The following piece will not be as abstruse as its title suggests. Rather, it results from the simple observation that, time and time again, some harmful outcome or process commonly attributed to the everyday workings of the market economy actually does exist, but it exists in the realm of the government and politics. Politicians and their friends really ought to be giving us some answers in light of these ills.
The line of attack might be seen as an application of Bastiat’s “broken window” fallacy.
As Murray Rothbard warned us, there are a great many “broken window fallacy mongers” about. If nothing else, their activities will keep us on our toes. A handful of examples may suffice and should help demonstrate that a basic understanding of economic principles is critical if we are to understand important causal connections in history and politics.
Let us begin with something that is supposed to be good: the much-heralded Keynesian “multiplier effect.” This is a second-level broken-window fallacy. Here a sophisticated fallacy-monger arrives, just after the free?market economist has dispelled a first-order fallacy by expounding the “seen” versus the “unseen.” The secondary fallacy-monger then says, “Oh sure, that sounds good, but there are many things the free-market economist hasn’t told you.”
One such thing is the joyous world of the multiplier. This holds that any money invested in productive enterprises will stir up great waves of activity throughout the economy at some mathematically constant rate, resting on some functional relationship between big economic aggregates (consumption, investment). Therefore, the state ought to expand the money supply (inflate) to make additional money available. At the end of the happy process, to paraphrase an old song, the solar radiation will be unwontedly great and there will be no precipitation.
Austrian-school economist Rothbard performed a great takedown of this notion with his suggested “personal multiplier.” Faithfully following the mathematical form of the multiplier principle, he “proved” by reductio ad absurdum that a sum of money given to any reader of his book would, when spent, “prime the pump of a 100,000-fold increase in the national income.”1
So it appears the Keynesian multiplier is a theoretical bust. There is, however, a bureaucratic “multiplier effect.” Political scientist Tom Burns writes that kings created bureaucracies so as to govern more effectively and in time found themselves displaced by these officials. Republics and, later, democracies inherited the bureaucracies and ran with them.
As a result, civil society now exists only “as a vast residue from which power and authority have been extracted and distilled into sovereignty.” This works for the state because “Renaissance bureaucracy”—the ancestor of modern bureaucracies—“was a great chain of command” and “[d]ispersing sovereign power through the many chains of command of a bureaucracy multiplies power.”
Burns quotes the German sociologist Niklas Luhmann: “Thus power takes on a hierarchic, i.e., reflexive, form in order to be able to accomplish a multiplicity of influences simultaneously. …This extension of power is put through with the aid of such actions as representation, transfer or delegation, which quite innocently suggest that the power which is being exercised remains what it was, while they actually multiply its effectiveness.” Luhmann adds: “To apply power to the reinforcement of power amplifies the total power available in a social system, by means of a sort of relay technique.”2
So there is a multiplier effect and, even if it isn’t mathematically constant, the state can answer for it.
Then there are claims about “cutthroat,” or “predatory,” competition in business, which is said to lower the moral tone of society and yield sundry zero-sum games. But competition can involve degrees of voluntary cooperation within an industry, friendly relations between competitors, or it can run to personal rivalries, depending on the personalities involved. It need not become a serious problem until or unless one party brings in the state to strengthen his hand. Even a businessman who loses out to competitors is not annihilated; he can find other work in the same industry or try his hand at something new.
In some cases, fierce competition with outbreaks of violence may arise where property rights are unclear or unenforced, as in the famous “wars” in the Old West between the ranchers and the farmers, not to mention the beleaguered sheep herders. These conflicts were fairly manageable, however, compared to real, eliminative competition between states, which we call war. In these competitions, which are indeed predatory, one state may cease to exist altogether, or lose territory to another state.
Economist Jörg Guido Hülsmann has proposed a political “progression theorem.” He argues that states are driven to expand territorially, when possible, in order to gain more revenue, in order to expand further, gain more revenue, and so on. The drawback is, as noted, that losing a major war can mean the “death of a state” (to use Rothbard’s phrase). After two destructive world wars, European states still seek to enlarge their incomes, but having reached the limits of politically feasible taxation, they must enhance their revenues indirectly through inflationary fractional-reserve banking and public debt. As each central bank reaches its limits of monetary expansion, each state’s only hope is to have some even higher jurisdiction prop up its money (since the whole point has been to evade the normal penalties markets finally inflict on counterfeiters).
Expansion by Stealth
With war off the agenda, the bureaucracy of the embryonic pan-European state tries to expand its revenues and jurisdiction by peaceful, indirect means— more carrot than stick—by conning additional states into entering the EU,3 while deliberately failing to address fundamental “constitutional” questions such as withdrawal from the union, an expansion by stealth that nicely recapitulates the strategy of the Federalists in the United States in 1786–1787.
Historians Bruce Porter, William Hardy McNeill, Charles Tilly, and many others have treated eliminative state competition, with its attendant wars, as the main engine of rapid state building.4
Thus an inherent, irrational growth dynamic attaches to states. Businesses, unlike states, know when to quit expanding because of the inbuilt profit-and-loss test. States can be said to expand “irrationally” because they have no such test, in part because the costs involved are not paid by the decision-makers themselves. Their only risk, as noted, is gambling and losing in some armed struggle with another power. This may be a restraint, but it is not as decisive as red ink on the quarterly report.
This is not to say that a state will always and continuously strive to expand externally. A state may be unable to extract sufficient resources from production, and cultural factors may intrude as well. A state unable to expand outward will certainly be tempted to make more work for itself at home. Successful states like the United States may do both simultaneously. In the case of a successful imperial state, a real synergy can get underway through institutional “blowback” from overseas policing methods, and such.
However we may sort this out, it seems that states are generally driven to expand in a way that business is not. Business competition is not very much like war at all, except in the realm of bad metaphors. Of course if the state’s regulatory branches shape the environment in certain ways that spread moral hazards everywhere, we can have something like the savings-and-loan scandal of the 1980s. But that came to an end when the free ride ran out; even here the message to quit arrived sooner than such messages seem to come to the state.
While on the subject of irrational growth, I should at least mention the complaints made in the 1940s that the market economy, because of inbuilt defects, could not produce enough growth, whereas Soviet communism doubtless could do so. By the late 1950s the complaint was that there was “too much” growth. Such shifts in attack suggest there is much truth to the famous comment of Joseph Schumpeter that, as far as most intellectuals are concerned, the guilty verdict against the market is already in, although the details of the indictment may change.5
One more item might be mooted before we leave the topic of competition and war. It is that militarism itself generates high time-preference and lowers the social (market) rate of saving.6 In her essay “The Iliad as the Poem of Force,” Simone Weil remarks in passing on the severe foreshortening of time as the fight-keen Achaeans approached Troy. Not knowing how much longer he may live, each Greek’s value-scale shifted dramatically toward present consumption and away from concern for the future.7 It is almost superfluous to mention the seedy material culture near any large military base, with pawn shops, strip clubs, and the like, as the dominant businesses.
The Inevitable Trend Toward Monopoly
The idea of an inherent expansionist dynamic brings us to the claim that competitive capitalism inevitably means the “eating up” of smaller enterprisers and the rise and persistence of giant private “monopolies.” This charge has been kicking around since the late nineteenth century in the United States, and the failure to address it adequately has led to all manner of historical misunderstanding and bad legislation. Rothbard did address the matter, rather conclusively.
In a hundred-page tour de force,8 Rothbard reduced“monopoly” to its proper bulk and resurrected Lord Coke’s seventeenth-century definition of monopoly as “a grant of special privilege by the State, reserving a certain area of production to one particular individual or group.”9 On this understanding, without legal-political barriers to entry even the largest business is not a monopoly; it is simply very good at satisfying the consumers and/or unchallenged by good competitors for the moment. But there is genuine monopoly: first, the state itself, which asserts a monopoly of initiating force within a given territory; second, enterprisers working under a grant of exclusive privilege from the state.
Here is how Rothbard describes the evils of monopoly:
All the effects that monopoly-price theorists have mistakenly attributed to voluntary cartels, therefore, do apply to governmental monopoly grants. Production is restricted, and factors are released for production elsewhere. But now we can say that this production will satisfy the consumers less than under free-market conditions; furthermore, the factors will earn less in the other occupations.10
Once again, a problem said to arise on the market is to be found in the orbit of the state.
The Market Fosters Disorder and Social Disruption
The charge here is that the market economy, as such, leads to social disruption, social decay, “atomization” of society, alienation, and the rest. The decline of small towns and businesses will be highlighted. We are all doomed, it seems, to deal endlessly with dizzying and unwanted “social change.” The critics of course often have their own list—of desirable social changes—to be imposed by the state, but that is another matter.
Everyone from the tamest “liberal” centrist to the wildest Marxist or feudal reactionary feels free to make these charges. Paul Baran and Paul Sweezy’s fundamentalist-Marxist tract, Monopoly Capital, which blamed literally everything deplorable in American life on late, or “monopoly,” capitalism, is just a sample of this genre.11 Nice work, if you can get it; but it seems likely that these critics don’t have the right target in their sights.
I now introduce the Interstate Highway Theorem. It flows from the safe assumption that no capitalist or consortium of capitalists would have risked their own money on this “eighth wonder of the world.” The theorem simply states that, on their own, free-market participants would never have put together such a highway system, and of course they did not. We would have had roads of some kind, but not this particular public-goods boondoggle.
The interstate highways grew out of congressional pork-barrel politics and Cold War military-industrial considerations, and were popular because they “made work” for certain contractors and allied unions. Any losses to small towns, or to picturesque American ways of life dependent on those towns, caused by the building of interstates may be addressed to whatever federal departments presided over their construction, enforced eminent domain on wicked “hold-outs,” and subsidized the usual corporate suspects to build those roads. They may not be addressed to the free market.
Another aspect of this alleged problem is the claim that social conditions in market-based societies render people “inauthentic,” cutting the ground out from under true friendship and treading all true fellow-feeling under foot. Leaving Jean-Jacques Rousseau, a pioneer of this attack, to one side, it is enough to consider what the Scottish Enlightenment writers said on the matter in rebuttal. Sociologist Allan Silver points out that for Adam Smith “instrumental” friendships based on exchange (What have you done for me lately?) were actually “more pervasive before commercial society instituted the distinction between markets and personal relations.” Further, in pre-capitalist societies, as understood by the Scottish thinkers, “the space between friend and enemy was not occupied, as in commercial society, with mere acquaintances or neutral strangers, but charged with uncertain and menacing possibilities.”
Thus the “Scots understand commercial society as limiting instrumental exchange to the newly distinct domain of the market…. Before commercial society, the purpose of friendship, as the Scots see it, was to help friends by defeating enemies….” So it turns out, on the Scottish thinkers’ analysis, that we can see “commercial society, far from ‘contaminating’ personal relations with instrumentalism, as ‘purifying’ them by clearly distinguishing friendship from interest.”12
While we are still on the theme of social disruption, we may ask who causes the bulk of it. Political scientists Youssef Cohen, Brian R. Brown, and A. F. K. Organski have pointed out that a good many Third World conflicts “are defensive in nature: they are all brought about by the aggressive expansionism of the state,” especially where “states are still involved in the primitive accumulation and centralization of power resources.” These writers suggest that “over a relatively long period of time state expansion will generate violent conflict” and thus “it is the progression toward greater order itself that produces much of the relatively greater violence we find in new states.”
They conclude that “the evidence strongly suggests that the rate of economic development is related to both the rate of state expansion and collective violence in a way that runs contrary to the way postulated by the dominant view on such matters.” Further, “state expansion seems to produce much more violence than economic growth…. Rather than state expansion being an antidote for the violence produced by economic modernization, our rather limited evidence shows that it is economic modernization which is the antidote to the violence produced by state expansion.”13
State-building may itself be the fundamental error and so-called “failed states” may well have earned their plight. Of course an array of stupid Cold War tricks played by the great powers in those countries can answer for part of the outcome as well. But this consideration leaves us yet within the realm of state action.
To put matters another way, markets work well at what they are supposed to do; governments work badly at what they are supposed to do. Governments do, however, work well at other things: creating violence, disorder, and disrupting orderly social life. Since they do so while imposing something they call “order”—by threats, intimidation, and violence—most people are content to imagine that governments are the source of order.
Many writers see inflation, especially where it refers to any set of rising prices, as another problem inherent in the market economy. The state must there fore be ever watchful and ready to resort to various stern measures to “fight inflation.” Some critics—for example, the conservative historian John Lukacs—like to talk vaguely of general social inflation: of values, grades, esthetics, and everything. And while he does not lay these ills directly at the feet of the market economy, others do. For many critics, market relations as such are supposed to render everyone radically unstable, rationally self-centered, and prone to go deeply into debt so as to have the whole panoply of consumer goods sooner.
But leaving to one side the cultural question of the inflation of the American ego by Emerson, Whitman, and others, price inflation would seem the primary culprit and it comes from the state. If individual rates of time preference are lowered by easy credit, leading to the consequences of which many writers complain, we must inquire into the origins of the easy credit. Obviously, I take it as having been thoroughly shown by Ludwig von Mises and Rothbard, among others, that inflation is the expansion of the supply of money through state-controlled central banks, which, if taken far enough, is the cause of economic depressions.14
The cultural history of the late nineteenth and early twentieth centuries is badly in need of rewriting by a historian who can analytically separate out new methods of mass marketing (for example, by Sears and Roebuck), installment buying, “Fordism,” and the like, from monetary expansion by the Federal Reserve. Once this is done, we may expect to learn that “inflationary” excesses in culture, consumption, education, and so on arose crucially from expectations grounded in easy money.As noted, easy money leads us straight to the state, the central bank, and their social allies in business and academe who believed that an expanding money supply was the key to prosperity. The unhampered market, once more, may plead innocent.
Dear old “market failure” must necessarily be mentioned here. This notion is basically the obverse of the public-goods problem. Suffice it to say that in the view of some observer, “the market” has failed to do X, or provide much-needed service Z. Part of the problem stems from the tendency to reify the market and then fault this monolithic mechanism or super-mind, or whatever it is supposed to be. But the market is not a thing or a person, but is instead a complex and extensive network of bilateral exchanges, which for convenience we call the “market.”15 Another variant is to complain that exchanges are being blocked by excessive transaction costs or the like, when on the face of it, a particular “market” hasn’t come into being simply because, as things stand, no one wants to exchange the things some observer would like to see exchanged.16 I don’t know who is supposed to keep track of missing markets that should exist, unless of course it is the state.
But we must leave this topic for now, since it is large enough to justify treatment elsewhere.
The alleged “atomization of society” brings us to the grave problem of “social action.” It is interesting that whenever successful social action takes place, as it does all the time, governments and their apologists immediately denounce it as a dreadful evil, because the people cooperating do not do what these observers would like them to do. Actually occurring social action always turns out to be the wrong kind, and is reinterpreted as a social problem.
One thinks of the gathering attack on societies in which kinship relations help structure business relations and markets—as in East Asia, for example. This, apparently, is the most wicked “crony capitalism,” which, lacking transparency and the like, must be corrected by whatever superpower happens to be in the neighborhood. But from a free-market standpoint, what is actually wrong with doing business with your cousin, if the state as such is not in the picture?
Stamping out “ethnic” allegiances in trade in the name of market freedom, “transparency,” and fairness might sound good to some people, but who exactly would do the stamping? Obviously, it would have to be the state, which is the indispensable culprit in crony capitalism to start with. (This is a key in Russia and China, where it is often the former communist bureaucrats who are today the state-connected crony capitalists.)
During the Vietnam War, well-placed American social scientists studied the supposed failure of social action in South Vietnam. What this seems to have meant is simply that such social cooperation as existed failed to generate much support for the South Vietnamese state sponsored by the United States. Given the alleged absence of a properly functioning social structure, one theorist suggested that the South Vietnamese state substitute itself for the missing intermediate structures.17 We cannot resolve here the obvious problem that if the state provides the structures, they will no longer be very intermediate.
It is probably not market relations that have leached away people’s personal autonomy, thereby reducing their ability to cooperate and undertake social action. Once again, I would suggest looking in the direction of the state.
Tying of Services and Products
Another complaint is that businesses attempt to “tie” goods and services to one another, rendering the poor consumer dependent on one product line. They may well try, but other actors in the market and consumers themselves will find ways around this practice.
It is otherwise with the state. As Sheldon Richman has mentioned to me, states “tie” their “products” and “services” all the time. As a precondition of driving on government roads, you get to patronize the government-sponsored insurance cartel. In some states you get to have your car checked by a government-sponsored mechanic. Go to a government airport and you get a taste of the government’s idea of providing security.
And your Social Security number, which Congress swore would never become a national ID, is fast coming to resemble a Soviet-style internal passport.
Even on the most pessimistic reading of this issue, the market remains well ahead of the state.
Now we come to the claim that business corrupts politics. Well, yes and no. Politics does not seem to require much corrupting.
Naturally, there are plenty of actual businessmen who are happy to enlist the state to restrain trade for them, grant them subsidies and bounties, and the rest. They try to use the state for their economic advantage. This is the “instrumentalist” view of the state, which holds true across a wide range of activities and which is, despite what some writers think, entirely compatible with a great deal of state “autonomy.” After all, if the state did not have independent power, it wouldn’t be much of an aid to these interest groups, would it?
There is indeed plenty of business-government collaboration around, enough to justify calling it by its own name: corporatism.18 Since such practices are the antithesis of laissez-faire liberalism, it is hard to see how the free market can rightly get the blame for them. We are back in the ballpark of the state again, this time with some of its allies.
I have long believed that if a given society had suffered, successively, a drought, a famine, and a flood, followed by a popular revolt set off by grinding taxation and, finally, a foreign invasion, the typical historian would lay primary blame for the unhappiness of the people on the failure of the market economy. We have just seen this kind of judgment made in relation to the disaster in New Orleans.
Even if we were somehow to blame the sinking of New Orleans on politicians who talk a lot about free markets, this has nothing to do with any real chain of causation that would reach back to the free market. The talkers currently in office have famously spent hundreds of billions of dollars on misbegotten war in Iraq, which suggests that their talk about frugality, free markets, and the rest is so much eyewash. There is no disembodied “free-market ideology” stalking the country and forcing the poor government to leave levees in disrepair or unimproved.
Talk is cheap, not frugal.
After all, despite the alleged outbreak of frugality, billions upon billions of dollars still flow into the federal treasury and bureaucrats still manage to spend them. Neither the people nor the free market—conspicuous by its absence–should answer for bad decisions made by officials allocating money taken from the toiling masses. Probably if you have a levee, you ought to maintain it. This is entirely separate from the question of whether government should have been in the levee-building business in the first place, or whether people should live in flood zones. Tackling these questions would involve us in an historical regression into the remote origins of a situation significantly shaped by government, a situation fraught with peril if the government should ever let its own creations slide.
The buck still stops with the federal government because it took the bucks, some of which could have fixed its levees, and then did not do so. Leaving aside the ethics of how governments get their money, the United States had plenty of it, and chose to squander much of it on a night out in the Middle East. The left is right to point this much out.
But the left will not follow us further along our path of analysis. This particular mixture of state activity and inactivity—Iraq versus New Orleans—goes to such questions as whether governments are very good at managing anything and whether states can even calculate rationally. Our best evidence says, no. As Rothbard puts it, “[T]he costs of government are bound to be much higher than those of the free market…. [T]he State cannot calculate well and therefore cannot gauge its costs accurately.”19
So, no, the free market did not sink New Orleans, nor did its shambling cousin, the disembodied and selective free-market talk found in and around the Republican Party.
A Parthian Shot
The last topic broached reminds us that the Republican Party habitually proclaims its fervent wish to put government “on a businesslike basis.” Democrats usually favor putting business on a government-like basis. The difference between the two programs is this: the second is possible and it could go forward, up to the point that social cooperation and markets collapse; the former is literally impossible.
Government cannot be put on a businesslike basis because it lacks the profit-and-loss test available to businesses on the market. Thus it doesn’t know when to stop doing something, short of a disastrous setback, cannot calculate its costs, and so on. But enough about government; I think we can agree that for the topics just canvassed at least, the market is not guilty and the state is about to enter the witness box.
- Murray N. Rothbard, Man, Economy and State, vol. 2 (Los Angeles: Nash Publishing, 1970 ), p. 759.
- Tom Burns, “Sovereignty, Interests and Bureaucracy in the Modern State,” British Journal of Sociology, December 1980, pp. 494–95.
- Jörg Guido Hülsmann, “Political Unification: A Generalized Progression Theorem,” Journal of Libertarian Studies, Summer 1997, pp. 81–96.
- Bruce Porter, War and the Rise of the State (New York: Free Press, 1994), William Hardy McNeill, The Pursuit of Power (Chicago: University of Chicago Press, 1982), and Charles Tilly, “Warmaking and Statemaking as Organized Crime,” in Peter B. Evans, Dietrich Rueschemeyer, and Theda Skocpol, eds., Bringing the State Back In (Cambridge: Cambridge University Press, 1985), pp. 169–91.
- Joseph Schumpeter, Capitalism, Socialism, and Democracy (New York: Harper & Row, 1950), p. 144.
- On war and time preference, see Hans-Hermann Hoppe, “Time Preference, Government, and the Process of De-Civilization,” in John V. Denson, ed., The Costs of War (Auburn, Ala.: Ludwig von Mises Institute, 1999), pp. 455–508.
- Si^an Miles, ed., Simone Weil: An Anthology (New York: Weidenfeld & Nicolson, 1986), pp. 174–75,181.
- Rothbard, chapter 10, “Monopoly and Competition,” pp. 560–660.
- Ibid., p. 591, Rothbard’s wording, not Coke’s.
- Ibid., p. 789.
- Paul Baran and Paul Sweezy, Monopoly Capital (New York: Monthly Review Press, 1970).
- Allan Silver, “Friendship in Commercial Society: Eighteenth-Century Social Theory and Modern Sociology,” American Journal of Sociology, May 1990, pp. 1481–82,1484, and 1487.
- Youssef Cohen, Brian R. Brown, and A.F.K. Organski, “The Paradoxical Nature of State Making: The Violent Creation of Order,” American Political Science Review, December 1981, pp. 904, 907–909 (italics added).
- Rothbard, pp. 745–47.
- For all that has been said against nominalism, sometimes we are dealing with a name.
- One could almost call this the Chicago School variant.
- Charles A. Joiner, “The Ubiquity of the Administrative Role in Counterinsurgency,” Asian Survey, August 1967, p. 553.
- See Robert Higgs, Against Leviathan: Government Power and a Free Society (San Francisco: Independent Institute, 2005).
- Such problems are in a way the socialist calculation problem writ small; see Rothbard, pp. 803 and 825–26, where he notes that under socialism “each governmental firm introduces its own island of chaos into the economy; there is no need to wait for full socialism for chaos to begin its work” (p. 826). Obviously, the principle applies in its proper degree to government “firms” or departments under present-day “mixed-economy” corporatism.