Regulation

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It is accepted by the mainstream that state regulation of the free market is a necessary feature of the so-called “mixed economy”, the supposed halfway house that allows us to benefit from capitalism without succumbing to its alleged excesses while, at the same time, avoiding the catastrophe of all-out socialisation and state control. This essay will subject this view to a critique and will reveal that, in fact, regulation of markets does nothing more than substitute arbitrary government preferences for the preferences of freely acting individuals, is a cause of the very “excesses” (such as oversized firms) which are blamed on capitalism, and that the best regulator is, in fact, the free market itself.

In examining “regulation” we should first be clear about precisely what it means, which is that the state will use the force of law in order to, compel, prohibit, restrict or otherwise subject to control some targeted behaviour of its citizens. In other words, it is a violent, physical intervention into people’s lives in order to produce one outcome while preventing another. This seems perfectly justifiable in instances when the behaviour that is subject to regulation is neither peaceful nor voluntary and is in fact invasive and predatory – in other words the particular behaviour under consideration constitutes a crime, such as murder and theft. However much libertarians may dispute either the legitimacy or effectiveness of the state in preventing and/or responding to such acts, we can at least understand the need for this kind of regulation – to protect people from the violent, invasive and uninvited actions of others, actions which are, of course, unjustifiable in libertarian theory. But what do we mean by state regulation of the free market? The very phrase “free market” is an abstraction used deliberately by commentators to deflect attention away from what it actually is and to create, instead, the impression that it is some kind of self-aware, self-controlling entity that can indulge in all of its irrational flights of fancy while being subject to neither rule nor reason when it seemingly appears out of nowhere to inflict grave harm upon us in the same way that a criminal might. The free market, however, is nothing more than individual people and institutions trading goods and services voluntarily on terms which they agree amongst themselves. It is a diffuse, decentralised network of people striving to meet their own needs as they perceive them and to seek others to provide the wherewithal to better their lives. It is an entirely peaceful, voluntary operation and no one is forced to participate in any exchange with another individual if he does not believe that he will be better off as a result of the exchange. For the state to regulate the market, then, means that the state will use force in order to diminish, control or otherwise outlaw certain transactions which otherwise may have been undertaken voluntarily had the regulation not been present. For the state to regulate is to introduce a code of violent compulsion into otherwise peaceful and voluntary relationships.

There is something distinctly odd when state “protection” through regulation is extended beyond crimes into the arena of voluntary relations. For what is it that people are really being protected from here? Voluntary transactions do not come out of nowhere to surprise us like an armed robber might do. Rather, they must be chosen freely and consciously by each individual person. So if every transaction in the free market requires a voluntary choice then the only purpose of regulation must be to “protect” us from the results of our own choices and to prevent us from entering certain transactions which we may otherwise like to enter if the terms are attractive to us. People often think that those being regulated are unscrupulous vendors who may try to sell us some kind of snake oil solution to a problem we may have. It is true, of course, that crooked businessmen may try to sell us something that doesn’t really work, is a fake, or causes some kind of fire or damage. However, these instances constitute a fraud or a tort and are already governed by the area of the law that regulates involuntary or invasive acts. Regulation of the free market, on the other hand, is solely concerned with restricting the transactions that people may be happy to undertake voluntarily with no force or fraud. As it takes two to complete a transaction – the purchaser and the vendor – if businesses are prevented from choosing to sell then you are equally prevented from choosing to buy. Our choices are therefore constricted by state regulation as much as those of businesses selling to us are and it is us who are regulated as much as businesses are. It is for this reason that an excessively regulatory and bureaucratic jurisdiction is often nicknamed “the nanny state” – a persistent and seemingly omnipresent matriarch who never ceases to stop interfering in your life in order to make sure that you make the “right” choices, choices that it believes are better for your life regardless of the maturity and sophistication of your own decision-making process.

There are several mantras or excuses that the state uses to justify its regulation of voluntary transactions – the prevention of rash, impulsive or short sighted behaviour; imperfect or otherwise flawed knowledge on the part of one of the parties to the transaction; maintaining standards of quality; and finally, the great all-encompassing excuse that seems to validate the state’s wading into anything it pleases, which is maintaining standards of safety. Doubtless there are other categories of state regulation also (such as environmental regulation and control of so-called “essential” industries) but these four form the backbone of the state’s regulatory bodies. We will proceed now to examine each of them in turn and in doing so we will reveal the damaging effects of state regulation while demonstrating how, in fact, the free market itself is the best regulator.

First, then, is the prevention of rash, impulsive, or short sighted behaviour. The implication here is that people may enter a transaction which provides, or has a chance of providing, benefits in the short term while providing a high likelihood of burdens in the future – possibly severely detrimental burdens such as economic ruin, ill health or early mortality. So in other words, people may choose to use tobacco, alcohol or narcotic products to achieve an immediate sense of pleasure without considering the longer term effects, or they may choose to gamble, bet, or otherwise enter some kind of financial arrangement that promises untold wealth if it is successful, but may result in economic ruin if it is not. In economic jargon the complaint here is that people’s time preferences are too high and that the inducement towards the present good is so strong in people’s minds that they heavily discount the possibility of the future bad. People discard prudence, foresight, and good judgment in favour of emotional, impulsive and irrational motives, and so the state should step in, so the argument goes, in order to prevent people from falling victim to their own lack of patience. In the first place we might as well mention that, while it is true that some or, indeed, many decisions may be regretted after the fact, it is the case that all actions can result in consequences that are either detrimental or not as favourable as those that were intended. Prior to an action, costs and benefits are only hypothetical and it is always easy to judge an action with the benefit of a retrospective view. However, as it is also true that some actions are more likely or are guaranteed to produce a longer term detriment in spite of an immediate gain, the more important point is that people’s time preferences are no business of the state’s and it is dubious to assert that people should, in all instances, prefer the longer term to the shorter term – at least not to the extent that the force of law is used to compel such a preference. There is no reason, for instance, why someone should not value the immediate pleasure from a cigarette instead of a longer, healthier lifespan and it is quite possible for an individual to regard a longer life as duller if it is devoid of short term pleasantries. The regulation of an action may stop, restrict, or otherwise control the action but it does not stop the motivating desires behind the action itself which are imbedded wholly within people’s minds. The preferences that influenced them still exist and have not been eradicated, and people are, instead, forced to embrace an outcome which they do not regard as preferable. So in other words, while the individual may have to forego a benefit today, in his own mind the pain of having done so in order to wait for another benefit to come sometime in the future (such as a longer, healthier life) may be worse to that individual. That person, from his point of view, suffered a loss rather than a gain. Regulation doesn’t, therefore, make benefits appear and costs disappear; rather, it simply forces people to endure what are, in their minds, heavier costs.

However, even if we were to accept the premise that people should take the longer view, the irony here is that regulation and state interference into people’s lives is what causes high time preference and rash, impulsive behaviour in the first place, along with the eradication of any kind of prudence, patience, good foresight and self-responsibility. In particular, the existence of the regulatory state fosters the mind-set that if an action is dangerous, or has a high chance of producing an unfavourable outcome, then the state will ensure that it is banned or the dangerous elements are removed. In other words because an army of bureaucrats has gone through the decision-making process on your behalf you simply do not have to care or pay any attention to the possible negative results of your actions because the guiding hand of the state will ensure that only good things can flow from anything you do. Indeed, the regulatory state is little more than a giant, inflatable cushion for people to avoid having to take responsibility for the consequences of their own decisions. When, of course, a decision in an unregulated area turns sour the cry is always “why were they allowed to sell this awful thing to me!” whereas what they really mean is “why was I allowed to choose to buy this awful thing from them!” What results, therefore, is a vicious circle where the growing regulatory state induces less prudence, a lower standard of care and thus more bad decisions that need to be met by increased regulation. To make matters worse if the regulatory state fails and you do happen to suffer some negative consequences, then in comes the helping hand the welfare state to rescue you anyway. If you drink or smoke too much and fall sick then state provided healthcare will look after you; if you gamble away your life savings then state benefits will still keep you fed, watered and sheltered even if you haven’t achieved the riches that you might have had you been successful. The upside of all of these decisions remains intact – that lucky horse may still promise to pay out millions and the whiskey will taste as good – but the downside has been heavily reduced as the state has insulated you from having to realise, or pay for, the full extent of the natural penalties of your actions if they occur. Thus, these types of frivolous and imprudent actions have become more attractive rather than less, and so they will be taken more frequently rather than less, resulting in more negative consequences rather than fewer. The result of this is, of course, moral hazard – carelessness for your actions when you can preserve your gains while heaping your losses onto everyone else. And finally, of course, all of this takes place within the sphere of the state’s inducement of a high consumption, high time preference society through the illusion of prosperity brought about by the forced lowering of interest rates, monetary inflation and the smokescreen of paper wealth.

Obviously, in a society that is wholly unregulated by the state people would be responsible for their own actions, and a culture of better decision making and more prudential planning would be induced. This does not mean, however, that you are completely on your own in determining whether you should proceed with a decision – an allegation of those who believe that the free market leads to an atomistic existence. It is this aspect that we will now explore when we examine the next reason that is proffered for the supposed necessity of regulation – imperfect or otherwise flawed knowledge on the part of one of the parties to the transaction. It is usually the case, of course, that the sellers of everything we choose to buy are experts in that particular product or service they are selling. They developed the product; they know what it should be capable of; they know the science behind it; they know where its raw materials or ingredients came from, who put them all together and how; they spend all day studying and marketing to their target demographic. We, on the other hand, are not so expert in these products, of which we may buy tens or even hundreds in a given week. We do not have the time to sift through mountains of information in order to find out whether a particular product is suitable for us, or whether it is likely to end up being either a waste of money or the cause of a much steeper loss. Surely the state should step in and compel companies to provide more information about their products? Surely it is only because of state regulation that we have mandatory lists of ingredients and nutritional breakdowns on food products and surely it is only because of the mandatory inclusion of warning labels that we know not to iron clothes while we are wearing them?

The key to unlocking this is to realise that the provision of information is an end in itself, an end which consumes scarce resources. Therefore, the value of this information needs to exceed the cost of those resources. To take a ridiculous example, the time it takes to cook an egg on the sunlit body of a car is a piece of information. The vendor of the car would spend valuable resources, such as labour, eggs, a stopwatch, etc. in gathering and publishing this information. However, if this information is useless to prospective purchasers of the car – in other words, it would not affect their desire to purchase the car one way or the other – then the vendor has incurred a deadweight cost and has simply wasted resources that would have been better spent on something else. How much information should be provided is part of the market process and it is consumers themselves who will determine through their purchasing habits whether or not a given set of information is valuable and is a requirement of a purchase. If consumers happily purchase products without receiving certain information then it indicates that the provision of such information would be a waste; if they choose to abstain then it may indicate that the purchase, on its present terms, is too risky and they require extra resources to be spent on providing more information about what it is they would be buying. It is here, of course, where the market’s own key regulator – price – steps in. At a low enough price consumers may be happy to purchase the product without further information as the risk of loss is relatively low so that gathering extra information would not be worthwhile. If the price was relatively high, however, consumers may demand more information so that they are more equipped for making a better decision before committing a relatively larger sum of money. And, of course, products sold with less information will, all else being equal, usually be priced lower than products sold with more information anyway on account of the fact that the vendor of the former products has not had to incur an extra cost. The forced provision of information by the state, however, is markedly different. Because it is not subject to the profit and loss test there is no way of telling whether such information is valuable or not; it is simply an arbitrary decree that resources must be directed in a way other than that desired by consumers. Additional costs are then heaped onto suppliers which, of course, result in higher prices for products – the extra money being spent on something that consumers simply do not want. To take a another extreme example, the state could mandate that an information booklet the size of a telephone directory should be sold with every loaf of bread, detailing the precise ingredients, the transportation process used, a detailed schematic of the ovens used for baking, the life stories of the baker and the wheat farmer and so on. It is obvious that the provision of this useless information would increase enormously the cost of a loaf of bread and thus make consumers worse off than they were before. The principle remains the same when the state requires seemingly more “sensible” – but still useless for the consumer – information to be provided.

The principle is also the same for the next two reasons that the state has for increasing the scope of regulation – maintaining standards of quality and standards of safety. The quality of a product is also part of the market process and cannot be subject to arbitrary standards. At any one time a higher quality product will, all else being equal, cost more than a lower quality product – meaning that more resources must be devoted to producing the higher quality product than the lower quality product. If more resources are used in creating a higher quality product then fewer resources are left over to be devoted to other things. Consumers must choose whether they wish their resources to be spent on a few higher quality or many more lower quality products through their purchasing habits. If they prefer the latter yet the government mandates that higher quality products must be produced then consumers are made worse off than they otherwise would have been. The sustainable way to increase quality is to increase the number of resources available so that such quality can now be afforded. It is here where the free market’s own regulatory mechanisms step in. If consumers, as a result of an increase of available wealth, demand that vendors produce higher quality items then quality standards are likely to develop within each industry. If vendors have to demonstrate that their products have reached a certain standard of quality then it creates a market for reputable, third party certifiers to examine the product and declare that it has met the required standards of quality that are expected by consumers. If it does not then no such declaration is made and the business must go back to the drawing board. Such third parties will be interested in making honest and trustworthy appraisals as it is the trustworthiness of their appraisals that lead to more product sales and hence, more vendors seeking their services for quality certification. Increased quality is therefore achieved through increased wealth creation which makes more resources available for this quality to be achieved, as opposed to state regulation which simply redirects existing resources from places where they are already needed.

Exactly the same is true when it comes to product safety because increasing safety also consumes valuable resources and we as consumers must determine how many resources we wish to divert from providing for other ends towards providing for more safety. With the regulation of product safety, it is important again to emphasise that we are not talking about the regulation of actions which may be defined as crimes or torts. If someone loads a child’s toy with explosives and it detonates then clearly such an action would be unlawful. Rather, what we are talking about is the regulation of safety standards that are accepted by both parties as terms of the contract – in other words, where the standards of safety sold are part of the product’s features or definition. For example, all else being equal, a car built with a thicker chassis, or a chassis constructed out of a stronger material, is likely to have greater crashworthiness than a car with a thinner chassis or a chassis constructed out of weaker material. If the latter car is purchased then the lower crashworthiness – and the resulting lower protection of the vehicle’s occupants in the event of a collision – is an accepted part of the contract and an accepted feature of the vehicle. Once again, the market’s own regulator – price – is king in this regard. All else being equal, the less safe car will be less expensive than the safer car. If consumers choose to purchase the less safe car the resources which could be spent on making the car safer are better off, from their point of view, being used somewhere else. If, however, the state steps in and mandates that, in the name of increasing safety, only the more expensive car should be sold then this would clearly lead to impoverishment. Indeed, some people may not even be able to afford the super safe car at all. They previously chose to purchase the less safe car because the value of the transportation it provided was worth the risk of being more heavily injured in the event of a crash. If state mandated “safety” standards price them out of the market so that they cannot afford a car at all then they have clearly lost very heavily. There is no such thing as a “no brainer” safety requirement that is valid in all places at all time – there is only what can be afforded. Requirements only seemingly become “no-brainer” when they can be easily afforded. And, of course, the way to increase the affordability of safety is to increase wealth creation so that more resources are available to be devoted towards increasing product safety. Just as with the increase of quality, if consumers, as a result of an increase of available wealth, demand that vendors produce safer items then industrywide standards of product safety will develop. If vendors have to demonstrate that their products have reached a certain standard of safety then, once again, the market is opened for reputable, third party certifiers to determine whether a product has achieved the standard that is expected by consumers. Underwriters Laboratories is an example of such a private, third party solution. Increased safety, like increase quality, is therefore achieved through increased wealth creation which makes more resources available for safer products to be made, as opposed to state regulation which simply confiscates existing resources from other ends.

What we have learnt from all of this is that regulation itself consumes valuable resources and so the value it produces must also take place in the societal rank of values. It cannot stand apart from the market process but must, rather, be part of it. The allegation that the markets are never “self-regulating” simply amounts to stating that people are not making the correct choices with resources that they own whereas the budding critic does. If the market is not “self-regulating” then, as we explained earlier, it means that people are not self-regulating and must be forced into making choices other than the ones that they prefer.

Earlier we explained how one of the tragic ironies of regulation is that it creates the very need for its own existence by perpetuating rash and foolish purchasing choices as people come to believe that the state is there to protect them from any possible negative consequence. Unfortunately, such a perpetuation is present on the supply side of the market as well. An increasing regulatory code heaps onto the shoulders of vendors increasing costs of compliance with that code. As well as spending money on market research, developing their products and targeting their advertising, prospective entrepreneurs not only have to hire armies of lawyers to ensure that they are complying with the regulatory code but very often the regulatory code itself will require the business to make an additional outlay – such as the requirement to publish extra information. The costs of compliance with regulation are more easily borne by large, established businesses yet they may be devastating to small start-ups or entrepreneurs with limited capital. For example, in a report for the Office of Advocacy of the U.S. Small Business Administration, Nicole and Mark Crain of Lafayette University calculated that the per-employee cost of federal regulatory compliance was $10,585 for businesses with nineteen or fewer employees, but only $7,755 for companies with five hundred or more. It is for this reason why regulation is, in fact, favoured rather than opposed by large, established businesses – for it creates a cosy cartel between business and the state which shuts out most prospects of new competition while at the same time saving face when they duly comply with these regulations for the “benefit of the consumer”. However, such stifling of competition is what creates some of the very problems that regulations are supposed to solve – poor provision of information, poor quality, and poor safety features. The result, therefore, is that regulation needs to increase in order to produce standards of consumer service that the free market would have produced by itself – except now with the deduction of the enormous cost of passing, complying and monitoring the said regulations. All of the supposed pitfalls and excesses of capitalism are therefore not a product of the free market but are, in fact, spawned by the regulatory state – and the response is supposed to be more regulation and increased oversight by a growing state bureaucracy. The most complained about industries in the world today, such as utilities, public transport and healthcare, supposedly demonstrate the tragedy of allowing private actors to provide so-called “essential” goods and services. Yet it is those very industries that suffer from the heaviest state interference.

State regulation of the free market is, therefore, a truly self-perpetuating, self-growing monstrosity, creating the very problems it seeks to solve – lazy, careless, and thoughtless purchasing choices on the one hand, and an oligarchy of large, greedy, unscrupulous businesses on the other, stifling economic progress and innovation in favour of micromanagement by a faceless bureaucracy. It is also a symptom of the globalist elitist agenda to unify and harmonise state bureaucracies into international trade agreements and treaties so that the reach of control and top-down direction does not stop at the state border – an agenda that was recently rebuffed (although will probably not be solved) by both the Brexit vote and the election of Donald Trump as the next US President. If we wish to regain economic progress and win back our liberty then destroying the regulatory state must be a high priority.


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Decentralisation and Liberty

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In some recent essays concerning the UK’s referendum in June to determine its membership of the European Union, and the virtues of small states as opposed to larger states, we elaborated some themes regarding how decentralisation and decentralising processes are a boon for individual liberty and a step towards harmony and economic progress. This essay will gather these thoughts together with an emphasis on how small or, rather, optimally sized institutional units pave the way towards two things that not only libertarians, but also everyone else, will claim to want to achieve – economic prosperity on the one hand, and minimal war and conflict on the other.

The mantra of statist and, indeed, mainstream political thinking is that unity, centralisation and the consolidation of states and state institutions is the way forward for peace and prosperity. Not only does this mean larger state institutions with more power but also the fusion of individual states into larger territories under a single jurisdiction. In some ways this seems plausible, even to the libertarian. Wouldn’t unified laws will aid certainty? Wouldn’t we be better off if there were no borders or tariffs to impede the trade goods and workers? And surely the possibility of war will be diminished if we all join together under one, unified banner?

The main problem with this view, however, is that it places the state, state institutions and what these institutions wish to achieve at the centre of society. All of the millions of individual people and thousands of non-state, voluntary institutions that are motivated by their own desires, values and choices are ignored or at least subsumed by the grander edifice. Most lay people who hold the centralising view probably do so naively, but it is the primary preoccupation of statists and intellectual elites that society is something to be managed, controlled or directed by them and those like them while all of the lesser beings should be made to obey quietly with the confidence that their highly educated masters are doing what is best for them. Indeed, rather than seeing any value in individual, voluntary and non-state institutions, the centralising view treats the human race as one, giant, amorphous blob, like a lump of play dough that can be shaped in any way and manner that can be chosen at will – and that the easier it is for the dough to be shaped then the better society will be. Hence, the holders of this view are likely to look favourably upon institutional centralisation and consolidation which conveniently places more power in the hands of people such as themselves to achieve their shaping of society according to their visions. This attitude was rife, at least implicitly, among the so-called “Remainers” in the UK’s “Brexit” vote on June 23rd. Not only, is it believed, that all good things flow from the top down like manna from heaven, but that anyone who was in favour of leaving the EU was, in some way, stupid, backward or a kind of provincial, country hillbilly. For instance, shortly after the referendum, Professor A C Grayling called on Parliament to block Britain’s exit from the EU on the grounds that it is Parliament’s job to determine what is best for the electorate, the latter of which lack “the expertise, patience and time” to make decisions via a direct vote. The implication of this is that the people do not know what is best for them and they have blindingly walked down the path of sheer folly by voting to leave the EU, and they should instead have placed their trust in those better educated than themselves. However, he has completely missed the lesson that should have been learned from this result. The establishment wheeled out all of the big guns in order to persuade the electorate to vote for “Remain” – including the current and the three former living Prime Ministers, most of Parliament and the Cabinet, the Bank of England’s chief and other big bank bosses, the IMF, directors from at least fifty-one FTSE 100 companies, and many heads of foreign governments including the President of the United States – and yet “Leave” still won the vote. When the advice of all of these heavyweights is rejected by the British public then, instead of stooping into a sulk over the supposed stupidity of the great unwashed and demanding that they defer to the “expertise” of their so-called representatives, Grayling and his ilk should realise that such a rejection indicates that everyone is just a bit fed up of being told what is good for them and having decisions made for them by political elites. Such decisions and endless promises of peace and prosperity have brought us, in the last twenty years, two burst financial bubbles, massive money printing that has made the rich richer while failing to provide productive jobs and increasing incomes for everyone else, and at least half a dozen disastrous wars and interventions that are producing deadly blowback in the form of terrorism. What the elitist attitude ignores is that society is not something that is there to be engineered and moulded like a lump of metal in a blacksmith’s forge. Rather, it is made up of individual people who shape it according to their individual thoughts, feelings and desires, motivated by what they believe is best for themselves and for their families. An economy is not some giant machine into which goes “input” to be processed by “jobs” into some kind of “output”, nor is it necessarily true that the higher the numbers of “input”, “jobs” and “output” the better everything is. Rather, a prosperous economy is the product of individual people trading resources voluntarily in directions that they see fit so that they can satisfy ends that they wish to see fulfilled. “Society” is not a collective that demands broad brush categories such as “food” or “houses” or “better railways” etc. Rather, it is me wanting, say, a ham sandwich at 1pm on Tuesday, or you wanting a small apartment in the Hampstead area of London to rent for three years, a business wanting to invest in a small car factory that will be completed in the five years, and everyone else wanting a myriad of highly specific ends in highly specific places at highly specific times that are the product of our own choosing. The economy is not something to be directed by central banks who squash the rate of interest down to its lowest possible point through so-called “monetary policy” or “quantitative easing” in order to “stimulate” some kind of beast into life. Rather, the rate of interest reflects the strength of everybody’s individual preferences for consumption ahead of investment so that the correct amount of resources can be sustainably channelled into roundabout methods of production. Each of us co-operates, through the division of labour, to accomplish things that we each want with the resources available in varying timescales that we are each prepared to bear. It is this co-operation of individuals to achieve their own ends through the nexus of production, trade and exchange that creates a society and not any management and direction from giant, all-encompassing institutions that achieve their ends through force.

The second problem with the centralising view is that the achievement of peace and prosperity in fact demands the very opposite of state and institutional centralisation and consolidation. As counter-intuitive as it might sound, harmony is achieved by division, not unity, while the growth and strength of the human race as a whole is accomplished by the weakness, relative to each other, of its component parts. Economic prosperity, for instance, is characterised by a growing complexity of the economic system – an increasing division of labour with more and more different people specialising in more and more different tasks to produce more and more different products for more and more different people. In other words, its natural tendency is to spread outwards from the centre with more diffused, decentralised knowledge and specialisation. Growth and centralisation of the institutions that support this prosperity under the banner of unity are therefore likely to stifle rather than aid its progress. Indeed the very concept of “unity” requires the same, repeated rules for everyone and the same approaches towards everything regardless of their individual, specialist needs. Hence you get the proliferation, in large, consolidated states, of “one size fits all solutions” that attempt to force everyone through a single, “unified” channel, as though all of us with all of our differences characteristics and requirements are being squeezed through a sausage maker to create a bland, blended puree. (Curiously, those who champion centralisation and state uniformity are also the ones who squeal for “diversity” and celebrating “difference” – at least when those diverse differences are demonstrated or practised by favoured minority groups). Indeed, it is usually, if not always, the case in nature that as something becomes bigger and more complex it is characterised by greater division and decentralisation, not by increased unity and consolidation. A human being is not simply a larger version of a single cell organism. Rather, he is made up of a countless number of individual cells that coalesce into different organs and tissues, each of which specialises in different life sustaining activities. We do not have one, single “unified” organ that pumps the blood, inhales and exhales air, rids the body of toxins, acts as a nervous system and also as a skeleton. In other words as nature achieved a complex human being by decentralising and delegating various functions to different organs that act independently of, but symbiotically with each other, so too will humans only achieve a complex and prosperous society by increasing the division of labour and the degree of specialisation in more and more decentralised institutions.

Division rather than unity is also necessary for creating and preserving the conditions that economic prosperity requires – strong private property rights, minimal taxation and minimal regulation. The benefits of a large number of divided states as opposed to large, unified states, is that if one tiny state of a size equivalent to Luxembourg implements, say, an onerous tax then only that state is affected and the disruption to everyone else in the world will be relatively minimal. If that state introduces ridiculously high border tariffs then only the small proportion of global trade into that territory will be burdened while freer trade will remain for everybody else. Similarly if that state introduces burdensome laws and regulations that infringe upon people’s lives only those people will be affected. The hampering effects of state action upon economic prosperity will, therefore, be localised and minimalised in a world of deconsolidated, small states. In a world of much larger states and state institutions, however, the introduction of a tax will affect everyone; the introduction of a new regulation will affect everyone, everywhere at all times regardless of their own needs and preferences; and the introduction of a border tariff will affect the trade of everybody who wishes to trade across the lines of the large, unified state. Hence the hampering effects of state taxes and regulations and infringements upon private property are magnified as the state becomes larger. This is not all, however, for the incentives to tax, regulate and otherwise infringe private property rights are much greater in a large, unified state than in smaller states. Smaller states are, by their nature, economically weaker than larger states and are more reliant upon maintaining the free flow of goods and services from abroad which simply cannot be produced with the resources at home. Each state will therefore compete with all other states to attract foreign investment and the unhindered import and export of goods and services by minimising taxes, regulation and border tariffs. Because the jurisdiction of a small state covers only a small area, if its rates of taxation, regulation and border tariffs are relatively high then investment will simply flee to a more competitive jurisdiction which may be only tens of miles away and the standard of living in the small state will plummet. A large state, however, whose jurisdiction covers a larger territory and possesses access to a larger number of domestic resources has no such incentive to keep its tax and regulatory burdens to the minimum. With more domestic wealth and resources available and with the threat of capital fleeing for foreign shores thousands of miles away minimised, large states are free to increase their tax and regulatory predations to a much higher degree than smaller states. One of the supposed benefits of the EU is the so-called common market – the notion that goods and workers may move freely under a single tax and regulatory code. Yet any benefits achieved by having to deal with a single code are likely to be outweighed by its gargantuan size whereas a myriad of small and trifling tax and regulatory codes in a world of greater state division is likely to be a better condition for promoting trade and prosperity. Indeed, former UKIP/Independent MEP Godfrey Bloom has referred to the EU as a “customs union” rather than a market union – in other words, a single bureaucracy rather than a single market, a chance for the state to stamp out the irritating competition between states which forces them to keep their tax and regulatory rates low (as demonstrated recently in the EU’s disagreement over the rate of tax Apple had agreed to pay to the Irish government) and replace it instead with a giant socialistic paradise of government control. Instead of emphasising the “unionisation” of tax rules and regulations, those who wish to encourage economic prosperity should instead concentrate on reducing them – and the only way to do this is to make the state entities which impose them smaller and weaker, not bigger and stronger.

The argument for the “unity” and the consolidation of states becomes even more absurd when we consider the desire to preserve peace and prevent war. Murders are committed by murderers; rapes are committed by rapists; thefts are committed by thieves. If we want to minimise the effects of murders, rapes and thefts then it is obvious that the last thing we want is for all of the murderers, rapists and thieves to join together under the banner of “unity” so they are free to combine their powers to murder, rape and steal to a greater degree with increasing ingenuity. Similarly, wars are started by states and are fought between states. Therefore, if we wish to minimise wars and their effects then it follows that we need to make states smaller and weaker; it makes no sense whatsoever to make them bigger and stronger. The argument that unifying states is likely to prevent wars seems to rest on the assumption that government is the glue that holds society together and it is in fact all of the people whom they govern who are the cause of endless conflict. Thus a bigger and powerful government is able to “unite” all of these people and stop them from fighting each other. Nothing could be further from the truth. Apart from the fact that, as libertarians, we know that the state’s dependence upon force and violence for its wellbeing renders it an institution that is bound to inflict rather than prevent conflict, bigger and more powerful states are the enablers of bigger and more destructive conflicts rather than our salvagers from them. Private actors and institutions are necessarily splintered, decentralised and reliant upon voluntary trade for their sustenance. Tiny states have equally tiny tax bases from which they can command a very limited number of resources. The ability of such persons and institutions to start and sustain wars is extremely limited. Large states, on the other hand, are vast concentrations of wealth and power which not only have enormous tax bases from which to draw the means to fund eminently more destructive firepower but the advent of central banking – another creature of centralisation and “unity” – has allowed large states to fund their conflicts through monetary inflation rather than through demanding their citizens to cough up directly. So does anyone sensibly argue that private actors and small states would achieve the level of carnage and destruction that the large and powerful belligerents managed to reach in the two world wars? Does anyone believe that a decentralised world of small states and private institutions would have had the ability to force us to endure a generation and a half of potential nuclear terror during the cold war as the vast territories of the US and the Soviet Union managed to do? The most spectacular terrorist atrocity (i.e. an attack by non-state actors) of the past generation – the destruction of the World Trade Center in 2001 – killed just fewer than 3000 people, a figure which, while undoubtedly tragic, stands in the shadow of the more than 1 million Iraqis who have died as a result of the US invasion of their country. There would, of course, be fewer states left to fight each other in a world of consolidated, centralised states. However, this completely ignores the fact that the states that remain are armed with a destructive ability far superior to any minor state or territory – and especially compared to any private criminal. Any conflicts in a decentralised world would be localised to small pinpoints on the world map, affecting, at most, a few thousand people and, with the participants lacking the resources to continue fighting and disrupting trade for too long, would probably be over in weeks if not days. Contrast this to the situation in which we languish today where the ridiculous cult of interventionism and “collective security” – another banner of “unity” – forces all such local conflicts to be escalated into drawn out, global catastrophes, as the forays into Korea, Vietnam, Iraq, Afghanistan, Libya and Syria have demonstrated. It is clear that if we wish to preserve peace and prevent war then we need to prevent the institutions that start and fight wars – states – from becoming too big and powerful.

On a related note, there is a distinct air of utopianism in the minds of the centralisers and consolidators when it comes to the issue of preserving peace. War and conflict are doubtless terrible things and we would have a much better world if they did not exist. However, it is also true that, for as long as humans have walked the earth, individuals and institutions have run into conflicts with each other and that these conflicts have been escalated into violence. This is just human nature. Unwittingly, in trying to prevent all war everywhere and at any time by “unifying us” under the yoke of bigger and larger states, the advocates of such an approach have, instead, served to escalate the size and duration of wars and vastly magnify their destructive capabilities. The more sensible approach, we would suggest, is to acknowledge that war and conflict will always exist and to recognise that a superior social system will never eliminate these aspects of humanity entirely, just as in the same way libertarians do not expect a free market in private defence and security to ever completely eradicate murder, rape and theft. Our task instead is to find ways to reduce the frequency, duration and potency of these awful things as much as possible. When it comes to war only cutting the potential belligerents down to size and reducing their ability to wage destructive wars in the first place is likely to achieve this.

As we have seen, the liberating effects of decentralisation owe themselves to the relative weakness of deconsolidated and splintered states and state institutions. However, these liberating effects do not arise out of the smallness of the states and state institutions per se. Rather it is because the individual person becomes stronger relative to an institution the more decentralised and localised that institution is. Within his own immediate family, which may consist of only half a dozen people, an individual person’s needs and views are likely to be highly influential upon the other members of the family. They will attempt to provide for and accommodate these views and needs as an active part of their lives simply because the individual is close to them both physically and emotionally. An individual will have a little less influence in his immediate community or on a civil or parish council, where there are more people involved and few of them will be as familiar with him as his immediate family. However he would clearly have more influence in such a circle than in an entire town or city. And once, of course, we get to the level of an entire country such as Great Britain, a diverse nation of various economic, social and ethnic backgrounds, a single person’s lonely vote in, say, a general election becomes a drop in the ocean along with all of the other c. 45 million votes that are eligible to be cast. And if a country such as Britain was to be absorbed into a superstate such as the EU an individual may be drowned out by a chorus of 500 million other voices. The larger an institution becomes then the more its ability to focus on the “micro” issues that really affect people’s lives is progressively diminished and is replaced by a concentration on “macro” or global issues, the successful tackling of which is determined not by the wellbeing of individual people but, rather, by the measurement of aggregated statistics. So whereas, say, a family will care about whether Dad has a job that he enjoys and pays enough to feed and house the family or whether Grandma can get her hip operation in a hospital local enough for her to travel to, large state governments will instead care about GDP and the size of hospital waiting lists. Whereas a local council might focus on whether there is a sufficient bus service to a small community or whether a particular street is clear of litter, large governments, instead, have transport and environmental policies. Who in the bureaucracy is likely to care whether these policies might overlook the specific needs of one community or street some hundreds or even thousands of miles away from the capital? More local institutions are also likely to be populated more homogenously, with each person experiencing relatively similar priorities and holding a relatively similar worldview. Thus the ability to induce empathy between those who lead and those who are led is much more likely and, indeed, may produce more of a situation of symbiosis, or a sense of “working together” to further common goals as opposed to the “command and follow” routine of large states. In other words, even though a particular institution may still function officially through the methods of power and force, the smaller and more localised it is then the more likely such an institution will approach the individual and his needs in a voluntary and peaceful manner – or at least relatively so compared to much larger, faceless state institutions. Even the socialisation of property – considered to be the antithesis of libertarians, or at least right-leaning libertarians – is less likely to be a problem in, say, a small, voluntary commune where all of the commune’s members can air their views as to how their collective resources should be put to use and where all the members are likely to share a common motivation and purpose. Yet a similar exercise on a nationwide scale has always proven to be a disaster – not to mention, of course, that is easier for someone to leave a small commune than it was to leave, say, the Soviet Union.

It is important to realise that decentralisation is not necessarily about breaking every institution down into its smallest possible parts just for the sake of it. There is nothing wrong with large entities or institutions if such sizes generate advantages that could not otherwise be attained. Rather, the primary purpose of decentralisation is to devolve decision making authority (or what might be called “sovereignty”) to its the lowest possible level and that the closer this is to the individual then the more liberating the decentralising effect will be. So there is nothing wrong with lots of individuals or small institutions deciding to form a large institution to achieve a common purpose. This is precisely what individuals do when they form companies and joint enterprises. Whatever criticism we might hurl at the inadequacy of corporate governance and executive dominance, it is still basically the case that the individual shareholder of such an entity can liquidate his position if he wishes to disassociate himself from the institution. Thus the ultimate fate of the institution is dependent upon the willingness of individuals to continue its existence rather than upon its own volition. When, however, such an institution, which may originally have been organised voluntarily, becomes the ultimate decision making authority – like the modern state has become – and is able to prevent its component parts from exercising any significant autonomous power that would seal its fate, then the anti-liberating effects of consolidation and centralisation will be felt. This has been the case with the United States which, having started off as an association of small, independent, sovereign states has become, at least since the American Civil War, a compulsory union with the power concentrated in Washington DC rather than in the state capitals.

Decentralisation cannot depend solely upon formal, constitutional arrangements or treaties and it is naïve to argue that such set ups are adequate. What matters is where the de facto ability to enforce decision making power lies. An individual shareholder has de facto power over a company, for instance, because a court will enforce the sale of his shares and whatever other rights he may have. Technically, the individual member states of the EU remain wholly sovereign nations and, indeed, are so at this present time – the perceived loss of sovereignty of which its citizens complain has come in part from the fact that the politicians of the individual state governments have been happy to haemorrhage more and more powers to Brussels that override the individual, local needs of each country. However, if all of the military, policing and judicial might of the combined EU member states was to be consolidated in Brussels – which is, of course, the eventual aim of the super-statists – then it would be the case that no individual member state would retain the ability to enforce its sovereignty over the larger entity. Hence, it was a good thing for the UK to vote to leave the EU before such a consolidation occurred. What matters for the process of decentralisation and its liberating effects, therefore, is that any legal or enforcement system must be able to give effect to the decision making authority of smaller and smaller institutions. Therefore, large, standing armies, and consolidated police forces and judicial systems run from vast buildings in the capitals of large states, such as the Pentagon in Washington DC, are the biggest fears for those of us who wish to achieve a world of liberty – and with it, a world of peace and prosperity.


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States and Corporations

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To say that the existence of the state is, in the mainstream, uncontroversial would be something of an understatement. While the precise individuals who form the state and the specific acts that they choose to do with state power often attract controversy, the existence and sustenance of the state itself is deemed to be essential for not only a functioning and orderly society (such as that which could be provided by a so-called “night watchman” state) but also to contribute, or even to cause, the economic and cultural progression of that society. This belief has become even more potent since the state, sometime in the twentieth century, became endowed with so-called “democratic legitimacy”, i.e. it is supposed to be run by representatives chosen by the people for the people.

Let us run through some of the uncontroversial and supposedly necessary aspects of the state that are barely questioned by anyone today.

First, the state possesses a territorial monopoly of the legitimised use of the initiation of force and violence. The state alone is permitted to fund itself not through voluntary exchange but through compulsory levy (i.e. taxation); people are required to pay to the state that which the state says they should pay regardless of the “service” that they receive from the state in return. The state, further, is permitted to confiscate the legitimately earned wealth and property of individuals and to hand it to other individuals in order to achieve so-called “social justice” and a reduced inequality of wealth and income. Further, the state may use this legitimised force to ban certain uses of one’s own property that in no way interferes with the person or property of anyone else. It may also use this force to compel individuals to deal with their property in certain ways specified by the state, usually at one’s own expense – a power of the state that is euphemised by the term “regulation”.

Second, the state alone is tasked with maintaining law and order and the protection of the person and property of individuals from criminals. The possession and trade of goods and services to enable individuals to accomplish this themselves – such as personal firearms – is increasingly restricted by the state to the extent that such possession or trade itself becomes a crime, even if the intent is simply to prevent criminal acts against oneself. You are therefore utterly reliant upon the state for your own protection and, moreover, you are defenceless against the state when its employees aggress against you. Nevertheless this does not prevent the state from requiring private organisations to police the populace on its behalf – such as in the collection of taxes from payrolls and the requirements of banks and other financial institutions to report on the transactions of their customers.

Third, should the state fail to maintain law and order and to protect your property from criminals, it is then the state to whom you must turn if you want a redress. For the state also enjoys over its territory the privilege of being the sole provider of the dispensation of justice in conflicts between parties, including in conflicts which involve itself. This takes place not just in state run court houses refereed by state employed judges but also (when the state or some of its members have been seen to cause an incident that results in public outrage) in so-called “independent public enquiries”. These are undertaken by a different employee (or retired employee) of the state and the funding still flows from state coffers so there is no wonder why these are almost always written off by the general public as a whitewash.

Fourth, the state alone is tasked with providing so-called “national defence” and securing the state’s borders. Although the restriction of civil liberties in the face of either a real or imagined threat against the state’s sovereignty by a foreign invader is not uncontroversial, it is hardly new and is, in fact, a hallmark of every war into which the state drags its people. More commonly, however, the state may prevent foreign visitors from entering the territory of the state even if domestic private property owners have invited them. People who wish to come to the state’s territory to create jobs and wealth, or simply those who wish to work, are forcibly restricted by the state, even if a domestic employer is willing to hire them. The state also controls, by force, the flow of trade across its borders and imposes tariffs and other restrictions on the movement of goods, regardless of whether a domestic individual or entity wishes to conduct peaceful trade with a foreigner.

Fifth, the state alone is permitted to print and issue currency in the form of paper money or electronic credits to the extent that it may create this money and use it to buy goods and services for itself without having worked to create any wealth in the first place. Other people who do this are labelled as “counterfeiters” and are subject to the full brunt of the state’s forceful retaliation. Such a power to create money is bound only by the economic consequences of price inflation and credit expansion but it permits the state to fund and grow its activities without resorting to increased taxation, instead robbing the domestic population of the purchasing power of the existing notes that they hold.

Sixth, the state forcibly maintains a monopoly over transportation networks such as roads, highways, railways and airports. If they are not nationalised outright, the state frequently contracts out the provision of other supposedly “essential” industries such as healthcare and the supply of utilities such as gas, electricity and water under the rubric of “privatisation”, yet it maintains a tight control over these industries to the extent that they are little more than a state dominated oligarchy.

Seventh, the state tasks itself with the “education” of the children who are born and/or raised within the state’s territory, mandating, through the threat of punishment, attendance at certain ages dictated by the state, regardless of what children may prefer to be doing or better at doing. The state employs the teachers, sets the curriculum, determines the standards to be achieved through examination (i.e. sets the grades) and is responsible for inspecting its own schools and institutions. Private education is possible but, apart from being monitored closely by the state, is nearly always prohibitively expensive and thus is seen, with some resentment, as being the preserve of the wealthy and privileged. Thus the majority of people have little choice but to turn to the state to provide the education of their children. Furthermore, the state takes it upon itself to interfere in the general upbringing of children, with state run schools often tasked with policing parents and dispensing lessons such as “citizenship” and “personal, social and health” education in order to make up for supposed parental shortfalls.

Finally, the state is supposed to protect us and to provide for us in our hour of need – such as if we lose our job or when we retire. State provided retirement benefits are little more than a giant Ponzi scheme. Funds confiscated by taxation from the earliest “beneficiaries” to provide for their retirement were not saved and invested by the state; rather, they were consumed in current expenditure. Instead, it is the current tax confiscations of younger generations that pay for the pensions of today’s retirees. The state forcibly prevents private individuals and companies from engaging in such a scheme as it ultimately results in collapse and losses for the later investors, and those that do offer such a service are thrown by the state in jail. The state’s own scheme is, as we are beginning to see today, susceptible to such a fate yet the state exempts itself from having to follow its own rules.

No doubt readers can think of many other “uncontroversial” aspects of the state that are held dear among mainstream views. Each of these aspects could be demolished in separate, longer treatments and many libertarian writers have, of course, done just that. What we wish to do here, however, is to ask our fellow citizens who do not counter these “functions” of the state a very simple question: if you accept with gladness or even celebrate these aspects of the state that we have just listed, can you imagine also permitting a private corporation to do the same things that the state does? Can you imagine a private corporation being able to initiate the use of force and violence against other people? Would a private company be allowed to force you to do what it wants with your own property? If you get into a contractual dispute with AT&T should AT&T be allowed to judge the outcome of the conflict? If American Airlines assaults or kills your family should American Airlines sit both in the dock and on the judge’s throne? Should Microsoft be tasked with national defence and arm itself with nuclear weapons? Should McDonalds be able to tell you which foreigners and which goods and services can cross the border even if you want them to come and visit you? Could we imagine a world in which Google or Walmart can print paper money and force people to accept it in return for goods and services? Or a world in which Facebook builds all of the roads and runs all of our utilities? Would it be possible for, say, Apple to be able to force our children to attend its schools? And finally, should we allow Bank of America or J P Morgan Chase to force investors to participate in Ponzi schemes? Most lay persons are likely to recoil in horror at the thought of any private corporation being able to do all of these things. Yet, bizarrely, they either accept or defend the fact that the state should participate in these activities.

One likely retort to this is that the state is supposed to govern for “the people” whereas companies are interested in making profits for their shareholders. Indeed, the state uses its self-proclaimed subservient and altruistic nature to exempt itself from all of the proper behaviour that is required of private citizens, who are supposed to be interested in only their own gain. While it is true that companies are primarily interested in making a return for their shareholders (why else would the shareholders have invested in the business?), it is also true that companies can only achieve these profits by serving the needs of their customers. It is the customers who decide, through their choices to spend or not to spend money with the corporation, whether those profits are made. In any case, however, we might point out that an odious act does not transform into a good one simply on account of for whom it is done. If I steal your money this act is rightly viewed as wrong, regardless of whether I intend to keep the money for myself or whether I intend to give it to someone else who may, in my opinion, “need” it more than you do. Similarly, therefore, if the state confiscates your money through taxation and distributes it via the welfare state the fact that it goes to “the people” makes this act no more moral than if the bureaucrats kept it all themselves (which, of course, they often do – not only are the administrative costs of the welfare state frequently underestimated but most of the money disappears into the hands of the state’s favoured contractors and suppliers rather than directly into the bank accounts of the poor). Moreover, we don’t even have to go so far as to cite strictly moral or immoral acts to illustrate this point. Monopolies, for example, are viewed as being bad because they tend to reduce quality and raise costs over time; this fact does not change simply because it is the state that runs a monopoly over say, healthcare, rather than a private corporation.

Another likely response to our question is that the state is under the supposed “democratic control” of the people and that if the state uses these powers “illegitimately” or irresponsibly then they will be booted out at the ballot box. Apart from the fact that, again, an illicit act does not become moral simply on account of who controls those who are doing it, a citizen has the right of voting between a bare handful of carefully selected and screened candidates only once every four or five years. Moreover, a person cannot choose with any specificity which policies and manifestos to support. Rather, he has to throw what little weight he has behind a single candidate (or party) and all of that candidate’s stances on a wide spectrum of issues, from whether we should continue funding wars in the Middle East down to whether a person may light up a joint in his own home. And once elected the successful candidate can simply abandon whatever promises he made in return for your vote straight after. As if that wasn’t bad enough, what if your preferred candidate does not get elected? You still have to suffer the implementation of the odious policies of an alternative candidate whom you may utterly despise. With a private corporation, however, you can choose to vote or to not vote for them with your wallet every single minute of every single day. You don’t have to wait for a few years if you want to switch from Tesco to Sainsbury. Moreover these choices are very specific. If you change your grocery supplier you are not also changing your telephone provider. If you ditch Ryanair and start flying EasyJet you can still get your clothes from Debenhams. If a corporation takes your vote, i.e. your money, then breaks its promises it made before you handed it over it is called “breach of contract” and for this the company can be sued. And finally, your choice to shop at Sainsbury’s or Tesco is not dependent upon a majority of other people wishing to do so – both are able to trade regardless of whether they are supported by a majority of consumers.

What we can take from all of this is that if a private corporation possessed every single right and function of the state except the power to tax and demand your patronage, then you would have more control over it than you do over the state. The situation we have produced, therefore, is, on the one hand, a society of corporations over whom each individual has a high degree of control yet which are required to abide by all of the laws and at least a basic code of morality, and on the other hand a state which no one can control yet can, for the most part, do whatever it likes. It seems to me that if we are to suffer the illicit and illegitimate powers of the state at all they would be far safer in the hands of a private corporation rather than the state.

Of course our goal is that nobody should have the right to carry on these acts that we outlined in the first part of this essay – that they should be illegal regardless of who does them and in whose name. No one should have the power to tax, to confiscate the income and wealth of other people; no one should be able to print money; nobody should be able to arm themselves with all manner of horrific weaponry while forcibly disarming everyone else; and no one should be able to run a Ponzi scheme. When you take all of these characteristics of the state and ask yourself what life would be like if anyone else was allowed to do them, you rightly begin to shudder with fear. So why should we ennoble the state with the dubious privilege of being able to do them?

Hopefully what we have outlined here is a useful point with which a libertarian can turn a debate with a statist or state-biased lay person, and to cause that person to reconsider either his active or his tacit support for the state and its actions.

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Myths about Freedom

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Libertarian enthusiasts usually take pride in their theoretical understanding of the ethics of liberty and the evils of statism. It is difficult not to read and be enthralled by the works of distinguished authors such as Murray Rothbard, Hans Hermann Hoppe, Walter Block, and from earlier generations the likes of H L Mencken, Albert Jay Nock and Frank Chodorov, before we even mention Ludwig von Mises and Friedrich von Hayek. Nevertheless, it is not likely to be the detailed theoretical purity of libertarianism that will be of much help in persuading the passive majority of the population that a free society is both the most economically prosperous and the most just. Rather, our main concern will be in overcoming the statist-bias that most people hold, a bias induced as a result of their indoctrination by their state school education, mainstream media and the presentation of any political debate as requiring at least some kind of government response. This bias crystallises in a number of myths that serve to put a mental block from any acceptance of a society without government, or at least a society where government plays a minimal role. This essay will attempt to explore and debunk some of these myths, not only to refute them but to do so in such a way as to cause people to realise just how ridiculous any adherence to them is, and that the truth is not only correct but blindingly obvious. Indeed such a revelation needs to be this powerful as that same statist bias usually results in the outcome of any debate concerning the necessity of government to be distinctly unbalanced. It is not enough for us libertarians to explain how the free market may make society better off in ten or twenty ways; for if the person whom we are trying to persuade finds an eleventh or a twenty-first thing that we cannot categorically demonstrate will be dealt with successfully in a society without government, then never matter how persuasive our previous arguments and never mind how much the balance is stacked in our favour, the one perceived failure is taken as capitulation that government is necessary and any hope of a free society needs to be abandoned. New and radical ideas that challenge what everyone has always held to be true are often met with this type of defence mechanism, permitting them to dismiss the new truth and return to the comfort of the status quo. This, in many ways, is the libertarian’s most formidable enemy, may be more formidable than the state itself. Let us turn, then, to trying to shatter some anti-freedom myths.

No one will Build the Roads!

The first myth is what may be summarised as the “who will build the roads?” problem – that we are so used to government engaging in the monopolistic production of certain goods that we cannot imagine a world where government would be absent from that sphere of production. Under this category is included such questions as “who will take care of the disabled?”; “who will supply the water?”; “without the NHS what will happen to you when you are poor and sick?”; and so on and so forth. Aside from pointing out that everything (including roads) that government runs was first, at some point, invented by the free market and not by government bureaucrats, we might point out that the capitalist-entrepreneurs manage to successfully deliver into our hands some of the most technically complex items with components and expertise delivered from a multitude of countries. Refrigerators, television sets, radios, laptops, smartphones, cars, the list goes on. Having achieved all of this, will the prospect of having to take on something as wildly complex and as technically unnerving as laying down some tarmac from A to B strike the fear of God into budding entrepreneurs? Would those that aspire to the fame and fortune of Bill Gates and Steve Jobs be twisting and turning in their sleep from nightmarish apparitions of such a horror? Can these inferiors only be rescued by the boldness and bravery of the elite government bureaucrats who can master this fiendishly complicated endeavour? Clearly this is utter nonsense and any perpetuation of this myth relies solely on the argument from existence. Yet we can easily counter this by imagining what our thought process would be if government had taken over a lot more than it already does. If government had monopolised the smartphone industry, would you be saying “thank God for government! Without them, who will build the iPhone?!” If government took over the stationery stores would you wonder “who will sell me my pencils and pens?!” if government was to vanish? If you could only get clothes from government department stores, would the sudden loss of this monopoly mean that we would all have to go round stark naked?

Libertarians are, of course, always at something of a perceived disadvantage in challenging this myth as we are not advocating any strict, one-size fits all plan like other ideologies do. We intend to leave everyone alone to make their own plans peacefully. Hence we do not know precisely who will build the roads, where they will be, what they will look like and how they will be run. Indeed we don’t even know if roads will cease exist and be replaced by some more convenient method of transport. 2015 is the year to which, in the film Back to the Future II, the protagonist finds himself transported, surrounded by cars that fly and roadways and highways that exist not on the ground but in the sky. And yet here we are, one year earlier in 2014, without anything even approaching that level of technology because government forcing us to pay for their roads through taxes stifles any competitive innovation in that area. Indeed, anything that government touches lacks modernisation and development. Roads, schools, the post office, rubbish collection and so on all carry on with the same monotonous methods, procedures and technology while the free market around them innovates. Government is not only unnecessary for building the roads – it is actively preventing us from developing better methods of transport.

Greed and Individualism

The second myth we must tackle is that more freedom encourages greed, selfishness, and an individualistic, atomistic existence in which no one cares for anyone else. Nothing could be further from the truth. Libertarianism is neutral regarding the personal choices that people make so long as those choices are non-violent. Freedom may permit you to make as much money and keep it all for yourself, to shut yourself away from all social contact, to never give anything to charity, or to refuse to help an old lady across the street. But it also permits you to not make as much money as you can, to give as much of it away as you like, and to help as many old ladies across the street as you have time for. It encourages neither type of behaviour. The only reason why freedom and capitalism are accused of encouraging greed and selfishness is because people in free societies have generally chosen the path of increasing productivity, material wealth and the standard of living (ignoring, of course, the fact that while this confers great riches upon the most productive, the living standards of all people are raised far above what they otherwise would be). People who dislike these outcomes attack the system of freedom rather than the choices people make under it because they need to hide the fact that they simply wish to force society away from choosing a path that most people want but that they, the disgruntled, do not want. If they were to acknowledge that nothing about freedom per se encourages greed and selfishness they would reveal that what they are really trying to achieve is to force humanity to conform to their ends rather than what people individually want. It is true that people, as individuals, think and feel pleasure and pain as individuals first, then that of their closest family and friends second, of minor acquiantances third, and for the most part probably do not even care about the billions of remaining people whom they will never meet. Human nature places the individual at the centre of his own life. But not only are humans also sociable and co-operative creatures – the greatest product of this being the division of labour where, as if by magic, the actions of one person, you, could be serving the needs of someone thousands of miles away whom you do not even need to meet let alone care for – it is not the task of political philosophy to correct or otherwise make amends for perceived failures of human nature. Humans are self-interested and act as individuals; it is impossible for it to be otherwise and any political system has to accommodate rather than subvert or alter these facts. It is precisely because freedom is the only political system that does this that free societies have flourished to degrees unobtainable by any other political system. But the greatest irony surely has to be that it is capitalism and freedom that promotes moral fervour, selflessness and care for others, whereas it is any government system attempting to do the same by its usual raison d’être – force and violence – that encourages an individualistic and atomistic existence.   Forced government redistribution of wealth does not cause the donor to become any more moral or selfless; for moral actions require moral choices and if he is simply forced to have his earnings siphoned off into the welfare pot then this demonstrates nothing about his moral character. But further, if anything, having been denied the personal choice to determine which causes are good ones for your money, it is more likely that forced redistribution will instil in you bitterness, resentment and hatred of your fellow humans rather than sympathy, care and a willingness to help. Moreover, it is the existence of generous social safety nets that leads directly to the fracturing of family relationships and friendships and of any need to engage with fellow human beings on a personal and empathetic level. These relationships become most important precisely at your time of need and if the state is there ready to fill your cup in hand on these occasions then cultivating them becomes relatively less important. In a free society however, not only must each person possess a great empathetic skill in order to determine how best to serve everyone else under the division of labour, but the lack of a welfare state means one must rely on one’s friends and family, and they must in turn be able to rely on you. Hence these bonds of mutual care and assurance become stronger under a free society whereas a government-run society all but eradicates them. Finally, the bigger government becomes, the more it leeches from the productive sector, the higher the glittering stack of gold (or paper money, at least) that it steals encourages people to stop producing and to start finding reasons why they should be the beneficiaries of a share of the loot ahead of anyone else. Hence the proliferation of lobbyists, focus groups, think tanks, statisticians, and so on that exist for nothing more than showing why thieved tax revenue should go to one place and not another, and it is hardly astonishing when all manner of alleged societal ills and problems appear seemingly out of nowhere and can be, conveniently, solved by a fat wad of government cash being paid to their sponsors. Big government therefore pits each human against every other in a fight for the loot – it is a contest of who can get everyone else’s money first. If this is not selfish and greedy, then what is?

War of All Against All

Related to the last myth is the allegation that without government every human being would forever be robbing, stealing from and murdering everyone else, reducing humanity to the level of brutal savages and putting an end to civilisation as we know it. This myth suggests that it is an inherent part of human nature to oppose to the death every other human being in a fight for what is a fixed pool of resources, much like animals do in the jungle. If you can’t struggle your way to the top of the food chain in this “society” you will die at the hands of someone else. The first question to ask any advocate of this position is if, in the event that government and its monopoly of security, protection against crime and law enforcement, was completely abolished in a flash, would that person immediately go out and start looting, maiming and killing? In other words, is the only thing keeping you from putting a gun to someone else’s head the fact that government will detect and imprison you? Do you have no conscience whatsoever and are utterly dependent upon government to stop you from turning into a predatory animal? Furthermore, is government the only reason you go to work every day to co-operate with your fellow employees, greet your neighbours a good morning, have coffee with friends, walk your kids back from school, and sit down to a family meal in the evening where you will talk, laugh and joke with other human beings? Will you stop doing all of these sociable activities and engaging co-operatively with other human beings if government vanished? If you meet a friend for lunch is government the only thing stopping you from shooting him and pinching his dessert? The answer is of course no, an answer that is necessitated by the government advocate’s recognition of this behaviour as immoral. Humans possess consciences, moral fervour, and the ability to distinguish between right and wrong. If he concedes that there are some acts that he would not carry out even if there would be no sanction whatsoever, is it not reasonable for our government supporter to expect this of other people as well? At the very least he has every reason to expect the same of every other person with whom he engages in these sociable activities. Indeed, can he name anyone he knows who, absent government, would transform into a criminal, and if he can, do those people form a majority of his friends and acquaintances? Humans not only possess a moral fervour that prevents them from acting wrongfully in the absence of retribution, but they also transcend their recognition of strict moral duty and are, additionally, an inherently sociable and co-operative species. Not only do we form bonds of friendship and kinship far more powerful than any government gun, but, as we mentioned when tackling the previous myth, we have developed a system of co-operation – the division of labour – in which you do not even have to know, meet, like, love, respect or admire any other human being whose needs you serve. Indeed, you may positively hate that person and yet you can still achieve gain through co-operation within the boundaries of voluntary trade – a gain that is mutual and not just for you, where both parties come off better, all in spite of the fact that you do not care a bit about each other. Government was not necessary for this creation – it was truly a “spontaneous” order, spontaneous in the sense that it was the product of human purpose but not of any human’s design. Only a handful of sociopaths and nutcases – a bare of minority of the population – require deterrence in order to prevent them from committing crimes. In addition to private security forces being able to deal with these individuals, there will certainly not be any overnight, societal collapse. Rather, it is government that pits each human against his fellow. Government achieves all of its ends through violence and force – someone gains at the expense of someone else. If you can tap into that mechanism then you can pinch, plunder and pillage from anyone whom you like. But it gets worse than that for government overlays this regime of violence with a veneer of democratic legitimacy, thus weakening people’s sharp, moral distinctions and ennobling anything you do against another human being, however evil and immoral, all OK as long as it was done through democratically elected government. It is worth emphasising this point – not only is government permitting this behaviour but is effectively saying that it is a good thing. It is no small wonder that with such encouragement the war of all against all not only exists under government but becomes prolific.

Companies will Poison our Food!

Our final myth is the notion that private companies, in seeking to maximise their profits, will put poisonous chemicals in our food, will cut corners with safety, our buildings will collapse, our cars will crash, our lives will be at the mercy of these profit-hungry merchants of greed! The obvious retort to this ridiculous assertion is that if a company is expecting people to buy its goods, if it is expecting to outwit its competition, and if it is expecting to make profits, then just why on Earth would it do these things? What advantage is there in creating a product that is going to kill your customers ahead of one that will not and will keep them coming back to you time and time again to keep on purchasing your products with loyalty? As soon as it is realised just how dangerous the goods you are selling are, won’t a competitor leap in with safer products and drive you out of business? At the base of this misunderstanding is the idea that, in the absence of government, regulation will simply vanish and companies will have a free hand to do whatever they like without restriction. But regulation is itself a market activity – not only does it consume scarce resources just like any other but it aims for an end that consumers desire. At the heart of regulation is not the desire to forcibly stop a company from producing in a certain way or from carrying out a certain activity. Rather it is to furnish information to customers so their choices are more informed. Indeed, free market regulators are dealers in the market for information and they need to decide precisely which information is of the most benefit to consumers. Although there exists consumer groups and watchdogs to which people subscribe in order to gain more information about the companies from which they buy, most regulation will take effect as independent certifications of standards which companies will have to achieve. If the standard, in quality, safety, or whatever is achieved then the company will be licensed to advertise the fact that its products have met this standard. Underwriters Laboratories, which regulates product safety, is an example of this arrangement. The regulator too has to judge precisely which standards consumers are willing to pay for. If consumers do not care to know whether a product has achieved a certain standard then companies will not seek certification or accreditation. If the standard is too high then products will become too expensive and the regulator will cease to receive custom from companies and will go out of business. If, on the other hand, the standard is too low then the certification is meaningless as customers are demanding knowledge of a level of quality that the regulator is not setting out to detect. Free market regulation is therefore alive and thriving and it is tied to precisely how much of it consumers demand. If people will not buy your goods because they do not achieve the level that is demanded by private regulators then you will find yourself going out of business.

Related to this notion is the myth that profit seeking will cause a relentless quest by greedy businessmen to deplete the resources of the Earth and after an extravagant party everything will be used up and the world will be left as a barren wasteland. This idea overlooks the fact that profits are determined not only by revenue but also by costs. Just as companies seek to maximise their revenues in order to be profitable so too must they decrease their costs. They are under constant pressure to achieve more output with less input. There is, therefore, an inbuilt incentive towards conservation in a free market – using less, and not more. If resources become depleted then their cost begins to increase so companies have to pay more to use them as inputs, squeezing profit margins and encouraging the switch to less scarce materials. Thus not only is the endangered resource preserved for only those ends which need it most desperately but the increased price induces the production of substitutes or fresh discoveries of the virgin material that were previously unprofitable to harness. As we have explained in detail elsewhere, the very resources that are in danger of depletion today are precisely those where the pricing, profit and loss system has been restricted and replaced by government licensing. Rainforests, fish stocks, and endangered animals are all examples of where ownership has been overridden by government fiat. As they are ownerless the use of these resources is not regulated by the cost of their depletion so there is every incentive to consume them now until they waste away. If this should be doubted then why are elephants, tigers and whales in danger of extinction whereas dairy cows, chickens, and sheep are not? How come the evil profit-seeking capitalists have not, quite literally, driven lambs to the slaughter until there are none left?

Conclusion

These are just some of the main myths which libertarians might encounter when trying to promote their vision of a free society. No doubt there will many more of them that crop up as a result of the statist bias that is inherent in most individuals. Libertarians face an uphill struggle in this regard, but hopefully what we have determined above goes some way to showing how ridiculous clinging to government really is.

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Capital – The Lifeblood of the Economy

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It is the gravest deficiency of mainstream economics that it fails to understand the necessity, role and structure of capital in the economy, a failure that permeates through to lay debates concerning production, income, wealth and redistribution. This essay will explain why this deficiency will lead to economic ruin unless its errors are comprehended and corrected.

Production

It is self-evident that everything desired by humans that is not the free gift of nature at the immediate point of consumption must, in some way, be worked for. By “worked for” we mean that the human consciously strives to devote means to bringing about an end that would not otherwise exist. The benefits of air, for example, must be “worked for” in the sense that the body has to contract the diaphragm to inhale. But to the extent that this is not a conscious process, that the human does not knowingly have to divert resources to meet this end means that air is, to all intents and purposes, a free good. Very few, if any, other goods meet this criteria and the environment of the first human that walked on the Earth was one of unrelenting scarcity, a complete and utter dearth of anything necessary, enjoyable or desirable for that human being’s existence.

An isolated human, therefore, has to work to produce his goods. The extent of his success determines his productivity or, to put it more starkly, his income. If, at the start of the day, he has nothing and he labours to produce three loaves of bread then by sunset we may say that his productivity, or his income, is three loaves of bread per day. Productivity does not rise proportionally with effort. It may be possible to achieve a high level of productivity with relatively little effort or, conversely, to waste ones efforts on boondoggles that turn out to be a complete failure. While it is generally true, therefore, that harder work will begat a greater level of productivity it is not necessarily true – humans must direct their efforts in the most appropriate way to enable the greatest productivity, not necessarily in the hardest way.

Let us take, then, the first human on Earth who has nothing except air to breathe and nature’s gift of his body which empowers him with the ability to labour. Let us say that, at this point, his wealth, his accumulated stock of produced goods, is zero. It will be the task of his existence to increase this level of wealth. How does and how should he go about this?1 Let us say that his first desire is to find firewood to burn and keep warm. So on the morning of day one of his existence he has no logs to burn and his wealth is zero. Off he goes on a brief expedition and, using only the body that nature has given him, he returns in the evening with three logs. His productivity, or his income for the day, is therefore three logs. We may also say that his wealth has increased from zero to three logs. However, he then makes the decision to burn all of the three logs to keep him warm for the night. His act of burning the logs is his consumption. He has used the three logs as consumer goods to directly yield him a satisfaction in his mind. However, with the arrival of morning, he is in exactly the same position that he was in on the previous morning – his stock of wealth is once again zero. So off he goes on another expedition and returns again, with three logs. Once again his income is three logs and his wealth has expanded by three logs. But again he burns them overnight, meaning that yet again his stock of wealth on day three is back to zero.

It is therefore the case that one’s stock of wealth is directly related to the amount of it that is consumed. The more of one’s produced product (income) that is consumed, the less overall wealth one has.

Let us say that, within a week, our human grows weary of collecting three logs every single day only to see them vanish again overnight. He wants to increase his wealth. What can he do? It should be self evident that the only thing he can do is to reduce his consumption; if, he wants to be wealthier at the start of tomorrow than he was at the start of today he needs to reduce his level of consumption by abstaining from burning one or more logs. Let us say that he decides to burn only two logs and sets aside one. The following morning, therefore, his wealth is now one log, whereas the previous morning it was zero logs. He is now wealthier today than he was twenty four hours ago, this increase of wealth being owed to the fact that our human he has engaged in an act of saving2. With his saved wealth he can do one of two things. The first possibility is that he can hoard it. If he hoards it then all this means is that, while his wealth will increase as his act of hoarding continues, the human’s consumption of the wealth that he is accumulating daily is merely delayed. This method of saving does not, in and of itself, permit wealth to grow and from this perspective serves little purpose. If all else is equal, he might as well burn the third log today and enjoy the extra warmth rather than leave it lying around for a future date3. However, the second thing that he can do is to take his saved logs and invest them. To invest means rather than consuming his wealth directly the human takes it and uses it as a tool of production of further goods. This must be the result of a transformation of the goods into such a tool. Let us say that the human saves enough logs to invest in the production of a wheelbarrow and that, for one week, he labours to construct the wheelbarrow. The finished wheelbarrow is now a capital good – a good used in the production of further goods. The aim, in this case, is for the wheelbarrow to be used to transport logs that will then, in turn, be burnt as firewood. Let us say that with the aid of the completed wheelbarrow he is now able to bring home six logs per day rather than the initial three. By aid of the capital good he is therefore able to increase his production of other goods. His wealth therefore increases by more than it would have done so without the aid of the capital good.

What, therefore, are the inherent qualities of this act of saving and investment? What, in particular, will induce the human to engage in it? There are several aspects to note:

  • It requires abstinence from direct consumption of the good that will be transformed into a capital good;
  • The abstinence is for a period of time, that is the time taken to transform the goods into capital goods that yield further goods for consumption;
  • In order to justify the period of abstinence, the yield of goods from the capital goods must be higher than it would have been without the capital good.

This final point is of crucial importance. For what will determine the human’s propensity to save/invest on the one hand and his propensity to consume now on the other? The answer will be his willingness to trade the period of waiting in which the capital good will be constructed against the increased quantity of goods that will result. He will start to save at a point when the increased quantity of goods yielded is more valuable to him than the utility gained from direct consumption now of the capital good. He will stop saving when consuming now will yield him more utility than waiting for an increased quantity of goods in the future. This propensity to wait is called his time preference. If time is relatively more valuable to him than an increased quantity of goods then he has a high time preference. If the increased quantity of goods is relatively more valuable than the waiting time then he has a low time preference.

Increasing Capital – the Structure of Production

The consequences of the increased yield of consumer goods – in this, case, from three logs per day to six logs per day – and the resulting increase in wealth means that our human yet again has to face the same choice as he did with his original stock of wealth – to consume or save (hoard/invest). Only now, however, he has to make this choice with an increased quantity of goods. What will be the possibilities?

  • He could choose to consume and save at the same rate as he did previously, that is one saved log per two consumed. Out of a total of six logs he will, therefore save two logs per day and consume four;
  • He could choose to consume at an increased rate and save at a reduced rate. One day of doing this would be to save the same quantity of logs as he was before (one) and consume the remainder (five); however, he could also increase the quantity he saves while decreasing the rate, for example by saving one and a half logs and consuming four and a half.
  • He could choose to save at an increased rate and consume at a reduced rate, for example by consuming the same quantity of logs as he did before (two) and saving the remainder (four); however, he could also increase the quantity he consumes while decreasing the rate, for example by consuming three logs and saving three.

The precise consequences of each choice are unimportant, merely that each will occur at a different rate depending on what is chosen. It should be self-evident that more saving will begat more capital goods and more consumption but only after the period of waiting; more consumption will mean more goods can be enjoyed today at the expense of relatively fewer in the future. But in practice, we might add, it tends to be the case that the wealthier a person becomes the more he tends to follow the third scenario, specifically by increasing the quantity he consumes while decreasing the rate. The rich, for example, consume a much greater quantity of goods than poorer people do but as a proportion of their wealth they consume less. This will have important consequences as we shall see when we consider the effects of taxation and redistribution below.

However, let us assume that, whatever choice the human makes, there will be a rate of saving that permits investment to continue. What will happen now?

As the level of production is now dependent upon a capital good, the rate of saving must, at the very least be able to maintain this capital good. Capital goods are not consumed directly but they are consumed in the process of production through wearing down. While no new wheelbarrow will need to be produced, of course, a level of saving that permits its parts to be repaired or replaced will be necessary. If the human is not able to maintain his capital goods what happens? It means that he is using it for the purposes of production the results of which are consumed to the detriment of repairing and replacing the capital stock; in short he is engaging in capital consumption. It should be self evident that if the capital is lost, production must decline and so too will the standard of living. The dangers of capital consumption will become clearer when we discuss it below4.

However, let us assume that our lone human is able to maintain the existing capital stock and also has enough further saving that does not need to be used for this purpose. What will happen? He will, of course, invest in further capital goods to increase his production of consumer goods. Let us say that, satisfied with the utility gained from and his ability to maintain his wheelbarrow, he decides instead to invest his logs in the production of tools. Let us say that he fashions from a log directly an axe handle. But the axe head cannot be made out of wood. He must acquire and fashion metal in order to complete the axe. Aren’t the saved logs useless for this purpose? Not at all; for while the saved logs cannot be used directly in the production of the axe head, they can be used indirectly in order to sustain our human during the production of the axe head. In short, let’s say he goes on an expedition far from home in order to acquire the material to fashion the axe head. He takes the saved logs with him and burns them at night to keep him warm. To the extent that the venture is successful and he returns from the expedition with the material to fashion the axe head, then the consumption of the logs has been compensated by the acquisition of the axe head. The axe head can then be used to fell entire branches or even trees which can then be transported in the wheelbarrow for our human to consume. Let us say that, once again, his output doubles as a result of the introduction of the axe, meaning that he now takes home twelve logs each day.

What does this addition of another capital good – the axe – demonstrate? In the first place, it once again demonstrates the requirement of waiting during the production of the additional capital good, waiting that must be sufficiently offset (in the valuations of the human) by the resulting increased level of production. But there are two more crucial aspects:

  • That, in terms of providing for the human’s needs, it is relatively less important to stress the amount of capital he possesses as compared to its precise structure. The new capital structure is intricately woven and the stages are dependent upon each other. For example, if he had two axes and no wheelbarrow, he could fell a lot of trees but would lack the means to transport them. If he had two wheelbarrows and no trees then he could transport a lot of logs but he wouldn’t be able to fell enough trees to fill and use two wheelbarrows. As we can see therefore, capital growth manifests itself as increasing the stages of an intricate production structure through the passage of time. Any interference with the precise structure of capital would be as detrimental as capital consumption; in the complex economy a corollary would be all of the world’s factories, tools and machines, consisting only of tractors. It would not be hard to see that, in spite of the overall level of capital being very high, the specific glut of tractors and corresponding shortage of absolutely anything else would lead to a very severe degree of impoverishment;
  • That the logs used in discovery and fashioning of the axe head, by not being used directly as a capital goods, were used as a fund to produce a capital good. The majority of capital investment is, in fact, the use of a fund of saved products that are consumed in the production of other products and these latter products are the capital goods. In the complex economy we can see how wages, for instance, which are consumed by workers are paid out of saved funds in return for their production of goods which are either sold or used as capital goods (or both if the buyer uses them as capital goods), just in the same way that the logs were consumed in production of the axe head.

This method of saving and investment in capital goods is frequently termed in “Austrian” literature as “roundabout” methods of production; that an increase in capital leads to a longer production structure with multiple stages (in our case hacking of logs off the trees with tools, collection of logs in the wheel barrow, followed by consumption). However a more appropriate description would be that increased saving and investment in capital goods results in a process of production that takes more time for a greater quantity of produced products.

Further Increases in the Structure of Production – The Source of Wealth

This outline of a simple economy consisting of our lone human and two stages of production should illustrate how that human can further increase his wealth. Assuming he continues to save at a rate above that which permits him to maintain the existing capital goods (the wheelbarrow and the axe) he can continue to expand the stages of production of logs or begin to invest in the lower stages of production of other goods. He might, for example, use one log to build a fishing net to catch fish, thus increasing his quantity of fish to add to his wealth. He then might be able to use quantity of saved fish and saved logs to sustain him in building a boat which permit him to catch and even greater quantity of fish. It is this process of capital accumulation, its maintenance and its regulation into a particular structure that is the cause of the increase of wealth. Relatively speaking, the more capital that our human has, the more tools, equipment, machines, etc. that he fashions by abstaining from the consumption of the goods that make them (and by waiting for them to be completed), the wealthier he is.

It should not be difficult to abstract from this simple illustration the workings of a complex economy. The only substantial differences are the existence of the division of labour and the resulting necessity of trade which serve as the most complicating factor in trying to visualise the complex, growing economy. For in such an economy people, on the whole, do not produce goods for their own consumption but rather they concentrate on the production of a specific good (or service) which they then trade in return for other goods. The other goods, of course, are never traded directly but with the aid of a medium of exchange, money, so that you sell the goods that you produce for money and then take money to buy the goods and services that you want to consume5. Each and every single day, then, any person who goes to work engages in production of a produced product. If you are a baker you produce bread, if you are a butcher you produce meat, if you are a fishmonger you produce fish. But no one butcher, baker or fishmonger directly consumes his own product, rather he trades it for money which he then uses to buy the goods he wants. So the baker, for example, may sell bread to the fishmonger who will pay for it with money. The baker may then use the money he receives to buy meat from the butcher. From the point of view of the economy as a whole, the situation is no different from that of the economy with the lone individual. We will remember that, in the latter situation, if our loner produced three logs per day and burnt (consumed) three logs per day then on the morning of the following day he is in exactly in the same position regarding his personal wealth as he was the previous morning. If, in our complex economy, the butcher, baker and fishmonger produce, respectively, on one day three cuts of meat, three loaves of bread and three fish, then if after trade these are all consumed by somebody at the end of the day, then tomorrow the economy as whole will be in exactly the same position as it was at the start of the previous day. If, however, some of these products are saved then tomorrow the economy as a whole will be wealthier than it was at the start of the previous day6.

Saving and investment in the complex economy will not, of course, take place in the form of hoarding the physical products like it did in the simple economy. Rather, let’s say that that the baker sells three loaves of bread to the butcher and receives in exchange for them money. His saving takes place in the form of saving money rather than goods directly. His investment will come in the form of spending this money on goods that are used for investment – i.e. are transformed into capital goods – rather than for consumption. For example, let’s say that he takes his saved money (we shall call it £100) and buys fish from the fishmonger. In exactly the same way as the logs sustained the lone human in constructing the axe head, the fish provide sustenance for the baker while he increases his capital at his bakery – let’s say he invests in a new oven. The fish, therefore, provided a fund which was used to construct a new capital good, the oven which will produce more consumer goods. In his own mind, however, the baker will not reckon in terms of fish, ovens, or the extra amount of bread that is produced as a result of the oven’s construction. Rather, he will say that he has an investment of £100, an investment whose return will be measured not by the physical quantity of extra bread produced but by the increased money he will receive from being able to sell the extra bread. It is this extra money that, in his own mind, compensates him for the waiting time in constructing the capital good. If we say, for example, that he invested his £100 at the start of the year and by the end of the year his sales had increased by £10 then we may that the return is 10% per year. This return is known as interest, the compensation for the waiting time between the point of saving and the point that the increased quantity of consumer goods is available for consumption (and in this case, when the baker has the money from the increased sales).

Another possibility is that rather than expanding his existing business the baker creates a new one; or he could lend the saved funds to somebody else to invest in their business. Let’s say that he lends the money to a new entrepreneur, the candlestick maker. The candlestick maker has himself also saved £100. for his new business and so, together with his own saving and the money lent to him by the baker, he has a total investment in his firm of £2007. The candlestick maker will then take that money and spend it on the fish (or other goods) that will sustain him in producing the capital goods needed for his new candlestick business. Let us say that this business is successful and, at the end of the year, the resulting sales means that the value of the business has increased from the initial £200 to £220 – the original £200 capital and £20 return on that capital as a result of increased sales. This £20 will be divided between the baker and the candlestick maker depending on the terms of their investment, but overall the firm has received interest of 10% per annum.

We have, of course, left out of this simplistic calculation the fact of depreciation – the wearing down of the capital goods during their use in production. Suffice it to say here that at the end of the year the original amount of saving reckoned in money terms will be less than £200 owing to the depreciation of the capital goods in the venture. More on this can be read here].

Another aspect we have deliberately ignored is entrepreneurial profit and loss. The rate of return that any one person needs to receive to induce him to save and invest is the interest return – the compensation for waiting. We have assumed in all of the illustrations above that any saving and investment will for sure result in the return that is expected. But this is never the case in real life – the actual return may be greater than, less than, or equal to what was expected. In all cases, then, the actual return will consist of:

Interest + Profit/Loss8

Going back to our original lone human, he may find that his wheelbarrow actually is only enough to bring him an extra two logs per day whereas he originally wanted three. His return will therefore consist of an interest return of three logs and a profit/loss of negative one log. Or, he may be delightfully surprised to find that his wheelbarrow is enough to bring in four logs per day in which case he will earn interest of three logs and profit/loss of one log. Or, the most disastrous of all outcomes would be that he finds the wheelbarrow is a complete hindrance and, in fact, means that he is able to harvest fewer logs than he was with his bare hands! Let’s say he can only bring home two. In that what is earned is interest of three logs and profit and loss of negative four logs. The real loss that he experiences is much higher than the nominal loss of logs – four and one respectively – as, at the time he decided to save and invest, he needed a return of three logs to justify the waiting time. Although he only appears to lose one log by erroneous construction of the wheelbarrow his actual loss is much greater because of the waiting time he endured. In our complex economy, profit and loss takes the form of having to anticipate that other people will want to purchase the additional produce that is enabled by the capital good. If the actual selling price of the final goods is more than what was needed to induce an entrepreneur to save and invest then this represents an entrepreneurial profit. If it is less than he suffers an entrepreneurial loss9.

It is not necessary for the reader to dwell too much on the intricacies of profit and loss in order to understand the role of capital in increasing wealth. An elaboration is offered here merely for the sake of a degree of completion. Interest, however, is vital in understanding the role of capital. It must be emphasised again that people will begin to save and invest in capital goods when the resulting outlay of consumer goods is higher than what could be produced without the capital goods, and this outlay must be sufficient to compensate for the waiting time in which the capital goods are constructed. In short, people must make a choice between having fewer goods to consume today or more goods to consume at a future date. The number of additional goods that a person wants to appear at the future date to induce saving is his interest return. Whether this return actually appears or not and to what degree determines his profit and loss. But it is this desire to consume more in the future, to abstain from consumption today for a lot more of it tomorrow, that enables the economy to grow and for wealth to expand. There is no other way than by saving and investment in capital goods.

In the complex economy, of course, everyone can be savers and investors and we do so in a multitude of different ways and through different channels. Anyone who earns a wage and then spends a portion of it on his monthly outgoings (i.e. consumption) and uses the remainder to, say, deposit in a savings account, or to buy bonds or shares is investing in capital goods and increasing the capital stock of the economy. If it is saved in a savings account, the bank will lend that money to companies who will use it to invest in the capital goods, the return on which will enable the bank to pay interest to the depositor. If stocks or bonds are bought then money is advanced to a company directly. The crucial aspect is that by saving money, you are not consuming. By investing it you are turning those goods that could have been consumed today into capital goods that will produce more goods to be consumed in the future.

Having therefore examined in some detail the role of capital in wealth accumulation and raising the standard of living, let us proceed to analyse some aspects of Government interference that will affect the rate of saving and investment.

Taxation

Taxation is the deliberate confiscation by the Government of that which has been produced. It must be emphasised that all taxation, whatever name it is given, however one may attempt to justify it, must be a taxation of produce. There must be something that has been produced that the Government can come along and take. In our example of the lone human, the Government would have come along and taken some of his logs, i.e. confiscated his produce directly. In the complex economy the Government tends not to confiscate produce directly but rather money which it then spends on produce, i.e. the produce that the taxed individual could have bought is diverted, by way of money, to the Government.

From our analysis of saving and investment above we also know that there are only two types of produce that can be taxed – that which is produced today (income) and that which was saved and invested (capital, or wealth). There is nothing else that can be taxed and all taxes are either taxes on income or on wealth. What are the implications and results of each? Let us deal with the material effects first of all. If the Government taxes income, that is, the presently produced product, we know from our analysis above that it can do so up to a point which still permits enough saving to maintain the existing capital stock. If it does this, the present level of production can continue as the capital goods will keep functioning. However, for the remainder of the produce that is confiscated, there will be less saved in the hands of private individuals and entrepreneurs to invest and increase the capital stock. Capital growth, therefore, will be retarded. And even if the private individuals would not have saved this income but would have consumed it, it is still the case that they have suffered a loss from the fact that the produce is directed towards Government ends rather than their own. The important point is, however, that taxation retards the ability of private individuals to grow capital and increase production and, hence, the standard of living must either stagnate or improve less quickly.

It is no answer to this charge to assert that Government might take this money and spend it on allegedly “important” capital projects such as roads, schools, hospitals, and other spending on what they like to call “infrastructure”. As we noted above it is not the capital stock that is so important but rather the capital structure. For the invested capital must take a form in which it meshes cleanly with the rest of the existing capital and its produce supports the production of goods further down the chain of production. It would, for example, be useless to bring a fishing net to a cattle ranch. The only way to determine whether capital contributes to the capital structure is through the pricing, profit and loss system – that capital that is successfully producing generally needed products to create further products will turn a profit for the enterprise. But how does Government, devoid of the need for profit and loss, know that, say, a factory or a road must be built? What if it diverts its taxed resources to building a grand factory but there are no machines to put in this factory? How does it know how large the factory should be, what it should produce, etc.? No Government has any method of gauging these criteria. Our lone human, we noted, needed in his capital structure an axe to fell trees and a wheelbarrow to transport the logs. Having instead two axes or two wheelbarrows would have been of no use to him. Precisely the same is encountered when Government produces roads when there are no cars, hospitals but no operating equipment, tractors but no plough, railway locomotives but no wagons. Such was frequently the case in the former Soviet Union where buildings and machinery frequently were lying incomplete because a crucial part had received underinvestment and hence was simply missing. It is true, of course, that the capital structure that remains in private hands will adapt to the capital that Government has forced upon it. If a Government produces a road, for example, it becomes more economical to increase the production of cars in order to fill it. But all this means is that private investment has been forced to adapt to what the Government has produced whereas these Government projects are frequently sold to the public as being necessary to “boost the economy” etc. Instead the capital structure has been twisted and distorted from the form that it would have taken had it been left alone and the structure that is in fact produced is serving ends that are relatively less valuable than those that would have been served in the absence of the Government interference. As Bastiat would put it, the Government may be able to point to its wonderful roads that are full of cars (that which is seen), but what is not seen is all that was not produced as a result of this diversion of funds10. It is for this reason that, economically, all Government spending must be regarded as waste spending.

However, what if the Government initiates an even higher level of income taxation, a level that does not permit enough saving to main the existing capital stock? Then, disaster will strike. For now the existing capital stock will start to wear down and cannot be replaced. As the capital structure collapses, production will decline and so too will the standard of living. Production processes will become shorter and less roundabout as the produce that could have maintained them is siphoned off into Government consumption. The situation is exactly the same as if the lone human consumed the logs that should have been diverted to maintaining his wheelbarrow. He enjoys, for the moment, the additional consumption of the log but at the expense of a severely reduced level of consumption in the future. But when the Government taxes income at such a level the private citizens do not even get to enjoy this temporary upswing of consumption, merely the bureaucrats and politicians whose lifestyles it is supporting.

Within this category of taxation of income we may place all of the everyday taxes from which people suffer – income taxes, sales taxes, excise taxes, corporation taxes, capital gains taxes, dividend taxes, VAT, etc. Anything that is a tax on productivity or newly produced good is a tax on income.

Finally, we consider the horror of horrors – when Government doesn’t tax the presently produced product but instead directly taxes the existing stock of capital. Within this category fall inheritance taxes, property taxes and wealth taxes. The results of such action should be obvious as it deliberately sets about consuming the capital stock. It dismantles the factories, machines and tools and diverts them towards Government consumption and even if the Government diverts them to “investment” then this will simply be of the same kind of Government “investment” that we just outlined with regard to income taxes. Wealth taxes are the most ruinous and destructive, attacking the very means of production and leading to a rapid decline in output and the standard of living. The situation is precisely analogous to our lone human chopping up his wheelbarrow and using it as firewood – there is a temporary increase in enjoyment today that must be offset by a very rapid decrease tomorrow.

It is at this point that we should consider all “soak the rich” taxation rhetoric and practice. For it is usually the point of view of politicians and the non-rich that the wealthy provide an inexhaustible slush fund that can be plundered and pillaged to serve whatever “needs” might be desired. Earlier we noted that there is a tendency (although not strictly a necessity) that as income increases the proportion of that income that a person devotes to consumption decreases and the proportion that is devoted to saving and investment increases. Therefore, while the rich consume more in terms of quantity than a poorer person, as a percentage of their overall income they consume far less. A person earning an income of £1 000 per month might consume £800 worth and save £200, a consumption rate of 80% and a saving rate of 20%. However a person earning £10 000 per month might consume £3 000 and save £7 000 – a consumption rate of 30% and a saving rate of 70%. So while the rich person is visibly consuming more in terms of quantity he is saving and investing a very great deal more. This saving and investment is obviously channelled into capital goods, goods which are used in the production of consumer goods that other people can buy. By increasing the supply of consumer goods the prices of these items drop and so they become more affordable to everyone else and the general standard of living increases. To the extent that the “rich become richer” through this process it is only because they invest in those capital goods that produce the wares that are most eagerly sought for by the masses. Indeed the only way to really become rich under conditions of free exchange is to abstain from consumption and divert your savings to that which people most want to buy11.

If the Government therefore sets about taxing the rich to what extent can it do so? It should be clear from our analysis that it can tax the proportion of the rich person’s assets that comprise his consumption spending. If this is done then what the rich man would have spent on fine dining, chauffeurs, exotic holidays etc. is simply diverted to Government spending. The capital structure remains untouched. But the amount of consumption spending by the rich is extremely limited; indeed if all of it was to be confiscated and distributed to the world’s poor there would barely be enough to give everyone a handful of pennies. Therefore, if taxes on the rich are to be increased then they must start attacking the saved wealth of the rich, that is the capital structure. In short, factories, machines, and tools – the very things that were churning out affordable products that the masses wanted to buy – are liquidated and diverted to Government uses, either to Government consumption or to a form of investment that, as we noted above, must necessarily be less valuable than that which existed before. The very worst thing that can be done is to tax the capital stock and distribute it in welfare for then the saved wealth of society is quite literally transferred from those who saved and invested it to those who consume and destroy it. With fewer machines and tools there will be less production, with less production there will be fewer goods, with fewer goods there are higher prices and with higher prices there is less that everyone is able to buy.

We might conclude this section, therefore, by saying that from the point of view of the standard of living, all taxation will retard its level or growth. However, that form of taxation which decays the existing capital stock is the most destructive. Wealth taxes, inheritance taxes, property taxes and their ilk should be firmly resisted.

It is not sufficient, however, to merely consider the material effects of a policy of taxation, wherever it may fall. We also need to consider the psychic effects. It is self-evident that all taxation is a confiscation from one set of persons and a distribution to another set of persons. Those who have had their goods confiscated must be producers; those who receive in distribution must be (relative) non-producers. Indeed, usually some kind of non-productive status is what qualifies a person as a recipient of welfare spending – poverty, illness, disability, etc. It is an axiom of human action that all humans devote their energies to that which has the most benefit for the smallest cost. We endure the toil of labour because the loss experienced in doing so we deem to be worthwhile for the value that is gained as a result. The same is true of consumption and investment. Each has its own benefits and costs. The benefit of consumption is the enjoyment that it provides to the mental faculties; its cost is the labour expended in production of the article to be consumed and that, once it is consumed, it is gone forever and cannot be devoted to an alternative or additional use and further needs must be met by increased production. The benefit of investment is an increased yield of consumer goods in the future; its cost is the pain of having to deny oneself the consumption today of the goods that will be added to the capital stock.

If there is any change in the relative proportions of these benefits and costs it follows that certain activities will become more attractive (i.e. more valuable) and others will become less attractive. Yet this is precisely what the effects of taxation are, effects that fall heavily upon the impetus to produce, consume, or invest. We noted earlier that a person will start to invest at the point that the increased quantity of goods that results from the investment is sufficient to compensate him for the waiting time necessary to produce the capital good. Yet if the fruits of this productivity are taxed it means that the yield is reduced. To the individual saver and investor, the benefit of saving and investment has declined, but the costs remain the same – he must still expend the same amount of labour and must endure the same amount of waiting time but only now for a smaller yield. The value, therefore, of investing will, to him, decline and consumption will become relatively more attractive. There will therefore be less investment and more consumption, lower output and the standard of living will decline. It gets worse, however, when we look to the recipients of taxed income or wealth. For in a world where there is no tax, the enjoyment of consumption must be outweighed by the costs of production and the incentive to invest. Only if the value of consumption is higher than the toil of production and the yield from investment will consumption be carried on. But if one now receives an income free of the necessity to produce, both of these costs are removed. For now, why should one labour to produce when he can simply receive the benefit – the enjoyment – for free? And why should he invest when he can simply demand another article from the Government once he has consumed the first? And even if he did invest his income from other people’s taxes, this will simply be taxed away anyway. Why bother?

In short, therefore, taxation reduces the relative value of production and investment. It increases the relative value of consumption. There will therefore be less production and investment and more consumption, the stock of capital will decline, output will decline and the standard of living will lower also.

Regulation

Regulation is, in common social democratic discourse, deemed to be a necessary tempering (or tampering, one might say) of the otherwise capitalist economy, the wise overlords stepping in and ensuring that people do not compromise “safety”, “quality” or whatever in their supposedly lustful pursuit of profits. We will leave to one side any discussion of the fact that regulation is itself a service that consumes scarce resources and that the benefits of a regulation must be offset by its cost – hence it is a market activity just the same as any other. Rather, we shall focus exclusively on the effects of Government (i.e. forced) regulation upon saving and investment in the capital stock.

The effect of a regulation is to ban a certain activity from being carried on by otherwise free individuals; an example would be a restriction on to whom a certain product can be sold, perhaps by age or income. Or, it can take the effect of a requirement to do so something, usually before something else can be done. For example, it may be required to provide a list of ingredients or a nutritional breakdown on an item of food before it can be sold. However sensible they may seem the effect of regulations is to limit the ends to which capital may be devoted.

Let us first of all consider regulations that take the form of bans. As we noted above the incentive to save is dependent upon the fruits of production that are the result of the investment. In a free market a person can invest in whatever he thinks people will want to buy. By advancing goods and services to meet people’s ends he earns a return. The public could, for example, in the saver’s estimation be demanding more of goods X, Y and Z. He will invest in the line of production that he believes will yield the highest return. But what happens if the Government then intercedes with a regulation? It is effectively saying to the investor “you may invest in goods X or Y, but not in good Z”. In other words, an entire avenue of investment opportunity is closed off even though both the public and the investor may wish to trade the good Z. What then happens if Z was the most profitable investment? Then, by having to invest in the relatively less profitable X or Y, the value of saving and investing to the investor will reduce. Therefore, there will be less saving and less investment. Indeed he might even decide that the profit opportunities afforded by X or Y to be insufficient to reward him for the waiting time between the act of saving and the receipt of returns. He may just decide to consume entirely that which he would have invested. The amount of capital investment therefore decreases and so too does the standard of living. But even if he does invest in X or Y this is not what the buying public are demanding – they want Z and no extra amount of X or Y will compensate for this loss.

However, the more common type of regulation is of the second kind – that a product may be invested in but there are regulatory requirements that must be met before one can do so. Let us take the typical type of regulation on which the Government feels itself qualified to pronounce judgment and that is health and safety. If the public demands food, for example, it may be perfectly happy to buy food that comes without any detail of ingredients or nutritional breakdown. The Government then decides that people aren’t giving enough thought to their health (probably as a result of them being able to get free healthcare, which has been dealt with in detail here). So the Government then steps in and says to the investor “OK, you can invest in food but to do so you must provide a list of ingredients, a nutritional breakdown and, with every sale, you must provide a free fact sheet of how to live healthily.” The effects of such an edict should be clear – for every article that is now sold, the investor must spend additional money on analysing every article of food for its ingredients and nutritional content and must spend even more money further on producing the factsheet. Yet the public are not demanding these things so they will not be willing to pay any more for the articles that are purchased. The effect of this regulation, then, is to increase the amount of capital that is needed to produce the same return. Or, to put it another way, the same amount of capital produces a lower return. So once again, then, the value of investing to the investor is lowered and there will be less of it. By heaping on to production artificial, deadweight costs that serve no one capital is simply consumed purposelessly. It is conceivable that regulation may cripple an industry so much that it deters all investment and investors will simply stop producing the regulated products altogether. In practice what tends to happen is that regulation forces out the smaller investors, the upstart companies, while the big players are able to absorb the added costs. The economy is then left with a few key providers in each sector who are able to raise prices and lower quality as a result of this insulation from competition.

Regulation is therefore one of the most powerful ways in which capital investment can be restricted, possibly even more so than taxation.

Uncertainty

The final aspect of Government intervention into saving and investment we will consider is that of uncertainty. Whereas before we were analysing the effects of known Government policies on taxation or regulation, here we will look at what happens when someone simply doesn’t know, or cannot be sure of, precisely what the Government will do.

Rothbard describes succinctly the role of uncertainty in human action:

[A] fundamental implication derived from the existence of human action is the uncertainty of the future. This must be true because the contrary would completely negate the possibility of action. If man knew future events completely, he would never act, since no act of his could change the situation. Thus, the fact of action signifies that the future is uncertain to the actors. This uncertainty about future events stems from two basic sources: the unpredictability of human acts of choice, and insufficient knowledge about natural phenomena. Man does not know enough about natural phenomena to predict all their future developments, and he cannot know the content of future human choices. All human choices are continually changing as a result of changing valuations and changing ideas about the most appropriate means of arriving at ends. This does not mean, of course, that people do not try their best to estimate future developments. Indeed, any actor, when employing means, estimates that he will thus arrive at his desired goal. But he never has certain knowledge of the future. All his actions are of necessity speculations based on his judgment of the course of future events. The omnipresence of uncertainty introduces the ever-present possibility of error in human action. The actor may find, after he has completed his action, that the means have been inappropriate to the attainment of his end.12

It follows from this excerpt that an increased degree of uncertainty leads to an increased possibility of error – that there is an increased likelihood that the scarce goods used in attainment of the end will, in fact, not attain the end and will be wasted. And, as Rothbard highlights, part of the composition of this uncertainty stems from future human choice, in our case the choices of the Government actors.

We noted above that the effect of Government taxation and regulation is to render less valuable the act of saving and investment to the individual. If he knows that he will be taxed and regulated to nth degree then he can, at least, factor this in to his calculations and act accordingly. If, however, the Government creates an aura of uncertainty – that an individual investor may find his fruits taxed or regulated not necessarily to the nth degree but may be to the n + 1st degree, or the n – 1st degree, or to a whole other range of possible degrees, then this weighs heavily on his mind in deciding whether to save and invest. Indeed heaping on uncertainty effectively increases the psychic costs of an action. The greater the degree of uncertainty and the more likely it is that his decision to invest will result in error (the error in this case being that he will suffer a more crippling degree of taxation or regulation than he would prefer) the more costly it becomes. Hence, the relative attractiveness of consumption increases. Indeed, consumption renders neutral this uncertainty – if something is consumed then the Government, for sure, can’t come along later and attempt to tax it away. There will, therefore, be more consumption and less saving and investment. The capital stock will not grow as fast and neither also will the standard of living.

Uncertainty, often labelled “regime uncertainty”, has been an important factor following the 2008 financial crisis and the subsequent malaise. Precisely because nobody knows precisely what the Government will try next, whether it be stimulus, taxes, regulations, capital controls, inflation or whatever, nobody is willing to take the risk to save and invest. Indeed, in the US, the huge increase of excess bank reserves – i.e. banks simply holding onto cash – following the expansion of the monetary base is at least partly explained by the phenomenon of increased uncertainty.

Conclusion

What we have realised through our analysis, therefore, is that capital accumulation is the source of increased wealth and an increased standard of living. Where there are strong private property rights to this capital and its fruits then capital accumulation will, all else being equal, be encouraged. Where these rights are compromised by taxation and regulation, they will be discouraged. Further, as our discussion of uncertainty entails, it is not sufficient that these rights are left uncompromised today but there must also be an expectation that they will not be compromised in the future.

We have not said much about Government-induced credit expansion that leads to business cycles. The effect of credit expansion is to divert goods away from consumption and to invest them in more roundabout production processes. This looks, on the face of it, as if the Government is doing a benevolent thing – it is causing us to increase the capital stock! But as we noted above, the return on capital must be sufficient to justify the waiting time. If people are not willing to endure this waiting time then investment cannot occur. Indeed credit expansion is forced saving and investment in an increased capital stock. When the credit expansion halts it is not possible to continue this diversion of goods into building and maintaining this capital structure; rather the latter now becomes fully dependent upon the consumption/saving preferences of consumers. But these preferences are not sufficient to carry out the level of investment required. The capital structure is revealed as malinvestment and must be unwound. Tragically, the Government, in ignorance of what we have learnt here about waiting times and the necessity for a precise capital structure that meets the needs of consumers, responds to this series of events by trying to boost consumption, even though it is not consumption that needs a shot in the arm. If anything, there needs to be more saving and investing so that at least some of the projects that were embarked upon during the credit expansion can be justified.

All in all the effects of Government upon capital accumulation and the creation of wealth are a disaster. All that is needed for these things to occur is private property and free exchange and Government, if we are to endure at all, should concentrate on guaranteeing these institutions.

1Strictly it is a necessity of human action that it seeks improvement to the current condition. Therefore, simply moving an object out of one’s way or to where one would prefer it to be is an act of “production” and an increase in “wealth” from the acting human’s point of view. But for the sake of simplicity we will discuss production, income and wealth as alluding to driving towards an increase in the number of material, tangible goods that the human can enjoy.

2Here we may briefly consider what the purpose of increasing wealth is. Excluding the possibility that someone gains utility simply from owning a lot of stuff, it can only be to consume in the future. The ultimate aim of all production is consumption, if not by yourself then by your heirs. Production that does not eventually result in consumption gains nothing. This is important for understanding what the human does with his saved wealth.

3We must add emphatically that hoarding is not unproductive and typically takes place in times of uncertainty – when one does not know whether he might suddenly need to call upon extra resources – or to cater for a known period of un-productivity, such as storing food for the Winter.

4Technically speaking if the level of “saving” is insufficient to maintain capital then there is a net dis-saving. As Mises puts it: “The immediate end of acquisitive action is to increase or, at least, to preserve the capital. That amount which can be consumed within a definite period without lowering the capital is called income. If consumption exceeds the income available, the difference is called capital consumption. If the income available is greater than the amount consumed, the difference is called saving. Among the main tasks of economic calculation are those of establishing the magnitudes of income, saving, and capital consumption.” Ludwig von Mises, Human Action, Scholar’s Edition, p. 261. However for the purposes of this essay we shall define income as the produced product and saving as the portion of the income that is not consumed, regardless of whether the rate of saving is sufficient to maintain the capital stock.

5Money as well as being the medium of exchange is also is the facilitator of economic calculation without which a complex economy could not exist. Money is also a good in its own right but there is not space here to dwell on the fascinating reasons how and why it comes into existence. Interested readers should consult Ludwig von Mises, The Theory of Money and Credit.

6A word of extreme caution in necessary when discussing the economy in the aggregate. Simply because we say that x amount of produce is consumed or y amount of produce is invested does not mean that it does not matter precisely who is consuming and who is investing. For it matters very much to the particular individuals concerned. If, for example, the baker purchases three cuts of steak from the butcher with the intent to consume all of them but the fishmonger steals them and consumes two but saves one, even though the fishmonger has “saved” one steak that would have been consumed by the baker we can in no way say that the economy is “better off”. The loss of utility of steak consumption to the baker cannot be compared or measured against the gain of utility to the fishmonger who consumes two steaks and saves one. Similarly if a slave is forced to labour to produce bread in the bakery and he gets nothing in return we cannot say that the economy is better as a result for there has been a very real loss to the slave in spite of the bread produced. We can only assume that there are gains in utility when there is voluntary exchange and any analysis of the economy as a whole which results in conclusions of one state of affairs being “better” or “wealthier” than the other must be made under the assumption of voluntary production and exchange.

7Whether someone is a stockholder or a lender to a firm or enterprise is a legal difference, not an economic one. They are both advancing saved funds to further the firm’s ventures but on different terms.

8There is also the possibility of additional compositions of return that we will ignore here. See Murray N Rothbard, Man, Economy, and State, Scholar’s Edition, pp 601-5, although it remains doubtful whether some of these can be distinguished conceptually from existing categories of return.

9Calculated profit and loss in the complex economy is measured against the societal rate of interest which is determined by the societal time preference rate. The societal interest rate is the price at which all willing borrowers can borrow money and all willing lenders can lend it and the success of failure of an enterprise will, by and large, be judged against this rate.

10Claude Frédéric Bastiat, That Which Is Seen and That Which Is Not Seen.

11Capitalism, in contrast to socialist and Marxist myths, has always been a system of production for the masses, of increasing the outlay of basic, everyday items that are sold inexpensively to everyone. Very little of capitalist production is devoted to luxury production for the rich.

12Rothbard, p.7, (italics in original).

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Social Democracy

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The author responded to a lengthy article, posted online, that advocated strongly social democracy. Unfortunately the original link has broken but the text below quotes the article in its entirety, interjected by responses.

“Democracy is a form of government in which all citizens take part. It is government of the people, by the people, and for the people. Socialism is where we all put our resources together and work for the common good of us all and not just for our own benefit. In this sense, we are sharing the wealth within society.”

Socialism is the abolition of private property in the means of production, i.e. no individual owns the physical entity of or is entitled to the capital value of any capital or producer good. Once this has been accomplished there remains the problem of how to direct these resources to the most highly valued ends. Contrary to the tacit assumption of many socialist thinkers there is no separate, conscious entity who feels and knows what the “common good” is; there are only individual humans who each value different ends independently; they may agree, in some cases, on what are valuable ends but they still hold these values as individuals and they are liable to change. Further, there will be disagreement on how these ends are to be achieved and precisely which of the scarce means are to be allocated to them. So how is a) the most valuable ends and b) the most suitable means for those ends to be determined under Socialism? How is disagreement on these matters to be reconciled?

All valuable ends are confronted by the same problem – scarcity of the means of production. Hence the economic problem is how to direct scarce means to the most highly valued ends. You can advocate that this can be done either through socialised property or private property but you cannot argue in favour of both together – they are entirely different solutions to the same problem. If you start from the premise that “certain industries” may be socialised you are already advocating that at least some of the factors of production should be allocated to these industries, but this can only be arbitrary. How do you know? And if you know how do you know which factors should be allocated and in which proportion? How do you compare one set of allocations with another set?

A system of private property in the means of production answers this through pricing, profit and loss. For private property gives way to exchange which creates supply and demand which produces prices which produces profit and loss. Hence costs and revenue can be reduced to a single common denominator, the unit of exchange (money), that allows resource allocation to be compared across the entire economy.

In the absence of private property, however, there can be no exchange. There are therefore no prices in the factor of production and no profit and loss. How are the factors of production to be compared? How is the electorate or its democratically elected caretakers of the means of production to compare the cost of 5 tonnes of steel, 3 tonnes of wood, 40 labour hours, 500 sheets of paper, 6 billboards of advertising, 30 hours of telephone calls if it cannot reduce these inputs to a common denominator?

“Of course when people hear that term, “Share the wealth” they start screaming, “OMG you want to rob from the rich and give it all to the poor!”  But that is NOT what Democratic Socialism means. To a Democratic Socialist, sharing the wealth means pooling tax money together to design social programs that benefit ALL citizens of that country, city, state, etc.”

If a person is wealthy in a pure private property society (where trade is entirely voluntary) it is because he has produced a comparatively high quantity of goods that other individuals are willing to purchase. A poorer person has produced comparatively less. The wealth of the rich can only grow if they abstain from consumption of their income and invest it in order to increase the number of goods they can produce. Most of the wealth of the rich consists of, or is derived from, real valuable assets – factories, commodities, plant, shops and inventories. They continue to be rich because these assets are productive – other people are willing to exchange them for another valued good, i.e. money. If they cease to be productive their capital value will decline and so will the wealth of the owner.

If the amount of pooled wealth available for government programs is to increase these real resources have to be liquidated from their current uses and the workers have to be laid off and transferred to Government employment. For every resource that is consumed in a government program that is one resource less that can be used for something else. By which method do you calculate whether the resources are being put to their most valuable ends in the hands of private entrepreneurs or in government programs?

“The fire and police departments are both excellent examples of Democratic Socialism in America.  Rather than leaving each individual responsible for protecting their own home from fire, everyone pools their money together, through taxes, to maintain a fire and police department. It’s operated under a non-profit status, and yes, your tax dollars pay for putting out other people’s fires. It would almost seem absurd to think of some corporation profiting from putting out fires. But it’s more efficient and far less expensive to have government run fire departments funded by tax dollars.”

This is no different from insurance. Individuals pool their premiums together with a private provider in order to provide the resources for extinguishing fires in an emergency and/or compensating the unfortunate victims of fire damage. The only difference is that each individual can choose whether to pool his premiums with one particular provider or not (or at all). The insurer therefore has to act in a way that will retain its customer base, one of which is to keep premiums lower than those of its competitors. The primary method of accomplishing this is to minimise the amount that has to be paid out in compensation and the only way to do this is to prevent and control fires as much as possible. The insurer may, therefore, specify that your home be fitted with some basic fire-fighting equipment such as fire extinguishers or fire blankets and that all of your equipment is electrically tested, for example. If the cost of this is less than the saving you make on a lower premium then you are likely to do this. They may charge higher premiums in cases where flammable substances are stored on a property, or refuse to insure you altogether because the risk would be too great, thus discouraging the accumulation of dangerous materials. The result of this is that each person pays according to the amount of risk he is willing to bear and everyone, consumer and insurer, is equally interested in taking steps to minimise the number of fires as much as possible.

If a fire does start, however, the longer they burn the more the insurer has to pay in compensation to a covered individual. They are therefore likely to respond with the utmost urgency with their own, privately owned, fire fighting equipment or privately contracted fire fighting supplier in order to minimise the amount of damage.

All of these incentives are lost when fire-fighting is managed by the Government. The Government does not need to be concerned about losing your premium to a competitor – you have to pay it in taxes or it will incarcerate you regardless. Hence it is less bothered about minimising the amount of damage. Fewer homes will therefore be installed with preventive equipment and less electrical testing will take place. There will therefore be more fires. Further the tax paid towards fire-fighting services is not adjusted to your individual level of risk; rather it is determined by your income. There is therefore less incentive to avoid the accumulation of risks that contribute towards fire. Every preventative measure you take is an extra cost but there is now no added benefit – you still have to pay the tax and you are still entitled to the same service as everyone else. The result will be less prevention and more fires, more destruction of property and consequently less overall societal wealth.

And finally, once a fire starts, the Government is not going to lose any money if your house burns. Even if it has to pay you compensation the Government will not go out of business if it has to pay too much, unlike a private firm. The Government-employed fire-fighters know that, regardless of what happens to your house, they will, in principle, still be employed and paid tomorrow regardless of the cost to the Government of compensating you for your house. This is not to suggest that Government fire-fighting will always be slow, shoddy and negligent. But given these facts what is the likelihood that a Government fire service will respond more efficiently to a case of fire than a private fire service?

This is a typical case of Government having carried out a particular function for so long that everyone forgets what it looks like when it is carried out privately. Yet the above should demonstrate how it would most likely be done and to a higher degree of efficiency than by the Government.

“Similarly, public education is another social program in the USA. It benefits all of us to have a taxpayer supported, publicly run education system. Unfortunately, in America, the public education system ends with high school.  Most of Europe now provides low cost or free college education for their citizens. This is because their citizens understand that an educated society is a safer, more productive and more prosperous society. Living in such a society, everyone benefits from public education.”

No one denies that education is a beneficial and indeed a good and beautiful thing. But for every resource spent on education there is one less resource to be spent on something else. How do you know that education is the most productive use for these resources?

We could devote the entire productivity of the world to a huge and glorious education system where everyone pops out as smart as Einstein. But there would be no cars, no shops, no food, no computers, no houses, no offices, no factories etc. because all resources are devoted to the education system.

The problem faced by an economic system is not to determine what is valuable in the abstract – it is how to direct the scarce means to their most highly valued ends before all others.

“When an American graduates from college, they usually hold burdensome debt in the form of student loans that may take 10 to even 30 years to pay off. Instead of being able to start a business or invest in their career, the college graduate has to send off monthly payments for years on end. On the other hand, a new college graduate from a European country begins without the burdensome debt that an American is forced to take on. The young man or woman is freer to start up businesses, take an economic risk on a new venture, or invest more money in the economy, instead of spending their money paying off student loans to for-profit financial institutions.  Of course this does not benefit wealthy corporations, but it does greatly benefit everyone in that society.”

But the cost has to be paid by someone. If the graduate has to pay for his own education then yes he has less money to “start up businesses, take an economic risk on a new venture, or invest more money in the economy”. But if everyone else has to pay for his education through taxes then everyone else has that little bit less to do all of those wonderful things. The graduate has only gained what everyone else has lost.

“EXAMPLE  American style capitalistic program for college: If you pay (average) $20,000 annually for four years of college, that will total $80,000 + interest for student loans. The interest you would owe could easily total or exceed the $80,000 you originally borrowed, which means your degree could cost in excess of $100,000.”

If the cost of $80 000 tuition is paid back by the graduate without the interest of, say, $20 000 then that is $20 000 less that can be loaned to another student. There will therefore be fewer funds available to loan to more students for their education. Fewer students will therefore be educated. That is presumably not the intended outcome of this author. Governments, of course, could simply raise taxes to make up the shortfall. But again, all this will mean is that what the graduate has gained the taxpayer has lost.

“EXAMPLE  European style social program for college: Your college classes are paid for through government taxes.  When you graduate from that college and begin your career, you also start paying an extra tax for fellow citizens to attend college. Question – You might be thinking how is that fair? If you’re no longer attending college, why would you want to help everyone else pay for their college degree? Answer – Every working citizen pays a tax that is equivalent to say, $20 monthly.  If you work for 40 years and then retire, you will have paid $9,600 into the Social college program.  So you could say that your degree ends up costing only $9,600. When everyone pools their money together and the program is non-profit, the price goes down tremendously. This allows you to keep more of your hard earned cash!”

The cost of $20 monthly is arbitrary and no proof of this being the real cost under such a system is offered. The conclusion that “the price goes down tremendously” is, therefore, a non-sequitur. If anything, the cost of education is likely to go up as relieving every individual of the cost of his tuition will cause an increase in demand which causes prices to rise.

This is the reason, in the UK, for the recent “outrages” over higher education tuition fees. Government sanctioned loans systems artificially stimulate demand while the Government also caps the number of students, hence leading to a reduction in supply. Increasing demand and suppressed supply equals spiralling costs.

It is therefore Government interference with the higher education system and not private finance that makes bearing the costs of higher education so intolerable to graduates.

“Health care is another example: If your employer does not provide health insurance, you must purchase a policy independently.  The cost will be thousands of dollars annually, in addition to deductible and co-pays. In Holland, an individual will pay around $35 monthly, period.  Everyone pays into the system and this helps reduce the price for everyone, so they get to keep more of their hard earned cash.”

Healthcare premiums are so expensive in the US precisely because of Government interference in the insurance industry (and the only reason that insurance is the preferred method of funding healthcare is an anomaly that originates in The Great Depression). If Governments legislate so as to compel a provider to insure risks which are perceived by the latter as higher and more costly then the latter is forced to take on the burden of paying more than it would like when these risky events transpire (an almost guaranteed certainty if the insured event is something over which the policyholder has control. This is simply compensating individuals for their deliberate actions). Costs, therefore, rise.

Socialised healthcare under Medicare and Medicaid under which the healthcare consumption of an individual is divorced from its cost to the individual, the ease of malpractice suits, and lengthy and bureaucratic drug approval processes mandated by the FDA all contribute to the rise in healthcare costs in the US. None of these are phenomena of the free market.

Holland also operates on an insurance-led basis. One should investigate whether the lower cost allegedly associated with this is because of less and not more Government involvement.

“In the United States we are told and frequently reminded that anything run by the government is bad and that everything should be operated by for-profit companies.”

This is a list of Federal Government departments and agencies. Just a brief glance will reveal Government involvement in commerce, transport, housing, education, broadcasting, agriculture, labour, security, energy, healthcare, environment and engineering. Even if America is “frequently reminded” by somebody “that anything run by the Government is bad” no person can look sensibly at this list and conclude that Government does not already control or regulate vast areas of the US economy.

“Of course, with for-profit entities the cost to the consumer is much higher because they have corporate executives who expect compensation packages of tens of millions of dollars and shareholders who expect to be paid dividends, and so on.”

Executive compensation cannot determine market prices of consumer goods. Every good purchased by you is evaluated on its merits alone, not on the costs that went into producing it. If you deem the merchant’s asking price to be less valuable to you than the utility you will gain from the good then you will make the purchase. Otherwise, you will not make the purchase. It is therefore because an entity’s goods are so highly valued and consequently sell so well that companies are willing to pay more to hire the best employees. Not so if their sales are less successful.

Profit (and loss) is revenue minus costs. In order to make a profit you must increase your revenue as much as possible but what is forgotten is that you must reduce your costs also. Employee compensation is a cost and the higher it is in relation to revenue the lower the profit of the entity will be; the lower the profit, the less it will be able to invest in growth and the sooner it is more likely to stumble in meeting the needs of consumers which is the first step to insolvency.

In 2011, total executive compensation at Tesco plc was £21.7m against a turnover £60.9bn, approximately 0.0356%. Even if executive compensation did drive up consumer prices one has to wonder how such a small percentage could make much of a difference.

Finally, regarding very large corporations one might wish to investigate the effects of monopoly and regulatory privilege granted by Government and the effects of Government–granted limited liability in generating a preference for the large, publically-traded entity before implying that these beasts are creations of the pure pricing, profit and loss system.

“This (and more) pushes up the price of everything, with much more money going to the already rich and powerful, which in turn, leaves the middle class with less spending money and creates greater class separation. This economic framework makes it much more difficult for average Joes to ‘lift themselves up by their bootstraps’ and raise themselves to a higher economic standing.”

You cannot leave the general population with less spending money and push up the price of everything simultaneously. If the population was left with less money then it would have less with which to bid for goods and services. The latter would therefore remain unsold until prices were dropped. If prices were dropped, profits for vendors would drop. If profits drop then costs have to be cut. One of those costs is executive compensation.

If a firm, however, is able to continue to raise its prices without affecting sales and this increases profit margins beyond that experienced in other industries, resources are diverted away from the less profitable industries and into the profitable both by the existing entity and by new competition. Supply is therefore increased and prices consequently decrease.

It is therefore very difficult for an entity to raise its prices to increase profits without a) choking off sales or b) attracting competing investment.

The most effective way for the latter to be avoided is for the entity to induce the Government to regulate the industry. Compulsory licensing, planning permission, Government imposed trading standards, health and safety standards, employment regulation, etc. all serve to deter competition. For every extra regulation that must be complied with is an extra cost that a new competitor must meet and, by virtue of its status as a start-up, must consist of a larger portion of its costs that those of an incumbent provider. There is therefore a tendency for larger firms to become entrenched and for the “Average Joes” to be unable to “lift themselves by their bootstraps” – all because of Government intervention.

“So next time you hear the word “socialism” and “spreading the wealth” in the same breath, understand that this is a serious misconception.”

That is precisely what the effect of socialism is. In a capitalist society wealth accumulates to each person according to his productivity. If another system is adopted then the wealth must be distributed in a different way with a different result; otherwise implementing socialism would be pointless. Hence socialist writers devoted part of their theory to the problem of distribution of goods in a socialist society, i.e. to “spreading the wealth”.

“Social programs require tax money and your taxes may be higher.”

Correct.

“But as you can see everyone benefits because other costs go down and, in the long run, you get to keep more of your hard earned cash!”

What has been demonstrated, in fact, is that costs rise under socialism. If an individual does not have to pay for his consumption, all else being equal he consumes more. Hence demand rises and so do costs.

“Democratic Socialism does NOT mean taking from the rich and giving to the poor.”

It means taking from the productive to fund the unproductive. This can be the only logical outcome of a system other than private property, where the fruit of production accrues to the producer.

“It works to benefit everyone so the rich can no longer take advantage of the poor and middle class.”

It benefits the unproductive ahead of the productive. The unproductive are able to take advantage of the productive. Productivity therefore becomes less valuable and decreases whereas un-productivity becomes more attractive. Societal wealth therefore declines.

POSTSCRIPT: The main error of the author of the original article (apart from providing blatant examples of Bastiat’s famous “broken window” fallacy) is the belief that a market economy provides benefits only for some whereas “democratic socialism” provides benefits for all. Precisely the opposite is true. Under the free market all exchanges are voluntary. If A exchanges a good with B then it must be because they each value what they receive more highly than what they give up. Both therefore benefit from the transaction and we can say that social utility is increased. A system of “democratic socialism” however would necessarily involve violently enforced transactions (taxes). If an individual has to be coerced into a transaction then it necessarily means that he values abstaining from the transaction more than entering it (otherwise he would have entered it voluntarily). The recipients of Government spending may gain (as does the Government itself) but here, in contrast to a market economy, some have gained at the expense of others. As we cannot make interpersonal utility comparisons (i.e. we cannot “measure” utility) it is impossible to say that the gain to one is greater than the loss to another. But even if this wasn’t true the fact remains that the coerced individuals would have gained greater utility from not being taxed and to them the transaction is very much a loss; hence a system of “democratic socialism” does not provide “benefits for all”.

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The Scourge of the Collective

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By the far the most significant error with any political, social, economic or philosophical discourse today is that all questions, issues and problems are posed by starting not from the individual but from the collective as the most significant unit in the discussion. Time and again, even among liberal and libertarian circles, hot topics are posed as any of the following: “Should we do V?”; “Should society allow X?”; “Should the Government intervene in Y”? “Should everyone be forced to do Z?”

Such a way of tackling these problems assumes that there must be an answer that is applicable to everyone. That, for everyone, either one of A or B must apply but individuals (those selfish, unfeeling, heartless and greedy morons whose interests must always be subjugated by the “good of the people”) are never able to choose which one of those they might prefer. Indeed, for libertarians and liberals to accept the false dilemma by entering these discussions results in them conceding the basic assumption of the statist opposition, that is that the individual is subordinate to the collective.

Here are some common examples. Please note that the discussion of each is not intended to resolve the issue at hand, merely to demonstrate the correct way of posing the question.

1. Should we intervene in other countries’ affairs?

Anyone attempting to answer this question is invited to argue, in the face of brutal oppression or of invasions of countries elsewhere, that either everyone must be forced to pay for or participate in “our” intervention or everyone must not. In short, a more honest way of stating the question is “should the Government confiscate the fruits of our productivity (i.e. tax) us to pay for military aggrandizement abroad?”

But why should we all have to intervene or all not have to intervene via the Government? If I believe so strongly that the aggressive violence on the part of state leaders or armies overseas is so unjust and must be repelled then what is stopping me from sending my financial help with money that I have earned to this cause? Indeed, what is stopping me from resigning from my current life and flying out to act as a freedom fighter in defence of the helpless civilians? On the other hand, if I believe that whatever is going on abroad is none of my business or I have (in my view) much greater pre-occupations at home and that my financial resources are best devoted to these why should I be taxed to fund a cause that others find important but I do not? What right does anyone else have to money that I have earned but they have not? Further, actions always speak louder than words. If you believe so strongly in something then you should be able to put your own money where your mouth is. If you are only willing to do so with other people’s money then perhaps it isn’t that much of a just cause after all?

In short, the problem should be discussed as follows. If the individual wants to support a cause abroad should he be prevented from doing so if it inflicts no violence or aggression on any other individual? If he does not wish to support such a cause then should he be forced to do so when his antipathy is similarly free of violence and aggression?

2. Should we allow the buying and selling of organs?

Again, the question is not “should we permit or ban the trade of organs?” It’s “should I be prevented or permitted by you from trading what is a part of my person or property with another individual on terms agreeable to ourselves that inflicts no violence or aggression on anyone else?” Answers on either side must therefore be directed to the question of what justifies one individual or group of individuals being able to violently enforce their point of view on others who do not share this point of view.

3. Should we regulate industry X?

The story is always the same. Something terrible happens, a plane crash, a building falls down, or someone loses their life savings through the collapse of some hair brained investment scheme. The clamour is always for us to regulate more, usually in the name of safety, to prevent such disastrous consequences from ever happening again. In practice what this means is that the Government should be permitted to tax all of us in order to more closely supervise industry X, industry X being whichever industry is deemed to have caused the unfortunate event.

As tempting as it is to launch into a discussion of the fact that regulation itself consumes valuable resources and hence is also a part of the market process, plus that regulations are often the very cause of the problems that they seek to ameliorate (or at least the existing regulations fail to detect problems that should have been obvious within their existing scope – Bernie Madoff for instance), we shall stick to the problem of how these questions should be posed correctly. If I think that industry X should be regulated then why can’t I pay, with my own resources, a consumer watchdog to keep an eye on industry X and report to me any potential problems? Or, as would more likely be the case, why do I not just refuse to purchase products from industry X and insist that, before I return as a paying customer, they must conform to the standards laid out by regulator Y? (Underwriters Laboratories is a good example of this arrangement). Should my desire to see industry X regulated allow me to command the resources of people who wish to have nothing to do with industry X, or are happy to accept its products unregulated at the price for which they are on offer?

4. Should we ban smoking in public places?

The loaded phrase in this question is “public places”, a good definition of which is as follows:

“Generally an indoor or outdoor area, whether privately or publicly owned, to which the public have access by right or by invitation, expressed or implied, whether by payment of money or not, but not a place when used exclusively by one or more individuals for a private gathering or other personal purpose.”

The problem is that most premises that are within the scope of this definition of “public place” in various pieces of legislation are not places that are paid for and maintained by public money (taxes). They are privately owned and operated places to which members of the public usually do not possess a right to enter but rather are invited to do so in order to carry out trade. Shops, bars, restaurants, gyms, etc. are all good examples of this kind of premises that are categorised as a “public place”. No one is forced to enter these places, to purchase products that are sold there or to pay for their upkeep. In short all activity that goes on there is entirely voluntary.

The question, therefore, is not whether “we” should ban smoking in “public places”. It is “should I, as an owner of private premises into which the public are invited, be forced by you and others to allow or prevent my invited visitors from smoking when you have no obligation to enter, pay for or maintain these premises?” Alternatively “why if I prefer or prefer not to smoke when I am an invited visitor to certain premises should I be not able to find premises that suit my desire accordingly when you need not enter, pay for or maintain these premises?”

In conclusion, the common element running through all of these questions is the absence of violence and aggression involved in the acts concerned. In short all of the questions can be posed as “Should X prevent Y from doing activity Z when Y carrying out activity Z inflicts no violence or aggression on X?” Posing the questions in this way strips naked all collective thinking and exposes it for what it really is: the violent enforcement of the values, tastes and morals of some people upon people who do not share the same.

Finally, the words of Ludwig von Mises in these regards are instructive:

Individual man is born into a socially organized environment. In this sense alone we may accept the saying that society is-logically or historically-antecedent to the individual. In every other sense this dictum is either empty or nonsensical. The individual lives and acts within society. But society is nothing but the combination of individuals for cooperative effort. It exists nowhere else than in the actions of individual men. It is a delusion to search for it outside the actions of individuals. To speak of a society’s autonomous and independent existence, of its life, its soul, and its actions is a metaphor which can easily lead to crass errors.

The questions whether society or the individual is to be considered as the uitimate end, and whether the interests of society should be subordinated to those of the individuals or the interests of the individuals to those of society are fruitless. Action is always action of individual men. The social or societal element is a certain orientation of the actions of individual men. The category end makes sense only when applied to action. Theology and the metaphysics of history may discuss the ends of society and the designs which God wants to realize with regard to society in the same way in which they discuss the purpose of all other parts of the created universe. For science, which is inseparable from reason, a tool manifestly unfit for the treatment of such problems, it would be hopeless to embark upon speculations concerning these matters. (Human Action, Scholars Edition, p. 143)

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