structures of capital, by time preferences, by consumer demand, by resource constraints– and therefore the capitalist must plan with the price mechanism as his guide. The planners in a capitalist economy are those that privately own the means of production and allocate those means in accordance with where profits indicate economic need.
Hoppe writes:
Without the institution of private property, the information conveyed by prices simply does not exist. Private property is the necessary condition of the knowledge communicated through prices. But then it is correct only to conclude, as Mises does, that it is the absence of the institution of private property which constitutes socialism’s problem. To claim that the problem is a lack of knowledge, as Hayek does, is to confuse cause and effect, or premise and consequence.
Thus, the failure of socialism is not per se its lack of knowledge held in the minds of individuals. As Hoppe noted of Hayek’s knowledge problem, this does not get to the root of it; and he anticipated exactly how the neo-socialists (who have abandoned traditional central planning; the proof of this is in their very embrace of prices) would take advantage of Hayek’s weak argument. Mises’ argument, as held high by the pro-Misesians such as Rothbard, Salerno, and Hoppe, remains the greatest single devastation against socialism and the fact that socialists today do not talk in terms of a price-less single state-ownership of factors structure is a testament to that.
Originally published at Austrolibertarian.
Listen to the Audio Mises Wire version of this article. Most people have never heard of dialectical materialism. The term looks so obtuse that you’d be forgiven for thinking that only pretentious students loitering outside the philosophy department smoking hand-rolled cigarettes could imagine that it has anything to do with real life. It certainly can’t exert much influence in the world if only a small number of radical Marxists could even tell you what it means.
On the contrary, writes Mises, dialectical materialism dominates the ideas of more people than you think. It has been absorbed by those who do not call themselves Marxists and even by people who consider themselves anticommunist.
When Mises released his book Theory and History: An Interpretation of Social and Economic Evolution in 1957, dialectical materialism was still the official philosophy of the Soviet Union and the Berlin Wall was still a good thirty years from coming down. However, Mises’s critique (found in chapter 7) is still relevant. The ideas that dialectical materialism represents have not fallen out of favor and may even be on the rise.
But what the heck is dialectical materialism?
Well, I’m glad you asked.
Dual Origins: Hegelian Spiritualism and Materialism Marx theorized that human history is best viewed as a series of class struggles between social forces that have contradictory interests. For example, the class struggles between slaves and their masters, between feudal lords and their subjects, and—in his day—the class struggle between capitalists and their workers. He believed that seeing history as the history of class struggle had better explanatory power than viewing it through other lenses, such as the history of ideas, technological innovations, or military conflicts.
In fact, properly viewed through the lens of class struggle, history would naturally subsume those other ways of seeing the world and illuminate the context in which they unfolded, particularly when it came to technological innovation, which Marx thought would ultimately determine the struggle of the age. He wrote, “The hand-mill gives you society with the feudal lord; the steam-mill society with the industrial capitalist.”Karl Marx, The Poverty of Philosophy (1847). Mises (1957, p. 72) summarizes Marx's view as follows: “These forces are the driving power producing all historical facts and changes.”
The weird thing about dialectical materialism, Mises notes, is that Marx seemed to cobble it together from pieces of two existing philosophies that contradicted each other. These two philosophies were Hegelian spiritualism (after the influential German philosopher Georg Wilhelm Friedrich Hegel) and materialism. Marx believed that he was building upon them, but Mises believed they were incompatible.
The Prussian government and the intellectuals of Prussian universities preferred Hegelian spiritualism, because it essentially said that history was guided by the world spirit, or weltgeist, which acted through the great men of history and government to bring about its will. Hegelian spiritualism justified their privileged position by giving them a pretext for ruling over the plebs, since the weltgeist had conveniently picked them out for the task.
The materialists, on the other hand, thought that reality was just “what you see is what you get,” and as such didn’t think that the Prussian aristocracy had any right to rule—even less a divine one granted by some elitist specter. They wanted to overthrow the state—by violent revolution if necessary—and see those pampered high hats to hell.
Hopefully you are beginning to see how Marxism combines these two theories.
Marx Tweaks the Hegelian Dialectic Now, Hegel is as perplexing a philosopher to understand as you’ll find and notoriously difficult to read even for bookish academic types. Despite his impregnable style he did pass on one very famous idea which I think is quite useful and does actually have the power to demystify the world sometimes, if you interpret it generously. It was also adapted and repurposed by Marx. It’s called the Hegelian dialectic and goes something like this: in a society you have a prevailing doctrine which is widely accepted and taken for granted by most people—but this cannot remain indefinitely so. At some time, a movement comes along proposing to challenge and overturn the prevailing wisdom, saying that it is nonsensical and should be repudiated only to be replaced with a new one.
Hegelians call the first doctrine the thesis and the opposing doctrine the antithesis. But here’s where it gets interesting. The antithesis never successfully overturns the thesis and throws it out the window completely. Instead the two doctrines begin to fuse together creating a synthesis, which combines elements of both. This third doctrine becomes the dominant thesis of a new era. But no sooner has this process completed than the whole damn thing is poised to start again. This new prevailing wisdom, combining elements of the old movement and the one which opposed it, will soon come to be opposed by a new antithesis which opposes that. Hegel believed that this process was a law that governed history but that it also mirrored the thinking process and described the logic by which people come to understand the world itself.
Marx extracted the dialectic and fused it into his own philosophy, hoping to prove that socialism was bound to come about “with the inexorability of a law of nature” by a dialectical process of class struggle in which the workers eventually threw off the chains of their capitalist overlords to create a classless society in which everyone would be equal and work for the common good.
Dialectical Materialism in a Nutshell This philosophy is dialectical materialism:
1) Everything that exists is material. There are no gods, no souls, no spirits to call up at a séance, or any of that eerie supernatural stuff. Weltgeists are completely out of the question. What you see is what you get. Our thoughts and ideas are only reflections of material phenomena in our physical brains. This is materialism.
2) Everything that exists is in contradiction and conflict with something else, like magnetic poles, Republicans and Democrats, or your in-laws arguing furiously over who burnt the turkey at Thanksgiving. They duke it out, and from their struggle emerges something new. This is dialectics.
According to Marx, at a certain stage in their development the existing material productive forces of society come into contradiction with the existing production relations, or the established social system of property laws. This leads to an epoch of social revolution during which the superstructure transforms itself. This is the application of the Hegelian dialectic in Marxism.
The Misesian Critique of Dialectical Materialism In Theory and History, Mises strives to highlight how Hegelianism stands in stark contradiction to materialism and that no rational fusion of the two is possible. For one thing, Hegelians believed that the ultimate basis of the universe was mind (which they called “spirit” or “geist”), while the materialists believed that it was matter.
For Hegel, the dialectical process of thinking mirrors the creation process. Via logic the mind acquires knowledge of reality. Matter does not have its own substance but arises from the mind of God (in a manner of speaking), named geist.
Mises says that this worldview is completely incompatible with any kind of materialism. In philosophical terms, Hegel is what is called a spiritual idealist—meaning that he thinks the universe is made of something spiritual rather than material. Mises contends that it was “nonsensical” to take dialectics out of its idealistic grounds and transplant it to a system that was empirical, because Hegelianism viewed what we commonly call empirical reality as “ein Faules” (something rotten or inert). Although it seemed real, it was not real at all apart from the way that reason apprehended it. Its true source was divine action—the ultimate truth.
Friedrich Engels, in trying to prove dialectical materialism, studied the natural world and was wowed to find examples of dialectical processes in full bloom wherever he looked. The whole of geology is a series of negated negations, he wrote. A butterfly comes into existence from an egg through negation of the egg, and then is negated again as it dies. The barleycorn is negated by the barley plant, which produces another barleycorn but in several times the quantity. Mises strongly suggests that this is not actually some ground-shaking revelation but just a silly word game. He points out that it is just as sensible to call a butterfly the “self-assertion” of the egg as the negation of it—the maturing of its inherent purpose and fulfillment of its ultimate potential. Engels was only substituting the word negation for the word change.
Although Marx and Engels boasted of putting the philosophy of Hegel on its feet, Mises concluded that the two simply wanted to latch onto him because his philosophy was dominant in their time. Perhaps it would look better, from their point of view, to propose a philosophy claiming to build upon a great master rather than to repudiate him.For more, see Theory and History: An Interpretation of Social and Economic Evolution (1957; repr., Indianapolis, IN: Liberty Fund, 2005), particularly pages 69–71. I have taken the liberty of providing the necessary historical context and interpretation of Hegel and Marx necessary for a layperson to understand Mises’s ideas.
Listen to the Audio Mises Wire version of this article. April 20, 2020, has become a fateful day in the history of the oil industry, with prices plunging to a –$37 per barrel. Although this was an aberration due to the global downturn amid the COVID-19 pandemic and in the following days the prices "recovered" to $10 per barrel, it's clear that the old days of the oil bonanza (when corrupt governments could count on prices of up to $100 per barrel to finance their regimes), are gone for good. In the coming years, the corporations that survive in the oil business will be those with modern equipment, good administration, and a strong culture of innovation. Mexico's PEMEX lacks all three.
Petróleos Mexicanos (Mexican Petroleum, or PEMEX), an oil company wholly owned by the Mexican government since 1939, has become a nationwide symbol of corruption and is one of the most indebted and inefficient in the entire world. Despite the supposed government efforts to rescue the company, PEMEX's losses doubled last year, skyrocketing from $9.575 billion in 2018 to $18.367 billion in 2019—and then to nearly $22 billion in the first quarter of 2020. It's a dead man walking, with infrastructure so outdated that in February 2020 their output of gasoline fell by 24 percent, the production of diesel fell 36 percent, and its oil exports plummeted 32 percent. Meanwhile, the company keeps digging its grave with an $8 billion "investment" in a new refinery in Dos Bocas (in the state of Tabasco) a project that almost the entire industry sees with skepticism because of the environmental damage and the high propensity of flooding in the area. With this kind of background, its no surprise that even before the vaudeville of April 20 two of the three major rating agencies (Moody's and Fitch) had downgraded PEMEX to junk bond level and that an eventual bankruptcy is virtually certain.
So, let's summarize: PEMEX is a company on its deathbed, with unsurmountable levels of debt, almost collapsed infrastructure, a bleak history of corruption, near zero chances of recovery, and a weight that threatens to drown the entire Mexican economy with it, potentially pushing the Mexican bonds into "speculative" territory. And all that was BEFORE the pandemic and the ensuing global recession. So, the diagnosis should be clear. The only rational way forward would be to prepare PEMEX for its bankruptcy, looking for possible investors or building a strategy to minimize the damages of the inevitable collapse. But no. That won't happen.
Instead of laying it to rest in peace, the Mexican government has chosen to pour the few resources it still possesses into a delirious effort to bring the state company back from the dead and turn it into a cornerstone of the national economy. On April 2, President López Obrador took direct control of several trusts whose combined value nears $30 billion. The reason? To "invest" the money backing PEMEX (among other "priorities"). On April 21, he gave the company another $2.7 billion in the form of a tax cut.
The question is, Why? Of course, a big part of the mystery may be explained with Thomas Sowell's famous aphorism: "It is hard to imagine a more stupid or more dangerous way of making decisions than by putting those decisions in the hands of people who pay no price for being wrong." And yet there seems to be more to this story that the mere incompetence of a bunch of bureaucrats with nothing to lose on the gamble. Behind PEMEX's tragedy and the government's insistence on keeping it alive there's more than irresponsibility. There is fanaticism.
This may be hard to believe for the American audiences, but down south in Mexico oil is far more than a commodity. It is almost sacred—a vital element in the worshipping of the state.
It began on March 18, 1939, when Mexico's then socialist government decreed that all the local companies of the oil industry (mainly of American, British and Dutch origin) would be seized by the Mexican government to secure the "national dignity" and independence from those hated "foreign powers." From there, the government created a Mexican version of the Soviet "Red Army myth," only this time it was not about the communist soldiers pushing back the reactionaries in the Russian Civil War. It was about the Mexican workers stepping up to fill all the high-ranking jobs of the foreigners and turning PEMEX into a powerhouse through the sheer strength of their patriotism and the high intelligence of the Mexican workers, who—according to the myth—hitherto had been systematically discriminated against by the racist owners of the private companies.
That story was preached for decades. Even in the 1990s, and even in private Catholic schools (such as the ones I attended as a kid), every month of March was filled with references to the supposed heroism behind the seizure of the oil industry. Teachers would tell us, almost with tears in their eyes, about the little children who back in 1939 had given their piggy banks to President Cárdenas to help him pay for the expropriation.
So, the government successfully turned PEMEX first into a monopoly and then into a source of national pride and the pillar of the regime's legitimacy. Crude oil exports became one of the anchors of the economy, and in the twentieth century the refineries were among the largest industrial projects of Mexico. The oil sacredness at the altar of the state reached its peak after the discovery of huge reserves in the Gulf of Mexico, which led President López Portillo to proclaim in the late 1970s that from then on Mexico's challenge would be to "administer the abundance," because PEMEX would single-handedly bring the country into the developed world.
But, as always happens, reality kicked back in. The supposed "abundance" turned into a huge economic crisis, and PEMEX's labor union (el Sindicato de Trabajadores Petroleros), led by the notorious Joaquín Hernández Galicia, became a mob-like organization whose methods would have made Jimmy Hoffa blush. While the union's leaders became moguls with the money and privileges granted by the government, the rank and file workers accumulated a series of "labor conquests" and benefits unheard of in the rest of the Mexican economy, drowning the company with overstaffing and wastefulness. Hernández Galicia was so powerful that in 1984 he was able to crush President De la Madrid into submission. He was arrested in 1989, but PEMEX and its union remained almost as corrupt. In 2000 the sindicato illegally financed the presidential campaign of the regime's candidate, and in 2016 the company was directly involved in the multinational Odebrecht bribery scandal.
Of course, PEMEX's corruption was not an isolated incident. All of the state-controlled businesses of the Mexican government (empresas paraestatales (parastatal companies), ranging from telephones to energy, banks, food distribution, and even alcoholic beverages) were walking disasters that had turned the country into a dystopian land of bureaucratic oppression. However, between the late 1980s and early 1990s, the government sold almost all of them and broke the state monopoly in industries such as banking, phone service, and railways. The only major exceptions were the electrical companies and PEMEX in the oil industry.
In 2013 the energy reform allowed a certain measure of private competition in the oil and gasoline businesses in Mexico, but even then PEMEX retained its position as the major player. Still, millions of Mexicans felt that this reform was tantamount to treason against the homeland, and current president López Obrador campaigned on the promise to eliminate it and return the state oil company to its former "glory." He hasn't repealed the reform—so far—but he has paused any further privatization, has officially proclaimed that protecting PEMEX is to "rescue the national sovereignty," and his administration is pumping billions of dollars into what everyone out there knows its a lost cause.
That's the power of the myths built by the state. Since 2017, when the first non-PEMEX gas stations opened in Mexico, most people have opted to fill their tanks at Shell, Mobil, BP, or Chevron, but many of that same people would scream in anger at the very idea of privatizing PEMEX: HOW DARE YOU? ARE YOU A TRAITOR? That image of the little children back in 1939, lined up with their piggy banks in hand to help President Cárdenas, is still imprinted on their minds, and they're willing to suffer a bad service, a corrupt union, and a criminal monopoly just to feel that they're not betraying those kids. That's more than mere irresponsibility. That is fanaticism—and ingrained slavery.
In dark hours, when people fear for their lives, they eagerly deliver their freedom to the state. Many want the government take control of their lives, because they think it will be better for them. Ludwig von Mises has written extensively about the erroneous belief that in an emergency the state must take control of the economy because the market economy supposedly fails. Specifically, Mises dealt with this subject in his writings on war socialism.
In Human Action, he writes about the reasoning in favor of state planning:
The market economy, say the socialists and the interventionists, is at best a system that may be tolerated in peacetime. But when war comes, such indulgence is impermissible. It would jeopardize the vital interests of the nation for the sole benefit of the selfish concerns of capitalists and entrepreneurs. War, and in any case modern total war, peremptorily requires government control of business.” (1998, p. 821).
In Nation, State, and Economy Mises similarly remarks:
So-called war socialism has been regarded as sufficiently argued for and justified with reference mostly to the emergency created by war. In war, the inadequate free economy supposedly cannot be allowed to exist any longer; into its place must step something more perfect, the administered economy. (2006, p. 117).
The similarity between the reasoning in favor of war socialism and the arguments that have been brought forward during the corona emergency is striking. Today war rhetoric abounds. Emanuel Macron explicitly stated, “We're at war,” and sent, as in Spain, the military to the streets. US president Donald Trump similarly speaks of “Our Big War” and invokes the wartime authority of the Defense Production Act. We hear the slogan “We are in this together” all the time.
Mises discusses German war socialism during the First World War in detail. He points out that Emperor Wilhelm II basically lost all powers to the General Staff. General Ludendorff “became virtually [an] omnipotent dictator,” he explains in Omnipotent Government (1985, p. 42), and subordinated everything to the war effort.
Winning the war was thought to be the outstanding goal, which could only be achieved by centralizing all powers. These powers were given to the military. After all, they were the experts in military matters.
Today, we face a similar tyranny of experts, to borrow a term from William Easterly. In the medical emergency, enormous power lies in the hands of doctors such as Anthony Fauci in the US or Christian Drosten in Germany. These experts advise governments what to do—for instance, which size of gatherings shall be prohibited (events of 1000, 100, or 3 persons), if and for how long economies shall be locked down, and if the wearing of masks shall become mandatory. And politicians follow the advice of the doctors. After all, they are the experts.
The similarities to war socialism do not end there. Indeed, to different degrees we are experiencing war socialism, because the war against the virus involves a massive central invasion of private property. Almost all economic activity has become subordinated to the war effort. In many countries businesses not considered essential to the war effort are forced to close down, such as retail stores, gastronomy businesses, or hotels. Others are forced indirectly to close, as their customers are confined.
In a sense, the whole population has been conscripted in the fight against the virus. Some people are allowed to continue producing, because it is considered worthwhile. Other people have been conscripted and ordered to fight the war on the home front. They are not allowed to leave their homes, as the experts consider this the best way to fight the virus and win the war. Even children are forced to contribute to the war effort by staying home. The central planners also decide when it is worthwhile to leave the home trenches, i.e., to walk the dog or buy groceries.
As in other wars, borders are temporarily closed and the international division of labor is severely hampered. War is financed in three main ways (Mises 2006, pp. 136–42).
First, goods and services are confiscated. In the corona war, medical material is being seized. Companies are closed and individuals confined. They shift their “production” toward the war effort. They produce “social distancing,” which is considered the main “good” necessary to win the war against the virus. Second, taxes are increased. Indeed, war profit taxes are especially popular. We are already hearing the first proposals in that direction. Third, the printing press accelerates, which we are experiencing as well.
In sum, the government interventions in the corona epidemic can be considered as a form of war socialism.
The next question is: is war socialism true socialism?
According to Mises, true socialism exists when there is a “transfer of the means of production out of private ownership of individuals into the ownership of society. That alone and nothing else is socialism. (Mises, 2006, p. 142).
Mises declares: “the measures of war socialism amounted to putting the economy on a socialistic basis. The right of ownership remained formally unimpaired. By the letter of the law the owner still continued to be the owner of the means of production. Yet, the power of disposal over the enterprise was taken away from him” (2006, p. 143).
In socialism, the central authority decides what is produced. In corona socialism, the government indirectly does that also: it decides which businesses are allowed to open and which are not. Thus, it decides what can be produced (masks, ventilators) and what will not be produced (tourism or sporting events).
Mises clarifies: “War socialism was by no means complete socialism, but it was full and true socialization without exception if one had kept on the path that had been taken” (Mises 2006, p. 144). Of course, corona socialism, as an instance of war socialism, is considered to be temporary, as “exceptional provisions for the duration of the war” (Mises 2006, p. 146).
But does war socialism achieve its aim? The defenders of the centralized effort claim that “the organized economy is capable of yielding higher outputs than the free economy” (Mises 2006, p. 117).
The opposite is true. It is the private economy that wins wars. The private economy is yielding more goods and services to alleviate the corona epidemic. The efficiency of private companies these days is amazing. Uncounted solutions are coming from the private sector, which is switching to the production of masks, medical suits, drugs, ventilators or coming up with safe new ways of delivering goods and services to consumers.
Private companies swiftly shift their production efforts due to anticipated profits. In a market economy, it is profits that direct production, quickly taking all human needs into account. In contrast, the medical production czars tend to have only one end or human need in mind. They want to slow down infection rates at all costs. They disregard other human ends, such as creating successful businesses and enjoying a vast array of goods and services such as vacationing or other leisure activities. When these ends cannot be reached, there may be other health problems, such as heart diseases or psychic issues. The forced lockdown brings economic misery. A general fall in living standards ensues with all its consequences.
The central medical planning focuses only on measurable variables such the infection rate. By not taking into account other ends (and not being able to do so), this planning exerts enormous harm from the point of view of voluntarily interacting individuals. In contrast to the central planning approach, which focuses on one end, all ends in human society are taken into account in the market economy through (expected) profits. Production is adjusted swiftly and efficiently toward the changing ends of consumers.
It is entrepreneurial profit seeking that unleashes human creativity and genius and thereby satisfies human needs as efficiently as humanly possible. The right answer to a war, and to the corona war as well, is therefore to eliminate all barriers to entrepreneurship:
For anyone of the opinion that the free economy is the superior form of economic activity, precisely the need created by the war had to be a new reason demanding that all obstacles standing in the way of free competition be set aside. (Mises 2006, p. 117)
In other words, in order to win the corona war, government should cut taxes and regulations vigorously. Unfortunately, governments around the world have opted for the opposite path, namely war socialism. If they do not quickly rectify their responses and end their war, the socialization of our economies will continue. Mises warns: “in the long run war and the preservation of the market economy are incompatible” (1998, p. 824).
Introduction In 1997 Ralph Raico published an article titled “Keynes and the Reds.” Raico’s article highlighted John Maynard Keynes’s review of a 1936 book by the British socialists Sidney and Beatrice Webb called Soviet Communism. In his review, Keynes discusses Joseph Stalin’s USSR and concludes: “The result is impressive.” For Raico, a historian in the classical liberal tradition, this statement contradicts the conventional idea that Keynes was a model liberal.
Unfortunately, Keynes’s defenders still portray him as a model liberal. For example, Robert Skidelsky claims, “Keynes was a lifelong liberal” and “He was not a socialist.”Robert Skidelsky, Keynes: Return of the Master (New York: PublicAffairs, 2009), pp. 157, 135. Roger Backhouse and Bradley Bateman insist: “He was a classical liberal in his politics, being as attached to individual freedom as the most ardent libertarian, who throughout his life repudiated socialism.”Roger Backhouse and Bradley Bateman, Capitalist Revolutionary: John Maynard Keynes (Cambridge, MA: Harvard University Press, 2011), p. 148.
This article is a sequel to “Keynes and the Reds.” It presents further evidence that shows that Keynes was sympathetic to Soviet socialism and not a genuine liberal.
The Bolshevik Revolution Keynes was highly enthusiastic about socialism in Russia from the very beginning. He celebrated the Bolshevik Revolution of 1917. The Russian Revolution broke out on March 8, 1917, and Czar Nicholas II abdicated on March 15. The prospect of a socialist revolution in Russia elated Keynes, and he wrote to his mother:
I was immensely cheered and excited about the Russian news. It’s the sole result of the war so far worth having. An acute and even struggle is now going on between the Socialists and the Milyukov constitutionalists. I see not the remotest chance, however, of any pro-Tsar counter-revolution.John Maynard Keynes to Florence Ada Keynes, Mar. 30, 1917, PP/45/168/9/8–9, Papers of John Maynard Keynes, King’s College Archive Centre, Cambridge University.
Vladimir Lenin and the Bolsheviks took power on November 7, 1917. Keynes happily announced, “The only course open to me is to be buoyantly bolshevik.”The Collected Writings of John Maynard Keynes, 30 vols. (London: Macmillan and Cambridge University Press for the Royal Economic Society, 1971–89), vol. 16, p. 266. In December, he cofounded the 1917 Club in London.Hugh Thomas, John Strachey (New York: Harper and Row, 1973), p. 68. Of course, the club was named in commemoration of the year of the Bolshevik Revolution. The membership of Keynes’s 1917 Club reads like a who’s who of twentieth-century British socialists: G.D.H. Cole, Hugh Dalton, J.A. Hobson, Ramsay MacDonald, Oswald Mosley, John Strachey, H.G. Wells, and Leonard Woolf.
Again in February 1918, Keynes admitted to “being a Bolshevik.”The Collected Writings of John Maynard Keynes, vol. 16, p. 267. The famous journalist Clarence W. Barron, founder of Barron’s magazine, met Keynes in 1918 and recorded: “Lady Cunard says Keynes is a kind of socialist and my judgment is that he is a Socialist of the type that does not believe in the family.”They Told Barron (New York: Harper and Brothers Publishers, 1930), p. 189.
Keynes described himself as a Bolshevik, but what was the nature of this revolution? As Sean McMeekin writes, “In their first two months in power, the Bolsheviks had not so much won over the Russian people as harassed and bludgeoned them into submission.”Sean McMeekin, The Russian Revolution: A New History (New York: Basic Books, 2017), p. 223. Tragically, Keynes’s Bolshevik comrades killed over one hundred thousand Russians in the months that followed their takeover.
The 1920s From 1919 to 1923, Keynes devoted most of his energy to postwar financial problems, but he remained enthusiastic about the socialist experiment in Russia. He proclaimed on April 26, 1922: “An extraordinary experiment in socialism is in course of development. I think there may be solid foundations on which to build a bridge.”The Collected Writings of John Maynard Keynes, vol. 17, p. 408.
Keynes held Vladimir Lenin in high regard. On July 6, 1922, he declared that “[Lenin’s] political control of affairs was of a high intellectual competence. The histories of revolution contain nothing more remarkable or more coldly and splendidly glittering than the career of Lenin.”Ibid., p. 436–37.
Certainly, no genuine liberal can agree with Keynes’s endorsement of Lenin. As Robert Service writes, “Lenin relied on dictatorship and terror.”Robert Service, Lenin: A Biography (Cambridge, MA: Belknap Press of Harvard University Press, 2000), pp. 10, 410. Lenin’s government killed over 4 million of its own people, making him the fifth-bloodiest megamurderer of the twentieth century.R.J. Rummel, Death by Government (New Brunswick, NJ: Transactions Publishers, 2009), p. 8. By 1923, Lenin’s regime had opened over 350 concentration camps across the USSR. These camps were the foundation of the gulag system that eventually “chewed up almost 40 million lives.”Ibid., p. 9.
Keynes’s enthusiasm for the socialist experiment in Russia united him with his future wife, the Russian ballerina Lydia Lopokova. As her biographer admits, Lopokova had “natural sympathies for socialism.”Judith Mackrell, Bloomsbury Ballerina (London: Weidenfeld and Nicolson, 2008), p. 259. Lopokova wrote to Keynes in April 1922, “I see you have sympathy for Russia.”Lydia and Maynard: The Letters of Lydia Lopokova and John Maynard Keynes (New York: Charles Scribner’s Sons, 1990), p. 35.
Keynes impressed Lopokova with his involvement in Russian, or “USSRian,” societies. He wrote her on February 24, 1924, “I enclose a paper for you to look through about the new USSRian Society I have agreed to join.”Ibid., p. 162. And on May 10: “I enclose a prospectus of the new society I have joined for getting into intellectual touches with Russians!”Ibid., p. 189.
What was this new USSRian society? In July 1924, Keynes was a founding vice-president of the Society for Cultural Relations with the USSR (SCR).For documentation, see Edward W. Fuller, “Was Keynes a Socialist?” Cambridge Journal of Economics 43 (2019): 1653–82, esp. 1675. Also see note 62. The SCR was a pro-Soviet society controlled and financed by VOX (All-Union Society for Cultural Relations with Foreign Countries).Michael David-Fox, Showcasing the Great Experiment: Cultural Diplomacy and Western Visitors to Soviet Union, 1921–1941 (New York: Oxford University Press, 2012), pp. 82–84. VOX was the Soviet government’s international propaganda agency; it was essentially a front for socialist propaganda outside the Soviet Union. Keynes’s vice-presidency of the SCR means that he had been working in conjunction with the Soviet government’s propaganda machine for more than a decade before he published The General Theory.
Keynes married Lopokova on August 4, 1925, and the couple honeymooned in the USSR with the SCR. Keynes spoke to the Soviet politburo on September 14, 1925. Leon Trotsky attended, as he was the chairman of the technical and scientific board of industry. Trotsky identified Keynes as a socialist: “Even the more progressive economist, Mr. Keynes told us only the other day that the salvaging of the English economy lies in Malthusianism! For England, too, the road of overcoming the contradictions between city and country leads through socialism.”“Dialectical Materialism and Science,” The New International, February 1940, p. 31, https://www.marxists.org/history/etol/newspape/ni/vol06/no01/v06n01–feb–1940–SWP.pdf. When Keynes returned, Virginia Woolf recorded that “Maynard has a [Soviet] medal set in diamonds.”The Diary of Virginia Woolf, vol. 3 (New York: Harcourt Brace Jovanovich), pp. 43–45.
Keynes addressed the SCR after his trip to the Soviet Union. He declared, “During the next fifty years the U.S.S.R. would make larger contributions to the world than any other European country.”SCR: 1924–1944 (London: SCR, 1944), p. 2. Also see John Maynard Keynes to Lydia Lopokova, Oct. 31, PP/45/190/3/14, Papers of John Maynard Keynes. At the time of this statement, the Soviets had already killed 5 million of their own people.
Keynes was certainly aware of the Soviets’ brutality. In fact, he attributed the brutality to the “beastliness” in the “Russian and Jewish natures.” He wanted to “achieve its [the USSR’s] goal” but “not in that [beastly] way”:
The mood of oppression…is the fruit of Red revolution—there is much in Russia to make one pray that one’s own country may achieve its goal not in that way. In part, perhaps, it is the fruit of some beastliness in the Russian nature—or in the Russian and Jewish natures when, as now, they are allied together. But in part it is one face of the superb earnestness of Red Russia, of the high seriousness, which in its other aspect appears as the spirit of elation….beneath the cruelty and stupidity of New Russia some speck of the ideal may lie hid.The Collected Writings of John Maynard Keynes, vol. 9, pp. 270–71.
Keynes grew increasingly close to Sidney and Beatrice Webb in the mid-1920s. In 1926 Virginia Woolf recorded, “The Keynes’, Lydia and Maynard, are both completely under the sway of the Webbs….The great Keynes…is at her [Beatrice’s] feet.”The Letters of Virginia Woolf, vol. 3 (New York: Harcourt Brace Jovanovich, 1978), p. 289. That year he attended the Socialist Summer School, and Beatrice recorded: “I see no other man that might discover how to control the wealth [or means of production] of nations in the public interest.” The Diary of Beatrice Webb, vol. 4 (Cambridge, MA: Belknap Press of Harvard University Press), pp. 93–94.
On the political spectrum, Keynes put himself as far to the left as one could possibly be. In fact, he viewed himself as even farther to the left than Sidney Webb: “I have played in my mind with the possibilities of greater social changes than come within the present [socialist] philosophies of, let us say, Mr Sidney Webb….The republic of my imagination lies on the extreme left of celestial space.”The Collected Writings of John Maynard Keynes, vol. 9, pp. 309–10. This statement led Rod O’Donnell to correctly conclude that “[Keynes’s] vision lay beyond the Fabian Socialism of Webb.”Rod O'Donnell, “Keynes’s Political Philosophy,” Perspectives on the History of Economic Thought, vol. 5 (Aldershot: Edward Elgar, 3–28, 1991), p. 5.
The Soviets reciprocated Keynes’s esteem. In 1927 the Soviet government invited him to the USSR to celebrate the tenth anniversary of the Bolshevik Revolution. He wrote to his wife on October 16, 1927: “I was much flattered last night by getting the enclosed invitation from the Bolsheviks to go to Russia next month to celebrate the tenth year of the Republic. My first impulse was to accept (assuming that the invitation covers you too)….The idea is very attractive.”John Maynard Keynes to Lydia Lopokova, Oct. 16, 1927, PP/45/190/3/241, Papers of John Maynard Keynes.
Keynes visited the Soviet Union in 1928. On his return he observed the Soviet Union is “much more normal than anyone here thinks.”“A Trip to Russia,” PS/4/81, Papers of John Maynard Keynes. The Soviet government had already killed 7 million of its own.Rummel, Death by Government, p. 83.
1930–The General Theory Keynes was closely connected with the British socialist movement in the early 1930s. He was an associate member of the New Fabian Research Bureau.Margaret Cole, The Story of Fabian Socialism (Stanford, CA: Stanford University Press, 1961), p. 235. This was Britain’s leading socialist think tank, run by fellow 1917 Club and SCR member G.D.H. Cole. Keynes was also involved with its sister organization, the Society for Socialist Inquiry and Propaganda. On December 13, 1931, he gave a speech to this society titled “A Survey of the Present Position of Socialism.”“A Survey of the Present Position of Socialism,” PS/5/104–22, Papers of John Maynard Keynes. A diluted version of the speech is contained in The Collected Writings of John Maynard Keynes, vol. 21, pp. 33–39. Also see Rod O’Donnell, “Keynes’s Socialism: Conception, Strategy, and Espousal,” Keynes, Post-Keynesianism and Political Economy: Essays in Honour of Geoff Harcourt, vol. 3 (London: Routledge, 1999), pp. 158–60.
Keynes was an important economic advisor to Britain’s first socialist prime minister, his old friend Ramsey MacDonald from the 1917 Club. Indeed, Keynes viewed himself as a more radical socialist than MacDonald and Hugh Dalton, another 1917 Club member. In June 1930, at a meeting with those men, Keynes described himself as the “only socialist present.”Hugh Dalton, The Political Diary of Hugh Dalton (London: Jonathan Cape, 1986), p. 115. Beatrice Webb agreed and said, “[Keynes is] certainly more advanced than MacDonald.”The Diary of Beatrice Webb, vol. 4 (Cambridge, MA: Belknap Press of Harvard University Press), p. 103.
In 1923 Keynes bought Nation and Athenaeum, a weekly political newspaper. By early 1931, he had merged it with the New Statesman, Britain’s leading socialist newspaper. That paper was founded in 1913 by his close friends the Webbs. The combined paper was called the New Statesman and Nation, and Keynes was the new chairman of the board. From February 1931 until his death in April 1946, Keynes was chairman of Britain’s leading socialist newspaper.
Robert Skidelsky admits that Keynes’s newspaper had “sympathy for Soviet communism.”Robert Skidelsky, John Maynard Keynes: The Economist as Saviour (New York: Viking, 1992), p. 389. However, to distance Keynes from the bad name of Stalinism, Skidelsky blames the paper’s pro-Soviet stance on its editor, Kingsley Martin. Like Roy Harrod, Keynes’s official biographer, Skidelsky insists that “the New Statesman was unmistakably Kingsley Martin’s.”Ibid.
First, Keynes himself demanded that the socialist Martin be the editor during the merger negotiations.Edward Hyams, The New Statesman: The History of the First Fifty Years, 1913–1963 (London: Longmans, 1963), p. 120. Second, Keynes asked Martin if he would make the newspaper socialist in policy, and Martin told him he would. “As it happened this was the right answer: Keynes was a Socialist in policy.”Ibid., p. 125; Father Figures: The Evolution of an Editor, 1897–1931 (Chicago, Henry Regnery, 1970), p. 198. Of course, by 1927 Keynes knew that Martin was a socialist: “after dinner must go to Kingsley Martin to talk to some of his young socialists.” See John Maynard Keynes to Lydia Lopokova, Feb. 16, 1927, PP/45/190/3/173, Papers of John Maynard Keynes. Finally, Martin himself contradicted Skidelsky’s claim that Keynes was just an aloof chairman of a pro-Soviet newspaper:
Maynard was the only active director of the N.S.&N. Right up until his death in 1946 we met frequently at his Sussex home at Tilton or his house in Gordon Square.…His biographer, Sir Roy Harrod [like Skidelsky], mentions his intimate connection with the Nation and then says that as the years went by he fell out of sympathy with the N.S.&N. policy. This does not tell the story.Editor: New Statesman Years, 1931–1945 (Chicago, Henry Regnery Company, 1970), p. 41.
Keynes's magnum opus, The General Theory of Employment, Interest and Money, was published on February 4, 1936. E.S. Goller wrote in the Daily Worker on April 16 of that year: “With little to gain and a lot to lose, Keynes was one of the chief organisers of the Congress of Peace and Friendship with the U.S.S.R. in Cambridge. Where Keynes’s sympathies are, it is easy to judge.”“Vulgar Marxism? A Critic Criticised,” GTE/8/12, Papers of John Maynard Keynes. The Congress of Peace and Friendship with the USSR that Keynes helped organize was a “British Soviet front organisation.”Giles Udy, Labour and the Gulag (London: Biteback Publishing, 2017). A.L. Rowse wrote in his review of the General Theory:
At every single point, without a single exception, it is in full agreement with Labour [socialist] policy….No wonder Mr. Cole, in a vociferous welcome, has acclaimed the books as “the most important theoretical economic writing since Marx’s Capital”…Mr. Cole is justified…It may be described as, for the first time in this country, laying the foundations of a Socialist economics.Keynes: Contemporary Responses to the General Theory (Bristol, UK: Thoemmes Press, 1999), p. 111.
John Buchan and Keynes were members of a dinner club called the Other Club, and they dined together regularly for over a decade. Just after The General Theory was published, Buchan described Keynes as a “gentlemanly communist.”The Island of Sheep (London: Hodder and Stoughton, 1936), p. 105. Buchan recorded that “his line is that he despises capitalism.”Ibid., p. 106. Keynes affirmed, “Private capitalism is an out-of-date institution.”The Collected Writings of John Maynard Keynes, vol. 21, p. 491.
Keynes declared only 119 days after The General Theory was published: “Until recently events in [Stalinist] Russia were moving too fast and the gap between the paper professions and the actual achievements was too wide for a proper account to be possible. But the new system is now sufficiently crystallised to be reviewed. The result is impressive.”The Collected Writings of John Maynard Keynes, vol. 28, p. 333.
No genuine liberal can agree with Keynes that Stalinist Russia was “impressive.” The period of collectivization in the USSR coincided with the development and publication of The General Theory. In this period, Stalin “enslave[d]…100 million people” and 11.5 million of his own people were killed.Stalin: Waiting for Hitler , 1929–1941 (New York: Penguin Press, 2014), p. 131; Rummel, Death by Government, p. 83. Further, during this period Stalin rapidly expanded his gulag system of concentration camps. By the time he died in 1953, Stalin had killed approximately 55 million, making him the bloodiest megamurderer in human history.Ibid. As Raico has insisted, Keynes’s 1936 claim that Stalinist Russia is “impressive” shows that he was not a true liberal.
Keynes’s Later Years In 1939, Keynes praised the Left Book Club. He exclaimed, “How foolish, too, to decry the Left Book Club! It surely is one of the finest and most living movements of our time.”The Collected Writings of John Maynard Keynes, vol. 21, p. 496. What was the Left Book Club? “The Communist Party and the Left Book Club” was published in May 1938, and it reads: “The Communist Party of Great Britain uses the Left Book Club as a channel for revolutionary propaganda and activity.”“The Communist Party and the Left Book Club,” The Economic League, May 1938, p. 1, http://www2.warwick.ac.uk/services/library/mrc/studying/docs/stalinism/778–2_b.pdf.
Moreover, this document shows that Keynes’s SCR was connected to the Left Book Club. As noted, Keynes was a founding vice-president of the SCR in 1924, and it was financed and controlled by the Soviet government. The flow chart in the document shows that the Left Book Club had connections to the “Propaganda Depts. of the Soviet Government and Communist International.”Ibid., p. 2. In short, Keynes’s endorsement of the Left Book Club was an endorsement of the British Communist Party and, by extension, the Soviets.
Stafford Cripps was the Webbs’ nephew, and in 1950 he became president of the Fabian Society. In the early 1930s he was assistant secretary of the New Fabian Research Bureau and a major funder of the Society for Socialist Inquiry and Propaganda. In the late 1930s Cripps attempted to unite the socialist Labour Party with the Communist Party. Keynes exclaimed in 1939, “I am all for Sir Stafford Cripps, and I would join his movement.”The Collected Writings of John Maynard Keynes, vol. 21, p. 496. He told Cripps, “I am in full sympathy with what you are doing.”Ibid., p. 502. Keynes stated around this time, “The question is whether we are prepared to move out of the nineteenth century laissez-faire into an era of liberal socialism.”Ibid., p. 500.
In 1939 Keynes praised “the splendid material of the young amateur communists.”Ibid., p. 496. Here he was praising the communists in the Cambridge Apostles, a society at Cambridge that he joined on February 28, 1903. By the 1930s, “Keynes was plainly the intellectual leader and the most active member of the Society,” and “he acted as a father figure for the Apostles.”Richard Deacon, The Cambridge Apostles: A History of Cambridge University’s Elite Intellectual Secret Society (New York: Farrar, Straus and Giroux) p. 135. John Costello, Mask of Treachery (New York: W. Morrow, 1988), p. 133. Keynes controlled entry into the society, and a socialist orientation was “a prerequisite for election to the Apostles at this time.”Costello, Mask of Treachery, p. 257.
The Cambridge Five was a notorious Soviet spy ring at Cambridge. All of the Cambridge Five were members of Keynes’s Apostles, and at least eight of the Apostles were confirmed Soviet spies: Guy Burgess, Kim Philby, Michael Straight, Anthony Blunt, Donald Maclean, Guy Lidell, John Cairncross, and Leo Long. Beyond these eight, there were at least forty more Soviet spies operating around Cambridge. As yet, scholars have been unable to link some forty code names (including Poet, Chaffeur, and Professor) to specific individuals.Andrew Lownie, Stalin’s Englishman: The Lives of Guy Burgess (London: Hodder and Stoughton, 2015).
Keynes ran the British treasury during the Second World War. As Skidelsky reports, “He was the treasury.”Robert Skidelsky, John Maynard Keynes: Fighting for Freedom (New York: Viking, 2000), p. 135. In July 1944 Keynes went to the Bretton Woods Conference to design the postwar world monetary system. His American counterpart was the US Treasury official Harry Dexter White. Keynes and White are the two individuals most responsible for the postwar monetary system that emerged.
Today it is well known that White was a Soviet spy.In 1997, a US Senate committee concluded, “the complicity of Alger Hiss of the State Department seems settled. As does that of Harry Dexter White of the Treasury Department.” Benjamin Steil, The Battle of Bretton Woods (Princeton, NJ: Princeton University Press, 2013), p. 329. And while collaborating with White in 1944 at Bretton Woods, Keynes was vice-president of the SCR.SCR: 1924–1944, p. 1. Also see note 19; and Edward W. Fuller, “Keynes and the Ethics of Socialism,” Quarterly Journal of Austrian Economics 22, no. 2 (2019): 139–90, esp. 171, https://qjae.scholasticahq.com/article/10468–keynes–and–the–ethics–of–socialism. This means that the postwar monetary system was designed by two men with connections to the socialist government of the USSR. Of course, the Keynes-White monetary system devolved into the current world monetary system.
Conclusion Ralph Raico challenged the idea that Keynes was a genuine liberal.Also see Ralph Raico,” Was Keynes a Liberal?” Independent Review 13, no. 2 (2008): 165–88. No doubt, Raico was correct. Contrary to sympathetic commentators, Keynes was not in the tradition of genuine liberalism. Rather, as O’Donnell states, “Keynes envisaged and espoused a particular form of socialism” and “it is clear, explicit and unambiguous; he used the term socialism to characterise his own views.”Rod O'Donnell, “Keynes’s Socialism: Conception, Strategy, and Espousal,” Keynes, Post-Keynesianism and Political Economy: Essays in Honour of Geoff Harcourt, vol. 3 (London: Routledge, 1999), pp. 149, 164.
Not hesitating to exploit a health pandemic to advance their ideological agenda, Jacobin magazine on March 26 published an article attempting to proactively blame “millions” of coronavirus deaths on “capitalism.”
Titled “How Capitalism Kills during a Pandemic,” the article advances tired slogans about free markets placing “profits above people,” buttressed by faulty and at times self-contradictory arguments that prove unpersuasive.
To set the most alarmist tone possible, author Nick French begins by warning the reader that the coronavirus “will likely kill millions of people in the United States alone.”
This prediction cherry-picks the most ominous of such projections, irresponsibly relying on the report from London's Imperial College COVID-19 Response Team, who own authors admitted includes projections that are “worst-case,” combined with the incredibly unrealistic caveat that “there are no interventions or changes in people's behavior.” The report further admitted that "Epidemic timings are approximate given the limitations of surveillance data in both countries," in essence cautioning that such predictions will be moot once more sufficient data becomes available. (The Jacobin article was published before a leading author of the report altered his predictions based upon the dramatic responses imposed in countries around the world.)
With the reader sufficiently shocked by the worst-case projection of victims based on partial data and unrealistic assumptions, French quickly assigns the villain: “Many of these fatalities could have been avoided if we had a social order that placed the needs of people over profit,” he declares.
Helping to shape the readers’ cartoonish image of evil capitalism, the article informs us: “capitalists prioritize profits over the welfare of their workers and of humanity as a whole,” and adds, “They will pollute the environment with deadly toxins and planet-destroying greenhouse gases before spending money on safe production processes.”
Mass death is but an unconsidered side effect in the heartless system of capitalism. Such is the framing that French establishes.
This leads into his specific critiques:
“First, pharmaceutical companies could have started to develop a vaccine for the virus years ago. The novel coronavirus that is now ravaging the world is actually one of a family of coronaviruses (including SARS and MERS) with which we have long been familiar,” French notes. “It would have been possible to begin research on vaccines and cures for coronaviruses in general, giving us a head start on treatments for the current outbreak. But pharmaceutical companies did not pursue this research, because the prospect of a cure was not sufficiently profitable.”
Two elephants in the room go unaddressed in this argument. First, if a vaccine for the virus would save millions of lives in the US alone, potentially tens of millions of lives worldwide, why would that product not be profitable? Does the author honestly think that a product that could literally save one’s life would not be in high demand?
Secondly, why does the blame for failing to develop a vaccine fall squarely on private pharmaceutical companies? What about all the other developed nations that have some form of single-payer or universal healthcare system that the Jacobin crowd thinks will save us all? Why didn’t any of them develop a vaccine?
Next, the article addresses concerns about the consequences of the economic shutdown being imposed on the American economy. “Losing a job could result in losing your health-care coverage or being unable to pay your student loans,” French writes. This concern is entirely justifiable.
But somehow French doesn’t see the irony in lamenting the close tie between one’s job and health insurance coverage—a result of government policy making insurance coverage tax exempt—as somehow the fault of “capitalism.” Without government interference, far more health insurance coverage would be owned by individuals, not supplied by employers.
Moreover, the student loan debt crisis is largely a government phenomenon as well. Decades of government subsidies and low-interest loans have helped drive up college tuition, and the federal government owns more than 90 percent of all student loan debt.
French blames “capitalism” for putting individuals in precarious situations that are highly exacerbated by the pandemic crisis, but the roots are to be found in government intervention.
Next, he blames greedy capitalist owners for forcing workers to go to work and risk their health because doing otherwise would “hurt bosses’ bottom line.”
In the following paragraph, however, French is forced to concede that the only specific example he cites, Starbucks, despite staying open for a while, “has since shifted to only providing drive-through service because of employee pressure.”
In a competitive market, employers must treat employees reasonably well, or else they will be bid away by more hospitable workplaces.
French then points out the shortages of personal protective equipment such as face masks at hospitals across the country, insisting that this too “is the product of a system that puts profit over people.”
Not so fast. Cumbersome FDA approval processes have been instrumental in slowing the production of much-needed face masks. Moreover, it’s profit-driven private companies such as 3M that are ramping up production of face masks right now in order to bail out the unprepared public health system.
Undaunted, French insists, “If we adequately invested in public hospitals or used state resources to rapidly produce necessary medical equipment, the unfolding pandemic would not hit our health-care system nearly as hard.”
What amount of “investment” would be adequate goes unmentioned. Also unmentioned are the certificate of need (CON) laws still in place in thirty-five states, which require healthcare facilities to get permission from a government commission to expand or otherwise invest in additional medical equipment. These commissions are often stacked with representatives from existing hospitals, who have an incentive to restrict new supply and thus limit competition. Imagine if potential rival retail stores needed to get permission from a committee full of Walmart and Target executives in order to open a new location.
CON laws are one of countless government interventions limiting the supply of medical care in the US. In this the American Medical Association also plays a vital role. As reported by the American Conservative, the AMA “artificially limits the number of doctors, which drives up salaries for doctors and reduces the availability of care.”
For more than a hundred years, the AMA has successfully lobbied governments to enact laws that restrict the number of new doctors in the country. AMA activities have included dramatically decreasing the number of medical schools across the country and turning the process of becoming a doctor into a monumental feat that “requires navigating a maze of accrediting, licensing, and examining bodies.”
The only system putting “profits over people” is that of government interference into the healthcare industry.
French next tries to convince readers that countries with single-payer systems are well equipped to handle the outbreak, unlike the allegedly free market US system.
But on this attempt he also can’t avoid self-contradiction or a downright obfuscation of facts: “Despite the fact that Italy’s health capacity has been overstressed by the particularly brutal explosion of coronavirus there,” he writes, “its universal single-payer health-care system is ensuring that every person, no matter their job or income level, can receive the best treatment possible.”
Well, not every person.
As Politico reported as early as March 3, weeks before French published his article, “anesthesiologists and doctors are being called on to make increasingly tough calls on who gets access to beds and respirators when there are not enough to go around.”
Instead of every person receiving treatment, as French would have you believe is happening, doctors in Italy are forced into “prioritizing younger, otherwise healthy patients over older patients or those with pre-existing conditions.”
French also insists that “Single-payer systems have allowed Denmark and South Korea to quickly institute coronavirus testing on a large scale, which has been essential to their success in slowing the virus’s spread.”
In the case of South Korea, however, it was a previous decision by the government to get the public sector out of the way and allow private sector companies to come to the rescue in cases of emergency that was responsible.
Learning from the 2015 MERS outbreak, reports ProPublica, “Korean officials enacted a key reform, allowing the government to give near-instantaneous approval to testing systems in an emergency.”
The result? “Within weeks of the current outbreak in Wuhan, China, four Korean companies had manufactured tests from a World Health Organization recipe and, as a result, the country quickly had a system that could assess 10,000 people a day.”
In these unprecedented times, many are scared, mourning, and otherwise looking for a villain to blame. Jacobin wants to convince readers that somehow for-profit capitalism is to blame for an underwhelming preparedness. Their argument, however, amounts to little more than sloganeering and half-truths. If anything, it’s the wealth created by capitalist systems that will save lives during this pandemic.
Horrific videos out of China, uploaded at great personal risk, expose the communist lies and mishandling of the COVID-19 outbreak. The mishandling of public health by the centralized Chinese regime is just the latest example of how the regime believes control, secrecy, and centralization are the solutions to most any problem.
Examples extend well beyond the current coronavirus crisis.
The Chinese Economic Miracle That Wasn’t Like America, China responded to the 2008 crisis with a balance sheet increase. China went much further, however, as Ronald-Peter Stöferle and Mark J. Valek explained in 2018:
While in the US the balance sheet total of the banking system increased by USD 4,000bn in the years after the global financial crisis, the balance sheet of the Chinese banking system expanded by USD 20,000bn in the same period. For reference: This is four times the Japanese GDP.
At a greater rate than most nations on Earth, China flooded the credit markets, distorting the local economy by forcing Chinese manufacturers to respond to a government-planned demand and by expanding crony capitalism, making businesses more likely to take root in the country if they were connected with the Communist Party.
As economist and professor Per Bylund wrote inThe Observer, in a China-style economy, influence with the government “[carries] significantly more weight than actual value creation, and consumers have little say in which projects get priority.”
This overdependence on government-backed deals weakened the Chinese economy by forcing ordinary Chinese people to conform to a distorted labor market.
Riddled with malinvestment produced by the government’s easy credit policies, the country is seeing “loss-making factories, with excess production capacity [and] insolvent ‘zombie’ companies” dominate the environment, as Claudio Grass explained.
As the Chinese population begins to age and the Communist Party’s centrally planned economy begins to crumble, growing urban centers such as Wuhan, in the heart of central China’s Hubei Province, face a series of woes caused by the market distortion.
With car factory workers and members of a crippled government-backed steel industry trying to survive in the cramped environment, common Chinese in Wuhan find themselves living in an overpopulated and highly polluted urban center where some estimates suggest that up to 10 percent of the population is unemployed.
Despite the growing population density, the business opportunities didn’t materialize and Wuhan became an environment ripe for the rapid spread of pathogens. So much so that by early 2018 researchers had started to warn about the link between the hazardous mix of air pollutants found in cities like Wuhan and increasingly high death rates.
Unfortunately for the Chinese people, the government-managed economy hadn’t just become toxic due to the high number of subsidized factories pumping poisonous gases into the air.
In an interview with Bill Sardi, Lawrence Broxmeyer, MD, of the N.Y. Institute of Medical Research explained that long before the novel coronavirus outbreak Wuhan residents already suffered from an ongoing tuberculosis epidemic that surged during the winter months between 2004 and 2013:
Among the conditions [Chinese researcher Xiaobing Yang] attributed to the increased transmission of TB in the winter was indoor crowding, subsequent vitamin D deficiency, and even air pollution. The increasingly severe air pollution in Wuhan, powered by the influx of foreign companies and the increased use of incineration for waste disposal, resulted in a visible haze so thick that it reduced peripheral vision as far back as June of 2012.
As the years went by and the Wuhan population grew, the demand for food shot up.
With farmers pressed to provide the 11 million living in Wuhan with poultry and swine, farms were expanded. As farms became larger, they produced larger amounts of waste.
By 2015, Wuhan had five major waste incineration plants in use and was already planning to build more. In 2018, an unexpected health scare forced farmers to get rid of much more than just pig manure:
By July, 2018, fourteen large pig breeding farms in Wuhan, with a combined annual pig production of 1.5 million pigs pooled investments with the intent to slaughter 2 million pigs per year. China alone accounted for more than half of the world’s pig population. That is until another purported virus (African swine fever) spread throughout China which had no cure and a near zero survival rate for infected pigs, and which, by August 2019 virtually wiped out 40% of China’s entire pig population, including those in Wuhan.
With one-quarter of the globe’s pigs dying in just one year, Broxmeyer explained, it’s likely that many of the sick pigs were incinerated. Once pathogens are airborne, he later elaborated in the interview, humans become highly vulnerable to them.
If this timeline of events helped create the conditions for a perfect storm, the Communist Party’s response to the events that unfolded in late 2019 helps explain why the Chinese government’s approach to the management of the economy and healthcare not only helped to create this mess, but actually made matters much, much worse.
The Chinese Regime's Response to COVID-19 Much like it has done with the Chinese economy, the Communist Party of China has turned the Chinese healthcare system into a government-run structure, putting the majority of lives in the hands of public hospitals and health centers.
The fact that Chinese citizens and taxpayers have so little influence through market processes or through government institutions has only worsened the situation.
Although it is not quite like the single-payer system that Bernie Sanders is so passionate about, the Communist Party has expanded taxpayer-subsidized health insurance throughout the country over the past fifteen years.
When the first cases of the novel coronavirus were reported and Chinese residents sought their benevolent public servants for help, the fragility of the Chinese public healthcare system was laid bare for all to see.
Long lines, doctor shortages, high costs for drugs, and a list of other issues have all pushed Chinese patients to flood social media with complaints—or at least try to.
In order to reverse course and save face, the Chinese government did what any socialist authoritarian regime would do in the face of disaster: forcefully lock people away, impose curfews, and even issue passport-like documents to some households allowing only one family member to go out every two days for grocery shopping and the like.
Knocking on people’s doors to check if household members were sick also became a regular occurrence in some regions, as authorities would check in with those who had traveled to the epicenter of the outbreak in recent months.
Meanwhile, Trump promises that it’s all under control at home as government officials scramble to develop a second coronavirus test kit that actually works. For their part, the American media conglomerates have trumpeted how the Chinese government’s response could have been more effective if it not for “conspiracy theory peddlers,” all the while assigning the blame for the expected economic crash to Trump.
The reality is that Trump isn’t to blame for the Centers for Disease Control and Prevention’s slow response to coronavirus, and he certainly isn’t going to direct government officials to drag people out of their cars and into solitary confinement in public hospitals.
Nothing to See Here After the Chinese government saw its fragilities exposed far and wide by the COVID-19 coronavirus outbreak, it appeared to embark on a mission to shift the blame for its failures.
A group of Chinese medical researchers is now pointing the finger at the United States, claiming that an individual that came to Wuhan spread the virus to workers at the Huanan Seafood Wholesale Market in November, initiating the chain reaction that made Wuhan the epicenter of the health crisis.
This unknown “patient zero,” the study suggests, came from another country, triggering speculations that the authors were referring to the United States.
Whatever the case, it’s clear that the densely populated and heavily polluted town of Wuhan was made far more vulnerable to a health scare of pandemic proportions because of the measures implemented by the Chinese state.
Through the expansion of credit, crony capitalism, and the imposition of public healthcare institutions that distort the market, Chinese citizens find themselves cornered and forced to resort to inadequate government-backed services in a desperate attempt to survive.
March is Women’s History Month. Among the women who have been remembered and honored, however, one who has clearly not received enough attention is Rose Wilder Lane (daughter of Laura Ingalls Wilder). Among the past century’s most ardent proponents of liberty, she developed the inseparable connection between life and liberty and the importance of individuals understanding the implications of their freedom. In her honor, especially given the current lack of serious attention to protecting our liberties in current American politics, revisiting Give Me Liberty (1936), which traces her evolution from communism to a devotion to liberty, seems particularly appropriate. And it has surprisingly clear implications for the 2020 election.
In 1919 I was a communist.
From this point of view…the Profit System causes the injustice, the inequality, we see. We must eliminate profit; that is to say, we must eliminate the Capitalist. We will take his current profits, distribute his accumulated wealth, and ourselves administer his former affairs….When the Capitalist is gone, who will manage production? The State….It was at this point that the first doubt pierced my Communist faith….
This economic revolution concentrated economic power in the hands of the State…so that the lives, the livelihoods, of common men were once more subject to dictators…Every advance toward personal liberty which had been gained…was lost by the collectivist economic reaction….
Representative government cannot express the will of the mass of the people….In actual fact, the population of a country is a multitude of diverse human beings with an infinite variety of purposes and desires and fluctuating wills…Any government of multitudes of men, anywhere, at any time, must be a man, or few men, in power….
Centralized economic control over multitudes of human beings…must become such minute and rigorous control of details of individual life as no people will accept without compulsion….
What I saw was not an extension of human freedom, but the establishment of tyranny on a new, widely extended and deeper base….
The Soviet government exists to do good to its people, whether they like it or not…To that end they have suppressed personal freedom; freedom of movement, of choice of work, freedom of self-expression in ways of life, freedom of speech, freedom of conscience….
Producing food from the earth and the sea, making goods from assembled raw materials, and their storing, exchanging, transporting, distributing and consuming by vast multitudes of human beings are activities so intricately inter-related and inter-dependent that efficient control of any part of them demands control of the whole….
The Communist hope of economic equality…rests…on the death of all men and women who are individuals….
I came out of the Soviet Union no longer a communist, because I believed in personal freedom….I [saw] an essentially medieval, planned and controlled economic order was taking over the fruits of the industrial revolution while destroying its root, the freedom of the individual….
I understood at last that every human being is free; that I am endowed by the Creator with inalienable liberty as I am endowed with life; that my freedom is inseparable from my life, since freedom is the individual’s self-controlling nature….
I hold the truth to be self-evident, that all men are endowed by the Creator with inalienable liberty, with individual self-control and responsibility….The extent to which this natural liberty can be exercised depends upon the amount of external coercion imposed upon the individual….Whoever makes decisions is responsible….
The men who met in Philadelphia to form a government believed that all men are born free. They founded this government on the principle: All power to the individual….The intent was actually to give the governing power to each common man equally….Common men were to govern themselves…by destroying power itself, so far as this could possibly be done. Power was diminished to an irreducible minimum….Never before had the multitudes of men been set free to do as they pleased….
[I]ndividualism. In less than a century, it created our America….
American wealth is innumerable streams of power…flowing through the mechanisms that produce the vast quantities of goods consumed by the multitudes, and the men who are called the owners can hardly be said even to control the wealth that stands recorded as theirs, for its very existence depends upon satisfying chaotic wants and pleasing unpredictable tastes….in this American chaos business and industry were compelled to serve those desires or perish….
There is no system here….But if this chaos were replaced by a system…functioning for the sole purpose of serving the public good, these men must be replaced by a bureaucracy… controlling in detail, and according to a plan devised by men possessing centralized economic power, all the processes….
[America’s] brief experiment in individualism has not only created great wealth and an unimaginable multiplication of forms of wealth in goods and services, but it has also distributed these forms of wealth to an unprecedented and elsewhere unequalled degree.
As I was reading Lane’s words, I started to get a strong sense of how “this is as much about 2020 as it is about when she wrote.” But I was then floored by just how true that sense was.
I read…that less than 10 per cent of our population own more than 90 per cent of the wealth. This alarmed me in 1893…But it seems to me even more alarming that many American minds accept this statement as true upon no better proof than that they have read it, and from it conclude, first, that “something must be done,” and, second, that the proper thing to do is to take ownership away from individuals and have property administered by The State; which means, by autocratic rulers giving orders through an enormous bureaucracy….
There is nothing new in planned and controlled economy. Human beings have lived under various forms…for six thousand years. The new thing is…individualism…[the principle that created this country and has, in fact, brought the greatest good to the greatest number]….
Can individualism…stand against the determined attack of [those] organized, controlled, and fanatically sure that a strong man in power can give a people better lives than they can create for themselves?…
Will [we] defend the Constitutional law that divides, restricts, limits and weakens political-police power, and thus protects every citizen’s personal freedom, his human rights, his exercise of those rights in a free, productive, capitalist economy and a free society? Or will he permit…suppressing individual liberty, sacrificing human rights to an imagined “common good,” and substituting for civil laws the edicts, or “directives,” once accurately called tyranny and now called administrative law? This is the choice that every American must make….the present situation puts it before us and requires a decision….
[N]othing whatever but the constitutional law, the political structure, of these United States protects any American from arbitrary seizure of his property and his person….
In 1933 a group of sincere and ardent collectivists seized control of the Democratic Party, used it as a means of grasping Federal power, and…began to make America over. The Democratic Party is now a political mechanism having a genuine political principle: national socialism….
[R]eactionary pseudo-thinkers shifted American thought into reverse….They called it “liberal” to suppress liberty; “progressive” to stop the free initiative that is the source of all human progress; “economic freedom,” to obstruct all freedom, and “economic equality” to make men slaves….We never heard that these United States are a political structure unique in all history, built upon…the fact that individual persons are naturally free, self-controlling and responsible….
These United States stand for a political principle that must conquer and change the whole world, because it is true….Americans have been creating a new world, the modern world…[but] We wanted the ancient thing that was marked “New.”…
Today, Federal administrative agencies have nearly destroyed those divisions of the political power which alone protect the property, liberty and lives of American citizens…because a state that dictates men’s action in producing and distributing goods must have undivided and absolute power.
[L]eading statesmen assume that…suppression of liberty is good for mankind, and that these new forms of an old tyranny are here to stay….
Free thought, free speech, free action, and freehold property are the source of the modern world. It cannot exist without them. Its existence depends upon abolishing these reactionary state controls and destroying the socialist State.
The task before Americans is to end these police-controls of peaceful, productive American citizens, to repeal all the reactionary legislation and…Executive orders…to abolish the Federal corporations, departments, bureaus and agencies that dictate and enforce these State controls…to require men in public office to recognize again every American’s natural right as a free person….
No politician, yet, has asked American voters to give him the power to strip any State of the powers it has usurped from its citizens, nor to strip the Federal Government of the powers it has usurped from the States; to restore the rights of the citizens, the rights and powers of the States…nor to add…further restrictions that will adequately protect the property, liberty and lives of persons… and make the United States again the world-champion of human rights and the leader of the world-liberating revolution….
[R]eactionary national socialism hampers all Americans now.
Lane’s experience with the reality of Russian socialism, expressed insightfully, has brought many to see the paramount importance of freedom (or more often, the tragedy of its absence) in human lives. What we can learn from Give Me Liberty is also reinforced in her 1943 The Discovery of Freedom. She offers us lessons which need relearning in each generation if liberty is to be defended from the ongoing erosion it faces. And it is very hard to miss just how appropriate her words still are for the political situation Americans face most of a century later. That is why it is useful to remember what she wrote in her autobiographical sketch,
I am now a fundamentalist American; give me time and I will tell you why individualism, laissez-faire and the slightly restrained anarchy of capitalism offer the best opportunities for the development of the human spirit. Also I will tell you why the relative freedom of human spirit is better—and more productive, even in material ways—than…any other rigidity organized for material ends.
A re-occurring phenomenon surrounding socialism is that whenever a new project is being started, Westerners will visit the places and – supposedly at least – find paradise on earth. Socialism works in these countries, they always proclaim. It was the case in the 1920s when the Soviet Union started its seven-decade journey of despotism, it was true in Cuba, Maoist China, today’s Venezuela (all of it beautifully chronicled by the Institute of Economic Affairs’ Kristian Niemietz) – it was even true in North Korea.
So it shouldn’t be too shocking — but rather just another frustrating example of someone who ignores the impossibility of this system — when one consider the comments made by Marcelo Sánchez Sorondo two weeks ago. The big difference: Sarondo is a bishop. Or to be more precise, he's the chancellor of the Pontifical Academy of Social Sciences. The Catholic Church, throughout the misery communism brought in the twentieth century, stood tall in many of the countries which underwent these sick experiments, and was responsible for at least some of the tiny amount of hope that remained in many Eastern Bloc states.
Nowadays, we have Bishop Sánchez Sorondo who praises the Communist Party-led China, saying that “China is the best implementer of Catholic social doctrine.” How the Chinese example can be seen as the best example of such Catholic social doctrines like human dignity, subsidiarity (i.e. decentralization of political power to the lowest level), or private property, all of it being developed over centuries of teaching (and profoundly written down for example by Pope Leo XIII in his Rerum Novarum), is a good question.
But hey, at least China is defending the Paris Climate Accord! “In that, it is assuming a moral leadership that others have abandoned,” the bishop said. Overall, as the Catholic Herald quotes him, the Communist state can be seen as nothing short of “’extraordinary,’ saying: ‘You do not have shantytowns, you do not have drugs, young people do not take drugs.’ Instead, there is a ‘positive national conscience.’”
Now, it is indeed true that Christianity is on the rise in China, and could overtake membership in the Communist Party soon, as this graph from the Council on Foreign Relations shows:
However, this is happening not because of the Chinese state, but despite it: Christian music, like Handel’s Messiah, is forbidden to be played. Chinese authorities have started to crack down on Christian communities in recent months, confiscating bibles, and arresting religious leaders. Just one month ago, the government blew up – yes, blew up – a Christian megachurch. The Chinese state in some areas has barred anyone under 18 from attending religious services. As The Independent wrote: “the surging popularity of non-state-approved churches has raised the ire of authorities, wary of any threats to the officially atheist Communist Party's rigid political and social control.” All of that not even mentioning the cruelties of forced abortion.
Of course, persecution of practicing believers is nothing new in socialist regimes. This was especially true at the beginning of Maoist China, where under Mao the state abolished all belief systems different than Communism. The Economist writes: “Communist revolutionaries saw these religious traditions as an impediment to progress and a reason why the country remained poor. So they set about destroying the entwined belief system of Confucianism, Daoism and Buddhism, and replaced it with the new trinity of Lenin, Marx and Mao. Only by doing so, they believed, could China be saved.”
The Communist’s dislike of religion was evident from the beginning, if not inherently needed for its own survival, as Ryszard Legutko writes in The Demon in Democracy:
“Marx’s attitude well reflects the feelings that the socialists and communists have always had about religion: on the one hand, a profound hostility, often accompanied by an almost sadistic longing for a world in which religion would be wiped out without a trace; on the other, a wish that socialism become a genuine form of religion in the sense that it would satisfy needs, dreams, and desires similar to the way in which religion did and which apparently inhered in human nature.”
Only one religion is allowed in a Communist paradise: Communism itself.
Meanwhile, the Church has stood as the biggest barrier between Communists and their inhumane goals. Legutko continues: “The communists felt— quite rightly — that the Church and Christianity were the strongest barriers that protected the nation against the regime and its ideology, and that their power would not be secure until the Christians were totally subdued.”
To be sure, it is true that things could be — and have been — worse. Indeed, since the opening of the markets by Deng Xiaoping, significant improvements have occurred under what was once a Soviet-style regime. But a lot still needs to happen until the Chinese people can be considered free, especially when it comes to personal freedom (where the country ranks number 136 of 159 in the world in the latest Human Freedom Index). Religion could play a crucial play in this. But not through a state, as Bishop Sánchez Sorondo thinks – rather as a belief system pitted against state socialism.
Few people outside New York City noticed that Bill de Blasio was sworn in for a second term as mayor of the Big Apple, as the Usual Luminaries did not show up for the occasion. However low-key the ceremony might have been on that freezing January day, it was significant one thing: the political leadership of New York once again is looking to unabashed socialism as the guiding light (or, perhaps more appropriate, darkness) for the city’s future.
Declared the New York Times in an editorial:
You dance with the one that brung ya, as the saying goes, but Bill de Blasio sees no reason to embrace the maxim. Bill and Hillary Clinton gave him a vital kick-start in politics and, fittingly, Mr. de Blasio chose the former president to swear him in as New York’s 109th mayor four years ago. Times change. For his second inaugural, on Monday, the Clintons were well in his rearview mirror.
Instead, the swearing-in duties fell to Senator Bernie Sanders of Vermont by way of Brooklyn, who, not coincidentally, was Hillary Clinton’s chief rival for the 2016 Democratic presidential nomination. It was Mr. de Blasio’s way of saying that even a pretense of Clintonian centrism was in disfavor at City Hall and that “a new progressive era,” as he called it in his remarks, ruled the day. Mr. Sanders may not have brung him to the dance, but he now had the mayor’s heart.
Having grown up in Brooklyn in an era when the main topic of discussion among his peers was whether one was a Stalinist or a Trotskyite (Sanders proudly chose to side with the mass-murderer Trotsky, in contrast to the mass-murderer Stalin), Sanders no doubt feels a kinship with de Blasio, who recently called for an end to private property in New York during a self-congratulatory inter:view with New York Magazine:
What’s been hardest is the way our legal system is structured to favor private property. I think people all over this city, of every background, would like to have the city government be able to determine which building goes where, how high it will be, who gets to live in it, what the rent will be. I think there’s a socialistic impulse, which I hear every day, in every kind of community, that they would like things to be planned in accordance to their needs. And I would, too. Unfortunately, what stands in the way of that is hundreds of years of history that have elevated property rights and wealth to the point that that’s the reality that calls the tune on a lot of development.
… Look, if I had my druthers, the city government would determine every single plot of land, how development would proceed. And there would be very stringent requirements around income levels and rents. That’s a world I’d love to see, and I think what we have, in this city at least, are people who would love to have the New Deal back, on one level. They’d love to have a very, very powerful government, including a federal government, involved in directly addressing their day-to-day reality.
De Blasio and Bernie Sanders are not the only people who long for a truly socialist New York. Last fall, as the 100th anniversary of the Bolshevik Revolution approached, the New York Times waxed nostalgic about the days when the city was “the capital of American communism.” Indeed, the “Newspaper of Record” portrayed communism as a “lost cause,” a movement that brought hope, even as the NYT actively covered up millions of deaths in the Ukraine resulting directly from communist policies that New York intellectuals, union activists, and journalists so revered.
It is obvious that de Blasio wishes a return to the strict rent control that led to thousands of abandoned apartment buildings by the early 1980s and turned much of the New York City into a dystopian landscape made famous in the “Death Wish” film series. Indeed, policies that a generation of socialists pushed upon the city from the 1930s until the 1990s led to a financial crisis in 1975 (when the city illegally sold bonds to pay off previous bonds, a “privilege” granted only to the federal government) and a crime-ridden city until things began to turn around about 25 years ago.
(New York City does have some remaining rent control as well as “rent stabilization” policies, but city government has not been as hostile to privately-owned housing today as it was 40 years ago. While the de Blasio administration did proclaim a one-year freeze on rent increases in 2015 – a good start to bringing back the “good, old days,” but not enough to destroy the housing stock, at least not yet – nonetheless it will take a number of years to re-create the housing hellhole that was New York when the fictitious Paul Kersey hunted down muggers and murderers in the Big Apple.
While one doubts that de Blasio will be able to single-handedly return New York City to its dystopian past, there is no doubt that he wants to invoke the same policies that led the city into serious decline in the first place. Like so many other hardcore socialists, de Blasio understands absolutely nothing about commerce and he believes that central planning enforced with outright state-sponsored violence can replace a society built upon private enterprise and make it even better.
The French intellectual Tallyrand once said of the Bourbon dynasty: “They have learned nothing and forgotten nothing.” Politicians like Bill de Blasio take Tallyrand one step further: they learn nothing but forget everything.
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Socialism’s popularity is reviving in America.
Socialist Alexandria Ocasio-Cortez captured a seat in the new Congress and is calling for confiscatory tax rates at the same time Democratic Socialist candidates are thriving in many areas of the nation. The Washington Post reported in July that it’s “been a good summer for the Democratic Socialists of America,” who have “never had more adherents or more clout.” The Democratic Socialists of America openly calls for the abolition of capitalism.
It would be gratifying to Karl Marx, born 200 years ago in Trier, Germany. In a New York Times tribute headlined, “Happy Birthday, Karl Marx. You Were Right!” philosophy professor Jason Barker declared that “educated liberal opinion is today more or less unanimous in its agreement with Marx’s basic thesis” that capitalism is fatally flawed. But that presumption is true only if “educated liberal opinion” simply does not care about tyranny.
Trier, Germany, held a huge birthday celebration highlighted by the unveiling of a 5,000-pound bronze statue of Marx donated by the communist Chinese government. Jean-Claude Juncker, the president of the European Commission, gave a speech lauding the communist theoretician, declaring that:
Karl Marx was a philosopher, who thought into the future, had creative aspirations, and today he stands for things which is he not responsible for and which he didn’t cause…. One has to understand Karl Marx from the context of his time and not have prejudices….
Juncker hyped Marx’s doctrines to claim that European governments need to give more handouts to fulfill citizens’ “social rights.” Daniel Kawczynski, a British member of parliament whose family had fled communist Poland, denounced the celebration: “I think it’s in very poor taste. We have to remember that Marxism was all about ripping power and individual means away from people and giving to the State. Marxism … allowed a small band of fanatics to suppress the people.”
Unfortunately, as decades have passed since the fall of the Soviet Union, romanticism is deep-sixing the bitter facts of the lives people in communist regimes were forced to live. British Guardian columnist Paul Mason hailed the Soviet takeover of Russia for providing “a beacon to the rest of humanity.” But Marxism in practice didn’t work out so well. Communist regimes produced the greatest ideological carnage in human history, killing more than a hundred million people in the last century. Many zealots believe that it is unfair to Marx’s legacy to hold him culpable for the perennial savagery by regimes that invoked his name. But the seeds of tyranny were there from the start.
The “Divine Idea” Marx’s salvation scheme was built on a mystical foundation supplied by German philosopher G.W.F. Hegel. Though the New York Times eulogy for Marx touted Hegel as an advocate of a “rational liberal state,” Hegel was derided in his lifetime as the “Royal Prussian Court Philosopher” and for promoting the notion that the State is “inherently rational.” Hegel deified government, asserting that “the State is the Divine Idea as it exists on earth” and “all the worth which the human being possesses — all spiritual reality, he possesses only through the State.” Hegel scorned any limits on government power: “The State is the self-certain absolute mind which recognizes no authority but its own, which acknowledges no abstract rules of good and bad, shameful and mean, cunning and deceit.”
Marx, perhaps blinded by Hegel, never recognized the inherent danger of Leviathan. Nor did Marx explain how communism would actually arise after the demolition of capitalism. Equally important, he never even attempted to reveal how the State would “wither away” after the “dictatorship of the proletariat” commenced. Marx’s humanitarian piffle did nothing to deter Lenin from decreeing that “liberty is so precious that it must be rationed.”
Marxists assumed that vastly increasing government power was the key to liberating humanity. But all-powerful regimes quickly become ends in themselves. In 1932, Soviet dictator Joseph Stalin decreed the death penalty for any theft of state property. In Ukraine, where millions were starving because of the brutal collectivization of farms, even children poaching a few ears of corn could be shot.
The history of communism proves there will never be a shortage of intellectual apologists to sanctify any and every atrocity. In 1936, Sidney and Beatrice Webb, two prominent British socialists, justified Soviet repression because “any public expression of doubt … is an act of disloyalty and even treachery” to central economic planning. Thus, to liberate people with food and clothing, government was entitled to execute anyone who criticized the Five Year Plan for agriculture and textiles. The Webbs glorified Soviet ethical doctrines: “Paramount is the injunction to abstain from and to resist ‘exploitation,’ meaning any employment of others at wages for the purpose of making a profit out of their labor.” The Webbs observed that “abstention from exploitation is the ethical duty that is … most forcibly and frequently impressed on the youthful mind.” They presumed that all private contracts are exploitative and that politicians would never abuse their power by exploiting those under their thumb.
Economist John Maynard Keynes hailed the Soviet Union in 1936 as “engaged in a vast administrative task of making a completely new set of social and economic institutions work smoothly and successfully.” American churchman Sherwood Eddy wrote in 1934, “All life [in Russia] is … directed to a single high end and energized by such powerful and glowing motivation…. It releases a flood of joyous and strenuous activity.” American philosopher John Dewey visited the Soviet Union and proclaimed upon his return, “The people go about as if some mighty, oppressive load had been removed, as if they were newly awakened to the consciousness of released energies.” Jean-Paul Sartre, France’s most respected postwar philosopher, declared, “Soviet citizens criticize their government much more and more effectively than we do. There is total freedom of criticism in the USSR.” After controversy erupted in France in 1997 over a book that claims communist regimes had killed nearly 100 million of their own citizens, a French Communist Party spokesman sought to differentiate Stalin and other communist leaders from Hitler: “Agreed, both Nazis and communists killed. But while the Nazis killed from hatred of humanity, the communists killed from love.”
While many Western intellectuals painted the Soviet Union as a utopia, some communists had fewer illusions. In 1928 Grigori Pyatakov, one of six Soviet leaders personally named in Lenin’s last testament, proudly declared, “According to Lenin the Communist Party is based on the principle of coercion which doesn’t recognize any limitations or inhibitions. And the central idea of this principle of boundless coercion is not coercion by itself but the absence of any limitation whatsoever — moral, political, and even physical. Such a Party is capable of achieving miracles.” Pyatakov was one of the stars of the 1937 Moscow show trials, confessing to ludicrous charges of sabotaging mines in Siberia, and was executed shortly thereafter.
Boundless Tyranny Marx’s hostility to private property guaranteed boundless tyranny. Property rights are the border guards around an individual’s life that deter political invasions. Socialist regimes despise property because it limits the power of the State to regiment the lives of the people. A 1975 study, The Soviet Image of Utopia, observed, “The closely knit communities of communism will be able to locate the anti-social individual without difficulty because he will not be able to ‘shut the door of his apartment’ and retreat to an area of his life that is ‘strictly private.’” Hungarian economist János Kornai observed, “The further elimination of private ownership is taken, the more consistently can full subjection be imposed.”
Marxist regimes felt entitled to inflict unlimited delusions on their victims — for the good of the people, or at least proletariats. East Germans were told the Berlin Wall existed to keep fascists out — even though all the killings by border guards involved East Germans who were heading West. Marxism promised a utopia, and that unsecured pledge sufficed to treat subjects like serfs bound to endlessly submit and obey. Anyone who tried to escape was treated as if he were stealing government property.
Communism is still often portrayed as morally superior to capitalism because it banishes greedy corporations poisoning people for profit. According to Marxist theory, environmental problems cannot arise in socialist countries because man and nature are by definition in harmony. But Eastern Bloc regimes became a vast graveyard for Mother Nature. Pollution was pervasive largely because of the deification of economic plans. As long as the factories roared and industrial output rose, it didn’t matter that people and everything else were dying.
I traveled behind the Iron Curtain many times in the mid to late 1980s to study first-hand the results of Marx’s philosophy. I saw pervasive fear in the faces of emaciated people on the streets of Bucharest, Romania, and I saw the terror in the eyes of young Czechs when anyone touched on the subject of politics. I encountered border guards who flew into a tizzy at any piece of paper that might contain subversive ideas. And I witnessed legions of Western apologists who always insisted on giving communist regimes more time and more Western handouts to redeem themselves.
Marx continues to appeal to social justice warriors, thanks to axioms such as “from each according to his ability, to each according to his need.” And who determines “need”? The presumably omniscient, benevolent State. Marxism promised to end the “class struggle,” but it did so by subjugating almost everyone to officialdom. As Yugoslavian dissident Milovan Djilas observed in 1957, communism begot a new class of supreme bureaucrats with their own vested interest to perpetuate their power. Abolishing private property left people hostage to petty government officials who kept their jobs by punishing anyone who failed to kowtow to the latest dictates. As Leon Trotsky explained, “In a country where the sole employer is the State, opposition means death by slow starvation … who does not obey shall not eat.”
Regardless of Marx’s intentions, his doctrines spurred perpetual dread in hundreds of millions of victims. But it was criminally naive to expect happy results from any system that bestowed boundless power on politicians. Two hundred years after Marx’s birth, never forget that a philosophy that begins by idealizing government will end by idealizing subjugation.
Originally published by the Future of Freedom Foundation
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Is Venezuela paying the price for adopting gun control?
The shocking nature of Venezuela’s economic collapse has been covered ad nauseam. However, one aspect of the Venezuelan crisis that does not receive much coverage is the country’s gun control regime.
Fox News recently published an excellent article highlighting Venezuelan citizens’ regret over the gun control policies the Venezuelan government has implemented since 2012. Naturally, this regret is warranted. The Venezuelan government is among the most tyrannical in the world, with a proven track record of violating basic civil liberties such as free speech, debasing its national currency, confiscating private property, and creating economic controls that destroy the country’s productivity.
Elections have proven to be useless, as they’ve been mired with corruption and charges of government tampering. For many, taking up arms is the only option left for the country to shake off its tyrannical government. However, the Venezuelan government has done well to prevent an uprising by passing draconian gun control which will be detailed below.
Venezuela’s Lack of a Second Amendment Tradition Historically speaking, Venezuela has never had a robust history of private gun ownership like that of the United States. The absence of a Second Amendment or check on the federal government’s monopoly on firearm usage is a vestige of its colonial legacy. Its Spanish colonial overlords did not possess a political culture of civilian firearms ownership. It was mostly the military and the landed nobility that held firearms throughout the colonial era. This tradition has persisted even after Latin American countries broke away from Spain in the 1820s.
Fast forward to the 20th century, Venezuela began its first attempts to modernize its gun policy. In 1939, the Venezuelan government enacted the Law on Arms and Explosives (Ley de Armas y Explosivos) which established the Venezuelan state’s monopoly on firearm usage. The state was the only entity that could possess “weapons of war” which include: canons, rifles, mortars, machine guns, sub-machine guns, carbines, pistols, and revolvers. Civilians could only possess .22 rifles and shotguns, and in certain circumstances could possess handguns provided that they obtained a license.
Progressive Ideas Role in Consolidating Venezuelan Statism Ideas matter.
It’s no surprise that Venezuela embarked on this gun control escapade during the late 1930s. This was a period where statism was in vogue throughout the world as witnessed with the rise of Fascism and Communism in Europe. Even during the New Deal era, the US initiated its first foray into federal gun control with the passage of the National Firearms Act (NFA) of 1934. Despite its anti-gun policies, Venezuela at least maintained some semblance of limited government in economic affairs up until the 1970s.
However, the nationalization of its oil industry in the 1970s and the subsequent economic downturns of the 1980s and 1990s shook up Venezuela’s institutional foundations. The country was then ripe for a demagogic takeover.
Hugo Chavez’s Anti-Gun Agenda When socialist strongman Hugo Chávez took power, not only was Venezuela’s previous gun control order kept intact, but it was also expanded upon. Article 324 of Venezuela’s current Constitution (the 26th in its history) maintained the State’s previous monopoly on firearms and placed the National Armed Forces of Venezuela as the entity in charge of regulating all firearms in Venezuela.
In 2002, the Venezuelan government passed the first version of the Control of Arms, Munitions and Disarmament Law, reinforcing the state’s iron grip on firearms in Venezuela. A decade later, the law was modified to enhance the scope of gun control and gave the Venezuelan Armed Forces exclusive power to control, register, and potentially confiscate firearms.
Under the banner of fighting crime, Venezuela implemented a ban on the sale of firearms and ammo in 2012. Like other gun bans, this proved futile in fighting crime. According to the Venezuelan Violence Observatory’s statistics, Venezuela’s murder rate increased from 73 murders per 100,000 people in 2012 to 91.8 murders per 100,000 people in 2016.
Gun Control: Turning Citizens into Disarmed Subjects Venezuelans are now defenseless against a government that runs roughshod over their civil liberties, while also destroying their economic livelihood. As if it weren’t enough, everyday Venezuelans must put up with rampant crime and the constant threat of colectivos, Venezuela’s infamous pro-government paramilitary units.
Although gun control in and of itself does not automatically lead to tyranny, historical events remind us that well-intentioned interventions from previous governments can be used by the next round of political operatives for nefarious purposes. Firearms bans, confiscation, and registration give the state a virtual monopoly on violence, thus turning its citizens into defenseless subjects. When the rubber meets the road, a disarmed populace has no chance against a well-armed Leviathan.
Foreigners may scoff at the US’s Second Amendment, but it is one of the most far-reaching rights the framers of the Constitution made sure to protect. Political turmoil can emerge at any time and citizens must have a final means of protecting themselves in the case that all institutional options have been exhausted.
Modern monetary theory, or MMT, has been getting a lot of attention lately, often celebrated as a revolutionary breakthrough. However, there is absolutely nothing new about it. The very basis of the theory, the idea that governments can finance their expenditures themselves and that therefore deficits don’t matter, actually goes back to the Polish Marxist economist Michael Kalecki (1899–1970).
MMT as a Centralization Tool MMT says that the national debt means that we owe the money to ourselves, so the central bank in combination with the political branch, which gives its blessing and approval, can now together spend as much as they want without facing any consequences. In other words, we can print our way to prosperity. The only real problem according to the theory is that there is not enough money and not that resources are scarce and therefore limited.
To understand the basic idea behind this, let’s use the game Monopoly as an example. If players decide to double the amount of Monopoly money to play with, the logical outcome will be that people start to pay much higher prices for the locations on the board. Whenever more money is chasing the same amount of goods, prices will rise. Another lesson is that the bank will always win, especially when it has the power to change the rules at any time during the game.
The main cause for most of the problems of our days is the current central banking system. But how many people have ever thought about what money is or how it came into existence? How many know whether it was always used as debt security by government declaration or if it once was a property title, as it still pretends to be? Well, I can tell you that over the past decades, I haven’t met a lot of people who have really thought about these questions. At the same time, our public education system and the mass media ensure that the next generation won’t think about them either. Meaningless distractions, alternative facts, and daily doses of fear effectively crush most inquisitive instincts. It’s a process that Immanuel Kant recognized a long time ago and described in the following way:
First, these guardians make their domestic cattle stupid and carefully prevent the docile creatures from taking a single step without the leading strings to which they have fastened them. Then, they show them the danger that would threaten them if they should try to walk by themselves. Now this danger is really not very great; after stumbling a few times they would, at last, learn to walk. However, examples of such failures intimidate and generally discourage all further attempts.
With MMT, a massive shift in terms of centralization of power will take place. Drastic changes in our current system would be possible, with a massive push away from the private sector and from individual freedom toward more government control. This is extremely dangerous. History is our witness that centralization in the hands of government, particularly when coming from a so-called morally superior ideology, never has a good outcome for the people. State officials, institutional actors, and those closest to the top of the power pyramid were the only ones who ever benefited from such systems.
MMT essentially gives carte blanche to such interest groups to boost government spending to astronomical levels. At the same time, it allows for a government-enforced massive redistribution of wealth and a gigantic misallocation of capital within a very short period of time.
In the next few years, the biggest growth potential anywhere in the market, besides the military-industrial complex, will be found in everything that is related to climate change. You can be sure that governments will just print massive amounts of money and flood this sector with it, where you will find a tremendous number of formal politicians and bureaucrats creating artificial and well-paid government-sponsored jobs. The European Union alone wants to spend €1 trillion on this new sector by 2030. If Trump loses the next election, Americans can be sure that MMT will finance the same moves over there, too, most likely with the “Green New Deal.”
Let me quote Joan Robinson, who used to be a friend of Kalecki, MMT’s inspirer, during his days at Cambridge University. She summarized his theory as follows: “the workers spend what they earn and the capitalists earn what they spend.” Interesting, isn’t it? This is how the original Marxist thinkers defined capitalism. You might have understood that in their eyes the individual is the worker and when everything is under government control, the politicians and bureaucrats become the real capitalists. This is exactly the opposite of my understanding of capitalism, which is only possible in a free and decentralized society. Of course, it is important to understand that the term “capitalism” has been purposefully misdefined and hijacked from the beginning by Marxist thinkers.
Far-Reaching Consequences MMT also conveniently facilitates other dangerous policies and ideas that had thus far seemed unrealistic, such as universal basic income and “helicopter money,” which have been particularly propagated by government-sponsored economists for the past few years. It sounds pretty cool that people will not have to work to make a living—they can lay back and enjoy money for free provided by the government. But as we all know every coin has two sides, and to me as a fan of history, and monetary history in particular, an old saying comes to mind: “gold is the money of kings, silver is the money of the bourgeoisie, barter is the money of peasants—and debt is the money of slaves.”
It would seem that the only thing history actually teaches us is that we learn nothing from it. Nevertheless, there is hope due to the decentralized and open-source internet and the increasing connectivity of and access to knowledge—these ensure the competition of ideas, the emergence and evolution of different schools of thought, and the means for millions of people to learn about the world and become conscious individuals with their own opinions. In addition to that, our financial system is also being challenged and pushed in a more positive and healthy direction as hard assets, block chain applications, and cryptocurrencies lay the foundation for a decentralized approach in which financial sovereignty is key and privacy is respected.
For now, however, we still live in a two-class society, divided between those who have to pay taxes and those who live off them. As you can imagine, the abovementioned changes and shifts are not welcomed by government and its servants. They see a return to a culture of public debate, based on respect and on the premise that we can “agree to disagree,” with the humble understanding that no one knows the truth, as a threat. Therefore they enforce a deindustrialization agenda in combination with mass migration, using the climate hoax as an excuse to speed up a cultural suicide. They prefer to have a monoculture and are against the amazing beauty that lies in complexity, in different cultures, in different regions, with different languages and beliefs. By splicing them all together, they destroy all of them at once.
At the end of the day, what MMT, the Green New Deal, quantitative easing (QE), negative interest rate policy (NIRP), helicopter money, or any other sort of government promise or intervention have in common is that they are all collectivistic by definition, aimed against the individual and based on the crazy findings of the “Economic School of Zimbabwe”—where everyone became a trillionaire. Henry Hazlitt described it best, in his “Marxism in One Minute“:
The whole gospel of Karl Marx can be summed up in a single sentence: Hate the man who is better off than you are. Never under any circumstances admit that his success may be due to his own efforts, to the productive contribution he has made to the whole community. Always attribute his success to the exploitation, the cheating, the more or less open robbery of others.
Never under any circumstances admit that your own failure may be owing to your own weakness, or that the failure of anyone else may be due to his own defects—his laziness, incompetence, improvidence or stupidity. Never believe in the honesty or disinterestedness of anyone who disagrees with you.
This basic hatred is the heart of Marxism. This is its animating force.
Republished at LewRockwell.com. Originally published at executive-global.com.
[Newsweek column from May 7, 1956, and reprinted in Business Tides: The Newsweek Era of Henry Hazlitt.]
Keynesism—the philosophy of big government spending, deficit financing, and continuous inflation—today dominates the policy of nearly every government in the world. Yet developments in the last few years have destroyed its central prop.
The disciples of Keynes disagree among themselves about what the chief contribution of the master really was. Yet most of them would probably agree with his leading American disciple, Prof. Alvin H. Hansen, that “Keynes’s most notable contribution . . . was his consumption function.” In 1936 in his famous General Theory of Employment, Interest, and Money, Keynes declared that there is a “fundamental psychological law, upon which we are entitled to depend with great confidence . . . that men are disposed, as a rule and on the average, to increase their consumption as their income increases, but not by as much as the increase in their income.” He went on to call this “law,” rather pretentiously, the consumption “function.” Keynes’s great “discovery,” in short, was that if we knew what national income was going to be we could tell from a curve or a mathematical formula what consumption was going to be.
Of course, from time immemorial it has been a truism that most families spend most of their income. Official statistics for the last eight years, for example, show that on the average in that period Americans spent about 93 percent of their annual income on personal consumption and save only about 7 percent of it. So if you knew what personal disposable income were going to be next year, it would be hard to make too great a percentage error in predicting what consumption expenditures were going to be. It would be much easier, however, to make a substantial percentage error in predicting what saving was going to be, because saving is comparatively such a small figure.
I append at the bottom of this article a table showing (in billions of dollars) the nation’s disposable personal income for the last twelve years, the amount of personal savings, and saving as a percentage of disposable income. Now Keynes’s great “law” is that consumption does not increase in proportion to income, and therefore savings increase proportionately more than income increases. The events of 1955 were in themselves a crushing contradiction of this “law”. Disposable income increased by $14.6 billion, but savings fell by $1.2 billion. The total percentage of saving to disposable income fell from 7.2 to 6.3. The same thing happened between 1953 and 1954. Disposable income went up, $4.4 billion, savings down, $1.5 billion. Out of the last eleven years, in sum, Keynes’s “law” worked in four and was reversed in seven.
I may be accused of unfairness for including the enormous savings in 1944 and showing their decline in 1945, 1946, and 1947 in spite of substantial rises in disposable income in each year. It will be said that savings were heavy in 1944 and 1945 because they were war years and consumer goods were not available. Precisely. But this only underlines the fact that Keynes’s “law” is no law, and that the relationship of spending and saving does not depend solely on total income changes but on innumerable factors. Savings may depend less on what people earn today than on what they expect to earn tomorrow. Their spending this year may depend to a large extent on whether they expect the prices of the things they want to buy to be higher or lower next year. People may buy on impulse, or refrain from loss of confidence. In short, experience and statistics fail to support the main Keynesian tenet; and the Keynesian logic is a rope of sand.
When Karl Marx put forth his theory of history, one of the primary characteristics of the mechanical historical actors was their “class consciousness.” In Marxist doctrine, the whole of humanity in a capitalist society can be divided cleanly into two classes: the proletariat and the bourgeoisie. The proletariat was the exploited working class, and their class consciousness would eventually cause them to revolt against the capital-owning bourgeoisie, whose own class consciousness compelled them to exploit the proletariat by “stealing” the product of their labor.
Fallacies abound in Marxist theory, of course, but one of the commonly pointed-out fallacies of the class theory is that the so-called “working class” is impossible to cleanly define. After all, white-collar workers that comprise modern-day middle-class employees seem to have characteristics of both classes, as described by Marx. But this critique, though valid, misses the bigger point of Marxian theory and how it played out in the real world during the twentieth century.
While critics point out the impossibility of clearly defining the two classes, they overlook the very simple method of defining and distinguishing between the proletariat and the bourgeoisie that Vladimir Lenin recognized. Because Marx’s theory deterministically dictated that each class would display its respective “consciousness” – as opposed to simply asserting that they should or might — this absolutist assertion gives a very clear, if circular, means of determining which citizens fall into which class. Thus, Lenin decided simply, and in accordance with Marxist doctrine, that any Russian citizen who agreed with his revolutionary ideals, regardless of station, was a member of the proletariat, and anybody who opposed his revolution was, by default, an enemy bourgeoisie (with all the violent implications included).This is circular reasoning, of course, but it is consistent with doctrinaire Marxism because if Marx’s class theory is dogmatically interpreted, such logical circularity is valid. This point is worth underscoring because of the swarms of modern defenders of Marx who deny that Lenin was a “true” Marxist.
Regardless, this was the interpretation of Marx’s theories that Lenin adopted and applied prior to the October revolution in 1917, and it had tyrannical implications for how the Soviet Union would be born. As the eminent Soviet historian Martin Malia points out in his great work The Soviet Tragedy:
There existed basically only two classes with two worldviews in society [according to Marxism-Leninism], the proletariat and the bourgeoisie; if any political actor, whatever his de facto class, did not have a scientific revolutionary consciousness, he was automatically a burzhui [the Russian colloquial for “bourgeoisie”] and an enemy. The Leninist Part thus represented a metaphysical, not an empirical, proletariat, and this primacy of ideological “consciousness” over real life was Lenin’s understanding of the class struggle and the driving force of all his politics.Martin E. Malia, The Soviet Tragedy: A History of Socialism in Russia, 1917-1991 (New York: Free Press, 1994), 100.
As Malia points out, the early organization of Lenin’s party was not a “worker’s party” – although many peasant laborers did eventually join his revolution. It was, in fact, a revolutionary party that largely enjoyed the support of “petty intellectuals,” which by most standards would be considered to be part of the bourgeoisie. Only by employing this circular logic that “the proletariat will have a revolutionary consciousness; ergo, anybody with a revolutionary consciousness is a proletariat” could Lenin argue, in accordance with Marxism, that his revolutionary party represented a worker’s revolution.
But Lenin and Marx’s logical fallacy and historical determinism had darker implications that played out in the atrocities that followed during the Soviet century. As Malia continues in his description of the early days of Lenin’s Party:
Organizationally . . . the Party had the classic structure of a Social Democratic Party, with a Central Committee chosen by a Congress elected by local committees. It is these characteristics of 1917 Bolshevism that have been called “democratic.” But this democracy existed only for members of one class, the workers, and only for politics within the Party. And in Leninist ideology that pervaded this organization, the rest of society and all rival political organizations – even other socialist parties – were regarded as class enemies, as “bourgeois” or “petty-bourgeois,” who therefore would have to be eliminated once the true party of the proletariat came to power.Ibid., 102.
Lenin was doing little more than applying Marxist theory to Russia’s circumstantial particularities. To say, as some neo-Marxists argue, that this is a dishonest reading of Marx is simply false. Marx denied the possibility of a worker’s ability to deviate from his so-called “class consciousness” (though some members of the bourgeoisie, such as himself, could rise above his class consciousness and help lead the proletariat into glorious socialism). So as Lenin took power, he was quite clearly applying Marx’s ideas correctly by deeming any opposition – regardless of social standing – as being an enemy member of the bourgeois class.
This concept is also important in understanding how class distinction was made after the Bolsheviks established power and enacted their reforms. Once the State took ownership of all capital in the country, it would be impossible to distinguish any citizen as a member of the “proletariat” or “bourgeoisie” according to the ownership of capital. But by identifying people according to their “consciousness” — which is to say, by their support of the Communist Party or its opposition to it — Soviet citizens could easily be divided into these classes. After all, any true proletariat would certainly support the self-proclaimed worker’s party!
The result, of course, was to throw “kulaks” — a oxymoron describing a “wealthy peasant” — in the gulag, and to “purge” the party of any enemy who deviated from the appropriate “consciousness.” In other words, Marxist class theory, dogmatically interpreted, justifies thought control. You’re either with us, or against us.
Today, of course, many people laugh derisively at accusations of “cultural Marxism,” an ill-defined term usually levied against members of the cultural left. But as more and more people accept the notion of thought control in the form of violently protesting “offensive” speech or any expression of non-leftist cultural values, it seems easy to recognize this behavior as just a repeat (thankfully a less successful repeat, so far) of the real-world application of Marx’s revolutionary opposition against any person guilty of possessing the wrong “consciousness.”
In times of crisis, governments have a tendency to overcompensate for risk. This tendency may be in the public’s best interest, but it could also serve broader governmental interests. The public and government’s interest are not always one and the same.
After the September 11 attacks, a bipartisan Congress enacted the disastrous USA PATRIOT Act (Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act) in an alleged attempt to stop terrorism. After the 2008 financial crisis, the progressive Congress implemented Dodd-Frank, which dramatically expanded federal regulatory authority over the financial sector. During today’s novel coronavirus (SARS-CoV-2) pandemic, legislators are contemplating similarly disastrous measures. Some politicians have called for the nationalization of the medical supply chain, while others propose draconian quarantining measures that could result in the expansion of government surveillance.
Crises often provide the public with a useful case study for understanding how systems can operate under stress, which is why some institutions are “stress tested” in times of peace and prosperity. Interestingly enough, the federal government conducts these sorts of national security exercises on a regular basis; however, presidential administrations, past and present, have largely ignored warning signs. There is even evidence that the government downplayed the warning signs of the inevitability of the September 11 attacks.
History would have us believe that government is not adept at formulating the necessary strategies to confront crises, but governments are simply comprised of people. People are inherently imperfect, and it is incredibly difficult to adequately address risks of these proportions.
We are in uncertain territory during this pandemic. This virus, as its name implies, is novel. We lack adequate information about its transmissibility, mortality rate, degree of criticality, and treatment. As the Wall Street Journal reports, “Uncertainty makes it impossible to weigh costs and benefits, such as whether reducing the spread of a virus is worth the cost of an economic shutdown.” This feeling of uncertainty has thoroughly resulted in a “tsunami of negative news” by the media, which has in turn influenced politicians to act irrationally. Former Secret Service agent and Fox News contributor Dan Bongino has referred to some in the media as “hysteria merchants” and “panic salesmen.” This feeling of insecurity is precisely why I wrote about the need to refrain from exaggerating “the novelty of our situation.”
Measures Proposed Some elected officials and media pundits have been promoting the hysterical notion that we can either implement draconian (national) lockdown measures on both the economy and individuals or be complicit in the mass death of millions. This line of binary thinking has become all too common, but it is surely no way to govern a nation, let alone a nation the size of the United States (roughly 320 million people). Given the overwhelming diversity of our population and geography, it is prudent to evaluate the situation on a state-by-state basis, which is precisely why the US's political structure—even after decades of centralization— still relies on the principles of federalism. To mitigate the risk of exposing mostly unaffected populations to “hot-spots,” public health agencies and professional medical associations could propose some base measures for states to implement, such as ensuring that individuals do not unduly interact outside of maintaining essential services.
As of March 25, more than half of all coronavirus cases have occurred in just four states (New York, New Jersey, Washington, and California). The question remains: what to do to ensure that the growth in the number of cases is not exponential? Some lawmakers seek indefinite lockdowns at the national level, while others prefer a more targeted approach. One of the questions we should immediately ask is what authority or powers do the federal government have and what authority are we, the people, willing to let it have?
Federal lawmakers are confined to measures that are arguably within the bounds of the United States Constitution and within legal precedent. Citizens around the world are enduring the full brunt of their leaders “never letting a crisis go to waste.” Some politicians have engaged in a bevy of civil liberty–infringing responses, such as mass surveillance techniques, enforced lockdown measures, restrictions on movement, and the closure of public facilities including places of worship.
The United States has been comparatively safe from autocratic tendencies at the federal level—compared, that is, to many foreign regimes—with officials offering recommendations rather than explicit mandates. For example, President Trump has sought more targeted measures to lock down so-called hot spots affected by the virus. Critics have derided this as putting money above public health, but as economist Paul Romer writes, “we need to shift within a couple of months to a targeted approach that limits the spread of the virus but still lets most people go back to work and resume their daily activities.” Romer rightfully acknowledges that if Treasury secretary Mnuchin’s prediction of 20 percent unemployment comes true, the economy as we know it may fail.
No Need to Nationalize the Medical Supply Chain Rather than nationalizing the medical supply chain to “improve distribution of equipment,” public health and emergency management agencies could assist states by connecting states and localities to medical equipment producers and distributors on an as-needed basis. This would ensure that states take the lead in determining which medical supplies are necessary given their levels of viral cases. This facilitation would ensure that states with more novel coronavirus cases receive adequate supplies until supply can meet demand.
Nationalization of the supply chain, on the other hand, would distort the price signals present in a free enterprise system. As Jon Miltimore writes, “No single producer and central authority can possibly know what is most needed in a given economy consisting of millions of people and products. We overcome this problem by relying on information that comes from price signals.” Profit-seeking entrepreneurs will enter to meet the demand, just as Elon Musk has proposed to do.
Private enterprise is mobilizing at levels not seen since World War II to combat the “invisible enemy,” as President Trump calls it. Since private businesses are voluntarily working to supply healthcare workers with needed resources, President Trump has been hesitant to enforce the Defense Production Act. While private enterprise works with government agencies to boost supply, governments around the world are “imposing massive closures on schools, travel and gathering places, and barring many workers from going to work.” These limits on freedom are troubling but expected.
Mass Surveillance Is Not the Answer Either Wartime measures are being modified to combat this pandemic. Some foreign lawmakers have proposed and implemented mass surveillance measures to track infected patients. For example, the Israeli government recently passed a law allowing the Shin Bet, or Israel Security Agency, to utilize cellphone location data to “track down the persons that had contact with known infected hosts, and then notify them via SMS about the next steps they must take.”
The White House has proposed partnering with American technology companies such as Facebook and Google to use “geolocation data for disease tracking.” Perhaps even more worrisome, the White House has initiated conversations with these companies over how to limit the spread of misinformation during this pandemic, which could lead to censorship.
There may be potential economic benefits to tracking the location of infected Americans. If we can properly assess the spread of the virus, then parts of the country could reopen, assuming the virus can be contained. Such data may inform government decision-making, but government should not have access to geolocation data of individuals, especially if it is not deidentified. If country-specific surveillance is not sufficiently frightening, there has been talk about “an international mobile tracing scheme” to enable “authorities to monitor movements and potentially track the spread of the disease across borders.”
While this pandemic continues, the public must ensure that any infringements “in the public interest" do not last beyond this crisis. Governments have a tendency to continue to find new justifications for old war powers. The Guardian, a progressive outlet, writes, “As we witnessed with the authoritarian reactions to 9/11, emergency violations of civil liberties are not easily rolled back, and often aggregate over time.” At the Financial Times, Yuval Noah Harari outlines the citizen empowerment needed during this pandemic. He writes, “When people are told the scientific facts, and when people trust public authorities to tell them these facts, citizens can do the right thing….A self-motivated and well-informed population is usually far more powerful and effective than a policed, ignorant population.”
Mass surveillance in the name of public health, nationalization of industry, and legally enforced quarantine measures—these are all very real possibilities in the United States. This crisis has provided policymakers or thought leaders the opportunity to demonstrate their true character while allowing everyday Americans to display their entrepreneurial spirit. Unlike past economic crises, this public health crisis is a government-mandated shutdown of “nonessential business.”
Conclusion As the novel coronavirus began infecting Americans, some industries and businesses voluntarily closed operations to protect the public health. Other industries and businesses followed suit as a result of CDC and other public health expert guidance. To manage the shock to the medical supply chain, private enterprise has mobilized en masse to fill the gap between production and demand. As free enterprise mitigates the public health risks of the virus, government should use this opportunity to learn that the best path forward is to provide leadership and guidance rather than coercion. Government may be useful in providing oversight during this pandemic, but we cannot let the cure be worse than the problem.
Drastic measures are less necessary when businesses and individuals voluntarily cooperate to combat a public health crisis. If this case study can teach one lesson, it is that humanity can solve problems when given proper incentives, making coercion unnecessary. This is largely why the White House has not enforced the Defense Production Act to coerce businesses into building up the medical supply chain. Additionally, technology companies such as Facebook and Google voluntarily provide information to nonprofits and public health researchers so that they can provide adequate insight.
Although some would like to blame capitalism for the early missteps in the federal response to the virus, the opposite is true. It was federal public health regulators who hampered the private sector response to this crisis. To ensure that the United States moves past this pandemic, we must take an approach that minimizes government infringements of civil liberties; we must also maximize the incentives of private businesses and individuals who want to assist in our efforts to combat this “invisible enemy.”
The Austrian school of economics, marked by its unique causal-realist approach, contributed many important insights to the development of economic science. However, regardless of their profound contribution, the Austrian school has been usually charged as “unscientific” due to the lack of mathematical models in the Austrian analysis. Yet, calculations are being made everywhere in the Austrian framework, since the vital core of their theories is the importance of calculation for economic agents’ actions. Certainly, the concept of the impossibility of a central-planned socialist regime was the most fully elaboration of economic calculations.
The concept of economic calculation was first proposed by Ludwig von Mises in his book Economic Calculation in the Socialist Commonwealth published in 1920. Prior to Mises’s analysis, there were numerous social thinkers who criticized the operation of a socialist economy since for them, such an economy violates the fundamental nature of human beings. Nevertheless, this criticism was purely based on ethical and philosophical grounds. Mises was one of the first, along with Max Weber and Boris Brutzkus, who independently proposed an entirely different analysis from a purely economic perspective. However, Weber somehow constructed an ideal-type psychological model,Selgin, George A., Praxeology and Understanding: An Analysis of the Controversy in Austrian Economics (Auburn, Alabama: Ludwig von Mises Institute, 1990), p. 18. and from which he eventually came to the conclusion that a socialist economy is “wasteful” and “inefficient".Hayek, Friedrich A., Collectivist Economic Planning (Routledge & Kegan Paul Ltd. London, 1963), p. 34. On the other hand, Brutzkus dealt only with concrete problems of Russia.Ibid. Yet, “although to some extent Max Weber and Professor Brutzkus share the credit of having pointed out independently the central problem of the economics of socialism, it was the more complete and systematic exposition of Professor Mises.”Ibid., p. 36. For Mises, such an economy is not just wasteful and inefficient, it is impossible from a purely theoretical point of view.
Mises’s analysis can be summarized as follow:
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Without private property in the means of production, there will be no market for the means of production.
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Without a market for a means of production, there will be no monetary prices established for the means of production.
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Without monetary prices, reflecting the relative scarcity of capital goods, economic decision-makers will be unable to rationally calculate the alternative use of capital goods.Boettke, Peter J., Calculation and Coordination: Essays on Socialism and Transitional Political Economy (Routledge, 2001), p. 31.
Indeed, the problem raised by Mises is that the cental planner is unable to propose a rational economic calculation. In short, it is a calculation problem.
However, Mises’s student, Friedrich Hayek, though he accepted the final conclusion of his mentor, argued that “it does not really touch the heart of the problem.” In his essays collected in Individualism and Economic Order, he proposed another analysis that is developed on his notion of “division of knowledge”:Hayek, Friedrich A., Individualism and Economic Order (University of Chicago Press, 1948).
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Knowledge is dispersed, dispersal, and non-unified. Thus, individual knowledge is always imperfect.
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In a free-market economy, those dispersal knowledge is coordinated through the price system.
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Under a centrally planned socialist economy, after abolishing the price system, the central planner is not able to possess all knowledge of the whole society.
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Being unable to possess all necessary knowledge, the central planner thus is not able to rationally calculate the efficiency of alternative uses of capital goods.
For Hayek, the ultimate cause of the calculation problem is indeed the knowledge problem. Within the Austrian circle, some believe that the analysis of Hayek is a consistent development of the Misesian conclusion.Boettke, Peter J., Calculation and Coordination: Essays on Socialism and Transitional Political Economy (Routledge, 2001). Lavoie, Don, Rivalry and Central Planning (Cambridge University Press, 1985). However, there are reasons to argue that what Mises and Hayek said were actually two different things.
First, as Salerno pointed out in his postscript of Mises’s paper:
Mises thus assumes in all his writings on the subject that the planners have full knowledge of consumer valuations of final goods as well as of the various means available for producing these goods under known technological conditions. For example, Mises (p. 21) writes, "The administration may know exactly what goods are most urgently needed. … It may also be able to calculate the value of any means of production by calculating the consequence of its withdrawal in relation to the satisfaction of needs."Salerno, Joseph T., "Postscript: Why a Socialist Economy is 'Impossible'”, in Mises, Ludwig von, Economic Calculation in the Socialist Commonwealth. (Auburn, Alabama: Ludwig von Mises Institute, [1990] 2012), p. 59.
Clearly, in the Misesian paradigm, knowledge was already assumed to be perfectly possessed. Yet, “despite this knowledge, the socialist administrators would be unable to arrive at a useful social appraisement of the means of production in cardinal terms.”Ibid. Furthermore, the calculation problem is based on purely theoretical grounds, but the knowledge problem is simply a practical problem for the operation of a socialist economy. Hence, “economic theory per se can say nothing conclusive about the viability of central planning, and the choice between capitalism and socialism must be purely political.”Klein, Peter G., The Capitalist and the Entrepreneur: Essays on Organizations and Markets (Mises Institute, 2010), p. 9.
Second, even when the central planner is assumed to possess perfect knowledge about all market participants, it merely means that the planner has qualitative knowledge about the market. On the other hand, economic calculation requires the qualitative information to be transmitted quantitatively, thus making the calculation possible.Salerno, Joseph T., "Postscript: Why a Socialist Economy is 'Impossible'", pp. 57-61. Besides, David Gordon has also pointed out that “just as Mises showed, by his regression theorem, that money can only arise on the market out of a non-monetary goods under barter, so money on the market is needed to transform ordinally ranked subjective values into money prices which are indispensable for imputations of productivity and for economic calculation by entrepreneurs.”Murray, Rothbard N., Economic Controversies (Auburn, Alabama: Mises Institute, 2011), p. 190.
Finally, as Salerno emphasized, so as to come up with a possible calculation, economic agents need not only present knowledge, or past price, but also future prices, which every market participant needs to appraise because he does not know it directly at the present.Salerno, Joseph T., "Postscript: Why a Socialist Economy is 'Impossible'”, pp. 57-61. Still, we can assume that, in a magical way, the central planner somehow obtains not only present knowledge, but also future knowledge, such that they have the ability to foresee exactly what is going to happen in the future. Yet, even given such an assumption, economic calculation is still not possible, not only due to the lack of the price system, but also because the appraisement is always imaginative, existing in the mind of individuals. Salerno’s analysis further emphasized the insight of Mises that appraisement is the factor drawing the distinction between the central planner and the entrepreneur in the market.
The notion of division of knowledge is, undoubtedly, an important contribution of Hayek to the fields of social sciences and thus needed to be recognized. However, putting knowledge on the center of his economic analysis seems to be misleading.
One of the most common fallacies of the new populists is to say that their model is the “Nordic” one and that those countries are successful examples of how “socialism works”. When I mentioned it to the Finnish Finance Minister Petteri Orpo at a recent ECR dinner, he could not believe it.
Expropriations, massive tax increases, appropriation of savings and subordinating the growth model to political control is what populists defend. The same as Venezuela, which all of them praised — from Bernie Sanders to Owen Jones or Corbyn and Chomsky — until it collapsed. Then they moved on to the fallacy of “the Nordic model”.
Do you know what interventionists forget about the Nordic nations?
They are leaders in the economic freedom index (Heritage) and ease of doing business according to the World Bank.
[RELATED: "These US States Have Higher Incomes than Nearly Every European Country" by Ryan McMaken]
Private property is guaranteed by law and citizens’ savings are fully private and free of government control. All Nordic countries have been lowering the tax wedge and — until the recent US tax cuts — had lower corporate tax rates than the US.
The state does not dictate or impose schooling and healthcare (most have co-payment schemes). It simply administers and promotes choice between private and state-run services.
They are leaders in private banking, which finances the vast majority of economic activity (80%).
They are leaders in attracting capital, guaranteeing legal security and private investment.
Nordic countries are also leaders in the privatization of inefficient state-owned entities and applying world-class private company corporate governance and defending shareholder interests in semi-state owned companies (Statoil, etc).
[RELATED: "Turning Their Backs on Sweden's Welfare State" by Per Bylund]
The public sector does not dictate the growth pattern or the way in which the economy should be run, it is generated from the private sector, which finances more than 60% of research and development, and government applies private-sector best practices of efficiency and transparency in the management of public services. In addition, public officials do not have a life-long position. The opposite of the political control these populists defend.
Nordic countries have carried out successful privatizations of state sectors, from telecommunications to electricity generation and distribution. Even the postal service and some forests were privatized.
They have a labor market that is among the most flexible in the world.
In these countries, private education is encouraged through school vouchers, not forced state-run schools.
There is also the fact that it is virtually impossible to copy in the US a model used in countries with fewer inhabitants than New York, but the most important difference is that choice, freedom and private initiative are the cornerstone of Nordic nations, pillars of a society that none of the populists want to implement.
No, socialism is not the model of the Nordic countries. And the interventionists that use these countries as their “model” have a completely different system in mind. State control.
I recommend you read Scandinavian Unexceptionalism by Nima Sanandaji or “The Secret of their Success” in The Economist.
The success of the Nordic countries has been to take pro-market measures, privatize inefficient sectors and guarantee private property, wealth creation as well as legal and investment security.
The Nordic countries know that there is no welfare state without a thriving private sector, economic freedom, and private investment and that the public sector is there to facilitate, not absorb the country’s economic activity. They know that there are no tax revenues without a flourishing private sector. And they know, because they made the mistake in the past, that multiplying state intervention only leads to failure. That’s why they rejected socialism.
There is nothing Socialist about the Nordic Nations. Being leaders in Economic Freedom, free enterprise, defense of private property, leaders in private banking and entrepreneurship promotion is the opposite of socialism. Interventionists willingly want us to confuse a welfare system in a capitalist society with socialism.
Socialism is the political and economic theory which defends that the means of production, distribution, and financing should be owned or controlled by the state. Nordic countries are NOT socialist. They are capitalist societies with a welfare state, like most capitalist nations have, by the way. The US as well. And they are the first ones that understood what we all know: socialism never works.
Originally published at dlacalle.com
Socialism and capitalism offer radically different solutions to the problem posed by scarcity: everybody can’t have everything they want when they want it, so how can we effectively decide who will own and control the resources we have? The chosen solution has profound implications. It can mean the difference between prosperity and impoverishment, voluntary exchange and political coercion, even totalitarianism and liberty.
The capitalist system solves the problem of scarcity by recognizing the right of private property. The first one to use a good is its owner. Others can acquire it only through trade and voluntary contracts. But until the owner of the property decides to make a contract to trade his property, he can do whatever he wants with it, so long as he does not interfere with or physically damage the property owned by others.
The socialist system attempts to solve the problem of ownership in a completely different way. Just as in capitalism, people can own consumer products. But in socialism, property which serves as the means of production are collectively owned. No person can own the machines and other resources which go into producing consumption goods. Mankind, so to speak, owns them. If people use the means of production, they can do so only as caretakers for the entire community.
Economic law guarantees that harmful economic and sociological effects will always follow the socialization of the means of production. The socialist experiment will always end in failure.
First, socialism results in less investment, less saving, and lower standards of living. When socialism is initially imposed, property must be redistributed. The means of production are taken away from current users and producers and given to the community of caretakers. Even though the owners and users of the means of production acquired them through mutual consent from previous users, they are transferred to people who, at best, become users and producers of things they didn’t own previously.
Under this system, previous owners are penalized in favor of new owners. The non-users, non-producers, and non-contractors of the means of production are favored by being promoted to the rank of caretaker over property which they had not previously used, produced, or contracted to use. Thus the income for the non-user, non-producer, and non-contractor rises. It is the same for the non-saver who benefits at the expense of the saver from whom the saved property is confiscated.
Clearly, then, if socialism favors the non-user, non-producer, non-contractor, and non-saver, it raises the costs that have to be born by users, producers, contractors, and savers. It is easy to see why there will be fewer people in these latter roles. There will be less original appropriation of natural resources, less production of new factors of production, and less contracting. There will be less preparation for the future because everyone’s investment outlets dry up. There will be less saving and more consuming, less work and more leisure.
This adds up to fewer consumption goods being available for exchange, which reduces everyone’s standard of living. If people are willing to take the risk, they will have to go underground to compensate for these losses.
Second, socialism results in inefficiencies, shortages, and prodigious waste. This is the insight of Ludwig von Mises who discovered that rational economic calculation is impossible under socialism. He showed that capital goods under socialism are at best used in the production of second-rate needs, and at worst, in production that satisfies no needs whatsoever.
Mises’s insight is simple but extremely important: because the means of production under socialism cannot be sold, there are no market prices for them. The socialist caretaker cannot establish the monetary costs involved in using the resources or in making changes in the length of production processes. Nor can he compare these costs with the monetary income from sales. He is not allowed to take offers from others who want to use his means of production, so he cannot know what his foregone opportunities are. Without knowing foregone opportunities, he cannot know his costs. He cannot even know if the way he produces is efficient or inefficient, desired or undesired, rational or irrational. He cannot know whether he is satisfying less or more urgent needs of consumers.
In capitalism, money prices and free markets provide this information to the producer. But in socialism, there are no prices for capital goods and no opportunities for exchange. The caretaker is left in the dark. And because he can’t know the status of his current production strategy, he can’t know how to improve it. The less producers are able to calculate and engage in improvement, the more likely wastes and shortages become. In an economy where the consumer market for his products is very large, the producer’s dilemma is even worse. It hardly needs to be pointed out: when there is no rational economic calculation, society will sink into progressively worsening impoverishment.
Third, socialism results in over-utilization of the factors of production until they fall into disrepair and become vandalized. A private owner in capitalism has the right to sell his factor of production at any time and keep the revenues derived from the sale. So it is to his advantage to avoid lowering its capital value. Because he owns it, his objective is to maximize the value of the factor responsible for producing the goods and services he sells.
The status of the socialist caretaker is entirely different. He cannot sell his factor of production, so he has little or no incentive to insure that it retains its value. His incentive will instead be to increase the output of his factor of production without regard to its dwindling value. There is also the chance that if the caretaker perceives opportunities of employing the means of production for private purposes—like making goods for the black market—he will be encouraged to increase the output at the expense of capital values. No matter which way you look at it, under socialism without private ownership and free markets, producers will be inclined to consume capital values by over-using them. Capital consumption leads to impoverishment.
Fourth, socialism leads to a reduction in the quality of goods and services available for the consumer. Under capitalism, an individual businessman can maintain and expand his firm only if he recovers his costs of production. And since the demand for the firm’s products depends on consumer evaluations of price and quality (price being one criterion of quality), product quality must be a constant concern of producers. This is only possible with private ownership and market exchange.
Things are entirely different under socialism. Not only are the means of production collectively owned, but so too is the income derived from the sale of the output. This is another way of saying that the producer’s income has little or no connection with consumer evaluation of the producer’s work. This fact, of course, is known by every producer.
The producer has no reason to make a special effort to improve the quality of his product. He will instead devote relatively less time and effort to producing what consumers want and spend more time doing what he wants. Socialism is a system that incites the producer to be lazy.
Fifth, socialism leads to the politicization of society. Hardly anything can be worse for the production of wealth. Socialism, at least its Marxist version, says its goal is complete equality. The Marxists observe that once you allow private property in the means of production, you allow differences. If I own resource A, then you do not own it and our relationship toward resource A becomes different and unequal. By abolishing private property in the means of production with one stroke, say the Marxists, everyone becomes co-owner of everything. This reflects everyone’s equal standing as a human being.
The reality is much different. Declaring everyone a co-owner of everything only nominally solves differences in ownership. It does not solve the real underlying problem: there remain differences in the power to control what is done with resources.
In capitalism, the person who owns a resource can also control what is done with it. In a socialized economy, this isn’t true because there is no longer any owner. Nonetheless the problem of control remains. Who is going to decide what is to be done with what? Under socialism, there is only one way: people settle their disagreements over the control of property by superimposing one will upon another. As long as there are differences, people will settle them through political means.
If people want to improve their income under socialism they have to move toward a more highly valued position in the hierarchy of caretakers. That takes political talent. Under such a system, people will have to spend less time and effort developing their productive skills and more time and effort improving their political talents.
As people shift out of their roles as producers and users of resources, we find that their personalities change. They no longer cultivate the ability to anticipate situations of scarcity, to take up productive opportunities, to be aware of technological possibilities, to anticipate changes in consumer demand, and to develop strategies of marketing. They no longer have to be able to initiate, to work, and to respond to the needs of others.
Instead, people develop the ability to assemble public support for their own position and opinion through means of persuasion, demagoguery, and intrigue, through promises, bribes, and threats. Different people rise to the top under socialism than under capitalism. The higher on the socialist hierarchy you look, the more you will find people who are too incompetent to do the job they are supposed to do. It is no hindrance in a caretaker-politician’s career to be dumb, indolent, inefficient, and uncaring. He only needs superior political skills. This too contributes to the impoverishment of society.
The United States is not fully socialized, but already we see the disastrous effects of a politicized society as our own politicians continue to encroach on the rights of private property owners. All the impoverishing effects of socialism are with us in the U.S.: reduced levels of investment and saving, the misallocation of resources, the overutilization and vandalization of factors of production, and the inferior quality of products and services. And these are only tastes of life under total socialism.
Excerpted from The Free Market Reader
The new “democratic socialists” want to make their followers believe that one could redistribute wealth and income and socialize a large part of the economy without harming production and productivity. They claim that a comprehensive control of the economy by the government would bring more justice and more prosperity. The democratic socialists want more planning and less market. Yet this postulate ignores that socialism does not fail by accident or circumstance. Socialism fails because it suffers from four fundamental design defects.
First, socialism eradicates private property and markets and thus eliminates rational calculation.Second, socialism allows soft budgets, so there is no mechanism in place to discard inefficient production methods.Third, abolishing private property and replacing it by the state distorts the incentives.Four, the socialist system with its absence of private property and of free markets inhibits the economic coordination of the system of division of labor and capital. The Importance of Market Prices Socialism cannot bring prosperity because it destroys the market functions of private property. Under socialism, private ownership of the means of production no longer exists, and thus there are no market prices for capital goods available. Institutionally, socialism consists in abolishing the market economy and replacing it with a planned economy. By doing away with private property of the means of production, one wipes-out market information and valuation. Even if the socialist administration puts price tags on the consumer goods, and the people may own consumer goods, there is no economic orientation about the relative scarcity of capital goods.
Many supporters of socialism suppose that business management is nothing more than a kind of registration or simple bookkeeping. Vladimir Lenin believed that the knowledge of reading and writing, and some expertise in the use of the basic arithmetic operations and some training in accounting, would be enough for the conduct of business operations. The socialists promote engineering and science, but they believe that there is no need for the entrepreneur. The regime may spend heavily on education but when there is no entrepreneurial economy, the people will stay poor, nevertheless.
The Role of Scarcity The socialists ignore scarcity. They assume that a plan could stipulate the allocation of goods and services according to needs and wants. Yet the planners must answer how such a plan should find its standards of valuation. Without prices and markets, there is no orientation about which factors of production are more and which are less valuable. The socialist planners have no knowledge of the costs of the production process. Without markets, the prevailing value structure remains unknown.
Supply in relation to want makes goods valuable. In a market economy, the relative prices show the degrees of scarcity. By observing the prices, the market participants receive the information that guides them to align their economic decisions to the market signals. The price system informs about relative scarcities. There is no need for a comprehensive system of detailed information about the origin and nature of the scarcity beyond the prices to make a rational decision. The price system reduces complexity for the individual decision maker to the single number of the price. In a market economy, the economic participants need only partial knowledge to act rationally. In capitalism, the motivation to gain profits and to avoid costs work as an incentive to behave rationally. In a market economy, the prices provide information and incentives simultaneously for the seller and the buyer.
All production faces the problem of an almost unlimited number of ways how to produce a good. One can manufacture a commodity with very different raw materials, technologies, and combinations of the production factors and in an endless variety of designs.
Setting Priorities Along with the technological feasibility of a project, one must calculate its profitability. Without costs in relation to sales, a technical evaluation makes no sense. That a project is technically viable does not mean that its realization is also worthwhile. What appears efficient from a technical point of view need not be so in terms of economic expediency. With costs left out of the consideration, socialist production is blind to the risk of producing goods that cost more than they are worth. In a socialist economy, even a benevolent dictator could not provide the right mix of goods in terms of price and quality
Socialists suppose that to implant their rule on the economy all that is necessary is to socialize the private companies, replace the management, and install worker councils, and the new economic order would flourish. The early socialists expected that abundance would follow not least because now the workers would get what before went into the hands of the capitalists as profits. Yet the socialists ignored that the socialization of the means of production was just the beginning. They failed miserably in running the economy.
The error of socialist economic planning is to assume that business management could also continue as before after socialist operators take over the capitalist management. While the socialist regime can train administrators and engineers and put the party members in the position of directors, these new leaders cannot decide according to relative scarcities because there is no longer a private property-based entrepreneurial price system available.
The reality of socialism is the command and obedience. Without orientation from markets and prices, brute force rules the allocation of the goods. The claim to combine socialism and democracy is as much a fraud as the assertion that socialism would bring prosperity. Socialism’s true face is totalitarian despotism .
It is no wonder that even a degenerate capitalism produces more prosperity than the best socialism. Therefore, the task ahead cannot be to remove capitalism in favor of socialism but to make capitalism better. In other words: make it more capitalist.
Back at the end of May, New York Post opinion editor Sohrab Ahmari wrote the essay that launched a thousand debates when the religious journal First Things published his anti-liberal polemic entitled “Against David French-ism”. While David French is certainly no libertarian, Ahmari identified him as the poster-boy for the classical liberal ideas that he believes have led to America’s spiritual collapse and are on the verge of bringing about a wave of Christian persecution. Ahmari recently went so far as to say that Bernie Sanders, if elected president, would bring a return of “the colosseum,” a reference to the state persecution of early Christians by being fed to lions in gladiatorial games. The answer, according to Ahmari, is that Christians should work to seize the reins of state power, eliminate tolerance under the law, and then use the state to crush Christianity’s secular enemies. All of this in the name of establishing a common good that will supposedly allow for the flourishing of all.
However, there are many reasons to argue that Christian statism is not within the tradition of orthodox Christianity.
I brought Ahmari’s illiberal conservative vision to the attention of Mises readers earlier this year, and warned that attempts for Christians to seize state power would lead to disaster for themselves and everyone else due to the corrupting nature of power. However, Ahmari and his allies have only grown more agitated and vocal. Ahmari and French recently met in person for a debate to hash out their differences. As was to be expected, given the personal nature of Ahmari’s attack on French, the debate became deeply personal. Aside from the fire and fury, Ahmari once again openly demonstrated his illiberalism, with a shocking call for Christians to seize state power and abolish the legal doctrine of viewpoint neutrality when it comes to the use of public spaces. Ahmari also made known that “I am willing to ban things. Let me put it that way.”
As was inevitable, this latest exchange prompted a wave of essays and editorials for and against one side or the other. In particular, two essays at the American Conservative provides some important context that libertarians should be aware of as this deeply illiberal strain of conservatism continues to garner attention.
Responding to Ahmari, my friend Emma Ayers, the managing editor of Young Voices (a media shop I frequently write with), argued that the root of the divide between French and Ahmari is theological, rather than political in nature. French is an evangelical Protestant while Ahmari is a recent convert to a rather traditionalist form of Catholicism. Ayers pointed out that Ahmari’s vision of the role of religion in government is highly colored by his Catholic beliefs, and that such a vision for society clashes with many of the beliefs of Protestants, especially those from the Appalachian region of the south where she grew up. Inevitably then, an attempt to impose a Christian conception of the common good would be difficult since Christians themselves disagree about what exactly that would look like.
Not to worry, though, taking to Twitter, Ahmari responded to Ayers’ claims with scorn and derision, mocking Ayers and the types of Protestants she talks about as being ignorant hicks who clearly don’t know what is good for them. Such a response to criticism is emblematic of the libido dominandi or lust for power that inevitably tends to corrupt even the best intentions when it comes to using state power. Ahmari clearly believes he knows what is best, and everyone, including fellow Christians who disagree, better get in line or prepare to face the consequences once he and his ilk have (somehow) managed to take power.
In response to Ayers, Emile Doak, a development associate at the American Conservative argued that Ayers is incorrect in trying to separate theology from politics, a claim that was also raised by many of Ahmari’s Twitter compatriots. Doak argues that all politics is inherently theological in nature and that, in effect, the secular left is merely following a different liturgy and attempting to impose their own religious views upon everyone else and that they are able to do so because of the vile “individualism” that has apparently “polluted” our society. Thus, he calls for conservatives to establish a state-managed industrial policy, tariffs to protect American workers, and bans on pornography and other things that Christians disapprove of. Doak concludes that “conservatives need a better answer than proceduralism and individual autonomy—and that starts by recognizing that politics and theology are unavoidably connected.”
There can be no doubt that Christianity has historically be involved in politics, as the hundreds of years of political power and influence held by the Catholic Church demonstrates, not to mention the role that mainline Protestant denominations historically had in American politics (which ironically was used to oppress Catholics). However, this historical precedent does not necessarily translate into Christian statism being accepted as orthodox Christianity.
Indeed, Jesus Christ, the founder of Christianity seems like the last person one would look to when it comes to attempts to justify establishing a Christian state on earth. For one thing, Jesus explicitly said that his “kingdom is not of this world” and that if it was his followers would have taken up arms and rebelled in order to prevent his arrest at the hands of state authorities. Jesus instructs Christians that this unearthly kingdom is supposed to be their first priority, and that as citizens of this kingdom the world will reject them and hate them as the world rejected and hated him.
Completely rejecting the forceful and implicitly-violence filled rhetoric of people like Ahmari, Jesus goes so far as to instruct his followers to “love your enemies and pray for those who persecute you.” This does not sound like the basis on which to justify seizing state power and using state violence to force people to behave and act as you think they should.
Ahmari and other illiberal Christians argue that a theocratic state is necessary for Christians to defend themselves from persecution. Yet, as mentioned above, Jesus made clear that Christians should expect to be persecuted. The apostle Peter, believed by Catholics to be the first Bishop of Rome and therefore the first Pope, even instructed Christians to be thankful that they get to suffer as Christ suffered.
In calling for his followers to be separate from this world, Jesus certainly was not calling them to engage in societal revolution to impose a common good based on the moral order. Ahmari complains a great deal about contemporary immorality, bemoaning things such as “drag-queen story hour” at libraries, abortion, and pornography. No doubt many Christians are concerned about such things. Yet, during the time period of early Christianity, the Roman Empire was filled with numerous practices that would be considered to be immoral, ranging from pederasty and slavery to brutal and cruel gladiatorial games. Yet, we do not see the early Christians launching attempts at society-wide revolution to take control of the empire and purge all immorality from public life. And in later centuries when Christians did come to hold positions of political power we see that such power tended to lead Christians astray, rather than the other way around, as the numerous scandalous Popes and various inter-Christian religious wars have amply demonstrated.
Later thinkers also rejected the idea that Christians are required to take over and enforce morality. As has been noted by Ryan McMaken, St. Augustine and St. Aquinas both rejected arguments that it was the role of the civil government to regulate private morality, with both notably rejecting the state prohibition of fornication and prostitution.
More recently, Christian humanist thinker and author C.S. Lewis summed up the issue quite succinctly when he argued that “the practical problem of Christian politics is not that of drawing up schemes for a Christian society, but that of living as innocently as we can with unbelieving fellow-subjects under unbelieving rulers who will never be perfectly wise and good and who will sometimes be very wicked and very foolish.”
Libertarian Christians should be aware that they are not compromising their beliefs or somehow acting in a way divorced from Christian history and orthodoxy when they do not join Ahmari and other illiberal Christians in their quest for power and control over non-believers. Ahmari’s clear disdain for even his fellow Christians who disagree with him should be a clear warning of the danger his Christian statism poses to not only society at large, but even other Christians.
Nicolás Maduro’s recent visit to China has been highly criticized because it was done in the worst of the Venezuela’s crisis. Almost 4 million people have left this country in recent years — a country that is ranked on the 2018 Misery Index as the most miserable country of the world. Hyperinflation is destroying the hope of millions of Venezuelans that for many reasons continue living there and suffering the misery that socialism has achieved.
Maduro's visit to China is understandable. China has given Venezuela around 65 billion dollars in loans, cash, and investments. Venezuela still owes more than 20 billion dollars, and as Russ Dallen said, the Chinese want to get paid back and the only way is with Venezuela’s oil production back up and running. This means that the Asian country is practically the owner of Venezuela’s oil. The regime has mortgaged the country's wealth, and future generations will suffer the consequences. With an oil production perpetually hampered by the regime's policies, decaying technology, and the rampant corruption linked with the drug-trafficking and terrorist activities of the main heads of the regime, the 5 billion dollars obtained during Maduro's current visit will only worsen the sad situation that Venezuelans are suffering.
At the end of July 2018, the National Assembly estimated that each week six Venezuelan children die of starvation. Some of the most important universities in Venezuela made a survey in 2017 (ENCOVI2017) and in that time 87% of Venezuelan households were poor; 9 of 10 Venezuelans could not pay for food; 8.2 million Venezuelans could barely afford 2 or less meals each day — meals with low nutrition and little protein; 6 out of 10 Venezuelans have lost at least 11Kg (24 pounds) of their body weight because of the lack of food. This is set to worsen as the crisis continues.
Recently, Maduro has incrementally raised the minimum wage 3,000%, removed 5 zeros from the currency value, and eliminated some exchange control rules. Nevertheless those policies are ineffective because these measures do nothing about the root causes of the nation's misery. The real causes, of course, the socialism and a narco-terrorist regime. The effects of the regime's out-of-control spending is easy enough to see. Professor Steve Hanke from Johns Hopkins University measures daily the annual inflation of Venezuela. To my knowledge, his measure is the most accurate measure — and the nearest to the real situation of Venezuela. As of the time of this writing, the annual inflation reported by Hanke is 45,236%. Needless to say, people are getting poorer — and poorer at a rapidly increasing rate.
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With this hellish scenario some pictures and videos of the dictator Maduro were posted in social media. He can be seen enjoying the culinary arts of chef Salt-Bae in one of his high class chain restaurants Nusr-Et in Turkey. Maduro and his wife Cilia smile with satisfaction as they eat a piece of meat that would cost more than a whole year's salary for many Venezuelans. The resulting anger and indignation of people in Venezuela was immediate. The critics were focused on this miserable and selfish act: while Venezuelans are starving, have no access to medicines, and whose only hope is to flee a country devastated by socialism, their "rulers" enjoy the luxuries of capitalism in a far-off land.
Despite significant economic progress since ancient times, most people in agrarian societies continued to live at the subsistence minimum until modern times. By the nineteenth century, it was said that these societies fell into a "Malthusian trap." The Malthusian trap describes a situation that keeps population growth in line with available resources. The increase in income per person was not sustainable in the long run, as economic growth was inevitably consumed by population increases.
Western European countries, however, managed to escape the Malthusian trap through the Industrial Revolution which accelerated in the nineteenth century. Escaping the Malthusian trap meant an increase in both population growth and economic prosperity for the vast majority of people. For example, Europe’s population more than doubled between 1800 and 1900, but the decline of living standards no longer accompanied this growth as it had in pre-industrial societies. Economic historians explained that the phenomenon resulted from technological advances, demographic shifts due to European marriage patterns (marrying in later years, establishing a separate household, having fewer children), and increased human intelligence. All of the above are supposed to secure the systematic excess of output growth rates over the overpopulation growth rate. It seems that one crucial factor needs to be added to the list: capitalism itself, where economic laws are fully unfolded and have maximum manifestation and impact on society. Humanity entered a capitalist mode of production, which became possible by limiting absolutism and intrusion into the economy, creating democratic institutions, and improving human rights, law supremacy, and its uniform application.
The ideal market economy emerges in the society that is described as a collection of numerous self-governing producers that meet multiple independent consumers and freely exchange commodities and services according to the rates established on the market by the equilibrium between supply and demand. People behave according to the rules and freely exercise their right to enter a business transaction or refuse to participate. Such a society is characterized by the primacy of private property, an extensive division of labor and cooperation, and rich assortments of commodities and services. Economic freedom was accompanied by a high degree of personal freedom. The closest social formation of this ideal happened to be capitalism at the times of classical liberals in the course of the beginning stages of the Industrial Revolution.
Thus, we already see the following pattern: In the societies of hunter-gatherers, economic laws had minimal manifestation but the most prolonged influence (more than 150,000 years). The agricultural revolution created more stable and secure communities, but they were characterized by a lack of capital the lead to low use of more productive factors of production. Low levels of personal economic freedom also inhibited growth and productivity. Industrialization, on the other hand, offered an escape.
But the escap is not always permanent. Socialist governments often act to undo the benefits of insutrialization and capitalism. Historically, socialist regimes have tried to suppress or override the natural operation of personal choice and capital accumulation in economiees. Socialism, in general, encroaches on private property rights, controls the economy, and subordinates individual decision-making to the collective. In this regard, it is appropriate to assume that socialism would push society back toward the Malthusian trap.
Let us examine this hypothesis in light of the case of Venezuela. Venezuela escaped the Malthusian trap only in the thirties of the last century, judging by the GDP output per capita (Figure 1). According to scholars, in the period from the 1920s to the 1940s, the average annual growth rate was more than 10 percent. Indeed, in order to escape the gravity of the trap, an economy needs a high magnitude of acceleration. Now it is hard to believe, but in 1950 , the country ranked fourth in the world in terms of GDP per capita. Unfortunately, as soon as Venezuela established itself as a powerhouse of South America, the government started to implement economic policies from the cookbooks of socialism. Undoubtedly, the country fell prey to the Soviet Union’s influences on Latin America during the Cold War. The main assault was directed on private property rights in the industry and in agriculture. In the late 1950s, the government nationalized the telephone company and founded state-owned metallurgical plants and petrochemical and oil corporations. The authority initiated the agrarian reform whereby the state practically expropriated lands from large landowners and redistributed it among new farmers. Despite the continuing economic growth, the Venezuelan economy was poisoned by the venom of socialism. By the 1970s, Venezuela was a mixed economy with a significant share of state-owned enterprises in the most valuable sectors, which were controlled by a central planning agency. Every new government doubled down on implementing socialist measures as a way to solve the socio-economic issues facing society. It was a continuous trend of nationalization of industries, control of prices and minimum wage, unionization, the imposition of new taxes, and administration of exchange and interest rates.
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The high revenue from the oil boom fueled the economy; however, the government went on an enormous spending spree. People and the remaining business became live out of the state generosity rather than creating wealth themselves. By 1980, the economic growth stalled, and in the next decade, Venezuela’s economy experienced stagnation. Partial liberal reforms undertaken by the government in conjunction with IMF could not divert an unfavorable trend. Several fruitful years in the mid-2000s, due to a super profit from unprecedented prices for petroleum products, was the last breath before the economy went for a nosedive after the market correction. The economy was exhibiting negative growth, hyperinflation, extreme impoverishment of the population, the deficit of basic food and consumer products. How can one explain such unfortunate events? Socialism adversely affects personal and economic freedoms—the essential components of socio-economic systems that are subject to universal and natural economic laws. The implementation of socialistic measures inhibited the natural flow of market forces in the official economic sphere and funneled them to the shadow .
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Venezuela has fallen into the man-made socialist Malthusian trap. The socialist Malthusian trap is a condition of politico-economic zugzwang when every consecutive move leads to an even worse situation. Whatever the government does in the framework of the socialist way of thinking will have an accumulating negative effect on people’s wellbeing. Venezuela entered the territory of a humanitarian crisis, which manifested itself in widespread hunger and weakened health care. Gregory Clark’s “A Farewell to Alms: A Brief Economic History of the World” determined the average daily energy intake from food per capita of about 2,300 or less, as is typical for those social systems that did not escape the Malthusian trap. At the same time, WHO established 2,100 kcal/capita/day as a minimum daily norm. Figure 2 shows that even during the years of stable GDP growth in 1960–1970, Venezuelans experienced food supply problems. This may be evidence of a socialist agricultural reform in the late 50s. Also, the inability to feed their people is a common feature of all socialist regimes. The country was counting on food imports, and when the price of oil was high, food consumption increased. In the socialistic Malthusian trap, people faced acute hunger. The recent study revealed that Venezuelans lost an average of 24 lbs in body weight in 2017. Therefore, both indexes show that socialism drove the country into the Malthusian trap. In contrast to the original trap that all societies used to experience in their history, the socialistic Malthusian trap is human-made. The economic misery was not caused by full-scale warfare or a natural disaster of biblical proportions. Instead, Venezuela had all the ingredients for success, which pre-industrial society was lacking, but stepped into the uncharted territory of socialism and lost the bet.
Socialism, as a regime of willful ignorance of fundamental economic laws and economic illiteracy, drives society back into the Malthusian trap. Venezuela is a vivid and unfortunate example of the implementing of the socialist idea in modern times. The way out of the trap is a full restoration of economic and individual freedoms that guarantee fundamental laws of the economy to unfold freely to people’s advantage.
In April 2019, the Center for Economic and Policy Research (CEPR) published a report called Economic Sanctions as Collective Punishment (Weisbrot and Sachs 2019). The report tries to evaluate the consequences of the economic sanctions the United States imposed on Venezuela in August 2017. In it, the authors conclude that said sanctions decreased the population’s daily calorie intake, increased the mortality rate, and displaced millions of Venezuelans as a consequence of the worsening economic depression and hyperinflation.
However, in May 2019, a report was published by Brookings that refutes these claims. This new report, Impact of the 2017 Sanctions on Venezuela: Revisiting the Evidence (Bahar, Bustos, Morales, and Santos 2019), finds that the methodology Weisbrot and Sachs utilized did not allow them to estimate the causal effect of the sanctions and that accordingly their conclusions are incorrect for two reasons. First, in the absence of an adequate counterfactual, the effects of the sanctions cannot be separated from the negative economic trends in Venezuela that preceded them. Second, the deterioration observed by Weisbrot and Sachs could also be explained by other, more important factors beyond the 2017 sanctions that have not been taken into account.
If we stick to the data, regardless of which socioeconomic indicator we choose, it seems clear that the sharp economic downturn began long before 2017.
Access to International Financial Markets Prior to August 2017, international markets had already stopped the flow of credit to Venezuela. The spread of Venezuela’s sovereign debt — the premium that holders of sovereign bonds demand that the country pay above the “risk-free” rate — was on average 2,884 basis points in the 30 days before the sanctions were announced. This is 7.8 times more than the margin paid by the rest of Latin America and 9.5 times more than what was paid by emerging markets during the same period. As can be observed in the following graph, the imposition of sanctions did not have an impact on the Venezuelan spread.
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On the contrary, the spread only increased — by 1,013 basis points — when Nicolás Maduro announced the creation of a commission for refinancing and restructuring Venezuela’s foreign debt. The data indicate that by August 25, 2017, the Venezuelan government’s capacity to issue debt was either severely limited or nonexistent and investors had already discounted possible sanctions and their potential impact.
Oil Production Weisbrot and Sachs argue in their report that Venezuela’s problems worsened as a consequence of the sanctions. They use Colombian oil production as the counterfactual to determine the sanctions’ impact on Venezuela. For Colombia’s oil production to be considered a suitable comparison, both trends should be similar prior to the sanctions imposed on Venezuela.
However, although the trends seem similar for the period selected by Weisbrot and Sasch, they differ significantly if we go back further back in time.
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Therefore, it would not be reasonable to expect parallel trends after the sanctions. In fact, the evolution of Colombia’s oil production is due to very different underlying factors, which would explain the different trends. Some analysts agree that the fall in Venezuela’s oil production is nothing more than a continuation of a decline that began with the dismissal of more than eighteen thousand workers from PDVSA (the state-owned oil and natural gas company) after the national strike during Hugo Chávez’s presidency. This dismissal resulted in an important loss in administrative and technical capacity (Forero 2003). Even during the golden age of oil, 2004–14, Venezuela’s oil production fell by 24 percent between 2005 and 2016.
Another comparison can be made with oil production in countries that belong to OPEC (excluding Venezuela). As the following graph shows, the trends in oil production were similar before the fall in oil prices (even since 2013). However, oil production in OPEC countries did not decrease after the fall in crude oil prices at the beginning of 2016. In Venezuela, on the other hand, oil production began to collapse.
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Can we conclude that the difference in oil production between OPEC countries and Venezuela is a result of the sanctions? Based on the data, the answer is no. In fact, there is no counterfactual that is appropriate for analyzing Venezuela’s oil-production trends.
Socioeconomic Consequences Weisbrot and Sachs’s work attributes the negative performance of Venezuela’s socioeconomic indicators entirely to the August 2017 sanctions. They argue that Venezuela lacks enough foreign currency to import food and medicines to satisfy the population’s basic needs because of the fall in oil production and the consequent decrease in revenue. In contrast, Brookings’s new report concludes that it is impossible to measure the effect of the observed decrease in production before the sanctions. Furthermore, the significant deterioration in Venezuela’s socioeconomic conditions began in 2013 and cannot be observed in any other part of the region.
The following image shows the value of food imports from Latin America over time. In 2016, the year before the sanctions were imposed, Venezuela was already importing 71 percent less than its maximum in 2013.
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Something similar occurred with imports of medicine and medical equipment. Venezuelan imports fell by 68 percent between 2013 and 2016, whereas they stayed constant in the rest of the region. In other words, most of the fall happened before the sanctions in August 2017. By the end of 2017, Venezuelan imports of these basic sanitary products constituted only 8 percent of the amount observed in 2013.
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Next, the daily measure of the purchasing power of the Venezuelan minimum wage is analyzed in terms of the cheapest calories available, calculated by Douglas Barrios of the Center for International Development at Harvard University (CENDAS, for its acronym in Spanish). Using the prices reported by CENDAS for fifty-eight products at more than fifty points of sale in the metropolitan area of Caracas, they obtained the maximum quantity of daily calories that can be purchased with a minimum wage, on average, for every month between 2010 and 2018. As can be seen in the following graph, there has been a sharp reduction in Venezuelans’ calorie intake, but this decrease began long before the sanctions of 2017.
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The data show that at the moment when the sanctions were imposed, an entire minimum wage could only buy 6,132 of the cheapest calories available per day, 92 percent less than in January 2010. This represents only 56 percent of the minimum dietary needs of a family of five people, which is estimated to be 10,800 daily calories. While the purchasing power of the minimum wage continued to decrease after August 2017 (at levels that only enable the purchase of hundreds of calories), it is impossible to determine how much of this decrease was simply a continuation of the strong trend observed before the sanctions were imposed.
Weisbrot and Sachs also associate a 31 percent increase in the overall mortality rate recorded in Venezuela between 2017 and 2018 (according to their own sources) with the sanctions, concluding that they have been directly responsible for forty thousand deaths. These data have supposedly been extracted from an internal report by the United Nations about Venezuela, Overview of Priority Human Needs (March 2019), which, it seems, is not publicly available. Therefore, to make a comparison that is objective and publicly available, we use data on infant mortality are used because it is often recognized as a good indirect measure of the overall quality of public health services.
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The graph shows infant mortality rates in the first year of life expressed per thousand live births in Latin America over time. In line with the previous findings, the decline in infant mortality (and the correlated increase in overall mortality rates) preceded the imposition of sanctions in August 2017.
Conclusion Although it is probable that the sanctions have had some impact on oil production in Venezuela, the analysis in Brookings’s report does not find sufficient evidence to conclude that the sanctions were responsible for the worsening of the socioeconomic crisis. At this moment, there are not sufficient publicly available data to rigorously estimate a causal effect. The Brookings report therefore concludes that most of the deterioration of socioeconomic indicators occurred prior to the sanctions of August 2017. In fact, a large part of the suffering and devastation in Venezuela has been inflicted by those in power since 1999 and not as much by the sanctions imposed in 2017.
Originally published at UFM Market Trends
The second and third volumes of Marx’s Kapital were published posthumously under the editorship of his close associate Friedrich Engels in 1883 and 1894, respectively. It is a curious fact that by then the underlying foundations of Marx’s economic system as presented in the first volume in 1867 were completely outdated. In a sense, the whole starting point of Marx’s analysis was obsolete before its ending saw the light of day. This obsolescence has not hampered in the slightest the tremendous success of Marxism in the political and cultural realm. The narrative of the inherent exploitation of wage workers by capitalists is alive and well today, in spite of a growing material standard of living and ever more innovative technological amenities that only a few years ago were unimaginable.
Marx had of course acknowledged that capitalism enhances the standard of living of the vast majority of people, workers included. Marx’s acknowledgment is precisely the reason why the idea that workers are always remunerated at the subsistence level had to be rescued by redefining the concept of subsistence. Subsistence was no longer considered to be about mere survival, but rather about living a fulfilled life which is contingent on the stage of economic development. Some critical commentators have found this idea of subsistence to be sufficient to discard the Marxian exploitation theory, but strictly speaking, the mere fact that the material standard of living of workers is increasing under capitalism, does not at all imply that workers are not exploited. It might well be the case that workers still do not get their fair share even today.
However, to the extent that exploitation exists in society, it does not emanate from any inherent features of the relationship between capital and labor in a free-market order. This argument was demonstrated early on by the great Austrian economist Eugen von Böhm-Bawerk in his masterful critique Karl Marx and the Close of His System (1896).
Even after more than 120 years, it is worthwhile to understand Böhm-Bawerk’s critique and not merely because he provided several interesting examples for which the labor theory of value does not seem to hold. After all, such examples might only be the exceptions that leave the rule untouched. It is especially worthwhile to read Böhm-Bawerk, because he exposed an inner contradiction that jeopardizes the entire Marxian framework.
To the lasting embarrassment of all self-proclaimed modern-day Marxists, nobody has yet presented a viable solution to Böhm-Bawerk’s critique. This article will look at Marx’s serious blunder step by step as it developed into self-defeat, as first exposed in Böhm-Bawerk.
The Labor Theory of Value In the first volume of Das Kapital, Marx presented his fundamental principle of value, namely the notion that the value of any given commodity is determined by the socially necessary labor time involved in its production. This labor time is the production time necessary under socially normal conditions at any given time, with the socially necessary degree of skill and intensity of labor. Labor according to Marx is thus the only determinant of value. And what is more, the fact that certain quantities of different goods exchange on the market for one another signifies that the same amount of socially necessary labor time is stored up in these quantities.
This strict formulation of the labor theory of value, just like any other theory of value for that matter, must ultimately serve as the basis for explaining the exchange ratios of various goods on the market. Thus, Marx explained:
that which determines the magnitude of the value of any article is the amount of labour socially necessary, or the labour-time socially necessary for its production.... Commodities, therefore, in which equal quantities of labour are embodied, or which can be produced in the same time, have the same value. The value of one commodity is to the value of any other, as the labour-time necessary for the production of the one is to that necessary for the production of the other. (Capital, Vol. I, ch. 1)
This thesis implies that the market price of a commodity ultimately stands in proportion to the labor time necessary for its production. Furthermore, this rule is also true for wages, i.e. the market price for labor services. Wages stand in proportion to the labor time necessary to produce the goods and services that are needed to maintain the worker’s labor power.
Surplus Value and Exploitation Wage workers are thus, according to Marx’s theory, remunerated at a price that is equivalent to the value of a bundle of goods and services necessary to stay alive and healthy so as to be able to continue to expend labor power. Marx’s theory is reminiscent of a subsistence wage theory, but, as pointed out above, the subsistence level is allowed to increase with capitalist development. One fact, however, remains: The total value of the goods produced exceeds the sum of wages paid to the workers. This excess means that labor, being the only source of value, produces a surplus value over and above its own remuneration. This surplus value is the source of the exploitation of the working class. In other words, workers expend more labor time than would be necessary to produce a quantity of goods equivalent in value to their own remuneration. The value of the goods produced during the additional labor time is extracted by the capitalist-entrepreneur. This alleged form of exploitation is all-pervasive in the capitalist mode of production.
From the vantage point of modern subjective-value theory, which reached its breakthrough in the 1870s shortly after the first volume of Das Kapital appeared, it is rather surprising how the labor theory of value, on which the whole exploitation theory is based, could ever have been so influential. It certainly did not start with Marx. The seeds of the exploitation theory can be found in the writings of classical economists such as Adam Smith and even more so David Ricardo. Marx merely pushed the idea of labor being the only source of value to its ultimate conclusion.
Nuance in the Classicalists There are passages in Adam Smith’s work that point in the direction of Marx’s exploitation theory. In the Wealth of Nations, Smith stated for example that in a developed economy, “the whole produce of labour does not always belong to the labourer. He must in most cases share it with the owner of the stock [i.e., capital] which employs him” (Book 1, ch. 6). In other parts of the book, however, Smith laid the groundwork for what came to be called the productivity theories of capital interest, pointing out that the use of capital renders labor more productive and in that sense increases both value and revenue. This point implies that the remuneration of capital is not necessarily paid out of a reduction of wages. Marx entirely ignored Smith’s second point, choosing instead only to adopt the first.
Likewise, Marx only acknowledged those parts in Ricardo’s writings that supported his own preconceptions while other parts remained untouched. In particular, in the first chapter of his Principles Ricardo highlighted an important exception to the labor theory of value invoking the time element. This exception was ignored by Marx without expressly denying it, as Böhm-Bawerk pointed out in his account of the history of capital and interest theories. BöhmBawerk keenly remarked that there is a good reason for Marx’s selective reading of the classics, because the fact “that an oak-tree of a hundred years possesses a higher value than corresponds to the half minute’s labour required in planting the seed is too well known to be successfully disputed” (Böhm-Bawerk 1890, p. 387).
In this vivid example, Böhm-Bawerk directly hinted at what he considered to be the true source of capital income – not exploitation of the workers, but time, or rather time preference. This idea was fully developed in his Positive Theory of Interest and has since stimulated the writings of next generation Austrian-school economists such as Ludwig von Mises and Murray Rothbard. However, regardless of whether one subscribes to Böhm-Bawerk’s particular theory, economic scholarship made it clear that value cannot be accounted for by labor alone.
Marx’s Contradiction The final nail in the intellectual coffin of the Marxian exploitation theory became apparent only after the publication of the third volume of Das Kapital. In the third volume, Marx explicitly tried to prove that his fundamental principle of value does not contradict the empirically observable phenomenon of a tendency towards the equalization of the rate of profit across various economic sectors. Here, Marx failed. Remarkably, Böhm-Bawerk anticipated this failure prior to the publication of the third volume, but only after its publication did it become undeniable.
Marx separated capital into two distinct parts. The first part he called variable capital. It is that part which is “converted into labour power” or simply that sum of money in any given investment project that is expended on labor services. The other part he called constant capital. It is expended on capital goods such as machines as well as raw materials. Now, according to Marx’s fundamental law of value, it is only the variable part of capital that can yield a surplus value and hence a profit for the capitalist.
The proportion of surplus value to variable capital is called the rate of surplus value and is an expression of the degree of exploitation. However, what is of interest to the capitalist-entrepreneur is not the degree of exploitation per se, but rather the total rate of profit, which is given by the proportion of surplus value to total capital expenditure (constant and variable). Any given productive endeavor is characterized by a certain combination of variable and constant capital which Marx referred to as the organic composition. This organic composition, as he acknowledged, is necessarily very different from one sector of the economy to another. This implies that at any given rate of surplus value the rate of profit varies from one sector to another according to the organic composition of capital.
The higher the proportion of constant capital in any given productive endeavor, the lower the rate of profit. How then, could there ever be a tendency towards the equalization of the profit rate throughout the economy? There could not, unless one is willing to reject the fundamental premise that goods exchange for each other according to their values as measured by the labor power necessary to produce them.
Marx’s Dissolution Marx himself saw the problem clearly and admitted that “it appears therefore that here the theory of value is irreconcilable with the actual movement of things, irreconcilable with the actual phenomena of production, and that, on this account, the attempt to understand the latter must be given up.” His attempt at solving the problem ends up repudiating the idea that value, and hence market prices, are determined by labor. It simply cannot be the case that profits equalize when prices and exchange values of goods and services form in proportion to the labor power used in their production. As Marx himself wrote:
[A]ssume that all commodities in the different branches of production are sold at their real values. What would then be the outcome? According to the foregoing, very different rates of profit would then reign in the various spheres of production.
In order for profit rates to equalize, those goods for which a larger proportion of variable capital is used would have to sell systematically below “value” and those goods for which a smaller proportion of variable capital is used would have to systematically sell above “value.” But this is just to admit that labor is not the only determinant of value, and if that is the case, the exploitation theory crumples. The latter relies on the premise of labor being the only source of value. Hence, in the third volume, Marx eventually has to reject the premise laid out in the first. As Böhm-Bawerk summarized in the last and yet untranslated German edition of his history of capital and interest theories: “The beginning of any theoretical system has probably never been belittled more thoroughly and conclusively by its ending.”
Conclusion Despite the tremendous and fatal blow that Marx’s exploitation thesis received at the hand of Böhm-Bawerk, the exploitation theme continues to thrive in the hearts of those who operate from envy or even a misconstrued sense of justice. Exploitation has a compelling emotional element that can animate the spirit of those who tend to be aghast at the very existence of a separation between a laborer and an owner of the means of production.
But despite the temptation to cling to an easy storyline, we must recognize two things: first, emotional perception of an unjust relationship between the capitalist and the recipient of wages does not itself prove the existence of this relationship. Economic analysis, which especially in the Austrian tradition focuses on the element of cause-and-effect in interpersonal relations, cannot make sense of the exploitation theory. It challenges the logical stream of analysis to deny first the subjective nature of value and second the equalization of profit rates. Exploitation theory therefore is an unjustified disregard of economic logic.
And secondly, it is important that the defender of the capitalist-based market remind any who might listen that it is capitalism that brings about prosperity for all who take part in a society based on the division of labor. That is, in a society that depends on the free market for the distribution of resources, the beneficiaries are not merely the so-called capitalist class, but even the wage earners.
As the standard of living in this free economy grows over the years, decades, and centuries, it is this system which fuels the growth of wages; not merely in the nominal sense, but more fundamentally in the “real” sense. That is, wage earners benefit in that they can satisfy a greater number of needs as these goods become more affordable. To bring prosperity to the wage earner, to eradicate the remaining vestiges of a natural state of poverty, capitalists play an important and benevolent role. Far from exploiting the workers, capitalism improves their lives compared to what they otherwise would have been.
Originally published in Austro-Libertarian Magazine Vol I, No. 3 | Summer 2019.
The Socialist ManifestoBy Bhaskar Sunkara Publisher: Basic Books, April 2019
In seeking to understand and encapsulate the motivation for socialism’s return to the limelight over the previous decade, George Reisman’s particular focus on the failure of economic interventionism as a system is quite useful (Piketty’s Capital: Wrong Theory, Destructive Program). While socialists in all decades have cast their core blame on an essential dynamic of capitalism—the distinction between wage earners and the recipients of profit (capitalists)—they have continued to ignore the fundamental differences between the process of free market capitalism and the effects of a “capitalism” marked by bureaucratization, regimentation, manipulation, and control by the coercive state, also known as interventionism.
Reisman describes our era as one characterized by the “US government’s assault” on the market economic system. He writes that “over the course of several generations, the US government has taxed away trillions upon trillions of dollars that otherwise would have been saved and invested and thereby added to the capital of the American economy.... And its policies of chronic inflation and credit expansion have caused the waste of a substantial portion of the greatly reduced supply of capital that remains.”
Moreover, “massive credit expansion pouring into the real estate market resulted in the last decade in millions of homes being constructed for buyers who could not afford to pay for them, thus representing a massive unremunerated transfer of wealth and causing a corresponding deficiency in the capital of producers throughout the economic system.”
And finally, “the deficiency of capital has been compounded by a steadily growing list of government imposed rules and regulations written and enforced by dozens of government agencies and now amounting to more than 700,000 pages.... These rules and regulations exist for the purpose of forcing business firms to do what is unprofitable or prevent them from doing what is profitable.”
All these (taxes, inflation, and regulation) have undermined the market economy to such an extent that “government’s massive assault on the supply of capital has begun to transform the American economic system from one of continuous economic progress and generally rising living standards into one of stagnation and outright decline.”
This has created a great sense of economic disillusionment among the rising generation of Westerners; and without a proper education in the dynamics of capitalism and an underlying spirit of egalitarian resentment, they are fueled for socioeconomic revolt. Reisman once more:
As people have learned that the economic system is not indestructible, they have turned in anger and resentment against ‘economic inequality,’ as though it were the surviving wealth of others that was the cause of their poverty, rather than the fact that, thanks to the government, others do not have sufficient capital to supply and employ them in the manner they would like.
A New Socialist Manifesto And thus, into this context of disillusionment and despair comes The Socialist Manifesto, authored by Bhaskar Sunkara, founder and publisher of the growing Jacobin magazine brand. In many ways, this book might strike those familiar with Jacobin as a sort of culmination of the framing, style, and narrative advanced within it over the last near-decade. Indeed, The Socialist Manifesto is not an achievement of original insights seeing the light for the first time, nor is it meant to be—this is not the purpose it seeks to fulfill.
There are several other things that the book is not: a blueprint for a socialist paradise, a policy program manual for the open-minded legislator, a general exposition in defense of the Marxist interpretation of socio-political affairs, or a response to the more important critiques of socialism over the last century and a half. This is consistent both with Jacobin’s demeanor in general and Sunkara as a proponent of a particular socialist tradition, which will be elaborated below.
Rather than explicating a grand socialist interpretation of socio-economic phenomena in the abstract, the book’s role is instead to survey the difficult obstacles the radical left has faced in its struggle against the world and to set the tone for a realistic path into a socialist future. It is intended to embolden and help fill in the gaps for a mainstream audience that is, whether we like it or not, swiftly becoming distrustful of capitalism.
That is to say, it positions itself not as needing to defend a socialistic interpretation of “class relations,” but as painting a picture of hope in an age of economic, and therefore social, despair. It offers a sweeping overview of socialism’s journey from its birth, to its life on the global stage, to its once-presumed death upon the collapse of the Soviet Union. From here, Sunkara offers an explanation for its sudden return and, in light of the frustrations of socialism’s past, puts forth a vision of “how they can win,” to paraphrase the title of chapter nine.
General Observations This observation—that the book is one of historical narrative and future vision-setting, rather than a case for socialism as a theory—is not itself an indictment of its contents. On the contrary, it is for this reason that the book serves a productive purpose and has direct relevance not only for illuminating the mindset and demeanor of one of the leading outlets for socialist thought, but also for drawing analogies to the recent failures of the once-hopeful “libertarian movement.”
However, in spite of its general usefulness for understanding how a socialist in the twenty-first century might come to terms with socialism’s past failures (in theory and practice), it might dawn on the discerning anti-socialist reader that the socialist resurgence will try to win the future without ever having to deal with the contributions of the antisocialist economists and economic historians of the nineteenth and twentieth centuries.
It is concerning that Sunkara’s book does not deal with Menger’s subjective value theory, Böhm-Bawerk’s destruction of Marxian exploitation, or Mises’s socialist calculation argument precisely because it does not need to. Men believe what they want to believe; they interpret events as they will; and political victory is a reflection of what people do believe, not what is intellectually justifiable. Democracy, Mises once noted, “cannot prevent majorities from falling victim to erroneous ideas and from adopting inappropriate policies which not only fail to realize the ends aimed at but result in disaster. Majorities too may err and destroy our civilization. The good cause will not triumph merely on account of its reasonableness and expediency.”
There is a lesson to be learned here, not only for scholars and laymen well-studied in Austro-libertarian theory, but also for anyone concerned with the rising socialist spirit: socialists do not need to be right in order to make their mark. A correct understanding of the world was not the cause of the Bolshevik Revolution and it was certainly not a prerequisite of their eventual demolition of Eurasia. Whether they are good or evil, ideas—as Richard Weaver famously titled his book—have consequences.
Thus, The Socialist Manifesto enters the fray for those already convinced that socialism is a possible alternative to what we have. It builds on the increasingly popular mindset that capitalism has failed us and that, specific to the concerns of the Marxist ideology, it has especially failed in promoting the participation of the wage-earning class in the magnificent wealth-creation accomplishments of our time. This is an important point: Sunkara does not deny that capitalism has brought to the world a standard of living never yet seen before; in fact, he acknowledges that the present age is “the best time in human history to be alive.” But what is particularly relevant to the application of the old Marxist worker-capitalist class division is the idea that the wage-earner, under the capitalist model, does not reap the just reward for his labor.
The general capitalistic response is to observe that A) this interpretation of things depends on a theory of justice that was long ago swept away by Böhm-Bawerk’s demolition of the exploitation theory and B) that even aside from the dubious ethical foundations, it is in fact the case that working conditions and wage earner standards of living have improved greatly due to capitalism. And yet, if the socialist, as is true of Sunkara, ignores those who make similar arguments to Böhm-Bawerk, it does not matter how wealthy workers become compared to prior ages: they will always and by definition live under a repressive social order.
This makes socialism an idea that is particularly difficult to deal with. Proponents of capitalism who emphasize the tremendous living standards that capitalism has brought to the world must remember that rising material wealth for the working class, in the mind of the educated socialist, does not overcome their particular passion for doing away with wage-earner vs. capitalists as a relational dynamic. The working class’s improvement over time is something that only some socialists will admit to (Sunkara does seem to allude to an admittance here), but nevertheless because the worker does not receive the full profit from his expended labor, the entire dynamic can only be seen as exploitative and oppressive. This jaded interpretation of the relationship between recipients of profit and recipients of wages precludes the socialist from ever letting down his guard.
This is precisely the argument that underlies the entire narrative of The Socialist Manifesto and it is the reason why the true socialist in the general Marxian tradition is completely dissatisfied with the welfare state, so-called social safety nets, unionism, and other “big government” left-social interventions that characterize the Western world. Here, we find the important distinction between the “social democracy” of Scandinavia, Elizabeth Warren, and other leftist interventionists on the one hand, and the “democratic socialism” of Jacobin magazine, the Democratic Socialists of America, and Bernie Sanders (even if the latter is in some ways impure in his socialism) on the other.
In a word, social democracy leverages a system of private ownership of the means of production and adjusts, massages, intervenes, and regulates it on behalf of the poor and underclasses. But democratic socialists maintain that all this is necessarily a continuation of the system which separates the worker from his product (alienation), as well as from the profits that his labor produces (exploitation). Democratic socialism, then, seeks not to grow the government under our present ownership structure, but rather to advance the cause of a complete reshaping of the framework of modern society —that is, to deliver man into the next epoch, the next stage of history.
While this may be considered a silly dogmatism of the socialist ideologue, this is in fact the lesson that Sunkara draws from socialist movement history. From its inception, socialism and the working classes for which it sought liberation would be bound to struggle against the capitalist class and its domination of the state apparatus. Thus, in the third chapter, “The Future We Lost,” Sunkara traces the struggles of post-Marx German socialist party politics. Their failure to organize in a sustaining fashion can be explained by a variety of factors from internal disputes between revolutionaries (Rosa Luxemburg and Karl Kautsky) and reformists (the later Eduard Bernstein, who drifted from his once radical Marxism) to the attempts by Otto von Bismarck to appease the socialists with mass welfare programs.
But Sunkara’s takeaway for our time is that the “social-democratic compromise is inherently unstable,” that the capitalist class will “attempt to undermine the [socialist] program,” and that social democracy isn’t the goal, but is in fact a temporary tool through which the road to true socialism can run. Social democracy, because it maintains and uses the capitalist-dominated state, is inherently unstable and crisis-prone. Thus, “when the crisis comes, the next step isn’t retreat, but to press on further.”
In fact, Ludwig von Mises himself affirms this distinction between the radical (Marxist) socialists and the German reformists. In Omnipotent Government, he writes:
Marxians do not support interventionism. They recognize the correctness of the teachings of economics concerning the frustration of interventionist measures. In so far as some Marxian doctrinaires have recommended interventionism they have done so because they consider it an instrument for paralyzing and destroying the capitalist economy, and hope thereby to accelerate the coming of socialism. But the consistent orthodox Marxians scorn interventionism as idle reformism detrimental to the interests of the proletarians. They do not expect to bring about the socialist utopia by hampering the evolution of capitalism; on the contrary, they believe that only a full development of the productive forces of capitalism can result in socialism. Consistent Marxians abstain from doing anything to interfere with what they deem to be the natural evolution of capitalism.
This leads us backward to the origin and meaning of capitalism itself. If socialism offers an alternative to the modern economic framework, it is therefore implied that we presently do not have socialism. To engage the socialist left, one must be aware of the lens by which they view the world. We Austro-libertarians often observe that the twentieth century is a tale of the rise of statism, of the step-by-step push (and often shove) against free markets, and the continued participation of government in various industries. Defining capitalism as free markets, since the logic and plain meaning of private ownership implies the decision making onus should be on the property-owner, we see in our time a systematic deviation away from the capitalist arrangement. Sometimes, following this way of thinking, we define the current order as the rise of socialism.
In dealing with socialists who find their roots in Karl Marx and his disciples, it is far more helpful to take up the Misesian distinction between socialism and interventionism. As propounded in Kristoffer Hansen’s essay in the summer 2019 Austro Libertarian issue, whereas the latter economic arrangement allows the capitalist system to exist, nevertheless from time to time and in various ways, it intervenes, manipulates, and distorts. However, the idea that interventionism (what Mises called the “hampered market”) should be separated from laissez-faire capitalism is an unnecessary and meaningless distinction in the mind of the socialist; what matters is not whether government participates in the market, but whether capitalists are allowed to arrange capital resources and produce goods for their own profit independent of the profit-sharing participation of the wage-laborers.
That is, do workers own the means of production and therefore have claims to profits, or do capitalists own the means of production and therefore have the claims to profits? This is the fundamental question in the eyes of the socialist. And it is because capitalists, or non-laborers, take a profit and leave the workers with a wage (they completely ignore the possibility of a capitalist loss) that we therefore live in a capitalist world. Social democracy, contrary to true socialism, seeks to maintain this framework and adjust the distribution of wealth in various ways and via various programs and regulations depending on the particular technocratic plan. In this way, Republicans and Democrats, establishment “liberals” and establishment “conservatives,” are merely two camps competing for control of state power, each with a different plan to best manage the economy.
While we free market libertarians would challenge the idea that economic-management from the state constitutes a meaningful capitalism, and therefore maintain the distinction between capitalism and interventionism, it must be realized that the rise of the self-aware socialist such as those associated with Sunkara and Jacobin magazine are not mere big-government Democrat Party hacks. There is important nuance and care involved in a proper understanding of their place on the left.
Moving now to the rise of capitalism in the West, Sunkara observes the tragic dawn of capitalism as a “societal shift as we went from using markets from time to time to producing for the market as our all-consuming task.” That is, before the tragic rise of capitalism, people would enjoy the fruits of their own labor and would engage in market exchanges only as they felt periodically necessarily to attain a good otherwise outside their productive capability. But with the rise of wage-labor as a socio-economic norm, it became the way of the worker to labor for the market’s benefit, not their own. Capitalism, therefore, under Sunkara’s narrative, was a sorrowful development that has caused an immense lack of fulfillment in the lives of those who receive only pitiful wages as they create goods others will enjoy.
This thesis is expressed skillfully, but it is not an original insight by Sunkara, nor is it intended to be. In fact, this is the standard interpretation of the rise of capitalism used by socialists against the capitalist system, and also by advocates of a “third way” alternative between laissez-faire capitalism and socialism; including interventionists and traditionalist “distributists.” While it is by far the minority position in our age to explain this shift in positive rather than negative terms, what Sunkara interprets as a tragic social shift toward “producing for the market” is in fact the discovery that a society that operates under the division of labor produces higher standards of living, for all who participate, than one which is primarily structured around self-sustainability. Few understand that an economy where workers “produce for the market” is the same economy where the market produces for the workers; for all workers are also the market’s consumers.
It may be acceptable that capitalism in a specific sense (using the infamous Enclosure Acts of eighteenth and nineteenth century Britain) was, as Sunkara argues, “an accident of history,” but the primary feature of this new capitalism was the very dynamic that prompted the end of centuries of economic and population stagnation: the division of labor itself. Prior to the development into a capitalistic arrangement, as Friedrich Hayek explains in Capitalism and the Historians, it was the case that “to be left without [the means of production —land and tools] meant in most instances death by starvation or at least the impossibility of procreation.” In other words, the new wage-earning class that socialists deride as the product of capitalism is in fact a group of people who would have, before the division of labor, never even existed.
What is often missed by those who decry the working conditions of the new industrial proletariat is that socialists lean heavily on the horrific description of working-class conditions made by nineteenth century bourgeois writers. These writers compared their own middle-class living standards with the relative ravages of the new impoverished, without even reflecting on the proper comparison: a life of struggle versus nonexistence. As Hayek explains, “the proletariat which capitalism is said to have ‘created’ was thus not a proportion of the population which would have existed without it and which it had degraded to a lower level; it was an additional population which was enabled to grow up by the new opportunities for employment which capitalism provided.” It was capitalism that first birthed the additional population and, over decades, capitalism that improved their lives and conditions.
What Sunkara, after Marx, describes as the great modern tragedy where men “must” participate in an economy where they need to produce for the market, is not even close to Western society’s tragedy; it is instead its greatest boon.
With the above serving as an overview of the book, it is helpful to categorize the remaining thoughts in terms of its key failures, its key successes, and four lessons that we Austro-libertarians might take from the book and its role in the socialist movement.
Three Key Failures 1. As is so common in the socialist interpretation of the world, there is no appreciation for the difference between laissez-faire capitalism and what Mises called the “hampered economy.” By collapsing all post-industrial revolution economies into a broad and vague “capitalism,” they can dismiss the world without having to deal with the specific warnings (and apparent vindication) offered by the laissez-faire proponents against the Western political-economic framework of “interventionism.” Thus, they describe the modern system as “neo-liberalism,” which is the alleged result from a capitalist-state relationship.
Of course, the advocates of the “unhampered market” have long been drowned out and pushed aside while central planners offered to structure the economy from the top-down, dismissing whole cloth what they considered to be outdated analysis of economic problems. Thus, the twentieth-century story of the West is one of state-interventionism, state-driven central banking, and policy after policy of betrayal of the free market. On this issue, and admittedly in understandable Jacobin fashion, the storyline once again refuses to deal with the difference between a free capitalist economy and an economy driven and manipulated by coercive power.
- While it may have been outside the boundaries of Sunkara’s objectives, it must always be recognized when socialists communicate their vision as if the most devastating critiques of Marxist theory never took place. One can certainly understand their motivation in refusing to recognize these critiques strategically (to affirm their existence would bring them attention), but as long as socialists ignore them, their theory will always remain categorically a failed one. If Mengerian subjective value theory undermined the labor theory of value on which Marxism’s exploitation thesis stood, and if further Böhm-Bawerk exposed the tremendous contradiction of Marx’s exploitation thesis independent even of the value theory, and if Mises proved conclusively that a socialist “economy” could not rationally allocate the factors of production regardless of whether exploitation was legitimate, upon what ground does Marxism stand?
Casting aside questions of whether or not the Soviet system was truly socialistic, or even whether Cuba, Red China, or the myriad other tyrannies to which socialist movements gave way were in fact socialistic at their height, it can never be forgotten that capitalists don’t just have empirical experience on their side, we have theory itself. Marxism misinterprets the relationship between wage-earner and capitalist, and Marxists compound their failures by advocating for a system that contradicts itself, as well as what can be known about human action. But as is so typical, these difficulties are almost never dealt with before impressionable socialist-leaning audiences.
- The theoretical economic failures of socialism are one thing, but among the most damaging aspects of socialism as a political force is the complete inability to come to terms with the actual contributions that capitalism has provided the world. By this, it is not meant merely that capitalism is preferable to the prior “epoch” of feudalism, nor do we merely mean that capitalism has its here-and-there positives; Sunkara would no doubt affirm these. Rather, at a sweeping narrative level, Sunkara attributes problems to capitalism that do not take into account the reality of these problems independent of capitalism such as scarcity, tradeoffs, and even the problems of social disillusion and emptiness that mark modern society. It is to Sunkara’s detriment that he incorporates the economic aspects of all social difficulty that was a prominent feature of Marx’s theory of progress and historical development.
To categorize this failure, we might describe it as the general blindness that socialists have to “cause and effect” in analyzing economic and social history. It is cliché to complain about a common ignorance regarding the distinction between correlation and causation, but one must recognize the extent to which socialists fail to comprehend its role in interpreting the development of social phenomena. The end toward which socialism seeks to move mankind has always been an end in search of a theory. They attribute to capitalism problems that are either natural or caused by activities that are themselves deviations from capitalism; and conversely they attribute to socialization (and government) progressions which were in fact caused by capitalism. The lack of demonstrated cause and effect, therefore, is a serious weakness in the overall narrative presented.
Two Qualified Successes This is a difficult category in which to express oneself clearly, because it can so easily be interpreted by the reader as a softening up toward socialism. So let the above points of failure render this potential interpretation completely false. Leftism as a project, which includes socialism as a species, is the antithesis of all that I hold dear. Nevertheless, an objective criticism of this book can pinpoint several areas of refreshment.
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The Socialist Manifesto carries the same overall demeanor and posture, naturally, of Sunkara’s Jacobin magazine. In my mind, one of the core characteristics of Jacobin is that they are tremendously well-informed about the history and struggle of their movement. They view the grand narrative of world affairs, especially at the dawn of international socialism, in an immensely mature and developed fashion. In fact, one might venture so far as to say that this is the socialist’s greatest strength: their interest, despite their misunderstood interpretations, in the unfolding of history at a meta-level. I will be quick to point out that my own fascination with the Jacobin demeanor stems largely from the fact that libertarians are so often (rightly) perceived as having a very poor understanding of the history of human affairs. While this is certainly true of the typical socialist, indeed the typical contemporary man, it is refreshing to think deeply about narratives and meta-human struggles. Engaging with Jacobin intellectually is a fruitful exercise.
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Whereas many socialists simply scoff at examples such as the Soviet Union and respond that this “wasn’t real socialism,” Sunkara takes the time to struggle through the past failures, to learn lessons from them, and to interpret them in light of their strengths and weaknesses. Whatever can be said about the actual conclusions drawn (mostly, they are wrongheaded and blinded), it is indeed an engaging project that benefits even the critical reader who is able to properly understand the mind of the modern intellectual socialist.
As well, grasping the unfolding of history in our time, learning the motivations and contexts of historical events, and coming to terms with the making of the modern world, renders Sunkara’s endeavor important. After all, whether we like it or not, socialism is on the rise. Should we not understand it? Should defenders of freedom and capitalism not be prepared to correct all who promote the tragic and terrible thinking of the socialist? Quality from our opposition can stir quality in our correction.
Four Lessons for Austro-Libertarians 1. Decentralization is our own path forward. If socialism is on the rise and the impetus of their political engagement seeks to take over the source of power in central governments, it strikes me as completely absurd to fight the fashionable with the unfashionable in the court of modern power. If the Instagram-style socialism of Alexandria Ocasio-Cortez is the medium through which the modern socialists claim their path, does it not seem like a strategic blunder to seek a national strategy? The Jacobin-style socialists have a strategy and emphasis on central power; we ought to take the opposite emphasis: federally political tactics cannot be said to be worthless, but as a whole, decentralism, political and social, can be a much more powerful tide. To the extent that they despise those who withdraw from increasingly centralized political power, to that extent we ought to depend on anti-centralization.
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Depoliticization is our own path forward. On a related note to the previous point, we must pursue non-political strategies. Entrepreneurship, the extension of our participation in non-political social institutions, and especially the depoliticization of education and understanding of the humanities must be core. The socialists put much stock in political strategies, in using the democratic-public square (a public square which does not carry the same meaning in pre-politicized times) to advance their cause. A key aspect of decentralism, then, is de-politicization in both our activities, preferences, and interpretation of the world around us.
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We must oppose modern sacred cows. In many ways, socialists have rhetoric on their side. They can claim to be democratic, champions of utopian equality, opposers of “reckless” capitalism, and politically universal. They are entirely correct that they are the fulfillment of the leftist project in our time. Thus, we must not pushback with a “restrained democracy,” or a “reasonable equality,” or anything else that gives them the foundation on which to radicalize the very institutions of modern leftism. Democracy itself must be challenged, egalitarianism itself must be opposed, and the dynamic of capitalism must be defended.
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We need better libertarians, not merely more libertarians. To challenge the rising narratives of an intellectually-curious socialism, it is important to understand their arguments, be able to refute them, and subsequently present a defensible alternative. While this is becoming increasingly difficult in an era when critical thinking and rhetorical expression are lost arts, ideologies, worldviews, and interpretive frameworks are at the foundation of civilization. To ignore the struggle and difficulty in understanding the world is to sow the seeds for the domination of those who misunderstand it.
Originally published in Austro-Libertarian Magazine Vol I, No. 3 | Summer 2019.
Max Eastman during the time from the Bolshevik Revolution through the early 1950s was one of the most famous political writers in America, known also for such literary works as The Enjoyment of Laughter. He began as a radical and, surprising though it may seem to us today, he first looked upon Lenin with favor. How was this possible? He was, and remained throughout his life, a devotee of the scientific method, and he saw Lenin as engaged in a great social experiment. After a long struggle, he saw the error of his ways. Lenin was a dogmatist guilty of great crimes, and socialism was a recipe for disaster. He devoted many years to combating the system he had once foolishly favored, and Reflections on the Failure of Socialism is the record of his insightful assault on socialism and his defense of the free market.
This insightful book was made available by a donation from Randall Dollahan and Kathleen Lacey.