“Capitalism – A Treatise on Economics” by George Reisman – A Review

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It is not often that the present author is moved to review any particular publication by a specific author, let alone one that was published nearly twenty years ago. However, Capitalism by George Reisman, at more than one thousand pages long, is the first major treatise that is at least related to the “Austrian” tradition since the publication of Murray N Rothbard’s Man, Economy and State in 1962.

Although Reisman is a contemporary of Rothbard and a fellow student of Ludwig von Mises, Reisman’s approach to economics is markedly different from either. Indeed, armed solely with knowledge of his pedigree one might be forgiven for wondering why more attention has not been directed towards to Reisman’s work from within “Austrian” circles. It is only after having read this treatise that one can see why. Although Reisman claims that Mises is his primary intellectual influence, there is very little of this treatise that could be regarded as distinctly Misesian. Rather, Reisman’s direct influences are the classical economists (especially Smith, Ricardo and J S Mill, upon whom he relies for support to an extent far beyond his reliance upon Mises) and Ayn Rand. Reisman specifically rejects the categorisation of economics as the science of human action, and prefers, instead, to regard it as “the science that studies the production of wealth under the division of labour”. He therefore willingly abandons any analysis of individual values, means, ends, and choices, and restores economic theory to the study of holistic aggregates; indeed we might say that his definition of economics, which views wealth as an entity possessing some kind of objectively determinable magnitude, demands such a restriction. Reisman positions the businessman, rather than the consumer, as the centre of the economic system, stating that consumers (as a whole) are largely dependent upon businessmen (as a whole) rather than vice versa. While, according to Reisman, consumers provide the direction of economic activity (i.e. the precise direction of resources to fulfilling specific industries), businessmen and capitalists are responsible for its extent, i.e. the limits of saving and capital investment. In other words, it is the decisions of capitalists that determine the extent of “economic progress” (a term Reisman prefers to “economic growth”) rather than those of consumers. A corollary of this is that production and producers are reinstated as the keystones of economic activity rather than consumption and consumers (there is at least an implication in parts of the treatise that production is good and proper whereas consumption is bad and wasteful, although this is much muted compared to the same in Reisman’s classical influences). Furthermore, it is clear that Reisman does not regard his approach to economics as a wertfrei science and, instead, believes his economic theory to be a rigorous promoter and defender of the capitalist system – an attitude that cannot be avoided by his definition of economics as the study of the accumulation of wealth under the division of labour, a division that he says is only possible under private ownership of the means of production. Thus, in Reisman’s world, a discussion of economics is a discussion of capitalism which, presumably, explains the book’s title.

What can we say about Reisman’s approach? Without beating about the bush we must state at the outset that Reisman, who is thoroughly acquainted with “Austrian” economics, has jettisoned a tremendous degree of sound theoretical understanding from the science. Although Reisman, who self-identifies as an “Austro-classical” economist, endeavours to restore to economics many of the (in his opinion) sound doctrines of the classical economists that were allegedly rejected following the discovery of the law of marginal utility and the backlash against Marxism, we must conclude that the result is something of a retrogression rather than a synthesis of two, hitherto quite disparate, schools of thought. In Reisman’s world, the achievement of all ends and their associated costs never advance deeper than the objective measurement of exchanges for money. He never advances any exposition of individual ends and subjective costs (indeed, he explicitly rejects the doctrine of opportunity cost). Hence the entire purpose of the economic system as serving the needs of individuals and the types of decisions that individuals must make in order to achieve these ends is missing, subsumed by the supposedly limitless need of man as a whole to accumulate “wealth” in perpetuity. In other words, Reisman’s restoration of the primacy of the production of “wealth” overlooks the fact that all production is ultimately aimed at providing for consumers and that it is the ends of consumers to which the economic system is geared. It is perfectly consistent to state, as does the wertfrei “Austrian” school, that the purpose of all economic endeavour is to provide for consumption while on the other hand remaining firm that the means of achieving this consumption can only be served by increased production. Therefore, while we can hold that the desire for consumption is the ultimate cause of economic progress, we can also state that production is the proximate cause. Thus, while Reisman’s categorisation of economic theories under the headings of either “productionism” or “consumptionism” – the former of which involves the promotion and encouragement of increased production as the means towards economic progress, the latter the promotion and encouragement of increased consumption – provides an instant and convincing cognitive aid, it obscures the clarity afforded by this insight of the “Austrian” school.

Furthermore, Reisman’s repositioning of the capitalist/businessman as the driver of economic progress relies upon capitalists providing the bulk of investment funds, i.e. that it is the consumption/saving decisions primarily of businessmen that determines the extent of economic progress. He argues that the wages of labourers do not provide a significant source of investment funds and are usually consumed either immediately or are saved in order to purchase durable consumer goods such as housing or automobiles. Any investment saving that labourers do happen to undertake is likely to be wholly disinvested at retirement, thus netting out the saving of younger generations. However, there is no reason for Reisman to think that this this must be the case. It is just as possible for investment funds to come from the savings of everyday individuals that are then lent to businessmen for them to deploy in their enterprises via a conduit such as bank savings accounts (and such a view would greatly undermine any opinion that capitalism keeps the masses in servitude as wage labour). The distinctive role of the businessman is that he provides entrepreneurial talent in order to generate economic progress by directing those saved funds to where they are most urgently desired by consumers. Yet Reisman’s treatise lacks any extensive theory of entrepreneurship and only passively recognises the need for superior decision-making in order to fulfil the ends of consumers. This lacuna in Reisman’s theory means that in order to position the businessman as the driver of economic progress he has to paint him as the primary provider of investment funds. This contrasts greatly with Reisman’s mentor, Mises, who makes entrepreneurship a hallmark of Human Action, thus giving us an insight into the economic significance of the businessman that extends far beyond the fact that he simply didn’t consume his wealth. (Some of Reisman’s views on what determines an individual’s consumption/investment preferences, which inform his theory here, are also incorrect and we will explore these below). In any case, however, Reisman seems to support his theory through a blurring of economic categories, such as labourers, consumers, capitalists, etc. (something which, irritatingly, is done all too frequently). In reality, all individual people in the economy participate in different categories at different times – a man is clearly a labourer when he goes to work, a consumer when he spends his wages in the shops, and a saver when he buys a corporate bond. However, when we are discussing, for the purposes of conceptual clarity, the roles of individuals in these economic categories, we isolate those specific roles from other categories and thus we always talk of labourers qua labourers and consumers qua consumers, etc. So even if it may happen be true that the particular people who are businessmen are responsible for the greater part of saving and investment, businessmen are consumers too and considering them as consumers qua consumers it is their decision to refuse to consume their wealth today in favour of accumulating greater wealth for consumption tomorrow that provides the source of investment funds. It is therefore true to state that it is the choices of consumers who determine both the direction and extent of economic progress. Moreover, as Mises also recognises, any consumer who is currently a wage earner can transform himself into a businessman, entrepreneur or capitalist by saving and investing his wages (while, equally and oppositely of course, any businessman who decides to consume his fortune may end up as a wage earner).

Finally, it is one thing to state that the preoccupation of the economic activity of any one (or even most) individuals may be with the accumulation and augmentation of their own wealth. But it does not follow from this that the science of economics itself concerns the accumulation of wealth. Animals preoccupy themselves with the need to attain food and shelter but this does not mean that the focus of zoology is with the achievement of these things.

Examining Reisman’s treatise on its own, non-wertfrei terms as a rigorous defence of the capitalist system, much of its earlier part is a detailed offence against the fallacies of socialism, collectivism, interventionism and environmentalism (and later, Keynesianism and inflationism). These devastating, if often heavy handed, critiques are likely to be viewed as by Austro-libertarians as Reisman’s greatest achievement in this work, even if some of it was previously published as The Government Against the Economy. A specific and lengthy chapter is possibly the most passionate assault against the ecology movement, a chapter that could easily be expanded and published as a separate treatise (Reisman’s stress of the anti-human zeal of environmentalism resonates with that of environmentalists, such as former Greenpeace Canada President Patrick Moore, who have become disillusioned with the movement). Reisman’s explanation of various forms of government intervention, such as price fixing, with reference to specific notable examples such as the oil recession of the 1970s, in which he traces out all of the effects (and effects of alternatives to) government meddling have rarely been matched. Yet much of the remainder of Reisman’s exposition does not in fact read as a promotion or a defence of the capitalist system; rather it is more akin to an aggregative, accountancy-laden explanation of what the capitalist system does, much like a description of some giant machine that swallows up inputs measured in numbers and churns out some kind of output, also measured in numbers. Reisman categorises an endeavour as productive according to its ability to earn money voluntarily through exchange. Hence all government functions, relying upon taxation, must necessarily be classified as consumption and not production. In other words, government can never produce and must always be a leech on the genuinely productive, capitalist system. Moreover, his excellent critique of socialism recognises that socialism must entail tyranny and a replacement of the ends sought by individuals with the ends sought by leaders. However, Reisman’s aggregative, accountancy approach never builds upon this insight. In the depths of the latter half of the treatise one almost forgets any connection between these accounting entries and how the capitalist economy serves the needs of individual people. One of Reisman’s stated aims in the treatise is to show how a proper understanding of the capitalist system should prevent one from feeling any kind of “alienation” from or subjugation by the capitalist system – something which Reisman comes closest to achieving through his analysis of the division of labour. Yet in the main it would appear that the Mises-Rothbard approach of detailing the economy as a network of bilateral, voluntary exchanges between individual people striving to meet their own needs through voluntary co-operation (and how these disparate and often conflicting goals and purposes nevertheless mesh into a harmonious, productive society) is much more conducive to achieving this than is Reisman’s aggregative, accountancy method. While it is true that the ability of capitalism to manifestly increase the standard of living and the degree of material wealth lends it a tremendous amount of moral weight, we can suggest here without too much elaboration that any rigorous defence of capitalism and, moreover, freedom can proceed only by focussing on the primacy of the needs of each individual person, not all of which can be measured or attained though objectively viewable exchanges for money. This omission in Reisman’s work also weakens the distinctly economic flavour of this treatise, as individual choices, desires, wants, decisions and actions do not seem to matter.

Turning now to some of Reisman’s theoretical contributions to the science of economics, there are two that stand out in particular. The first is his attempted demolition of the “conceptual framework” of the Marxist exploitation theory by asserting the primacy of profit rather than of wages. In Reisman’s view, critics of Marxism, including Böhm-Bawerk, have accepted the categorisation, originating with Adam Smith, of profits paid to capitalists as deductions from wages, and have sought explanations in order to justify this deduction. Reisman, however, asserts that wages, paid to labourers, are, in fact, a deduction from profits. If profits are calculated by subtracting business costs from business revenue, it is clear that if a person undertakes an enterprise to achieve, say, 100 units of revenue then every monetary outlay he expends in order to achieve that 100 units of revenue must count as a deduction from it. The fewer costs he has the more profit he is left with. Thus it is profits that represent the primary economic income, not wages. It is conceivable for the economic system to have profits but not wages in the event that every individual person operated as a sole trader and employed no other individuals. If, however, a businessman hires labourers to assist in his enterprise, the wages he must pay to these workers for their assistance are deducted from the ultimate sales revenues. Therefore, according to Reisman, wages only appear in the economic system on account of the help that other people provide to a businessman’s enterprise, and their help stakes a claim on his revenue. Thus it is wages that are deducted from profits, not vice-versa.

Whatever the merits of this view we must conclude that, to the dyed-in-the-wool Marxist, it is likely to be beside the point. The source of contention in the exploitation theory is that the businessman doesn’t do anything and simply leeches off the productivity of the worker; in other words by hiring labourers the businessman simply abdicates any participation in the act of production yet still gains an income. Reisman himself provides the answer to this by pointing out that labour is not the only source of productivity in a division-of-labour society and that it is, in fact, decision making, risk-taking, management and oversight that are also essential – in other words, entrepreneurship. And yet, as we noted, any extensive treatment of entrepreneurship is precisely what is missing from Reisman’s theory. Therefore, it must be submitted that an understanding of entrepreneurial profit and loss and the insulation of the labourer from business risk coupled with the time preference theory of interest provides a more effective demolition of Marxism than the primacy of profit theory which, if correct, provides only additional ammunition for it.

This brings us to Reisman’s next theoretical contribution which is his net-consumption/net-investment theory of aggregate profits, profits which he tries to explain in an environment of an unchanging supply and flow of money. The attempt to explain profit in terms of physical goods is relatively straightforward. Goods, of course, can increase or decrease and thus there can be absolutely more (profits) or fewer (losses) of them across society as a whole. We can also understand clearly, across the time structure of production, how the consumption of a smaller quantity of physical goods can be foregone today in order to produce a larger quantity of goods tomorrow. This is not so when it comes to accounting for profits and losses in terms of money which is assumed to be fixed in supply and flow. For every transfer of money that represents a credit to ones businessman’s income must show up as a corresponding debit to another businessman’s costs. Hence, while some individual businesses would earn profits and others would suffer losses, all profits and losses across the economy as a whole would net out and hence any question of aggregate profit would be impossible. The only method of solving this conundrum is to somehow, on the societal balance sheet, create a credit entry to income/equity without a corresponding debit entry to costs. It is the explanation of how this is possible that Reisman sets out to achieve.

The first element of aggregate profits – “net consumption” – derives from the fact that business revenues from consumption spending by labourers (and, as we noted, Reisman categorises all spending by labourers as consumption spending) shows up also as a business cost in the form of wage payments. Therefore, revenue and cost cancel each other out on the societal income statement. Similarly, business to business spending will be counted as both an equal and opposite revenue and cost and will net to zero. However, “the payment of dividends by corporations, the draw of funds by partners and proprietors from their firms, and the payment of interest by business firms” (which Reisman regards as “transfers”) to business owners, which provide the latter with a source of consumption spending, does not show up as a business cost yet does, once spent, show up as a business revenue. Thus the rate of profit is determined solely by the desire of the capitalists to consume. This element of profit has, Reisman claims, the ability of providing continued aggregate profits in an environment of unchanging money. For example, if the volume of spending is 1000 units of money each period, business costs could be 900 while business revenues could be 1000 and profits 100 in each and every period. (Reisman uses similar reasoning to explain how the rate of profit is increased by taxation as all taxation is consumption spending). The second element, “net investment”, derives from the fact that business spending on assets to produce business revenue are capitalised as assets and only later depreciated incrementally as a business cost. Thus, in an environment where the volume of spending is the same, business revenue exceeds business cost. For example, if 100 units of money are expended on capital assets, 800 units are spent on business costs, and there are 1000 units of business revenue, profits would be 200 as the 100 units spend on capital assets are not charged as a cost. Reisman believes that net investment provides a finite outlet for aggregate profit because, eventually, depreciation charges from assets previously capitalised will equal the value of new assets capitalised. For example, if 100 units of monetary spending on assets per year are capitalised and then depreciated at an uncompounded, annual rate of 10%, depreciation charges will be 10 units in year one, 20 units in year two, 30 units in year three, and so on until, in year 10, depreciation charges will exactly equal the 100 units of additional investment and so net-investment will provide no source of aggregate profit in that year. Thus, Reisman believes, only net consumption is capable of providing continuous, aggregate profits period after period. Net consumption and net investment are, however, joined at the hip. Reduced net consumption provides increasing funds for net investment to be capitalised on the balance sheet and charged as business costs only at increasingly remote points in the future.

What can we say about this theory? It should not be surprising to “Austrians” that Reisman’s theory is based upon net-consumption and net-investment as it those elements that are determined by the “Austrian” theory of time preference, which affects the rate of interest. (What Reisman refers to as “profit” is what most “Austrians” would refer to as “interest” – Reisman offers no explicit distinction between entrepreneurial profit and loss on the one hand and what “Austrians” would regard as interest on the other). Yet Reisman regards his theory as standing in opposition to the time preference theory and, moreover, the older productivity theory of interest. However, Reisman’s approach, characterised as simply a description of accountancy practices and the summation of money flows, does not challenge the time preference theory at all. The primary question of profit and interest that is answered by this latter theory is why do businessmen not impute the full value of the final product to the factors of production. In other words, why, even after businessmen are compensated for their managerial or oversight activities as a factor of production, is there always a further residual surplus that is not eliminated by competitive bidding amongst entrepreneurs? Why is there, to use Reisman’s terminology, a “going rate of profit” at all? The net-consumption/net-investment theory, while explaining that rises in net consumption will increase the rate of profit while reductions in them will lower it, only really explains how, from an accounting point of view, profits are possible. Reisman offers no extended treatment of the motivations of capitalists in paying (and of labourers in accepting) a sum lower than the total of business revenues and thus it is difficult to regard this as a distinctly economic theory. A more convincing explanation of his theory would detail how, with decreasing time preference, more funds are advanced to factors of production yielding revenue in the future, thus diminishing net consumption and the rate of profit, while these expenditures will be capitalised at increasingly higher amounts, depending on the time period when they come to fruition, relative to the ultimate business revenue that is earned. Thus Reisman’s accountancy-laden approach would, in this way, be fully reconciled with the “Austrian” approach to profit, or, rather, to what “Austrians” would call interest.

When Reisman does address the motivations that determine net-consumption and net-investment he does so erroneously. Reisman defines time preference as the determinant of “the proportions in which people devote their income and wealth to present consumption versus provision for the future.” It is Reisman’s link between this posited desire to provide for the future and net-investment that causes him to declare that net investment can provide only a limited contribution to net profit. To quote: “As capital and savings accumulate relative to income, the need and desire of people to increase their accumulated capital and savings still further relative to their income diminishes, while their desire to consume their income correspondingly increases”. In other words, the more saving and capital people possess the more they have provided for the future and thus productive expenditure will fall and consumption will rise, choking off net investment in the form of further additions to the asset side of the balance sheet. Thus depreciation charges begin to equalise new investments and aggregate profits from net-investment begin to fall. This view, however, is mistaken. Time preference has nothing to do with the desire of people to provide for the future. The need to provide for the future is always a present end just like any other and could be achieved by plain saving rather than investment. Time preference, rather, is the rate at which individuals prefer a larger quantity of goods available at some point in the future ahead of a smaller quantity of goods available today. It is perfectly possible for people to continue to invest sums of capital that will not produce consumer goods for well after they are deceased. Indeed, this is precisely why people have inheritances to bequeath. Many of the buildings, factories and infrastructure we have today were created not in our own lifetimes but were handed down to us from past generations. And it is further possible that capital accumulation and technological progress, which Reisman himself stresses enhances the ability to produce capital goods, will enable the production of capital goods that last further and further into the future. People would not even need to create capital goods that last so long with the purpose that they do so – in other words they could be perfectly limited in their own time horizons and yet still produce capital goods that yield a product well after the elapse of this time horizon. Let’s say, for example, that the current rate of time preference means that the produce from all assets appearing after thirty years hence is fully discounted to zero. In other words, only what the assets can produce in the next thirty years is valuable to present persons. If a capital good was created that could yield produce for sixty years, after the elapse of each year, another year’s discounted produce would be capitalised as this year is drawn into the thirty year time horizon. Therefore, such assets will provide a continued source of credits to business equity (and, thus, profits) without corresponding business costs. This is precisely the case with some of the most valuable patches of urban land which, for all intents and purposes, will go on producing well beyond the lifetimes and time horizons of any living person. Thus there is no reason for net-investment to be so limited in its contribution to aggregate profits in the environment of unchanging money. Moreover, we can see in this way how accumulating, aggregate profits that are capitalised for longer and longer periods is the hallmark of an economically progressing society – one where more and more capital is invested for longer – while the opposite, aggregate losses, represents retrogression through capital consumption.

Finally, as we noted above, there is no reason to discount saving by labourers a source of investment funds. This would divert spending from business revenue as the funds would be lent to businesses who would then spend it on “productive expenditure”. Without any corresponding business revenue the rate of profit would fall. (Thus we can see why increased funds that are made available for lending must be made at increasingly lower rates of interest).

There are one or two further disagreements we can cite here. First, “Austrian” business cycle theory, the jewel in the crown of “Austrianism”, is never explained at length and instead takes its place in a wider treatment of the effects of inflation. Second, his treatment of neoclassical price theory is too aggregative and does not explain how individual bidders and suppliers bring about a harmony between the quantity demanded and the quantity supplied. Third, as in his critique of the time preference theory of interest, Reisman often perceives differences or disagreements where there are none, such as that alleged between his productivity theory of wages and the marginal productivity theory of wages, the latter of which he describes incorrectly. And finally, in spite of having been the translator of Mises’ Epistemological Problems of Economics, Reisman has little to say concerning method – something which perhaps descends from his rejection of economics as the science of human action, which underpins Mises’ methodological dualism that divides economics from the natural sciences.

Overall, therefore, the question of whether Reisman’s approach to economics has successfully synthesised the “Austrian” and classical schools, and, moreover provided a progressive outlook for the science of economics must, regrettably, be answered in the negative. Rather, Reisman’s positive economic theory in this treatise comes across more as a restatement and re-polishing of classical economics (with some corrections to that school of thought), peppered with insights from neoclassicism and the “Austrian” school. Reisman’s rejection of the primacy of human action as the subject matter of economics has been at the expense of not only losing a great deal of theoretical understanding in the wertfrei science that this affords, but also weakening any positive promotion for capitalism and freedom.

Nevertheless, while this review has been mainly been critical of Reisman’s positive economic theory, we must end by celebrating the fact that our author has, in this treatise, many great things to say concerning socialism, environmentalism, interventionism, inflationism, Keynesianism and all other manner of false doctrines rejected by “Austrians” and libertarians alike. What Reisman has put to paper here are among the finest critical analyses of these areas ever written and, even if one cannot agree with Reisman’s specific, economic outlook, these contributions alone place Reisman in the top rank of economists whose work should be studied avidly.

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Utilitarian Arguments for Liberty

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Utilitarianism or some form of consequentialism has underpinned the ethical worldview of many libertarians past and present. Within the “Austrian” School we may cite Ludwig von Mises, F A Hayek and Henry Hazlitt as proponents of this approach, contrasting with the more rule-based or deontological approaches of, say, Murray N Rothbard and Hans Hermann Hoppe, and the objectivism of Ayn Rand.

This essay will seek to examine some utilitarian and consequentialist arguments in favour of liberty. In doing so we must bear in mind two aspects. First, not all utilitarian arguments are of the same ilk and vary from simple approaches of judging outputs resulting from a posited situation with interpersonal utility comparisons, all the way to more general and sophisticated treatments such as that of Mises and that of Rothbard in his noted article “Towards a Reconstruction of Utility and Welfare Economics”1. Here, therefore, we will compare these two utilitarian approaches towards liberty. Second, the adequacy of utilitarianism can be examined from the point of view of providing a moral bulwark for a world of liberty on the one hand and from the point of view of promoting such a world on the other; our treatment of it may be different in each circumstance because that which may be suitable to form the moral foundations of liberty may be not be the key aspect that we can emphasise when persuading the populace of the virtues of a libertarian society. Hence we must examine any utilitarian argument from both points of view.

We will begin, then, with the basic forms of consequentialism that look to measure the output of individual scenarios. Such an approach will often posit an emotive and hypothetical situation where one individual owns property and another individual will succumb to some kind of malady such as hunger, illness and ultimately death unless he gets his hands on that same property. A typical example is of a lost man wandering in the woods, cold, malnourished and in immediate need of food and shelter. He comes across a log cabin, of which someone else is clearly the first user/occupier. By peering through the window our lost man can see that it is full of food. Would it be ethical for him to break in to the cabin, use it as shelter, and/or eat some of the food without the permission of the first user?2

The rule-based approach to libertarianism would state that the lost man does not have a right to break into the cabin, use it as shelter and eat the food without the permission of the cabin’s first user (hereafter, the “owner”) as it is a clear breach of the non-aggression principle. However, a utilitarian or consequentialist may argue that while the cabin owner has a prima facie right to the ownership of the cabin and its contents the question should be answered by taking the approach that avoids the most harmful consequences – or, conversely, promotes the best consequences. In this particular situation, the loss of the food or shelter to the cabin’s owner would, apparently, not be a remarkable cost. Yet the denial of it to the lost man, starving and shivering in the open, would be tremendous, may be even as much as his life. We may warrant, therefore, that the starving man should be able to break into the cabin.

Is it possible for such a view to form a) the moral backbone for libertarianism and b) a persuasive argument in promoting a libertarian society? In answer to the first question, we must decide firmly in the negative. First, all of these scenarios, such as the starving man in the woods, are purely hypothetical situations to which we are expected to give hypothetical responses. However, ethical dilemmas do not arise in hypothetical situations; they arise in real situations where there are genuine conflicts over scarcity. Although such hypothetical situations could one day come about, the danger of entertaining them is that it can be worded in such a way as to provoke the answer most desirable to its proponent. Thus the die is already loaded in favour of the latter’s political philosophy. Walter Block comments on such an example provided by Harold Demsetz of the Law and Economics movement (which is basically a utilitarian approach to legal rights). Demsetz’s scenario is that of “Austrian Pure Snow Trees”, which are owned by a religious sect. An ingredient from these trees happens to be the only cure for cancer, but the religious sect will not allow them to be used for that purpose, reserving them instead for religious worship. Demsetz challenges whether it is really “evil and vicious” to override the private property rights of the religious sect so that cancer sufferers can benefit from the trees’ curative ingredient. Block responds at length:

Given [Demsetz’s] highly emotional example, it is indeed hard to resist the notion that it would be preferable if the trees were used as a cancer cure.

Emotionalism can be a double edged sword, however. As long as our intuitive imagination has been unleashed by Demsetz in this creative way, why not push the envelope a bit? Consider, then, the case where the views of this religious sect are absolutely correct! That is, if the trees are torn down for so idolatrous and unimportant a purpose as curing cancer, then we’ll all be consigned to Hell forever. Wouldn’t it then be “intuitively appealing” to allow the islanders to continue their ownership of these trees?

Demsetz, in taking the opposite position, is acting as if the cult is erroneous in its religious beliefs. But assume for the moment the “cultists” to be correct in their world view. It would then be justified – according to Demsetz – not only to protect them from the onslaught of the cancer victims, but to seize the assets of the latter if this would in any way help the former. Suppose, that is, that there was a cancer cure, owned, now, by the victims of this dread disease, but that for some reason the worshippers determined that this material would help them in their efforts to contact the Deity. Then, according to the logic established by Demsetz, it would be appropriate public policy to forcibly transfer the cure to the control of the religious ”fanatics.” Surely Demsetz knows nothing-for certain that would render such a conclusion invalid.

[…]

Let us extend the Demsetzian argument in yet another dimension. Suppose that it was not the islanders’ trees that could cure cancer, but rather their hearts. That is, the only way to save the sufferers from this disease would be to kill, not the Austrian Pure Snow Trees, but their owners, the members of this religious sect, and then to take their hearts, chop them up, and feed them to cancer victims. Would Demsetz (“emotionally”) support this “modest proposal” to do just that?

[…]

Ultimately, there are only two ways of settling such problems. All others are merely combinations and permutations of these two. On the one hand, there is a provisional or instrumental property rights system. Here, holdings are secure only as long as no one can come up with a plausible reason for taking them away by force. Under this system, either dictators or majorities (or dictatorial majorities) hold the key to property rights. The difficulty is that there are no moral principles which can be adduced to derive any decisions. Presumably, utility or wealth or income maximization is the goal; but due to the utter impossibility of interpersonal comparisons of utility, this criterion reduces to arbitrariness. On the other hand is a thoroughgoing and secure property rights system. Here, one owns one’s possessions “for keeps.” The only problem here is the temptation to overthrow the system in order to achieve some vast gain, such as the cure for cancer. Demsetz’s example is so forceful by virtue of the fact that he expects his readers will consider a cure for cancer to be more valuable than a pagan rite – he knows it is likely they will engage in interpersonal comparisons of utility. But these temptations are easily resisted as they are inevitably imaginary and artificially constructed. We have yet to be presented with a real world example where there is a clear cut case for massive property rights violations.

[…]

Hypothetical arguments have their undoubted philosophical use. [However], the point being made here[…]is that [deontological] libertarian rules are only inconsistent with broad based utilitarian concerns in the imagination, not in reality.

Note how far from reality Demsetz must remove himself in order to manufacture an example that is intuitively consonant with his support for what in any other context would be considered murder (hearts) or theft (trees) or slavery-kidnapping (draft).

[…]

In very sharp contrast indeed, resort need not be made of fanciful examples to defend the libertarian vision.3

Imaginary scenarios, then, are always worded so that the listener is encouraged to empathise emotionally with the economically deprived while completely ignoring the point of view of the property owner, or at least making the latter look frivolous and capricious. Such a rhetorical trick applies not only to specific scenarios but also to entire political treatises. How much, for example, do the imaginary, hypothetical situations of the original position and the veil of ignorance in John Rawls A Theory of Justice – which do not exist in the real world – demand the very answer that the author desires?

Second, the purpose of ethics is to resolve or otherwise avoid conflicts that arise from the result of physical scarcity. Rule-based approaches to liberty that provide physical demarcations to denote property rights permit this to a high degree of certainty in any given situation as the boundaries of permissible action are constructed objectively. Because all valuations through action result in physical changes to physical goods, objective evidence of these changes – i.e. homesteading, production, etc. – give an immediate cue to indicate to a latecomer that the property may not be touched4. Consequentialist approaches, however, cannot rely on objective, physical demarcations to denote property rights; rather, they rely upon the measurement of competing subjective values. This renders the resolution of conflicts and conflict avoidance much more difficult. The question the lost man faces is what am I permitted to do right now? If moral boundaries are based upon hypothetical and changing values and tastes then this question cannot be answered. He may assume that the cabin owner values the cabin and its stock of food less than he does, but he has neither evidence nor proof of this. Indeed the cabin owner isn’t even there to ask. And whether the cabin owner values it less may change from day to day. Yesterday, the cabin owner might not have valued these resources very highly at all; today, however, what if the cabin owner has himself suffered an accident and requires the shelter and food, which he believes to be in secure possession, and is now under threat from the wanton consumption by the lost man? What if the cabin owner’s life is threatened by the loss of food and shelter? Indeed, what if he had purchased the cabin as insurance against that very possibility? There is, therefore, no way of making a rational decision ex ante.

Third, if ethical determinations cannot be made ex ante then it follows that a decision must be made ex post. In other words, the lost man could take a chance by breaking into the shelter and then battle out the question of whether he was right to have done so later through litigation or a settlement process. It is for this reason that utilitarian forms of libertarianism tend to be minarchical rather than anarchical. Hence, this basic form of utilitarianism provokes the very monolithic state apparatus that libertarians should be opposing, and puts in its hands a tool – interpersonal utility comparisons – with which to make its decisions, a tool that is ridiculously uncertain and malleable5. To be sure, it might be possible for individuals to form an empathetic judgment based on interpersonal utility comparisons in an individual situation. But it does not follow from that possibility that a government or a court could make a rigorous determination when passing legislation or enunciating judgments that affect the lives of millions of people in multitudes of different situations6.

Fourth, at the heart of many consequentialist approaches is a fundamental misunderstanding as to what the concepts of “liberty” and “freedom” actually mean. If one views them as meaning freedom from want, from hunger, from the elements and so on then one is naturally led to a consequentialist approach. However, properly considered, liberty is a sociological concept that applies to the relationship between each individual human being. A person is free if he can live his life without the physical interference of his person and property by others. Whether he is hungry, cold, or naked, on the other hand, concerns his relationship not with other human beings but, rather, with nature. This can only resolved not by extending his “freedom” forcibly into the territory of others but by gaining power over nature – in short, by productivity. Any number of theoreticians can spill oceans of ink in trying to determine whether or how the wealth of the cabin owner should be distributed to the lost man in the woods. Yet wouldn’t it be so much better if society was so wealthy that the lost man possessed the wherewithal to prevent himself from being in such a wandering state in the first place? What if the man had an inexpensive GPS system; compacted supplies of food in pill/tablet form that could sustain him for weeks or months; emergency communication devices that would alert a private protection agency to his whereabouts? Yet it is precisely such productivity that is threatened by consequentialist determinations of property rights. Strong private property rights that remain certain following original appropriation or voluntary transfer promote economic growth by encouraging saving, long term planning and low time preference. Uncertain or vague private property rights do the exact opposite. If it is possible that your property will be snaffled in an instant by someone who allegedly “values” it more than you do then the attractiveness of using the good for saving and investment is lowered. You will be willing to take fewer risks and will work less hard with the good if you know that the fruit of your efforts might be confiscated in the blinking of an eye. At worst, such weak property rights encourage immediate consumption as soon as you get your hands on any good at all. That way, in most cases it will no longer exist for someone to take it away again at a later date.

Turning now to our next question, would such basic consequentialism serve in any way to persuade people of the virtues of a libertarian society? Again we have to answer firmly in the negative. We must remember that the primary preoccupation of libertarianism is with the evil and oppressive monolith known as the state. This is the entity that truly destroys freedom; it confiscates our income to fund its profligate spending; forces us to use its worthless paper money that it prints incessantly to fuel its endless foreign wars; destroys families and fuels poverty and dependency with the massive welfare state; regulates what we can do with our bodies, what we can say with our own mouths, where we can set up business, whom we may employ in that business and on what terms. Government is estimated to have killed approximately 262 million people outside of warfare during the twentieth century; private affronts to liberty – even such horrendous crimes such as murder and rape – pale in comparison to this. The US government’s so-called war on terror, at a cost of several trillion dollars, has killed an estimated 1.3m Iraqis, Afghanistanians and Pakistanis in its first ten years, even though more Americans are killed by falling televisions than by terrorist attacks. The greatest insult has to be that it is this miniscule private crime that supposedly constitutes the very justification for the state and its monopolisation of security and litigation. Although there is no shortage of nobility in striving to apply justice in every individual case, libertarians must fry the biggest fish and not spend their time debating whether a lost man breaking into a cabin is or is not an affront to liberty. When attempting to promote liberty, let us confront the very real ogre of the state rather than dwelling in imaginary scenarios that will make no practical difference to people’s everyday lives. Furthermore, as we mentioned above, if justice depends on interpersonal utility comparisons in individual cases, then it craves for the existence of a compulsory referee in the form of the state, the very thing that destroys liberty entirely. We must conclude then that this basic form of utilitarianism, which seeks to evaluate outputs from specific situations, must fail on all accounts as an argument in favour of liberty.

Let us now turn towards a second conception of utilitarianism, the more sophisticated approach adopted by such eminent theoreticians as Ludwig von Mises. The tenor of this approach is that voluntary exchange under the division of labour – i.e. the market – is essential for the survival and flourishing of every individual human being; every human is so interdependent upon every other that to plump for anything else would result in the rapid disintegration of the standard of living or, at worst, certain death. Hence this form of utilitarianism concentrates on the virtues of the market itself rather than looking to the justice of individual situations. Mises, and others who follow this approach, therefore avoid any complications arising by way of interpersonal utility comparisons.

It is important to realise that this argument is predicated upon a few other important Misesian insights. First is that when pondering the economic organisation of society only two extremes are possible – the free market or total socialism. As Mises so effectively argued, any “interventionist” point or “mixed economy” approach in between these two extremes will cause effects that must either lead to abandonment of the intervention on the one hand or to total control on the other. One must therefore choose between one or the other and cannot favour anything in between. By demonstrating the economic impossibility and the catastrophic consequences of full socialism Mises demonstrates the complete lack of basis for making a choice that favours full government control. The only rational option, therefore, is the unfettered free market. Second, and related to this theme, Mises was of the view that “society” is synonymous with social co-operation under the division of labour. As he says in Human Action:

A society that chooses between capitalism and socialism does not choose between two social systems; it chooses between social cooperation and the disintegration of society. Socialism is not an alternative to capitalism; it is an alternative to any system under which men can live as human beings.7

Following this line of thinking, questions such as “how to organise society” strike one as absurd when society itself is already a form of organisation. We do not have the choice of “picking” from an array of options when it comes to forming a society. Either there is social co-operation under the division of labour and society exists; or there is an atomistic hand-to-mouth existence and society does not exist. Any person, therefore, who genuinely wishes to promote a theory of society cannot rationally opt for any kind of socialism and, a fortiori, any kind of interventionism8.

How useful is this approach for forming a moral backbone for libertarianism? At first, this approach seems remarkably more plausible than the basic form of consequentialism that we just discussed. By looking at the general consequences of the market we do not get caught up in traps such as interpersonal utility comparisons and we have a strong counter-argument against anyone who proposes a collectivist theory of social organisation. Moreover, the fact that the marketplace serves to improve the material wellbeing of every individual human being lends it a heavy degree of moral weight. If the free market was to spread misery and discontent through perpetuating a lower standard of living we would surely be willing to lend it less moral credence. Unfortunately, however, this utilitarian approach lacks the very thing to which the basic form of consequentialism was far too devoted – a rigorous passion for the justice rather than simply for the utility of private property rights.

First, although it provides a rhetorical defence against those who profess their collectivist aspirations to be for the benefit of society, it will never provide a defence against megalomaniacs who are content to milk everyone else for all they are worth. In other words, it will never provide an answer to those who believe society exists to serve them alone and that they are entitled to use other people in any way they see fit. The existence of such megalomania should not be dismissed lightly. Simply because we associate it more with caligulan monarchs and despots of times gone by does not mean to say that our democratic structures are impervious to it. Many libertarians are vocal opponents of what they see as “US exceptionalism” – the idea that the US government can pretty much do whatever it pleases in foreign affairs and standards that apply to a foreign government do not apply to the US. How can this be described as anything except megalomania?

Second, the logical effects of the socialisation of society – the total collapse of the division of labour and the complete decimation of the standard of living – can be gut wrenchingly long run effects. Society currently has plenty of capital that can be consumed and afford a comfortable, even luxurious living to any one individual. The Soviet Union took an agonising seventy years to die, a span of time that exceeds that of most individual’s adult lives. An advocate of socialism and socialisation is therefore not necessarily advocating his own certain death or relegation to poverty. He may be content to live like a king for the duration of his life and not care a whit if society became deeply impoverished long after he has dropped off of his mortal coil. Arguably this was the attitude inherent in Keynes’ oft-quoted quip “in the long run we are all dead”. As Murray Rothbard is supposed to have retorted, “Keynes died and we were left with the long run”. But such an attitude is provoked and enflamed by the fact that democratic government is a revolving door with officeholders required to endure repeated elections, endowing them a very short time in which to accomplish their goals. Every politician yearns for his day in the sun when he is lauded and praised as a great statesman, but he has to achieve this now, in the short run, before he loses an election. As long as he can reap the headlines and rewards during his tenure and, possibly, for the remainder of his life, who cares if his policies are ultimately destructive after he is long gone? It is for this reason that democratic governments are suffering from ever increasing and crippling debt as each generation of politicians seeks to shower its electorate with free goodies that only have to be paid for years after they have left office (or have died) and it is somebody else’s problem9. So too, could we suggest, that endless war has become the norm as each successive leader tries to demonstrate his Churchillian qualities and to elevate himself to the legendary, almost Godlike realms of the great warrior-statesman such as Lincoln and Roosevelt. Never mind that war ultimately is destructive; never mind that it destroys entire cities and societies; never mind that it kills, maims and otherwise ruins the lives of millions of innocent civilians. As long as the commander-in-chief can claim to have vanquished a cherry-picked foe in some distant country then his place as a saviour of civilisation is assured, at least in the meantime. So too do the manufacturers and profiteers of armaments display the same attitude. They know how evil and destructive war ultimately is; there is no shortage of literature espousing this fact. But they get to reap heavy profits now and to enhance their own lifestyles now. Why should they care about what happens in the long run?

Third, by resting its case on the general virtues of the market this kind of utilitarianism suggests that if some form of social organisation, other than the market, however unlikely, becomes feasible then private property rights could be legitimately overridden. In other words if some form of collectivism could sustain the division of labour and a standard of living equal to or exceeding that of the free market would the force behind government taxation, theft, murder then become legitimate? However, surely if such a world was to come about we would still argue that people have the right to self-ownership and the right to the ownership of goods in their possession as first user or through voluntary transfer? Of course, a person might choose to submit to the yoke of government planning if it affords him a higher standard of living than that of the free market, but this is a different kettle of fish as the submission is then purely voluntary. On its own, however, any ability of a system other than the free market to sustain a society is insufficient as a justification to override private property rights.

Fourth, this brand of utilitarianism may convey a sense of prospective justice – that which should happen concerning property rights in the future – but what does it have to say about retrospective justice? In short, how does utilitarianism know whether the existing structure of property rights is just? After all, the existing structure of ownership benefits a lot of thieves and plunderers that would need to be dealt with in the transition from a statist to a libertarian society. A libertarian steeped in natural law and Lockean homesteading theory would answer this question rather straightforwardly. Any current owner would have to demonstrate that his title derives either from original appropriation or through voluntary transfers in title. If it is not and someone who claims such a title comes forward then ownership must be yielded to the latter. A utilitarian, however, has a bit of a problem as his philosophy generally focuses on the benefit changes to the existing array of property titles to the current market participants. He could argue that, like the natural lawyer, all existing titles to property could be examined against competing claims and then either endorsed or rectified accordingly. However, because his theory is based on the efficacy of the market in developing the division of labour his case for requiring this is demonstrably weakened. Certainly theft and plunder disrupted the efficiency of the market in the past. However, wouldn’t a mass of re-appropriations to rectify ancient crimes undermine the efficacy of the market today, at least temporarily? Would it not be easier, from the point of view of efficiency, to just preserve all existing titles then let everyone go forward? Why compound a past disruption to the market with a new one? It is upon this basis that this brand of utilitarianism is criticised for preserving the status quo, for permitting, in the transmission to a libertarian world, the bureaucratic class to keep their hands on the loot, much like the oligarchy did in Eastern Europe after the collapse of the Soviet Union. To be sure, this argument against utilitarianism is not, in the view of the present author, as strong as some libertarians make it out to be. Nevertheless, utilitarianism does open itself up to the charge that there comes a point where stolen property should remain in the hands of the thieves (or their heirs) simply because the act of unwinding the theft would cause more disruption to the market than to not to do so, particularly if the property is heavily invested in an enterprise that provides substantial employment and is apparently productive. Moreover, while it is straightforward enough to justify voluntary trade in the marketplace as promoting the division of labour and the standard of living, we have to wonder whether the utilitarian can provide much of a justification for original appropriation – that is, for the first user of a good to retain it – with his utilitarian arguments alone. Original appropriation is of course the genesis of voluntary trade – we appropriate virgin goods with the intent to produce with them and trade them away for things we want in exchange, thus helping to overcome the fact that the world’s resources are not evenly distributed amongst different geographic regions. However, such a justification can only stand if one can also demonstrate that the originally appropriated property is previously ownerless and unvalued by other people, and is only recognised as scarce and valuable by the first user. The only possible such demonstration is that the first user was the one to “mix his labour with it”, whereas the actions of everyone else demonstrated no preference for that property. Hence all utilitarian arguments in favour of the free market, fundamentally, collapse into the Lockean homesteading theory anyway.

Having addressed the question of whether this form of utilitarianism can be a useful moral underpinning for libertarianism, let us turn now to whether it is useful as a persuasive tool for espousing the virtues of a free society. In this sphere, utilitarianism certainly fares much better. The heaviest gun in the arsenal of the utilitarian libertarian is the fact that living in an unfettered free society where government exists, at most, as a “night watchman”, limited to protecting private property rights of the individual, will produce manifold increases in the standard of living through a rise in real wage rates. It also has the virtue, in contrast to the basic form of consequentialism, of concentrating its focus on the very institution that is an anathema to freedom – the government – instead of getting bogged down in the minutiae of individual cases. Squarely, it is government that needs to withdraw itself from the marketplace and it is government that needs to stop meddling in economic affairs in order to bring about these wonderful consequences. Furthermore, every government minister promotes his programmes on the basis that they will serve to help at least some sector of society, if not everybody. The utilitarian, however, armed with a thorough understanding of economics, can easily demonstrate why the results must always be the very opposite of those intended and why the government interference will always, necessarily, create more harm than good when examined under the terms of its own justification. While, therefore, a given politician or promoter may have ulterior motives in proposing any programme – such as to benefit lobbyists, donors or other special interests – his public justification for the programme can be shown as shambolic. There may, of course, be some difficulty in disabusing people of the notion that the free market is a “sink-or-swim” society and there is also added problem of those who steadfastly refuse to try their hand in the marketplace for what might seem like a distant reward and prefer instead to yield to the siren song of government redistribution. To this, only a passionate plea for the justice of the market place can provide an answer.

Conclusion

George Reisman explains how an understanding of the consequences of free market economics has “powerful implications for ethics”:

It demonstrates exhaustively that in a division-of-labor, capitalist society, one man’s gain is not another man’s loss, that, indeed, it is actually other men’s gain — especially in the case of the building of great fortunes. In sum, economics demonstrates that the rational self-interests of all men are harmonious. In so doing, economics raises a leading voice against the traditional ethics of altruism and self-sacrifice. It presents society — a division-of-labor, capitalist society — not as an entity over and above the individual, to which he must sacrifice his interests, but as an indispensable means within which the individual can fulfill the ultimate ends of his own personal life and happiness.

A knowledge of economics is indispensable for anyone who seeks to understand his own place in the modern world and that of others. It is a powerful antidote to unfounded feelings of being the victim or perpetrator of “exploitation” and to all feelings of “alienation” based on the belief that the economic world is immoral, purposeless, or chaotic. Such unfounded feelings rest on an ignorance of economics.10

While, therefore, we must conclude that no form of utilitarianism provides an adequate, watertight moral backbone for libertarianism, which can only be furnished by demonstrating the justice inherent in private property rights and free exchange, we must also agree that we can never ignore the manifold benefits to every individual and the harmonious society that they create. Indeed, few people, publically, ever attempt to propose an ethical theory that does not create a society of peace and harmony. Thus a through understanding of the effects of the free market can provide a framework with which to refute competing theories on their own terms. Furthermore, few deontological libertarians omit to pepper their theories with demonstrations of the beneficial consequences of the marketplace. While, therefore, this essay has been generally critical of utilitarianism it is likely that it will always have a central place in libertarian theory.

1Reprinted in “Economic Controversies”, pp. 289-333. Rothbard is, however, keen to note that his reconstruction does not provide any plea for an ethical system, merely “conclusions to the framer of ethical judgments as part of the data for his ethical system”.

2Another example is the so-called runaway train that will hit five people if diverted onto one track or only one if diverted onto the second. Should the signalman switch the points to the second track to ensure that only the one person is killed?

3Walter Block, Ethics, Efficiency, Coasian Property Rights and Psychic Income: A Reply To Demsetz, The Review of Austrian Economics, Vol.8, No. 2 (1995) 61-125, at 76-84 (emphasis added, some footnotes omitted.

4Libertarian jurisprudence does, of course, have to determine precisely which physical acts result in which property rights. However, any difficulty is likely to remain only in borderline cases or cases where evidence of prior ownership is fleeting or difficult to apprehend and, in general, all persons should be able to determine in the majority of situations whether property is subject to a prior right and a third party referee would not be required to determine this.

5As a result it is also the case that consequentialists vary in their particular views concerning the justice of taxation, eminent domain, intellectual property, etc. on to a greater degree than rule-based libertarians.

6Ironically, the same argument based on interpersonal utility comparisons – that the wealthy value what they have less than the poor and that the latter “need” this wealth more than the rich do – is used by proponents of government welfare and redistribution. It is difficult to understand how an argument that can be used against a world of liberty can be used in favour of it.

7Ludwig von Mises, Human Action: A Treatise on Economics, p.676.

8It is upon this foundation that Mises’ examination of concrete economic policies, where he moves from the wertfrei into the world of value judgments – the effectiveness of the policies themselves from the point of view of those who promote them – is  based.

9Because the incessant tendency is now reaching a chronic level the ability to postpone the day of reckoning has become ever more difficult and most of the more recent glory-seekers are now living to reap what they sow. Former Federal Reserve Chairman Alan Greenspan is a pertinent example.

10George Reisman, Capitalism: A Treatise on Economics, p. 17.

Austro-Libertarianism – Three Next Steps

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Austro-libertarianism undoubtedly has a long history of scholarship of which it can proudly exemplify as not only providing a coherent body of truthful insights into the way in which the world really works, but also provides a foundation for a just and prosperous society.

However, far from resting on any laurels (and I doubt any scholar in this tradition would ever believe that we are at the stage where we can do such a thing), this essay will suggest three areas of development to which scholars in the Austro-libertarian tradition may wish to focus their research.

Pure Praxeology

The first area is to reconceive “Austrian” economics as a pure (or at least “purer” theory) of praxeology. Although “Austrian” economics is noted for deriving its laws from the theory of individual human action, economics traditionally – not least because concepts such as exchange, production, prices, money, and so on are the complex phenomena that we wish to study and understand the nature of – concentrates only on action above the level of the bilateral exchange of wares for a money income. Our economic categorisations and concepts therefore rest on that limitation. “Austrian” treatises, although they begin quite properly by explaining how economic theory is derived from the action axiom (together also with extremely useful chapters on unilateral or “Robinson Crusoe” exchange), soon begin to espouse their theories in terms of these more aggregative concepts, only occasionally returning to individual action in order to emphasise a particular point1.

A simple example to illustrate this point is the economist’s approach to the classification of goods. A “consumer good” is one that is purchased by a consumer for money without any further sale for money expected. Bread, for example, is treated as a consumer good because it generally goes through no further monetary exchange prior to being consumed. At the individual level, however, the bread may only be a capital good in making, say, a sandwich. Labour is combined with the bread and other goods – say cheese and tomatoes – in order to produce the final consumer good of a cheese and tomato sandwich. We can say the same thing about cutlery and crockery, paper and ink and so on. All of these goods are used at the level below that of exchange for money by individuals to produce further goods. “Land”, on the other hand, is treated as the natural resources which are a gift to all humans, not just an individual human being. However, a good produced by another human being may, to the individual who happens to stumble upon it, comprise “land” in the sense that it is a free gift to him and that he has not had to exert any productive effort in order to bring it into the condition in which he finds it. If, for example, I find an abandoned car in perfect working order and (assuming there are no competing ownership claims), even though the car is a produced good, as far as my action and my computation of costs and benefits towards that action goes, the car is a gift of nature and is in exactly the same condition as, say, a tree that has grown naturally.

It is easy to see why any loss of the connection to individual action can quickly lead economists in the “Austrian” tradition and their fellow travellers down wrong paths. Murray N Rothbard provides an extensive critique of W H Hutt’s aggregative concept of “consumer sovereignty” – the idea that all consumers are sovereign over producers and that the latter exist only for the benefit of the former and not for themselves2. The market place is where everybody seeks to benefit himself through voluntary exchange, and there is not, in fact, a distinct class of labourers, of producers and of consumers with one being “sovereign” over the other. Rather, everybody at differing points of the day (even from minute to minute) participates in a different economic category – a man is a labourer when he goes to work; he is a consumer when he stops by at the shop on his way home; he is a capitalist if he purchases some shares for his pension, and so on. Questions of “sovereignty” – the boundaries of rule – concern only the political arena. Concentration on the basis of economic law in individual human action would have avoided any fallacy and prevented a resort to parcel phenomena into homogenous, collective blocks. However, Rothbard hardly escapes the same danger to which Hutt succumbed, building his entire theory of production using the economic fiction of the Evenly Rotating Economy (ERE), an economy in which all economic activity is repeated and known. Thus, entrepreneurial profit and loss is eliminated. This model allows (or, perhaps, forces) Rothbard to conclude that capital goods earn no net rents and that all rents are paid back to the original factors of production – land and labour – a theme that is oft repeated throughout his entire treatise. It is submitted here, however, that regardless of how such an approach may be helpful in illustrating the complexity of the structure of production, any firm or even implied conclusions drawn from it are likely to be grossly misleading and can only lead to error. The most dangerous false step from this presentation is to assume that the ownership of land – as an original factor – provides essentially free income to those who happen to hold it. Needless to say Rothbard takes great pains to rebut this conclusion, but his attempt could be condensed, with a slight modification, to a single paragraph:

As the only income to ground land that is not profit or interest, we are left with the original gains to the first finder of land. But, here again, there is capitalization and not a pure gain. Pioneering—finding new land, i.e., new natural resources—is a business like any other. Investing in it takes capital, labor, and entrepreneurial ability. The expected rents of finding and using are taken into account when the investments and expenses of exploration and shaping into use are made. Therefore, these gains are also capitalized backward in the original investment, and the tendency will be for them too to be the usual interest return on the investment. Deviations from this return will constitute entrepreneurial profits and losses. Therefore, we conclude that there is practically nothing unique about incomes from ground land and that all net income in the productive system goes to wages, to interest, and to profit3.

The correct position, therefore, is that “things” do not “earn” anything. All actions, whether they involve the dispensation of labour, land or capital goods, require the sacrifice of one state of affairs (“costs”) in the pursuit of another state of affairs. It is hoped that the ends brought about are more valuable than the ends given up. The creation of this value if the action is successful (or its destruction if it is not) is the product of entrepreneurial judgment. All income from any action is therefore paid out to cover costs, interest or entrepreneurial profit and loss. All net rents in the economy accrue only to this latter element – successful entrepreneurial judgment with the means at one’s disposal, whether this is your labour, land that you own, or a capital good that you hold. All of these things that can be bought or sold for more or less money than is sufficient to cover their costs plus interest. It is only by remaining firmly anchored to action at the individual level that this realisation can remain in focus4.

Coupled with this endeavour of better preserving the link between the complex phenomena in the economy with individual action is a greater emphasis on “Austrian” methodology not as a separate topic but one to be espoused during the course of the treatise. The reason for this is that a “vulgar” conception of “Austrianism” would state that all economic theory and all of the laws of economics are deduced logically from the action axiom and one or two subsidiary axioms. Truths derived empirically have little or no place in “Austrian” economics. This is not, however, altogether true. Only the core theory concerning the action axiom and its immediately related categories, in addition to some of the more fundamental laws (such as the law of marginal utility) are deduced logically. However, there is a great body of “Austrian” economic law that requires the ascertainment of empirical facts. We cannot, for example, derive economic laws of bilateral exchange without ascertaining the existence of more than one human being, an endeavour which any individual cannot simply deduce. We cannot have an “Austrian” approach to the economic effects of taxation unless one group of persons had, in fact, attempted to tax another group. We cannot have an “Austrian” business cycle theory without first assuming the existence of banks, the practice of fractional reserve banking, a loan market and even money itself must be presupposed. Although the regression theorem, for instance, is a valid praxeological law5, it would only exist if we first of all knew that money existed and that people had chosen to use a good as a general medium of exchange. Now it is true, of course, that these laws would remain valid and true even if the substantive human choices upon which they rely had not been made. If we imagined a world without money, for example, and pondered its existence merely as a hypothetical we could still derive “Austrian” laws concerning it without it ever actually existing. The actual phenomena in existence simply direct our interest to them as those are the areas that matter in our lives and hence are the things we wish to study and understand. No doubt it is also quite impossible to try and “imagine” alternative institutions and choices that have never existed and to apply to them the core “Austrian” theory, especially as our own experience of real concepts such as money, exchange, prices, banking and so on often provides an illustrative tool to our theoretical insights. However, it is more accurate to speak of the entire endeavour of “Austrian” economics not solely as a body of economic law that is deduced logically, but as the application of the core theory, deduced from the action axiom, to the substantive institutional choices that humans have made, the existence of which is verified empirically6. More prominent highlighting of the “Austrian” method and the source of each parcel of knowledge during the course of a treatise would aid greatly any misunderstanding in this regard.

Ethics

The second area of fertile development in “Austro-libertarianism” is the necessity to sever or more sharply delineate the relationship, often casually assumed not only in political philosophy but also in the opinions of lay persons, between legal norms and moral norms. That is, the question of what should be legal – in other words, those norms which may be enforced by the imposition of violence – should be separated from the question of what is good, worthy or preferable. It is submitted that this is one of the greatest barriers to a proper understanding of the role of violence in interpersonal morality, and has been dealt with in detail by the present author here, here and here. Many people happily recognise the illegitimacy of the legal (violent) enforcement against themselves of norms that other people value as moral ends which, as the hapless victims of this enforcement, they themselves do not (or at the very least, they would complain about it). But, because of the prevalence of the legitimising effect of democracy and the blurring of any distinct line between the governors and the governed, most would not think twice to advocacy of the legal (violent) enforcement of ends that they deem good against other people. Indeed, the criterion for what should be legally enforced boils down to little more than what most people think should be legally enforced. Libertarians need to create an understanding that the proper role of violent enforcement is restricted to preserving the physical integrity of each individual’s person and property – and as moral agency requires such integrity in order for a person to choose and act, such an insight is crucial for any proper understanding of interpersonal morality. The examination of whether something is bad, unpleasant or a vice must be separated from the question of whether its prevention should be enforced legally; and, equally and oppositely, the examination of that which should be peacefully permitted by the law should be separated from the question of whether such acts are good and noble things. In addition to aiding moral and political philosophy, this would be of a benefit to libertarianism specifically as it would render inert the perceived support for all of those bad and unpleasant things – drugs, prostitution, gambling, blackmail, and so on – which are non-violent but are nevertheless not necessarily things that we would wish to see in our society7.

Inflation

The final area for development in Austro-libertarianism, this time in the field of economic history and anthropology, is to engage in a rigorous study of the effects of inflation and inflationism throughout history. “Austrian” scholars have certainly charted well the purely economic effects but, in the opinion of the present author, an exhaustive study of the social, cultural, political, and aesthetic effects of inflation is yet to be written, at least in the “Austrian” tradition. As Henry Hazlitt notes:

[Inflation]…discourages all prudence and thrift. It encourages squandering, gambling, reckless waste of all kinds. It often makes it more profitable to speculate than to produce. It tears apart the whole fabric of stable economic relationships. Its inexcusable injustices drive men toward desperate remedies. It plants the seeds of fascism and communism. It leads men to demand totalitarian controls. It ends invariably in bitter disillusion and collapse8.

Apart from the wide “macro” effects of inflation – not least of which include the birth of odious ideological movements and regimes and their ability to fund wars and conflict – also of interest is how inflation effects us at the individual level. For example, how many of our day-to-day products that we enjoy today are the result of genuine development by a capitalist economy and how many are simply substitutes developed in an era of inflation to enable people to attempt to salvage some of their previous standard of living? Products such as instant coffee, condensed milk; synthetic clothing; plastic bottles; and so on. How many genuine labour saving products were developed not because people genuinely wanted to save time but because inflation had either reduced their income to such a degree that time came at a premium or because inflation had induced impatience and a present-oriented fervour? Indeed the latter may have had distinct ramifications beyond the economic – the birth of adolescence as a distinct demographic; the sexualisation of society; the preference for entertainment ahead of learning; the attraction to style rather than to substance; the prominence of sound bites and “tweets” rather than in-depth analysis; the emphasis on youth and adaptability to an ever changing world rather than on age and accumulated wisdom. All of these things have significant consequences for which inflation much at least be partly responsible. Further, how much does inflation distort our views of reality and of what is possible? Inflation, as Hazlitt noted, makes speculation rather than production profitable – the image of productivity and wealth creation rather than the very thing itself. It makes big or easy wins more attractive than patient investment in a lifelong endeavour. But at the extreme we might say that we have attempted to replace reality itself with dreamed ideals. Government, has taken over and replaced real money (gold and silver) with a fake paper counterfeit. Having replaced reality with one form of fakery, we expect government to be able to legislate to replace reality with our pseudo visions, to carry out the miracle of transforming stones into bread. Thomas Nast’s cartoon, Milk Tickets for Babies in Place of Milk (below), concerning the inflation during the American Civil War, perhaps captures the foundation of this mindset in artistic form. The cartoon contains representations of reality that are passed off, for example, by Acts of Congress as reality itself. As English professor Paul A Cantor explains:

Nast’s illustration brilliantly captures [the confusion of] things with representations of things. Like Magritte [in the painting The Treachery of Images], Nast reminds us that a picture of a cow is not actually a cow, but he is not making a merely aesthetic statement. He is drawing a more serious analogy between the duplicity involved in artistic representation and the duplicity involved in the government printing money and forcibly establishing it as legal tender, an analogy embodied in the parallel “This is a Cow By Act of the Artist” and “This is Money by the Act of Congress”9.

Given that “Austrians” lead in the way in a providing a genuine understanding of the definition and effects of inflation it would be appropriate for an historian versed in “Austrian” theory to undertake a full study along the lines that we have suggested here.

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1It is also the case that most “Austrian” scholars writing today received their initial education in the mainstream economics tradition and only later “turned” to “Austrianism”. Thus one senses a tendency, if not a persistency, to lapse into the comfort of aggregative and pseudo-concepts, at best obscuring the essential connection to individual human action, and at worst completely losing it and ending up in the rhetoric of collectivist and societal-oriented action.

2Murray N Rothbard, Man, Economy and State with Power & Market, p. 631-6

3Ibid., p.530, emphasis added.

4The present author is not enthusiastic about the excessive use of equilibrium constructs and they should, at the most, be used as a tool in order to distinguish one concept from another, an endeavour that would be impossible without such a construct. Nevertheless, it is possible that a dynamic equilibrium – a fiction in which there is change and entrepreneurial profit and loss but where all forecasts of the particular entrepreneur in the model are correct – together with a focus on the costs of land acquisition and of the dispensation of labour would have created a better illustration than the ERE. But whatever model is used, it is submitted that the illustration of every stage of production, whether it is with land, labour or capital, necessitates the elements of costs, interest and entrepreneurial judgment and that, contra to Rothbard’s assertion that the mental construction of the ERE is necessary in explaining the structure of production, a much clearer grasp of reality can be and, indeed, is attained without omitting any of the crucial elements.

5Although this is disputed. See Gary North, The Regression Theorem as Conjectural History, Ch. 7 in Jörg Guido Hülsmann (ed.), The Theory of Money and Fiduciary Media – Essays in Celelbration of the Centennial.

6If anyone should doubt this and remain steadfastly wedded to the idea that “all” of “Austrian” economics is deduced logically this then he should attempt to present an “Austrian” treatise written in formal logic.

7The present author has dealt with the so-called “thick” or “thin” libertarian debate here.

8Henry Hazlitt, Economics in One Lesson, p.157.

9Paul A Cantor, Hyperinflation and Hyperreality: Thomas Mann in Light of Austrian Economics, The Review of Austrian Economics, Vol. 7, No. 1 (1994), 3-29.

Conspiracy Theories

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The slur “conspiracy theorist” is like an ejector button. It seemingly has the power to jettison from respectability its hapless and often unsuspecting victim, never to be listened to or taken seriously again. In some regards, as will be seen below, this is justified but it is also, and more seriously, the case that “conspiracy theorist” is a convenient label used to dispose of anyone who challenges official wisdom.

Specifically, “conspiracy theorists” are theorists of history, providing a narrative of and explanation for past events. What they all have in common is that their resulting explanations differ from the “accepted” or “official” version that people believe or are supposed to believe, selecting and interpreting their facts and evidence in light of a specific theory that the alleged “conspiracy theorist” holds1. In short, it is nothing more than “revisionist history”, but the nomenclature of this discipline as dealing with “conspiracies” is used as a veneer to denote a cover-up or a secret, something that is not supposed to be known, that there are sinister forces at work secretly manoeuvring to exploit the hapless know-nothings. People are often willing to believe that the Establishment2 does things that harm the very people it is supposed to serve (or at least live in peaceful co-existence with) but this is normally only due to the specific actions or policies that were adopted at the time. Far fewer are willing to consider that the system, adorned with all the comfortable rhetoric of “democracy”, “representation”, “accountability” and so on, is per se harmful and exploitative, the very conclusion that must be drawn from most of that which “conspiracy theorists” claim. Hence it becomes easy to dismiss revisionists as cantankerous crackpots and their verbage as panic-stricken paranoia.

In the first place let us state clearly and emphatically that no one person, whether they be a democratically elected Government, a university department, a particular scholar, biographer, or whoever has the monopoly on the interpretation of history. Simply because somebody challenges accepted wisdom does not mean that he or she should be dismissed out of hand or that old and accepted paradigms should remain rigidly enforced3. Indeed it should be unnecessary to labour the point given that contrarianism has so often been the green shoot of truth, discovery and invention and that daily all entrepreneurs, for example must, be practising contrarians by seeing and understanding things which other people do not do so as of yet. However when the logical result of a specifically historical theory is to undermine the existing structure of society itself there is an understandable reluctance to engage with it. This does not mean, of course, that all theories need to be taken seriously. A theory suggesting that flying pigs murdered Julius Caesar, or that Marie Antoinette could draw thunderclouds with a clap of her hands should, for instance, rightly be ridiculed. For theories of history cannot violate established laws of the natural sciences or of the social sciences such as praxeology (although the attempted violation of economic law is a favourite pastime of Governments and their court intellectuals). If they do then the revolution properly takes place within those sciences and not within history. If pigs were discovered to fly, for instance, an historical theory concerning their cause of the Caesar’s assassination would have to come after this was established scientifically. But where a theory is in harmony with established laws then one should not shy away from the full extent of its logic.

However, having defended the right of anyone to present a revisionist theory of history, it is frequently the cases that these theorists do not set themselves up to be taken particularly seriously. The basic problem is that “conspiracy theories” too often use the same tools as the establishment in their narratives. Accepted or conventional narratives are notorious for using abstractions that fail to examine the actions and motivations of the specific individuals who were responsible for the historical events. With the War between the States, for example, the historical narrative is that “The South” seceded from “The United States” to preserve “slavery” and the resulting war brought “freedom” and “union“; “Britain” declared war on “Nazi Germany” to defend “Poland“; “The United States” was forced into the “Cold War” and to create a “Military-Industrial Complex” to defend “the Western World” from “the Communist threat“; The “US Government” launched the “War on Terror” to defend us from “terrorists” who want to destroy “us“. By grouping people and events into large, homogenous classes that can be easily categorised as “good” (if they are on “our” side) or “evil” (if they are on the “other” side) one eradicates from examination any question of individual behaviour and motives. Yet history is nothing but a string of individual actions presaged by their motives and if any leeway in developing alternative explanations is to be gained then these must be the ripest fruits for examination. Unfortunately “conspiracy theorists” do not tend to do this and instead themselves ascribe all of the worlds evils to large, homogenous classes. So you have feminists explaining history as being primarily concerned with the domination of “men” over “women”; Marxists as the struggle between exploitative and an exploited classes; still others ascribing causative events to “Jews”, “Freemasons”, “capitalists”, or believers in a “New World Order”. A subset of this failure is a concentration on the mechanics or the method ahead of the motive, often to a rather futile extent. For example, however many studies are done on the audio, visual and witness evidence, however many elaborate recreations of the shooting(s) are carried out, no one is ever going to establish once and for all that Lee Harvey Oswald was not a lone gunman in Dealey Plaza on November 22nd 1963. Nor is watching endless loops of the World Trade Center collapsing going to absolutely establish whether the twin towers were detonated internally. This does not mean that the “how” of history is unimportant as it is, of course, important to show the ways in which motivated individuals brought their desires to fruition. But this discipline is simply a disembodied wraith when unconnected to any “why”, especially when it is inconclusive.

There is, however, one proud tradition that does not succumb to this failing, a tradition that systematically scrutinises the motivations and actions of the participating individuals in historical events with a rigorous degree of scholarship. The Austro-Libertarian school of thought, although relegated to the fringes of academic circles, has good reason for being able to do this. The field of praxeology, the study of the logical consequences that unfold from human action, endow these scholars with the appropriate tools to not only explain individual motivations and actions but specifically to explain why people are likely to behave the way they do when they gain membership of a particular homogenous class. Rather than dealing with countries, states, groups, peoples etc. Austro-Libertarian history deals with the particular interests that particular people are able to have and, in many cases, are able to satisfy by virtue of the positions that they occupy within these classes. By accepting that all people, whether they are private citizens, emperors, presidents, generals, company CEOs or whatever, are subject to the same praxeological laws, by knowing the precise benefits and limitations which certain persons in history faced, not to mention a strong passion for justice grounded on the important Libertarian principle that all individuals are subject to the same moral law, Libertarian historians can construct a much richer and more convincing tapestry of history than any of the officially accepted narratives or other revisionist disciplines. Central to all of this is the theory of the State, that as an entity it alone enjoys the use of violence and possesses the ultimate decision making authority over a given territory. As it is a praxeological necessity that all humans maximise their benefits and minimise their costs the charge that individuals will use the framework of the state to enrich themselves at the expense of others becomes not only convincing but practically a scientific requirement. If one should ever doubt this then Rothbard’s Wall Street, Banks and American Foreign Policy reads almost like a directory of the interests and motivations of the key political players and financiers of US foreign policy from the beginning of the progressive era to the Reagan Administration. Or how about Hans Hermann Hoppe’s examination of the democratic ruler vs the monarchical4? How democracy, relegating leaders to mere caretakers rather than owners of the realm must, by praxeological necessity, lead to a widespread ravaging of resources, increased suppression of the populace and the debt-fuelled growth of the welfare-warfare state. And how, by coating the State with a veneer of legitimacy, it can expand to heights that monarchs of ages past could only have dreamt of – the dubious achievement of a worldwide paper money entirely issued and controlled by Government institutions is something kings never brought about yet democracy, a rarity before 1900, was able to make it a reality by 1971. Still others such as Tom Woods, Thomas DiLorenzo, and Ralph Raico have tackled big taboos in American and world history, DiLorenzo’s work on Abraham Lincoln in particular bringing a much needed sledgehammer to a mountain of largely mythical, established wisdom.

So if you want real history, real explanations of past events, the movers, the makers, the shakers, the wheelers, the dealers, supported by the rigorous science of praxeology and a deep-felt understanding of justice, then look no further than the great historians of the Austro-Libertarian tradition.

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1For a detailed explanation on how history is necessarily an interpretation of events in light of theories, see the excellent treatise by Ludwig von Mises, Theory and History.

2We shall use this as a catch-all word to describe the subjects of “conspiracy theories”, ranging from Governments, multi-national corporations and the corporate state, the military, intelligence agencies, secret societies, etc.

3Apparently this problem also exists in the natural sciences even capturing seemingly reluctant revolutionaries – for example the co-discover of oxygen, Joseph Priestly, categorised his own discovery as “dephlogisticated air” owing his allegiance to the prevailing phlogiston theory. Thomas S Kuhn, The Structure of Scientific Revolutions, pp 53-6, quoted in Murray N Rothbard, Ludwig von Mises and the Paradigm of our Age, Ch. 14 in Rothbard, Egalitarianism as a Revolt Against Nature and other essays.

4Hans Hermann Hoppe, Democracy – The God that Failed.

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