Murray Rothbard wrote the above words in 1994, shortly before his untimely passing. They sum up the main theme of a series of brilliant articles that he published in the 1990s calling for a radical readjustment of libertarian strategy to the new political and social realities that had emerged in the aftermath of the collapse of communism in Eastern Europe and the Soviet Union. In these articles, Rothbard identified both the abstract social philosophy and the concrete political movement that then had emerged as the greatest menace to liberty and society. He also proposed a radical reformulation of the political spectrum and a revised political vocabulary to express the new strategy called for in the altered ideological and political context.

Before proceeding further, I want to point out that Rothbard’s articles, despite their deep insight and radical implications for libertarian strategy, have been largely overlooked by friend and foe alike for a couple of reasons. First, when he wrote the articles, Rothbard was hard at work on his monumental two-volume treatise on economic thought. Understandably, he wrote the articles quickly as one-off responses to particular events, ideas, and political developments during a period of rapid change, from 1991 to 1994. Rothbard’s new views on strategy were therefore presented as fragments in different articles containing inevitable repetition and overlapping. This obscured the fact that taken together these articles presented a systematic and comprehensive strategy for radical social and political change. Second, the articles appeared in the Rothbard-Rockwell Report a journal of social, political, and cultural commentary. Unfortunately, Triple R’s scintillating polemics and its coverage of an incredibly broad range of topics sometimes diverted the reader from the deep theorizing that informed many of its articles. I confess that I did not appreciate the significance of Rothbard’s articles, and their unity and breadth of vision, until very recently.

After the collapse of communism, and with Nazism and fascism “long dead and buried,”Murray N. Rothbard, “Frank Meyer and Sidney Hook,” January 1991, in The Irrepressible Rothbard, p. 22. Rothbard argued that social democracy was the only remaining statist program, and its advocates were hell bent on making the most of their ideological monopoly. In the “new post-communist world,” Rothbard wrote:

The Enemy of liberty and tradition is now revealed full-blown: social democracy. For social democracy in all of its guises is not only still with us . . . but now that Stalin and his heirs are out of the way, social democrats are trying to reach for total power.Ibid.

Not only is social democracy still with us in its many variations, but it has managed to define “our entire respectable political spectrum, from advanced victimology and feminism on the left over to neoconservatism on the right.”Murray N. Rothbard, “A Strategy for the Right,” January 1992, in The Irrepressible Rothbard, p. 19. Make no mistake about it, Rothbard warned, “on all crucial issues, social democrats stand against liberty and tradition, and in favor of statism and Big Government.” Furthermore, social democracy is far more insidious than other forms of statism because it claims “to combine socialism with the appealing virtues of ‘democracy’ and freedom of inquiry.”Rothbard, “Frank Meyer and Sidney Hook,” p. 23. As shrewd observers of the political scene for a century and a half, social democrats—or left liberals, in the American political lexicon—are indeed seriously committed to democracy. As Rothbard explained:

The maintenance of some democratic choice, however illusory, is vital for all varieties of social democrats. They have long realized that a one-party dictatorship can and probably will become cordially hated . . . and will eventually be overthrown, possibly along with its entire power structure.Murray N. Rothbard, “The November Revolution . . . and What to Do about It,” November 1994, in Making Economic Sense (Auburn AL: Ludwig von Mises Institute, 1995), p. 473.

Picking up on the insight of the contemporary political theorist Paul Gottfried, Rothbard noted that the social democrats’ devotion to democracy also serves as a pretext for an attack on those who assert the “absolute” inviolability of the right to free speech and a free press. This assault on free speech, Rothbard presciently pointed out in 1991,

constitutes an agenda for eventually using the power of the State to restrict or prohibit speech or expression that neocons [and social democrats] hold to be “undemocratic.” This category could and would be indefinitely expanded to include: real or alleged communists, leftists, fascists, neo-Nazis, secessionists, “hate thought” criminals, and eventually . . . paleo-conservatives and paleo and left-libertarians.Rothbard, “Frank Meyer and Sidney Hook,” p. 25.

Rothbard probed deeper to expose the peculiar social philosophy that is at the root of all strains and variants of social democracy as well as communism. He identified this philosophy as progressivism, which is far more than a social and economic program for the here and now. It is a utopian social philosophy that looks toward the establishment of a future heaven on earth. The core belief of progressives is based on the Enlightenment myth that history is an inexorable and ever-upward march toward the perfection of mankind. In the case of social democrats, perfection is defined as a society ruled and engineered by a righteous, efficient, and egalitarian socialist state. Moreover, unlike traditional Marxists, social democratic progressives believe that history unfolds not through class struggle and bloody revolution but through the relentless forward march of democracy. In Rothbard’s words:

The left are, in their bones, “progressives,” that is, they believe, in Whig or Marxoid fashion, that history consists of an inevitable March Upward into the light, toward and into the Socialist Utopia. They believe in the myth of inevitable progress; that History is on their side.Murray N. Rothbard, “Liberal Hysteria: The Mystery Explained,” October 1992, in The Irrepressible Rothbard, p. 338.

The ultimate goal of this progressive and inevitable transformation of society is not, as it is with traditional Marxists, the eradication of all class distinctions and the collective ownership of the means of production under the dictatorship of the proletariat. Rather it is, in Rothbard’s words, “a socialist, egalitarian State, run by bureaucrats, intellectuals, technocrats, ‘therapists,’ and the New Class in general in collaboration with accredited victim pressure groups striving for ‘equality.’ The capitalist and entrepreneur class will not be liquidated, nor will their means of production be expropriated. Instead, the market economy will be kept but heavily taxed, regulated, and restricted. According to Rothbard:

The Social Democrats realize that it is far better for the socialist State to retain the capitalists and a truncated market economy, to be regulated, confined, controlled, and subject to the commands of the State. The Social Democrat goal is not “class war,” but a kind of “class harmony,” in which capitalists and the market are forced to work and slave for the good of “society and of the parasitic State apparatus.Ibid.

With “neoconservative” progressives having hijacked the conservative movement and the so-called New Democrat Bill Clinton revealing his hard-left progressive inclinations, Rothbard realized that the urgent first step in combating progressivism was to completely revamp the prevailing conception of the US political spectrum and its vocabulary. On the left of his reconstructed spectrum, Rothbard arrayed all political factions inspired by the progressive-Marxist vision of social change. These groups were also fanatically devoted to democracy not merely as the surest means for instituting the progressive political and economic agenda but, in Rothbard’s words, “as a shibboleth, as an ultimate moral absolute, virtually replacing all other moral principles including the Ten Commandments and the Sermon on the Mount.”Rothbard, “The November Revolution,” p. 86. In Rothbard’s view the Left ranged from official conservatives and neoconservatives to left liberals and included their allied intellectual and media elites and official victim groups.

On the right, Rothbard grouped all those who cherished traditional American liberties and social institutions and who aimed to stop, roll back, and undo progressive encroachments on them. Rothbard initially puzzled over the label that best suited his proposed grand coalition, or “fusion,” of right-wing opposition groups, which included many (but not all) libertarians, and various paleo- and traditional conservative groups. He summarily rejected the name “conservative,” tentatively proposing the terms “radical reactionaries,” “radical rightists,” and “the Hard Right.”Rothbard, “A Strategy for the Right,” p. 12. He finally settled on “politico economic reactionaries,” or simply “reactionaries.”Rothbard, “A New Strategy for Liberty,” p. 32; Rothbard, “Liberal Hysteria,” pp. 339–40.

The term “reactionary” is particularly fitting for opponents of the progressive agenda. It is true that the word was coined during the French Revolution to designate those who sought a restoration of the ancien régime. But its modern usage can be traced to Karl Marx, who used the term as a pejorative to describe many of his predecessors and opponents in the nineteenth-century socialist movement whose Utopian economic schemes involved “turning back the clock” to the precapitalist and preindustrial era of feudalism and medieval guilds. Taking a cue from their master, later communists and social democrats used “reactionary” as a smear word against the defenders of capitalism for opposing the allegedly inevitable march of history towards socialism. As Rothbard pointed out:

They become hysterical at setbacks, at regressions in that march, regressions which have, of course, been dubbed “reactions.” In both the Communist and the Social Democratic worldview, the highest [morality, is to be] “progressive,” to be . . .  on the side of . . . the inevitable next phase of history. In the same way, the deepest, if not the only, immorality, is to be “reactionary,” to be devoted to opposing inevitable progress, or even and at its worst, working to roll back the tide, and to restore the past, “to turn back the clock.”Rothbard, “Liberal Hysteria,” p. 339.

The odium that attaches to the terms “reaction” or “reactionary” today is, therefore, strictly due to its polemical use by Marxist ideologues. Outside of politics, the term has a positive connotation in many uses. In particular, the antigen-antibody reaction “is the fundamental reaction in the body by which the body is protected from complex foreign molecules, such as pathogens and their chemical toxins.”Wikipedia, s.v. “Antigen-Antibody Interaction,” last modified March 14, 2022, 15:33, https://en.wikipedia.org/wiki/Antigen-antibody_interaction. Also see J.A. Spiers, “Goldberg’s Theory of Antigen-Antibody Reactions in Vitro,” Immunology 1, no. 2 (April 1958): 89–102. In other words, the human immune system is reactionary. It reacts against and annihilates invaders and restores the human body to its healthy status quo ante. To be a politico-economic reactionary, then, is to seek to undo the ravages of our economic, social, and cultural institutions perpetrated by progressive policies; to turn back the clock by ousting the invaders from their positions of power and restoring the social body back to health.

Rothbard perceptively applied his analysis of progressivism to explain the mystery of the bitter and hysterical leftist hatred of Francisco Franco and Augusto Pinochet, of Spain and Chile, respectively. The loathing of left liberals for these men was even greater than it was for Adolf Hitler. For Franco and Pinochet had thwarted the march of history, had actually turned back the clock by leading successful counterrevolutions against democratically elected leftist governments. Today we witness the same frenzied and unhinged progressive vituperation heaped upon Donald Trump, Viktor Orban of Hungary, Jair Bolsonaro of Brazil, and Giorgia Meloni of Italy because these politicians have committed an even graver sin against the progressive creed than Franco and Pinochet did. They have actually taken power in democratic elections while using explicitly antiprogressive, reactionary rhetoric, thereby exposing the myth that democracy is the guarantor of inevitable social progress toward an egalitarian socialist state. How deeply these elections shook up and disoriented progressives is demonstrated in the crazed tweet by Swedish economist Anders Åslund well in advance of the Hungarian election: “If Hungary really votes overwhelmingly against democracy and for corruption I cannot see why it should be accepted in the EU” (emphasis added).Anders Åslund (@anders_aslund), “If Hungary really votes overwhelmingly against democracy and for corruption I cannot see why it should be accepted in the EU. Kick it out!,” Twitter, April 3, 2022, 4:25 p.m., https://twitter.com/anders_aslund/status/1510730232273195009. Slightly less idiotic but more revealing is the resolution passed recently by the august European Parliament asserting that Hungary is no longer a full democracy but “a hybrid regime of electoral autocracy.”Jorge Liboreiro and Sandor Zsiros, “Hungary Is No Longer a Full Democracy but an ‘Electoral Autocracy,’ MEPs Declare in New Report,” Euronews, September 16, 2022, https://www.euronews.com/my-europe/ 2022/09/15/hungary-is-no-longer-a-full-democracy-but-an-electoral-autocracy-meps-declare-in-new-repor. Rothbard was thus right on the money in his evaluation of the progressives’ response to the successful political reactions led by Franco and Pinochet: “Let reaction occur, let the phases be rolled back, . . . and these people flip out, go into orbit, for then maybe their religion is a false one after all.”Rothbard, “Liberal Hysteria,” p. 339.

Whether or not the current populist politicians in the United States and Europe believe their own rhetoric and are genuine reactionaries is beside the point. Their ascension to power in democratic elections despite the endless stream of ridicule, hatred, and contempt spewed at them by the Western political, media, and academic elites demonstrates that a genuine reaction would be possible with the right leader. As Rothbard recognized, a reactionary movement requires “a charismatic leader who has the ability to short-circuit the media elites, and to reach and rouse the masses directly.”Rothbard, “A Strategy for the Right,” p. 11.

In a piece written in 1954 but published posthumously in 2002, Rothbard explained that to be effective, the leader of a dissident political movement must be a “demagogue.” He or she must

appeal to the masses over the heads of the State and its intellectual bodyguard. And this appeal can be made most effectively by the demagogue—the rough, unpolished man of the people, who can present the truth in simple, effective, yet emotional, language. The intellectuals see this clearly, and this is why they constantly attack every indication of libertarian demagoguery as part of a “rising tide of anti-intellectualism.”Murray N. Rothbard, “In Defense of Demagogues,” Mises Daily, April 23, 2002, https://mises.org/library/defense-demagogues.

In defending demagogy as a political method, Rothbard, of course, understood that it could be used by the Left or the Right. Nevertheless, as he foretold in 1954, since socialism has become the “fashionable and respectable ideology . . . [any] demagogy, any disruption of the apple cart, would almost certainly come from the individualist opposition.” The Left instinctively knows this, which is why “The respectable statist Left . . . fears and hates the demagogue, and more than ever before, he is the object of attack.”Ibid.

After reconstructing the political spectrum to reflect the realities of the post-Communist world, Rothbard laid out the political strategy that reactionaries need to employ to roll back progressivism. He pointed out that reactionaries and progressives are both minorities and in polar opposition to one another. Between them is the majority of Americans, who are confused and “torn between conflicting worldviews.” They constitute what Rothbard, following Vladimir Lenin, called “the Swamp,” the terrain over which ideological battles are fought.

Rothbard pithily sums up the problem facing the rightist opposition to the progressive power grab:

The problem is that the bad guys, the ruling classes, have gathered unto themselves the intellectual and media elites, who are able to bamboozle the masses into consenting to their rule, to indoctrinate them, as the Marxists would say, with “false consciousness.”Rothbard, “A Strategy for the Right,” p. 9.

This state of affairs exists because, since the beginning of the twentieth century, progressive and corporate liberal politicians and their business and financial cronies have induced increasing numbers of intellectuals to apologize for and legitimize their rule in exchange for subsidies from the Federal government or lucrative positions in its ever-expanding regulatory, welfare, and warfare agencies and bureaus. What Rothbard calls a “monopoly of the opinion-molding function” in society has thus been granted to a privileged and coddled class that today consists of “a swarm of intellectuals, academics, social scientists, technocrats, policy scientists, social workers, journalists and the media generally.”Ibid.

So, what is to be done to break this formidable monopoly and destroy the “unholy alliance” of the political establishment and its privileged intellectual apologists? Rothbard recommended “a strategy of boldness and confrontation, of dynamism and excitement, a strategy, in short, of rousing the masses from their slumber, and exposing the arrogant elites that are ruling them, controlling them, taxing them, and ripping them off.”Ibid., p. 10. For a rousing right-wing populism of this sort is precisely what the ruling elites fear. They prefer a judicious, bipartisan discussion of the “issues,” in measured and solemn tones and without acrimony. Progressive politicians especially fear and warn against the so-called politics of resentment—precisely because the resentment would be aimed at them by those whom they exploit. In contrast, Rothbard counsels rightists to return to the fiercely ideological, and highly partisan politics of nineteenth-century America which was marked by bitter and personal resentment of the opposition party and its members.

Not only must the strategy of the right be confrontational according to Rothbard, it also “must fuse the abstract and the concrete: must not only attack the elites in the abstract, but must focus on the existing statist system, on those who right now constitute the ruling classes.”Murray N. Rothbard, “Right-Wing Populism,” January 1992, in The Irrepressible Rothbard, p. 40. This means, above all, that the rightist strategy must be personal, must aim at exposing the lies, corruption and scandals of specific members of the ruling coalition. Thus, Rothbard wrote of the anti-Clinton movement that rapidly coalesced during Clinton’s first term as president:

The movement erupted in reaction to all the objectively loathsome attributes of the Clintons and their associates—the stream of lies, evasions, crookery, sex scandals, and frantic attempts to run all of our lives. But quickly the hatred of the personal attributes of Clinton spilled over to his programs, to his ideology. Thus we had the most powerful “nuclear fusion” in all of politics: the intense blending of the personal and ideological. The growing realization of the socialist tyranny involved in all of Clinton’s programs . . . joined with and greatly multiplied by the loathing for Clinton the man.Rothbard, “A New Strategy for Liberty,” p. 36.

The final part of the Rothbardian strategy is, thus, to get those on the right to grasp a simple insight—long ago assimilated by the left—that politics is war. That is, in domestic politics no less than in interstate military conflict, in the words of the great German political theorist Carl Schmitt, “the adversary intends to negate his opponent’s way of life and therefore must be repulsed or fought in order to preserve one’s own form of existence.”Carl Schmitt, The Concept of the Political, trans. George Schwab (Chicago: University of Chicago Press, 2007), p. 27. Furthermore, politics inherently involves what Schmitt calls “enmity,” or the distinction between “friend and enemy,” concepts “to be understood in their concrete and existential sense, not as metaphors or symbols.”Ibid., pp. 27, 33. For, to quote Schmitt again, “war follows from enmity. War is the existential negation of the enemy.”Ibid., p. 33. Although Schmitt focuses almost exclusively on interstate conflict, he emphasizes the “ever present possibility of conflict . . . of combat . . . the real possibility of physical killing” as an essential attribute of the political, whether in the context of “domestic [or] foreign friend-and-enemy groupings.”Ibid., pp. 32–33. From the Rothbardian perspective, the conflict in domestic politics is certainly war in the existential sense. The ruling elites by virtue of their control of the State apparatus not only threaten physical violence and even death against the ruled for failure to submit to their taxes and edicts, they also actually practice violence and killing against dissenters or “insurrectionists” among the ruled.

Rothbard recognized that any serious political challenge to progressives by a united and self-conscious fusionist-rightist movement would be a war—and a religious war at that. I will conclude by quoting at some length a rousing clarion call to arms to the Right by Rothbard:

We are engaged, in the deepest sense . . . in a “religious war” and not just a cultural one, religious because left-liberalism / social democracy is a passionately held worldview, “religion” in the deepest sense, held on faith: the view that the inevitable goal of history is a perfect world, an egalitarian socialist world, a Kingdom of God on Earth. . . . It is a religious worldview toward which there must be no quarter; it must be opposed and combated with every fiber of our being.

. . . . And the metaphor is properly military. The looming struggle is far wider and deeper than over-indexing capital gains. It is a life-and-death struggle for our very souls, and for the future of America. . . .

The war for reaction will require, above all, courage, the guts not to buckle at the all-too-predictable smear response of the media, of the pollsters, and all the rest. . . .

And above all we need what the left fears above all: An adherence to the military metaphor, to the concept of us vs. them, good guys vs. bad guys, to Taking America Back. We must aim, not only for rolling it all back, not only for saving us from the Leviathan State and nihilist culture, and not only for restoring the Old Republic. For eventually we must drive the wooden stake through the heart of the Enemy, to kill once and for all the monstrous dream of the Perfect Socialized World.Rothbard, “Liberal Hysteria,” pp. 339–41.

The lesson for libertarians is that there are only two sides in the current political struggle. There is no middle ground. You are either a progressive or a reactionary. You either join, or acquiesce in, the forced march into socialism or you join the reaction—the fight to turn back the progressive clock or, better yet, to smash it to smithereens.

This collection provides important example of populist laissez-faire opinion from the Jacksonian Era in the United States. In terms of economic policy, the Jacksonians favored low taxes, decentralization, and hard-money while opposing central banks and regulation of private business.

William Leggett was born on April 30, 1801 in New York City and died at age thirty-eight, on May 29, 1839 in New Rochelle, New York. He was a Jacksonian era journalist and the intellectual leader of the laissez-faire wing of Jacksonian democracy. He wrote editorials in support of individual liberties and private property rights while working with William Cullen Bryant at the Evening Post.

A Strange Liberty calls for the relentless pursuit of decentralization in whatever manner this course is still open to decent, freedom-loving citizens.

—Paul Gottfried, from the foreword

Democratic socialism—the ideology that dominates the world today—aspires to become a world state. The route toward it requires a single world currency to be created. That would undoubtedly create a dystopia. Might this become a reality? And if so, how can it be averted? This book aims to find answers to these questions.

Part 11. Concerning Right Thinking: LogicThe arguments in this book claim to be strictly logical. For a better understanding, a few basics of logic—the doctrine of correct thinking—are presented. These show the possibility of making use of the incorruptible power of judgment.

2. What We Know for a Fact: Humans ActThe phrase “humans act” is logically undeniably true; it applies a priori. From it further true statements can be derived—so-called action categories—which help to think through the political-economic questions raised in this book with impartiality.

3. What is Indispensable for Human Action: Private PropertyPrivate property is not an arbitrary variable, as many believe. It is a category of human action and cannot be denied without contradiction; unconditional respect for property also proves to be an ethically convincing norm of action.

4. Interpreting History: The Role of TheoryTo understand history, one must necessarily resort to theories; without theory, there is no grasp of reality. The insights provided by a priori theory are an indispensable ingredient in the unbiased interpretation of historical events.

5. Driving Force of Civilization: InequalityThe prerequisite for peaceful and productive cooperation, and economic and cultural human progression, is humans’ inequality with regard to their abilities and goals. This is also a logical insight regarding action, and it explains the process of civilizing humanity.

6. The Perfection of Exchange: MoneyThe modern economy and society based on the division of labor are particularly fostered when people use money. Money developed spontaneously in the free market without the intervention of a state, and having a currency for the whole world would be economically optimal.

7. The Decivilizing Force: The StateThe state is a territorial monopolist with ultimate decision-making power over all conflicts in its territory. It doesn’t solve interpersonal conflicts; rather, it is the cause of many and increasing numbers of social disputes.

8. The State and the Deterioration of Money: From Commodity to Fiat MoneyOut of self-interest, the state obtains the monopoly over the production of money, and by force it replaces commodity money with its own fiat money. As a result, its power expands enormously, thereby becoming basically uncontrollably large.

9. Anatomy of Disruption: What Fiat Money CausesState fiat money suffers from economic and ethical defects: it hampers economic progress and is socially unjust. Fiat money leads to a “transvaluation of all values.” It is not compatible with a liberal and prosperous economy and society.

10. A Destructive Ideology: Democratic SocialismDemocratic socialism has become the dominant ideology worldwide. It relativizes and undermines property in many ways, making the state increasingly powerful, thus destroying the conditions for free and prosperous social and economic life.

11. Impact Assessment: A Case for the A Priori TheoryThe a priori theory can be used to reliably estimate the consequences of human actions: it can be used to derive conditional statements about the future that are valid under specific conditions, and it can also be used to trace action—logical path dependencies.

Part 212. The  Progression Theorem: Toward a World GovernmentStates want to expand their power internally and externally. This applies above all to states that follow democratic socialism: they are working toward creating a worldwide uniform democratic socialism, a uniform world state with a uniform fiat world currency.

13. The Nation: Community of Language and ValuesThe nations—the language and value communities—are an impediment to democratic socialism’s aspiration of establishing a unified world state. Therefore, democratic socialists try to vanquish the nations, and especially the principle of nationality.

14. Migration: Natural and UnnaturalThe proponents of democratic socialism use migration as a means to abolish nations and the nation-state and to pave the way for a worldwide democratic socialism under a unified leadership. But this will not be achieved by a politicized migration.

15. The Illusion of Democracy: The “Iron Law of Oligarchy”As in every democracy, an oligarchic elite rule is also formed in democratic socialism. It has a particularly strong incentive to create a uniform fiat world currency in order to come closer to the goal of creating a uniform world government, a world state.

16. US Dollar Imperialism: The Bretton Woods SystemThe Bretton Woods system was the first attempt to establish a single politicized world currency. It was doomed to fail because the nations had sufficient room for maneuver to escape the abuse made possible by the Bretton Woods system.

17. The Campaign against Currency Choice: The EuroIn Europe, states have succeeded in abolishing the last remnants of monetary competition and introducing a single currency. This example shows how a political world currency can be created: with the irrevocable fixing of exchange rates between national currencies.

18. The Secret and Sinister Power: The World Central Bank CartelThe national central banks form an international cartel in line with the democratic socialists’ ideas. Their monetary policy is making the global financial and economic system increasingly dependent on a globally unified monetary policy, the logical end of which is a unified world currency.

19. Blueprints for a Single World Currency:Bancor, Unitas, US Dollar, INTOR, and the LibraThere are many specific proposals to create a single world currency—brought about by a political decision, not by free market forces, for the democratic socialists want a monopolized single fiat world currency.

20. The Dystopia: A Single Fiat World CurrencyA single fiat world currency would threaten freedom and prosperity on this planet to an extent that many probably cannot even imagine: with a single fiat world currency, the path would be open to a totalitarian world state.

21. Technological Disruption: CryptocurrenciesThe emergence of cryptocurrencies could prove to be the crucial disruption and achieve what economic and ethical insight has not yet been able to achieve: the opening of a free market for money, and making it impossible to establish a world state.

22. A Ray of Hope: Free Market for Money and Private Law SocietyA free market for money provides people with the best possible money. It would also effectively put an end to the freedom-destroying program of democratic socialism and make possible a private law society, in which the same law applies to all.

EPILOGUE: A Better World Is PossibleWe have been walking the ominous path toward a world state with a fiat world currency for decades. It is not an inevitable result, but to prevent it, essential things have to change. These will include rejecting false doctrines in modern social and economic theory and firmly reestablishing the a priori theory.

The reader will come away with a better understanding of how political decentralization continues to be relevant, useful, and important in the modern world.

Table of Contents

Foreword by Carlo LottieriPrefaceIntroduction: Universal Rights, Locally Enforced

Part I: Big States, Small States, and Secession    1. More Choices, More Freedom, Less Monopoly Power    2. Political Anarchy Is How the West Got Rich    3. Why Regimes Prefer Big States and Centralized Power    4. Why the Classical Liberals Wanted Decentralization    5. Secession as a Path to Self-Determination    6. Nationalism as National Liberation: Lessons from the End of the Cold War    7. A Brief History of Secession Plebiscites in Europe    8. Why the US Supports Secession for Africans, but Not for Americans    9. From Taxes to Trade, More Secession Means More Freedom  10. If California Secedes, What Happens to Locals Who Opposed Secession?  11. How Small Is Too Small?  12. When It Comes to National Defense, It’s More than Size that Matters  13. If America Splits Up, What Happens to the Nukes?

Part II: Decentralization and Democracy  14. Why “One Man, One Vote” Doesn’t Work  15. Democracy Doesn’t Work Unless It’s Done Locally

Part III: Lessons from America’s Past, and Strategies for the Future  16. How Early Americans Decentralized Military Power  17. Before Roe v. Wade, Abortion Policy was a State and Local Matter  18. When Immigration Policy Was Decentralized  19. Why Indian Tribal Sovereignty Is Important  20. Sovereignty for Cities and Counties: Decentralizing the American States

Postscript:  A Tale of Two Megastates: Why the EU Is Better (In Some Ways) than the USIndex

If I have managed to exceed expectations, this book will also make you excited about what economics has to offer. Because economic literacy is mind-opening. Sound economic reasoning is an enormously powerful tool for understanding both the economy and society. It uncovers what is going on under the surface and why things are the way they are. In fact, economic literacy is necessary to properly understand the world.

Part I: Economics1.   What Economics Is           The Economy           The Economic Problem           Economics as Understanding2.   Economic Theory           The Starting Point           Unpacking Human Action           The Genius of the Action Axiom3.   How to Do Economics           The Meaning of Exchange           Price and Value           Price Mechanism           The Step-by-Step Method           Economics as a Social Science

Part II: Market4.   A Process, Not a Factory          A Coordinated Process          Continuous Innovation          Continuous Uncertainty5.   Production and Entrepreneurship          Production to Overcome Scarcity          Capital and Production          The Role of the Entrepreneur          Entrepreneurs Make Mistakes6.   Value, Money, and Price          The Problem of Measuring Value          The Use of Money          The Emergence of Money          The Importance of Money          Money Prices          Fiat Currency and Price Inflation7.   Economic Calculation          The Nature of a Productive Economy          The Driving Force          The Production of Value          Entrepreneurship and Management

Part III: Intervention8.   Monetary Intervention          The Boom-Bust Cycle          The Rate of Return and Capital Investments          The Cause and Nature of the Artificial Boom          The Turning Point          The Corrective Bust9.   Regulatory Intervention          The Seen          The Unseen          The UnrealizedConclusion: Action and InteractionFurther ReadingIndex

The American notion [is] that the end of government is liberty, not happiness, or prosperity, or power, or the preservation of an historic inheritance, or the adaptation of national law to national character, or the progress of enlightenment and the promotion of virtue; [and] that the private individual should not feel the pressure of public authority, and should direct his life by the influences that are within him, not around him. . . .     Liberty is not a means to a higher political end. It is itself the highest political end.                                                                                                                            —Lord Acton

Anyone who discovers that David Gordon is reviewing one’s work immediately has two conflicting emotional responses. The first emotion is one of elation because one knows that one’s work is going to be given a fair and thoughtful consideration by someone who knows what the important issues and questions are. The second emotion, however, is one of trepidation because one realizes that if one’s argument has the slightest trace of ambiguity, or if one has not reasoned carefully, or left too many premises suppressed, then these will be duly noted. Either way for the person whose work is being reviewed, it is a win-win situation because it affords an opportunity to learn and make improvements—even if at times it can be painful.

The interesting thing about David Gordon reviews is that they are also essays, for they afford the reader a chance to not only gain insight about the work being considered but also the general subject matter being examined. This is the case, because David Gordon is a virtual walking encyclopedia, and because of this, he brings a wealth of information and insight to the subject matter that is being discussed. If you have not read Gordon’s reviews, examine An Austro-Libertarian View: Essays by David Gordon, 3 Vols. (Mises Institute), and you will be well-rewarded for your effort. Here you see the work of an intellectual historian.

Besides being a master reviewer,He also publishes book reviews in the International Philosophical Quarterly, Quarterly Journal of Austrian Economics, and Review of Austrian Economics, as well as several book notes in Ethics. He has written approximately three hundred book reviews for his own journal, The Mises Review, and also written articles and reviews for Chronicles and The American Conservative. He has been a reviewer for Library Journal from 1979 to the present. David is a senior fellow for the Mises Institute where he lectures and conducts colloquia. He is author of the following: Resurrecting Marx: The Analytical Marxists on Freedom, Exploitation, and Justice; The Essential Rothbard; The Philosophical Origins of Austrian Economics; Introduction to Economic Reasoning, and Critics of Marxism. Further, he is the editor of Secession, State, and Liberty and coeditor of H.B. Acton, The Morals of Markets and Related Essays.

David Gordon is also editor of the Mises Review and The Journal of Libertarian Studies. He publishes in such philosophy journals as Analysis, British Journal of Political Science, Canadian Journal of Philosophy, Ethics, International Philosophical Quarterly, Journal of Libertarian Studies, Mind, Political Studies, Review of Austrian Economics, and Social Philosophy and Policy. He has published eleven articles in Analysis.

To appreciate David’s style of writing and method of analysis, one needs only to consider his essay, “Anscombe on Coming into Existence and Causation” (Analysis 44.2 [March 1984]: 52–54).  Here he carefully shows that in terms of her own suppositions, Anscombe did not succeed in showing that there is a difficulty in supposing that something has come into existence at a particular time and place without supposing that it has a cause. “That we cannot tell whether something has come into existence without a cause is no reason against thinking that such a circumstance is possible” (p. 54).  This essay is classic David Gordon, and one can appreciate it even if one does not have much sympathy for the standard Humean view of causation, which as a matter of fact Gordon does not.  His primary concern is whether the argument is sound—are its premises true and its reasoning valid.

David Gordon earned his BA, MA, and Ph. D. in History from UCLA. He is a member of Phi Beta Kappa, and he was awarded the Rothbard Medal of Freedom from the Ludwig von Mises Institute in 2006. David is a powerful intellectual champion for liberty, who understands with the great classical liberal, historian Lord Acton that liberty is indeed the highest political end. He takes his task of defending liberty seriously. He does it with wisdom and style, and we have all benefited by it.

David has a unique intellect and sense of humor. He has been a good friend and intellectual colleague to many over the years. I am pleased to be included in this group, and I am proud to edit this collection of essays in his honor.

All of the essays in this volume cover a wide range of issues that have concerned David in one way or another for some time, and they all endeavor to follow his example when it comes to clarity and careful reasoning. They each do so in a unique way and style, and I have as much as possible tried not to impose unnecessary uniformity on these essays.I should also express my appreciation for the editorial assistance provided by Jakub Bożydar Wiśniewski and Judith Thommesen.  Here are the authors and their abstracts.

1. Roger E. Bissell, “Laissez-Faire vs. “Flattening the Curve”:

Lessons from Government Attempts to Deal with Economic and Health Disasters”:David Gordon has recently commented that “Even a small chance that emergency measures will permanently subvert civil liberties needs to be considered.” I concur and argue that despite certain issues concerning temporary inadequate knowledge of the problem’s magnitude and severity of the current health crisis, the pre-1929 laissez-faire approach to economic recessions should have been more widely employed from the very outset: it is superior in terms of moral and practical outcomes and is, more fundamentally, the only approach consistent with individual liberty.

2. Billy Christmas, “Nozick and the Natural Duty of Justice”:

The two main rival theories of political legitimacy are Lockean consent theory and the Kantian natural duty theory. The Lockean theory says that a political organization may only legitimately coerce if, inter alia, it is consented to by those it coerces. The Kantian theory says that we have a duty to the state because it is only through the state that we are able to exercise our duties to respect one another’s freedom. Our obligation to the state is therefore not acquired through any voluntary act, but is rather naturally incumbent upon us. Robert Nozick’s libertarianism is famously Lockean, however, his justification for the state involves no affirmative act on the part of the governed. Instead, he offers an “invisible hand argument” in which we come to have an obligation to the state in virtue of the processes through which that state emerged, even though none of them involve our expression of consent. In this essay I will argue that Nozick’s argument, with a little reconstruction, is a far more plausible alternative to both Lockean philosophical anarchism and Kantian statism. It affirms the normative importance of even imperfectly just coercive institutions that all acknowledge deference to, whilst affirming the normative reality of our rights outside of those contingent institutions. What is missing in Nozick’s account is the assurance problem. Kant thinks that it applied to anarchy; actually it applies to all situations of distrust.

3. Douglas J. Den Uyl and Douglas B. Rasmussen, “Avoiding the Political Realist-Idealist Dichotomy”:

So-called “political idealism” has come under attack in recent years from “political realism.” Political idealism was originally connected to the theorizing of John Rawls but has since come to refer to any theory that does not begin with actual political practice and actors. In this essay we begin by outlining our own approach to political theory and then go on to show how within that framework both realism and idealism are made compatible. Against the realists, our framework allows us to argue both that realists cannot escape idealism completely and that the essence of politics is reconciliation, not conflict. Against idealists, we argue that our classical realist metaphysical and epistemological dispositions would require welcoming the work of realists without having to claim they represent the only theoretical procedure.

4. Stephen R. C. Hicks, “Liberals Need More and Better Cognition Theory”:

When I say that liberalism is best, am I speaking the truth? Do the facts and the evidence and the arguments make my assertion justified? Consequently, is my belief objective—or subjective? Do I know it, or is mine just another opinion? Is it all “just” semantics—or do concepts have real meanings? Do statistics lie or capture probabilities? Is history written by the winners and so dismissible bias, or can we all genuinely learn from it?

In this essay I focus on two mistakes that regularly plague thinking about objectivity. One is the mistake of seeing only two options (intrinsicism and subjectivism) when in fact there are three. The second is making assumptions that implicitly demand omniscience or a view from nowhere—and taking the failure of human cognition to live up to those impossible standards as making objectivity impossible. Instead, we should start with actual human beings and discover how their cognitive capacities work and why objectivity arises as a need for them to strive for.

5.  Lester H. Hunt and R. Kevin Hill, “Epidemics as a Problem for Liberty”:

Faced with an epidemic of a deadly disease, humans have often had recourse to coercive non-pharmaceutical interventions (CNPIs), ranging in severity from requiring the wearing of masks to shutting down all enterprises declared “non-essential” (lockdowns). Which CNPIs are compatible with liberty? It might seem that none are, but in this paper we will assume that “liberty” is actually a framework of person-and-property rights, such as are embodied in traditional Anglo-American common law, and that some coercive measures are not only compatible with such a framework, but actually required by it. Some CNPIs, such as (in some circumstances) isolating carriers of the disease, can easily be justified on the basis of such a framework of rights. Someone who infects another with a dangerous disease is violating their rights, even if the carrier does not know or actually disbelieves that they are infectious: this would mean that they are an “innocent threat” (Nozick) and defensive coercion against a sufficiently menacing innocent threat is justified, not because they deserve it (they are innocent) but because the person being defended has rights and does not have a duty to submit to being killed or injured. Other measures—such as banning large gatherings—can in some cases also be justified within this framework, but in these cases the justification is less straightforward and more constrained. The problem is that in enforcing a rule against large gatherings we are coercing, not only people who pose a threat to others, but in addition people who take adequate safety-steps and pose no threat at all. How can coercing the latter group be justified? It can be justified if the disease is sufficiently dire and the public health benefits of the rule sufficiently great that those people are fully compensated, via implicit in-kind compensation, by the rule itself. In certain dire circumstances, lockdowns can also be justified by such considerations, though here the people who bear the brunt of the rule may have to be compensated with cash payments collected from the people for whom the rule represents a net gain. It may be that the benefit from the rule that goes to those who gain from it is less than the costs inflicted on those it harms. In that case, the gainers would no longer be gainers if they were to compensate the victims of the rule. That would mean it would not be worth their while to do the one thing that is necessary to make the rule a just, non-exploitative one.

6. Alejandra M. Salinas, “Post-Marxist Populism in the Twenty-First Century”:

This essay presents an outline of the basic ideas put forward by the Marxist theoretical family in the last decades, and it analyzes the case of philosopher Ernesto Laclau (1935–2013). It points out the main resemblances and divergences between his work and the other Marxist formulations: the desire for political hegemony and the elimination of capitalism reveals its Marxist nature. The rejection of economic essentialism and historical determinism shows its Post-Marxist traits. Laclau’s work is ultimately a variety of Marxism in that it advances an anti-capitalist, anti-liberal theory, methodological collectivism, and unlimited State power. His apology for the “subversion and dislocation” of social life, the defense of unbridled political antagonism, and a hegemonic government challenge the core of classical liberal theory: the protection of free cooperative individual exchanges, the rule of law, and the design of a minimal government.

7. Aeon J. Skoble, “Anarchy, Nozick, and Gordon”:

In responding to my discussion of Nozick’s argument as to how the minimal state could arise without violating anyone’s rights, David Gordon objected that I misconstrue the coercive/monopolist status of the dominant protective agency.  In this essay I discuss how Gordon’s interpretation of Nozick differs from mine but why in either case Nozick’s argument doesn’t quite succeed in defending the minimal state against individualist anarchism.  I also discuss how Nozick’s argument can be repurposed to Gordon’s advantage in the debate between minimal state libertarians and anarchist libertarians.

8. Jasmine Rae Straight: “The Anti-Liberty Requirements of Affirmative Consent”:

The conventional wisdom that influences university policy on what is considered valid sexual consent has undergone radical change over the past twenty years. Valid consent being the criteria that makes subsequent sexual behavior morally justified because the consent is morally transformative in the way that matters. Affirmative consent policies are now being used increasingly at universities across the country, as well as forming the basis for legislation in some U.S. states. University policies that define affirmative consent are varied, but policies generally require the consent to be voluntary, conscious, unambiguous, and ongoing. The consent can be communicated verbally or behaviorally as long as it is clear and continues throughout the sexual encounter. I will argue against both the unambiguous and ongoing requirements of sexual consent. I contend that we should reject the affirmative model of sexual consent because of the problems with these requirements and I then offer some reasons in favor of returning to a lack of dissent model of sexual consent.

9. Jakub Bożydar Wiśniewski, “Economics and Ethics: Neither Independent nor Intertwined, But Mutually Relevant”:

This essay argues that the disciplines of economics and ethics are neither strictly interdependent, nor inextricably intertwined, but mutually relevant. Thus, it presents an alternative view to the one suggesting that economics and ethics should be kept strictly separate and the one suggesting that they should be combined into a hybrid discipline. More specifically, the present essay contends that there are four major ways in which economics and ethics can learn from each other while keeping their respective areas of competence intact. Negatively, economics can curb the excessive ambitions of normative theorizing, while positively it can demonstrate the normative potential of cooperative efficiency. On the other hand, negatively ethics can elucidate the normative preconditions of undertaking complex forms of social cooperation, while positively it can illustrate the role of moral resources in addressing various operational challenges. Finally, the essay concludes with the suggestion that the key to the proper understanding of the relationship between economics and ethics may lie in regarding the former as the meta-ethics of cooperation—i.e., the positive science of normative coordination.

As should be evident, these essays are all concerned in various and complex ways with the cause of individual liberty and of a society in which people practice moral responsibility through exercising their own choices. These essays seek to explain and defend liberty, and in so doing, honor the work and life of David Gordon. We hope that David enjoys them.

                                                             —Douglas B. Rasmussen

The book is intended to be a reference for all readers, whether "Austrian" or not, and to bridge the gap by providing a crash course in the necessary theory and history while keeping the discussion tethered to current events.

— From the Introduction

[Governments] know that their young men will readily sacrifice their lives and limbs and that their old men will readily sacrifice the lives and limbs of their sons and grandsons, and that their women will readily sacrifice the lives and limbs of their husbands, their sons, and their brothers in what they believe to be a noble cause, but they have a deadly fear— sometimes, but not always, well founded—that women and old men will shrink from pinching the stomachs of themselves and the young children, so that warlike enthusiasm will decay if it once gets about that the association of war with abundance to eat, drink, and wear is delusive, and that there is still truth in the old motto of “Peace and plenty.”… True that to be pinched by high prices rather than by small money incomes and large taxes made the people rage in the first place against the persons who were supposed to profit and often did profit—most of them quite innocently—by the rise of prices instead of against Government.E. Cannan, An Economist’s Protest (New York: Adelphi Company, 1928), p. 100; idem, Money: Its connexion with Rising and Falling Prices, 6th ed. (Westminster: P.S. King & Son, Ltd., 1929), p. 99.

[T]he true costs of the war lie in the goods sphere: the usedup goods, the devastation of parts of the country, the loss of manpower, these are the real costs of war to the economies.… Like a huge conflagration the war has devoured a huge part of our national wealth, the economy has become poorer.… However, in money terms the economy has not become poorer. How is this possible? Simply … claims on the state and money tokens have taken the place of stocks of goods in the private economy.J.A. Schumpeter, “The Crisis of the Tax State,” in idem, The Econmics and Sociology of Capitalism, ed. Richard Swedberg (Princeton, N.J.: Princeton University Press, 1991), pp. 118–19.

“War, huh, what is it good for? Absolutely nothin’.It ain’t nothin’ but a heartbreakerIts got one friend, that’s the undertaker.…War can’t give life, it can only take it away.”E. Starr, “Recording of ‘War,’” written by N. Whitfield and B. Strong, from the album War & Peace (Detroit: Motown Record Corporation, 1970).

The costs of war are enormous, as the above quotations trenchantly indicate, and inflation is a means by which governments attempt, more or less successfully, to hide these costs from their citizens. War not only destroys the lives and limbs of the soldiery, but, by progressively consuming the accumulated capital stock of the belligerent nations, eventually shortens and coarsens the lives and shrivels the limbs of the civilian population. The enormous destruction of productive wealth that war entails would become immediately evident if governments had no recourse but to raise taxes immediately upon the advent of hostilities; their ability to inflate the money supply at will permits them to conceal such destruction behind a veil of rising prices, profits, and wages, stable interest rates, and a booming stock market.

In the following section I explain how war, completely apart from its physical destructiveness, brings about the economic destruction of capital and a consequent decline in labor productivity, real income, and living standards. The argument in this section draws on the Austrian theory of capital as expounded in the works of Ludwig von Mises and Murray N. Rothbard. Section 3 analyzes the reasons why different methods of war financing will have different effects on the public’s perceptions of the costs attending economic mobilization for war. The analysis developed in this section owes much to the classic discussion of inflationary war financing by Mises.Mises, Nation, State, and Economy, pp. 151–71 Section 4 concludes the paper with a brief explanation of how inflation constitutes the first step on the road to the fascist economic planning that is typically foisted upon capitalist economies in the course of a large-scale war.

The conduct of war requires that scarce resources previously allocated to the production of capital or consumer goods be reallocated to the raising, equipping, and sustaining of the nation’s fighting forces. While the newly enlisted or inducted military personnel must abandon their jobs in the private economy, they still require food, clothing, and shelter, in addition to weapons and other accoutrements of war. In practice this means that “nonspecific” resources such as labor and “convertible” capital goods including steel, electrical power, trucks, etc., which are not specific to a single production process, must be diverted from civilian to military production. Given the reduction in the size of the civilian labor force and the conversion of substantial amounts of the remaining labor and capital to the manufacture of military hardware, the general result is a greater scarcity of consumer goods and a decline of real wages and civilian living standards.

However, the transformation of the economy to a war footing implies much more than merely a “horizontal” reallocation of factors from consumer goods to military production. It also entails a “vertical” shift of resources from the “higher” stages of production to the “lower” stages of production, that is, from the production and maintenance of capital goods temporally remote from the service of the ultimate consumers to the production of war goods for present use. For, as Mises Ibid., pp. 168. points out, “War can be waged only with present goods.” but, in substituting the production of tanks, bombs, and small arms destined for immediate use for the replacement and repair of mining and oil drilling equipment intended to maintain the flow of future consumer goods, the economy is shortening its time structure of production and thus “consuming” its capital. Initially, this capital consumption is manifested in the idleness of fixed capital goods that cannot be converted to immediate war production, e.g., plant and equipment producing oil drilling machinery, and the simultaneous over-utilization of fixed capital goods that can be so converted, e.g., auto assembly plants now used to produce military vehicles. In the short-run, then, the flow of present goods or “real income,” in the form of war goods and consumer goods, may actually rise, even in the face of a loss of part of the labor force to military service. But as years pass, and industrial and agricultural equipment is worn out and not replaced, real income inevitably declines—possibly precipitously— below its previous peacetime level.

SchumpeterSchumpeter, “The Crisis of the Tax State,” p. 127. has provided a graphic summary of the horizontal and vertical shifts of resources caused by the exigencies of a war economy, and the deleterious effect of the vertical shift on the capital stock:

First, “war economy” essentially means switching the economy from production for the needs of a peaceful life to production for the needs of warfare. This means in the first place that the available means of production are used in some part to produce different final goods, chiefly of course war materials, and in the most part to produce the same products as before but for other customers than in peacetime. This means,furthermore, that the available means of production are mainly used to produce as many goods for immediate consumption as possible to the detriment of the production of means of production-particularly machinery and industrial plant—so that that part of production that in peacetime takes up so much room, namely the production for the maintenance and expansion of the productive apparatus, decreases more and more. The possibility to do just this, that is to use for immediate consumption goods, labor, and capital which previously had made producer’s goods and thus only indirectly contributed to the production of consumer’s goods (i.e., which made “future” rather than “present” goods, to use the technical terminology), this possibility was our great reserve which has saved us so far and which has prevented the stream of consumer’s goods from drying up completely.… Our poverty will be brought home to us to its full extent only after the war. Only then will the worn-out machines, the run-down buildings, the neglected land, the decimated livestock, the devastated forests, bear witness to the full depth of the effects of the war.

In commenting upon the effects of World War I on the British economy, Edwin CannanCannan, An Economist’s Protest, p. 183. also drew attention to the crucial fact of the vertical shift of resources and the capital consumption it implies, observing that

… during the war addition to material equipment at home and foreign property abroad wholly ceased. The labor thus set free was made available for war production and for the production of immediately-consumable peace-goods.

[Moreover] everyone conversant with business knows that renewals, if not repairs, have been very seriously postponed in all branches of production and that stocks of everything have run down enormously. The labor which would in ordinary times have been keeping up the material equipment was diverted to war-production and the production of immediately consumable peace-goods.… It was chiefly the tapping of these resources that enabled the country as a whole to get through the war with so little privation.

It may be objected that empirically, the vertical shift of resources is likely to be trivial, because “investment” constitutes such a small segment of real output and therefore the increase in the output of war goods must come mainly from resources diverted from the consumer goods industries combined with a reduction of the leisure of the civilian population, i.e., through increased overtime and labor participation rates. But this fallacious consumer-belt-tightening theory of war economy is based on the Keynesian national income accounting framework, according to which capital investment constitutes a small fraction of total GDP. For example, during the fourth quarter of 1994, the annual rate of real gross private investment in the U.S. totaled $939.7 billion or slightly more than 17 percent of real GDP while real personal consumption expenditures in the same quarter equaled $3629.6 billion or almost 67 percent of real GDP.Federal Reserve Bank of St. Louis, National Economic Trends (May 1995), pp. 4, 18–19.

Unfortunately, in this framework the investment in “intermediate inputs” is netted out to avoid “double counting.” These intermediate inputs to a great extent comprise precisely those types of capital goods, namely, stocks of raw materials, semi finished products, and energy inputs, that can most readily be converted for use in the production of present goods, whether for military or consumption purposes. As MisesMises, Nation, State, and Economy, p. 162. observes, this is one form that capital consumption took in Germany during the First World War: “The German economy entered the war with an abundant stock of raw materials and semi-finished goods of all kinds. In peacetime, whatever of these stocks were devoted to use or consumption was regularly replaced. During the war the stocks were consumed without being able to be replaced. They disappeared out of the economy; the national wealth was reduced by their value.” These future or higher-stage goods permanently “disappeared” because the resources previously invested in their reproduction had been withdrawn in order to augment the production of war materials.

In fact, in a modern capital-using economy, at any given moment during peacetime, the aggregate value of resources devoted to production and maintenance of capital goods in the higher stages of production far exceeds the value of resources working to directly serve consumers in the final stage of the production process. As an example, for the U.S. economy in 1982 total business expenditures on intermediate inputs plus gross private investment totaled $3,196.7 billion while personal consumer expenditures totaled $2,046.4 billion. Over 6o percent of the available productive resources, outside the government sector, was therefore devoted to the production of capital, or future, goods as opposed to consumer, or present, goods.M. Skousen, The Structure of Production (New York: New York University Press, 1990), pp. 191–92.,On the critical importance, for analyzing the capital structure, of using a concept of “gross investment” that includes both investment in fixed capital and investment in intermediate inputs in all stages of production, see M.N. Rothbard, Man, Economy, and State: A Treatise on Economic Principles, 2nd ed. (Auburn, Ala.: Ludwig von Mises Institute, [1962] 1993), vol. 1, pp. 339–45.

Governments have at their disposal three methods for financing a war: taxation, borrowing from the public, and monetary inflation or the creation of new money. Governments may also resort to coercive requisitioning, that is, confiscating the material resources and conscripting the labor services they deem necessary for the war effort without compensation or in exchange for below-market prices and wage rates. Historically, a combination of these methods has generally been used to effect the transfer of resources from civilian to military uses during a large-scale war. From the viewpoint of technical economic theory, however, the government could always realize the funds necessary to carry out its war aims exclusively from increased taxation and noninflationary borrowing on capital markets. As SchumpeterSchumpeter, “The Crisis of the Tax State,” p. 121. pointed out with regard to Austria, immediately after the First World War, “It is clear … that strictly speaking we could have squeezed the necessary money out of the private economy just as the goods were squeezed out of it. This could have been done by taxes which would have looked stifling, but which would in fact have been no more oppressive than the devaluation of money which was their alternative.Despite his general stance against inflationary financing of war, Schumpeter (“The Crisis of the Tax State,” p. 121), does concede that “… it is everywhere impossible completely to cover the cost of war by taxation, from the point of view both of politics and fiscal technique.” Mises (Nation, State, and Economy, pp. 151–71) and Cannan (Money: Its Connexion with Rising and Falling Prices, pp. 93–102) are even firmer than Schumpeter in their views that inflation is not technically necessary to finance a major war. For the latter two, whatever quantity of resources can be extracted from the private economy by inflationary finance can also be appropriated via taxation and non-inflationary borrowing. It should be noted however that Mises (Nation, State, and Economy, p. 165) maintained that market incentives could never be rendered attractive enough in practice to attract sufficient manpower to serve in the the armed forces under war conditions and that, therefore, conscription was a necessary supplement to market transactions financed by taxes and borrowing. Mises here not only argues that the supply curve of enlistees is inelastic but also implicitly assumes that it is fixed under all circumstances, seemingly ignoring the possibility that a spontaneous shift to the right in the supply curve will occur in the case of a war fought in defense of hearth and home or for a cause that is widely and passionately believed to be just.

Why, then, if strictly fiscal measures are capable of yielding sufficient revenues to pay market prices for all the resources required to conduct war, have belligerent governments almost always had recourse to the methods of monetary inflation and the direct commandeering of commodities and services? The answer lies in the fact that war is an extremely costly enterprise and the latter two methods, although in very different ways, operate to partially conceal these costs from the public’s view.Not all pre-Keynesian economics acceded to the view of Mises, Schumpeter, and Cannan that inflation is not theoretically or practically necessary for financing a major war. Two of their prominent contemporaries, A.C. Pigou (The Political Economy of War, 2nd ed. [New York: Macmillan, 1941]) and Lionel Robbins (The Economic Problem in Peace and War: Some Reflections on Objectives and Mechanisms [London: Macmillan, 1950]) insisted that inflationary finance and direct government controls are an inescapable part of a war economy. Beginning in the early post-World War II era, neo-Keynesian economists like Keynes himself totally innocent of capital theory, turned the older approach to war economics on its head, arguing that war spending, like any other kind of spending, operating through the multiplier process, automatically generates full employment and, therefore, economic prosperity and is likely to create an “inflationary gap” in the macroeconomy They therefore concluded that the conduct of war is inherently inflationary and necessitates extensive government controls over prices, production and labor markets to repress inflation and prevent it from undermining the war economy. For examples of the neo-Keynesian approach to “defense” economics, see A.G. Hart (Defense without Inflation [New York: The Twentieth Century Fund, 1951]) and D.H. Wallace (Economic Controls and Defense [New York: The Twentieth Century Fund, 1953]). Robert Higgs (“Wartime Prosperity? A Reassessment of the U.S. Economy in the 1940s,” The Journal of Economic History 52 [March]: pp. 41–60) provides a superb and long-overdue demolition of the Keynesian claim that World War II brought prosperity to the U.S. economy. When the public is accurately apprised of its full costs, war becomes increasingly unpopular, civilian enthusiasm and labor efforts flag, and unrest and even active resistance may ensue on the home front and spread to the front lines. The movement for “revolutionary defeatism” successfully fomented by Russia’s Bolsheviks during World War I is just one example of such mass resistance.

As Robert HiggsRobert Higgs, Crisis and Leviathan: Critical Episodes in the Growth of American Government (New York: Oxford University, 1987), p. 65. points out with regard to the tendency of governments to partially substitute a command-and-control economy for the regular fiscal mechanism during wartime and other so-called national emergencies:

Obviously, citizens will not react to the costs they bear if they are unaware of them. The possibility of driving a wedge between the actual and the publicly perceived costs creates a strong temptation for governments pursuing high-cost policies during national emergencies. Except where lives are being sacrificed, no costs are so easily counted as pecuniary costs. Not only can each individual count them (his own tax bill); they can be easily aggregated for the whole society (the government’s total tax revenue). It behooves a government wishing to sustain a policy that entails suddenly heightened costs to find ways of substituting non-pecuniary for pecuniary costs. The substitution may blunt the citizen’s realization of how great their sacrifices really are and hence diminish their protests and resistance.

The direct expropriation of resources works best when the resources in question are non-reproducible, as in the case of labor. By legally compelling its citizen-subjects to serve a specified term in military service at wage rates far below market levels, the government significantly reduces the budgetary costs of war and thus the amount by which it must ratchet up taxes. The cost concealment this facilitates explains the widespread use of mass conscription especially by almost all modern mass democracies, beginning with revolutionary France. But uncompensated confiscation of reproducible resources confronts an insuperable difficulty: while it does yield access to existing stocks of resources, it destroys the incentive on the part of private individuals and firms to reproduce these resources.

Continuation of industrial production processes requires pecuniary compensation to the producers as determined by the market, unless the government is willing to completely abolish exchange and implement a totally moneyless (and particularly chaotic) form of socialism, in which resources are allocated and the products distributed by bureaucratic ukase. This was attempted by the Bolsheviks during the period known as War Communism in the U.S.S.R. from 1918 to 1921 and proved a miserable failure.F.H. Carr (A History of Soviet Russia, Vol. 2, The Bolshevik Revolution, 1917–23 [Hammondsworth, Middlesex, England: Penguin Books Ltd., 1971], pp. 151–268) and Alec Nove (An Economic History of the U.S.S.R. [Baltimore: Penguin Books, Inc., 1972], pp. 46–82) provide comprehensive descriptions of the policies and events that marked the period of War communism. Paul Craig Roberts (Alienation and the Soviet Economy: Toward a General Theory of Marxian Alienation, Organizational Principles and the Soviet Economy [Albuquerque: University of New Mexico Press, 1971], pp. 20–47) convincingly argues the revisionist case that War Communism was not a wartime expedient adopted willy-nilly by hapless soviet authorities but the deliberate application of Marxian doctrine. While governments of mass democracies in fact went a long way toward replacing market incentives and processes with substantial elements of the centrally-planned or command-and-control economy during the two great wars of the twentieth century, at least at the inception of hostilities they still required a cost-concealing device that would yield them the money revenues with which to purchase real resources from their still-operative money-exchange economies. For this purpose, they consolidated the power to issue money in the hands of their central banks. Thus it was, for example, that within days of the outbreak of World War I each and every one of the belligerent governments suspended the operation of the gold standard, effectively arrogating to itself the monopoly of the supply of money in its own national territory.

To grasp how the issuing of new money obscures and distorts the true costs of war, we first must analyze the case of financing a war exclusively through the imposition of increased taxes supplemented with borrowing from the public. Prior to the increase of taxes and issue of government securities to raise war revenues, the national economy is operating with an aggregate capital structure whose size is determined by the “time preferences” or inter-temporal consumption choices of the consumer-savers. The lower the public’s time preferences, and therefore the more willing its members are to postpone consumption from the immediate to the more remote future, the greater is the proportion of current income that is saved and invested in building up an integrated stucture of capital goods. The greater the stock of capital goods, in turn, the greater the productivity of labor and the higher the real wage rate earned by all classes of workers.For detailed explications of the time-preference theory of interest, see Rothbard (Man, Economy, and State, vol. 1., pp. 313–86) and Ludwig von Mises (Human Action: A Treatise on Economics, 3rd ed. [Chicago: Henry Regnery Company, 1966], pp. 479–536. A recent defense and clarification of the theory is presented by by I.M. Kirzner (“The Pure Time-Preference Theory of Interest: An Attempt at Clarification,” in The Meaning of Ludwig von Mises: Contribution in Economics, Sociology, Epistemology, and Political Philosophy, J.M. Herbener, ed. [Norwell, Mass.: Kluwer Academic Publishers, 1993], pp. 166–92) while R.W. Garrison (“Professor Rothbard and the Theory of Interest,” in Man, Economy, and Liberty: Essays in Honor of Murray N. Rothbard, W. Block and L.H. Rockwell, Jr., eds. [Auburn, Ala.: Ludwig von Mises Institute, 1988], pp. 44–55) offers an illuminating and concise overview.

From the point of view of individual investors in the capital structure—business proprietors, stockholders, bondholders, insurance policyholders—the values of their titles and claims to capital goods are revealed by monetary calculation, specifically, capital accounting, and are therefore conceived as sums of monetary wealth.As Mises (Human Action, p. 230) explains: “Monetary calculation reaches its full perfection in capital accounting. It establishes the money prices of the available means and confronts this total with changes brought about by action and by the operation of other factors. This confrontation shows what changes occurred in the state of the acting men’s affairs and the magnitude of those changes; it makes success and failure, profit and loss ascertainable.” The accumulation or consumption of capital will always be readily evident in the changing monetary wealth positions of at least some individuals, assuming the purchasing power of money is roughly stable. It will especially be manifested in movements in the stock and real estate markets, which are devoted largely to the exchange of titles to aggregates of capital goods.Thus, as M.N. Rothbard (America’s Great Depression [Kansas City: Sheed and Ward, Inc., [1963] 1975], pp. 75, 316 fn. 29) points out, “Stocks … are units of title to masses of capital goods” and “… real estate convey[s] units of title of capital in land.” In addition, enlargements or diminutions of the capital stock will be manifested in fluctuations in current incomes—in aggregate pecuniary profits in the economy and in the general levels of salaries and wages.

As pointed out above, large-scale war involves a marked increase in preferences for present goods and necessitates a thoroughgoing reorientation of society’s productive apparatus away from future and toward present goods. To effectuate this temporal restructuring of production in a money-exchange economy, there must occur a radical alteration in the proportions of money expenditure, with consumption and military spending rising relative to saving-investment. Regardless of what technique is utilized to accomplish this shift in relative expenditure, it must give rise to a “retrogressing economy” during the transition to the war economy. The retrogressing economy is one characterized by a declining capital stock. Its onset is marked by a “crisis” involving aggregate business losses, rising interest rates, plunging stock, bond, and real estate markets, and a deflation of financial asset values.For an explanation of the concept of a retrogressing economy and the accompanying crisis, see Rothbard (Man, Economy, and State, vol. 1, pp. 483–86) and Mises (Human Action, pp. 250–51, pp. 298–300).

When taxes are raised to finance the war, the crisis is immediately evident. In order to pay their increased tax liabilities, citizens retrench on their saving as well as their consumption. In fact, they reduce their saving proportionally more than their consumption, for two reasons. First, assuming an increase in the income tax, the net interest return on investment is lowered, meaning that the investor can now expect less future consumption in exchange for a given amount of saving or abstinence from present consumption. If his time preference remains unchanged, the worsened terms of trade between present and future goods encourages the taxpayer to escape the tax by increasing spending on present consumption and reducing saving and, thereby, his prospects for future consumption. With all saver-investors responding in this manner, the aggregate supply of savings will decrease and the interest rate will be driven up to reflect the increased tax on investment income.

Second, moreover, because the incidence of the increased tax always falls on his present income and monetary assets, it leaves the taxpayer less well-provided with present goods. As his supply of present goods diminishes toward the bare subsistence level—at which point the premium he attaches to present over future consumption becomes approximately infinite—the individual experiences a progressive rise in his time preference, and the prevailing (after-tax) interest rate no longer suffices as adequate compensation for sustaining his current level of saving-investment. He accordingly further reduces the proportion of his income allocated to saving investment.On these two effects of the income tax, see Rothbard, Man, Economy, and State, vol. 2, pp. 797–99.

Finally, as a means of quickly generating the enormous revenues typically required at the outset of a large-scale war, the government might seek to tap, in addition to current income, accumulated capital. This most likely would involve a wealth tax that is levied on each household in some proportion to the market value of the property it owns, including and especially its cash balances. The tax, if it were uniformly enforced on all categories of wealth, would force capitalist-entrepreneurs to liquidate or issue debt against their real assets in order to discharge their tax liability. By its very nature, then, a wealth tax results directly in the consumption of capital. Moreover, even though such a tax is levied on net wealth accumulated in the past, it operates to powerfully increase time preferences and reduce savings even further, because it must be paid out of present income and monetary assets and the prospect of its recurrence can easily be precluded by completely consuming income as it is received and by consuming whatever privately owned capital remains.An analysis of taxes on accumulated capital or wealth can be found in M.N. Rothbard, Power and Market: Government and the Economy (Menlo Park, Calif.: Institute for Humane Studies, Inc., 1970), pp. 83–84, 87–88. As an important measure of war finance, Pigou (The Political Economy of War, 2nd ed. [New York: Macmillan, 1941], p. 84) advocates a progressive tax on personal wealth, defined broadly to include durable consumer goods and “the capitalised value of a man’s mental and manual powers.” Mises (Nation, State, and Economy, pp. 166–67) views short-term government borrowing as a preferable alternative to a tax on personal wealth. Pigou also considers borrowing as economically substitutable for a wealth tax, but prefers the latter on grounds of equity, viz., it compels “the rich” to bear a greater proportion of the burdens of war. By the way, Pigou’s statement that “the costs of a war can[not] be paid out of capital.… The source of the funds raised must be the real income of the country” misses the point (Pigou, The Political Economy of War, p. 84, fn. 1). The result of capital consumption induced by the wealth tax is precisely an increase in present real income at the expense of future real income as convertible capital goods and labor are shifted toward the production of present goods.

While the incidence of war taxes falls disproportionately on private saving-investment and wealth, the tax revenues thus appropriated are expended by the belligerent government mainly on present goods in the form of military services and equipment for immediate use. As in the case of an increase in the consumption/saving ratio that would follow from an autonomous increase in the social time preference rate, the “pure” or “real” interest rate that underlies the structure of risk-adjusted loan rates and rates of return on investment is driven up. The higher loan rates and the attendant fall in the market appraisals of debt and equity securities operate to discourage business borrowing and dampen investment in maintaining and reproducing the existing capital structure. The result is a contraction of the demand for capital goods and the sudden onset of “crisis” conditions.

The consequent decline in the prices of capital goods relative to consumer/military goods reflects the greater discount on future vis-a-vis present goods that is revealed in the higher interest rate, and it results in losses for firms in the higher stages of the production structure. In the aggregate, the losses of firms producing capital goods exceed the profits gained by the firms favored by the enhanced military expenditures. The appearance of aggregate losses in the capitalconsuming or retrogressing economy is ultimately attributable to the fact that labor productivity and real income is declining as resources are bid away from capital goods production by the increased military expenditures. These transitional, though highly visible, losses suffered by business firms are the first step in the process of imputing the decline of marginal productivities attendant upon the dissipation of the capital stock back to the incomes of labor and natural resources.On this process of imputation see Rothbard (Man, Economy, and State, vol. 2, pp. 483–84) and Mises (Human Action, pp. 294–300).

The capital-decumulation crisis is also manifested in a crash of the the stock market, because, as noted above, stocks represent titles to pro rata shares of ownership in existing complements of capital goods known as “business firms.” It is precisely the values of the prospective future outputs of a firm’s productive assets, particularly its fixed capital goods, that are suddenly more heavily discounted in appraising the capital value of the firm. This is especially true of firms that are themselves producing durable capital goods or inputs into these goods. The overall decline in the market’s estimation of the capitalized value of various business assets that is indicated by the fall in value of equity and debt securities, of course, not only reflects current business losses but is precisely how monetary calculation reveals the fact of capital decumulation. A drop in real estate markets would also occur at the inception of a tax-financed transition to a war economy, because industrial and commercial construction and land represent particularly durable resources whose capital values are therefore extremely sensitive to a higher rate of discount on future goods. Even if such capital goods may be converted to current military production, their values would still have to be written down to reflect the waste of capital involved in their construction. In other words, if the exigencies of war had been anticipated, labor and other nonspecific resources would not have been “locked up” in them for such lengthy periods of time.As Mises (Human Action, p. 503) notes, some capital goods “… can be employed for the new process without any alteration; but if it had been known at the time they were produced that they would be used in the new way, it would have been possible to manufacture at smaller cost other goods which could render the same service.”

Similar to business cycle crises, war mobilization crises will also feature certain secondary, although highly visible, financial and monetary aspects. Many highly leveraged firms in higher-stage industries, confronted by slumping output prices, will attempt to fend off the prospect of defaulting on their debts by undertaking a “scramble for liquidity,” which drives up short-term interest rates, raises the demand for money, and sharply lowers the prices of commodities that are dumped on the market for quick cash. This will precipitate a general fall in prices, which will intensify and extend the liquidity scramble. Actual and threatened defaults on bank loans and other securities also will begin to erode confidence in the soundness of the financial system. Even if the fractional-reserve banking system bears up under the strain, sparing the economy a collapse of the money supply and a “secondary depression,” the conspicuous bankruptcies of banks and business firms, reinforced by the sharp decline in private financial wealth and after-tax incomes, will quickly disabuse the populace of any notion that war breeds prosperity.

The government will be unable to avoid, and may even exacerbate, the mobilization crisis by substituting borrowing for higher tax levies. The reason is that, in contrast to taxes, which must be paid out of present income and monetary assets and therefore reduce both private consumption and saving (in accordance with taxpayers’ time preferences), government borrowing directly taps saving. When selling securities, the government competes with business for the public’s saved funds, and, because it is capable of bidding up the interest rate that it is willing to pay practically without limit, it is in the position to obtain all the funds it needs. As RothbardRothbard, Man, Economy, and State, p. 881. concludes “Public borrowing strikes at individual savings more effectively even than taxation, for it specifically lures away savings rather than taxing income in general.” With a qualification to be mentioned shortly, by thus “crowding out” private investment to acquire the funds for war financing, government borrowing insures that the entire burden of adjustment to a war economy is borne solely by the capital goods industries. The adjustment is now exclusively vertical, because consumption is not diminished, obviating any horizontal reallocation of resources. MisesMises, Human Action, p. 850. thus compares government borrowing to a kind of tax on accumulated capital in its devastating effect on the capital structure: “If current expenditure, however beneficial it may be considered, is financed by taking away by inheritance taxes those parts of higher incomes which would have been employed for investment, or by borrowing, the government becomes a factor making for capital consumption.”For an analysis of the inheritance tax as a pure tax on capital, see Rothbard, Power and Market, pp. 84–85.

Because it brings about greater capital consumption than tax financing does, government borrowing promotes a more severe crisis. Thus, for example, on the eve of the outbreak of World War I, between July 23 and July 31, and before the would-be belligerent States had “gone off” the gold standard and began inflating their respective national money supplies, panic selling forced the closing of all major stock exchanges from St. Petersburg and Vienna to Toronto and New York. Certainly, this broad decline in the market value of stocks was partially attributable to general uncertainty of the future and an increased demand for liquidity.B.M. Anderson, Economics and the Public Welfare: A Financial and Economic History of the United States, 1914–1946 (Indianapolis: Liberty Press, [1949] 1979), pp. 28–29. But it also represented a response to expectations of heavy government borrowing to finance war mobilization under the non-inflationary conditions of the gold standard.

The British economist Ralph G. HawtreyR.G. Hawtrey, Currency and Credit (New York: Arno Press, [1919] 1979), pp. 210–11. aptly described the initial stages of this mobilization crisis and the frantic attempts of government to suppress it by swift resort to legal debt moratoria and bank credit inflation:

The prospect of forced borrowing by the Government on a large scale will stifle the demand for existing stock exchange securities, and stock exchange operators and underwriters will find themselves loaded up with securities which are saleable, if at all, only at a great sacrifice. The disorganisation of business may be so great that an almost universal bankruptcy can only be staved off by special measures for suspending the obligations of debtors, like the crop of moratorium statutes with which Europe blossomed out in 1914.

A Government, indeed, faced with a great war, cannot afford to let half the business of the country slip into bankruptcy, and … the embarrassed traders are propped up, either by lavish advances granted them by arrangement, or by a special statutory moratorium.Michael A. Heilperin, the Misesian international monetary theorist, in his study of post-World War One inflations, also hints at a link between deficit financing and the war mobilization crisis, writing that “Deficit financing was closely connected with the course of development of monetary circulation. The outbreak of the war resulted not only in a need for deficit financing but also in widespread movements of panic on the part of the public. In order to prevent the panic from undermining the internal monetary conditions and thereby adversely affecting the war effort, moratoria on banks were declared almost immediately… Also the gold standard was suspended. Curiously, Heilperin’s valuable study, carried out in 1943–44 under the auspices of the National Bureau of Economic Research and “circulated to a large body of leading American experts of the day,” was never published by the NBER. In fact, when the NBER agreed to allow the copyright to revert back to Heilperin so that he could include the article in a book of his essays (published in 1968), the institute stipulated that it wished to remain unnamed in his acknowledgement (Heilperin, “Post-War European Inflations, World War I: A Study of Selected Cases,” in idem, Aspects of the Pathology of Money: Monetary Essays from Four Decades [London: Michael Joseph Limited, 1968], p. 97). I possess a copy of the article in original mimeographed form and the cover page is marked “Preliminary and Confidential” and bears the imprint of the “National Bureau of Economic Research, Financial Research Bureau.”

As noted, there is an important qualification to our conclusion that the substitution of government borrowing for taxation will exacerbate the mobilization crisis. Even if the monetary costs of war are paid for entirely by borrowing, the resulting adjustment of the real economy will not be entirely vertical, because the supply of savings is more or less “elastic” or sensitive with respect to changes in the interest rate.

Consequently, as the government’s fiscal agent bids up interest rates, some members of the public will be induced to voluntarily reduce their present consumption to a greater or lesser extent, in order to take advantage of the increased premium in terms of the enhanced future consumption per dollar of foregone present consumption promised by the higher-yielding securities. In fact, if the public’s structure of time preferences makes them sufficiently sensitive to rising interest rates in determining their consumption/saving ratio, consumer-good industries may conceivably come to bear a larger burden of adjustment than they would under tax financing.

In any case, we conclude that, when undistorted by monetary inflation, regardless of the fiscal technique or combination of techniques employed, economic calculation clearly and immediately reveals to market participants, individually and in the aggregate, the enormous destruction of real wealth and decline in real income entailed in mobilizing for a large-scale war. What insures this result is monetary calculation based on genuine market prices. Indeed, as MisesMises, Human Action, p. 261. points out, “The market economy is real because it can calculate.… Among the main tasks of economic calculation are those of establishing the magnitudes of income, saving, and capital consumption.”

Individual capital goods, even so-called fixed capital equipment, wear out in production and, in a world of unceasing change, must be replaced by physically different goods. The capital structure is thus undergoing a physical transformation at every instant of time. This means that capitalist-entrepreneurs, who must continually adjust the production processes under their control to changing consumer preferences, technical innovations, and resource availabilities, must have recourse to a common denominator in order to determine the outcome of their past production decisions and to assess the resulting quantity of productive resources they currently can dispose of as a starting point for future decisions.

In other words, only the market’s pricing process provides the meaningful cardinal numbers needed by entrepreneurs to calculate their costs, revenues, profits, and quantity of capital. Given the continual change in market conditions that impels constant adjustment of the real capital structure and given the vast physical heterogeneity of the complementary capital goods that constitute this structure, in the absence of monetary calculation utilizing genuine market prices, it becomes impossible for a producer not only to quantitatively appraise his capital and income, but to meaningfully conceive a distinction between them. Thus, without the guidance of capital accounting, there would be no telling how much of the gross receipts from his business the entrepreneur could allocate to his present consumption without dissipating his capital and therefore his ability to provide for future wants.As Mises (Human Action, pp. 210–11) writes, “Economic calculation is either an estimate of the expected outcome of future action or the establishment of the outcome of past action. But the latter does not serve merely historical and didactic aims. Its practical meaning is to show how much one is free to consume without impairing the future capacity to produce. It is with regard to this problem that the fundamental notions of economic calculation—capital and income, profit and loss, spending and saving, cost and yield—are developed.” Also see ibid., pp. 230, 260–62, 491, and 514–17.

As we have learned from the socialist calculation debate, in the absence of monetary calculation using genuine market prices, rational allocation of resources is impossible. By proscribing private property in the so-called “means of production,” socialist central planning effectively eradicates markets and prices for capital goods, thereby bringing about the abolition of monetary calculation and the inevitable destruction of the existing capital structure.For recent views of the socialist calculation debate that emphasize Mises’s original thesis that socialism is “impossible” precisely because it lacks the means of economic calculation, see Joseph T. Salerno, “Ludwig von Mises as Social Rationalist,” The Review of Austrian Economics, vol. 4: pp. 26–54; idem, “Why a Socialist Economy Is ‘Impossible’,” Postscript to Ludwig von Mises, Economic Calculation in the Socialist Commonwealth, trans. S. Adler (Auburn, Ala.: Praxeology Press, 1990), pp. 51–71; idem, Reply to Leland B. Yeager on “Mises and Hayek on Calculation and Knowledge,” The Review of Austrian Economics, vol. 6, no. 2: pp. 111–25 and Murray N. Rothbard, “ The End of Socialism and the Calculation Debate Revisited,” The Review of Austrian Economics, vol. 5, no. 2: pp. 51–76. While the effects of monetary inflation on economic calculation are not as manifestly devastating as outright socialization—at least initially—it, nonetheless, operates insidiously to falsify profit and capital calculations. One of the main reasons why inflation distorts monetary calculation is because accounting must assume a stability of the value of money which does not exist in reality. Nonetheless, where fluctuations in the purchasing power of money are minor, as is the case with market-based commodity moneys represented historically especially by the gold standard, this assumption does not practically affect entrepreneurs’ monetary calculations and appraisements. A mighty and complex structure of capital goods was built up under the nineteenth-century gold standard using precisely such methods of calculation.

However, when government operating through a central bank deliberately orchestrates significant fiat money inflation to pay for a war or for any other purpose, matters are much different. The resulting large decrease in the purchasing power of money, to the extent that it is not recognized and immediately adapted to in accounting procedures, will inescapably falsify business calculations. Moreover, prices in general do not adjust instantaneously upward in response to the increase in the money supply; rather, the fall in the overall purchasing power of money is the final outcome of a time-consuming, sequential adjustment process involving a distortion of relative prices, including the interest rate, i.e., or the price ratio between present and future goods.On the long-run non-neutrality of the monetary adjustment process, see Mises, Theory of Money and Credit, pp. 160–68 and Joseph T. Salerno, “Ludwig von Mises on Inflation and Expectations,” Advances in Austrian Economics, vol. 2: pp. 297–325 [reprinted here as Chapter 8]. Both of these effects operate to conceal the process of capital consumption during its early stages.

Under modern conditions, inflationary financing of war involves a government “monetizing” its debt by selling securities, directly or indirectly, to the central bank. The funds thus obtained are then spent on the items necessary to equip and sustain the armed forces of the nation. The result is a sudden expansion of demand for the products of the military and consumer-good industries, with no reduction in the monetary demand for the products of the capital-good industries. A boom is consequently precipitated, featuring rising prices, profits, and stock values in the former industries; The boom is particularly intense and dazzling in these industries because, during an inflation, prices rise in temporal sequence. Thus, prices and nominal incomes initially increase only for those sellers who receive the new money in the first round of spending and, therefore, before the prices of the productive inputs and consumer goods they themselves regularly purchase have had a chance to rise. As MisesMises, Nation, State and Economy, p. 158. concludes, “The war suppliers … have therefore gained not only from enjoying good business in the ordinary sense of the word but also from the fact that the additional quantity of money flowed first to them. The price rise of the goods and services that they brought to market was a double one, it was caused first by the increased demand for their labor, but then too by the increased supply of money.”

Because the increase in the demand for credit represented by the Treasury’s issuance of securities is met by newly-created bank credit, on the one hand, market interest rates do not initially rise. On the other hand, the higher prices for consumer and war goods eventually spread up the ladder of the structure of production and result in higher prices for the capital-good inputs produced by the higher-stage firms. As HeilperinHeilperin, “Post-War European Inflations,” p. 105. states in reference to World War I inflations, “The wave of rising prices tends to generate profits for anyone who holds inventories of goods and increases existing profits for producers. Higher current profits, in turn, induce a reappraisal by the market of future profit prospects which, when discounted by the unchanged interest rate, results in a rise in the equity values of capital-good firms also. War appears to breed universal prosperity.”

Nonetheless, capital consumption is proceeding apace, with aggregate real losses being suffered especially by higher-order firms. The reason why these firms do not discern their losses and progressive decapitalization is because of their accounting practices, which served them so well during the prewar period of roughly stable prices. Thus, despite the depreciating monetary unit, they continue to carry their fixed capital equipment on their books at historical cost, calculating their depreciation quotas accordingly. Even though some of their costs, especially wage rates, are continually driven up by the inflation-fueled bidding of the producers of military and selected consumer goods, capital-good firms, nevertheless, appear to be earning profits as their output prices continue ever upward with a lag.

It is only when it comes to replacing their plant and machinery—possibly years down the road—at the much higher “replacement cost” reflecting monetary depreciation that their decline in capital will at last become evident. Moreover, in many cases, the entrepreneurs will then discover that they themselves inadvertently exacerbated this capital consumption by spending their illusory pecuniary profits, which were actually part of their depreciation quotas, on high living and other forms of present consumption.

The Austrian economist, Fritz MachlupF. Machlup, “The Consumption of Capital in Austria,” The Review of Economic Statistics (January): pp. 13–19. illustrates this process of capital consumption for working capital with a striking example drawn from the Austrian inflation initiated during the First World War:

A dealer bought a thousand tons of copper. He sold them, as prices rose, with considerable profit. He consumed only half of the profit and saved the other half. He invested again in copper and got several hundred tons. Prices rose and rose. The dealer’s profit was enormous; he could afford to travel and to buy cars, country houses, and what not. He also saved and invested again in copper. His money capital was now a high multiple of his initial one. After repeated transactions—he always could afford to live a luxurious life—he invested his whole capital, grown to an astronomical amount, in a few pounds of copper. While he and the public considered him a profiteer of the highest income, he had in reality eaten up his capital.

Even after the monetary inflation manifests itself in a general rise in prices, the public can still be misled into believing that these price increases are the result of temporary shortages of essential materials or the machinations of unscrupulous war profiteers and price-gougers. It is only a matter of time, however, before workers and investors outside the military-industrial complex come to recognize that a depreciating monetary unit is a permanent feature of the war economy and their eroding real wages and illusory profits are brought clearly and painfully into focus. To postpone the day of accurate reckoning of the costs of war yet again, the government implements price controls. As a result of the inevitable shortages and inefficiencies generated by price controls, the government frantically institutes and then rapidly expands controls over production, distribution, and labor, until very little is left of the market economy and its capital structure. The final outcome of this process is an economy in which, although productive resources are still nominally privately owned, the State has effectively arrogated to itself the power to make all crucial production decisions. The all-encompassing war economy is, ultimately and inescapably, a fascist economy.As Charlotte Twight, America’s Emerging Fascist Economy (New Rochelle, N.Y.: Arlington House Publishers, 1975), pp. 16–17 perceptively argues, “Fascism is unique among collectivist systems in selecting capitalism as its nominal economic mate, but capitalism is turned inside out in this unlikely union.… [F]ascism tolerates the form of private ownership at the government’s pleasure, but it eliminates any meaningful right of private property. Fascist capitalism is ’regulated’ capitalism; it is government intervention in the economy on a massive scale. Avraham Barkai (Nazi Economics: Ideology, Theory, and Policy, trans. Ruth Hadass-Vashitz [New Haven, Conn.: Yale University Press, 1990], p. 248) characterizes the Nazi economy in similar terms: “The market still existed but was not a free market, and most decisions taken by the owners of enterprise were not ‘free’ either. The term ‘organized capitalism’ suits this economic method, subject only to the reservation that organization was imposed from above by extraeconomic, that is, political factors; it was these factors that were responsible for directing the economy in accordance with basically non-economic considerations. It was therefore a capitalist economy in which capitalists, like all other citizens, were not free even though they enjoyed a privileged status, had a limited measure of freedom in their activities, and were able to accumulate huge profits as long as they accepted the primacy of politics.”

Guenter ReimanG. Reimann, The Vampire Economy: Doing Business under Fascism (New York: The Vanguard Press, 1939). has fittingly entitled his book on the fascist economic system of Nazi Germany, The Vampire Economy, because, as a permanent war economy, it systematically and madly consumes the capital, the very lifeblood, of the host capitalist economy. And to enforce the compliance of its citizens in this painfully self-destructive course, an all-powerful state is indispensable. As ReimanIbid., p. xi. puts it: “[I]t is impossible to foretell when a military system will collapse as a result of a deficiency in foodstuffs, raw materials or other economic factors. As long as the state machine is in order, it has the power to cut down the consumption of the general public and to reduce— almost to eliminate—expenditures for the renewal of the industrial machine.… It is possible to increase production of arms and ammunition even with reduced supplies of raw materials. This can be done by drastically limiting production of consumption goods, by putting the population on starvation rations, and by letting vast sectors of the economy decay.” In Germany, for example, despite the fact that total production had increased from prewar levels as a result of the plundering of the productive wealth of vanquished nations and the relocation and forced labor of conquered peoples, by 1944 the output of the vital construction industries had shrunk to 25 percent of its prewar level while consumer goods output had declined by only 15 percent.Barkai, Nazi Economics, p. 238. The capital consumption that inflation brings about surreptitiously in the beginning, a repressive fascist State is required to sustain over the long run in the service of the war effort.

The American journalist, John T. Flynn,J.T. Flynn, As We Go Marching (Garden City, N.Y.: Doubleday, Doran and Co., Inc., 1944), p. 165. wrote that “A bad fascism is a fascist regime which is against us in the war. A good fascist regime is one that is on our side.” But, to repeat, all war economies are and must be in the end fascist economies. HiggsHiggs, Crisis and Leviathan, pp. 234–35. vividly characterizes the process by which, in an effort to conceal the costs of World War II from its citizens, the U.S. government was driven by the iron logic of economic theory to blunder into draconian fascist economic planning:

Huge military and naval forces required correspondingly large amounts of equipment, supplies, subsistence, and transportation. When the government’s procurement officers, their pockets bulging with newly created purchasing power, set in motion a bidding war that could have driven prices up to spectacular levels, thereby revealing the full costs of the government’s program and provoking political reaction and resistance, the government moved to conceal the costs by price controls.… But price controls on goods and services could not be effectively enforced while wages remained free to rise. Hence controls of labor compensation followed in due course. The market economy, a vast and delicately interdependent system of transactions, invariably surprised and confounded the administrators of partial controls. In response the government progressively expanded and tightened the command system until, during the final two years of the war, a thoroughgoing garrison economy had been brought into operation. Fundamentally the authorities, not the market, determined what, how, and for whom the economy would produce under this regime.

We conclude, then, that monetary inflation is the crucial first step in the process by which government seeks to conceal from its citizen-subjects the enormous costs associated with war, particularly the progressive destruction of the nation’s productive wealth. Specifically, the inflationary process is indispensable for masking the capital decumulation crisis precipitated by war mobilization, which would otherwise be swiftly revealed to one and all by monetary calculation. In the absence of the veil cast over real economic processes by inflation, the public’s enthusiasm for the alleged glories of war would be rapidly and significantly dampened by skyrocketing interest rates, plummeting stock and bond markets, and pandemic business bankruptcies and bank runs—not to mention the levying of confiscatory kinds and levels of taxation. Ironically, it is not money itself that is a “veil”—as classical economists used to claim and many contemporary quantity theorists still affirm—because it is precisely monetary calculation that permits market participants to meaningfully assess their wealth and income and appraise the outcomes of alternative allocations of resources. Rather it is central bank manipulation of the money supply that falsifies the calculation of economic quantities and distorts the insight of the citizenry into the true economic sacrifices that they are making for the cause.

Finally, it is worth emphasizing that the characterization of monetary inflation as a means for obscuring the real costs of war is an inference from strictly value-free economic theory and, as such, does not logically imply the value judgment that war ought to be financed by noninflationary fiscal methods. How a war should be financed and whether it should even be waged are equally questions that can only be resolved in light of a politico-ethical theory. Of course, this is not to deny that such a theory should be “consequentialist” in a broad sense and take into account in its formulation the positive conclusions of economics as well as of all other relevant sciences regarding the outcomes of various government policies. Indeed, given the conclusions of Austrian economic theory that the very concept of a “public good” is untenable and that national defense can and will, be supplied most efficiently by the market, like any other desired good, the road has been cleared for the construction of a politico-ethical argument that defense of person and property from local criminals as well as from foreign invaders should be left to the free market.For Austrian critiques of the concept of a public good, see, for example, Rothbard, Man, Economy, and State, vol. 2, pp. 883–90 and H.H. Hoppe, A Theory of Socialism and Capitalism: Economics, Politics and Ethics (Boston: Kluwer Academic Publishers, 1989), pp. 187–210. For the classic article defending the competitive production of defense services by private enterprise, originally penned in 1848 by a leading economist of the French liberal school, see Gustave de Molinari, The Production of Security, trans. J. Huston McCulloch (New York: The Center for Libertarian Studies, 1977). For more recent expositions of how the free market would work to provide defense and other public goods, see Morris and Linda Tannehill, The Market for Liberty (Lansing, Mich.: Morris and Linda Tannehill, 1970), pp. 107; Rothbard, Power and Market, pp. 1–7; M.N. Rothbard, For a New Liberty: The Libertarian Manifesto, 2nd ed. (New York: Collier Books, 1978), pp. 215–41; J.R. Hummel, “National Goods Versus Public Goods: Defense, Disarmament and Free Riders,” The Review of Austrian Economics, pp. 88–122; and J.R. Hummel and D. Lavoie, “National Defense and the Public-Goods Problem,” Journal des Economistes et des Etudes Humaines 5, nos. 2/3 (June/September): pp. 353–77.

The present book is an economic and political history of early  America, describing government policies and their effects on marketplace activity. In particular, it is a history of cronyism: when the government passes policies to benefit special-interest politicians,  bureaucrats, businesses, and other groups at the expense of the general public. Examples include a central bank’s selective credit expansion, discriminatory taxes and regulations, business subsidies, territorial acquisitions, and other foreign policy maneuvers, and new constitutions. The rewards of cronyism take the form of monetary gains, particularly increased incomes and profits for individuals and businesses, or psychic gains from greater power and authority. The government’s claim that it passed legislation to enhance public welfare is only a thin veneer for privileges and redistribution. 

Special-interest legislation is inherent in the very nature of government. On the free market, the network of voluntary exchanges, all activity is based on individual liberty and results in mutually beneficial outcomes. The competitive profit and loss mechanism incentivizes individuals to produce goods and services that consumers desire. However, the government, the legitimated monopoly of power, lacks this mechanism and produces outcomes that are harmful to society. The incentive structure is different: unlike the Invisible Hand of the market, individuals that control the coercive Visible  Hand are encouraged to pass legislation that benefits themselves at the expense of others. The stronger the government, the more lucrative the rewards. To control the government machinery is to control the levers of cronyism. 

Researchers have analyzed American special privileges before, but their studies focus on individual cases in select time periods that remain unintegrated into an overarching narrative. There is still a need for an overview of cronyism that covers the motivations behind and development of relevant policies, their effects on the economy, and the critical attempts to reform the system. To achieve this goal, I utilize the “Liberty versus Power” theory, developed by  Murray Rothbard in his five-volume Conceived in Liberty series. It contains three core components. 

First, history is a clash between the forces of liberty, or those in favor of individual decision making and the market allocating resources, and the proponents of power, the factions that support coercion and government organization of production. Libertarians want to reduce government power to limit cronyism while statists strive for the opposite. Favoritism is limited when a substantial interest with an ideological and pecuniary incentive to promote freedom exists. Otherwise,  only clashing groups that want to control power mitigates special privileges. The liberty and power forces, with a spectrum in between, continually define the evolution of a government’s interference with the free society. When liberty triumphs overpower, cronyism is reduced;  when the opposite occurs, privileges increase. 

Second, those who control the government’s power are corrupted over time. To quote Lord Acton, “power tends to corrupt and  absolute power corrupts absolutely.” I define corruption as the willingness of government officials to push for interventions that benefit themselves and other favored interests. Coercion and the use of force increases the ability to dispense favors, which incentivizes its occurrence. While there is often a strong moral element to corruption, my primary focus is the increased inducement to secure special-interest policies. Lord Acton’s famous quote can be modified accordingly:  “power tends to incentivize cronyism and absolute power incentivizes cronyism absolutely.” Cronyism is due to the corrupting nature of government power and only by eliminating it can society destroy such favoritism. 

Third, reforms that eliminate restrictions and redistributions are difficult to achieve because they require smaller government. This can only be accomplished through an outside amputation of power,  particularly secession, or a change in the administrative leadership that internally dismantles the government’s power. The problem with reform, internal or external, is that any attempt requires laissez-faire proponents to use the coercive structure to enact their preferred policies. However, power tends to corrupt, which means that the previous advocates of freedom ineluctably start to pass their own special privileges. Radicals lose sight of their original goals, moderates stress the need to compromise with the opposition, and political office increases the incentive to provide favors to supporters. Soon the temptation to grant cronyism becomes irresistible. While in office, the libertarian faction transforms into a new coalition indistinguishable from the former statist party. 

My thesis is the following: in early American history, special privileges increased in a staggered fashion and the Liberty versus  Power theory explains this evolution. A majority of the population adhered to a basic libertarian ideology while the remainder supported big government. When the interventionist parties, i.e., the Federalists, National Republicans, and Whigs, secured control, cronyism shot upwards. When the people elected the reform parties—the Anti-federalists, Republicans, and Democrats—cronyism declined before increasing due to the corrupting nature of power. The ultimate driver of privileges on both sides was the insatiable urge to create an empire,  a territorially vast and influential country. Statists wanted to replicate the European empires that easily facilitated cronyism. In stark contrast, libertarians envisioned their empire consisting of small independent governments that shared classical-liberal values. However, power and the lure of territorial acquisition corrupted the libertarian parties into creating the same belligerent empires they previously weakened. 

Therefore, cronyism increased in a nonlinear fashion. To prove my thesis, I describe the history of special-interest legislation over the backdrop of political history. My narrative concentrates on the motivations of the major “players,” or America’s “Great Men”— the politicians and businessmen involved in the legislative process— and their attempts at reform. As a result, my work is “a throwback to  a traditional approach to politics, focusing on elections, parties, and  the maneuvering of elite white males in government.” 

By utilizing the Liberty versus Power theory and a political narrative that stresses the Great Man perspective, I have intentionally made this work “old fashioned,” and deservedly so, given that the goal is to accurately study  American cronyism.

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In June 2004, Professor Hoppe visited the Mises Institute in Auburn to deliver an ambitious series of lectures titled Economy, Society, and History.

Over ten lectures, one each morning and afternoon for a week, Dr. Hoppe presented nothing short of a sweeping historical narrative and vision for a society rooted in markets and property. Delivered only from notes, to an audience of academics and intellectuals, the lectures showed astonishing depth and breadth. Even the most jaded scholars in the room were blown away by the erudition and scholarship of Hoppe’s presentation.

This project brings together the core of Hoppe’s lifetime of theoretical work in one vital and cohesive source. Here we find provocative themes developed by Hoppe in the 1980s and 90s, particularly in his essays found in A Theory of Socialism and Capitalism and The Economics and Ethics of Private Property. We also find his devastating critique of democracy, made famous in his seminal book Democracy—The God That Failed.

We’ve taken the recordings, edited them, and put them into a printed book. As always, Hoppe is equipped—and unafraid— to tackle history, anthropology, philosophy, sociology, ethics, politics, and economics, melding them into one coherent thesis:

Chapter 1: The Nature of Man and the Human Condition: Language, Property, and Production  Property developed naturally, not artificially, as a consequence of human action. What is the philosophical justification for private property, and what does property mean for economics and justice?

Chapter 2: The Spread of Humans Around the World: The Extension and Intensification of the Division of LaborHow did man evolve to develop trade and specialization? What did that mean for the development of society?

Chapter 3: Money and Monetary Integration: The Growth of Cities and the Globalization of TradeMoney solves problems of barter and trade; good money makes global economics possible. But money is always and forever subject to corrupting monopolization by states and central banks. How do we separate money from the state, and separate trade from politics?

Chapter 4: Time Preference, Capital, Technology, and Economic GrowthTime, and our preference for present goods over future goods, informs everything we do. Low time preference, demonstrated by capital accumulation, is the key to advancing civilization. How do we encourage capital accumulation when the forces of statism work against us?

Chapter 5: The Wealth of Nations: Ideology, Religion, Biology, and EnvironmentHow did the West get rich? What intellectual movements threaten progress, or advance it?

Chapter 6: The Production of Law and Order: Natural Order, Feudalism, and FederalismMust law be positive rather than evolved? Who creates it, and who enforces it?

Chapter 7: Parasitism and the Origin of the StateHow did we get here? How does the ruling class derive its putative legitimacy, and what can the distant origins of governance teach us about the vast managerial social welfare states we endure today?

Chapter 8: From Monarchy to DemocracyIs democracy really the great advancement in human liberty we have been taught to believe? What is the role of natural and artificial elites?

Chapter 9: State, War, and ImperialismStates are necessarily expansionist and bellicose. How do we tame their warring and intervening nature?

Chapter 10: Strategy: Secession, Privatization, and the Prospects of LibertyCan private covenant communities replace the state? Why is a private property order morally urgent? Is secession viable? How do we move forward strategically?

As you can see, this book is a tremendous addition to Hoppe’s body of work, and a hugely important contribution to the “big picture” outlook for the West. Hoppe’s work is more important today than ever, given the penchant of modern bureaucratic states to war, intervene, tax, regulate, debase, and generally plunder the engines of peace and civilization.

Economy, Society, and History is a blueprint for understanding the world, rethinking it, and creating a better one.

Academics and social scientists today tend toward hyperspecialization, but Dr. Hoppe does not make this mistake. In this approach he joins a long line of important thinkers who did not confine themselves to a narrow academic discipline and did not care to “stay in their lane.” We forget that many twentieth century economists, for example, capably applied knowledge in history, philosophy, logic, anthropology, sociology, epistemology, politics, and ethics to their work—including Ludwig von Mises, Hoppe’s inspiration, and Murray N. Rothbard, Hoppe’s mentor. In that very important sense Hoppe continues and builds on the work of both men.

If you are new to Hoppe’s work, this is an excellent introduction and survey to his syntheses of history, anthropology, property, ethics, and state. If you already know and enjoy Hoppe, you will find here a “Hoppe reader”: many of his best and most representative articles across a range of topics in one accessible volume. Consider it almost a reference guide, from which readers can guide themselves back to his lengthy books and articles. But this book has something for everyone, from his rigorous yet often overlooked implications of capitalism and socialism to his broadside against democracy on property rights grounds. Even the new or casual reader will come away with an excellent understanding of Hoppe’s work and worldview.

The title of course comes from Claude-Frédéric Bastiat, the great nineteenth-century French economic journalist and liberal. Bastiat gave us “The Great Fiction” to describe the government mechanisms by which people attempt to live at the expense of others. The state is always present in Hoppe’s work, whether front and center or lurking in the background. Hoppe’s subtitle, Property, Economy, Society, and the Politics of Decline gives an unsubtle clue as to what readers should expect: a damning indictment of the political world and its twenty-first-century managerial superstates. In Hoppe’s world, the state is a wholly decivilizing institution: a predator rather than protector, a threat to property and peace. Markets and entrepreneurs produce goods, governments produce “bads”: taxation (theft), regulation (semi-ownership, thus semi-socialism), devalued money (central banks), war (defense), injustice (state courts and police), and the ruinous effects of high time preference (democracy). Like Bastiat, Hoppe has no patience for obscuring or soft pedaling the realities of our political world.

Part one of the book deals with the development of human society and the concomitant rise of two often opposing forces, namely property and states. Here Hoppe explains civilization rising against a backdrop of greater productivity enabled by the painfully slow shift from nomadic to agrarian living. Once sufficient calories could be yielded from land, concepts of family and ownership come into greater focus. The Enlightenment and Industrial Revolution create more and more prosperity, a proto-middle class, while feudal and monarchical arrangements face pressure from subjects developing greater wealth and literacy. This pressure explodes in the nineteenth century, as groups of largely decentralized kingdoms, principalities, territories, and city-states come under the full sway of national boundaries and governments. The twentieth century ushers in the era of full democratic government in the West: the Great War washes away the last vestiges of Old Europe, while growing economic and military power places the United States squarely at the helm of an international order.

Hoppe, of course, does not accept at face value the notion of the twentieth century as “liberal,” and in fact finds much of it illiberal. A particular favorite from part one is a chapter from Democracy: The God That Failed titled “On Democracy, Redistribution, and the Destruction of Property.” This essay beautifully encapsulates all of his fundamental critiques of modern mass democracy, namely that it produces bad, shortsighted politicians who care nothing about their nation’s capital stock; bad, shortsighted voters who care nothing about future generations; bad, expansionary economic and foreign policy; and bad, central bank money to pay for it all. Citizens, unlike subjects of yesteryear, enjoy the illusion that government is “us.” But an illusion is all it is, and Hoppe enjoys slaying this most sacred of cows.

Part two focuses on the hugely important but often overlooked relationship between money and the state. While kings and sovereigns once enjoyed debasing money to line their pockets, modern central banks turn seigniorage into something far more systemic and harmful. Fiat money enables politicians to fund welfare and warfare programs unimaginable in previous generations, increasing state power at every turn. It also distorts virtually every economic decision made across society, resulting in gross inefficiency and malinvestment. Society suffers, purchasing power erodes, but an undeserving and state-connected banking class benefits from all the new money. The quintessential Hoppean explanation for this sordid process, namely power, is nicely presented in chapter 9, “Why the State Demands the Control of Money.”

Part three forays into Dr. Hoppe’s economic theory, particularly in the area of method. Much of what we consider to comprise modern economics is wrong, and in particular wrong because it subverts the role of theory with empiricism, statistics, math, and modeling. Human actors apply deeply subjective values to all economic goods, values which change almost constantly. They are not atoms or vectors to be studied by testing hypotheses with data, but volitional beings to which we must apply axiomatic deductive reasoning. Hoppe gives readers a crash course in certainty, uncertainty, and probability, to show their uses and more importantly their limitations in economics.

Part four considers the important subject of intellectual history in the context of the broad Austro-libertarian movement, and includes a truly heartfelt speech from Hoppe on his friend and colleague Rothbard which is sure to move you. It also includes a typically Hoppean critique of Friedrich von Hayek’s political theory, which in Hoppe’s view compares very unfavorably to his work in monetary policy and the knowledge problem. This section finishes with the text of Hoppe’s sweeping talk titled “The Libertarian Quest for a Grand Historical Narrative,” a marvelous narrative about where we have been and where we might be going.

Finally, part five is a collection of interviews with Dr. Hoppe and autobiographical essays, including one conducted by yours truly. These interviews give a better sense of Hoppe as a person and thinker, and greater insight into his development both personally and professionally. Readers will find plenty of intellectual ammunition here, along with answers to many of the simplistic challenges posed to Hoppe’s idealized conception of a private law society.

Reading Hans-Hermann Hoppe is always a pleasure and never a chore, because both the subjects and Dr. Hoppe’s command of them quickly win the reader’s attention and even admiration. Most academic writing is almost unbearable; and as alluded to earlier it is designed to appeal only to a tiny group of PhDs who work in a very limited area or subfield. Hoppe, by contrast, produces academic treatments of much broader and foundational issues which manage to hold appeal for intelligent lay audiences. The footnotes, the diamond-sharp deductive logic, the references to earlier works and thinkers—all the hallmarks of academic journals are there—without the tedium and hubris.

Hoppe is the rare intellectual who never preens or bores, and never loses the plot. He keeps things close to the bone, one might say: not quite sparse but never ornate or superfluous. There are no twenty-page detours into some faintly related topic merely for show, a habit even the best of academics sometimes fall prey to. Not Dr. Hoppe. His work inevitably strips out the nonessential and gets to the root of the issue at hand. Sometimes that essential and unadulterated focus comports with popular sentiment and thinking; oftentimes it does not. Hence his controversial reputation in certain emotive circles. But Hoppe, like any good social scientist, has an obligation to seek truth and help us understand the world. Thus he never appeals to the reader’s existing pretensions or prejudices, but instead always demands we follow the praxeological path of understanding human actors as they really are.

In other words, truth—unadorned and uncomfortable as it may be—is the end goal of any good social scientist. Thus, Dr. Hoppe is an unflinching advocate for reality and logic, and one you cannot ignore.

I’d like to talk to you this afternoon about two classes of Americans, and it may not be the two classes you think of, but nonetheless, there are two distinct classes in America, and we have to break up, and we have to break up sooner rather than later.

A nation that believes in itself and its future, a nation that means to stress the sure feeling that its members are bound to one another not merely by accident of birth but also by the common possession of a culture that is valuable above all to each of them, would necessarily be able to remain unperturbed when it saw individual persons shift to other nations. A people conscious of its own worth would refrain from forcibly detaining those who wanted to move away and from forcibly incorporating into the national community those who were not joining it of their own free will. To let the attractive force of its own culture prove itself in free competition with other peoples—that alone is worthy of a proud nation, that alone would be true national and cultural policy. The means of power and of political rule were in no way necessary for that.

Ludwig von Mises wrote this about a hundred years ago and it rings absolutely as true today as the day he wrote it and it’s all about the idea of letting people go if they want to form a different political union or political entity. At the end he mentions true national and cultural policy. And so I would ask all of you today to consider: Is America a nation at this point? I would argue no. Is it even a country? Barely. Or is it, as Ilana Mercer calls it, Walmart with nukes? And that’s what America feels like very much today. It feels like we’re all living in one big federal subdivision, doesn’t it?

Last night I mentioned that about a hundred years ago in the interwar period Mises wrote his great trilogy, three books, remarkable books: Nation, State, and Economy first, then Socialism, then Liberalism, all within a ten-year span. These three remarkable books basically laid out a blueprint for both organizing society in a prosperous and peaceful way and also a warning in Socialism about how to destroy it. Turns out it’s a lot easier to destroy than build.

Mises lays out his conception of what a liberal nationhood might look like. It’s rooted in property, of course, and rigorous self-determination at home, and what this means is that he’s always stressing the right of secession, back then, for political, linguistic, ethnic, economic minorities. They always have the right to secede, and of course, coming out of the patchwork of the former Austro-Hungarian Empire and in Europe, he understood what it meant to be a linguistic minority in particular. So, for Mises, any kind of nation, any kind of real nationalism, liberal nationalism, requires laissez-faire at home, of course. It requires free trade with your neighbors, to avoid a tendency toward war and autarchy, and it requires a noninterventionist foreign policy to avoid war and empire.

When we think of these three books, we can only imagine what the West and what America might look like today if these books had been read and absorbed broadly at the time. If Western governments had been even somewhat reasonable, let’s say over the past century, consuming, let’s say, only 10 or 15 percent of private wealth in taxes, maintaining just somewhat reasonable currencies backed by gold, mostly staying out of education and banking and medicine, and most of all avoiding supernational wars and military entanglements. If governments had just been somewhat reasonable in the West, we might still live in a more gilded era, like Mises once enjoyed in Vienna, but with all the unimaginable benefits of our technology and material advances today.

The truth is that liberalism didn’t hold and we have to be honest with ourselves about it. It didn’t hold in the West, and it never took root in the full Misesian sense anywhere, at least not for long, and that’s why all of us are here today. If the world had listened to Mises even somewhat, if Western states had committed to the prescription of sound money, markets, peace, all of our libertarian anarcho-capitalist theory might have been completely unnecessary. We might be sitting here today just sort of grumbling about potholes and local property taxes and local schools. Instead, we’re here talking about the state as an existential threat to civilization. So, two very different scenarios. But again, the world didn’t listen to Mises; that’s why it got Rothbard and Hoppe, by the way.

One of the great progressive achievements of the last hundred years, which goes almost totally unremarked today, goes to the title of my talk: the degree to which the Imposers, we can call them, have been able to portray themselves as the Imposed Upon. It’s absolutely uncanny. We see it in every aspect of American society and every aspect of our politics today. We see it in the presidential election; we see it with the culture wars; we see it in academia in spades; we see it with Antifa in the streets. If we think about just the last hundred years since Mises wrote these three books—the past century in America—progressives of all stripes, of all political parties, I want to add, what have they given us? They’ve given us two world wars, quagmires in Korea and Vietnam, endless Middle East wars in Iraq, Afghanistan—Yemen maybe is coming soon, Iran, who knows? They imposed these enormous welfare schemes that Amity Shlaes has written so much about in the form of the New Deal and Great Society programs, which have ruined how many untold lives. They created all these alphabet soup federal agencies and departments to spy on us, tax us infinitely, regulate every aspect of our lives. And they built the military-industrial complex and the state media complex and the state education complex. They legislated violations of basic human property rights, which would absolutely shock our great grandfathers if they were alive, all with the courts nodding along in their acquiescence. And to pay for it all, they gave us central banking—the Federal Reserve System hatched up, schemed right here on this island, in November of 1910. What do they, the Imposers, call this? They call it liberalism. If you oppose it, they call you a reactionary.

To be a libertarian today is to be a reactionary against the state degradations and depredations and impositions of the twentieth century. The political class, either the Imposers themselves or their agents, what has the political class gotten us? Well, they managed to ruin peace, they managed to ruin diplomacy, money, banking, education, medicine, not to mention, along the way, culture, civility, and goodwill. And if you oppose the Imposers and the elites, they call you a populist for it. So, call me a populist.

All of this, of course, flows from the Imposers, from their positive rights worldview which animates them. It animates everything they do and that’s why they’re able to scream at Rand Paul, for example, for denying them healthcare. Once you accept a positive rights view of the world, then anyone who doesn’t go along with your program is taking from you, and this is how they see the world, the Imposers. If the twentieth century represents a triumph of liberalism, I’d hate to see illiberalism.

We all know what the Imposers have in store for us now in the fledgling twenty-first century. And I would add, as an aside, a good way to tell a Beltway person from a Rothbardian is to ask them the simple question of whether they consider the twentieth century in the West a triumph of liberalism or not. I think most Rothbardians would say it was not, and I think most Beltway types would say it was. They consider the twentieth century some sort of victory for liberalism.

So, what that got us, along with all of these other problems is, of course, a huge divide in society. What they’ve gotten us is an almost unbelievable and epic divide in society between the Imposers and the Imposed Upon. How divided are we and along what kind of lines?

This was a nice little vignette, which took place the other day on Twitter. We have Chris Hayes, from MSNBC, who says, Well, you know with covid, “the most responsible way to deal with all these people”—that sounds like Seinfeld, “those people”—“if we survive this, is some kind of truth and reconciliation commission.” Wow, that sounds fun. I suspect many of us in the room would be candidates for that. I don’t know if there’s boxcars outside. So he represents the progressive left in America today. And then along comes our friend from the neoconservative right, the great Bill Kristol, with whom we’ve all had enough but we always get more. I mean, this guy does not go away. He’s like when you take the fish oil capsule at seven in the morning, and then at noon, that’s Bill Kristol. So, he says, “How about truth and no reconciliation?”

The degree of open contempt and hatred that these lunatics have for us has in part been exposed by Trump and Trumpism. And to that extent we owe Trump a degree of gratitude for letting us see them for what they truly are. I would ask either one of these gentlemen: If you truly believe, let’s say, 40 percent of the United States is beyond redemption, irredeemable, what does that mean? What do you propose doing with them? Does that mean some sort of reeducation camp? Presumably it means that either you separate from them somehow or you vanquish them, and by vanquish, that could be economically, politically, or, in the horrific scenario which we’ve seen repeated throughout history, even physically.

The divide we have in this country today is not so simple as saying blue and red states or counties, Republicans and Democrats, or liberals and conservatives, or even by class. It’s a little more complicated than that. There’s a company out there called Survey Monkey, which took in a lot of data after the 2016 election between Hillary Clinton and Donald Trump. There was a big Washington Post story using this, and they grouped it in a bunch of very interesting ways. I wonder how many people in this room were aware of some of these divides in American culture.

Sadly, there’s a huge divide along racial lines in voting patterns. If only white people had voted in the 2016 election, Trump would have won forty-one states and if only nonwhite people had voted, Hillary Clinton would have won forty-seven states. I view this as basically a testament to the Democrat’s ability to sell some kind of sick victimhood and dependency and to the Republican’s failure to sell any sense of real ownership or opportunity or capitalism. But nonetheless, that’s the divide. It’s real.

How about union members? If only union member households—in other words, a household with at least one union member—had voted, Hillary Clinton would have won forty states. And if no union members, Donald Trump would have won thirty-seven.

When we get into religion, things get even more stark. What about households that claim that the inhabitants are either atheists or no particular religion? Hillary Clinton would have won at least forty-six states, if only nonreligious people had voted. How about if households which claim Protestant or Catholic membership would have been the sole voters? Trump would have won forty-five states. Evangelical voters only, Trump would have won forty-seven states. People who attend church weekly, Trump would have won forty-eight states. People who seldom or never attend church or synagogue, Hillary Clinton would have won forty-three states.

t strikes me as we go through some of these numbers that these divides are awfully hard to overcome politically. I’m not sure how you do that. How about unmarried people? Hillary Clinton would have won thirty-nine states if only unmarried people had voted. Trump would have won forty-three states if only married people had voted, another huge quiet cultural and political gap in this country.

You’ve heard a lot about urban versus rural voters; it’s a motif which keeps coming up again and again. For purposes of the Survey Monkey data, an urban county is one with greater than 530 voters per square mile and a rural county is one with fewer than ninety voters per square mile. Again, only urban counties vote, Hillary Clinton wins forty states. Only rural voters vote, Donald Trump wins forty-seven states.

The last stat I’ll throw out is gun-owning households. (I know that none of you own firearms, but there are people who do. They lock them up and just shoot deer with them. They don’t have Uzis, or modified weapons....And I know there’s no weapons in this room today; I feel comfortable with that statement.) If only gun-owning households voted, Donald Trump wins forty-nine states. Guess which one he loses? The only one he loses is Bernie Sanders’s Vermont, because I think up there you just have a gun anyway just because you’re in Vermont but you vote for Bernie. So, if households with no firearms of any kind were the sole voters in America, Hillary Clinton also wins forty-nine states and guess which one she loses? West Virginia, another anomaly.

The point here is that these kinds of divides and problems cannot be neatly solved by politics, especially national politics, and if you think about them, they don’t cleave neatly along geographic lines. This isn’t the Mason-Dixon line. These kinds of divides exist in every state, they exist within counties. If you go to California, which we all think of as a deep blue state, then go twenty miles inland. You know what it is? It’s Trump flags, it’s country music, and it’s Mexican rancheros. That’s what it is. We don’t have the Mason-Dixon line in America in 2020. And more importantly, what we have to understand is: even if you could win some national election, if you could somehow get 51 percent of the voters to vote for a candidate like a Rand Paul, it doesn’t really matter, because hearts and minds haven’t changed. Politically vanquished people never really go away. This is what we have to understand; this is why we have to break up.

A couple of years ago, Bloomberg did some polling in the former Soviet Union, now Russia. There are millions of Russians, especially elderly Russians, who still absolutely pine for the Soviet days when they knew what their job was, they didn’t have to pay for their apartment, etc. Seventy percent of those people have overall a generally beneficial view about Stalin, in 2019. They view him as the great reformer who helped save their country from the Nazis, etc. In other words, despite all the historical examples that the twentieth century provided us, despite the fall and the collapse of the Soviet Union, despite all of the obvious benefits of capitalism, there is still a significant amount of nostalgia for the old system. Politically vanquished people don’t just go away. And the Hillary Clinton people thought that the deplorables were going to do just that. They thought they were dying, they thought they were aging out, and they thought there were fewer of them than there were, and that’s what happened in 2016 and that sent the entire country into basically some kind of psychosis, which we’re still suffering under today.

I know the concept of decentralization is one that’s obvious and clear to all of you. I know secession seems like a tough go, but I want to just throw out to you some happy facts, things that are happening slowly right under our noses, some very decentralist impulses which are at work. Of course, they have been absolutely intensified by the covid issue and by these terrible riots which have been roiling across the United States this summer and now into the fall. As it turns out, all crises happen to be local. What do I mean by that?

One beautiful thing about covid is that it has done further damage to our sort of credulousness when it comes to so-called authorities. Neither the UN nor the World Health Organization nor our own CDC has been able to project any sort of authority whatsoever amongst people. They have been able to drive no consensus. As a result, we’ve had vastly different approaches to covid across international lines and even within our fifty states, and even within some areas within various cities.

No central authority was able to sort of seize it and boss everyone around and tell everyone what to do. Of course, outlets like the New York Times tried to do that, but that’s just in the United States. It’s been absolutely fascinating to watch how places like Singapore and Hong Kong and Sweden have been relatively open and places like the province in China where it happened were drastically locked down. Some places like San Francisco have been drastically locked down, so there’ve been different approaches in this decentralized effort. And none of this is because people woke up one day and said ideologically, Wow, maybe we should try a more decentralized approach. No, it’s just what naturally happens in crises.

Even the vaunted Schengen Area Agreement in Europe, which allows free travel between the member countries, immediately broke down. All of a sudden, a German is a German again and a Frenchman is a Frenchman, and you can’t even drive across. I don’t think that Americans can drive or fly into Canada right now, even as we speak, with the liberal—supposedly liberal—Trudeau administration up there.

It turns out that when it comes to a crisis, things really get local very, very quickly. No matter who you are, even if you’re Bill Gates and you can buy ten vacation houses and go to New Zealand on your yacht, you have to be somewhere physically; you have to exist in an analog world, and that means you need calories, you need kilowatts of energy and air conditioning coming into your home or your abode, you might need some healthcare or some prescription drugs, and all of this becomes unavoidable in a crisis. You have to be somewhere. Even Jeff Bezos had a bunch of protestors surrounding his house, his swanky house in DC. Now I don’t know if he happened to be there at the time, but the point is even Jeff Bezos could conceivably be contained in his home by a mob that you can’t escape. This idea that we’re now on this sort of new global happy plane is being sorely tested, I think, by covid. I think that the idea of political globalism—the bad kind of globalism—is showing its strain. I think it’s cracking very badly.

Let’s talk about the great relocation that’s happening in America, this incredible movement of people out of cities. What’s the charm of a New York, a Manhattan, or a Chicago without the restaurants, and the theaters, and the food, and the museums? High rent, high crime, no fun? We find that a lot of younger people are starting to rethink things. I think this form of de facto secession away from these big cities, which tend to be very, very left-wing in orientation, is a wonderful development to see, because some of that political power that the big cities tend to hold is going to be attenuated. Atlanta tends to control Georgia; Nashville increasingly controls Tennessee. We see this in a lot of states. Las Vegas controls Nevada. But if people start to move away from these big cities, then some of that political power similarly is going to go with them.

This decentralist impulse is really the untold story of the twenty-first century: we see it in companies in the way they organize and manage their teams. Now we see all kinds of teleworking (which I think is a mixed bag, but nonetheless it’s happening, one way or another). Look at distribution systems, what used to be the old hub-and-spoke model of getting your products, like the JCPenney catalogue, or how you got a sweater forty years ago. We’re now looking at companies like Amazon that have a very decentralized system of spider webs. The distribution of goods and services is becoming radically decentralized.

How do we obtain information? It wasn’t that long ago, thirty years or so, you had to go to your local mall and they might have Milton Friedman’s Free to Choose or John Kenneth Galbraith’s Affluent Society. They didn’t have Rothbard. So, libraries and universities and professors were almost kind of like the new versions of monks. They were the literate ones, and you had to go to them to get information. But that’s no longer the case. You have something in your pocket the size of a deck of cards that has basically all of human history on it. That’s hugely decentralizing.

What we’re seeing right now in the education revolution is just absolutely phenomenal. Even before covid came along we had Khan Academy and all kinds of new platforms springing up. We had the student loan debt crisis. We had parents questioning the value of sending their kids to school for $40,000 a year so that they can get a degree which doesn’t get them a job and then when they come home after those four years they hate your guts. It turns out that that’s not such a good value proposition.

Money and banking itself is becoming increasingly decentralized. We have all kinds of payment gateways now. We have systems like PayPal, we have bitcoin, and so really it’s just that top layer of banking that is happening at major banks.

All of these things are happy facts and we ought to be celebrating and thinking about them when we consider the political landscape.

I’m not so sure that what matters for our immediate future is whether Trump or Biden wins. We all know what Biden is and what he will do. We don’t know what the hell Trump is or what he will do. That’s what it means to be Trump. But nonetheless, I think some of these impulses which are happening are inexorable. I’m not sure that even a Kamala Harris or a Joe Biden can stop them. We ought to celebrate that.

What’s interesting is that the one thing which still seems awfully centralized in our world is the political world. In other words, in all these other areas of life, all these things I’ve just been mentioning, decentralization is something that’s happening naturally, it’s happening by market force, it’s happening inexorably, and it’s happening by free choice of people. But the one area out of our lives where we still accept gross centralization, and all the inefficiencies it brings, is government.

Many things that used to be decided at the city level are now decided at the regional or the state level. Things that used to be decided at the state level, decided at the federal level—and then sometimes even at the international level. That’s really the political story of the twentieth century, the centralization of politics at higher and higher levels, which is of course antidemocratic, even though all of these people are telling us about our sacred democracy. Every level of government that’s further removed from you is attenuated by definition, is less democratic, because your input and your consent, so-called, is less and less meaningful. But I wonder if there aren’t even some hopeful signs when it comes to politics and the decentralization of political power.

At an event last fall in Vienna, Austria, Hans-Hermann Hoppe was on a panel, and one thing that struck me about what he said was, if you look at the nationalist impulses of the nineteenth and twentieth centuries, the patchwork of former Europe came together—if you think of Germany as all these principalities and regions, and Bavaria and Prussia, these areas came together. He said nationalism in the nineteenth and twentieth century was mostly a centralizing impulse. That’s what nationalism meant. When it becomes belligerent and spills over its borders, you get aggressive, you get Nazi Germany. But he said in the twenty-first century, from his perspective, nationalist movements tend to be decentralist. In other words, they’re moving away from this sort of global government model which we all thought was going to be our future in the late twentieth century.

Hoppe says, If we look at things like the Brexit vote, if we look at what’s happening in countries like Poland and Hungary, if we look at Catalonia—the Catalonian secession movement in Barcelona in the Catalonian region of Spain—these tend to be breakaway decentralist secessionist movements. That’s the difference between some of the national movements of today versus yesteryear. And I think this is coming soon to a city near you in the United States.

This kind of talk is really becoming reality. Ryan McMaken, who is the editor of mises.org, just wrote an article about how even the mainstream publications now are talking quite openly and seriously about secession, and I think that’s because on some level, nervously, they still think Trump could win. I think that’s what’s driving it.

There have been very serious people on both left and right, not wild-eyed radicals like me, who have been talking about this for the last several years. Frank Buckley, a law professor at George Mason University—oh, we can’t say that anymore, sorry; it’s GMU. It turns out George Mason had a slave or two. Buckley wrote a very serious book about what secession might look like just a year ago. And this is a sober conservative guy. Similarly, Angelo Codevilla, who writes for the Claremont Institute, a retired political science professor at Boston University, wrote an article back in 2016 called “The Cold Civil War.” You can find it at Claremont.org. Again, a very sober, serious conservative, the kind of guy who still uses the lexicon and things like statecraft; you know what I mean. And they’re talking about this. Similarly, people at places on the left, at places like the New Republic and The Nation, are talking about this like never before. Gavin Newsom, governor of California, has applied the term nation-state to his own state.

What happens in the fall, in a month, if somehow, some way Trump manages to win this election—I don’t know what that’s going to look like. I think we are going to see, first of all, an outpouring of grief and psychosis and outright violence from a significant portion of the country that we’re just not prepared for. But when that subsides, you’re going to simply see blue state governors saying, No, we’re walking away. The sanctuary-city talk will become more and more pronounced, and I think that’ll be a beautiful and helpful thing for this country.

Now, the flip side—and when I say who wins, I should say who’s actually installed in January; we don’t know anything about these ballots and postal delivery carriers dropping them in sewers or whatever it might be. But whoever wins—if Joe Biden and Kamala Harris are installed—I think what you’re going to see is nothing short of a new Reconstruction in America. I think you are going to see outright and open attempts, gleeful attempts in the media class to impose themselves on the red states and punish them. Not only for having the audacity to put Donald Trump in the White House instead of Hillary Clinton—who we all knew was going to win—but more importantly on a more macro level, for coming along and interrupting that arc of history that progressives believe in so deeply: that we’re always improving and that we’re always getting better, the past is always bad and retrograde. To have that upended by Trump is a sin which they still haven’t gotten over.

If Biden and Kamala Harris win, the sales tax deduction for state taxes will be immediately reintroduced so that those blue states can start deducting things again. I think you’ll see it in myriad ways. You will see sort of an outpouring, a collective outpouring from the Left that wants to use the state as sort of a laser focus, you know, to bludgeon us, the rest of us. And that, in turn, will cause the red state folks and the red state voters to be thinking very seriously about an exit strategy. I wish I could give you something more hopeful than that, because as I mentioned before, the problem here is that nothing goes along neat geographic lines. But the lines are there nonetheless, and we can’t ignore them.

I’ll close with this: Tom Woods, our friend who spoke earlier, he reminds us political arrangements exist to serve us, not the other way around. Who the hell said that we have to put up with all of this? Can we change ours without bloodshed? That’s the question of the twenty-first century. I think the question of the twentieth century was socialism versus property. I think the question of the twenty-first century is centralized versus decentralized. So, in postpersuasion America, where we seem to live, it’s not just a matter of intellectual error. There’s more to it than that. It’s not just about convincing academics and journalists and politicians that our cause is right and you should agree with us. Because it’s also about self-interest and power. They don’t see for themselves a path to greater self-interest and a path to greater power in the kind of society which all of us in this room would prefer to live in, and they’re not just going to let us have it without some effort on our part. And I hope very strongly that that path does not involve bloodshed.

There is reason for optimism: there is a decentralist impulse that is working its way across the world. It’s coming to America, and I think that is where we have to put our hopes and our efforts.

For Mises,Nation, State, and Economy: Contributions to the Politics and History of Our Time, trans. Leland B. Yeager (New York: New York University Press, 1983), pp. 34, 36. liberalism first emerged and expressed itself in the nineteenth century as a political movement in the form of “peaceful nationalism.” Its two fundamental principles were freedom or, more concretely, “the right of self-determination of peoples” and national unity or the “nationality principle.” The two principles were indissolubly linked. The primary goal of the liberal nationalist movements (Italian, Polish, Greek, German, Serbian, etc.) was the liberation of their peoples from the despotic rule of kings and princes. According to Mises,Ibid. liberal revolution against despotism necessarily took on a nationalist character for two reasons. First, many of the royal despots were foreign, for example, the Austrian Hapsburgs and French Bourbons who ruled the Italians, and the Prussian king and Russian czar who subjugated the Poles. Second, and more important, political realism dictated “the necessity of setting the alliance of the oppressed against the alliance of the oppressors in order to achieve freedom at all, but also the necessity of holding together in order to find in unity the strength to preserve freedom.”Ibid., p. 38. This alliance of the oppressed was founded on national unity based on common language, culture, and modes of thinking and acting.

Even though forged in wars of liberation, liberal nationalism was for MisesIbid., p. 35. both peaceful and cosmopolitan. Not only did the separate national liberation movements view each other as brothers in their common struggle against royal despotism, but they embraced the principles of economic liberalism, “which proclaims the solidarity of interests among all peoples.” MisesIbid., pp. 36–37. stresses the compatibility of nationalism, cosmopolitanism, and peace:

[T]he nationality principle includes only the rejection of every overlordship; it demands self-determination, autonomy. Then, however, its content expands; not only freedom but also unity is the watchword. But the desire for national unity, too, is above all thoroughly peaceful. … [N]ationalism does not clash with cosmopolitanism, for the unified nation does not want discord with neighboring peoples, but peace and friendship.Mises (ibid., p. 34) gives the charming example of the Italian nationalists who shouted to the imperial Austrian soldiers: “Go back across the Alps and we will become brothers again.”

As a classical liberal, MisesLiberalism in the Classical Tradition, Trans. Ralph Raico, 3rd ed. (Irvington-on-Hudson, NY and San Francisco: The Foundation for Economic Education and Cobden Press, 1985), p. 109. is careful to specify that the right of self-determination is not a collective right but an individual right: “It is not the right of self-determination of a delimited national unit, but rather the right of the inhabitants of every territory to decide on the state to which they wish to belong.” MisesIbid., pp. 109–10. makes it crystal clear that self-determination is an individual right that would have to be granted to “every individual person … if it were in any way possible.” It should also be noted in this respect that Mises rarely speaks of the “right of secession,” perhaps because of its historical connotation of the right of a government of a subordinate political unit to withdraw from a superior one.

While championing self-determination as an individual right, MisesNation, State, and Economy, pp. 39–40. argues that the nation has a fundamental and relatively permanent being independent of the transient state (or states) which may govern it at any given time. Thus he refers to the nation as “an organic entity [which] can be neither increased nor reduced by changes in states.” Accordingly, MisesLiberalism, p. 106. characterizes a man’s “compatriots” as “those of his fellow men with whom he shares a common land and language and with whom he often forms an ethnic and spiritual community as well.” In the same vein, MisesNation, State, and Economy, p. 79n 45. cites the German author J. Grimm, who refers to the “natural law … that not rivers and not mountains form the boundary lines of peoples and that for a people that has moved over mountains and rivers, its own language alone can set the boundary.” The nationality principle therefore implies that liberal nation-states may comprise a monoglot people inhabiting geographically non-contiguous regions, provinces and even villages.Liberalism, p. 113. MisesIbid., 110. contends that nationalism is thus a natural outcome of and in complete harmony with individual rights: “The formation of [liberal democratic] states comprising all the members of a national group was the result of the exercise of the right of self-determination, not its purpose.”However, Mises (1983, p. 37) concedes that in rare cases, “where freedom and self-government already prevail and seem assured without it,” such as Switzerland, the right of self-determination may not result in a nationally unifi ed state. MisesOmnipotent Government: Th e Rise of the Total State and Total War (Spring Mills, PA: Libertarian Press [1944] 1984), p. 101. elaborates on this important point:

Liberalism does not say: Every linguistic group should form one state and one state only, and each single man belonging to that group should, if at all possible, belong to that state. Neither does it say: No state should include people of several linguistic groups. Liberalism postulates self-determination. That men in the exercise of this right allow themselves to be guided by linguistic considerations is for liberalism simply a fact, not a principle or a moral law.

It should be noted here that, in contrast to many modern libertarians who view individuals as atomistic beings who lack emotional affinities and spiritual bonds with selected fellow humans, Mises affirms the reality of the nation as “an organic entity.” For Mises the nation comprises humans who perceive and act toward one another in a way that separates them from other groups of people based on the meaning and significance the compatriots attach to objective factors such as shared language, traditions, ancestry and so on. Membership in a nation, no less than in a family, involves repeated, concrete acts of volition based on subjective perceptions and preferences with respect to a complex of objective historical circumstances.

According to Murray Rothbard,Murray N. Rothbard, “Nations by Consent: Decomposing the Nation-State,” Journal of Libertarian Studies 11, no. 1 (Fall 1994): 1–3. who shares Mises’s view of the reality of the nation separate from the state apparatus:

Contemporary libertarians often assume, mistakenly, that individuals are bound to each other only by the nexus of market exchange. They forget that everyone is necessarily born into a family, a language, and a culture. Every person is born into one of several overlapping communities, usually including an ethnic group, with specific values, cultures, religious beliefs, and traditions. … The “nation” cannot be precisely defined; it is a complex and varying constellation of different forms of communities, languages, ethnic groups or religions. … The question of nationality is made more complex by the interplay of objectively existing reality and subjective perceptions.

Unlike many late nineteenth- and early twentieth-century liberals, Mises was a passionate anti-colonialist. As a radical liberal, he recognized the universality of the right of self-determination and the nationality principle for all peoples and races. He wrote powerful and scathing indictments against the European subjugation and mistreatment of African and Asian peoples and demanded a quick and complete dismantling of colonial regimes. It is worthwhile quoting MisesLiberalism, pp. 125–26. on this at length:

The basic idea of colonial policy was to take advantage of the military superiority of the white race over the members of other races. The Europeans set out, equipped with all the weapons and contrivances that their civilization placed at their disposal, to subjugate weaker peoples, to rob them of their property, and to enslave them. Attempts have been made to extenuate and gloss over the true motive of colonial policy with the excuse that its sole object was to make it possible for primitive peoples to share in the blessings of European civilization. … Could there be a more doleful proof of the sterility of European civilization than that it can be spread by no other means than fire and sword?

No chapter of history is steeped further in blood than the history of colonialism. Blood was shed uselessly and senselessly. Flourishing lands were laid waste; whole peoples destroyed and exterminated. All this can in no way be extenuated or justified. The dominion of Europeans in Africa and in important parts of Asia is absolute. It stands in the sharpest contrast to all the principles of liberalism and democracy, and there can be no doubt that we must strive for its abolition. … European conquerors … have brought arms and engines of destruction of all kinds to the colonies; they have sent out their worst and most brutal individuals as officials and officers; at the point of the sword they have set up a colonial rule that in its sanguinary cruelty rivals the despotic system of the Bolsheviks. Europeans must not be surprised if the bad example that they themselves have set in their colonies now bears evil fruit. In any case, they have no right to complain pharisaically about the low state of public morals among the natives. Nor would they be justified in maintaining that the natives are not yet mature enough for freedom and that they still need at least several years of further education under the lash of foreign rulers before they are capable of being left on their own.

In those areas where native peoples were strong enough to mount armed resistance to colonial despotism, MisesIbid., p. 124. enthusiastically supported and cheered on these national liberation movements: “In Abyssinia, in Mexico, in the Caucasus, in Persia, in China — everywhere we see the imperialist aggressors in retreat, or at least already in great difficulties.” To completely phase out colonialism, Mises proposed the establishment of a temporary protectorate under the aegis of the League of Nations. But he made it clear that such an arrangement was “to be viewed only as a transitional stage” and that the ultimate goal must be “the complete liberation of the colonies from the despotic rule under which they live.” MisesIbid., p. 127. based his demand for the recognition of the right of self-determination and respect for the nationality principle among colonized peoples on the bedrock of individual rights:

No one has a right to thrust himself into the affairs of others in order to further their interest, and no one ought, when he has his own interests in view, to pretend that he is acting selflessly only in the interest of others.

This bring us to Mises’s key insight into the irreconcilable “conflict of nationalities” bred by majority rule — even under liberal democratic constitutions. As a keen observer of the pre- and post-Great War polyglot states of Central and Eastern Europe, MisesNation, State, and Economy, p. 46. notes that “national struggles can only arise on the soil of freedom.” Thus as prewar Austria approached freedom, “the violence of the struggle between the nationalities grew.” With the collapse of the old royalist state, these struggles were “carried on only more bitterly in the new states, where ruling majorities confront national minorities without the mediation of the authoritarian state, which softens much harshness.” Mises attributes such a counterintuitive outcome to the fact that the nationality principle was not respected in the creation of the new states.Mises (Liberalism, pp. 87–88) refers particularly to the Poles, Czechs, and Magyars, who substituted an “aggressive nationalism” for “the liberal principle of self-determination” with the aim of “domination of people speaking other languages.” German and Italian nationalists and other nationalities quickly followed suit. Mises’s point is illustrated in the modern ethnic conflicts that erupted in the wake of the collapse of Communism and the breakup of the Soviet Union and of Yugoslavia.On the ethnic-religious confl icts in the former Yugoslavia see Murray N. Rothbard, “Hands Off  the Serbs,” (RRR: Rothbard-Rockwell Report, 1993): 1–5 and “Nations by Consent,” pp. 1–10. 

MisesNation, State, and Economy, pp. 48–49. maintains that two or more “nations” cannot peacefully coexist under a unitary democratic government. National minorities in a democracy are “completely politically powerless” because they have no chance of peacefully influencing the majority linguistic group. The latter represents “a cultural circle that is closed” to minority nationalities and whose political ideas are “thought, spoken, and written in a language that they do not understand.” Even where proportional representation prevails, the national minority “still remains excluded from collaboration in political life.” According to Mises,Ibid., p. 51. because the minority has no prospect of one day attaining power, the activity of its representatives “remains limited from the beginning to fruitless criticism … that … can lead to no political goal.” Thus, concludes Mises,Ibid., p. 47. even if the member of the minority nation, “according to the letter of the law, be a citizen with full rights … in truth he is politically without rights, a second class citizen, a pariah.” 

In a later, unpublished paper dealing with the post-World War II reconstruction of Eastern Europe, Mises“An Eastern Democratic Union: A Proposal for the Establishment of a Durable Peace in Eastern Europe,” in Selected Writings of Ludwig von Mises: The Political Economy of International Reform and Reconstruction, ed. Richard M. Ebeling (Indianapolis, IN:  Liberty Fund, 2000), p. 184. put the matter even more strongly: “To be a member of such a linguistic minority means to be an outlaw. … There were and are autonomy and democracy only for the members of the ruling linguistic majorities. …” It is no wonder, then, that MisesIbid., p. 181. portrayed linguistic minorities as “bearers of permanent unrest … and hatred.”

MisesNation, State, and Economy, p. 50 thus characterizes majority rule as a form of colonialism from the point of view of the minority nation in a polyglot territory: “[It] signifies something quite different here than in nationally uniform territories; here, for a part of the people, it is not popular rule but foreign rule.” Peaceful liberal nationalism therefore is inevitably stifled in polyglot territories governed by a unitary state, because, MisesIbid., p. 56. argues, “democracy seems like oppression to the minority. Where only the choice is open oneself to suppress or be suppressed, one easily decides for the former.” Hence, for Mises,Nation, State, and Economy, p. 50. democracy means the same thing for the minority as “subjugation under the rule of others,” and this “holds true everywhere and, so far, for all times.” Mises dismisses “the often cited” counter-example of Switzerland as irrelevant because local self-rule was not disturbed by “internal migrations” between the different nationalities. Had significant migration established the presence of substantial national minorities in some of the cantons, “the national peace of Switzerland would already have vanished long ago.”

With respect to regions inhabited by different nationalities, MisesLiberalism, p. 113. therefore concludes, “the right of self-determination works to the advantage only of those who comprise the majority.” This is especially true, for example, in interventionist states where education is compulsory and “peoples speaking different languages live together side by side and intermingled in polyglot confusion.” Under these conditions, formal schooling is a source of “spiritual coercion” and “one means of oppressing nationalities.” The very choice of the language of instruction can “alienate children from the nationality to which their parents belong” and “over the years, determine the nationality of a whole area.” The school thus becomes the source of irreconcilable national conflict and “a political prize of highest importance.” With respect to the debate over compulsory education, MisesIbid., pp. 114–15. emphasizes, the only effective solution is to depoliticize schooling by abolishing both compulsory education laws and political involvement with schools, leaving the education of children “entirely to parents and to private associations and institutions.”

Compulsory education is only an extreme example of how interventionism exacerbates the inevitable conflict between different nationalities that are living together under the jurisdiction of a single state. In such a situation, MisesIbid., p. 116. argues: “Every interference on the part of government in economic life can become a means of persecuting the members of nationalities speaking a language different from that of the ruling group.” Perhaps Mises’s most important insight, however, is that even under a laissez-faire system, where government is rigorously restricted to “protecting and preserving the life, liberty, property and health of the individual citizen,” the political arena will still degenerate into a battleground between disparate nationalities residing within its geographical jurisdiction. Even the routine activities of the police and judicial system in this ideal liberal regime “can become dangerous in areas where any basis at all can be found for discriminating between one group and another in the conduct of official business.”Rothbard (1994, pp. 5–6) makes a similar point about the unavoidable political conflicts that arise in a situation where diff erent nationalities are bound together under the jurisdiction of a single, laissez-faire liberal government: “But even under the minimal state, national boundaries would still make a difference, often a big one, to the inhabitants of the area. For in what language … will be the street signs, telephone books, court proceedings, or school classes of the area?” This is especially true in states where “differences of religion, nationality, or the like have divided the population into groups separated by a gulf so deep as to exclude every impulse of fairness or humanity and to leave room for nothing but hate.” MisesLiberalism, p. 116. gives the example of a judge “who acts consciously, or still more often unconsciously, in a biased manner” because he believes “he is fulfilling a higher duty when he makes use of the powers and prerogatives of his office in the service of his own group.” 

Not only is the member of a national minority subjected to ingrained and routine bias in the political sphere, he is unable to grasp the thought and ideology that shape political affairs. His social and political worldview as well as his cultural and religious attitudes reflects ideas formulated and discussed in the national literature of, in effect, a foreign language, and these ideas diverge, possibly radically, from those of the majority linguistic group. According to MisesNation, State, and Economy, pp. 47–48. even though political and cultural ideas are transmitted and shared among all nations, “every nation develops currents of ideas in its own special way and assimilates them differently. In every people they encounter another national character and another constellation of conditions.” Mises gives the example of how the political ideal of socialism differed between Germany and France, and between the latter two and Russia.

The result of this natural “nationalizing” and differentiating of even similar ideas and intellectual trends is that the member of the minority nation confronts a linguistic and intellectual barrier that prevents him from meaningfully participating in the political discussion that shapes the laws under which he lives. Explains MisesLiberalism, pp. 119–20.:   

Cast into the form of statute law, the outcome of [the majority’s] political discussions acquires direct significance for the citizen who speaks a foreign tongue, since he must obey the law; yet he has the feeling that he is excluded from effective participation in shaping the will of the legislative authority or at least that he is not allowed to cooperate in shaping it to the same extent as those whose native tongue is that of the ruling majority. And when he appears before a magistrate or any administrative official as a party to a suit or petition, he stands before men whose political thought is foreign to him because it developed under different ideological influences. … At every turn the member of a national minority is made to feel that he lives among strangers and that he is, even if the letter of the law denies it, a second-class citizen.

The result of the political impotence of the national minority in a majoritarian democracy is that it perceives itself to be a conquered or colonized people. For as MisesIbid., p. 119. points out: “The situation of having to belong to a state to which one does not wish to belong is no less onerous if it is the result of an election than if one must endure it as the consequence of a military conquest. …” In the 1920s Mises had already identified the phenomenon of what today is misleadingly called “institutional racism” — because the problem lies not with all institutions, only political ones — but is better described as “democratic subjugation.” In the 1960s, Malcolm X“Malcolm Explains the Difference between Separation and Segregation.” Transcribed text from audio excerpt from “The Race Problem,” a speech at Michigan State University, East Lansing (January 23). gave poignant expression to the yearning for self-determination on the part of minority African nationalities in the U.S. saddled with an interventionist state controlled by peoples of European extraction:

This new type of black man, he doesn’t want integration; he wants separation. Not segregation, separation. To him, segregation … means that which is forced upon inferiors by superiors. … In the white community, the white man controls the economy, his own economy, his own politics, his own everything. That’s his community. But at the same time while the Negro lives in a separate community, it’s a segregated community. Which means it’s regulated from the outside by outsiders. The white man has all of the businesses in the Negro community. He runs the politics of the Negro community. He controls all the civic organizations in the Negro community. This is a segregated community. … We don’t go for segregation. We go for separation. Separation is when you have your own. You control your own economy; you control your own politics; you control your own society; you control your own everything. You have yours and you control yours; we have ours and we control ours.

Malcolm X“An Interview by A. B. Spellman,” in Malcolm X, By Any Means Necessary, 2nd ed. (New York: Pathfinder: [1964] 1992), pp. 31–32. later explained the concept of separation in terms more congenial to the liberal concept of national self-determination:

A better word to use then separation is independence. This word separation is misused. The thirteen colonies separated from England but they called it the Declaration of Independence; they don’t call it the Declaration of Separation, they call it the Declaration of Independence. When you’re independent of someone you can separate from them. If you can’t separate from them it means you’re not independent of them.

In analyzing the causes and solution of nationality conflicts, MisesNation, State, and Economy, p. 39. coined the terms “militant” or “aggressive” nationalism, which he contrasted with “liberal” or “peaceful” nationalism. Thus for Mises, the choice was never between nationalism and a bland, atomistic “globalism”; the real choice was either nationalism that was cosmopolitan and embraced universal individual rights and free trade or militant nationalism intent on subjugating and oppressing other nations. As pointed out above, he attributed the rise of anti-liberal nationalism to the failure to apply the right of self-determination and the nationality principle consistently and to the utmost degree possible in the formation of new political entities in the wake of the overthrow of royal absolutism by war or revolution. The consequence was peoples differentiated by language, heritage, religion, etc., arbitrarily and involuntarily bound together in artificial political unions. The inevitable outcome of these polyglot, mixed-nation-statesA more felicitous term than “mixed-nation-states” for these political entities would be “multinational states” but, given its current connotation, the latter term is likely to be misleading. was the suppression of minorities by the majority nationality, a bitter struggle for control of the state apparatus, and the creation of mutual and deep-seated distrust and hatred. This state of affairs often culminated in state-sanctioned physical violence, including the expropriation and expulsion and even the murder of minority populations. 

Mises argues that all of this could have been avoided if only the complete liberal agenda had been implemented. This includes, in addition to an economic policy of domestic laissez-faire and international free trade in goods, the crucial right of self-determination and the nationality principle to which it gives rise. MisesLiberalism, pp. 22–23. does not mince words in describing the plight of minority nationalities in an illiberal, interventionist system:

If the government of these territories [inhabited by members of several nationalities] is not conducted along completely liberal lines, there can be no question of even an approach to equal rights in the treatment of the members of the various national groups. There can then be only rulers and those ruled. The only choice is whether one will be hammer or anvil.

Mises goes further, however, and argues that even an end to interventionism will not resolve the conflict of nationalities. Almost alone among classical liberals and libertarians of his era and ours, Mises clearly recognizes that laissez-faire capitalism and free trade are necessary but not sufficient to ensure peace among different groups of individuals forced to live under a unified political system, each of which voluntarily and naturally self-identify as different peoples or nations on the basis of language, shared customs and traditions, religion, ethnic heritage or any other objective factor that is subjectively meaningful for them. As MisesIbid., p. 129. states:

All these disadvantages [experienced by minorities] are felt to be very oppressive even in a state with a liberal constitution in which the activity of the government is restricted to the protection of the life and property of the citizens. But they become quite intolerable in an interventionist or socialist state.

For MisesIbid., p. 118. the best that can be said of a government whose functions are strictly limited to protection of person and property and enforcement of contract is that it does not “aggravate artificially the friction that must arise from this living together of different groups.”

Mises defends the complete liberal agenda—the laissez-faire and self-determination principles — against those who vacuously attribute the “violent antagonisms” between nations inhabiting a single political jurisdiction to an “innate antipathy” between different peoples. To the contrary, argues Mises,Ibid., pp. 120–21. despite the hatreds that may naturally exist between various groups of people of the same nationality, they are able to get along peacefully when living under the jurisdiction of the same state, while different nationalities that are forcibly bound together under common political arrangements are in constant conflict:

The Bavarian hates the Prussian; the Prussian, the Bavarian. No less fierce is the hatred existing among individual groups within both France and Poland. Nevertheless, Germans, Poles, and Frenchmen manage to live peacefully within their own countries. What gives the antipathy of the Pole for the German and of the German for the Pole a special political significance is the aspiration of each of the two peoples to seize for itself political control of the border areas in which Germans and Poles live side by side and to use it to oppress the members of the other nationality. What has kindled the hatred between nations to a consuming fire is the fact that people want to use the schools to estrange children from the language of their fathers and to make use of the courts and administrative offices, political and economic measures, and outright expropriation to persecute those speaking a foreign tongue.

So it is not natural antipathies between peoples — which may or may not exist — but the political denial of the right of self-determination that is the underlying cause of national conflicts. In this vein, Mises issues a dire and, in hindsight, prescient warning: “As long as the liberal program is not completely carried out in the territories of mixed nationality, hatred between members of different nations must become ever fiercer and continue to ignite new wars and rebellions.” This is certainly true of today’s world, particularly in Asia and Africa, where European imperialists and colonialists dragooned different “nations” (tribes, chiefdoms, linguistic groups, ethnicities, religions) into deeply dysfunctional political unions. Most of the 37 wars being waged in 2015 on these continents were “intrastate” or civil wars and, of these, most are “fueled as much by racial, ethnic, or religious animosities as by ideological fervor.”GlobalSecurity.org 2019. Retrieved August 27, 2019. At their root lie the attempts of minority groups to resist or end oppression by the majority by seizing the existing state apparatus, seceding from the state, or creating an entirely new state, e.g., ISIS.

This brings us to the vexed question of immigration. For Mises, immigration is entirely a political problem. MisesLiberalism, pp. 138–39; Human Action: A Treatise on Economics, Scholar’s Edition (Auburn, AL: Mises Institute, 1998), pp. 160–63, 742–49. summarily dismisses the strictly economic arguments against free immigration as fallacious. He points out that, from the global point of view, migration raises the productivity of human labor, the supply of goods, and standards of living because it facilitates the reallocation of labor (and capital) from regions with less advantageous natural conditions of production to those with more advantageous natural conditions. Barriers to labor migration therefore cause a misallocation of labor and its geographic maldistribution, with a relative oversupply in some areas and undersupply in other areas. The effects of migration barriers are thus exactly the same as the effects of tariffs and other barriers to the international trade of goods: the reduction of productive efficiency and real income because comparatively unfavorable opportunities for production are exploited in some regions while comparatively favorable opportunities remain unutilized in others.

Although Mises argues that free movement of goods, capital, and labor tends to maximize the productivity of labor and the total output of goods and services, he does not envision this as the ultimate goal of liberalism. As MisesCritique of Interventionism, trans. Hans F. Sennholz, 2nd ed. (Irvington-on-Hudson, NY: The Foundation for Economic Education, 1996), p. 35. argues in another connection, it was a mistake to believe “that the essence of liberal programs was not private property but ‘free competition’ [i.e., free of the ‘economic power’ of large business enterprises].” The same also applies when evaluating the social desirability of labor migration: the welfare standard for Mises and classical liberals is not the “economistic,” Chicago-school goals of production efficiency or maximum labor productivity measured in objective terms but the securing of a full private-property regime. For it is the operation of the unhampered market based on private property that best satisfies consumer preferences for both exchangeable and non-exchangeable goods, which is the ultimate goal of all economic activity.On the crucial distinction between “exchangeable” and “nonexchangeable” goods, see Murray N. Rothbard, Man, Economy and State: A Treatise on Economic Principles with Power and Market: Government and the Economy, Scholar’s Edition, 2nd ed. (Auburn, AL: Mises Institute, 2009), pp. 214–18, 1323–24) and Philip Wicksteed, The Common Sense of Political Economy and Selected Papers and Reviews on Economic Theory, ed. Lionel Robbins (New York: Augustus M. Kelley, 1967), pp. 132–34.

In his brilliant but neglected analysis of the labor market in his economic treatise, Human Action, MisesHuman Action, p. 622. points out that even the completely unhampered migration of labor across political boundaries does not lead to maximum labor productivity and a distribution of labor that equalizes wage rates for the same kind and quality of labor services throughout the global economy. The reason?

The worker and the consumer are the same person. … Men cannot sever their decisions concerning the utilization of their working power from those concerning the enjoyment of their earnings.

Descent, language, education, religion, mentality, family bonds, and social environment tie the worker in such a way that he does not choose the place and the branch of his work merely with regard to the height of wage rates.

In discussing labor migration Mises therefore shifts the focus from the analytical abstraction of the “laborer” seeking the highest wages consonant with his leisure preferences to the real human actor who demonstrates preferences across a broad range of goals that include non-exchangeable goods like close proximity and association with members of the same family, religious affiliation, ethnicity or language group. Hence, MisesNation, State, and Economy, p. 64. explicitly recognizes that once the outdated assumptions underlying the free-trade doctrine advanced by Ricardo and the classical economists are dropped, and the international mobility of capital and labor as well as goods is considered, the case for free trade, while it remains valid “from the purely economic point of view … presents a quite changed point of departure for testing the extraeconomic reasons for and against the protective system.” Mises thus takes the analysis of migration beyond the realm of narrowly economic considerations and brings it into contact with the concrete political reality of the democratic mixed-nation-state and its characteristic suppression and violation of the property rights of national minorities by the majority nationality.

This analysis leads Mises to view mass “immigration,” that is, labor migration across state borders, even when it occurs for purely economic reasons, as posing an inherent problem. MisesLiberalism, p. 123; Nation, State, and Economy, p. 59. maintains that the creation of mixed-nation-states resulting from the immigration of workers of a foreign nationality “gives rise once again to all those conflicts that generally develop in polyglot territories” and “to particularly characteristic conflicts between peoples.” MisesNation, State, and Economy, p. 61n. 33 does recognize that peaceful cultural and political assimilation can take place “if the immigrants come not all at once but little by little, so that the assimilation process among the early immigrants is already completed or at least already under way when the newcomers arrive.” He cites the example of Chinese immigration to the United States in the nineteenth century, which did occur in a manner amenable to assimilation. MisesIbid., p. 61. remarks, however, that “perhaps” the Chinese would have “achieve[d] domination in their new home … in the western states of the Union if legislation had not restricted their immigration in time.” But this is strictly a positive observation and Mises draws no policy implications from it.

Indeed, MisesLiberalism, p. 139. exposes the economic arguments to restrict immigration put forward by protectionist trade unions in relatively high-wage countries like the U.S. and Australia as transparently self-serving and injurious to the economic interests of their fellow nationals as well as contrary to the teachings of sound economic theory. But MisesIbid., pp. 139–40. takes a more measured tone when considering the extra-economic argument in favor of immigration restriction that is disingenuously resorted to by the protectionists as a fallback position. According to the latter argument, in the absence of immigration barriers “hordes of immigrants” of non-English-speaking European and Asian nationalities would “inundate Australia and America.” Because these immigrants would arrive rapidly and in great numbers, the argument asserts, they could not be assimilated and Anglo-Saxons in the host countries would find themselves in a minority and their “exclusive dominion … would be destroyed.”

In evaluating this argument, MisesLiberalism, pp. 140–41. emphasizes the political problems that would arise in a mixed-nation-state created overnight by mass immigration:

These fears may perhaps be exaggerated with regard to the United States. As regards Australia, they certainly are not. … If Australia is thrown open to immigration, it can be assumed with great probability that its population would in a few years consist of Japanese, Chinese and Malayans. … The entire nation [not just workers] is unanimous, however, in fearing inundation by foreigners. The present inhabitants of those favored lands [the U.S. and Australia] fear that some day they could be reduced to a minority in their own country and that they would then have to suffer all horrors of national persecution to which, for instance, the Germans today [1927] are exposed in Czechoslovakia, Italy, and Poland.

While Mises does not take an explicit position on the desirability of a policy curbing massive immigration flows that are induced by economic opportunity, he acknowledges that “these fears” of the nationality inhabiting the receiving country “are justified,” especially in a world of interventionist states.Writing during World War II Mises (Omnipotent Government, p. 114; “The Fundamental Principles of a Pan-European Union,” in Selected Writings of Ludwig von Mises: The Political Economy of International Reform and Reconstruction, ed. Rich-ard M. Ebeling [Indianapolis, IN: Liberty Fund, 2000], p. 47) did strongly argue against admitting immigrants from the Axis states of Germany, Italy, and Japan. Mises,Liberalism, p. 141. who for many years observed firsthand the egregious maltreatment of national minorities in Central and Eastern Europe, vividly expresses the basis of the majority nation’s fear of being transformed into a national minority:

As long as the state is granted the vast powers which it has today and which public opinion considers to be its right, the thought of having to live in a state whose government is in the hands of members of a foreign nationality is positively terrifying. It is frightful to live in a state in which at every turn one is exposed to persecution — masquerading under the guise of justice — by a ruling majority. It is dreadful to be handicapped even as a child in school on account of one’s nationality and to be in the wrong before every judicial and administrative authority because one belongs to a national minority.

Thus, MisesIbid., p. 142. views immigration as always and everywhere a “problem” to which there is “no solution,” as long as interventionist political regimes are the norm. Only when the crossing of state borders by members of a different nation portend no political dangers for the indigenous nationality will the “problem of immigration” disappear and be replaced by the benign migration of labor that creates unalloyed and mutual economic advantages for all individuals and peoples. From Mises’s perspective, then, the solution to the immigration problem is not to legislate some vague, ad hoc right to the “freedom of movement” between existing fixed-boundary states. Rather, it is to complete the laissez-faire liberal revolution and secure private property rights by providing for the continual redrawing of state boundaries in accordance with the right of self-determination and the nationality principle. Then — and only then — can the continual and wealth-creating global reallocation of labor generated by a dynamic capitalist economy be peacefully accommodated without precipitating political turmoil and conflict.

Mises was a radical liberal nationalist and cosmopolitan whose overarching goal was to promote policies that facilitated the peaceful extension of the social division of labor founded on private property to all individuals and nations. He acknowledged the reality of separate nations and its meaningfulness for political and economic policy analysis. He recognized that political borders that were not formed according to the nationality principle were an insurmountable impediment to the fullest realization of the concept of free trade and an important source of national conflicts and protectionism that destroyed wealth. In particular, Mises realized that “immigration” was not the solution to the problem of the uneconomic spatial distribution of labor, but the very cause of the problem. The problem of immigration would be solved only with the consummation of the classical liberal revolution in the universal recognition of the right of self-determination. Then the problem — and the very phenomenon — of immigration would disappear, as the borders of states would move with the migration of peoples and nations.

Mises laid out his radical liberal program of self-determination and peaceful nationalism in two books written during the interwar period, Nation, State, and EconomyNation, State, and Economy. and Liberalism,Liberalism. originally published in German in 1919 and 1927, respectively. Later, however, during the dark days of World War II, MisesOmnipotent Government; “Postwar Reconstruction,” in Selected Writings of Ludwig von Mises: The Political Economy of International Reform and Reconstruction, ed. Richard M. Ebeling (Indianapolis, IN: Liberty Fund, 2000); “An Eastern Democratic Union.” wrote a number of works in which he abandoned hope that the liberal program would ever provide a workable solution to the problem of national minorities in Eastern Europe. Given the intellectual trends of economic nationalism and interventionism that had taken hold among the political leadership and public intellectuals in all nations, Mises“An Eastern Democratic Union,” p. 184. had come to believe “that the principle of nationality, as developed in Western Europe, is simply inapplicable in Eastern Europe, where the linguistic groups are inevitably mingled.” In lieu of the nationality principle as a guide to political organization, MisesIbid., p. 176. proposed an Eastern Democratic Union (EDU), a highly centralized and supranational democratic state to rule over all nationalities residing in the area “between the eastern boundaries of Germany, Switzerland, and Italy and the western borders of Russia … from the shores of the Baltic to those of the Black, Adriatic, and Aegean seas.”

MisesIbid., pp. 182, 183, 186–87. was remarkably forthright about the nature of the EDU: it would involve “a total suppression of local sovereignty” with “the whole territory of Eastern Europe … organized as a political unit under a strictly unitary government,” with the “foremost aim” being “to eliminate the problem of national minorities.” In the territory of the EDU, the largest linguistic group would be the Poles, comprising 20 percent of the population. There would thus be no national majority to lord it over minority nationalities. Under these politico-demographic conditions, MisesIbid., p. 187. believed that the constitution of the EDU would be able to effectively ensure every citizen equal treatment under the law and the right to free movement and choice of occupation within the union.

Without delving further into the details of Mises’s proposal, we may make three observations. First, although desperate times may have moved Mises to change his mind about the nature of the solution, he never wavered in his view of the essential problem, namely, the impossibility of the peaceful coexistence between majority and minority nationalities under a unitary government, especially a majoritarian democracy. Second, Mises anticipated criticism that his plan was an attempt to restore the old Austro-Hungarian Empire on a larger scale. In partially conceding this point, MisesIbid., p. 198. emphasized the liberal aspects of the empire: “This is true as far as old Austria … was the only power among those ruling in this area which tried to treat all citizens on an equal footing.” While admitting that the Austrian system had failed, Mises argued that his proposed constitution for the EDU embodied details “based on precisely the lessons the Austrian failure teaches us.” Finally, after World War II, Mises stopped writing about nationality conflicts because the problem had been rendered moot by the forcible incorporation of the warring nationalities of Eastern Europe — with the connivance of the other Allied powers — into the sphere of influence of a rigidly centralized despotic state, the Soviet Union. Mises restricted his focus to a strictly positive analysis of immigration barriers as an interventionist policy of economic nationalism that was designed to raise wage rates for domestic laborers, especially those belonging to labor unions. In sum, despite his EDU proposal, MisesHuman Action. never later expressed any departure from his interwar views about the source and nature of nationality conflicts and the insurmountable political problem they pose for mass immigration.

The founders of classical economics, namely David Hume (1711–1776), Adam Smith (1723–1790), and David Ricardo (1772–1823) and their British followers were fervent advocates of the principle of free trade between nations. Even more so were J.-B. Say (1767–1832), Frédéric Bastiat (1801–1850) and their Continental disciples of the liberal school (who for simplicity I will broadly classify as classical economists because of their link to Adam Smith). Despite their devotion to free trade, the classical economists were nationalists. They viewed free trade as one of the most important means for advancing the security, prosperity, and cultural achievements of their own nations. In this sense, they tended to be what Ludwig von Mises described as “peaceful” or “liberal” nationalists,For Mises’s description and defense of liberal nationalism, see the previous essay in this book. who recognized the existence of profound differences among nations and nationalities and loved their own nations above all others, yet discerned that the economic and cultural flourishing of each nation was inextricably linked with the flourishing of all other nations. In recognizing this international harmony of interests, the classical economists were naturally thoroughly cosmopolitan and anti-war.

The cosmopolitanism and pacifism of the classical economists has in the past been misconstrued — often deliberately — by their protectionist opponents as a lack of affection and concern for their nation and its interests. This erroneous interpretation of the classical case for free trade has once again gained currency in the writings of some contemporary libertarians and free-market economists who have embraced the anti-nationalist, globalist agenda. Fortunately, eminent historians of economic thought have previously demolished this gross caricature of the classical position and clarified the rationale of the classical economists in promoting free trade. Let us take a few examples.

Lionel Robbins was a British economist who was heavily influenced by Mises, Hayek, and the founders of the Austrian school early in his career. He was also one of the foremost historians of the classical school of economics, having written several articles and books on the subject. Robbins was emphatic in defending the view that the British classical economists promoted free trade because it improved economic conditions for Great Britain:

To the extent to which [classical economists] repudiated former maxims of economic warfare and assumed mutual advantage in international exchange, it is true that the outlook of Classical Economists seems, and indeed is, more spacious and pacific than that of their antagonists. But there is little evidence that they often went beyond the test of national advantage as a criterion of policy, still less that they were prepared to contemplate the dissolution of national bonds. If you examine the ground on which they recommend free trade, you will find that it is always in terms of a more productive use of national resources. … I find no trace anywhere in their writings of the vague cosmopolitanism with which they are often credited by continental writers [such as the protectionist, Friedrich List]. … All that I contend is that we get our picture wrong if we suppose that the English Classical Economists would have recommended, because it was good for the world at large, a measure which they thought would be harmful to their own community. It was the consumption of the national economy which they regarded as the end of economic activity.Lionel Robbins, The Theory of Economic Policy in English Classical Political Economy (London: Macmillan, 1953), pp. 10–11.

In a classic work, published just after World War II, Edmund Silberner surveyed the thought of the leading economists of the nineteenth century, including the British classical and French liberal economists, on the problem of war, its causes and solution.Edmund Silberner, The Problem of War in Nineteenth Century Economic Thought, trans. Alexander H. Krappe (Princeton, NJ: Princeton University Press, 1946). Silberner pointed out that the classical economists, whom he called “liberals,” viewed war as “economically and socially harmful” and “not only immoral but stupid” because “it is in effect the natural state of men ignorant of the laws of political economy.”Ibid., p. 280. Silberner summarized the classical-liberal position on the connection between free trade, prosperity, war, and the science of political economy as follows:

By favoring international accord … [free trade] contributes not only to the material prosperity of nations but also to the intellectual and moral progress of mankind as a whole. Of all known economic systems it is therefore … the most favorable to each nation as well as to the human race in its entirety. … [T]he establishment of commercial freedom will bring about one of the most profound revolutions in history. Free trade will assure to all men the maximum possible of material well-being, which in fact will know no other limits than the natural resources of the globe and the creative work of men. What is more, the influence of free trade will not be restricted to the economic field: freedom of international commerce will also considerably increase the external security of nations. … The role assigned by the liberals, in this matter, to political economy is most significant. This science must deal with war because peace is an essential element of public prosperity. Political economy … is regarded by the liberals as the science par excellence of peace. The diffusion of economic knowledge thus tends, in their eyes, to prevent wars.Ibid., pp. 281–82.

Having demonstrated the profoundly cosmopolitan and pacific attitudes of the classical economists, Silberner, like Robbins, emphasized that they were first and foremost nationalists. Thus he wrote: “Though hostile to militarism, they make it clear that their attitude is opposed neither to an enlightened patriotism nor to the principle of nationalities.”Ibid., p. 282. In addition, the classical economists not only saw free trade as the most effective policy for avoiding war but also as the best means of preparing for a war that was impending. According to Silberner, “whatever their differences of view [on the relative effectiveness of free trade as a deterrent to war] they all take it for granted that, if war is truly inevitable, free trade, by enriching the nations, prepares them better for it than does the protective system, which impoverishes them all.”Ibid. Finally, despite their abhorrence of war, the classical economists, “with a few exceptions,” were “opposed or hostile” to surrendering national sovereignty to a “supernational peace organization.”Ibid., p. 283.

In an important recent work, Razeen Sally has investigated the views on international economic order held by classical liberals from Hume and Smith to Wilhelm Röpke and other economists of the twentieth-century German Ordoliberal school.Razeen Sally, Classical Liberalism and International Economic Order: Studies in Theory and Intellectual History (New York: Routledge, 1998). In his treatment of Hume and Smith, Razeen argues that both view a person’s discriminative love for his or her nation as psychologically and morally warranted:

[B]oth Hume and Smith strongly believe that human fellow-feeling (or approbation of others) — the famous “sympathy” principle in eighteenth-century moral philosophy — might apply within a nation but hardly at all between nations. Sympathy subsumes a sentiment of patriotism or “love of country,” but does not extend to “love of mankind.” … Both Hume and Smith opine that this is right and proper, for the public interest is secured when one fixes one’s attention on something limited and proximate, stretching to patriotism or love of country, rather than something vague and uncertain like love of humanity.Ibid., pp. 56–57.

Accordingly Razeen insists that Hume’s and Smith’s advocacy of free trade is based on their belief that it is the policy that best conduces to enhancing the wealth and welfare of their own nation. Sally is emphatic on this point:

… Hume and Smith stick to considerations of the nation and the national interest as practical objects of analysis. This is a point of absolutely vital importance. Note that Smith does not expatiate on the wealth of “the world”; rather he focuses on the wealth of nations. First and foremost, the interrelation of economic phenomena is examined according to the criterion of national, not global, wealth maximization. … In contradistinction to the mercantilists, however, he holds that, under free trade, the national interest corresponds to the global interest. However, as a by-product, such a regime benefits the rest of the world through a better allocation of world resources, not to mention the dynamic gains of technology transfer, competitive emulation, and a widening market that spread across the globe. … This then is the context for Smith’s advocacy of unilateral free trade which the nineteenth-century classical economists believe in as well: one or a number of nations adopt free trade independently in their own interest; others, also acting in their self-interest, are likely to follow the example of pioneering free trading nations once the benefits of such a policy become readily apparent. [Emphases in the original.]Ibid., p. 58.

We need not, however, depend only on the interpretation of modern historians of thought on this matter for we have the words of the classical economists themselves. There is no better place to start than a famous statement by one of the first classical economists, David Hume. Hume’s dictum poignantly illustrates how, in the eyes of classical economists, free trade perfectly harmonized nationalism and cosmopolitanism.

I shall therefore venture to acknowledge, that, not only as a man, but as a British subject, I pray for the flourishing of commerce of Germany, Spain, Italy, and even France itself. I am at least certain, that Great Britain and all those nations, would flourish more did their sovereigns and their ministers adopt such enlarged and benevolent sentiments towards each other.David Hume, “Of the Jealousy of Trade,” in David Hume, Writings on Economics, ed. Eugene Rotwein (Madison: University of Wisconsin Press, 1970), p. 82.

As Robbins pointed out,Robbins, The Theory of Economic Policy, p. 10n. 5 Adam Smith “expressly repudiates” the globalist position that places the welfare of one’s own nation on all fours with that of other nations:

France may contain, perhaps, near three times the number of inhabitants which Great Britain contains. In the great society of mankind, therefore, the prosperity of France should appear to be an object of much greater importance than that of Great Britain. The British subject, however, who upon that account should prefer upon all occasions the prosperity of the former to that of the latter country, would not be thought a good citizen of Great Britain. We do not love our country merely as part of the great society of mankind — we love it for its own sake, and independently of any such consideration.Adam Smith, The Theory of Moral Sentiments (New Rochelle, NY: Arlington House, 1969), p. 337.

Ricardo’s closest disciple, J. R. McCulloch (1789–1864), argued that free trade unites all nations and peoples in common interest. “Commerce embracing different nations,” declared McCulloch,

by … making every people to a great extent dependent on others … forms a powerful principle of union and binds together the universal society of nations by the powerful ties of mutual interest and reciprocal obligation.John R. McCulloch, The Principles of Political Economy, 5th ed. (New York: Augustus M. Kelley, 1965), p. 92.

Now McCulloch is not saying that free trade will dissolve peoples and nations into a homogeneous globalist mass or eradicate the desire most individuals have for the flourishing and pre-eminence of the nationality or “people” they identify with. In fact he is saying quite the opposite: that free trade and the mutual benefits it confers on all nations are the only rational means available to sustain one’s own nation and secure its desired advancement and distinction among other nations. In McCulloch’s words:

It has been shown over and over again, that nothing can be more irrational and absurd, than that dread of the progress of others in wealth and civilization that was once so prevalent; that what is for the advantage of one state is for the advantage of all; and that the true glory and real interest of every people will be more certainly advanced by endeavoring to outstrip their neighbors in this career of science and civilization, than by engaging in schemes of conquest and aggression.Ibid., pp. 92–93.

Henri Baudrillart (1821–1892) was an eminent French liberal economist and economic historian and a follower of Bastiat’s. He was an avid free trader and anti-militarist, who objected to standing armies. Baudrillart however maintained that international free trade and division of labor are not only consistent with separate nations and nationality differences but require such separateness and differences. Wrote Baudrillart:

Those who do not consider at all the differences produced among men by climate, race, and institutions, are the very theoreticians of prohibitions who want every nation to be self-sufficient and devote itself to all industries at the same time. … By endeavoring to maintain that division of labor which Providence itself has established among men, political economy is obviously not hostile to the spirit of nationality; it bases the alliance of peoples on the difference of characters and faculties; it wants each to excel under the conditions peculiar to it, and each to produce so as to have means of exchange. To generalize and extend trade, it localizes industry.Henri Baudrillart quoted in Silberner, The Problem of War in Nineteenth Century Economic Thought, p. 111.

It is imperative to emphasize the nationalist basis of the classical case for free trade for two reasons. First, modern libertarians and “classical” liberals who favor open borders and are indifferent to the dissolution of historical nations often invoke the names of Hume, Smith, and Bastiat in support of their position. But as we saw, the liberality, pacifism, and cosmopolitanism of these great thinkers and their nineteenth-century followers is far different from the homogenizing globalism embraced by their modern epigones. Second, without taking a position on the vexed question of immigration, it is important to bear in mind that the classical rationale for the free movement of goods cannot be simply extended to justify the “free movement of labor,” that is, open borders, especially if the result is mass immigration. As nationalists, the classical economists would hardly look on with equanimity as their nation disintegrated.

F.A. Hayek was acutely concerned with our problem, since he, too, was wholly convinced of the importance of the intellectuals: “They are the organs which modern society has developed for spreading knowledge and ideas,” he declares in his essay “The Intellectuals and Socialism” (Hayek 1967). The intellectuals—whom Hayek characterizes as “the professional secondhand dealers in ideas”This definition by Hayek is somewhat idiosyncratic, in that it excludes the originators of ideas, e.g., among socialists, Saint-Simon and Marx.—exercise their power through their domination of public opinion: “There is little that the ordinary man of today learns about events or ideas except through the medium of this class.” Among other things, they often virtually manufacture professional reputations in the minds of the general population; and through their domination of the news media, they color and shape the information that people in each country have of events and trends in foreign nations. Once an idea is adopted by the intellectuals, its acceptance by the masses is “almost automatic and irresistible.” Ultimately, the intellectuals are the legislators of mankind (178–80, 182).

With all this, Hayek’s view of the intellectuals is flatteringly benign: their ideas are determined by and large by “honest convictions and good intentions” (184).At one point (182) Hayek does suggest that selfish personal interests might play a part in the intellectuals’ attitude; he refers, without naming him, to Karl Mannheim and “the curious claim…that [the intellectual class] was the only one whose views were not decidedly influenced by its own economic interests.” But he does not indicate why he considers this claim “curious.” In “The Intellectuals and Socialism,” Hayek does mention in passing the intellectuals’ egalitarian bias; the analysis, however, is basically in terms of their “scientism.” With his characteristic emphasis on epistemology, Hayek sees the revolt against the market economy as stemming from the methodological errors he identified and investigated at length in his brilliant study of the rise of French positivism, The Counter-Revolution of Science (1955).

Thus, in Hayek’s view, the chief influence on the intellectuals has been the example of the natural sciences and their applications. As man has come to understand and then control the forces of nature, intellectuals have grown infatuated with the idea that an analogous mastery of social forces could produce similar benefits for mankind. They are under the sway of “such beliefs as that deliberate control or conscious organization is also in social affairs always superior to the results of spontaneous processes which are not directed by a human mind, or that any order based on a plan beforehand must be better than one formed by the balancing of opposing forces” (186–87). Hayek even makes the following astonishing statement (187):

That, with the application of engineering techniques, the direction of all forms of human activity according to a single coherent plan should prove to be as successful in society as it has been in innumerable engineering tasks is too plausible a conclusion not to seduce most of those who are elated by the achievements of the natural sciences. It must indeed be admitted both that it would require powerful arguments to counter the strong presumption in favor of such a conclusion and that these arguments have not yet been adequately stated….The argument will not lose its force until it has been conclusively shown why what has proved so eminently successful in producing advances in so many fields should have limits to its usefulness and become positively harmful if extended beyond those limits.

It is exceedingly difficult to follow Hayek’s reasoning here. He appears to be saying that because the natural sciences have made great advances and because innumerable particular engineering projects have succeeded, it is quite understandable that many intellectuals should conclude that “the direction of all forms of human activity according to a single coherent plan” will be similarly successful.

But, in the first place, the advances of the natural sciences were not brought about in accordance with any overall central plan; rather, they were the product of many separate decentralized but coordinated researchers (produced analogously in some respects to the market process; see Baker 1945 and Polanyi 1951These are both works with which Hayek was quite familiar, which makes his argument at this point more perplexing.). Second, from the fact that many particular engineering projects have succeeded it does not follow that a single vast engineering project, one subsuming all particular projects, is likely to succeed; nor does it seem likely that most people will find such a claim plausible.

Why, then, is it natural, or logical, or easily comprehensible that intellectuals should reason from the triumphs of decentralized scientific research and of individual engineering projects to the success of a plan undertaking to direct “all forms of human activity”?In another essay, on “Socialism and Science,” 1978: 295, Hayek refers to “the undeniable propensity of minds trained in the physical sciences, as well as of engineers, to prefer a deliberately created orderly arrangement to the results of spontaneous growth—an influential and common attitude, which frequently attracts intellectuals to socialist schemes. This is a widespread and important phenomenon which has had a profound effect on the development of political thought.” It seems highly doubtful that surveys of political opinion among university professors in the United States, western Europe, or elsewhere, would find socialist opinions more common among physical scientists and engineers than in the humanities and social science faculties.

In his review of Hayek’s The Road to Serfdom, Joseph Schumpeter (1946: 269) remarks that Hayek was “polite to a fault” towards his opponents, in that he hardly ever attributed to them “anything beyond intellectual error.” But not all the points that must be made can be made without more “plain speaking,” Schumpeter declares.Hayek 1973: 161n. 18, 70, rebutted Schumpeter’s criticism, asserting that it was not “‘politeness to a fault’ but profound conviction about what are the decisive factors” for his having attributed merely intellectual error to his opponents in The Road to Serfdom. Hayek reaffirmed that: “It is necessary to realize that the sources of many of the most harmful agents in this world are often not evil men but highminded idealists, and that in particular the foundations of totalitarian barbarism have been laid by honorable and well-meaning scholars who never recognized the offspring they produced.” One wonders how Hayek could know this about the character of those who “laid the foundations of totalitarian barbarism.”

Schumpeter here implies an important distinction. Civility in debate, including the formal presumption of good faith on the part of one’s adversaries, is always in order. But there is also a place for the attempt to explain the attitudes, for instance, of anti-market intellectuals (a form of the sociology of knowledge). In this endeavor, “politeness” is not precisely what is most called for. As regards the positivist intellectuals who argued from the successes of natural science to the need for central planning: it may well be that this false inference was no simple intellectual error, but was facilitated by their prejudices and resentments, or perhaps their own will to power.Cf. the comment by George Stigler 1989: 6: “a central reason for the dissatisfaction of the intellectuals with the enterprise system” is that “it does not give them a mechanism to coerce changes in the behavior of individuals.” Cf. also Robert Skidelsky 1978: 83, who mentions, as one factor in the conversion of the younger American economists to Keynesianism, that, in the version propagated by Alvin Hansen, it provided a “rationale for the permanent direction of economic life by an élite of economists….In the Keynesian political economy, public policy would be handed over to the professional economists, who alone would understand what needed to be done.” Robert Higgs 1987a: 116 observes that American Progressives around 1900 found state intervention appealing because it implied a social organization supervised and directed by engineers, planners, technicians, and trained bureaucrats, and thus put “a wise minority in the saddle.”

In any case, Hayek’s gentlemanly deference to anti-market intellectuals can sometimes be downright misleading. Consider his statement (1967: 193):

Orthodoxy of any kind, any pretense that a system of ideas is final and must be unquestioningly accepted as a whole, is the one view which of necessity antagonizes all intellectuals, whatever their views on particular issues.

This, of a category of persons that in the twentieth century has notoriously included thousands of prominent apologists for Soviet Communism in all western countries, is indeed politeness “to a fault.”There is by now a substantial literature on the subject; see, for instance, Caute 1973. Richard Pipes 1993: 202 makes the interesting comment that: “The Bolshevik regime, for all its objectionable features, attracted them [intellectuals] because it was the first government since the French Revolution to vest power in people of their own kind. In Soviet Russia, intellectuals could expropriate capitalists, execute political opponents, and muzzle reactionary ideas.” See also the challenge issued by Eugene D. Genovese (1994) to his fellow intellectuals to testify publicly on what they knew of the crimes of Soviet Communism and when they knew it. There was, after all, good reason, as late as the 1950s, for Raymond Aron (1957) to have written on The Opium of the Intellectuals and for H.B. Acton (1955) to have entitled what is probably the best philosophical critique of Marxism-Leninism The Illusion of the Epoch.Cf. O’Brien 1994: 344, who notes that “the overwhelming majority of [his] academic colleagues adopted an attitude of judicious agnosticism and relativism towards the horrors of the Stalinist and other Marxist regimes.”

Nor was Communism the only nefarious orthodoxy to claim the loyalty of numerous intellectuals, as is shown by the cases of Martin Heidegger, Robert Brasillach, Giovanni Gentile, Ezra Pound, and many others. For a less complimentary but more realistic view of the integrity of modern intellectuals we may turn to the memoirs of the German historian Golo Mann (1991: 534), who quotes from his diary of 1933: “18 May. [Josef] Goebbels in front of a writers’ meeting in the Hotel Kaiserhof: ‘We [Nazis] have been reproached with not being concerned with the intellectuals. That was not necessary for us. We knew quite well: if we first have power, then the intellectuals will come on their own.’ Thunderous applause—from the intellectuals.”Benjamin Constant 1988: 137–38, in criticizing the French writers of the Revolutionary and Napoleonic period, described the intellectuals’ penchant to identify with arbitrary power: “all the great developments of extrajudicial force, all the examples of recourse to illegal measures in dangerous circumstances have from century to century been recounted with respect and described with complacency. The author, sitting comfortably at his desk, hurls arbitrary measures in every direction….For a moment, he believes himself invested with power just because he is preaching its abuse…in this way he gives himself something of the pleasure of authority; he repeats as loud as he can the great words of public safety, supreme law, public interest….Poor imbecile! He talks to those who are only too glad to listen to him and who, at the first opportunity, will test out his own theories upon him.” Constant’s words may be viewed as a prescient gloss on Stalin’s treatment of many of the Bolshevik intellectuals who had lent their aid to the creation of the Soviet terror state.

In chiding Hayek, Schumpeter suggested (1946: 269) that he might have learned a useful lesson from Karl Marx. Schumpeter’s own interpretation reflects his lifelong engagement with Marxism. Like Marx, he offered a highly pessimistic prognosis for the capitalist system, though for mainly different reasons (1950: 131–45). But while Schumpeter holds that intellectuals will play a key role in capitalism’s demise, he in no way relies on the scenario set forth in the Communist Manifesto.

There, Marx and Engels (1976: 494) announced that as the final revolution approaches, a section of the “bourgeois ideologists” will go over to the side of the proletariat. These will be the ideologists “who have worked their way up to a theoretical understanding of the historical movement as a whole.”The critique of Marxism as the camouflaged ideology of an intellectual would-be “new class” is part of the communist anarchist tradition, begun by Bakunin and continued by Machajski and others; see Dolgoff 1971 and Szelenyi and Martin 1991. Such a laughably self-serving description could hardly appeal to an inveterate skeptic like Schumpeter. Instead, his “Marxism” consisted in examining capitalism as a system with certain attendant sociological traits, and exposing the class interests of the intellectuals within that system.This approach, however, like the Marxist analysis of historical change in terms of class conflict, had numerous precursors among classical liberal thinkers; see the essay on “The Conflict of Classes: Liberal vs. Marxist Theories,” in the present work.

Compared to previous social orders, capitalism is especially vulnerable to attack:

unlike any other type of society, capitalism inevitably and by virtue of the very logic of its civilization creates, educates, and subsidizes a vested interest in social unrest. (1950: 146)

In particular, it brings forth and nurtures a class of secular intellectuals who wield the power of words over the general mind. The capitalist wealth machine makes possible cheap books, pamphlets, newspapers, and the ever-widening public that reads them. Freedom of speech and of the press enshrined in liberal constitutions entails also “freedom to nibble at the foundations of capitalist society”—a constant gnawing away that is promoted by the critical rationalism inherent in that form of society. Moreover, in contrast to earlier regimes, a capitalist state finds it difficult, except under exceptional circumstances, to suppress dissident intellectuals: such a procedure would conflict with the general principles of the rule of law and the limits to the police power dear to the bourgeoisie itself (1950: 148–51).

The key to the hostility of intellectuals to capitalism is the expansion of education, particularly higher education.Cf. Raymond Ruyer 1969: 155–56, who indicates the social and psychological problems resulting from prolonged state instruction (including “adult education”) and the diffusion of “culture” under the aegis of the state. He concludes: “It is typical that the greatest progress that has come about in ‘the democratic extension of culture’ has been produced by private enterprise in the form of paperback books, in which the state did not involve itself, except to impose its usual taxes.” A third of a century later, the same could be said of compact discs and computers. Ruyer’s work, quite unduly neglected, is a profound and elegant dissection of the intellectual’s persistent resentment of the free market economy and capitalist society. In this respect, it stands in contrast to the recent book of Raymond Boudon (2004). Despite its promising title (Why the Intellectuals Do Not Like Liberalism) and occasional insights, Boudon’s book proves to be superficial, e.g., in dating the intellectuals’ turn against a liberal order from around 1950. This creates unemployment, or underemployment, of the university-schooled classes; many become “psychically unemployable in manual occupations without necessarily acquiring employability in, say, professional work.” The tenuous social position of these intellectuals breeds discontent and resentment, which are often rationalized as objective social criticism. This emotional malaise, Schumpeter asserts,

will much more realistically account for hostility to the capitalist order than could the theory—itself a rationalization in the psychological sense—according to which the intellectual’s righteous indignation about the wrongs of capitalism simply represents the logical inference from outrageous facts… (1950: 152–53)Schumpeter 1950: 155 highlights an important channel of the intellectuals’ influence, by means of the state bureaucracies, which are “open to conversion by the modern intellectual with whom, through a similar education, they have much in common.”

A major merit of Schumpeter’s argument is that it elucidates an abiding feature of the sociology of radicalism and revolution: the hunt for government jobs. The interconnection between over-education, an expanding reservoir of unemployable intellectuals, the pressure for more bureaucratic positions, and political turmoil was a commonplace among European observers in the nineteenth century.See O’Boyle 1970; also Levy 1987: 160, who writes of “the state-created intelligentsias of post-Restoration Europe [i.e., after 1815] which, outpacing economic growth, faced serious underemployment and played important roles in the revolutions of 1830 and 1848.” In the Reichstag, Chancellor Otto von Bismarck (Raico 1999: 100) claimed that social revolutionaries in Russia consisted of the “diploma-proletariat,” an excess produced by higher education which society could not absorb. The leaders were not workers, but consisted “in part of people of genteel education, many half-educated people…dissipated students and unsullied dreamers…” In 1850, the conservative author Wilhelm Heinrich Riehl (1976: 227–38) offered a remarkable analysis, in many ways anticipating Schumpeter, of the “intellectual proletariat” (Geistesproletariat). Even then Germany was producing each year much more “intellectual product” than it could use or pay for, testifying to an “unnatural” division of national labor. This was a general phenomenon in advanced countries, Riehl maintains, resulting from the enormous industrial growth that was taking place. But the impoverished intellectual workers experience a contradiction between their income and their perceived needs, between their own haughty conception of their rightful social position and the true one, a contradiction which is far more irreconcilable than in the case of the manual laborers. Because they cannot “reform” their own meager salaries, they try to reform society. It is these intellectual proletarians who have taken the lead in social revolutionary movements in Germany. “These literati see the world’s salvation in the gospel of socialism and communism, because it contains their own salvation,” through domination of the masses.Schumpeter does not mention Riehl in Capitalism, Socialism, and Democracy and refers to him once in his History of Economic Analysis (1954: 427 and 427 n. 20), but only in connection with Riehl’s work in Kulturgeschichte (cultural history). Later revolutionary movements, whether of the left or the right, can be understood to a large extent as the ideologically camouflaged raid on the great state employment office. Carl Levy (1987: 180) has linked the expansion of the state from the later nineteenth century on to the growth in the numbers of the university-educated, who sought government jobs and utilized positivism as a facilitating ideology. Positivism

stressed the need for expertise, special training, and trained intelligence…[fortified by] a desacralizing of tradition and the rapid expansion of the public sphere…[there proliferated] schemes for the organization of society which substituted for traditional elites and capitalist entrepreneurs a stratum of experts and/or the lay clerisy. Examples can be found among the Fabians and the ILP [Independent Labor Party], [Edward] Bellamy and other American authoritarian utopia builders, the Italian socialist professors, and the French socialist elites.

From this perspective, we obtain a deeper understanding of the claim that the welfare state “saved capitalism.” What the welfare state has actually accomplished is to furnish a never-ending source of state jobs for the (mainly middle-class) products of what is still referred to as university education, without, as in the nineteenth century, requiring a revolutionary assault.Cf. Mises (1974: 47–48): “In dealing with the ascent of modern statism, socialism, and interventionism, one must not neglect the preponderant role played by pressure groups and lobbies of civil servants and those university graduates who longed for government jobs.” In this connection, Mises mentions the Fabian Society in Britain and the Verein für Sozialpolitik (Association for Social Policy) in Imperial Germany.

While there is doubtless a great deal of truth in Schumpeter’s identification of the systemic surplus of intellectuals as a source of anti-capitalism, it also presents certain difficulties.

Such an overproduction—and consequent un- or under-employment—is a feature of non-capitalist societies, as well. Its effect is the general destabilization of regimes, as occurs from time to time in underdeveloped countries. A more detailed knowledge of the situation in former Communist societies might show that it was also implicated in their subversion and final overthrow.

More to the point: it is not so much the unemployed intellectuals who are the problem but the ones who are employed. Intellectuals unable to find suitable jobs may well provide a receptive subculture as well as occasional cannon fodder for revolutionary movements: among communist anarchists in the late nineteenth century, or in some third world countries more recently. In Germany after the First World War, artists and writers frozen out of the avant-garde culture of Weimar were prominent among the early National Socialists.

But Schumpeter’s thesis does not hold for many other cases, probably the historically most significant ones. Émile Zola and Anatole France, Gerhart Hauptmann and Bertold Brecht, H.G. Wells and Bernard Shaw, John Dewey and Upton Sinclair were scarcely “unemployables” in the intellectual world. Today the “stars” of the mass news media of all the advanced countries—you would know their names in your own country; one could mention American “newspersons” who earn a million dollars a year or more, such being the savage inequalities of capitalism—are typically constant “nibblers” at the system of private enterprise. The question is rather why so many successful and highly influential intellectuals become carping critics of the free economy.Doubt is cast on Schumpeter’s fundamental analysis by Paul A. Samuelson 1981: 10, who points out that in Japan for decades “the continued omnipresence of Marxist terminology among journalists and teachers” has had no discernible effect on Japanese politics.

Both the title and the substance of "Vices are not Crimes" highlight the unique role that morality and moral principle had for Spooner among the anarchists and libertarians of his day. For Spooner was the last of the great natural-rights theorists among anarchists, classical liberals, or moral theorists generally; the doughty old heir of the natural law–natural rights tradition of the 17th and 18th centuries was fighting a rearguard battle against the collapse of the idea of a scientific or rational morality, or of the science of justice or of individual right.

Not only had natural law and natural rights given way throughout society to the arbitrary rule of utilitarian calculation or nihilistic whim, but the same degenerative process had occurred among libertarians and anarchists as well. Spooner knew that the foundation for individual rights and liberty was tinsel if all values and ethics were arbitrary and subjective.

Yet, even in his own anarchist movement Spooner was the last of the Old Guard believers in natural rights; his successors in the individualist-anarchist movement, led by Benjamin R. Tucker, all proclaimed arbitrary whim and might-makes-right as the foundation of libertarian moral theory. And yet, Spooner knew that this was no foundation at all; for the State is far mightier than any individual, and if the individual cannot use a theory of justice as his armor against State oppression, then he has no solid base from which to roll back and defeat it.

With his emphasis on cognitive moral principles and natural rights, Spooner must have looked hopelessly old-fashioned to Tucker and the young anarchists of the 1870s and 1880s. And yet now, a century later, it is the latter's once fashionable nihilism and tough amoralism that strike us as being empty and destructive of the very liberty they all tried hard to bring about. We are now beginning to recapture the once-great tradition of objectively grounded rights of the individual. In philosophy, in economics, in social analysis, we are beginning to see that the tossing aside of moral rights was not the brave new world it once seemed—but rather a long and disastrous detour in political philosophy, which is now fortunately drawing to a close.

Opponents of the idea of an objective morality commonly charge that moral theory functions as a tyranny over the individual. This, of course, happens with many theories of morality, but it cannot happen when the moral theory makes a sharp and clear distinction between the "immoral" and the "illegal," or, in Spooner's words, between "vices" and "crimes." The immoral or the "vicious" may consist of a myriad of human actions, from matters of vital importance down to being nasty to one's neighbor or to willful failure to take one's vitamins. But none of them should be confused with an action that should be "illegal," that is, an action to be prohibited by the violence of law. The latter, in Spooner's libertarian view, should be confined strictly to the initiation of violence against the rights of person and property.

Other moral theories attempt to apply the law—the engine of socially legitimated violence—to compelling obedience to various norms of behavior; in contrast, libertarian moral theory asserts the immorality and injustice of interfering with any man's (or rather, any noncriminal man's) right to run his own life and property without interference. For the natural-rights libertarian, then, his cognitive theory of justice is a great bulwark against the State's eternal invasion of rights—in contrast to other moral theories that attempt to employ the State to combat immorality.

It is instructive to consider Spooner and his essay in the light of the fascinating insights into 19th century American politics provided in recent years by the "new political history." While this new history has been applied to most of the 19th century, the best work has been done for the Midwest after the Civil War, in particular the brilliant study by Paul Kleppner, The Cross of Culture.Paul Kleppner, The Cross of Culture: A Social Analysis of Midwestern Politics, 1850–1900 (New York: Free Press, 1970). Also see Richard Jensen, The Winning of the Midwest: Social and Political Conflicts, 1888–1896 (Chicago: University of Chicago Press, 1971).

What Kleppner and others have shown is that the political ideas of Americans can be reduced, with almost remarkable precision, back to their religious attitudes and beliefs. In particular, their political and economic views depend on the degree to which they conform to the two basic poles of Christian belief: pietistic or liturgical (although the latter might be amended to liturgical plus doctrinal). Pietistic, by the 19th century, meant all groups of Protestants except Episcopalian, High Church Lutheran, and orthodox Calvinist; liturgical meant the latter plus Roman Catholic. (And "pietistic" attitudes, often included deist and atheist.)

Briefly, the pietist tends to hold that to be truly religious, a person must experience an emotional conversion; the convert, in what has been called "the baptism of the Holy Spirit," has a direct relationship to God or to Jesus. The liturgical, on the other hand, is interested in either doctrinal belief or the following of prescribed church ritual as the key to salvation.

Now, it might seem as if the pietistic emphasis on the individual might lead to a political individualism, to the belief that the State may not interfere in each individual's moral choices and actions. In 17th-century pietism, it often meant just that. But by the 19th century, unfortunately, such was not the case. Most pietists took the following view: since we can't gauge an individual's morality by his following rituals or even by his professed adherence to creed, we must watch his actions and see if he is really moral.

From there the pietists concluded that it was everyone's moral duty to his own salvation to see to it that his fellow men as well as himself are kept out of temptation's path. That is, it was supposed to be the State's business to enforce compulsory morality, to create the proper moral climate for maximizing salvation. In short, instead of an individualist, the pietist now tended to become a pest, a busybody, a moral watchdog for his fellowman, and a compulsory moralist using the State to outlaw "vice" as well as crime.

The liturgicals, on the other hand, took the view that morality and salvation were to be achieved by following the creed and the rituals of their church. The experts on those church beliefs and practices were, of course, not the State but the priests or bishops of the church (or, in the case of the few orthodox Calvinists, the ministers.) The liturgicals, secure in their church teachings and practices, simply wanted to be left alone to follow the counsel of their priests; they were not interested in pestering or forcing their fellow human beings into being saved. And they believed profoundly that morality was not the business of the State, but only of their own church mentors.

From the 1850s to the 1890s the Republican party was almost exclusively the pietist party, known commonly as the "party of great moral ideas"; the Democratic party, on the other hand, was almost exclusively the liturgical party, and was known widely as the "party of personal liberty."

Specifically, after the Civil War there were three interconnected local struggles that kept reappearing throughout America; in each case, the Republicans and Democrats played out their contrasting roles. These were: the attempt by pietist groups (almost always Republican) to enforce prohibition; the attempt by the same groups to enforce Sunday blue laws; and the attempt by the selfsame pietists to enforce compulsory attendance in the public schools, in order to use these schools to "Christianize" the Catholics.

What of the political and economic struggles that historians have, until recently, focused on almost exclusively—sound money vs. fiat money or silver inflation; free trade vs. a protective tariff; free markets vs. government regulation; small vs. large government spending? It is true that these were fought out repeatedly, but these were on the national level, and generally remote from the concerns of the average person. I have long wondered how it was that the 19th century saw the mass of the public get highly excited about such recondite matters as the tariff, bank credits, or the currency. How could that happen when it is almost impossible to interest the mass of the public in these matters today?

Kleppner and the others have provided the missing link, the middle term between these abstract economic issues and the gut social issues close to the hearts and lives of the public. Specifically, the Democrats, who (at least until 1896) favored the free-market libertarian position on all these economic issues, linked them (and properly so) in the minds of their liturgical supporters, with their opposition to prohibition, blue laws, etc. The Democrats pointed out that all these statist economic measures—including inflation—were "paternalistic" in the same way as the hated pietistic invasions of their personal liberty. In that way, the Democrat leaders were able to "raise the consciousness" of their followers from their local and personal concerns to wider and more abstract economic issues, and to take the libertarian position on all of them.

The pietist Republicans did similarly for their mass base, pointing out that big government should regulate and control economic matters as it should control morality. In this stance, the Republicans followed in the footsteps of their predecessors, the Whigs, who for example were generally the fathers of the public school system in their local areas.

Generally, the "mind your own business" liturgicals almost instinctively took the libertarian position on every question. But there was of course one area—before the Civil War—where pestering and hectoring were needed to right a monstrous injustice: slavery. Here the typical pietistic concern with universal moral principles and seeing them put into action brought us the abolitionist and antislavery movements. Slavery was the great flaw in the American system in more senses than one: for it was also the flaw in the instinctive liturgical resentment against great moral crusades.

To return now to Lysander Spooner—Spooner, born in the New England pietist tradition, began his distinguished ideological career as an all-out abolitionist. Despite differences over interpretation of the US Constitution, Spooner was basically in the anarchistic, "no-government" Garrisonian wing of the abolitionist movement—the wing that sought the abolition of slavery not through the use of the central government (which was in any case dominated by the South), but by a combination of moral fervor and slave rebellion. Far from being fervent supporters of the Union, the Garrisonians held that the northern states should secede from a proslaveholding United States of America.

So far, Spooner and the Garrisonians took the proper libertarian approach toward slavery. But the tragic betrayal came when the Union went to war with the Southern states over the issue of their declared independence. Garrison and his former "no-government" movement forgot their anarchistic principles in their enthusiasm for militarism, mass murder, and centralized statism on behalf of what they correctly figured would be a war against slavery.

Only Lysander Spooner and a very few others stood foursquare against this betrayal; only Spooner realized that it would be compounding crime and error to try to use government to right the wrongs committed by another government. And so, among his pietistic and moralizing antislavery colleagues, only Spooner was able to see with shining clarity, despite all temptations, the stark difference between vice and crime. He saw that it was correct to denounce the crimes of governments, but that it was only compounding those crimes to maximize government power as an attempted remedy. Spooner never followed other pietists in endorsing crime or in trying to outlaw vice.

Spooner's anarchism was, like his abolitionism, another valuable part of his pietist legacy. For, here again, his pietistic concern for universal principles—in this case, as in the case of slavery, for the complete triumph of justice and the elimination of injustice—brought him to a consistent and courageous application of libertarian principles where it was not socially convenient (to put it mildly) to have the question raised.

Talk about a suppressed intellectual tradition!

While the liturgicals proved to be far more libertarian than the pietists during the second half of the 19th century, a pietistic spirit is always important in libertarianism to emphasize a tireless determination to eradicate crime and injustice. Surely it is no accident that Spooner's greatest and most fervent anarchistic tracts were directed in dialogue against the Democrats Cleveland and Bayard; he did not bother with the openly statist Republicans. A pietistic leaven in the quasi-libertarian liturgical lump?

But it takes firmness in libertarian principle to make sure to confine one's pietistic moral crusade to crime (e.g., slavery, statism), and not have it spill over to what anyone might designate as "vice." Fortunately, we have the immortal Lysander Spooner, in his life and in his works, to guide us along the correct path.

Murray N. RothbardLos Altos, California1977

"End the Fed!" Three small words became one of the most improbable and powerful political chants in modern politics thanks to the presidential campaigns of Dr. Ron Paul. With the backdrop of a global financial crisis, the congressman from Texas was able to use the microphone of modern politics, forever changed by the internet and social media, to wake up a generation of Americans to the threat posed by central banks and fiat money. Ideological gatekeepers in Washington and the corporate press found themselves forced to recognize and attack a previously obscure school of economic thought that was now being talked about by college students, activists, and even the odd politician.

Of course, no such movements ever truly happen overnight. The seeds of the international Austrian revival were planted when Ludwig von Mises escaped World War II Europe and made a home for himself in America. With positions at New York University and the Foundation for Economic Education, Mises was able to develop a legion of followers in both academia and the public at large. Several students of his NYU seminar, such as Israel Kirzner, Hans Sennholz, and Ralph Raico, became important Austrian scholars in their own right. It was, however, Murray Rothbard who was perhaps Mises’s most significant mentee, with not only significant contributions to economics, history, and political philosophy, but popular writings aimed at energizing a grassroots Austro-libertarian movement far outside the restraints of the ivory tower.

Rothbard’s potent blend of serious scholarship and dynamic popularism became a model for the Mises Institute, which he helped found with Lew Rockwell in 1982. Since the beginning, the Institute has been both an incubator for new generations of Austrian scholars and a fount of education for the public at large.

Anyone who is familiar with the works of Mises, Rothbard, and the Austrian school understands how far removed they are from the progressive-dominated zeitgeist that has long controlled the most powerful microphones of the West. Although this carries with it the curse of limiting the influence that it could have with policymakers in government, it also means that it benefits from times when the public questions the very foundations of the institutions that it was indoctrinated to believe in.

2008 was such a time. Unfortunately, 2020 appears to be one as well.

The purpose of this collection is to highlight the important work of contemporary Austrian economists on the modern financial system. Although the mainstream financial press has been crediting American, European, and Chinese policymakers with upholding the global economy in the aftermath of 2008, Austrians have long been warning that these very same actions have only set the world up for a larger disaster. Promises in 2008 of the ease of normalizing monetary policy—such as by reducing balance sheets and phasing out market intervention—have been proven to be lies, just as Austrians warned.

While the government response to the coronavirus may serve as a catalyst for the next crisis, it is the irresponsible actions of central bankers, governments, and globalist institutions that will make the pain so much more intense. Worse still, the response will be led by individuals who are only versed in the same failed ideologies that brought us to where we are now.

The first section is a look back at major policy decisions that brought us to where we are now. One of the important aims of this collection is to highlight the truly global nature of these failings, not simply critiquing the actions of the Federal Reserve, but their colleagues at the European Central Bank, the Bank of Japan, and elsewhere. It is the coordinated attempt by central bankers around the world to try to bolster markets by hiding and mispricing underlying financial risk that has only served to escalate the fragility of the global economy.

This is followed by a look forward to what we might expect from policymakers as they are forced to respond. The combined fiscal and monetary response to the coronavirus and the government-imposed lockdown has highlighted the degree to which central bankers and modern governments feel completely unhampered by concerns about inflation or government debt. Every attempt will be made to prop up the financial bubbles they have created, and these actions will only compound the fundamental issues we face. Of course, as economic decision-makers become ever more drastic in their thought, we can expect them to resort more to using the full authoritarian powers of the modern state.

Lastly, the book looks at placing the ideas of the Austrian school within the context of the modern world.  Although questions of underlying ideology may be dismissed by “practical” individuals who pride themselves on being “independent thinkers,” Mises understood the degree to which our intellectual environment directly guides policy and institutional frameworks. In the aftermath of the challenging times that may be ahead, the only way to build a stronger, more prosperous, and more stable future will be with an ideological revolution.

I hope that you will find this collection of articles enlightening, even if the ramifications of their content mean difficulty in the short term.

In Against the Left, we examine some key battlegrounds in the struggle to preserve and advance real libertarianism against its enemies. These include the assault on the family, civil rights and "disabilities," immigration, environmentalism, economic egalitarianism, and the left-libertarian imposters who want to take libertarianism away from us.

Marx’s philosophical doctrines became popular in that people became familiar with some of his terms, slogans, and so forth, although they used them differently from the way they were used in the system of Karl Marx. Such simplification happens to many doctrines. For instance, Darwinism became known as the theory based on the idea that man is the grandson of an ape. What remains of Nietzsche is not much more than his term “superman,” which later acquired popularity in the United States without any connection to Nietzsche. Regarding Marx, people know his terms but they use them very loosely. But by and large, Marxian ideas have little or no opposition.

One of the reasons why the doctrine of Marx was so diluted in the public mind was the way Engels tried to explain Marxian theory. See his statement at the graveside of Marx: “Marx discovered the law of mankind’s historical evolution, i.e., the simple fact, hitherto hidden beneath ideological overgrowths, that men must first of all eat, drink, have shelter and clothing before they can pursue politics, science, art, religion, and the like.” Yet no one ever denied this. But now if someone says something against Marxian doctrine then they can be asked: “How can you be so stupid as to deny that one must first eat before one becomes a philosopher?”

Again there is the theory of the material productive forces. But no explanation is offered for their formation. Dialectical materialism states that the material productive forces come to the world—one doesn’t know how they come, nor where they come from—and it is these material productive forces that create everything else, i.e., the superstructure.

People sometimes believe that there has been a very sharp conflict between the various churches and Marxism. They consider Marxism and socialism as incompatible with the teachings of all Christian churches and sects. The early communist sects and early monastic communities were based on a peculiar interpretation of the Bible in general, and of the book of Acts especially. We don’t know much about these early communist sects but they existed in the Middle Ages and also in the early years of the Reformation. All these sects were in conflict with the established doctrines of their churches or denominations. So it would be absolutely wrong to make the Christian church responsible for them. I mention this to show that, at least in the minds of some groups, most of which the church considered heretical, there is no absolute conflict between socialism and the teachings of the church. The anti-Christian tendencies of the socialist forerunners of Karl Marx, of Karl Marx himself; and later of his followers, the Marxians, must first of all be understood within the whole framework which later gave rise to modern socialism.

The states, the governments, the conservative parties, were not always opposed to socialism. On the contrary; the personnel of a government has a tendency or a bias in favor of the expansion of government power; one could even say that there is an “occupational disease” on the part of government personnel to be in favor of more and more governmental activities. It was precisely this fact, this propensity of governments to adopt socialism—and many governments really did adopt socialism—that brought Marxism into conflict with the various governments.

I have pointed out that the worst thing that can happen to a socialist is to have his country ruled by socialists who are not his friends. This was the case with respect to Karl Marx and the Prussian government. The Prussian government was not against socialism. Ferdinand Lassalle attacked the liberal parties of Prussia, which were at that time fighting a great constitutional battle against the Hohenzollern kings, headed by Bismarck. The majority in Prussia at that time was against the government; the government couldn’t get a majority in the Prussian Parliament. The Prussian government was not very strong at that time. The King and the Prime Minister ruled the country without consent, without the cooperation of the Parliament. This was the case in the early 1860s. As an illustration of the weakness of the Prussian government, Bismarck, in his Memoirs, reported a conversation he had with the King. Bismarck said he would defeat the Parliament and the liberals. The King answered, “Yes, I know how that will end. Here in the square in front of the palace. First they will execute you and then they will execute me.”

Queen Victoria [1819–1901], whose oldest daughter [Victoria, 1840–1901] had married the royal prince of Prussia, was not very pleased by these developments; she was convinced that the Hohenzollerns would be defeated. At this critical moment Ferdinand Lassalle, who was at the head of a labor movement which was then still very modest, very small, came to the aid of the Hohenzollern government. Lassalle had meetings with Bismarck and they “planned” socialism. They introduced state aid, production cooperatives, nationalization, and general manhood suffrage. Later Bismarck really embarked on a program of social legislation. The greatest rival of the Marxians was the Prussian government, and they fought with every possible movement.

Now you must realize that in Prussia, the Prussian Church, the Protestant Church, was simply a department of the government, administered by a member of the Cabinet—the Minister of Education and Affairs of Culture. One of the councilors in the lower levels of the administration dealt with the problems of the church. The church in this regard was a state church; it was even a state church in its origin. Until 1817, there were Lutherans and Calvinists in Prussia. The Hohenzollerns didn’t like this state of affairs. The Lutherans were in the majority in the old Prussian territories, but in the newly acquired territories there were both groups. In spite of the fact that the majority of the whole Prussian people were Lutherans, the electorate of the Brandenburgs had changed from Lutherans to Calvinists. The Hohenzollerns were Calvinists, but they were the head of the Lutheran Church in their country. Then in 1817, under Frederick Wilhelm III of Prussia, the two churches were merged to form the Prussian Union Church. The Church was a branch of the country’s government.

From the seventeenth century on in Russia, the church was simply a department of the government. The church was not independent. Dependence of the church on the secular power was one of the characteristics of the Eastern Church at Constantinople. The head of the Eastern Empire was in fact the Superior of the Patriarch. This same system was to some extent carried over into Russia, but there the church was only a part of the government. Therefore, if you attacked the church, you also attacked the government.

The third country in which the problem was very critical was Italy, where the nationalist unification implied the abolition of the secular rule of the Pope. Until the second part of the nineteenth century the central part of Italy was ruled independently by the Pope. In 1860, the King of Sardinia conquered these states. The Pope retained only Rome, under the protection of a detachment of the French Army until 1860, when the French had to withdraw to fight Prussia. Therefore, there was a very violent feud between the Catholic Church and the Italian secular state. The struggle of the church against the ideas of the Marxians concerning religion is something different from their struggle against the socialist program. Today it is complicated even more by the fact that the Russian Church, the Oriental Orthodox Church, came as it seems, to some agreement with the Bolsheviks. The struggle in the East is to a great extent a struggle between the Eastern Church and the Western Church—a continuation of the struggle that originated more than a thousand years ago between the two churches. Therefore, the conflicts in these countries, between Russia and the western boundaries of the Iron Curtain, are very complicated. It is not only a struggle against totalitarian economic methods for economic freedom; it is also a struggle of various nationalities, of different linguistic groups. Consider, for instance, the attempts of the present Russian government to make the various Baltic nationalities over into Russians—a continuation of something that had been started by the Tsars—and the struggle in Poland, Czechoslovakia, Hungary, and so on, against the attempts of the Russian Church to bring them back, as they say, to the Oriental Creed. To understand all these struggles one needs a special familiarity with these nationalities and with the religious histories of these parts of the world.

In the sixteenth and seventeenth centuries there were changes that expanded the size of the territory in which the Pope’s supremacy was acknowledged. Therefore, there existed a Russian Church, the Orthodox Church, and a Ukrainian or Russian Catholic Church which acknowledged the supremacy of the Pope. All these things together constituted the great religious struggles of the East. However, one must not confuse the events happening in these nationalistic and religious struggles with the fight against communism. For instance, the politicians fighting against the Russians today are not always, or at least not in most cases, fighters in favor of a free economic system. They are Marxians, socialists. They would probably like to have a totalitarian police state, but they don’t want it to be governed by the Russians.

From this point of view, one cannot say that there is any real opposition to the social teachings and social programs of Marxism. On the other hand, it is important to realize that there isn’t necessarily always a connection between anti-Marxism, an ideological philosophy, and economic freedom.

One of the outstanding contemporaries of Karl Marx in Germany was a philosopher, Friedrich Albert Lange [1828–1875]. He wrote a famous book, The History of Marxism, considered for many years, not only in Germany but also in English-speaking countries, one of the best introductions to philosophy. Lange was a socialist; he wrote another book about socialism. In his book he didn’t criticize Marx, but rather materialism. Marxian materialism is a very imperfect materialism because it traces all changes back only to something which is itself already the product of the human mind.

It is important to stress the fact that the critiques of Marxism were sometimes very wrong. I want to point to only one typical example. This is the popular propensity of anti-Marxians to consider dialectical materialism and Marxism as something belonging to the same group of ideas as Freudian psychoanalysis. I am not a psychologist, but I only have to point out how mixed up these people are who believe that materialism in general and Marxian materialism in particular have some connection with Freudian psychoanalysis.

Before Sigmund Freud [1856–1939] and Josef Breuer [1842–1925], who opened up this whole method of thinking, began to develop their doctrines, it was the generally uncontested assumption among all doctors that mental disabilities were caused by pathological changes in the human body. If a man had something that was called a nervous or mental disease they looked for some bodily factor that brought about this state of affairs. From the point of view of the doctor who deals with the human body this is the only possible interpretation. However, sometimes they were absolutely correct when they said, “We don’t know the cause.” Their only method was to look for a physical cause. One could give many examples. I want to cite only one. It happened in 1889, just a few years before the first book of Freud and Breuer was published. An eminent man in France committed suicide. For political reasons and because of his religion, the question was raised whether or not he was sane. His family wanted to prove that it was a mental disease. In order to prove his mental disease to the Church, they had to discover some physical cause. There was an autopsy by eminent doctors, and their report was published. “We discover certain things in the brain,” they said; “there is something that is not regular.” At that time, people thought that if a man doesn’t behave like other people, has no physical sign of abnormality in his body, he is a malingerer. Sometimes this is unfortunate, because one can only discover whether or not a person is a malingerer after he is dead. In this regard, psychoanalysis brought about a great change. The case of Crown Prince Rudolf of Austria [1858–1889], who committed suicide at Mayerling, raised similar issues.

The famous first case was that of a woman who was paralyzed. Yet nothing could be discovered in her body to explain her situation. The case was written up by a man who followed the advice of a Latin poet: wait nine years with your manuscript before you publish. Breuer got the idea that the origin of this bodily deficiency was not physical but that it was in the mind. This was a radical change in the field of the natural sciences; such a thing had never happened before—a discovery that mental factors, ideas, superstitions, fables, wrong ideas, what a man thinks, what he believes, can bring about changes in the body. This was something that all the natural sciences had denied and contested before.

Freud was a very conscientious and cautious man. He didn’t say, “I have completely discredited the old doctrines.” He said,

Perhaps one day, after a very long time, the pathological doctors will discover that ideas are already the product of some physical external bodily factor. Then psychoanalysis will no longer be needed or useful. But for the time being you must at least admit that there is a temporary value in Breuer’s and my discovery and that, from the point of view of present-day science, there is nothing that confirms the materialist thesis that every idea or every thought is the product of some external factor, just as urine is a product of the body. Psychoanalysis is the opposite of materialism; it is the only contribution to the problem of materialism vs. idealism that has come from empirical research in the human body.

We have to deal with the ways some people abuse psychoanalysis. I do not defend those psychoanalysts who try to explain everything from the point of view of certain urges, among which the sex urge is considered the most important. There was a book by a Frenchman dealing with Baudelaire [Charles Baudelaire, 1821–1867]. Baudelaire liked to spend money, but he didn’t earn money because publishers didn’t buy his poems during his lifetime. But his mother had money; she had married money and her husband died and left it to her. Baudelaire wrote his mother a lot of letters. This writer found all sorts of subconscious explanations for his letters. I don’t defend this attempt. But his letter writing doesn’t need any further explanation than that Baudelaire wanted money.

Freud said he didn’t know anything about socialism. In this regard he was very different from Einstein [1879–1955] who said, “I don’t know anything about economics, but socialism is very good.”

If we follow how Marxism became the leading philosophy of our age, we must mention Positivism and the school of Auguste Comte. Comte was a socialist similar to Karl Marx. In his youth, Auguste Comte had been the secretary of Saint-Simon. Saint-Simon was a totalitarian who wanted to rule the whole world by world council and, of course, he believed he would be the president of this world council. According to Comte’s idea of world history, it was necessary to search for the truth in the past. “But now, I, August Comte, have discovered the truth. Therefore, there is no longer any need for freedom of thought or freedom of the press. I want to rule and to organize the whole country.”

It is very interesting to follow the origin of certain terms which are today so familiar that we assume they must have been in the language from time immemorial. In French, the words “organize” and “organizer” were unknown before the end of the eighteenth century or the beginning of the nineteenth century. With regard to this term, “organize,” Balzac [1799–1850] observed “This is a newfangled Napoleonic term. This means you alone are the dictator and you deal with the individual as the builder works with stones.”

Another new term, “social engineering,” deals with the social structure. The social engineer deals with the social structure or with his fellowmen as the master builder deals with his bricks. Reasoning in this way, the Bolsheviks eliminate those individuals who are useless. In the term “social engineering” you have the idea of planning, the idea of socialism. Today we have many names for socialism. If a thing is popular, then the language has many expressions for it. These planners say in defense of their ideas, you must plan things; you cannot let things act “automatically.”

Sometimes “automatically” is used in a metaphorical sense to apply to things that happen on the market. If the supply of a product drops, then they say prices go up “automatically.” But this doesn’t mean that this is done without human consciousness, without some persons bidding and offering. Prices go up precisely because people are anxious to acquire these things. Nothing in the economic system happens “automatically.” Everything happens because certain people behave in a definite way.

Also the planners say, “How can you be so stupid as to advocate the absence of planning?” But no one advocates the absence of a plan. The question is not “Plan, or no plan.” The question is “Whose plan? The plan of one dictator only? Or the plan of many individuals?” Everyone plans. He plans to go to work; he plans to go home; he plans to read a book; he plans a thousand other things. A “great” plan eliminates the plans of everybody else; then only one plan can be supreme. If the “great” plan and the plans of individuals come into conflict, whose plan is to be supreme? Who decides? The police decide! And they decide in favor of the “great” plan.

In the early days of socialism, some critics of socialism used to blame socialists for their ignorance of human nature. A man who must execute the plan of somebody else only would no longer be a man of the kind we call human. This objection was answered by those socialists who said, “If human nature is against socialism, then human nature will have to be changed.” Karl Kautsky said this many years before, but he didn’t give any details.

The details were provided by Behaviorism and by [Ivan] Pavlov [1849–1936], the psychologist mentioned in every book by a Marxist. The explanation was offered by Pavlov’s conditioned reflex. Pavlov was a Tsarist; he made his experiments in the days of the Tsar. Instead of human rights, Pavlov’s dog had canine rights. This is the future of education.

The Behaviorist philosophy wants to deal with human individuals as if there were no ideas or no faults in men. Behaviorism considers every human action as a reaction to a stimulus. Everything in the physical and physiological nature responds to certain reflexes. They say, “Man belongs to the same realm as animals. Why should he be different? There are certain reflexes and certain instincts that guide men to certain ends. Certain stimuli bring about certain reactions.” What the Behaviorists and the Marxists did not see was that you cannot even discredit such a theory of stimuli without entering into the meaning that the individual attaches to such stimuli. The housewife, when quoted the price of an object which she is considering buying, reacts differently to $5 than she does to $6. You cannot determine the stimulus without entering into the meaning. And the meaning itself is an idea.

The Behaviorists’ approach says, “We will condition the other people.” But who are the “we”? And who are the “other people”? “Today,” they say, “people are conditioned for capitalism by many things, by history, by good people, by bad people, by the church, etc., etc.”

This philosophy doesn’t give us any answer other than the answer we have already seen. The whole idea of this philosophy is that we must accept what Karl Marx told us because he had the great gift—he was entrusted by Providence, by the material productive forces, with discovering the law of historical evolution. He knows the end toward which history leads mankind. This leads eventually to the point where we must accept the idea that the party, the group, the clique, that has defeated the others by force of arms, is the right ruler, that he is called by the material productive forces to “condition” all other people. The fantastic thing is that the school which develops this philosophy calls itself “liberal” and calls its system a “people’s democracy,” “real democracy,” and so on. It is also fantastic that the vice president of the United States [Henry Wallace, 1888–1965] one day declared, “We in the United States have only a civil rights democracy—but in Russia there is economic democracy.”

There was a socialist author, valued highly by the Bolsheviks in the beginning, who said the most powerful man in the world is the man in whose favor the greatest lies are told and believed. (Something similar was said by Adolf Hitler.) Here is the power of this philosophy. The Russians have the power to say, “We are a democracy and our people are happy and enjoy a full life under our system.” And other nations seem to be unable to find the right answer to this idea. If they had found the right answer, this philosophy wouldn’t be so popular.

There are people living here in the United States, at an American standard of living, who think they are unhappy because they do not live in Soviet Russia where, they say, there is a classless society and everything is better than it is here. But it seems that it is not very much fun to live in Russia, not only from the material point of view, but from the point of view of individual freedom. If you ask, “How is it possible that people say everything is wonderful in a country, Russia, in which everything is probably not very wonderful,” then we must answer, “Because our last three generations were unable to explode the contradictions and the failures of this philosophy of dialectic materialism.”

The greatest philosophy in the world today is that of dialectical materialism—the idea that it is inevitable that we are being carried toward socialism. The books that have been written up to now have not succeeded in countering this thesis. You must write new books. You must think of these problems. It is ideas that distinguish men from animals. This is the human quality of man. But according to the ideas of the socialists the opportunity to have ideas should be reserved to the Politburo only; all the other people should only carry out what the Politburo tells them to do.

It is impossible to defeat a philosophy if you do not fight in the philosophical field. One of the great deficiencies of American thinking—and America is the most important country in the world because it is here, not in Moscow, that this problem will be decided—the greatest shortcoming, is that people think all these philosophies and everything that is written in books is of minor importance, that it doesn’t count. Therefore they underrate the importance and the power of ideas. Yet there is nothing more important in the world than ideas. Ideas and nothing else will determine the outcome of this great struggle. It is a great mistake to believe that the outcome of the battle will be determined by things other than ideas.

Russian Marxists, like all other Marxists, had the idea that they wanted to nationalize agriculture. That is, the theorists wanted to—the individual worker did not want to nationalize the farms; they wanted to take the big farms, break them up, and distribute the land among the small farmers. This has been called “agrarian reform.” The social revolutionaries wanted to distribute the farms to the poor peasants. In 1917, Lenin coined a new slogan, “You make revolution with the slogan of the day.” Therefore, they accepted something that was against Marxism. Later they started the nationalization of farm lands. Then they adopted this idea in the new countries they took over; they told every man that he would get his own farm.

They started this program in China. In China they took the big farms and abolished the rights of mortgage banks and landlords and freed the tenants from making any payments to the landlords. Therefore, it was not philosophy that made the Chinese peasants communistic, but the promise of a better life; people thought they would improve their conditions if they could get some farm land owned up to then by wealthier people. But this is not the solution for the Chinese problem. The advocates of this program were called agricultural reformers; they were not Marxians. The idea of land distribution is entirely un-Marxian.

Majorities are also not godlike. “The people’s voice is God’s” is an old German maxim, but it is not true. The basis of the idea of talking about pleasing the majority is that in the long run the majority will not tolerate rule by a minority; if the majority are not pleased there will be a violent revolution to change the government. The system of representative government is not radical; it is precisely a way to make a change of government possible without violence; many think that, with the approval of the people, they can change the government at the next election. Majority rule is not a good system but it is a system that assures peaceful conditions within the country. Newspapers, periodicals, books, and so on, are the opinion-makers.

The great progress of the modern age is that it led to representative government. The great pioneer of this idea was the British philosopher David Hume [1711–1776], who pointed out that in the long run government is not, as people believed, based on military power, but on opinion, on the opinion of the majority. What is needed is to convince the majority. It is not because the majority is always right. On the contrary, I would say the majority is very often wrong. But if you do not want to resort to a violent overthrow of the government, and this is impossible if you are the minority because if you are the minority they will overthrow you, you have only one method—to talk to the people, to write, and to talk again.

But how do we tell how many laws are too many, and which ones are pernicious?

Let us begin with some elementary considerations. A law may be defined as an edict which either forbids you to do something or compels you to do something. Sometimes, it is true, it may be merely a guiding rule which tells you how to do something, or defines procedures or standards, like weights and measures. But such standard-setting laws are few in number. Most laws are prohibitions or compulsions—in short, commands.

Why are laws necessary? They are necessary, first of all, to prevent people from injuring or aggressing against their neighbors; to prevent theft and fraud, vandalism and violence. On the more positive side, they are necessary to lay down rules of action, so that others may know what to expect of us and we of others, so that we may anticipate each other’s actions, keep out of each other’s way, and work and act so far as possible in cooperation and harmony.

In a modern society, the traffic laws epitomize law in general. When they instruct us to keep on the right side, to drive within a specified speed limit on a given street or highway, to stop at a red light, to signal our intended turns, they may seem to an impatient driver to be restricting his liberty, to be preventing him from getting to his destination in minimum time. But because these restrictions apply to everyone else, they are, if they are well conceived, helping not only him but all of us to get to our multitudinous destinations in the minimum time in which this can be done smoothly and safely.

How many traffic laws do we need? That is a difficult question to answer numerically. A general traffic code need consist only of a few simple rules, but they could all, it would seem, easily be embodied in a single statute. In any case, if the government confined itself to enacting a code of laws simply intended to prevent mutual aggression and to maintain peace and order, it is hard to see how such a code would run into any great number of laws.

Now let us look at the situation we actually face. In order to get an adequate picture, let us begin by comparing it with the situation as it existed more than a century ago in, for example, England. Let us take the year 1854, when the British philosopher Herbert Spencer wrote an essay on “Overlegislation.” Some of us are apt to assume that the mid-nineteenth century in England was perhaps the time and place when a great nation came nearest to a laissez-faire regime. Spencer did not find it so. He found the country buried under needless legislation, and piling up more. With the change of a few details, his essay sounds as if it were written yesterday:

Take up a daily newspaper and you will probably find a leader exposing the corruption, negligence, or mismanagement of some State department. Cast your eye down the next column, and it is not unlikely that you will read proposals for an extension of State supervision. …Thus, while every day chronicles a failure, there every day reappears the belief that it needs but an Act of Parliament and a staff of officers, to effect any end desired.

Spencer went on to refer to mid-nineteenth-century England’s “20,000 statutes, which it assumes all Englishmen to know, and which not one Englishman does know.” He found officialdom systematically slow, stupid, extravagant, unadaptive, and corrupt; and yet given more and more duties to fulfill. Instead of being confined to its primary duty of protecting each individual against others, the State is asked in a hundred ways to protect each individual against himself—“against his own stupidity, his own idleness, his own improvidence, rashness, or other defect.”

“It is in the very nature of things,” he continued, “that an agency employed for two purposes must fulfill both imperfectly.”

… And if an institution undertakes, not two functions, but a score—if a government, whose office it is to defend citizens against aggressors, foreign and domestic, engages also to disseminate Christianity, to administer charity, to teach children their lessons, to adjust prices of food, to inspect coal mines, to regulate railways, to superintend housebuilding, to arrange cab-fares, to look into people’s stink-traps, to vaccinate their children, to send out emigrants, to prescribe hours of labor, to examine lodging-houses, to test the knowledge of mercantile captains, to provide public libraries, to read and authorize dramas, to inspect passenger-ships, to see that small dwellings are supplied with water, to regulate endless things from a banker’s issues down to the boat fares on the Serpentine—is it not manifest that its primary duty must be ill discharged in proportion to the multiplicity of affairs it busies itself with?

Let us now pass over a century and a quarter, and see how our situation today compares with England’s then.

It is the individual states that enact the laws that affect their citizens most often and most intimately in their daily living. A figure averaging the number of laws passed each year in each of the 50 states would be hard to compile on a continuing basis and perhaps mean less than particular examples. Let us take our two most populous states, New York and California. During 1975, 1976, and 1977, the New York state legislature passed, respectively, 870, 966, and 982 public laws. (“Private laws” are not included here, as these individually affect only a handful of people.) During these same three years the California state legislature passed 1280, 1487, and 1261 public laws.

Now let us look at the implications of this. What does a new law do? It either puts a new prohibition or a new compulsion on each of us (or a large number of us), or it changes the rules under which we have hitherto been acting. So on the basis of these figures the citizens of individual states are being subjected to an average of about a thousand new prohibitions or rule-changes every year. No one is excused from not knowing what every one of these new laws commands. I leave it to the reader to picture what all this means in terms of human liberty.

But we have not even got to Federal laws. Supposedly, these are only needed to cover such matters as interstate commerce and are subject to severe limitations by the Constitution, so an innocent reader of that document might not see the need for many such laws. Though the Federal books were presumably blank when it started, the First Congress, which began on March 1789, did not see the need for many Federal laws. It enacted only 94.

But then, as more and more laws were piled up, succeeding Congresses were convinced that more and more additional laws were necessary. The 85th Congress, which opened in January 1957, enacted 1,009 laws; the 94th, which began in January 1975, enacted 588. The ten Congresses during that period enacted an average of 735 laws each, which means an average of 367 new Federal laws a year—or one new law every day. The reader should be reminded that individually many of these laws ran to well over 100 pages each.

The mania for piling up additional laws—new compulsions or prohibitions or changes of the rules—seems to be endemic in our democratic process. Every two years, when a new Congress is chosen, the rival candidates are eager to convince the voters that they can shower more blessings upon them than their respective competitors. “There ought to be a law,” they tell the voters, to forbid this or that, or to give you this or that. “If I am elected, I will introduce a bill”—to guarantee you this or that. So almost every Congressman introduces at least one bill with his name attached to it.

In the 94th Congress, which began in January, 1975, 3,899 bills were introduced in the Senate and 15,863 in the House—an average of 37 bills per member. These are by no means unusual figures. In the 93rd Congress, 4,260 bills were introduced in the Senate and 17,690 bills in the House. It is at least one stroke of luck for the country that only about one in every 30 or more such bills survives to enactment. But the individual Congressman who introduces it has made his point. He has “carried out his promise” to the voters.

It has been estimated that American legislative bodies ranging from city councils to Congress pass 150,000 new laws every year.Newsweek, January 10,1977. This total does not mean too much, because only a small section of the total applies to the residents of any given town or state. But a very meaningful figure would be the total number of live laws that still do apply to American residents of any given city or state.

Since its beginning Congress has enacted more than 40,000 laws. It is a fair assumption that most of these are still operative in some form.

When we come to the individual states we get to some really formidable figures. For Connecticut I am officially informed that: “We do not have information on the ‘live’ laws now on the books, but it is our understanding that there are about 3,500,000 words in the eleven volumes of the General Statutes.”Letter, June 7, 1978, from Agnes L. Kerr, Director, Administrastive-Legislative Division, Office of the Secretary of State, State of Connecticut. The legislative authorities of California regret that so far as the number of “presently operative statutes” of that state are concerned, “no such enumeration is readily obtainable,” though “most (but not all) enactments of the California legislature are codified in one of twenty-eight codes.” And the Department of State of New York informs me that so far as the total of live laws on the state’s books are concerned, “unfortunately, we don’t have the answer to this question.” So far as the “consolidated” (as distinguished from the “unconsolidated”) laws are concerned, however, these can be found in “six volumes covering 891 pages.” No one is allowed to plead ignorance of any of these state laws, of course, if he happens to violate one.

When we come to the number of town and city ordinances to which each of us is subject, it is difficult to say precisely what would be an average figure. But in Boston, for example, the Building Code alone contains about 500 pages; in addition, the City of Boston code consists of approximately 300 pages of ordinances and 300 pages of statutes. The Administrative Code of New York City consists of ten volumes running to a total of 8,000 pages. There are also 23 thick volumes of ringbinder notebooks containing the rules and regulations of city agencies published since 1967.

But on top of all of these laws—Federal, state, and local—is piled the greatest mountain of all—the endless orders, regulations, and edicts issued by the Federal and state “independent agencies.” There are 89 separate Federal independent agencies listed in the Congressional Directory for 1977. These are in addition to the innumerable commissions, “offices,” “services,” and “administrations” listed under the 12 cabinet departments. As long ago as 1954 the Hoover Commission found that the Federal government embraced no fewer than 2,133 different functioning agencies, bureaus, departments, and divisions. And practically all of them were running “programs.”

It was 10 years ago that Delaware Congressman William V. Roth and his staff made an eight-month statistical study and came up with the finding that “no one, anywhere, knows exactly how many Federal programs there are”—or who is spending how much on what. According to the 1968 Roth study, the Federal government at that time had 1,571 identifiable programs. Questionnaires sent to various agencies drew spotty responses. Inquiries were made as to the purpose of some 478 programs in Health, Education and Welfare; only 21 responded.

In August 1978, Congressman Gene Taylor from Missouri, going through stacks of the Code of Federal Regulations, found that the Code ran to 19,789 pages in 1938, to 20,643 in 1958, to 73,149 in 1976, and calculated it would top 120,000 pages by the end of 1978.

How can we add up the countless costs, penalties, discouragements, delays, hazards, impediments, obstructions, that these orders place in the way of production and commerce?

Even if we give up the futile attempt to add up the government regulations numerically, we can still point to some of the costs and hardships that they impose on the taxpayer, the motorist, the businessman, the homeowner, the consumer, the worker, the investor, and the nation as a whole. In the July Tax Review of 1978, published by the Tax Foundation of New York, Murray L. Weidenbaum, a former Assistant Secretary of the Treasury, has detailed some of these costs:

• The outlays of 41 regulator agencies are esimated to have increased from $2.2 billion in the fiscal year 1974 to $4.8 billion in fiscal 1979, a growth of 115 percent over the five-year period.

• Federally mandated safety and environmental features increased the price of the average passenger automobile by $666 in 1978.

• There are over 4,400 different Federal forms that the private sector must fill out each year. That takes 143 million man hours. The Federal Paperwork Commission recently estimated that the total costof Federal paperwork imposed on private industry ranges from $25 billion to $32 billion a year, and that “a substantial portion of this cost is unnecessary.”

• Regulatory requirements imposed by Federal, state, and local governments are adding between $1,500 and $2,500 to the cost of a typical new house.

• On the basis of a conservative estimating procedure, the aggregate cost of complying with Federal regulation came to $62.9 billion in 1976, or over $300 for each man, woman, and child in the United States. On the same basis, these costs may have reached $96.7 billion in the fiscal year ending September 30, 1978.

• The minimum-wage law has priced hundreds of thousands of people out of the labor markets. One increase alone has been shown, on the basis of careful research, to have reduced teen-age employment by 225,000.

• Approximately $10 billion of new private capital spending is devoted each year to meeting governmentally-mandated environmental, safety, and similar regulations rather than being invested in profit-making projects. Edward Denison of the Brookings Institution has estimated that in recent years these deflections of private investment from productive uses have resulted in a loss of approximately one-fourth of the potential annual increase in productivity.

• The nation as a whole feels the effect of government regulation in a reduced rate of innovation and in many other ways. The adverse consequences of government intervention in business decision-making range from a slowdown in the availability of new pharmaceutical products to the cancellation of numerous small pension plans.

Congressman Gene Taylor, whose figures on the extent of the Code of Federal Regulations I have previously cited, declares: “The cost imposed on the American economy by federal regulatory activity is now more than $60 billion per year. This serves to drive up the cost of consumer items, harasses small businessmen, fuels inflation, and increases the tax burden on the individual citizen.”

Suppose we turn back from our survey of the present enormous power and control now exercised by government, to a look at its growth since 1854 in England when Herbert Spencer was already expressing his alarm at the extent of that control. If the reader will glance down the list of the interferences that Spencer was then deploring, he will see that our own government is still engaged in all of them, or their equivalent (with the exception only of disseminating Christianity and sending out emigrants), but has added literally hundreds more.

In 1977 The Conference Board of New York was referring to some of that year’s economic interventions: price and income controls; limitations on profits; growing representation of workers and government on company boards of directors; statutory wage hikes; credit limitations; foreign exchange and import controls; limitations on foreign ownership; rent controls and subsidies; regulations on land-use planning; environmental, safety, and consumer protection regulations; antitrust laws; direct and indirect taxes; and government ownership. But the list could have been indefinitely extended.

There are two or three ways of trying to measure the size or growth of government quantitatively. One index is the number of people that it wholly or partly supports. In 1940 all American governments, Federal, state, and local, were employing 4,474,000 people. In 1977, the number was 14,624,000. The Federal government alone, in 1978, employed 2,066,000 persons in its armed forces and 1,930,100 in full-time permanent civilian employment. In addition, it was making Social Security payments to some 33 million persons, and the Congressional Budget Office was estimating that about 44 million were receiving some form of welfare aid.

The annual expenditures of the Federal government tell a succinct story. If we take them at ten-year intervals since 1929, we get the following result:

Year       Expenditures

1929        $  3.1 billion1939        $  8.8 billion1949        $ 38.8 billion1959        $ 92.1 billion1969        $184.5 billion1979        $487.5 billion

If any forecaster had dared to predict in 1929 that 50 years later the Federal government would be spending nearly 160 times as much in dollars in a single year (or 43 times as much in “real” terms), nobody would have believed him. By such a comparison, we have had a 4,200 percent growth in the Federal government since 1929.

Some readers may object that it is meaningless to complain about the mere number of laws; that we should carefully separate the “good” laws from the “bad,” and deplore only the latter. What this objection overlooks is that the mere multiplication and proliferation of laws is itself a major evil. Every unnecessary law is itself bound to be pernicious. And almost all laws that interfere with the functioning of the free market tend to delay or prevent necessary readjustments in the balance of production and consumption and to have other consequences opposite to those that the framers intended. When the rules of the game are being changed every day, when the totality of laws and regulations reaches the tens of thousands and the hundreds of thousands, the number of legislative blunders must multiply far more than proportionately. How is it possible to talk of retaining our liberties, for example, when collectively we are subjected not only to thousands of prohibitions and compulsions but to daily increasing prohibitions and compulsions?

More than 40 years ago the Swedish economist Gustav Cassell was warning: “The leadership of the state in economic affairs … is necessarily connected with a bewildering mass of governmental interferences of a steadily cumulative nature. The arbitrariness, the mistakes and the inevitable contradictions of such a polity will, as daily experience shows, only strengthen the demand for a more rational coordination of the different measures and, therefore, for unified leadership. For this reason planned economy will always tend to develop into dictatorship.”

Whatever the outcome may be, the future seems ominous. By whatever standard we measure it—the number of laws, the rate at which new ones are enacted, the multiplication of bureaus and agencies, the number of officeholders, pensioners, and relief-recipients the taxpayer is forced to support, the total or relative tax load, the total or per-capita expenditures—there has been an accelerative growth in the size, arbitrary power, and incursion of government, and in the new prohibitions, compulsions, and costs it keeps imposing upon us all.

One of his greatest career accomplishments was Conceived in Liberty, a masterful analysis of the libertarian origins of the American Revolution and the founding of the United States. Written with his lens of "liberty vs. power," this book demonstrated both his brilliance and originality — deftly handling a huge amount of research including a vast array of hitherto unknown facts.

Unfortunately, due to a tragic technological failing, the original print run of Conceived in Liberty only included the first four of a five-volume work. The fifth volume focusing on the adoption of the Constitution and the Washington administration, sat dormant for decades as a complete, but handwritten, manuscript.

Enter Patrick Newman.

As a young Research Fellow at the Mises Institute, Patrick Newman has made incredible use of the Rothbard Archives here in Auburn, Alabama. Some of his early career achievements include unearthing an original chapter of Man, Economy, and State — providing a fascinating look at Rothbard's own growth as an economist — and editing The Progressive Era, another work focusing on a pivotal period of American history.

While none of those projects compared to the work required to translate Murray's handwriting into a complete book project, it provided him with the tools he needed to get the job done. The result is the remarkable resurrection of what will become an important work in the libertarian historical canon.

The fifth volume of Conceived in Liberty highlights the most important battle of the American project — one that continues to this day — the conflict between those who want to centralize power, and those who choose to stand to defend the American heritage of liberty.

This book features a foreword by Judge Andrew Napolitano, a preface by Dr. Thomas E. Woods, and an introduction by Dr. Patrick Newman.

Henry Stuart Hazlitt was born in Philadelphia on November 28, 1894, the son of Stuart Clark Hazlitt and Bertha (Zauner) Hazlitt. His father died when Henry was a baby. His first years in school were spent at Girard College, a school in Philadelphia for poor, fatherless boys.

When Henry was 9, his mother remarried and their fortunes revived. The family moved to Brooklyn, New York, and it was there, at Public School 11 and Boys’ High School, that Henry received most of his formal education. Henry has apparently always had a gift for writing. His high school English teacher recognized his talent and appointed him “chief critic” of his fellow students’ test papers. This was “not an entirely gratifying distinction,”Phrases within quotation marks attributed to Hazlitt are taken either from his autobiographical notes or from transcripts of interviews with him. Henry wrote later, for it did not endear him to his classmates.

When Henry finished high school, he entered New York City’s free-tuition City College of New York (CCNY), but was forced to drop out after a few months. His stepfather had died and he had to support his widowed mother.

An inexperienced high school graduate wasn’t worth much on the job market. The only work for which Henry was then qualified was as an office boy at $5 a week. He was fired from his first job after only two days. But that didn’t faze him. He simply went out and got another job.

At that time there were no legal obstacles to hiring and firing—no minimum wage with which an employer had to comply, no Social Security or unemployment taxes to pay, no income taxes to withhold, no restrictions on hours or working conditions. Any would-be employer could hire anyone who wanted to work. If the arrangement didn’t work out, the employer could let the employee go without penalty. Or the employee could leave, confident that he could easily find other employment.

Henry had a succession of jobs at $5 per week. When he learned that secretaries could earn $15 per week, he determined to learn shorthand and typing. For several weeks he attended a secretarial school. With his newly acquired skills, he could command $10 to $12 per week. But again none of his jobs lasted very long—he hadn’t yet found his niche. Finally he decided he wanted to be a newspaper reporter. He applied for a job and was hired by The Wall Street Journal.

The Journal at that time was much smaller than it is now, and it reported primarily Wall Street news. Hazlitt’s bosses at The Journal dictated editorials to him on the typewriter and reporters called in their stories to him over the phone. Gradually he learned through on-the-job training.

Although he still knew very little about economics or the market, he was assigned to be the reporter in charge of following a half dozen small companies. When he attended one annual meeting, he learned how very little he knew. The management voted unexpectedly to “pass” its dividend, that is to pass over or to omit it. Hazlitt assumed “passing” a dividend meant “approving” the dividend. Fortunately for him, however, when he turned in his report he used their term; he said the dividend had been “passed.” His on-the-job training proceeded apace; he promptly learned the investment definition of that word, and no one was the wiser.

The Journal at that time had a “By-the-Way” column, composed of brief quips about current events. Members of the staff were encouraged to submit entries anonymously. To collect payment if an entry was used (75 cents per published entry), the author turned in the carbon copy of his entry. With Henry’s gift for expression, he soon became a persistent contributor and in time almost doubled his income with what he received for his short, clever “By-the-Way” paragraphs.

Henry Hazlitt was energetic, ambitious, and industrious. On-the-job training wasn’t enough for him. He was determined to get the education he had missed when he had to drop out of college. So he started his own reading program. He read about Shakespeare and the Marlowe controversy. He learned about evolution and the role of the state by reading Herbert Spencer. He began to read about economics and the stock market. In time, the depth and breadth of his reading gave him a broad liberal arts education. A book titled The Work of Wall Street made him realize the importance of economics and philosophical reasoning. From then on he read with a purpose—concentrating on economics. He read a couple of college texts. Although he lacked sophistication in economics, his natural good sense warned him to be on guard against socialist ideas.

One book he ran across while browsing in a library, The Common Sense of Political Economy (1910) by Philip H. Wicksteed, a British Unitarian minister, had a profound influence on him. Wicksteed had become acquainted with the Austrian School of Economics, the first school of economics to recognize that “value” is subjective and that market prices stem from the subjective values of individuals. This insight helped to shape Hazlitt’s intellectual development and led him to a firm understanding of market operations and the marginal utility theory of economics.

In addition to reading, young Henry also devoted some time every day to writing. He set out to write a book on a very ambitious subject, Thinking as a Science, and before many months had passed, it was finished. He submitted the book to five publishers, received five rejections, and got discouraged. Then a friend urged him to send it out once more. He did—and this time it was accepted by the well-known firm of E. P. Dutton & Co. In 1916, at the age of 22, Henry Hazlitt became a published author.

In 1916, Hazlitt left The Wall Street Journal and moved to the New York Evening Post, where he put his Wall Street experience to use writing “Wall Street Paragraphs.” He was working at the Post in 1917 when the United States entered World War I.

Henry wanted to volunteer, as some of his friends were doing, but he couldn’t afford to do so. The Army paid only $30 per month, not enough for him to support his mother. Then the Air Force announced that it was offering enlistees $100 per month. Henry volunteered, only to discover that, in spite of their published offer, the Air Force paid enlistees no more than the Army did. But once in the Air Force, he couldn’t get out. Henry’s mother had a rough time financially while he was away.

The Air Force sent Henry to Texas, to Princeton for ground school studies, and then back to Texas for flying instruction; he didn’t get overseas. Hazlitt was still in Texas when the war ended.

A few days after the Armistice was signed, the New York Evening Post wired Hazlitt that his successor in writing “Wall Street Paragraphs” was leaving. He could have his old job back if he could be there in five days. Hazlitt took off almost immediately for New York by train, went directly to the office, suitcase in hand, and worked in uniform his first day back on the job.

Hazlitt soon returned to his old regimen of reading and writing for his own education and edification. Before long he had written a second book, The Way to Will Power, published in 1922. At that time, Who’s Who had a policy of automatically listing any author who had had two books published by reputable firms. So at 28, Henry was a two-time author and his name appeared in Who’s Who.

After Hazlitt returned from the Air Force, he continued his pursuit of economic understanding. Among other books on monetary theory, he read Benjamin M. Anderson’s The Value of Money (1917). Hazlitt considered that book “profound and original” and he learned a great deal from it. Anderson, then teaching at Harvard, later became economist with the Bank of Commerce and then with the Chase National Bank. When Hazlitt was financial editor for the New York Evening Mail (1921–1923), he occasionally interviewed Anderson in connection with articles he was writing, and the two men soon became friends. Hazlitt wrote the foreword to Anderson’s important work, Economics and the Public Welfare: Financial and Economic History of the United States, 1914–1946 (1949).

In The Value of Money, Anderson had reviewed a large number of writers, American and foreign, most of them rather critically, on the subject of money. But when he came to the Austrian economist Ludwig von Mises, he wrote that he found in his work “very noteworthy clarity and power. His Theorie des Geldes und der Umlaufsmittel [later translated into English as The Theory of Money and Credit] is an exceptionally excellent book.” This was the first time Hazlitt had heard of Mises, but he remembered his name and Anderson’s comment. Years later when Mises’ works became available in English, Hazlitt made it a point to read them.

Throughout his life, Henry Hazlitt has spent most of his time at the typewriter and with books. From age 20, he wrote something almost every day—news items, editorials, reviews, articles, columns. By his 70th birthday, he figured he must have written “in total some 10,000 editorials, articles, and columns; some 10,000,000 words! And in print! The verbal equivalent of about 150 average-length books.” Hazlitt has also written or edited 17 books. (See the list at the end of this article.) His early works were literary and philosophical, his later books largely economic.

After leaving The Wall Street Journal, Hazlitt worked in various capacities—as economic commentator, financial editor, book reviewer, editorial writer, literary editor, columnist, and editor—for five different newspapers including The New York Times (1934–1946), a monthly financial letter, and three magazines, including Newsweek (1946–1966) for which he wrote the “Business Tides” column. In 1950, while still writing for Newsweek, Hazlitt and John Chamberlain became editors of the newly founded biweekly magazine, The Freeman, predecessor of this journal. (See the note at the end of this article for a list of the publications with which Hazlitt has been associated.) After he left Newsweek in 1966, he became an internationally syndicated columnist.

Hazlitt’s reading and studying over the years to satisfy his own intellectual curiosity spanned a broad spectrum of subjects. His vast reading, especially when he was a literary editor and book reviewer, is evident in The Anatomy of Criticism (1933), in which he discussed the critic’s role, the influence of the critic on the public, and the influence of the times on the critic. Hazlitt’s prodigious reading and prolific writing throughout these years were preparing him for the important contributions he was to make to the understanding of economic theory and social cooperation.

As a result of Hazlitt’s various assignments writing about financial and stock market news, his interests had been gradually directed toward business and economics. He read many books on economics, and he became knowledgeable as an economist. But he did not write a book on the subject until 1946.

As a patriotic gesture, The New York Times had made a promise not to fire anyone during the Depression. This proved a very costly promise to keep. It meant for one thing that The Times did no hiring for a couple of years. By 1934 they were in dire need of someone who knew economics. Thus, in the midst of the Depression, Hazlitt was hired by The Times as an editorial writer.

The Times was then being run by Arthur Sulzberger, son-in-law of the fairly “conservative” publisher and controlling owner, Adolph S. Ochs. Management seldom interfered with Hazlitt’s editorials, although Ochs’ daughter, Mrs. Sulzberger, would occasionally call Hazlitt and suggest some “leftist” idea. Hazlitt would explain, “The trouble with that, Mrs. Sulzberger, is …” She would reply, “Well, you know best.” Thus, The Times pretty much published what Hazlitt wrote—at least until 1944. More about this later.

Hazlitt is proud of his role in helping to introduce two economic giants to readers in this country—Ludwig von Mises, leading spokesman for the Austrian school of economics for many years, and Friedrich A. Hayek, also an Austrian economist, Mises’ protegé, and Nobel Prize Laureate in 1974.

As mentioned above, Hazlitt first heard of Mises through Benjamin Anderson’s The Value of Money. Years later when Hazlitt came across Mises’ Socialism, he reviewed it in The New York Times. His review appeared in the January 9, 1938, Book Review Section: “[T]his book must rank as the most devastating analysis of socialism yet penned. Doubtless even some anti-Socialist readers will feel that he occasionally overstates his case. On the other hand, even confirmed Socialists will not be able to withhold admiration from the masterly fashion in which he conducts his argument. He has written an economic classic in our time.”

Mises was then living and teaching in Switzerland. As a courtesy, Hazlitt mailed a copy of his review to the author and the two men exchanged a couple of brief letters. Two years later Mises came to the United States to escape the strife of World War II. Hazlitt was one of Mises’ few contacts in this country and Mises telephoned him. To Hazlitt, Mises was a “classic,” an author from a previous era. Mises’ call, Hazlitt recalled later, was almost as much of a surprise as if he had heard from such a legendary economic figure as Adam Smith or John Stuart Mill.

In 1944, Hazlitt reviewed F. A. Hayek’s The Road to Serfdom in The New York Times. As a young man in his native Austria, Hayek had come to know Nazism firsthand. In England where he was living and teaching just before the start of World War II, he observed the same interventionist trends that he had seen on the Continent. In 1944, in a devastating critique of Nazism, The Road to Serfdom, he warned the British that they were heading down the same path.

The book stunned academia and the political world. Hazlitt’s review, featured on page one of The Times’ Book Review Section (September 24, 1944), compared Hayek’s The Road to Serfdom to John Stuart Mill’s On Liberty. Hazlitt described it as “one of the most important books of our generation.” The University of Chicago Press had printed only 3,000 copies, and when the book made the best-seller list the publisher’s stock was soon exhausted, and they had to begin reprinting right away.

When John Maynard Keynes’ scheme for the International Monetary Fund and the International Bank for Reconstruction and Development (World Bank) was under discussion in Bretton Woods, New Hampshire, The Times offered to send Hazlitt to the conference. But Hazlitt saw no reason to go. He was opposed to the discussions. He said he could learn more by reading about them than he could by going there and talking with participants. Besides, if he stayed in New York he could also write editorials on other subjects. So he didn’t go.

While editorial opinion across the nation was largely favorable to the Bretton Woods discussions, Hazlitt was criticizing them. His editorials were the only “sour note.” When it was announced that 43 governments had signed the “marvelous” Bretton Woods Agreement, Sulzberger called Hazlitt to his office. “Now, Henry, when 43 governments sign an agreement, I don’t see how The Times can any longer combat this.”

“All right,” Hazlitt said. “But in that case I can’t write anything further about Bretton Woods. It is an inflationist scheme that will end badly and I can’t support it.” After that Hazlitt wrote no more editorials on the subject for The Times. However, Hazlitt was also writing a Monday column for the paper’s financial page, and there he continued to criticize Bretton Woods. At that point, Sulzberger suggested he might include a line at the end of Hazlitt’s Monday column: “The opinions of Mr. Hazlitt are not necessarily those of The New York Times.”

“You can do that, Mr. Sulzberger. But,” Hazlitt warned, “one consequence of such a disclaimer will be that, if you don’t print a similar line on other columns, the assumption will be that they are necessarily in agreement with the views of the editor of The Times.”Sulzberger understood Hazlitt’s reasoning and dropped the idea.

For some time Hazlitt had been mulling over the possibility of writing a “little book” on the fallacies of short-run economic interests. He discussed the idea with Mises, by then a close friend. He also told Harper’s editor for economics books about his idea. The editor offered to publish the book when it was written. The New York Times, for which Hazlitt was still working as an editorial writer, agreed to give him every other day off without pay to write the book. Economics in One Lesson was the result.

To Hazlitt, writing that book “came so easily,” he said later, “that I couldn’t take it very seriously.…“[W]riting these chapters was almost like writing daily editorials.… It took … about three months of alternate days off.” On the in-between days he was thinking about the book. “That meant one and a half months of actual writing.”

Reader’s Digest published two excerpts before the book’s publication, and the book promptly became a best seller. Hazlitt had suggested that the print run be increased to satisfy the additional demand anticipated from the Reader’s Digest publicity. Yet the publisher printed only 3,000 copies. The first week the book was out it was fifteenth on the New York Times best-seller list for non-fiction; the second week it was fourteenth, and then the third week it was seventh, disappearing from the list altogether in ensuing weeks—there just were no more books to be sold. After some time, when it had been reprinted and was available once more, it began to sell again, although it didn’t make the Times list again.

Writing Economics in One Lesson may have come easily to Hazlitt, but its impact has been enormous. It has been translated into eight languages. By 1977 it had sold 50,000 copies in hard cover, 700,000 in all editions, and it still sells at the rate of a few thousand per year, attracting new readers to economics with its delightful style and its simple explanations and illustrations of economic fallacies.

Economics in One Lesson is clearly Hazlitt’s most popular book. It established him as an economic journalist par excellence, the modern counterpart of the Frenchman Frédéric Bastiat (1801–1850), author of The Law. H. L. Mencken was quoted on the book jacket of the first edition as saying that Hazlitt was “the only competent critic of the arts … who was at the same time a competent economist, of practical as well as theoretical training, … one of the few economists in human history who could really write.” The book has introduced countless individuals to sound economic theory.

Harper & Brothers published the first 1946 hardcover edition of Economics in One Lesson. Harper arranged for later paperback editions, and kept the book in print until 1974. Then, without telling Hazlitt, it let the book go out of print and canceled the contract with the paperback publisher.

When Hazlitt learned this, he approached Harper and asked about reprinting in paperback. They hesitated but said, “If you bring it up to date, we’ll publish a new edition in hardback.” Hazlitt revised the book. Still “they dilly-dallied,” Hazlitt said, and didn’t publish it in either hardback or paperback. According to Hazlitt, “They said they didn’t think it would sell in paper. Hazlitt believed their real objection must have been ideological, since the book had been selling several thousand paperback copies a year. In time Hazlitt obtained the rights to the book, and in 1979 Arlington House put out a paperback edition.

Hazlitt left The Times for Newsweek about the time Economics in One Lesson came out. In Hazlitt’s view his situation was improved; his “Business Tides” columns in Newsweek would be signed; he would no longer be writing anonymously.

Hazlitt had been impressed with John Maynard Keynes’ The Economic Consequences of the Peace (1919) when it first came out. At that point, Hazlitt took everything Keynes said as “gospel.” But in 1923, Hazlitt read Keynes’ A Tract on Monetary Reform. By that time Hazlitt had done a fair amount of reading in monetary theory and could recognize economic errors when he read them. He was “appalled” by how “bad” a book it was and from that time on, Hazlitt “distrusted every statement Keynes made.”

B. M. Anderson commented to Hazlitt later that when Keynes discussed the quantity theory of money in A Tract on Monetary Reform, “he even states that upside down.” Which he did! The actual reason prices go up is that the government prints new money and distributes it to people who spend it. As the spenders compete for goods and services by bidding against other would-be spenders they make prices go up. Yet Keynes had said that when prices go up, the government must print more money to keep pace with the prices. The great German inflation was then raging (1923) and this was precisely what the German authorities were saying, that there was (as Hazlitt later paraphrased the Germans’ position) “no real inflation because the present volume of currency … had actually a smaller purchasing power than the former volume of currency because the depreciation per unit was greater than the multiplication of units.” Keynes agreed with the Germans “that it was necessary for them to keep printing marks to keep pace with the rising prices.”

Whether Keynes’ success was due to personal charisma, his prestigious positions with the British government, or to the “scientific” sanction his works gave politicians to do what they wanted to do anyway—that is to spend without taxing—is immaterial. The fact remains that from the 1930s on Keynes’ influence was enormous. And through it all, Hazlitt continued to be amazed by Keynes’ growing reputation.

In Economics in One Lesson, Hazlitt demolished various Keynesian programs in a rather low-key manner. Then in 1959, in The Failure of the “New Economics,” he critiqued Keynes’ major work, The General Theory of Employment, Interest, and Money (1936) in detail, citing chapter and verse. The Failure of the “New Economics” (1959) is much more scholarly than Economics in One Lesson, its market narrower, but it is by no means less important.

To refute each Keynesian error, Hazlitt expounded sound economic theory in a way academia couldn’t ignore. John Chamberlain, who reviewed the book in The Freeman, tided his review, “They’ll Never Hear the End of It.” The dean of the Department of Economics at a leading university questioned Hazlitt’s credentials for critiquing the noted Keynes. Mises came to Hazlitt’s defense. Hazlitt, Mises responded, was “one of the outstanding economists of our age,” and his anti-Keynes book was “a devastating criticism of the Keynesian doctrines.”

Henry Hazlitt was a personal friend of Mises. But he was also a student of Mises in the sense that he carefully studied his work. He attended Mises’ seminar at New York University quite regularly for several years. Although Hazlitt was himself an economist and author of note by then, he said about the Mises seminars that he always found that “no matter how many times I would go, no matter how often I heard in effect the same lectures, there would always be some sentence, some incidental phrase that threw more light on the subject.”

One remark by Mises which impressed Hazlitt was that questions of morality and justice always refer to social cooperation. Hazlitt agreed. But he thought the statement needed elaboration. This was a subject close to Hazlitt’s heart, for he had longed to write a book on ethics since he was a youngster.

As he pondered the subject he was struck by the insight of a statement by Jeremy Bentham (1748–1832): “Legislation is a circle with the same center as moral philosophy, but its circumference is smaller.” This idea became the theme of Hazlitt’s book on ethics, The Foundations of Morality (1964).

In this book, Hazlitt sought to unify law, ethics, morality, and manners, and to show their relation to social cooperation. Following Bentham, Hazlitt presented law, ethics (morality), and manners as three aspects of the same thing. “[B]oth manners and morals rest on the same underlying principle. That principle is sympathy, kindness consideration for others. … Manners are minor morals.” Law, he maintained, might be called “minimum ethics” with “the same center as moral philosophy.” Ethics and morality cover more territory than law; they have a “far wider sphere [than law]. … Morality,” he wrote, “certainly calls for active benevolence beyond that called for by the law.”

In The Foundations of Morality, Hazlitt discussed the literature on ethics and morality throughout the ages. And he described the way ethical and moral principles had been put into practice. He pointed out that the moral codes of many religions are similar and consistent with peaceful social relations. Yet their differences, as well as the cruelty and suffering inflicted on men in the name of organized religion, raise doubts as to the reliability of religious faith as a guide to ethical conduct.

Thus, Hazlitt offers a utilitarian basis for morality. The moral philosopher, he writes should seek a “foundation” for morality that does not rest on a particular religion. “[I]t is not the function of the moral philosopher, as such,” Hazlitt concludes, “to proclaim the truth of this religious faith or to try to maintain it. His function is, rather, to insist on the rational basis of all morality to point out that it does not need any supernatural assumptions, and to show that the rules of morality are or ought to be those rules of conduct that tend most to increase human cooperation, happiness and well-being in this our present life.”

In the course of his career, Hazlitt met many of the great and near great. As has been mentioned, he knew the economist, B. M. Anderson. He knew H. L. Mencken personally, and it was Mencken who recommended that Hazlitt succeed him as editor of American Mercury in 1933. Hazlitt was a frequent guest on the radio, debating face-to-face such socialist luminaries as former Vice President Henry A. Wallace, the late Secretary of State Dean Acheson, former U. S. Senators Paul H. Douglas and Hubert Humphrey. He is a Founding Trustee of The Foundation for Economic Education. He was, of course, a close friend of Mises and Hayek, but he also knew well all of the important personages in the libertarian/conservative movement—Leonard E. Read, Isabel Paterson, Rose Wilder Lane, John Chamberlain, William F. Buckley, Ayn Rand, Lawrence Fertig, and others.

Over the years, Hazlitt perfected a clear and lucid writing style. Writing so many editorials and short columns disciplined him to express himself succinctly and simply. Even his most important and profound books are composed of short, easy-to-understand chapters. Everything he writes may be read with pleasure and profit.

Throughout his career, Hazlitt has been an advocate of a minority point of view. He has been a constant critic of government intervention, inflation, and the welfare state, and he wrote books attacking them. His anti-Keynes, anti-Bretton Woods editorials, first published in The New York Times, also appeared later as a book (From Bretton Woods to World Inflation, 1984).

Hazlitt has spoken out repeatedly and untiringly in behalf of the freedom philosophy, limited government, free markets, and private property. At a banquet in 1964, honoring him on his 70th birthday, he spoke of the freedom movement and his part in it:

Those of us who place a high value on human liberty … find ourselves in a minority (and it sometimes seems a hopeless minority) in ideology. … We are the true adherents of liberty. … We are the ones who believe in limited government, in the maximization of liberty for the individual and the minimization of coercion to the lowest point compatible with law and order. It is because we are true liberals that we believe in free trade, free markets, free enterprise, private property in the means of production; in brief, that we are for capitalism and against socialism. …

I will confess … that I have sometimes repeated myself. In fact, there may be some people unkind enough to say I haven’t been saying anything new for 50 years!

And in a sense they would be right … I’ve been preaching liberty as against coercion; I’ve been preaching capitalism as against socialism; and I’ve been preaching this doctrine in every form and with any excuse. And yet the world is enormously more socialized than when I began. …

Is this because the majority just won’t listen to reason? I am enough of an optimist, and I have enough faith in human nature, to believe that people will listen to reason if they are convinced that it is reason. Somewhere, there must be some missing argument, something that we haven’t seen clearly enough, or said clearly enough, or, perhaps, just not said often enough. A minority is in a very awkward position. The individuals in it can’t afford to be just as good as the individuals in the majority. If they hope to convert the majority they have to be much better; and the smaller the minority, the better they have to be. They have to think better. They have to know more. They have to write better. They have to have better controversial manners. Above all, they have to have far more courage. And they have to be infinitely patient. …

Yet, in spite of this, I am hopeful.… [We are] still free to write unpopular opinion.… So I bring you this message: Be of good heart; be of good spirit. If the battle is not yet won, it is not yet lost either.

1913–1916—The Wall Street Journal1916–1918—New York Evening Post1919–1920—Mechanics & Metals National Bank (monthly financial letter)1921–1923—New York Evening Mail (financial editor)1923–1924—New York Herald (editorial writer)1924–1925—The Sun1925–1929—The Sun (literary editor)1930–1933—The Nation (literary editor)1933–1934—American Mercury (editor)1934–1946—The New York Times (editorial staff)1946–1966—Newsweek (associate & “Business Tides” columnist)1950–1952—The Freeman (co-editor)1952–1953—The Freeman (editor-in-chief)1966–1969—Columnist for the international Los Angeles Times Syndicate

Thinking as a Science (New York: E. P. Dutton & Co., 1916; 2nd ed., Los Angeles: Nash Publishing Corp., 1969)

Thinking clearly and logically is the secret of learning, Hazlitt says. He offers the reader many ideas for developing his powers of thinking—by concentrating, talking, and keeping a notebook handy to jot down ideas. He recommends books on how to reason and think.

In Hazlitt’s 1969 epilogue, he said if he were to revise the book he would further stress, among other things, the importance of language, perseverance, learning what has already been discovered, and writing. “Good writing is the twin,” he wrote, “of good thinking. He who would learn to think should learn to write.” Again he recommends books.

The Way to Will Power (New York: E. P. Dutton & Co., 1922)

After asserting that there is no such thing as the “Will,” young Hazlitt proceeds to offer a sensible guide for developing “will power”—by choosing worthy goals, aiming at them with determination, and developing good study and work habits.

A Practical Program for America, ed. by Henry Hazlitt (New York: Harcourt, Brace & Co., 1932)

When this book was published, the economy was in the midst of depression and Franklin Delano Roosevelt was governor of New York and had not yet run for President. Hazlitt was then editor of The Nation, from which these essays were taken. Except for Hazlitt, the authors were all looking for ways to improve the economy by amending national legislation. Hazlitt advocates free trade and recommends the repeal of all barriers to trade.

The Anatomy of Criticism (New York: Simon & Schuster, 1933)

Written at a time when Hazlitt was doing many book reviews, this book presents his philosophy of criticism. The discussants in a trialogue, a three-sided conversation, present their rationales for criticizing books, novels, poetry, paintings, sculpture, and the like. After discussing the relative merits of seeking objective standards, or relying exclusively on a critic’s subjective values, the discussants recognize that certain standards evolve on the basis of tradition, public opinion, ideas, ethical and moral views, and so on.

A New Constitution Now (New York: Whittlesey House/ McGraw-Hill Book Co., 1942; 2nd ed., revised, New Rochelle, N.Y.: Arlington House, 1974)

Hazlitt deplores our constitutional checks and balances that divide power and authority and make it difficult to assign responsibility. He prefers a parliamentary form of government with executive and legislative powers combined more or less as in the British cabinet system, not fully developed until well after our Constitution was written. With no fixed period of office in a parliamentary form of government, the people may throw the “ins” out if they are dissatisfied. Hazlitt suggests various changes in the franchise, the make-up of Congress and the Supreme Court, methods for amending the Constitution, and so on. He quotes John Stuart Mill, Walter Bagehot, James Bryce, and other thinkers.

In 1974, when Hazlitt revised this book, he dropped some of the minor reforms he had suggested in order to concentrate on his advocacy of a parliamentary form of government. With a parliamentary form of government, popular disaffection with an administration at any time would require it to face the electorate promptly. Then if the voters expressed a lack of confidence, that administration would fall and have to relinquish control. Hazlitt contends that this would have saved us the “nightmare” of Watergate and Richard Nixon’s near-impeachment. Control would have passed from Nixon’s hands without a serious crisis. Whether or not one agrees with Hazlitt, his views are worth studying.

Economics in One Lesson (New York: Harper & Brothers, 1946; Pocket Books, 1948; special edition for The Foundation for Economic Education, 1952; revised and updated paperback, New York: MacFadden-Bartell Corp., 1962; Westport, Conn.: Arlington House, 1979)

An economic “classic.” The role of an economist, Hazlitt says, is to consider not only the consequences of an action that are “seen,” but also its “unseen” consequences. Hazlitt proceeds to analyze the “unseen” consequences of various government programs such as legally-fixed minimum wage rates, price controls, government spending, and the like.

Will Dollars Save the World (Irvington-on-Hudson, N.Y.: The Foundation for Economic Education, 1947)

After World War II, when the productive machinery of the warring nations was in a shambles, the world clamored for U.S. grants and loans. But, Hazlitt points out, the harm had been done not only by enemy bombing but also by inflation and economic controls. Hazlitt gives 17 reasons why Marshall Plan dollars will not save the world.

To restore production, radical policy changes must be made to repeal government interventions. “The supreme irony is that the only country in the world today that is really producing anything—and for whose goods the rest of the world is therefore clamoring—is almost the only country that does not have government production ‘targets,’ but merely turns out goods in the volumes and proportions determined by supply and demand, free prices and free profits.” (p. 53) Hazlitt outlines a positive program to restore production in the devastated countries.

The Great Idea (New York: Appleton-Century-Crofts, 1951; rev. ed., published as Time Will Run Back: A Novel About the Rediscovery of Capitalism (New Rochelle, N.Y.: Arlington House, 1966; Lanham, Md.: University Press of America, Inc., 1986)

A fictional account set in the future when the entire world is under a single Communist dictator. His only son, Peter, heir to the dictatorship, had been raised by his mother who opposed Communism. When Peter’s father dies and he takes over, he encounters problems due to central planning. Conservatives in the Politburo oppose changes. But with the support and advice of one sympathetic Politburo member, he succeeds in introducing private property, free market prices, competition, and freedom of opportunity. Step-by-step they dismantle the controls. Fighting erupts between the two factions and there is a mild love story. A delightful way to learn some economics. The ending of the 2nd edition is modified slightly to make it somewhat more optimistic.

The Free Man’s Library (Princeton, N.J.: D. Van Nostrand Co., 1956)

An annotated bibliography of books that Hazlitt recommends to gain an understanding of the philosophy of the free market, limited government, private property system.

The Failure of the “New Economics”: An Analysis of the Keynesian Fallacies (Princeton, N.J.: D. Van Nostrand Co., 1959; Lanham, Md.: University Press of America, Inc., 1983)

John Maynard Keynes’ The General Theory of Employment, Interest and Money (1936) became the “gospel” on which practically all post-depression economic instruction has been based. Yet even Keynes’ followers found it “a badly written book, poorly organized … not well suited for classroom use.” (Paul Samuelson, quoted by Hazlitt, p. 2.) Moreover, when Hazlitt analyzed it, he was “unable to find in it a single important doctrine that is both true and original. What is original in the book is not true; and what is true is not original.” (p. 6) Nevertheless the book has had a tremendous influence. Hazlitt, therefore, proceeded to do something that had never been done before, to critique the Keynes book, chapter by chapter, on the basis of subjective, marginal utility (Austrian) economic theory.

The Critics of Keynesian Economics, ed. by Henry Hazlitt. (Princeton, N.J.: D. Van Nostrand Co., 1960; Lanham, Md.: University Press of America, Inc., 1984)

In the course of writing The Failure of the “New Economics,” Hazlitt encountered several noteworthy articles that criticized Keynes’ ideas. This anthology of the best of those includes essays by such well-known economists as B. M. Anderson, Arthur F. Burns, F. A. Hayek, W. H. Hutt, Frank H. Knight, and Ludwig von Mises. As if to underline Keynes’ lack of originality, two papers by pre-Keynes critics—Jean Baptiste Say (1767–1832) and John Stuart Mill (1806–1873) are included.

What You Should Know About Inflation (Princeton, N.J.: D. Van Nostrand Co., 1960; 2nd ed., with statistics and tables updated to 1964, D. Van Nostrand Co., 1965)

Hazlitt defines inflation as an “increase in the supply of money and credit.” (p. 1) A general increase in prices, he says, is “made possible … only by an increased supply of money.” (p. 6) To dramatize the unreliability of governments to “manage” money and maintain its value, Hazlitt quotes 12 denials by Chancellor of the Exchequer Sir Stafford Cripps that the British government would devalue the pound (pp. 22–24), denials made during the 20 months immediately prior to the British government’s September 18, 1949, devaluation. Hazlitt then proceeds to attack one inflationist fallacy after another.

The Foundations of Morality (Princeton, N.J.: D. Van Nostrand Co., 1964; 2nd ed., Los Angeles: Nash Publishing, 1972)

“[M]orality is older,” Hazlitt says, “than any living religion and probably older than all religion.” (p. 352) The role of the moral philosopher, therefore, is not to proclaim or maintain any particular religious faith. “His function is rather, to insist on the rational basis of all morality.” (p. 353)

Hazlitt sees a common denominator in law, morals (ethics), and manners. Manners are “minor morals”; they rest on the same principles as do morals or ethics—sympathy, kindness, consideration of others, (p. 75) Law is a “minimum ethics,” a circle with the same center as moral philosophy, (p. 69)

Hazlitt covers a great deal of material in this book. He reviews the classical literature on morality and ethics, and examines the teachings of the various religions. He discusses social cooperation and the need for general rules. The moral philosophy he sets forth is “utilitarian … [i]n the sense that all rules of conduct must be judged by their tendency to lead to desirable rather than undesirable social results.” (p. xii)

Man vs. the Welfare State (New Rochelle, N.Y.: Arlington House, 1969; Lanham, Md.: University Press of America, Inc., 1983)

The welfare state encompasses a mix of popular government interventions. In this book Hazlitt analyzes many of them—government spending, social security, progressive taxation, foreign aid, price controls, negative income taxes, planning, guaranteed employment—and he describes their devastating effects on incentives, savings, investment, and production.

As a warning of what can happen, he points to Uruguay, a “welfare state gone wild.” He writes also of Herbert Spencer’s prescient warning of “the coming slavery” (1884) due to Britain’s incipient government intervention. In his final chapter, ‘What We Can Do About It,” he recommends among other things that persons on relief be denied the vote so long as they remain on relief.

The Conquest of Poverty (New Rochelle, N.Y.: Arlington House, 1973; Lanham, Md.: University Press of America, Inc., 1986)

“The history of poverty is almost the history of mankind.… [U]ntil about the middle of the eighteenth century, mass poverty was nearly everywhere the normal condition of man.” (pp. 13, 178) Attempts to alleviate poverty by government welfare and poor relief failed wherever and whenever tried—in Rome, in England, in France, in Germany, and in the United States. The “conquest of poverty” is a product of the capitalistic system which protected private property and enabled people to “save and invest their savings in industries producing goods for the masses.” (p. 214)

The Inflation Crisis, and How to Resolve It (New Rochelle, N.Y.: Arlington House, 1978; Lanham, Md.: University Press of America, 1983)

Part I incorporates several of the more important chapters of What You Should Know about Inflation. In Part II Hazlitt analyzes and criticizes additional inflationist fallacies. Here are some of the chapter titles: “What Spending and Deficits Do,” “What Spending and Deficits Do Not Do,” “Where the Monetarists Go Wrong,” “Inflation and Unemployment,” “The Specter of ‘Unused Capacity,’” “Indexing: The Wrong Way Out,” “Why Inflation Is Worldwide,” “The Search for an Ideal Money,” “Free Choice of Currencies.”

From Bretton Woods to World Inflation: A Study of Causes and Consequences (Chicago: Regnery Gateway, 1984)

Hazlitt’s New York Times editorials, written at the time of the 1944 Bretton Woods Conference, form the nucleus of this book. Hazlitt pointed out then that the International Monetary Fund (IMF), established at Bretton Woods, would be inflationary, hamper world trade, and retard economic recovery. Hazlitt was distrustful of any state or bank, including the IMF, which was empowered to issue paper money. Also included in this book are several later articles by Hazlitt which amplify his 1944 conclusions.

The Wisdom of the Stoics: Selections from Seneca, Epictetus and Marcus Aurelius. Edited and with an introduction by Frances and Henry Hazlitt (Lanham, Md.: University Press of America, 1984)

In the course of Hazlitt’s lifelong studies, he was impressed by the philosophy of the Stoics. Mrs. Hazlitt, Frances, researched their writings. Stoicism, founded by Zeno (c. 320–250 B.C.), a Phoenician, the editors write in their introduction, “is one of the permanent philosophies of life.… an indispensable element in any rational philosophy.” Stoicism deals with the good and virtuous life. This book is a collection of aphorisms by three great Stoics from vastly different backgrounds. Seneca (c. 4 B.C.–65 A.D.), born in Spain, studied in Rome, gained favor, fame, fortune, then the enmity of Emperor Nero and was ordered to commit suicide. Epictetus (c. 55–130 A.D.), an ex-slave, became a favorite of Nero’s, received his freedom, and later was expelled. Marcus Aurelius (121–180 A.D.) was an Emperor. The maxims assembled here offer guidance to everyday living and are suitable for daily reading.

November 28, 1992 marked the 98th birthday of the noted author and economist Henry Hazlitt who has served with great distinction as a Trustee of The Foundation for Economic Education since FEE was founded in 1946, and whose personal papers and library are now housed at FEE. To mark his 95th birthday in 1989, Bettina Bien Greaves, a member of the Senior Staff of FEE and long-time admirer of Hazlitt, wrote this essay.

Translated from the Italian Della Moneta (1751) by Peter R. Toscano (1977).

From Wikipedia:

Della Moneta is divided into five sections, covering what are still seen today as the standard aspects of monetary theory. These include the origin of money, its value (including inflation and deflation), interest, and monetary policy.

The author, only 23 years old at the time, started with the history of Italian coinage, going back to the Greeks and Romans. Discarding the contemporary view of the origin of money through centrally planned contracts, Galiani proposes that money tends to arise spontaneously, through the need for trade, anticipating the Austrian school of economics by well over a century. He describes a sort of thought experiment, in which a government would attempt to trade or confiscate through taxes a portion of all goods in the kingdom, until it finds that the plunder is too diverse and complex to manage, and would then turn to demanding only the trade equivalent in some simple commodities that happen to have the traits seen as useful for money at the time, like compactness, ease of distribution and ease of storage.[1]

Interwoven into the other themes throughout the book is a second premise, that money, and material goods in general, have value based on their utility to people: a premise that was only rediscovered with examination of marginal utility 120 years later.[2] He even touches upon a modern idea that would not be deeply examined again until the mid 20th century: that the value of money and goods may reach an equilibrium in price, based on supply and demand. This may also be the first modern examination of supply and demand as an economic driver.

In Della Moneta, Galiani attempts to use philosophical methodology in the presentation and organization of his book. He also criticizes other early economic texts as failing to do so. For example, he mentions Montesquieu, whose book he argues was harmful to France, because it commits the is-ought fallacy, contains wishful thinking, and lacks scientific rigour.[3]

Galiani appears to have been well-versed in the complex debates about how and why money had such an impact on Europe in the previous two centuries, brought on by incidents like the price revolution in Spain in the 16th century, where an influx of gold plundered from the New World caused dramatic inflation in first Spain, then all of Europe, a crisis that continued to varying degrees until around the time of Galiani's book.

He makes mention, in the book, of previous thoughts on topics of political economy by others, including John Locke and Ludovico Antonio Muratori.

This book has widely cited by economists from different schools of economic thought from Adam Smith's time on, from Karl Marx through Joseph Schumpeter.

From the preface to the first edition:

The revival now of this ancient 100% system, with the readjustments demanded by modern conditions, would effectually restrain the monetary inflation and deflation incident to our present system; that is, would actually stop the irresponsible creation and destruction of circulating medium by our thousands of commercial banks which now act like so many private mints. For these and other reasons, the 100% system would be a great boon, even to bankers.

That this is true is recognized by a few bankers who have studied the economic effects of the system under which they now operate and who see that the 100% system would largely save them from great depressions.

The socialists and communists propose to cure poverty by seizing private property, particularly property in the means of production, and turning it over to be operated by the government.

What the advocates of all expropriation schemes fail to realize is that property in private hands used for the production of goods and services for the market is already for all practical purposes public wealth. It is serving the public just as much as—in fact, far more effectively than—if it were owned and operated by the government.

Suppose a single rich man were to invest his capital in a railroad owned by himself alone. He could not use this merely to transport his own family and their personal goods. That would be ruinously wasteful. If he wished to make a profit on his investment, he would have to use his railroad to transport the public and their goods. He would have to devote his railroad to a public use.

And unlike a government agency, the private owner is obliged by self-preservation to try to avoid losses, which means that he is forced to run his railroad economically and efficiently. And also unlike a government agency, the private capitalist is nearly always obliged to face competition—which means to make the services he provides or the goods he sells superior or at least equal to those provided by his competitors. Therefore the private capitalist normally serves the public far better than the government could if it took over his property. Looked at from the standpoint of the service they provide, the private railroads today are worth vastly more to the public than to their owners.

Though socialists chronically fail to understand it, there is nothing original in the theme just stated. It was hinted at in Adam Smith:

Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of the society, which he has in view. But the study of his own advantage naturally, or rather necessarily leads him to prefer that employment which is most advantageous to the society.Adam Smith, Wealth of Nations, 1776, Bk. IV, Ch. II.

At another point Adam Smith was even more explicit:

Every prodigal appears to be a public enemy, and every frugal man a public benefactor. … The principle which prompts to save, is the desire of bettering our condition. … An augmentation of fortune is the means by which the greater part of men propose and wish to better their condition. … And the most likely way of augmenting their fortune, is to save and accumulate some part of what they desire. … [The funds they accumulate] are destined for the maintenance of productive labor. … The productive powers of the same number of laborers cannot be increased, but in consequence either of some addition and improvement to those machines and instruments which facilitate and abridge labor; or of a more proper division and distribution of employment. In either case an additional capital is almost always required.Ibid., Bk. II, Ch. Ill.

One of them was George E. Roberts, director of the U.S. Mint under three Presidents, who was responsible for the Monthly Economic Letter of the National City Bank of New York from 1914 until 1940.

An example often cited by Roberts was Henry Ford and his automobile plant. Roberts pointed out in the July letter of 1918 that the portion of the profits of Henry Ford's automobile business that he had invested in the development and manufacture of a farm tractor was not devoted to Ford's private wants; nor was that portion which he invested in furnaces for making steel; nor that portion invested in workingmen's houses.

If Henry Ford had exceptional talent for the direction of large productive enterprises the public had no reason to regret that he had an income of $50,000,000 a year with which to enlarge his operations. If that income came to him because he had a genius for industrial management, the results to the public were probably larger than they would have been if the $50,000,000 had been arbitrarily distributed at 50 cents per head to all the [then, 1918] population of the country.

In brief, only that portion of his income which the owner spends upon his own or his dependents' consumption is devoted to him or to them. All the rest is devoted to the public as completely as though the title of ownership was in the State. The individual may toil, study, contrive and save, but all that he saves inures to others.

In the history of economic thought, however, it is astonishing how much this truth was neglected or forgotten, even by some of Smith's most eminent successors. But the theorem has been revived, and some of its corollaries more explicitly examined, by several writers in the present century.

But the Ford Motor Company, from the profits of which the original owner drew so little for his own personal needs, is not a unique example in American business. Perhaps the greater part of private profits are today reinvested in industry to pay for increased production and service for the public.

Let us see what happened, for example, to all the corporate profits in the United States in 1968, fifty years after George Roberts was writing about the Ford Company. These aggregate net profits amounted before taxes to a total of $88.7 billion (or one eighth of the total national income in that year of $712.7 billion).

Out of these profits the corporations had to pay 46 percent, or $40.6 billion, to the government in taxes. The public, of course, got directly whatever benefit these provided. Corporate profits after taxes then amounted to $48.2 billion, or less than 7 percent of the national income.

These profits after taxes, moreover, averaged only 4 cents for every dollar of sales. This meant that for every dollar that the corporations took in from sales, they paid out 96 cents—partly for taxes, but mainly for wages and for supplies from others.

But by no means all of the $48.2 billion earned after taxes went to the stockholders of the corporations in dividends. More than half—$24.9 billion—was retained or reinvested in the business. Only $23.3 billion went to the stockholders in dividends.

There is nothing untypical in these 1968 corporate reinvestment figures. In every one of the six years preceding 1968 the amount of funds retained for reinvestment exceeded the total amount paid out in dividends.

Moreover, even the $25 billion figure understates corporate reinvestment in 1968. For in that year the corporations suffered $46.5 billion depreciation on their old plant and equipment. Nearly all of this was reinvested in repairs to old equipment or to complete replacement. The $24.9 billion represented reinvestment of profits in additional or greatly improved equipment.

And even the $23.3 billion that finally went to stockholders was not all retained by them to be spent on their personal consumption. A great deal of it was reinvested in new enterprises. The exact amount is not precisely ascertainable; but the U.S. Department of Commerce estimates that total personal savings in 1968 exceeded $40 billion.

Thus because of both corporate and personal saving, an ever-increasing supply is produced of finished goods and services to be shared by the American masses.

In a modern economy, in brief, those who save and invest can hardly help but serve the public. As Mises has put it:

In the market society the proprietors of capital and land can enjoy their property only by employing it for the satisfaction of other people's wants. They must serve the consumers in order to have any advantage from what is their own. The very fact that they own means of production forces them to submit to the wishes of the public. Ownership is an asset only for those who know how to employ it in the best possible way for the benefit of the consumers. It is a social function.Ludwig von Mises, Human Action, 3rd Rev. Ed., Chicago: Henry Regnery Co., 1966, p. 684.

It follows from this that the rich can do most good for the poor if they refrain from ostentation and extravagance, and if instead they save and invest their savings in industries producing goods for the masses.

F. A. Harper has gone so far as to write: "Both fact and logic seem to me to support the view that savings invested in privately owned economic tools of production amount to an act of charity. And further, I believe it to be—as a type—the greatest economic charity of all.""The Greatest Economic Charity." Essay in symposium On Freedom and Free Enterprise, Mary Sennholz, ed., Van Nostrand, 1956, p. 99.

Professor Harper supports this view by quoting from, among others, Samuel Johnson, who once said: "You are much surer that you are doing good when you pay money to those who work, as a recompense of their labor, than when you give money merely in charity."James Boswell, The Life of Samuel Johnson, Boston: Charles E. Lauriat Co., 1925, Vol. II, p. 636.

So, saving and sound investment may be the most important benefit that the rich can confer on the poor.

This theme has found expression in this century by a deplorably small number of writers. One of the most persuasive was Hartley Withers, a former editor of the London Economist, who published an ingratiating little book in 1914, a few weeks before the outbreak of the First World War, called Poverty and Waste.Hartley Withers, Poverty and Waste, London: Smith, Elder, 1914; 2nd Rev. Ed., John Murray, 1931. The contention of his book is that when a wealthy man spends money on luxuries he causes the production of luxuries and so diverts capital, energy, and labor from the production of necessaries, and so makes necessaries scarce and dear for the poor. Withers does not ask him

to give his money away, for he would probably do more harm than good thereby, unless he did it very carefully and skilfully; but only to invest part of what he now spends on luxuries so that more capital may be available for the output of necessaries. So that by the simultaneous process of increasing the supply of capital and diminishing the demand for luxuries the wages of the poor may be increased and the supply of their needs may be cheapened; and he himself may feel more comfortable in the enjoyment of his income.Ibid., p. 139.

Yet in spite of the authority of the classical economists and the inherent strength of the arguments for saving and investment, the gospel of spending has an even older history. One of the chief tenets of the "new economics" of our time is that saving is not only ridiculous but the chief cause of depressions and unemployment.

Adam Smith's arguments for saving and investment were at least partly a refutation of some of the mercantilist doctrines thriving in the century before he wrote. Professor Eli Heckscher, in his Mercantilism (Vol. II, 1935), quotes a number of examples of what he calls "the deep-rooted belief in the utility of luxury and the evil of thrift. Thrift, in fact, was regarded as the cause of unemployment, and for two reasons: in the first place, because real income was believed to diminish by the amount of money which did not enter into exchange, and secondly, because saving was believed to withdraw money from circulation."Vol. II, p. 208.

An example of how persistent these fallacies were, long after Adam Smith's refutation, is found in the words that the sailor-turned-novelist, Captain Marryat, put into the mouth of his hero, Mr. Midshipman Easy, in his novel by that name published in 1836:

The luxury, the pampered state, the idleness—if you please, the wickedness—of the rich, all contribute to the support, the comfort, and the employment of the poor. You may behold extravagance—it is a vice; but that very extravagance circulates money, and the vice of one contributes to the happiness of many. The only vice which is not redeemed by producing commensurate good, is avarice.

Mr. Midshipman Easy is supposed to have learned this wisdom in the navy, but it is almost an exact summary of the doctrine preached in Bernard Mandeville's Fable of the Bees in 1714.

Now though this doctrine is false in its attack on thrift, there is an important germ of truth in it. The rich can hardly prevent themselves from helping the poor to some extent, almost regardless of how they spend or save their money. So far from the wealth of the rich being the cause of the poverty of the poor, as the immemorial popular fallacy has it, the poor are made less poor by their economic relations with the rich. Even if the rich spend their money foolishly and wastefully, they give employment to the poor as servants, as suppliers, even as panderers to their vices. But what is too often forgotten is that if the rich saved and invested their money they would not only give employment to just as many people producing capital goods, but that as a result of the reduced costs of production and the increased supply of consumer goods which this investment brought about, the real wages of the workers and the supply of goods and services available to them would greatly increase.

What is also forgotten by the defenders of luxury spending is that, though it improves the condition of the poor who cater to it, it also increases their dissatisfaction, unrest, and resentment. The result is envy of and sullenness toward those who are making them better off.

The first eminent economist who attempted to refute Adam Smith's proposition that "every prodigal appears to be a public enemy, and every frugal man a public benefactor" was Thomas R. Malthus. Malthus's objections were partly well taken and partly fallacious. I have examined them rather fully in another place;The Failure of the "New Economics," Van Nostrand, 1959, pp. 40–43 and 355–362. and I shall content myself here with quoting a few lines from the answer that a greater economist than Malthus, David Ricardo, made at the time (circa 1814–21): "Mr. Malthus never appears to remember that to save is to spend, as surely as what he exclusively calls spending. … I deny that the wants of consumers generally are diminished by parsimony—they are transferred with the power to consume to another set of consumers."Notes on Malthus (Sraffa edition), p. 449 and p. 309.

It remained for a few influential modern writers to launch an all-out attack on saving. One of them was Bernard Shaw. In a shamelessly ignorant and silly book,George Bernard Shaw, The Intelligent Woman's Guide to Socialism and Capitalism, Brentano, 1928, p. 7. Shaw actually argued that net saving in a community was not even possible—because food does not keep! "The notion that we could all save together is silly. … Peter must spend what Paul saves, or Paul's savings will go rotten. Between the two nothing is saved. The nation as a whole must bake its bread and eat it as it goes along. … When you see the rich man's wife (or anyone else's wife) shaking her head over the thriftlessness of the poor because they do not all save, pity the poor lady's ignorance, but do not irritate the poor by repeating her nonsense to them."

Shaw's statement is nonsense compounded. He talks as if men and women, in the Britain and America of 1928, existed at the level of the lower animals, and lived by bread alone. It might have occurred to him that in a modern society food production and food consumption form only a small fraction of total production and consumption. In the United States today, food and beverages account for only 13 percent, or about one eighth, of the gross national product. It should further have occurred to Shaw that even though each individual crop is harvested only during a few weeks of the year, the food supply must be at least sufficiently conserved to last a nation the year round.

And even in the most primitive agricultural societies some food has to be saved even beyond a year, if the society is to survive. The tribe that consumes that part of the corn that it should be setting aside as seed for next year's crop is doomed to starvation.

But neither in a modern nor in a primitive society is it primarily food that is saved from year to year. So far as the individual is concerned, what he nominally saves is money. (This used to consist of the precious metals, gold and silver, which kept extremely well, and did not constantly lose their value like today's universal paper currencies.) What the individual really saves is the consumption goods and services he refrains from demanding, so releasing labor and other resources for the production of more and better capital goods. The great bulk of primitive as of modern savings went into improving housing, land, and tools.

Shaw's argument falls into a reductio ad absurdum when it proves that there can be no net saving at all by the nation as a whole. What would Shaw make of the present U.S. Department of Commerce figures showing that there is in fact net national saving every year? (In the five years 1967—71 gross private domestic investment averaged annually about 14 percent of the U.S. gross national product.) If Shaw had merely looked around him, he would have seen how saving went into enlarging and improving the nation's productive equipment and into an increase in each decade in labor's productivity and in real wages.

Shaw threw himself into economic controversy all his life; but he never condescended to look up the facts and never understood even some kindergarten economic principles.

We have yet to discuss the views of the most influential opponent of saving in our time—John Maynard Keynes.

It is widely believed, especially by his disciples, that Lord Keynes did not condemn saving until, in a sudden vision on his road to Damascus, the truth flashed upon him and he published it in The General Theory of Employment, Interest, and Money in 1936. All this is apocryphal. Keynes disparaged saving almost from the beginning of his career. He was warning his countrymen in a broadcast address in January, 1931, that "whenever you save five shillings, you put a man out of work for a day." And long before that, in his Economic Consequences of the Peace, published in 1920, he was writing passages like this:

The railways of the world which [the nineteenth century] built as a monument to posterity, were, not less than the Pyramids of Egypt, the work of labor which was not free to consume in immediate enjoyment the full equivalent of its efforts.

Thus this remarkable system depended for its growth on a double bluff or deception. On the one hand the laboring classes accepted from ignorance or powerlessness, or were compelled, persuaded, or cajoled by custom, convention, authority and the well-established order of Society into accepting, a situation in which they could call their own very little of the cake that they and Nature an  the capitalists were cooperating to produce. And on the other hand the capitalist classes were allowed to call the best part of the cake theirs and were theoretically free to consume it, on the tacit underlying condition that they consumed very little of it in practice. The duty of 'saving' became nine-tenths of virtue and the growth of the cake the object of true religion. There grew round the nonconsumption of the cake all those instincts of puritanism which in other ages has withdrawn itself from the world and has neglected the arts of production as well as those of enjoyment. And so the cake increased; but to what end was not clearly contemplated. Individuals would be exhorted not so much to abstain as to defer, and to cultivate the pleasures of security and anticipation. Saving was for old age or for your children; but this was only in theory—the virtue of the cake was that it was never to be consumed, neither by you nor by your children after you. (Pp. 19–20.)

This passage illustrates the irresponsible flippancy that runs through so much of Keynes's work. It was clearly written tongue-in-cheek. In the very next sentences Keynes made a left-handed retraction: "In writing thus I do not necessarily disparage the practices of that generation. In the unconscious recesses of its being Society knew what it was about," etc.

Yet he let his derision stand to do its harm.

If we accepted Keynes's original passage as sincerely written, we would have to point out in reply: (1) The railways of the world cannot be seriously compared with the pyramids of Egypt, because the railways enormously improved the production, transportation, and availability of goods and services for the masses. (2) There was no bluff and no deception. The workers who built the railroads were perfectly "free" to consume in immediate enjoyment the full equivalent of their efforts. It was the capitalist classes that did nearly all the saving, not the workers. (3) Even the capitalist classes did consume most of their slice of the cake; they were simply wise enough to refrain from consuming all of it in any single year.

This point is so fundamental, and both Keynes and his disciples have so confused themselves and others with their mockery and intellectual somersaults, that it is worth making the matter plain by constructing an illustrative table.

Let us assume that in Ruritania, as a result of net annual saving and investment of 10 percent of output, there is over the long run an average increase in real production of 3 percent a year. Then the picture of economic growth we get over a ten-year period runs like this in terms of index numbers:

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(These results do not differ too widely from what has been happening in recent years in the United States.)

What this table illustrates is that total production in Ruritania increases each year because of the net saving (and consequent investment), and would not increase without it. The saving is used year after year to increase the quantity and improve the quality of existing machinery or other capital equipment, and so to increase the output of both consumption and capital goods.

Each year there is a larger and larger "cake." Each year, it is true, not all of the currently produced cake is consumed. But there is no irrational or cumulative consumer restraint. For each year a larger and larger cake is in fact consumed; until even at the end of five years (in our illustration), the annual consumers' cake alone is equal to the combined producers' and consumers' cakes of the first year. Moreover, the capital equipment—the ability to produce goods—is now 12 percent greater than in the first year. And by the tenth year the ability to produce goods is 30 percent greater than in the first year; the total cake produced is 30 percent greater than in the first year, and the consumer's cake alone is more than 17 percent greater than the combined consumers' and producers' cakes in the first year.

There is a further point to be taken into account. Our table is built on the assumption that there has been a net annual saving and investment of 10 percent a year; but in order to achieve this, Ruritania will probably have to have a gross annual saving and investment of, say, twice as much, or 20 percent, to cover the repairs, depreciation and deterioration taking place every year in housing, roads, trucks, factories, equipment. This is a consideration for which no room can be found in Keynes's simplistic and mocking cake analogy. The same kind of reasoning which would make it seem silly to save for new capital would also make it seem silly to save enough even to replace old capital.

In a Keynesian world, in which saving was a sin, production would go lower and lower, and the world would get poorer and poorer.

In the illustrative table I have by implication assumed the long-run equality of saving and investment. Keynes himself shifted his concepts and definitions of both saving and investment repeatedly. In his General Theory the discussion of their relation is hopelessly confused. At one point (p. 74) he tells us that saving and investment are "necessarily equal" and "merely different aspects of the same thing." At another point (p. 21) he is telling us that they are "two essentially different activities" without e'ren a "nexus."

Let us, putting all this aside, try to look at the matter both simply and realistically. Let us define saving as an excess of production over consumption; and let us define investment as the employment of this unconsumed excess to create additional means of production. Then though saving and investment are not always necessarily equal, over the long run they tend to equality.

New capital is formed by production combined with saving. Before there can be a given amount of investment, there must be a preceding equal amount of saving. Saving is the first half of the action necessary for more investment. "To complete the act of forming capital it is of course necessary to complement the negative factor of saving with the positive factor of devoting the thing saved to a productive purpose.Eugen von Böhm-Bawerk, Positive Theory of Capital, 1891, South Holland, Ill.: Libertarian Press, 1959, p. 104. … [But) saving is an indispensable condition precedent to the formation of capital.Ibid.

Keynes constantly deplored saving while praising investment, persistently forgetting that the second was impossible without the first.

Of course it is most desirable economically that whatever is saved should also be invested, and in addition invested prudently and wisely. But in the modern world, investment follows or accompanies saving almost automatically. Few people in the Western world today keep their money under the floor boards. Even the poorer savers put their money out at interest in savings banks; and those banks act as intermediaries to take care of the more direct forms of investment. Even if a man deposits a relatively large sum in an inactive checking account, the bank in which he deposits, trying always to maximize its profits or to minimize losses, seeks to keep itself "fully loaned up"—that is, with close to the minimum necessary cash reserves. If there is insufficient demand at the time for commercial loans, the bank will buy Treasury bills or notes. The result in the United States, for example, is that a bank in New York or Chicago would normally lend out five sixths of the "hoarder's" deposit; and a "country bank" would lend out even more of it.Of course, to repeat, a saver can do the most economic good, both for himself and his community, if he invests most of his savings, and invests them prudently and wisely. But–contrary to the message of the mercantilists and the Keynesians—even if he "hoards" his savings he may often benefit both himself and the community and at least under normal conditions do no harm.

To understand more clearly why this is so it may be instructive to begin by distinguishing between three kinds of ( or motives for) saving, and three groups of savers—roughly the poor, the middle class, and the wealthy.

Let us call the most necessary kind, which even the poorest must practice, "rent-day saving." Men buy and pay for things over different time periods. They buy and pay for food, for the most part, daily. They pay rent weekly or monthly. They buy major articles of clothing once or twice a year. A man who earns $10 a day cannot afford to spend $10 a day on food and drink. He can spend on them, say, not more than $6 a day, and must put aside $4 a day from which to pay out part at the end of the month for rent, light, and heat, and another part for a winter overcoat at the end of six months, and so on. This is the kind of saving necessary to ensure one's ability to spend throughout the year. "Rent-day saving" can symbolize all the saving necessary to pay for regularly recurrent and unavoidable living expenses. Obviously this kind of saving, sustained only for weeks or a season, and varying in time as among individuals, can in no circumstances be held responsible for business depressions. It is utter irresponsibility on the part of the Bernard Shaws to ridicule it.

The next kind of saving, which applies especially to the middle classes, is what we may call "rainy-day saving." This is saving against such possible though not inevitable contingencies as loss of a job, illness in the family, or the like.

It is this "rainy-day saving" that the Keynesians most deplore, and from which they fear the direst consequences. Yet even in extreme cases it does not, except in very special cyclical circumstances, tend to bring about any depression or economic slowdown.

Let us consider, for example, a society consisting entirely of "hoarders" or "misers." They are hoarders or misers in this sense: that they all assume they are going to live till 70 but will be forced to retire at 60; and they want to have as much to spend in each of their last ten years as in their 40 working years from 20 to 60. This means that each family will save one fifth of its annual income over 40 years in order to have the same amount to spend in each of its final ten years.

We are deliberately assuming the extreme case, so let us assume that the money saved is not invested in a business or in stocks or bonds, is not even put in a savings bank, earns no interest, but is simply "hoarded."

This of course would permit no economic improvement whatever. But if it were the regular permanent way of life in that community, at least it would not lead to a depression. The people who refrained from buying a certain amount of consumers' goods and services would not be bidding up their prices; they would simply be leaving them for others to buy. If this saving for old age were the regular and expected way of life, and not some sudden unanticipated mania for saving, the manufacturers of consumer goods would not have produced an oversupply to be left on their hands; the older people in their seventh decade would in fact be spending more than similarly aged people in a "spending" society, and the unspent savings of those who died would revert to the spending stream. Over a long period, year by year, there would be just as much spent as in a "spending" society.

Let us remember that money saved, in an evenly rotating economy, where there is neither monetary inflation nor deflation, does not go out of existence. Savings, even when they are not invested in production goods, are merely deferred or postponed spending. The money stays somewhere and is always finally spent. In the long run, in a society with a relatively stable ratio between hoarders and spenders, savings are constantly coming back into the spending stream, through old-age spending or through deaths, keeping the stream at an even flow.

What we are trying to understand is merely the effect of saving per se, and not of sudden and unanticipated changes in spending and saving. Therefore we are abstracting from the effects produced by unexpected changes in spending and saving or changes in the supply of money. If even a heavy amount of saving were the regular way of life in a community, the relative production and prices of consumers' and producers' goods would already be adjusted to this. Of course, if a depression sets in from some other cause, and the prices of securities and of goods begin to fall, and people suddenly fear the loss of their jobs, or a further fall in prices, this may lead to a massive and unanticipated increase in saving (or more exactly in non-spending) and this may of course intensify a depression already begun from other causes. But depressions cannot be blamed on regular, planned, anticipated saving.

Some readers may contend that I have not yet imagined the most extreme case of saving—a society, say, all the members of which perpetually save more than half as much as they earn, and keep saving, not for old age, or for any reasonable contingency, but simply because of a "religion" of saving. In brief, these would be the cake nonconsumers of Keynes's satire. But even such an imaginary society involves a contradiction of terms. If the members of that society intended always to live at their existing modest or even mean level, why would they keep exerting themselves to produce more than they ever expected to consume? That would be pathologic to the point of insanity. Keynes's allegory of the extent of supposed nineteenth-century thrift was purely an hallucination.

We come finally to the third type of saving—what we may call "capitalist" saving. This is saving that is put aside for investment in industry—either directly, or indirectly in the form of savings bank deposits. It is saving that yields interest or profits. The saver hopes, in his old age or even earlier, to live on the income yielded by his investments rather than by consuming his saved capital.

This type of "capitalist" saving was until recently confined to the very rich. Indeed, even the very rich were not able to take advantage of this type of saving until the modern development of banks and corporations. As late as the beginning of the eighteenth century we hear of London merchants on their retirement taking a chest of gold coin with them to the country with the intention of gradually drawing on that hoard for the rest of their lives.F. A. Hayek, Profits, Interest and Investment, London: George Routledge, 1939, pp. 162–163. See also the numerous cases mentioned in G. M. Trevelyan's English Social History, David McKay, 1942. Today the greater part even of the American middle classes, however, enjoy the advantage of capitalist saving.

To sum up. Contrary to age-old prejudices, the wealth of the rich is not the cause of the poverty of the poor, but helps to alleviate that poverty. No matter whether it is their intention or not, almost anything that the rich can legally do tends to help the poor. The spending of the rich gives employment to the poor. But the saving of the rich, and their investment of these savings in the means of production, gives just as much employment, and in addition makes that employment constantly more productive and more highly paid, while it also constantly increases and cheapens the production of necessities and amenities for the masses.

The rich should of course be directly charitable in the conventional sense, to people who because of illness, disability or other misfortune cannot take employment or earn enough. Conventional forms of private charity should constantly be extended. But the most effective charity on the part of the rich is to live simply, to avoid extravagance and ostentatious display, and to save and invest so as to provide more people with increasingly productive jobs, and to provide the masses with an ever-greater abundance of the necessities and amenities of life

This book is about what is generally referred to as the ‘firm’, a phenomenon in the market that appears obvious but that remains difficult to explain. While there is a field of study referred to as the theory of the firm, there are in fact a number of noteworthy theories. All of these theories claim to explain the firm’s rationale, value, and purpose. But the theories tend to describe the firm in different ways. The discussion is further complicated as there are several different definitions of this seemingly elusive concept. As a result, our understanding for the economic reality of the firm is inhibited.

The purpose of this book is not to reconcile these theories or definitions, however, but to try a new approach and provide an explanation for the firm by looking at the market setting where we find firms. We start by constructing an economic model of the market as an elaborate yet dynamic system of production without firms. This, in turn, allows us to study the limitations of the economic system of production, and what means are available to overcome them; or, more precisely, how the market deals with this ‘problem of production’. The goal is to elaborate on an explanation for the firm by seeking its economic function within the extensive production apparatus of the specialised market.

This chapter positions this book in the extant literature on the economics of organisations and institutions. It does so by summarising and delineating two strands of the academic literature that are separate but should complement each other: strategic management (or, as it is sometimes referred to, organisational economics), especially the theory of the firm, and the Austrian school of economics. While they have things in common and have recently been approaching each other, we will here draw from both strands to produce a theory of the firm. Our theory is based on the Austrian conception of production in the dynamic market process and it takes market-based production and the evolving dynamic of the market process as its point of departure. The perspective is Austrian, but the object for our analysis is borrowed from strategic management. The discussion thereby indirectly attempts to reconcile these literatures by providing a theoretical explanation for particular phenomena in the overlapping space between them. This first chapter is intended to provide background by making the reader familiar with economic theorising on the firm and what the two aforementioned literatures have in common.

Whereas firms are ubiquitous in the economy and therefore often assumed to be a natural component of the market, the concept of a ‘firm’ poses an interesting question relating to economising, organisation, and production. The question can be stated as simply ‘Why are there firms?’, but its simplicity is deceiving. The question requires both elaboration and contextualisation to make the problem clear. The ‘why’ in the question suggests that there must be a rationale for forming firms such that there is a distinct value of coordinating production specifically within firms, which directs our attention to the question of what possible alternatives to firm organising there could be. The commonly assumed alternative is a model of the market as predominantly decentralised exchange-based coordination of production. The theory of the firm literature aims to formulate an economic argument for firm organising in contrast to decentralised market exchange, and under what specific conditions this is of value and therefore can be the predicted outcome. Due to the importance placed on this distinction between firm and market, a significant and important subset of this literature stresses issues relating to the firm’s ‘boundaries’. A firm’s boundary denotes the point where the firm ends and the market begins (and vice versa), which indirectly suggests what makes the firm different from the market. The ‘why’ of the firm therefore relates to (if not requires) a definition of what constitutes a ‘firm’, since ‘why’ must point toward a certain ‘what’. Knowing the ‘why’ and ‘what’ should also provide insights necessary to investigate the ‘how’ of the firm, which is another important question at the core of the theory of the firm literature.

The questions of the firm’s why, what, and how are generally referred to as the Coasean questions of the firm since they were posed or implied in Ronald H. Coase’s ground-breaking, Nobel Prize-winning 1937 article ‘The Nature of the Firm’.R. H. Coase, 'The Nature of the Firm', Economica, 4:16 (1937), pp. 386-405. Coase was not the first to pose questions about the firm’s rationale, boundaries, and internal organisation, but his comparative framing was novel and the article’s approach has become starting point for the modern study of economic organisation and the firm. Coase’s basic question, which asserted a clear theoretical distinction between the firm as a planned hierarchy and the decentralised exchange in the market, was stated rather bluntly: ‘in view of the fact that it is usually argued that co-ordination will be done by the price mechanism, why is such organisation [the firm] necessary?’.Coase, 'The Nature of the Firm', p. 388. Indeed, as Coase points out, if the market economy is efficient there should be no need for and certainly no value in such alternative means to organise production. Coase answers the question by introducing a cost specific to market exchange — a marketing or transaction cost — that produces a cost-based rationale for organising hierarchies in the place of markets. The firm is according to the Coasean view a means to economise on the market’s transaction costs.

From our contemporary perspective, Coase’s article appears as the culmination of a vast literature on economic organisation and management of the firm in the 1920s and 1930s. This literature continued the earlier work by primarily Alfred Marshall, who discussed the abstract conception of a ‘representative firm’This highly abstract concept was criticised by Lionel Robbins, one of Coase’s professors at the London School of Economics, to whom the concept of ‘a long-period average business unit, representative of the organisation of a given line of production’ is both ‘superfluous’ and ‘misleading’. This concept, which ‘lurks in the obscurer corners of Book V [of Marshall’s Principles] like some pale visitant from the world of the unborn waiting in vain for the comforts of complete tangibility’, had nevertheless garnered ‘discernible’ influence in ‘certain recent discussions of applied economics’. L. C. Robbins, 'The Representative Firm', The Economic Journal, 38:151 (1928), pp. 387-404, pp. 391, 399, 387. and offered an extensive study of industrial organisation.See book IV, A. Marshall, Principles of Economics. 8th edition (1890) (New York: Macmillan, 1920). This line of research, to which Coase’s article was likely intended as a challenge but ended up making little if any impact,I have made the argument that Coase’s contribution should be considered a challenge to, and also attempt to undermine, this literature elsewhere. See P. L. Bylund, 'Ronald Coase's "Nature of the Firm" and the Argument for Economic Planning', Journal of the History of Economic Thought, 36:3 (2014), pp. 305-329. subsided within mainstream economics in the late 1930s. The economic study of the firm was not revived until Coase’s pioneering work was rediscovered in the late 1960s and early 1970s, primarily through the work of Oliver E. Williamson who adopted Coase’s comparative institutional analysis (‘firm vs. market’) as well as the concept of ‘transaction costs’. The rediscovery of the Coasean ‘make-or-buy’ perspective on coordination became the starting point for an extensive literature in economics aiming to explain firm organising, which developed over the course of some twenty years.Notable contributions to this literature include A. A. Alchian and H. Demsetz, 'Production, Information Costs and Economic Organization', American Economic Review, 62:5 (1972), pp. 777-795, S. J. Grossman and O. D. Hart, 'The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration', The Journal of Political Economy, 94:4 (1986), pp. 691-719, O. D. Hart, 'An Economist's Perspective on the Theory of the Firm', Columbia Law Review,  (1989), pp. 1757-1774, M. C. Jensen and W. H. Meckling, 'Theory of the Firm: Managerial Behavior, Agency Costs, and Capital Structure', Journal of Financial Economics, 3:4 (1976), pp. 305-360, B. Klein, R. A. Crawford and A. A. Alchian, 'Vertical Integration, Apropriable Rents, and the Competitive Contracting Process', Journal of Law and Economics, 21:2 (1978), pp. 297-326, O. E. Williamson, Markets and Hierarchies, Analysis and Antitrust Implications: A Study in the Economics of Internal Organization  (New York: Free Press, 1975), O. E. Williamson, The Economic Institutions of Capitalism  (New York: Free Press, 1985). This literature is still core to the study of the firm.

The emergence and development of the literature on economic organisation in the 1920s and 1930s coincides with the Socialist Calculation Debate, one of the great debates in economics. The latter was prompted by the work of Austrian economist Ludwig von Mises, who argued that an economic system based on socialism was both theoretically and practically impossible.L. v. Mises, 'Economic Calculation In The Socialist Commonwealth', in Hayek (ed) Economic Calculation In The Socialist Commonwealth (London: George Routledge & Sons, 1935), pp. 87-130, L. v. Mises, Socialism: An Economic and Sociological Analysis (1936) (New Haven, CT: Yale University Press, 1951). For a connection between Mises’s and Coase’s arguments, see Bylund, 'Ronald Coase's "Nature of the Firm" and the Argument for Economic Planning'. Mises was a proponent of the Austrian or ‘causal-realist’ school of economics founded at the University of Vienna, which focuses on studying the real market through the lens of a deductive theoretical framework. The tradition’s focus on the market as it is, rather than — as in modern mainstream economics — highly formalised mathematical models with only occasional relevance to the real workings of the market, suggests it perhaps should have researched the firm. After all, markets both then and now are predominantly populated with firms; most economic activity takes place within or between such organisations. Yet, in contrast to neoclassical economics, which gave the topic a lot of attention in the 1960s, 1970s and 1980s, the Austrian school did not develop a theory of formal economic organisation, and even less a theory of the firm.

This appears as a conundrum but is also an opportunity. That it is an opportunity is evident from two recent trends in the literature related to the Austrian body of research, on the one hand, and the study of the firm, its governance and organisation on the other. One trend is the growing interest for issues relating to economic organisation from within the Austrian school and by Austrian scholars. Since the 1990s, articles and books have been published as part of the Austrian research program that propose approaches to and directions for developing an Austrian theory of the firm.Noteworthy examples include N. J. Foss and P. G. Klein, Organizing Entrepreneurial Judgment: A New Approach to the Firm  (Cambridge, UK: Cambridge University Press, 2012), P. Lewin, Capital in Disequilibrium: The Role of Capital in a Changing World  (London and New York: Routledge, 1999), F. E. Sautet, An entrepreneurial theory of the firm  (Routledge, 2000). The other trend is evident by the (re)discovery of and then growing use and influence of Austrian economic concepts and theory in strategic management and entrepreneurship research.P. L. Bylund, 'Toward a Framework for Behavioral Strategy: What We Can Learn from Austrian Economics', in Das (ed) Toward a Framework for Behavioral Strategy: What We Can Learn from Austrian Economics Information Age Publishing, 2014), pp. 205-232, P. G. Klein and P. L. Bylund, 'The Place of Austrian Economics in Contemporary Entrepreneurship Research', Review of Austrian Economics, 27:3 (2014), pp. 259-279. These two trends, while addressing similar issues, have different starting points and approaches, and build off different theoretical frameworks. But, as we will see, they nevertheless have similar theory implications, however with different emphases, and therefore suggest a possible future convergence.

For scholars in management and entrepreneurship, Austrian economics has offered an opportunity to open new venues for research. While the formal models in mainstream economics, especially industrial organisation (IO), originally laid ground for the study of strategic management, they are deficient for producing predictions and advice in a dynamic world. The formalised economic approach offers little support for more practically oriented or realistic research aiming for understanding and aiding in the creation or management of real firms. In contrast, the Austrian view of the market as a dynamic, entrepreneurship-driven competitive discovery process, and its focus on realism in aiming to explain real empirical phenomena, has considerable potential to enhance research and practice in both management and entrepreneurship. As we shall see, modern research in these fields has already adopted several core Austrian concepts and insights.

The study of strategic management was originally an offshoot of the so-called Bain/Mason paradigm of industrial organization (IO). While IO focused on the overall efficiency of the economic system as compared to the perfectly competitive model, strategic management developed strategies for the individual firm to exploit the efficiency logic and so establish monopoly power through which it can earn above-normal returns.M. E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors  (New York, NY: Free Press, 1980), M. E. Porter, 'The Contributions of Industrial Organization to Strategic Management', The Academy of Management Review, 6:4 (1981), pp. 609-620, M. E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance  (New York, NY: Free Press, 1985). But the empirical market in which business leaders draft strategies and make decisions is scarcely similar to the perfectly competitive model. Also, in stark contrast to the model, real production is neither perfectly optimised nor instantaneous (which is often the case in formal economic models), and business decisions are always made under uncertain conditions. The market, in other words, is dynamic and uncertain, it is in a constant flux and is fundamentally less than perfectly foreseeable. Businesses consequently operate in a changing world — that is, disequilibrium — that is rather far from a stable equilibrium state, and this makes the formalised models describing maximising behaviour of rational actors with perfect information quite inapplicable in real business management.

It should therefore have been an obvious and expected development within strategic management to move toward adopting and analysing a more dynamic conception of the market and the firm. The change to focusing on the analysis of a more dynamic and ‘messier’ view of the market constituted a shift from the formal models of mainstream economics toward an Austrian conception of the market as a competitive and equilibrating process. As Robert Jacobson observed in the early 1990s, there are ‘relatively few strategy researchers [who] explicitly attribute or link their analysis to Austrian economics’, but ‘the influence of Austrian thinking is more widespread than this lack of attribution might suggest’. He continued by noting that much of the then-recent strategy research ‘fit[s] squarely into the Austrian school of thought’ and that this work even ‘can be seen as forming an “Austrian School of Strategy”’.R. Jacobson, 'The "Austrian" School of Strategy', The Academy of Management Review, 17:4 (1992), pp. 782-807, pp. 784, 802.

A similar shift has occurred in the study of entrepreneurship, though this field (at least the research done outside of economics departments) never adopted as fully the streamlined economic models on which strategic management was originally based. Entrepreneurship is here commonly perceived as some form of open-ended change, whether it is the fundamental ‘driving force of the whole market system’, as Mises puts it,L. v. Mises, Human Action: A Treatise on Economics. The Scholar's Edition (1949) (Auburn, AL: Ludwig von Mises Institute, 1998), p. 249. or simply the act of creating firms.Daniel F. Spulber, The Theory of the Firm: Microeconomics with Endogenous Entrepreneurs, Firms, Markets, and Organizations  (Cambridge: Cambridge University Press, 2008). As it constitutes a process of change, the concept and its impact on the market are profoundly difficult to express in formal notation. As a result, entrepreneurship could never rely on the models of modern economic theory as was the case in strategic management. This may be a reason why, as William J. Baumol noted, ‘[t]he theoretical firm is entrepreneurless — the Prince of Denmark has been expunged from the discussion of Hamlet’.W. J. Baumol, 'Entrepreneurship in Economic Theory', The American Economic Review, 58:2 (1968), pp. 64-71, p. 66.

Expunged is probably a proper description. Since at least the early 18th century studies in economic theory have placed the entrepreneur at the centre. Richard Cantillon, for instance, defines entrepreneurship as working for non-fixed income (and therefore the bearing of uncertainty)R. Cantillon, Essai sur la nature du commerce en général (1755) (London: Macmillan & Co, 1931). and saw in the entrepreneur the force that brings equilibrium to the market.M. N. Rothbard, An Austrian Perspective on the History of Economic Thought, Volume I: Economic Thought Before Adam Smith  (Auburn AL: Ludwig von Mises Institute, 1995), p. 352. Adam Smith, commonly regarded the ‘father’ of economics, saw in the ‘undertaker’ an agent that transforms demand into supply.A. Smith, An Inquiry into the Nature and Causes of the Wealth of Nations  (1776). Jean-Baptiste Say saw the entrepreneur as a speculator who runs the firm for profit.J.-B. Say, A Treatise on Political Economy or the Production, Distribution and Consumption of Wealth (1821) (Auburn, Al.: Ludwig von Mises Institute, 2008), see also M. N. Rothbard, An Austrian Perspective on the History of Economic Thought, Volume II: Classical Economics  (Auburn AL: Ludwig von Mises Institute, 1995), pp. 25-27. The common denominator of these classical approaches to entrepreneurship is that the concept is considered primarily in terms of the role or function it plays in the economy. Modern entrepreneurship, in contrast, has to a great extent approached entrepreneurship as an empirical phenomenon, in which entrepreneurship is measured as ‘self-employment’ or as the degree of non-concentration in an industry.See P. G. Klein, 'Opportunity discovery, entrepreneurial action, and economic organization', Strategic Entrepreneurship Journal, 2:3 (2008), pp. 175-190.

It was not until the work of Scott A. Shane and Sankaran Venkataraman,See especially S. A. Shane and S. Venkataraman, 'The promise of entrepreneurship as a field of research', Academy of Management Review, 25:1 (2000), pp. 217-226 and S. A. Shane, A General Theory of Entrepreneurship: The Individual-Opportunity Nexus  (Cheltenham, UK: Edward Elgar, 2003). who suggested the study and implications of the entrepreneurial opportunity as common denominator for studies in entrepreneurship, that theorising without direct basis in empirical observation regained its foothold in the field of entrepreneurship. Shane and Venkataraman relied heavily on the work of Israel M. Kirzner in reformulating the study of entrepreneurship, and contrasted Kirzner’s ‘alert’ entrepreneur with a conception of Joseph A. Schumpeter’s ‘disruptive’ innovator-entrepreneur.I. M. Kirzner, Competition and Entrepreneurship  (Chicago, IL: University of Chicago Press, 1973), J. A. Schumpeter, The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle (1911) (Cambridge, MA.: Harvard University Press, 1934). This has ultimately led to Austrian economics having a strong influence in entrepreneurship.

The use of Austrian concepts in strategic management is as prevalent as in entrepreneurship, but far from as explicitly attributed. Whereas entrepreneurship theory was built on an openly Austrian foundation, strategic management research only infrequently recognizes that many of the field’s core concepts have already been used, elaborated on and scrutinized by the Austrians. While there are indeed a number of studies in strategic management that explicitly use an Austrian approach or even adopt Austrian theory, the measurable relative influence of Austrian economics has not increased. Instead, concepts such as resource heterogeneity, uncertainty and dispersed knowledge — and their implications — are reinvented and drafted anew, and used as means to deal with problems arising due to the reliance on formal economic models. This may at times give a thoroughly strategic management flavour to these concepts that can seem to create a distinct paradigm, but it also subjects the field to costs as already developed theoretical concepts, which can be common knowledge in the Austrian tradition, are reinvented and suffer problems achieving consistency. The latter, in fact, is in line with a warning drafted by Jacobson, who cautioned that while Austrian economics is a mature theoretical framework and therefore both useful and valuable, it is also highly integrated due to its strictly deductive method; this means that ‘inconsistencies can arise when attempting to integrate other frameworks with Austrian paradigms’.Jacobson, 'The "Austrian" School of Strategy', p. 803. This may turn out to be a severe problem in strategic management as the field borrows, whether or not intentionally or even knowingly, several core concepts from Austrian economics, and it can equally become a problem in entrepreneurship theory as it originated as an application but not elaboration of Austrian theory. But, as we shall see in the next section, the same type of problem is latent also in Austrian theories of the firm.

Austrian approaches to studying the firm face similar problems as those we just discussed with respect to theories in strategic management including Austrian concepts and constructs. The approach, however, is the obverse: they take Austrian theory as starting point and then add concepts, theoretical devices and reasoning from mainstream (non-Austrian) theories of the firm to it.P. L. Bylund, 'Division of Labor and the Firm: An Austrian Attempt at Explaining the Firm in the Market', Quarterly Journal of Austrian Economics, 14:2 (2011), pp. 188-215. In contrast to typical Austrian theorising then, which maintains consistency through strict deductive reasoning, Austrian approaches to the firm place mainstream conceptualisations within an Austrian ‘market process’ framework. In order to make the pieces fit, the framework is often made out to hinge on a single or couple of Austrian core concepts (such as knowledge, capital theory, entrepreneurship or uncertainty). Consequently, we see Austrian theories that discuss how concepts in mainstream economic theories of the firm, like transaction costs, incomplete contracting, monitoring costs and so on, relate to, can be combined through, are supported or otherwise further explained by utilising an approach that at least in part is or derives from Austrian thinking. By placing ‘bridging’ Austrian concepts at the core of the theory, which supposedly adds an explanatory dimension to existent mainstream theories, an argument is indirectly generated for the value of incorporating core components of Austrian economics in mainstream theory development. But doing so could also introduce inconsistencies. The product is in any case a theoretical amalgamation that appears to be mainstream in many ways and therefore builds on strengths perceived in the already established theories, but is presented with a distinctly Austrian flavour.

Whereas these approaches purport to indicate steps toward an integrated framework that can explain economic organisation on Austrian terms, they predominantly attempt to achieve this goal by relying on the unorthodox method of ‘combining’ Austrian with decidedly non-Austrian theoretical constructs. As these constructs have different histories, are from different bodies of theory and commonly are formulated using very distinct (and, at least to some extent, incommensurable) assumptions and reasoning, they risk appearing more as a jumble of concepts inspired or held together by an Austrian-style market process argument than an integrated theory. As I concluded elsewhere, ‘the existing [Austrian] attempts fail to convincingly explain why there are firms because they are too narrowly focused on specific characteristics rather than on the firm in the market’.Bylund, 'Division of Labor and the Firm: An Austrian Attempt at Explaining the Firm in the Market', p. 191 It should, in fact, be difficult to imagine an Austrian approach to explaining economic organisation that does not see the firm as having or supplying a distinct and important function to the integrated market system in which it is thoroughly embedded. The firm should be both affected by and effectuate change in the market process. In this sense, the firm cannot be seen as ‘only’ a governance choice for certain types of transactions or applicable under a certain set of conditions or in specific situations (as several theories suggest), but should — considering the firm’s relative omnipresence in the market — play a more substantial role in how the market process works. The firm, seen from an Austrian point of view, should provide a function that fits in the broader scheme of things.

At this point it may be appropriate to address the question of how we define a ‘firm’. But this is exactly the problem with existing theories of economic organisation, whether they are Austrian or mainstream — there is no established definition of the phenomenon, so common in the market, that we refer to as a ‘firm’. Instead, the theoretical literature suggests (at least) four distinct definitions or rationales for the firm: as a technological necessity, as having a nature that is distinct from the market, as a means for avoiding costs of using the price mechanism, or as an accumulated collection of resources.Sautet, An entrepreneurial theory of the firm, pp. 5-6. As can easily be seen, there is no reason to assume that all four rationales are necessarily and always present where there is a firm, which makes the situation theoretically unsatisfying. If we for a moment assume that firms are more than simple ‘legal fictions’,Jensen, et al., 'Theory of the Firm: Managerial Behavior, Agency Costs, and Capital Structure'. by which we mean that economic organisation provides an actual and real economic function regardless of legal status, it should be clear that the empirical observation that firms are ubiquitous in advanced markets cannot properly guide the development of Austrian theory. This is not to say that empirical observations are unimportant, but quite the opposite. The fact that business firms are practically ‘everywhere’ should to theorists of the firm indicate that there may be more to this phenomenon than suggested by either of the simple rationales relied on in the extant literature, and that it therefore could play a more important role in the market process than, for example, offering a means for avoiding some costs of market transacting. Cost minimisation through choosing the ‘cheaper’ means of coordination can of course be a benefit of the firm, as is Coase’s argument, but the full out adoption of the mainstream market/hierarchy duality as one’s theoretical point of departure does not necessarily follow from this statement.

Despite this, many Austrian theories adopt Coase’s transaction cost theory of the firm, or in any case its argument or assumptions, as starting point. While it is true that Coase introduced the comparative institutional analysis of economic organisation in a nice way, there is reason to think that Coase’s framework is incompatible with Austrian theory. His theory of the firm was intended as a defence of economic planning, and it was in support of planning in the market (Coase’s conception of the firm) that he introduced the concept of transaction costs — a kind of cost affecting market exchange yet that somehow exists outside of economic actors’ opportunity cost assessments and therefore have no effect on efficient resource allocation.Bylund, 'Ronald Coase's "Nature of the Firm" and the Argument for Economic Planning', see also, H. Demsetz, 'R. H. Coase and the Neoclassical Model of the Economic System', Journal of Law and Economics, 54:4 (2011), pp. S7-S13. Coase’s point was that the market is ‘costly’ because resources are heterogeneous and market coordination is not rationally planned, and it follows from this that rational planning (by definition unaffected by this cost) would tend to be less costly. Coase explains that this is the reason such a ‘large sphere’ of the Western market economies are not coordinated through market exchange but are instead planned within firms, and contrasts this ‘decentralised planning’ through firms in the market with the centralised economic planning in Soviet Russia (as Coase notes, Lenin had said the country would ‘be run as one big factory’).

Setting the political connotations aside, Coase’s economic argument stands in stark contrast to how Austrian economists understand the market and how they conceive of capital heterogeneity and the implications thereof. To Austrians, as to Coase, it is ultimately the fact that resources in production are heterogeneous, produced and non-permanent that makes economic planning costly (if not impossible). But Austrians would argue, along the lines of Mises’s argument against socialist economic planning, that this is what makes the market an unbeatable (though still, it must be emphasised, imperfect) coordination mechanism for advanced specialised production — not the other way around. It is Coase’s decidedly un-Austrian framework that allows him to conclude that ‘planning’ is superior to and therefore a multitude firms are formed to supersede the market’s price mechanism.

Whereas Coase’s analytical approach of comparative institutionalism is rightly accepted and appreciated by Austrians, it is difficult to see why the rest of his argument should be. Rather than using a theoretically streamlined but otherwise realistic ‘imaginary construction’ (the common method in Austrian theorising) to isolate causal links and interdependencies in the real economy, Coase’s assumptions intentionally do away with any structural differences so that only the means of coordination remains to distinguish the firm from the market. The conclusion that the choice (which to Coase appears to be made by the economy rather than by an actual actor) of coordinating force between price mechanism and manager is a matter of selecting the least costly alternative is neither interesting nor important — it follows directly from the stated assumptions. This is an important difference between Coase’s analysis and the deductive theoretical framework of Austrian economics. Coase relies on a set of strong assumptions without obvious grounding in theory, whereas the Austrian approach incorporates assumptions within a causal-realist framework that provides a bulwark against arbitrariness.

Coase’s theory ultimately challenged the theory of economic organisation at the time and thereby the body of literature in economic organisation that developed in the 1920s and 1930s. While inspired by E. Austin G. Robinson, an influential Cambridge economist who had written on the logic of industrial organisation,See e.g., E. A. G. Robinson, The Structure of Competitive Industry  (London: Nisbet, 1931), for a discussion on Robinson's influence on Coase, see L. R. Jacobsen, 'On Robinson, Coase and "The Nature of the Firm"', Journal of the History of Economic Thought, 30:1 (2008), pp. 65-80. See also E. A. G. Robinson, 'The Problem of Management and the Size of Firms', The Economic Journal, 44:174 (1934), pp. 242-257. Coase’s approach deviated from Robinson’s in one important respect: he assumed that the firm’s internal organisation is practically a carbon copy of the market’s allocation of resources,Indeed, Coase argued that the ‘object of the organization was to reproduce market conditions’, that is to say ‘to reproduce [its] distribution of factors … within the business unit’. R. H. Coase, 'The Nature of the Firm: Origin', Journal of Law, Economics & Organization, 4:1 (1988), pp. 3-17, p. 4. which facilitated his marginal transaction analysis and allowed him to conclude that there is a strict cost rationale for the firm. The common starting point in the literature at the time, in contrast, was that the firm is defined contra the market by its more intensive division of labour. This difference means that the boundary of the firm, according to Coase’s theory, is the result of a simple cost comparison between different means for allocating resources, whereas ‘pre-Coaseans’ like Robinson derived organisational boundaries from real differences in productivity through resource heterogeneity and specialisation intensiveness.

The latter view was further developed in the works of Edith Penrose,For Robinson's influence, see L. R. Jacobsen, 'On Robinson, Penrose, and the resource-based view', European Journal of the History of Economic Thought, 20:1 (2011), pp. 125-147, see also E. T. Penrose, The Theory of the Growth of the Firm  (New York: John Wiley and Sons, 1959). who with mentoring assistance by Austrian economist Fritz Machlup,C. M. Connell, 'Fritz Machlup's Methodology and The Theory of the Growth of the Firm', Quarterly Journal of Austrian Economics, 10:4 (2007), pp. 300-312. authored an influential book on the evolution and growth of firms. The modern resource-based view of the firm, which applies a strict strategic management perspective on the value creation and value capture problems that arise due to resource heterogeneity, is based on Penrose’s non-Coasean approach as derived from the work of Robinson and Machlup. As will emerge through the discussion in subsequent chapters, this legacy of Robinson — and the classical economics approach to the study of the firm that it was based on — should be a much more appropriate starting point for developing a dynamic theory of the firm. Not only is this particular approach evolutionary and dynamic in the same sense that Austrian economics provides a framework for studying and understanding the market as a process, but it already includes several concepts that are compatible with the Austrian approach.

Nevertheless, an Austrian theory of the firm should probably not assume it as a starting point. Considering the deductive and integrative nature of Austrian theory, it would be a mistake to do more than take inspiration from other schools of thought — especially if they are based on different (or even incommensurable) assumptions. Despite how it is commonly approached, the economic theory of the firm is not a specialisation, but an elaboration and extension of the existent body of economic theory aimed at providing an answer specifically to the question of economic organisation. This answer cannot, obviously, contradict the theoretical framework, but can suggest a potential theoretical challenge to existing emphases or applications. In order to be true, a deductive theoretical framework and all its parts need to constitute a consistent whole; what remains, therefore, for Austrian theory to properly provide an answer to the so-called Coasean questions of the firm’s rationale, boundaries, and internal organisation is to extend the theory by applying it on and emphasising the particular issues that pertain to organisation. Indeed, as Mises notes, ‘[t]here is no specialization [in economics], as all problems are linked with one another. In dealing with any part of the body of knowledge one deals actually with the whole’.Mises, Human Action: A Treatise on Economics. The Scholar's Edition: 869 The point of departure for producing an Austrian theory of economic organisation, therefore, must be the existent body of Austrian theory and consequently the Austrian understanding for what constitutes and drives the market process. It follows that an Austrian theory of the firm should be based on or, at a minimum, be related to core Austrian concepts such as knowledge, capital theory, entrepreneurship and uncertainty. It should also fit with the theoretical framework — and in fact constitute a missing piece of the puzzle.

As finding and theorising on this piece is the task for this book, our focus must first and foremost be on what specific problem the firm can solve in the market process, by which we mean that organising certain economic activity within the firm must have a value for those involved in the firm as well as the market process as a whole. The former is a question of how the firm attracts labour and capital factors, and the latter addresses the overall value of the structure to the market as such. It is not sufficient to address either of these aspects without also addressing the other ones, as it is not sufficient to address either of the Coasean questions separately, since what then emerges as a potential solution may not fit with the overall theoretical framework. The take-home here is that the theory of economic organisation must be built on yet be ultimately delimited (if not restricted) by the theory of the market.

It should be noted that existing approaches to explaining the firm from an Austrian perspective usefully adopt a similar problem-focused methodology. From our perspective, however, they do so in a very limited sense by phrasing the question to be answered in terms of a gap in the theoretical framework rather than a real economic problem. The integrated economic function of organisation for market actors in the market process becomes an implication rather than a core contribution of the theory. Granted, this allows for the approaches to focus primarily or even exclusively on a specific concept or sub-theoretical orientation (such as capital theory or entrepreneurial discovery or judgement) while purporting to — at least indirectly — inquire into the nature of relationships that exist in the market (or, if we wish, between firms and markets). But the approach in effect emphasises trees at the cost of failing to appreciate the extent of — or even see — the forest. But the nature of economics is such that we are unlikely to fully understand the tree, as a phenomenon that arises within an economic or market context, without first considering the tree as embedded within and part of the forest. In other words, we have to deal with the market embeddedness of the firm in order to understand it, and we therefore need to target its function within the broader market context. This is the point of departure for this book.

The discussion above indicates not only that there is a seemingly unoccupied space for a theory to explain the firm from the point of view of the market process, but also that there are several theories, approaches, and frameworks that we can draw from. While a new theory of the firm can provide important insights, and it is indeed the purpose of this book to draft one, it is unnecessary to adopt a completely different approach and ‘reinvent the wheel’ completely. Yet to take the firm’s embeddedness seriously, it is necessary to derive the firm’s function from limitations that the market suffers without it. In this sense, we start from the beginning by discussing the market process and how it functions without firms. We look specifically at production as the core activity within the market process, and then elaborate on whether market production is subject to a fundamental problem or shortcoming, which can potentially be solved by entrepreneurs only through economic organising. The next chapter discusses the market as a dynamic process.

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Here are just a few teasers:

Ronald Coase, Nobel Laureate in economics, relates an interesting incident highly revelatory of the state of mind of opinion moulders in the United States.

It concerns the natural gas shortage of the 1960s. Edmund Kitch, of the University of Chicago, had written a study demonstrating the part that short-sighted federal regulation played in the shortage, and presented his findings in a public lecture in Washington, D.C., in 1971. In Coase’s words (1994: 49–50):

Much of the audience consisted of Washington journalists, members of the staff of congressional committees concerned with energy problems, and others with similar jobs. They displayed little interest in the findings of the study but a great deal in discovering who had financed the study. Many seem to have been convinced that the law and economics program at the University of Chicago had been “bought” by the gas industry ... a large part of the audience seemed to live in a simple world in which anyone who thought prices should rise was pro-industry and anyone who wanted prices to be reduced was pro-consumer. I could have explained that the essentials of Kitch’s argument had been put forward earlier by Adam Smith — but most of the audience would have assumed that he was someone else in the pay of the American Gas Association.

In this episode we see a microcosm of the world habitually inhabited by anti-market intellectuals and those who have absorbed their teachings. The continued flourishing of this class of intellectuals remains an enduring puzzle and problem for classical liberals. The purpose of this essay is not to propose a definitive solution to the problem, but mainly to assemble and contrast some of the more salient positions advanced (mostly) by liberal scholars, as a step towards solving the puzzle. Finally, I will suggest which position appears to me to be the most plausible.

Forty-three years ago, at the 1951 meeting of the Mont Pèlerin Society at Beauvallon, a distinguished panel of scholars discussed the treatment of capitalism by the intellectuals.T.S. Ashton, “The Treatment of Capitalism by Historians,” L.M. Hacker, “The Anticapitalist Bias of American Historians,” and Bertrand de Jouvenel, “The Treatment of Capitalism by Continental Intellectuals.” These were later supplemented by an additional essay by Ashton, a contribution by W.H. Hutt on the early nineteenth century factory system, and an introduction by F.A. Hayek on “History and Politics,” and published by the University of Chicago Press, 1954. The talks were assembled and published in a volume edited by F.A. Hayek, Capitalism and the Historians.

Arthur Schlesinger, Jr., (1954: 178) composed an entertaining screed on the work,A later, and less biased, judgment on the importance of the work is provided by Taylor 1997: 163: “During the following decade modern economic history took a dramatic swing away from the liberal-left consensus established by the Hammonds, Tawney, and the Webbs. The seminal text for this change of direction was the 1954 collection of essays compiled by F.A. Hayek, Capitalism and the Historians ...” in the form of a review for, of all things, the prestigious Annals of the American Academy of Political and Social Science. “All the contributors to this queer volume seem to be driven by some curious sense of persecution,” Schlesinger declared. Capitalism and the Historians is simply “a summons to a witch-hunt. Americans, one would think, have enough trouble with home-grown McCarthys without importing Viennese professors to add academic luster to the process.” Harvard professor Schlesinger ended by denouncing the University of Chicago Press for publishing the book in the first place: “What conceivably could have persuaded a university press to publish this book is hard to imagine. This volume is one more example of what Senator Fulbright recently called ‘that swinish blight so common in our time ... anti-intellectualism.’”

Yes, of course: Hayek, Ashton, de Jouvenel, and the others, all swinish anti-intellectuals and witch-hunters, possibly afflicted with a touch of mental illness (a “sense of persecution”). The review is, in fact, a good example of how New Deal hacks like Schlesinger treated classical liberal thinkers when they were able to get away with it, even, inanely, trying to whip the University of Chicago Press into line.

In his paper, Bertrand de Jouvenel described intellectuals as those who deal in the “mental images, representations of the universe ... of the things and agents therein, of [man] himself and his relation to them.” Since every society requires such representations, the importance of this group is very great (91).

It happens that a striking characteristic of modern intellectuals is their animosity towards the marketplace:

An enormous majority of Western intellectuals display and affirm hostility to the economic and social institutions of their society, institutions to which they give the blanket name of capitalism. (103)

Why should this be? The reason cannot lie, de Jouvenel argues, in a puritanical disdain for social arrangements that satisfy the hedonistic demands of selfish individuals. Modern welfare democracy is also such an arrangement (although not as efficient in accomplishing its end), yet it is not subject to the same antagonism (95–96).

De Jouvenel claims, surprisingly, that “the intellectual’s hostility to the businessman presents no mystery, as the two have, by function, wholly different standards.” While the businessman’s motto is the customer is always right, the intellectual’s task is to preserve the highest standards of his field even against the weight of popular opinion (hence, the tendency to favor the painters, novelists, poets, film-makers, etc., “who are for intellectuals only”). (116–21).

There is no doubt that de Jouvenel has identified what is felt to be one of capitalism’s major irritants. Many intellectuals find it impossible to resign themselves to the fact that, as Ludwig von Mises pointed out (1956: 9): “What counts in the frame of the market economy is not academic judgments of value, but the valuations actually manifested by people in buying or not buying.”

But the attitude of the intellectuals can hardly be wholly accounted for by the mere fact that entrepreneurs serve the wishes of the public, rather than any loftier end — and for the same reason de Jouvenel himself gave earlier. In democratic welfare states, politicians and bureaucrats are also supposed to serve the public, rather than to struggle to preserve standards of excellence per se. Yet the intellectuals’ enmity is rarely if ever directed against democracy, the welfare state, or its leaders and functionaries.

Thus, the problem remains. In a significant respect, the situation has deteriorated since the 1951 Mont Pèlerin meeting. Then, de Jouvenel could take for granted that even the modern leftist intellectual “takes pride in the achievement of technique [i.e., technology] and rejoices that men get more of the things which they want” (113). The same can hardly be said today, with the rise of a fanatical environmentalism and incessant attack on industrialism and the consumer society.

In 1972, twenty-one years after that panel at Beauvallon, R.M. Hartwell delivered a talk at the Mont Pèlerin meeting at Montreux, on “History and Ideology” (Hartwell 1974).I am grateful to Professor Leonard P. Liggio for bringing this essay to my attention. Hartwell, too, had occasion to remark on the “widely held aversion to the economic and political system which provided the institutional framework for modern economic growth.” As a historian, he naturally stressed the crucial role of historical myths, concocted and circulated by academic intellectuals, in nourishing this aversion.

Hartwell’s lecture is especially noteworthy for drawing attention to the systematic character of the anti-capitalist onslaught, as experienced by the typical educated citizen of a western democracy, including those journalists cited above. History, he notes, “is only one element in a battery of self-reinforcing prejudice” against private property and the market economy. In literature, economics, philosophy, sociology, and other subjects, the student is continually subjected to data and interpretations that converge on a single point: the viciousness of private enterprise and the virtuousness of state intervention and state-supported labor unionism. “And what schools and universities propagate in formal education,” Hartwell observes, “many other institutions reinforce” — particularly the churches, the creative arts, and the mass media (Hartwell 1974: 11–12).On the leftist leanings of American academics, see Lee 1994 and the surveys cited therein.

Now, twenty-two years later, we address, once again, the question of the intellectual and the marketplace.

This does not argue the futility of the question, however, but rather its central importance. In a sense, the Mont Pèlerin Society was founded to deal with the problem of the modern intellectual’s antipathy to capitalism and the harmful consequences of that antipathy. Most of us here have now lived long enough to understand the truth of Schumpeter’s assertion that “capitalism stands its trial before judges who have the sentence of death in their pockets.” The only thing that changes, Schumpeter wrote, are the particulars (1950: 144). That ever-changing indictment is presented, over and over again, by the intellectuals.

In earlier times, they indicted capitalism for the immiseration of the proletariat, inevitable depressions, and the disappearance of the middle classes. Then, a little later, it was for imperialism and inevitable wars among the imperialist (capitalist) powers.

In more recent decades, the indictment again changed, as earlier accusations became too obviously untenable.

Capitalism was charged with being unable to compete with socialist societies in technological progress (Sputnik); with promoting automation, leading to catastrophic permanent unemployment; both with creating the consumer society and its piggish affluence and with proving incapable of extending such piggishness to the underclass; with “neo-colonialism”; with oppressing women and racial minorities; with spawning a meretricious popular culture; and with destroying the earth itself.Cf. Bronfenbrenner 1981: 104: “Both the rise of environmental legislation and the postthalidomide burgeoning of ostensible consumer protection have come since Schumpeter’s death; both would have been grist for Schumpeter’s mill.” Philosopher Robert Nozick 1984: 134 wrote of an experience he often had in replying to criticisms that laissez-faire capitalism causes various evils, from monopoly and pollution to systematic overproduction or underproduction. After Nozick painstakingly refuted the stated charge, his interlocutor “drops the point and quickly leaps to another,” child labor, racism, advertising, etc., etc. “Point after point is given up. ... What is not given up, though, is the opposition to capitalism.” Nozick concluded that the particular arguments are not important, since “there is an underlying animus against capitalism” (emphasis in original). This is an experience that many another advocate of the free market could also attest to. As George Stigler remarked: “A constant stream of new criticism — such as the problem of homeless families — is being invented, discovered, or heavily advertised.”Stigler 1989: 1. I am grateful to Dr. Claire Friedland, manager of the George J. Stigler archives, for her kindness in making this and other unpublished papers of Professor Stigler available to me. The question remains: what is at the root of this ever-changing, never-ending indictment? What accounts for the intellectuals’ unremitting hostility to the market economy?

To throw light on these questions, we must go beyond the specific accusations themselves. Israel Kirzner writes (1992: 96):

Whatever the stated specific denunciations of capitalism, whatever the errors in economic analysis which are implicit in these denunciations, a thorough understanding of the anti-capitalist mentality cannot avoid ultimately coming to grips with the deep-seated prejudices and ingrained habits of thought which are, both consciously and unconsciously, responsible for the antipathy shown to the market system.

F.A. Hayek was acutely concerned with our problem, since he, too, was wholly convinced of the importance of the intellectuals: “They are the organs which modern society has developed for spreading knowledge and ideas,” he declares in his essay, “The Intellectuals and Socialism” (Hayek 1967). The intellectuals — whom Hayek characterizes as “the professional second-hand dealers in ideas”This definition by Hayek is somewhat idiosyncratic, in that it excludes the originators of ideas, e.g., among socialists, Saint-Simon and Marx. — exercise their power through their domination of public opinion: “There is little that the ordinary man of today learns about events or ideas except through the medium of this class.” Among other things, they often virtually manufacture professional reputations in the minds of the general population; and through their domination of the news media, they color and shape the information that people in each country have of events and trends in foreign nations. Once an idea is adopted by the intellectuals, its acceptance by the masses is “almost automatic and irresistible.” Ultimately, the intellectuals are the legislators of mankind (178–80, 182).

With all this, Hayek’s view of the intellectuals is flatteringly benign: their ideas are determined by and large by “honest convictions and good intentions” (184).At one point (182) Hayek does suggest that selfish personal interests might play a part in the intellectuals’ attitude; he refers, without naming him, to Karl Mannheim and “the curious claim ... that [the intellectual class] was the only one whose views were not decidedly influenced by its own economic interests.” But he does not indicate why he considers this claim “curious.” In “The Intellectuals and Socialism,” Hayek does mention in passing the intellectuals’ egalitarian bias; the analysis, however, is basically in terms of their “scientism.” With his characteristic emphasis on epistemology, Hayek sees the revolt against the market economy as stemming from the methodological errors he identified and investigated at length in his brilliant study of the rise of French positivism, The Counter-Revolution of Science (1955).

Thus, in Hayek’s view, the chief influence on the intellectuals has been the example of the natural sciences and their applications. As man has come to understand and then control the forces of nature, intellectuals have grown infatuated with the idea that an analogous mastery of social forces could produce similar benefits for mankind. They are under the sway of “such beliefs as that deliberate control or conscious organization is also in social affairs always superior to the results of spontaneous processes which are not directed by a human mind, or that any order based on a plan beforehand must be better than one formed by the balancing of opposing forces” (186–87). Hayek even makes the following astonishing statement (187):

That, with the application of engineering techniques, the direction of all forms of human activity according to a single coherent plan should prove to be as successful in society as it has been in innumerable engineering tasks is too plausible a conclusion not to seduce most of those who are elated by the achievements of the natural sciences. It must indeed be admitted both that it would require powerful arguments to counter the strong presumption in favor of such a conclusion and that these arguments have not yet been adequately stated. ... The argument will not lose its force until it has been conclusively shown why what has proved so eminently successful in producing advances in so many fields should have limits to its usefulness and become positively harmful if extended beyond those limits.

It is exceedingly difficult to follow Hayek’s reasoning here. He appears to be saying that because the natural sciences have made great advances and because innumerable particular engineering projects have succeeded, it is quite understandable that many intellectuals should conclude that “the direction of all forms of human activity according to a single coherent plan” will be similarly successful.

But, in the first place, the advances of the natural sciences were not brought about in accordance with any overall central plan; rather, they were the product of many separate decentralized but coordinated researchers (produced analogously in some respects to the market process; see Baker 1945 and Polanyi 1951These are both works with which Hayek was quite familiar, which makes his argument at this point more perplexing.). Second, from the fact that many particular engineering projects have succeeded it does not follow that a single vast engineering project, one subsuming all particular projects, is likely to succeed; nor does it seem likely that most people will find such a claim plausible.

Why, then, is it natural, or logical, or easily comprehensible that intellectuals should reason from the triumphs of decentralized scientific research and of individual engineering projects to the success of a plan undertaking to direct “all forms of human activity”?In another essay, on “Socialism and Science,” 1978: 295, Hayek refers to “the undeniable propensity of minds trained in the physical sciences, as well as of engineers, to prefer a deliberately created orderly arrangement to the results of spontaneous growth — an influential and common attitude, which frequently attracts intellectuals to socialist schemes. This is a widespread and important phenomenon which has had a profound effect on the development of political thought.” It seems highly doubtful that surveys of political opinion among university professors in the United States, western Europe, or elsewhere, would find socialist opinions more common among physical scientists and engineers than in the humanities and social science faculties.

In his review of Hayek’s The Road to Serfdom, Joseph Schumpeter (1946: 269) remarks that Hayek was “polite to a fault” towards his opponents, in that he hardly ever attributed to them “anything beyond intellectual error.” But not all the points that must be made can be made without more “plain speaking,” Schumpeter declares.Hayek 1973: 161n. 18, 70, rebutted Schumpeter’s criticism, asserting that it was not “‘politeness to a fault’ but profound conviction about what are the decisive factors” for his having attributed merely intellectual error to his opponents in The Road to Serfdom. Hayek reaffirmed that: “It is necessary to realize that the sources of many of the most harmful agents in this world are often not evil men but highminded idealists, and that in particular the foundations of totalitarian barbarism have been laid by honorable and well-meaning scholars who never recognized the offspring they produced.” One wonders how Hayek could know this about the character of those who “laid the foundations of totalitarian barbarism.”

Schumpeter here implies an important distinction. Civility in debate, including the formal presumption of good faith on the part of one’s adversaries, is always in order. But there is also a place for the attempt to explain the attitudes, for instance, of anti-market intellectuals (a form of the sociology of knowledge). In this endeavor, “politeness” is not precisely what is most called for. As regards the positivist intellectuals who argued from the successes of natural science to the need for central planning: it may well be that this false inference was no simple intellectual error, but was facilitated by their prejudices and resentments, or perhaps their own will to power.Cf. the comment by George Stigler 1989: 6: “a central reason for the dissatisfaction of the intellectuals with the enterprise system” is that “it does not give them a mechanism to coerce changes in the behavior of individuals.” Cf. also Robert Skidelsky 1978: 83, who mentions, as one factor in the conversion of the younger American economists to Keynesianism, that, in the version propagated by Alvin Hansen, it provided a “rationale for the permanent direction of economic life by an élite of economists. ... In the Keynesian political economy, public policy would be handed over to the professional economists, who alone would understand what needed to be done.” Robert Higgs 1987a: 116 observes that American Progressives around 1900 found state intervention appealing because it implied a social organization supervised and directed by engineers, planners, technicians, and trained bureaucrats, and thus put “a wise minority in the saddle.”

In any case, Hayek’s gentlemanly deference to anti-market intellectuals can sometimes be downright misleading. Consider his statement (1967: 193):

Orthodoxy of any kind, any pretense that a system of ideas is final and must be unquestioningly accepted as a whole, is the one view which of necessity antagonizes all intellectuals, whatever their views on particular issues.

This, of a category of persons that in the twentieth century has notoriously included thousands of prominent apologists for Soviet Communism in all western countries, is indeed politeness “to a fault.”There is by now a substantial literature on the subject; see, for instance, Caute 1973. Richard Pipes 1993: 202 makes the interesting comment that: “The Bolshevik regime, for all its objectionable features, attracted them [intellectuals] because it was the first government since the French Revolution to vest power in people of their own kind. In Soviet Russia, intellectuals could expropriate capitalists, execute political opponents, and muzzle reactionary ideas.” See also the challenge issued by Eugene D. Genovese (1994) to his fellow intellectuals to testify publicly on what they knew of the crimes of Soviet Communism and when they knew it. There was, after all, good reason, as late as the 1950s, for Raymond Aron (1957) to have written on The Opium of the Intellectuals and for H.B. Acton (1955) to have entitled what is probably the best philosophical critique of Marxism-Leninism, The Illusion of the Epoch.Cf. O’Brien 1994: 344, who notes that “the overwhelming majority of [his] academic colleagues adopted an attitude of judicious agnosticism and relativism towards the horrors of the Stalinist and other Marxist regimes.”

Nor was Communism the only nefarious orthodoxy to claim the loyalty of numerous intellectuals, as is shown by the cases of Martin Heidegger, Robert Brasillach, Giovanni Gentile, Ezra Pound, and many others. For a less complimentary but more realistic view of the integrity of modern intellectuals we may turn to the memoirs of the German historian, Golo Mann (1991: 534), who quotes from his diary of 1933: “18 May. [Josef] Goebbels in front of a writers’ meeting in the Hotel Kaiserhof: ‘We [Nazis] have been reproached with not being concerned with the intellectuals. That was not necessary for us. We knew quite well: if we first have power, then the intellectuals will come on their own.’ Thunderous applause — from the intellectuals.”Benjamin Constant 1988: 137–38, in criticizing the French writers of the Revolutionary and Napoleonic period, described the intellectuals’ penchant to identify with arbitrary power: “all the great developments of extrajudicial force, all the examples of recourse to illegal measures in dangerous circumstances have from century to century been recounted with respect and described with complacency. The author, sitting comfortably at his desk, hurls arbitrary measures in every direction. ... For a moment, he believes himself invested with power just because he is preaching its abuse ... in this way he gives himself something of the pleasure of authority; he repeats as loud as he can the great words of public safety, supreme law, public interest. ... Poor imbecile! He talks to those who are only too glad to listen to him and who, at the first opportunity, will test out his own theories upon him.” Constant’s words may be viewed as a prescient gloss on Stalin’s treatment of many of the Bolshevik intellectuals who had lent their aid to the creation of the Soviet terror state.

In chiding Hayek, Schumpeter suggested (1946: 269) that he might have learned a useful lesson from Karl Marx. Schumpeter’s own interpretation reflects his lifelong engagement with Marxism. Like Marx, he offered a highly pessimistic prognosis for the capitalist system, though for mainly different reasons (1950: 131–45). But while Schumpeter holds that intellectuals will play a key role in capitalism’s demise, he in no way relies on the scenario set forth in the Communist Manifesto.

There, Marx and Engels (1976: 494) announced that as the final revolution approaches, a section of the “bourgeois ideologists” will go over to the side of the proletariat. These will be the ideologists “who have worked their way up to a theoretical understanding of the historical movement as a whole.”The critique of Marxism as the camouflaged ideology of an intellectual would-be “new class” is part of the communist anarchist tradition, begun by Bakunin and continued by Machajski and others; see Dolgoff 1971 and Szelenyi and Martin 1991. Such a laughably self-serving description could hardly appeal to an inveterate skeptic like Schumpeter. Instead, his “Marxism” consisted in examining capitalism as a system with certain attendant sociological traits, and exposing the class interests of the intellectuals within that system.This approach, however, like the Marxist analysis of historical change in terms of class conflict, had numerous precursors among classical liberal thinkers; see the essay on “The Conflict of Classes: Liberal vs. Marxist Theories,” in the present work.

Compared to previous social orders, capitalism is especially vulnerable to attack:

unlike any other type of society, capitalism inevitably and by virtue of the very logic of its civilization creates, educates, and subsidizes a vested interest in social unrest. (1950: 146)

In particular, it brings forth and nurtures a class of secular intellectuals who wield the power of words over the general mind. The capitalist wealth machine makes possible cheap books, pamphlets, newspapers, and the ever-widening public that reads them. Freedom of speech and of the press enshrined in liberal constitutions entails also “freedom to nibble at the foundations of capitalist society” — a constant gnawing away that is promoted by the critical rationalism inherent in that form of society. Moreover, in contrast to earlier regimes, a capitalist state finds it difficult, except under exceptional circumstances, to suppress dissident intellectuals: such a procedure would conflict with the general principles of the rule of law and the limits to the police power dear to the bourgeoisie itself (1950: 148–51).

The key to the hostility of intellectuals to capitalism is the expansion of education, particularly higher education.Cf. Raymond Ruyer 1969: 155–56, who indicates the social and psychological problems resulting from prolonged state instruction (including “adult education”) and the diffusion of “culture” under the aegis of the state. He concludes: “It is typical that the greatest progress that has come about in ‘the democratic extension of culture’ has been produced by private enterprise in the form of paperback books, in which the state did not involve itself, except to impose its usual taxes.” A third of a century later, the same could be said of compact discs and computers. Ruyer’s work, quite unduly neglected, is a profound and elegant dissection of the intellectual’s persistent resentment of the free market economy and capitalist society. In this respect, it stands in contrast to the recent book of Raymond Boudon (2004). Despite its promising title (Why the Intellectuals do not Like Liberalism) and occasional insights, Boudon’s book proves to be superficial, e.g., in dating the intellectuals’ turn against a liberal order from around 1950. This creates unemployment, or underemployment, of the university-schooled classes; many become “psychically unemployable in manual occupations without necessarily acquiring employability in, say, professional work.” The tenuous social position of these intellectuals breeds discontent and resentment, which are often rationalized as objective social criticism. This emotional malaise, Schumpeter asserts,

will much more realistically account for hostility to the capitalist order than could the theory — itself a rationalization in the psychological sense — according to which the intellectual’s righteous indignation about the wrongs of capitalism simply represents the logical inference from outrageous facts ... (1950: 152–53)Schumpeter 1950: 155 highlights an important channel of the intellectuals’ influence, by means of the state bureaucracies, which are “open to conversion by the modern intellectual with whom, through a similar education, they have much in common.”

A major merit of Schumpeter’s argument is that it elucidates an abiding feature of the sociology of radicalism and revolution: the hunt for government jobs. The interconnection between over-education, an expanding reservoir of unemployable intellectuals, the pressure for more bureaucratic positions, and political turmoil was a commonplace among European observers in the nineteenth century.See O’Boyle 1970; also Levy 1987: 160, who writes of “the state-created intelligentsias of post-Restoration Europe [i.e., after 1815] which, outpacing economic growth, faced serious underemployment and played important roles in the revolutions of 1830 and 1848.” In the Reichstag, Chancellor Otto von Bismarck (Raico 1999: 100) claimed that social revolutionaries in Russia consisted of the “diploma-proletariat,” an excess produced by higher education which society could not absorb. The leaders were not workers, but consisted “in part of people of genteel education, many half-educated people ... dissipated students and unsullied dreamers ...” In 1850, the conservative author Wilhelm Heinrich Riehl (1976: 227–38) offered a remarkable analysis, in many ways anticipating Schumpeter, of the “intellectual proletariat” (Geistesproletariat). Even then Germany was producing each year much more “intellectual product” than it could use or pay for, testifying to an “unnatural” division of national labor. This was a general phenomenon in advanced countries, Riehl maintains, resulting from the enormous industrial growth that was taking place. But the impoverished intellectual workers experience a contradiction between their income and their perceived needs, between their own haughty conception of their rightful social position and the true one, a contradiction which is far more irreconcilable than in the case of the manual laborers. Because they cannot “reform” their own meager salaries, they try to reform society. It is these intellectual proletarians who have taken the lead in social revolutionary movements in Germany. “These literati see the world’s salvation in the gospel of socialism and communism, because it contains their own salvation,” through domination of the masses.Schumpeter does not mention Riehl in Capitalism, Socialism, and Democracy and refers to him once in his History of Economic Analysis (1954: 427 and 427 n. 20), but only in connection with Riehl’s work in Kulturgeschichte (cultural history). Later revolutionary movements, whether of the left or the right, can be understood to a large extent as the ideologically camouflaged raid on the great state employment office. Carl Levy (1987: 180) has linked the expansion of the state from the later nineteenth century on to the growth in the numbers of the university-educated, who sought government jobs and utilized positivism as a facilitating ideology. Positivism

stressed the need for expertise, special training, and trained intelligence ... [fortified by] a desacralizing of tradition and the rapid expansion of the public sphere ... [there proliferated] schemes for the organization of society which substituted for traditional elites and capitalist entrepreneurs a stratum of experts and/or the lay clerisy. Examples can be found among the Fabians and the ILP [Independent Labor Party], [Edward] Bellamy and other American authoritarian utopia builders, the Italian socialist professors, and the French socialist elites.

From this perspective, we obtain a deeper understanding of the claim that the welfare state “saved capitalism.” What the welfare state has actually accomplished is to furnish a never-ending source of state jobs for the (mainly middle class) products of what is still referred to as university education, without, as in the nineteenth century, requiring a revolutionary assault.Cf. Mises (1974: 47–48): “In dealing with the ascent of modern statism, socialism, and interventionism, one must not neglect the preponderant role played by pressure groups and lobbies of civil servants and those university graduates who longed for government jobs.” In this connection, Mises mentions the Fabian Society in Britain and the Verein für Sozialpolitik (Association for Social Policy) in Imperial Germany.

While there is doubtless a great deal of truth in Schumpeter’s identification of the systemic surplus of intellectuals as a source of anti-capitalism, it also presents certain difficulties.

Such an overproduction — and consequent un- or under-employment — is a feature of non-capitalist societies, as well. Its effect is the general destabilization of regimes, as occurs from time to time in underdeveloped countries. A more detailed knowledge of the situation in former Communist societies might show that it was also implicated in their subversion and final overthrow.

More to the point: it is not so much the unemployed intellectuals who are the problem but the ones who are employed. Intellectuals unable to find suitable jobs may well provide a receptive subculture as well as occasional cannon fodder for revolutionary movements: among communist anarchists in the late nineteenth century, or in some third world countries more recently. In Germany after the First World War, artists and writers frozen out of the avant-garde culture of Weimar were prominent among the early National Socialists.

But Schumpeter’s thesis does not hold for many other cases, probably the historically most significant ones. Émile Zola and Anatole France, Gerhart Hauptmann and Bertold Brecht, H.G. Wells and Bernard Shaw, John Dewey and Upton Sinclair were scarcely “unemployables” in the intellectual world. Today the “stars” of the mass news media of all the advanced countries — you would know their names in your own country; one could mention American “newspersons” who earn a million dollars a year or more, such being the savage inequalities of capitalism — are typically constant “nibblers” at the system of private enterprise. The question is rather why so many successful and highly influential intellectuals become carping critics of the free economy.Doubt is cast on Schumpeter’s fundamental analysis by Paul A. Samuelson 1981: 10, who points out that in Japan for decades “the continued omnipresence of Marxist terminology among journalists and teachers” has had no discernible effect on Japanese politics.

If Schumpeter declined to be “polite to a fault” when it came to anti-market intellectuals, what is one to say of Hayek’s own mentor, Ludwig von Mises?

No one surpassed Mises in the importance he attached to the power of ideas.For instance, in 1932, Mises 1990: 96 stated: “All the misfortunes from which Europe has suffered in the last two decades have been the inevitable result of the application of the theories which have dominated the social and economic philosophy of the last fifty years.” Thus, it was crucial to his social philosophy and historical interpretations to determine the basis of “the anti-capitalistic mentality,” especially as represented among the intellectuals (Mises 1956).

Often Mises emphasizes invidious personal motivation — resentment and bitter envy — as the source of this attitude. Replacement of the society of status by the society of contract aggravated feelings of failure and inferiority. With equality of opportunity and all careers open to talent, lack of financial success becomes a judgment upon the individual. This is a burden he attempts to shift by scapegoating the social system (1956: 5–11). Intellectuals share this weakness, perhaps in an accentuated form. On occasion, Mises goes so far as to trace the “psychological roots of anti-liberalism” to mental pathology. The scapegoating of the social system by those unable to cope with the reality of their relative failure in life is, Mises claims, a mental disorder which psychiatry has so far neglected to classify. Engaging in a bit of volunteer psychiatric nosology, he ventures to label this condition “the Fourier complex” (1985: 13–17), after the early French socialist, Charles Fourier.

Although Mises’s focus on envy and resentment is the best known of his attempts to explain the anti-capitalist mentality,On one of the very few occasions that he has taken notice of Mises’s writings, Paul Samuelson 1981: 10, n. 3 writes of his “notion that those who can’t hack it in the competitive commercial struggle for existence become the whiners and complainers who seek to subvert the capitalistic order.” This is also the only Misesian explanation mentioned by Nozick 1984: 138. a second and different approach of his seems more fruitful. In an early essay titled “The Psychological Roots of the Resistance to Economics” (1933: 170–88), Mises launches a radical attack on the strand of traditional western morality that has stigmatized moneymaking. Citing Cicero’s De officiis as an exemplary text, he identifies the contempt for moneymaking deeply ingrained in western culture as the source of the hostility towards capitalists, trade, and speculation “which today dominates our whole public life, politics, and the written word.” This contempt, nurtured and sustained through the centuries under changing regimes, is the natural outgrowth of a class morality — specifically, the morality of the classes that are sheltered from the market by the circumstance that they live from taxes.Friedrich Naumann, today a liberal icon in Germany, founded his National Social Association in 1896 to promote social welfare measures and an imperialist agenda. Eugen Richter, the chief authentic liberal political figure of the time, mocked Naumann’s little group as a “pastor and school teacher party.” Richter explained the deficient understanding of the market on the part of its members from the fact that they obtained their living from taxes. Raico 1999: 227. See also the essay on Richter in the present volume. In our own day, it is a morality generated by “priests, bureaucrats, professors, and army officers,” who look with “loathing and scorn” on entrepreneurs, capitalists, and speculators (1933: 181–82).It should be pointed out that Mises had in mind Continental regimes, in which the clergy was customarily supported by state subsidies. De Jouvenel, in Hayek (ed.), 1954: 104, points out that modern intellectuals have taken over the task of the medieval clergy: they are “forever thrusting the condition of the poor before the eyes of the rich,” and forever scolding the rich for being rich.

Insight into the prevalence of this anti-market ethic helps explain (as Mises’s other, envy-based approach does not) the anti-market attitudes often found even among the economically successful in the private sector, since “no one can escape the power of a dominant ideology.” Thus, “entrepreneurs and capitalists themselves are swayed by the moral outlook that damns their activity.” They suffer from a bad conscience and feelings of inferiority. This shows itself in, among other things, the support given to socialist movements by millionaires and their sons and daughters (1933: 184).Drawing on Schumpeter, Robert Higgs 1987: 239 comments on one of the results of the cultural hegemony of the anti-capitalist intellectuals: “the bourgeoisie loses faith in its traditional values and ideals; its defense of the free-market system grows steadily weaker as it accommodates itself to a political environment that gives ever greater priority to social security, equality, and governmental regulation and planning.” George Stigler 1984: 152–53 also held that, because of the influence of the intellectuals, capitalists have themselves become apologetic for their pursuit of profit. “To boast that large profits demonstrate great efficiency in producing existing products and introducing new ones is considered even by them [the capitalists] to be too archaic a form of thought for public consumption.” Mises 1933: 183 suggests another reason for the intellectuals’ rejection of economic theory, and, by implication, liberalism: they identify with “the demigods who make history,” while economics demonstrates the strict limits to the power of these masters of mankind.

A different slant on the anti-market attitudes of the economically successful is offered by another liberal scholar, Helmut Schoeck. In his Envy (1987), Schoeck presents an empirical examination of this pervasive yet elusive — and strangely under-investigated — phenomenon, in the light of evidence from anthropology, ethnology, social psychology, and history.Choi 1993 equates envy with the demand for social justice, and sees it as stemming from an inability to understand the sources and functions of entrepreneurial profits. While suggestive and useful as far as it goes, this would seem to take too narrow a view of envy.

Human beings are by nature prone to envy, springing from a primitive conception of causality that interprets the good fortune of others as having been achieved at a cost to oneself. People are equally subject, however, to a “universal fear of one’s neighbor’s envy and of the envy of the gods and spirits” (363, 308). Fear of the envy of others — of the “evil eye,” for example — gives rise to “a primitive, pre-religious, irrational sense of guilt,” and with it behavior patterns that aim at envy-avoidance.

In various societies varying means have evolved to cope with this sense of guilt and to ward off the retribution of the envious. With intellectuals in capitalist society, envy-avoidance often manifests itself in support for egalitarian causes. The diffuse dread of the envy of others, Schoeck finds, is “the root of that general, aimless sense of guilt which, during the past hundred years, has exercised so disrupting and disorienting an influence. The pangs of guilt (social conscience), and the naive assumption that there could ever be a form of society that was either classless or otherwise non-provocative of envy, have been responsible for the adherence to leftist movements of large numbers of middle- and upper-class people ...” (324). In adhering to movements that preach social and economic equality, they assuage their guilt and anxiety, for now they can feel they are helping to set up “a society in which no one is envious” (325).Regarding the leftist orientation of the economically successful, Schoeck remarks (327) that: “a man will opt for a philosophically decked-out, long-term communist programme ... all the more readily, the more unequal, distinguished, and exceptional is the position he already holds in society, in so far as he combines his privileged position with a sense of guilt.”

Schoeck’s theory has the advantage of accounting also for the peculiar self-righteous “idealism” often displayed by leftist intellectuals, especially among the young:

sensitivity to the envy of others is so deep-rooted in the human psyche that most people erroneously interpret the sense of redemption and peace, which they feel when they have made concessions to envy, as confirmation, not only of their moral superiority, but also of the expediency of their action in the reality of the here and now. (362)

We may add that the blessed release experienced by those who have, they feel, placed themselves safely beyond the envy of the resentfully dispossessed often turns to fury when they are faced with their class brethren who have casually spurned such psychological capitulation.

The authors considered so far have been agreed at least in assigning a great deal of weight in the ultimate determination of political events to intellectuals and the ideologies they generate. This was also the standpoint of Murray Rothbard, which he set forth theoretically (e.g., in Rothbard 1974: 72–76) and frequently explicated historically (e.g., Rothbard 1989 and 1996). Virtually uniquely among free-market thinkers, Murray Rothbard was equally adept, where appropriate, at analyzing political change as the result of interest-group machinations — for example, in the case of the Federal Reserve (Rothbard 1994). But the political relevance of the intellectuals has been challenged by another group of liberal scholars, most notably by George J. Stigler.Norman Barry 1989: 55 (see also idem 1984) somewhat overstates the case when he refers to an “intellectual schizophrenia” in classical liberal thinking, which undertakes to explain the expansion of the public sector by the actions of “sinister interests,” while crediting the triumph of the liberal cause to the advance of liberal “ideas.” Actually, the position of most liberals who have addressed the problem may be best summed up by the statement of R.M. Hartwell 1989: 122: “Ideas count, and always have, for good or for ill.” Barry’s own suggestion 1989: 54, that “there is an interplay between ideas and interests and that the relative strengths of the two forces will depend upon the prevailing institutional arrangements in the society in question,” is a fair summary of the customary liberal view.

Professor Stigler’s justly famed wit was on target when he defined intellectuals (1975: 314) as “people who strongly prefer talking and writing to physical exertion.” In this way, Stigler spurned the common but faulty inference that intellectuals are particularly intelligent. There is no necessary connection between the two categories: for the most part, what distinguishes an intellectual is his command of a particular discourse.Cf. the typically adroit aperçu of Raymond Ruyer 1969: 158: “One is an intellectual today . . . without any special aptitude for intellectuality, with an intelligence often inferior to that of a worker, an artisan, or a middling tradesman, and sometimes with an IQ manifestly close to the level of mental deficiency. In order to ‘pass,’ it is enough to have acquired the vocabulary of intellectuality.”

Stigler was quite aware that, despite the many benefits they reap from the capitalist system, intellectuals have by and large been its implacable critics in all the sectors they dominate (Stigler 1984a: 143–58)Cf., ibid., 161: “The intellectual wishes to choose his way of life and also to choose his standard of living. He chooses freedom, outside of the economic circuit, but he does not renounce the benefits of this circuit. The men who work within the economy displease him, as the yokels displeased the aristocrats, who nonetheless lived on the labor of the yokels, or as the clothiers and shopkeepers of the seventeenth century were the butt of the sarcasms of high society and the ‘persons of quality,’ who in the end might refuse to settle their bills.” It is a great pity that Ruyer’s insightful and beautifully written book has not been translated into English, nor gained the appreciation it deserves.. Yet, while “there is a natural temptation to credit to them ... the decline that has occurred in the public esteem for private enterprise and the large expansion of state control over economic life” (1982: 28–29), this temptation should be resisted. In his view, claims regarding the decisive influence of intellectuals and ideologies are unscientific, since such claims have never been quantified and subjected to empirical testing. In fact, there is a total lack of any theory of how ideologies originate and change (Stigler 1982: 35; 1984b: 3).

In contrast, Stigler proposes to attack the problem with the conventional analytical methods of (neoclassical) economics: hypotheses are to be formulated in quantifiable terms and tested against the data.

A central implication of economic theory is that “man is eternally a utility maximizer, in his home, in his office, — be it public or private — in the church, in his scientific work, in short, everywhere” (1982: 35). Just as they act on the market to maximize their personal utility, so “individuals consistently behave in a utility-increasing manner with respect to the use of the state” (1984b: 3), that is, in supporting measures that, in the aggregate, constitute the historical expansion of state power.

Very sensibly, Stigler warns against defining utility in such a way as to make the hypothesis tautological (1982: 26). Conceding that there is “no accepted content to the utility function,” he proposes one, viz., that a person’s utility “depend[s] upon the welfare of the actor, his family, plus a narrow circle of associates” (1982: 36).

How far this advances the argument is unclear, however. After all, a person’s adherence to a given ideology is usually conditioned by his belief that it will, in some sense, promote his “welfare” and that of his family and close associates, so that reliance on utility functions does not automatically obviate the need to reckon with the impact of ideology.

In Stigler’s view, the simplest way to test the role of ideology as a non-utility-maximizing goal is to ascertain whether the champions of a given ideology incur costs in supporting it:

If on average and over substantial periods of time we find (say) that the proponents of “small is beautiful” earn less than comparable talents devoted to urging the National Association of Manufacturers to new glories, I will accept the evidence. But first let us see it. (1982: 35)

“Utility,” then, appears, for all practical purposes, to mean maximization of income. This is reasonable from Stigler’s viewpoint, since employing another value, for instance, maximization of power, would create insuperable difficulties for formalization and empirical testing in Stiglerian terms.

Stigler further holds that the desire of intellectuals to maximize their incomes (now including prestige and “apparent influence”) explains their distribution along the political spectrum (1982: 34). He refers to Joseph Schumpeter as having partially accepted this position. But Schumpeter’s (and Riehl’s and others’) ascription of economic motives to the intellectuals is of a very different order from Stigler’s. As we have noted, Schumpeter held that economic factors (underemployment, etc.) tend to create a mind-set among intellectuals which is apt to generate anti-capitalistic ideologies that, in turn, spread throughout society. Stigler seems to maintain that economic factors operate upon individual intellectuals directly and immediately.

Stigler applies his notion of the relative unimportance of ideology in a general way to the repeal of the Corn Laws in England in 1846 usually considered a landmark victory of liberalism in its heroic phase. In this instance, it was not intellectuals like the classical economists, from Adam Smith on, nor even leaders like Richard Cobden and Robert Peel, who were responsible, but rather “a shift in political and economic power” (1975: 318–20).

Gary M. Anderson and Robert D. Tollison (1985) purport to provide a somewhat detailed study of the Anti-Corn League in the fashion of Stigler (as well as Gary Becker and others), which appears to avoid the ambiguities of Stigler’s position.Stigler at one point writes 1975: 315 that the intellectual’s role is not that of “simply meeting a well-defined demand for ideology by some important groups in the society. Groups and desired ideologies are neither clearly defined nor immutable through time, so the effective intellectual performs useful functions in detecting shifts of view, in filling in the details of the views, and in gradually adapting them to new circumstances.” His tasks are “giving coherence to a set of positions or interests, of developing them into principles sufficiently broad to allow ready application to new issues and facts, of finding the natural allies and uncovering the submerged conflicts between groups”; these are “not routine or unimportant tasks.” But Stigler’s qualifications undermine his position to a substantial degree. If the intellectuals have the job, among other things, of even defining interest groups, then their independent effect would seem to be considerable. While the authors do not deny that “ideology played a role” in repeal, they declare that any basically ideological explanation should be avoided because of its untestability. Instead, they apply the framework of public choice analysis, focusing on the part played by the direct financial self-interest of some of the League’s contributors and supporters. Yet it is far from clear how their own narrative, which piles up generally well-known facts with no attempt at quantification and formalization, is supposed to be “testable” in the rigorous sense they require. Droll is the authors’ earnest presentation of the public subscription for Cobden and the awarding of a seat for Manchester in the House of Commons to John Bright as “the Payoff” of the two great liberal leaders.

George Stigler sometimes combined his deprecatory estimation of the influence of intellectuals with a similarly low evaluation of the influence of individuals altogether, including political leaders. As a general explanation of political change, Stigler’s own hypothesis is that

we live in a world of reasonably well-informed people acting intelligently in pursuit of their self-interests. In this world, leaders play only a modest role, acting much more as agents than as instructors or guides of the classes they appear to lead. (1982: 37)

As a rule, the effect of prominent leaders on history is “almost infinitesimal” (1975: 319). It is safe to say that this assessment would find little agreement from students of the careers of Mohammed, Napoleon, Bismarck, or Hitler — or of Lenin and Stalin.In a work tracing the Marxist-Leninist revolutionary vision that came to be shared by intellectual and military cadres in poor countries across the world, Forrest D. Colburn wisely observes 1994: 104, “for a satisfactory understanding of revolution, the revolutionary impulse itself has to be explained, and only the most reductionist theorist would argue that the radical urge to remake state and society is either completely ‘rational’ or ‘self-interested’ ... this approach can perhaps explain the behavior of a Cuban bureaucrat or peasant, but it is a loss to explain Fidel Castro. His leadership of the Cuban Revolution cannot be explained solely as result of changes in objective conditions or material interests. His ideas — and he is full of them — are consequential because they surely shape his decisions. Explaining revolutionary elites’ ideas is crucial, because in a revolution ideas are more than a kind of intervening variable that mediates interests and outcomes. Ideas transform perceptions of interests, sometimes wildly so. They shape actors’ perceptions of possibilities, as well as their understanding of their interests.”

Authors who minimize the impact of ideology in politics would have a hard time accounting for the rise, duration, and final demise of Communism in Russia. It is difficult to imagine what could explain crucial episodes in the history of Soviet Communism if ideology is relegated to a subordinate position. Such episodes include Lenin’s own revolutionary career, the formation of the Bolshevik party, the coup d’état of October, 1917, the institution of “War Communism,” victory in the civil war, and the fanatical dedication of the cadres who carried out the collectivization of agriculture and the terror famine.

In a major study, Martin Malia asserts (1994: 16) that “the key to understanding the Soviet phenomenon is ideology,” specifically, Marxism-Leninism.

Malia traces the story back to the mid-nineteenth century. Russia, where civil society was weak and the state strong, provided fertile ground for the spread of socialist ideas. Liberal social theory the ideas of Locke, Hume, Adam Smith, Turgot, Jefferson, and others had never struck root. By the time an intelligentsia sprang up in Russia, European intellectuals, from whom the Russians derived most of their political views, had made capitalism into an object of horror. The chaos following the fall of the Tsar and the demoralization caused by the First World War permitted Lenin and his highly disciplined Bolsheviks to effect their coup d’état.

The Bolsheviks at once set about to realize the Marxist dream: to construct a free and prosperous society by abolishing private property and the market. But that task, Malia maintains, citing the Austrian School, in particular Mises and Hayek, was and is inherently impossible, an assault on reality (185, 515). From the start the Soviet Union was a “world-historical fraud” (15). The land that was supposedly in the vanguard of progressive humanity was, in truth, an arena of endless oppression, mass poverty, and boundless despair. Suppressing this reality, generating and propping up a surreality, became the job of the legions of state-intellectuals at home, and, abroad, of the fellow-traveling intellectuals in every western country.In contrast to Malia and others, Richard Pipes 1993: 502 holds that ideology was a “subsidiary factor ... not a set of principles that either determined [the Communist ruling class’s] actions or explains them to posterity.” Pipes’s reasoning, however, is seriously flawed: he claims, for instance, that Marxism could not have been complicit in Soviet crimes, because “nowhere in the West has Marxism led to the totalitarian excesses of Leninism-Stalinism.” Here he ignores the fact that, in the West, socialist parties abandoned orthodox Marxism, opting instead for a “mixed economy” and the welfare state. In any case, his argument concerns ideology only as a determinant of the actions of the Communist rulers, not as a means of animating and controlling the people. Pipes further maintains that ideology played only a minor role in National Socialism. In this case he relies on the writings of Hermann Rauschning, who held, allegedly on the basis of his personal experiences, including intimate conversations with Hitler, that Nazism represented mere “nihilism.” Rauschning’s reports, however, are a highly questionable source and possibly fraudulent; see Tobias 1990. Moreover, it would be impossible today to find any knowledgeable person prepared to argue that theideology of anti-Semitism played no role, or a minor one, in the Nazi massacre of the European Jews.

The indoctrination first began on a vast scale with the civil war, and its target were the millions of recruits of the Red Army. Every known means of propaganda, from the printed word, lectures, and discussion groups to cabaret, plays, and movies, was used by the thousands of Bolshevik cadres who toured the fronts, with the explicit aim of turning the Russian peasant-soldier into “a conscious revolutionary fighter.” The half-million Red Army soldiers who joined the Party in the course of the civil war became “the missionaries of the revolution,” who “carried Bolshevism, its ideas and its methods, back to their towns and villages, where they flooded into Soviet institutions during the early 1920s” (Figes 1997: 602). The pervasive propaganda barrage continued for seven decades, testifying to the awareness of the Communist authorities that repression alone could never ensure their continued rule.The use of the public school system for the mass indoctrination of the populace by all modern governments, but especially by totalitarian ones, is dealt with in Lott 1999.

Similarly, the collapse the Soviet regime can only be understood as a case study in the operation of ideology, in this case, of the end of an ideology’s sway.

The subversion of the Leninist faith began after Stalin’s death, with the “Thaw” introduced by Khrushchev. In the 1960s a few dissident intellectuals, often samizdat [independent, usually underground] publishers, sowed the seeds of doubt in small urban and university circles. Still, the great mass of Soviet citizens remained indoctrinated, until the declaration of perestroika and glasnost under Gorbachev.

Then the truth — of the crimes of Lenin as well as Stalin, the poverty prevailing in the socialist homeland, the true nature of the fantasy world woven by Soviet ideologists for decades — came to light. It was propagated by what Hayek called the “second-hand dealers in ideas,” in the press, television, and radio (Shane 1994: 212–44). “By 1991 polls showed the majority of Soviet citizens and a substantial majority of urbanites had lost that basic faith in the system ... the Soviet world-picture had been wrecked not by tanks and bombs but by facts and opinions, by the release of information bottled up for decades. ... What changed minds was the cumulative, synergistic effect of a great deal of new information on a variety of subjects at once” (Shane 1994: 214–15, 221). The same swelling cascade of information shattered the faith of the Soviet ruling class itself, dissolving its sense of its own legitimacy and, finally, its will to coerce (Hollander 1999).

The position represented by Stigler has, in turn, been criticized by other liberal scholars, among them Douglass C. North. North freely concedes that public choice theory is invaluable in explaining much of political behavior: interest group pressures do account for a good deal of political decision-making (1981: 56). But to regard this as the whole story is to fall victim, in his view, to the “myopic vision” of neoclassical economics:

Casual observation provides evidence that an enormous amount of change occurs because of large group action which should not occur in the face of the logic of the free rider problem. ... Large groups do act when no evident benefits counter the substantial costs to individual participation; people do vote, and they do donate blood anonymously. ... Individual utility functions are simply more complicated than the simple assumptions so far incorporated in neoclassical theory. (1981: 46–47)

Ideology, which, according to North, is ubiquitous, is “an economizing device by which individuals come to terms with their environment and are provided with a ‘world view’ so that the decision-making process is simplified.” The fundamental aim of ideology “is to energize groups to behave contrary to a simple, hedonistic, individual calculus of costs and benefits.”Cf. Sartori 1969: 410: “in the ideological actor the ‘logic of interest’ combines with the ‘logic of principles.’ In fact, ideological politics represents a situation in which the utility scale of each actor is altered by an ideological scale. Hence, and much to the bewilderment of the pragmatist, in this case the logic of interest no longer suffices to explain, and even less to predict, political behavior.” And, aside from rare exceptions, ideologies develop under the guidance of intellectuals (North 1981: 49–53)

A crucial part of ideologies, ignored by scholars who minimize their significance, are judgments of right and wrong, just and unjust. In this connection, North presents an argument that might well give such scholars pause:

If the concept [of just and unjust] is not crucial to the way in which choices are made, then we are left with the puzzle of accounting for the immense amount of resources invested throughout history in attempting to convince individuals about the justice or injustice of their position. (51)

In other words, if, as Stigler believed, people are reasonably well informed and act intelligently in pursuit of their self-interest, how are we to account for this massive and continual “misuse” of resources in contending over questions of right and wrong?

Robert Higgs is another knowledgeable critic of the Stiglerian position. In Crisis and Leviathan (1987a), he presents a detailed examination of the growth of the U.S. federal government in the twentieth century, highlighting the importance of intellectuals, “the specialists in the production and distribution of ideologies.” “An understanding of ideology,” he asserts, “is essential to an understanding of the growth of government” (1987a: 192, 36).Higgs (37) usefully defines ideology as “a somewhat coherent, rather comprehensive belief system about social relations,” with four distinct aspects: cognitive, affective, programmatic, and solidary.

Higgs, too, believes that the conventional neoclassical approach is incapable of explaining a wide range of political behavior (1987a: 39–41). Drawing on widely accepted conclusions of social psychology, including those of Amartya Sen, he notes that individuals often act to confirm, enhance, and validate their “identity” or “self-image.” For instance, “the kind of groups to which a person chooses to belong is closely connected with the kind of person he takes himself to be — a matter of prime concern to the typical person.” This holds also for the political dimension of their self-image. Again, like North, Higgs stresses that in acting politically people are often truly concerned with what is right and wrong, just and unjust, issues that cannot be reduced to a narrow hedonistic calculus. Citing Schumpeter on the purely formal nature of the utility theory of value, which implies nothing regarding the content of people’s wants, Higgs concludes that “one cannot demolish an ideological fortress with the weapons of neoclassical economics” (1987a: 42, 44; 1987b: 141–42).

Higgs’s own methodology is strictly empirical, though not in any unrealistically quantitative sense. Since rhetoric is crucial to ideology, ideological changes can often be tracked by a careful examination of the rhetoric of opinion leaders. However, as everywhere in science, the method applied must be suited to the area of reality under study: “Although we cannot measure [ideology and ideological changes] as we would height or weight, we can learn a good deal about them qualitatively, and for certain purposes such knowledge may be adequate” (1987a: 48–51).

Higgs’s insight that much political behavior involves the affirmation of one’s self-image prompts the question: How do people acquire political identities which they then act to instantiate and confirm? A fountainhead of such identities is clearly the system of formal education.Cf. North 1981: 54: “The educational system in a society is simply not explicable in narrow neoclassical terms, since much of it is obviously directed at inculcating a set of values, rather than investing in human capital.” From this point of view, it would prove highly instructive to examine how the educational establishments of western countries — especially higher education — function not only to convey the panoply of anti-capitalist ideas, but also to impart a particular self-image to a significant proportion of the students it processes, a self-image which they will then live out — roughly, their identities as members of the adversary culture, the bearers of a lifelong animus against private enterprise.

Hayek believed that historical writings have in all likelihood been the major medium for the spread of anti-market ideas among intellectuals. In his essay, “History and Politics,” he notes the great impact of historical interpretations on political opinion, and speaks of “a socialist interpretation of history which has governed political thinking for the last two or three generations and which consists mainly of a particular view of economic history” — especially, of the industrial revolution. It is an interpretation most of whose tenets have long been shown to be mythical (Hayek [ed.] 1954: 3, 7). Hayek observes that the continued domination of this view, long discarded by scholars, presents a problem. In fact, today, forty years after Hayek wrote these lines, the obsolete “catastrophic” version of the industrial revolution continues to be cherished by the great majority.

It may be useful to focus on an example of another legend that has been a part of socialist pseudo-history, and that has now likewise been exploded.

For decades the prevailing view was that German big business played a central and essential role in the Nazi rise to power. Coincidentally, this interpretation echoed the official position of the Comintern (Communist International), set forth in the 1920s and 30s, according to which a generic “fascism,” including its German variant, represented the naked fist of a bourgeoisie confronting the final proletarian assault.

For years socialists continued to tout the line that the financial and political support of German big business was to a great degree responsible for Hitler’s coming to power — and, consequently, for World War II and all the atrocities it entailed. In the Federal Republic of Germany, intellectuals never tired of repeating Max Horkheimer’s aphorism, couched in the patented portentousness of the Frankfurt School: “He who does not want to speak of capitalism should also be silent about fascism” (cited in Nolte 1982: 76). The view was shared and propagated, however, by many prominent non-socialist writers as well, Alan Bullock, Norman Stone, and H. Stuart Hughes, among them.

In 1985, in a work of superb scholarship, Henry Ashby Turner, Jr., of Yale, demonstrated that this interpretation was, simply, a myth. He relied on a multitude of primary sources ignored by other writers. Turner’s own analysis is now accepted by practically all experts in the field. Whether he will have any more success in seeing his version passed on to the educated public than the economic historians of the industrial revolution have had remains to be seen.

Years ago, R.M. Hartwell had posed the question, why do we observe the persistence of historical accounts that are demonstrably false (Hartwell 1974: 2)?Another question of Hartwell’s, why are most historians “softer on the ‘left’ than on the ‘right’?’” is also worth serious consideration. Towards the end of his work, Turner reflects on why so many professional historians should have accepted the old fable of Hitler and the German industrialists so uncritically. His reply is: bias. “Bias, in short, appears over and over again in treatments of the political role of big business even by otherwise scrupulous historians” (Turner 1985: 350). He attempts to explain this dangerous prejudice (350–51):

Professional historians generally have little or no personal contact with the world of business. Like so many intellectuals, they tend to view big business with a combination of condescension and mistrust.Cf. Pollard 2000: 1: “Making money is a dirty game. That sentence might almost sum up the attitude of English literature towards British business. Few writers have had first-hand experience of the world of commerce and industry. Their world is governed by the imaginative and the spiritual. It is no wonder therefore that they so often despise the other world that they see as materialistic ...” ... Since almost all of those who have concerned themselves with the relationship between the business community and Nazism have, to one degree or another, stood left or at least left of center in their political sympathies, a great many have found it difficult to resist the temptation to implicate big business ... in the rise of Nazism. Although deliberate distortion figures in some publications on the subject, the susceptibility of most historians to the myths dealt with in this volume is attributable not to intellectual dishonesty but rather to the sort of preconceptions that hobble attempts to come to grips with the past.

Another way of putting Turner’s explanation is in terms of one of the several components of the Marxist concept of ideology, as refined by Jon Elster (1985: 476, 487–90). The individual’s comprehension of social relations is inevitably skewed by the particular position he himself occupies in the network of these relations, because he necessarily comes to understand “the whole from the point of view of the part.”

Seen in this light, the root of the problem lies in the social position — the way of life — of the academic intellectual, whose views in turn profoundly shape and condition those of virtually all other intellectuals. Essentially, he is a mandarin, accustomed, to reiterate Mises’s point, to living from an assured source of income — usually taxes, but the case is similar with guaranteed endowments. As such, he will rarely find it possible to appreciate or even begin to understand the way of life of capitalists, entrepreneurs, traders, and speculators, men and women who live and die by the vicissitudes of the market. Thus, the problem turns out to be one not so much of invidious personal motivation as of a socially determined distorted cognition.

In reply, one might object that it is academic intellectuals who, of all people, are morally and professionally obliged to free themselves from socially imposed blinders and to strive to see the free market order as it really is. That they have manifestly not lived up to this obligation is, however, merely another way of stating the problem we have been considering.

My own inclination is towards the “second” approach of Ludwig von Mises, focusing on the ingrained hostility to business and profit-making in our culture. This millenia-old antipathy continues to be spread by the highly influential classes sheltered from the market’s threatening rigors, classes that will be with us for as far as we can see.

The theme of this book is the conquest of poverty, not its "abolition." Poverty can be alleviated or reduced, and in the Western world in the last two centuries it has been almost miraculously alleviated and reduced; but poverty is ultimately individual, and individual poverty can no more be "abolished" than disease or death can be abolished.

Individual or family poverty results when the "breadwinner" cannot in fact win bread; when he cannot or does not produce enough to support his family or even himself. And there will always be some human beings who will temporarily or permanently lack the ability to provide even for their own self-support. Such is the condition of all of us as young children, of many of us when we fall ill, and of most of us in extreme old age. And such is the permanent condition of some who have been struck by misfortune — the blind, the crippled, the feeble-minded. Where there are so many causes there can be no all-embracing cure.

It is fashionable to say today that "society" must solve the problem of poverty. But basically each individual — or at least each family — must solve its own problem of poverty. The overwhelming majority of families must produce more than enough for their own support if there is to be any surplus available for the remaining families that cannot or do not provide enough for their own support. Where the majority of families do not provide enough for their own support — where society as a whole does not provide enough for its own support — no "adequate relief system" is even temporarily possible. Hence "society" cannot solve the problem of poverty until the overwhelming majority of families have already solved (and in fact slightly more than solved) the problem of their own poverty.

All this is merely stating in another form the Paradox of Relief referred to in Chapter 18: The richer the community, the less the need for relief, but the more it is able to provide; the poorer the community, the greater the need for relief, but the less it is able to provide.

And this in turn is merely another way of pointing out that relief, or redistribution of income, voluntary or coerced, is never the true solution of poverty, but at best a makeshift, which may mask the disease and mitigate the pain, but provides no basic cure.

Moreover, government relief tends to prolong and intensify the very disease it seeks to cure. Such relief tends constantly to get out of hand. And even when it is kept within reasonable bounds it tends to reduce the incentives to work and to save both of those who receive it and of those who are forced to pay it. It may be said, in fact, that practically every measure that governments take with the ostensible object of "helping the poor" has the long-run effect of doing the opposite. Economists have again and again been forced to point out that nearly every popular remedy for poverty merely aggravates the problem. I have analyzed in these pages such false remedies as the guaranteed income, the negative income tax, minimum-wage laws, laws to increase the power of the labor unions, opposition to labor-saving machinery, promotion of "spread-the-work" schemes, special subsidies, increased government spending, increased taxation, steeply graduated income taxes, punitive taxes on capital gains, inheritances, and corporations, and outright socialism.

But the possible number of false remedies for poverty is infinite. Two central fallacies are common to practically all of them. One is that of looking only at the immediate effect of any proposed reform on a selected group of intended beneficiaries and of overlooking the longer and secondary effect of the reform not only on the intended beneficiaries but on everybody. The other fallacy, akin to this, is to assume that production consists of a fixed amount of goods and services, produced by a fixed amount and quality of capital providing a fixed number of "jobs." This fixed production, it is assumed, goes on more or less automatically, influenced negligibly if at all by the incentives or lack of incentives of specific producers, workers, or consumers. "The problem of production has been solved," we keep hearing, and all that is needed is a fairer "distribution."

What is disheartening about all this is that the popular ideology on all these matters shows no advance — and if anything even a retrogression — compared with what it was more than a hundred years ago. In the middle of the nineteenth century the English economist Nassau Senior was writing in his journal:

It requires a long train of reasoning to show that the capital on which the miracles of civilization depend is the slow and painful creation of the economy and enterprise of the few, and of the industry of the many, and is destroyed, or driven away, or prevented from arising, by any causes which diminish or render insecure the profits of the capitalist, or deaden the activity of the laborer; and that the State, by relieving idleness, improvidence, or misconduct from the punishment, and depriving abstinence and foresight of the reward, which have been provided for them by nature, may indeed destroy wealth, but most certainly will aggravate poverty.Nassau Senior, journal Kept in France and Italy from 1848–52, London: Henry S. King, 2nd ed. 1871, Vol. I, pp. 4–5.

Man throughout history has been searching for the cure for poverty, and all that time the cure has been before his eyes. Fortunately, as far at least as it applied to their actions as individuals, the majority of men instinctively recognized it — which was why they survived. That individual cure was Work and Saving. In terms of social organization, there evolved spontaneously from this, as a result of no one's conscious planning, a system of division of labor, freedom of exchange, and economic cooperation, the outlines of which hardly became apparent to our forebears until two centuries ago. That system is now known either as Free Enterprise or as Capitalism, according as men wish to honor or disparage it.

It is this system that has lifted mankind out of mass poverty. It is this system that in the last century, in the last generation, even in the last decade, has acceleratively been changing the face of the world, and has provided the masses of mankind with amenities that even kings did not possess or imagine a few generations ago.

Because of individual misfortune and individual weaknesses, there will always be some individual poverty and even "pockets" of poverty. But in the more prosperous Western countries today, capitalism has already reduced these to a merely residual problem, which will become increasingly easy to manage, and of constantly diminishing importance, if society continues to abide in the main by capitalist principles. Capitalism in the advanced countries has already, it bears repeating, conquered mass poverty, as that was known throughout human history and almost everywhere, until a change began to be noticeable sometime about the middle of the eighteenth century. Capitalism will continue to eliminate mass poverty in more and more places and to an increasingly marked extent if it is merely permitted to do so.

In the chapter "Why Socialism Doesn't Work," I explained by contrast how capitalism performs its miracles. It turns out the tens of thousands of diverse commodities and services in the proportions in which they are socially most wanted, and it solves this incredibly complex problem through the institutions of private property, the free market, and the existence of money — through the interrelations of supply and demand, costs and prices, profits and losses. And, of course, through the force of competition. Competition will tend constantly to bring about the most economical and efficient method of production possible with existing technology — and then it will start devising a still more efficient technology. It will reduce the cost of existing production, it will improve products, it will invent or discover wholly new products, as individual producers try to think what product consumers would buy if it existed.

Those who are least successful in this competition will lose their original capital and be forced out of the field; those who are most successful will acquire through profits more capital to increase their production still further. So capitalist production tends constantly to be drawn into the hands of those who have shown that they can best meet the wants of the consumers.

Perhaps the most frequent complaint about capitalism is that it distributes its rewards "unequally." But this really describes one of the system's chief virtues. Though mere luck always plays a role with each of us, the increasing tendency under capitalism is that penalties are imposed roughly in proportion to error and neglect and rewards granted roughly in proportion to effort, ability, and foresight. It is precisely this system of graduated rewards and penalties, in which each tends to receive in proportion to the market value he helps to produce, that incites each of us constantly to put forth his greatest effort to maximize the value of his own production and thus (whether intentionally or not) help to maximize that of the whole community. If capitalism worked as the socialists think an economic system ought to work, and provided a constant equality of living conditions for all, regardless of whether a man was able or not, resourceful or not, diligent or not, thrifty or not, if capitalism put no premium on resourcefulness and effort and no penalty on idleness or vice, it would produce only an equality of destitution.

Another incidental effect of the inequality of incomes inseparable from a market economy has been to increase the funds devoted to saving and investment much beyond what they would have been if the same total social income had been spread evenly. The enormous and accelerative economic progress in the last century and a half was made possible by the investment of the rich — first in the railroads, and then in scores of heavy industries requiring large amounts of capital. The inequality of incomes, however much some of us may deplore it on other grounds, has led to a much faster increase in the total output and wealth of all than would otherwise have taken place.

Those who truly want to help the poor will not spend their days in organizing protest marches or relief riots, or even in repeated protestations of sympathy. Nor will their charity consist merely in giving money to the poor to be spent for immediate consumption needs. Rather will they themselves live modestly in relation to their income, save, and constantly invest their savings in sound existing or new enterprises, so creating abundance for all, and incidentally creating not only more jobs but better-paying ones.

The irony is that the very miracles brought about in our age by the capitalist system have given rise to expectations that keep running ahead even of the accelerating progress, and so have led to an incredibly shortsighted impatience that threatens to destroy the very system that has made the expectations possible.

If that destruction is to be prevented, education in the true causes of economic improvement must be intensified beyond anything yet attempted.

Fiat inflation constantly reduces the purchasing power of money. To some extent, it is possible for people to protect their savings against this trend, but this requires thorough financial knowledge, the time to constantly supervise one’s investments, and a good dose of luck. People who lack one of these ingredients are likely to lose a substantial part of their assets. The savings of a lifetime often vanish into thin air during the last few years spent in retirement. The consequence is despair and the eradication of moral and social standards. But it would be wrong to infer that inflation produces this effect mainly among the elderly. As one writer observed:

These effects are “especially strong among the youth. They learn to live in the present and scorn those who try to teach them 'old-fashioned' morality and thrift” [emphasis added]. Inflation thereby encourages a mentality of immediate gratification that is plainly at variance with the discipline and eternal perspective required to exercise principles of biblical stewardship — such as long-term investment for the benefit of future generations.Thomas Woods, “Money and Morality: The Christian Moral Tradition and the Best Monetary Regime,” Religion & Liberty 13, no. 5 (September/October 2003). The author quotes Ludwig von Mises. See also William Gouge, A Short History of Paper Money and Banking in the United States, to which is prefixed an Inquiry into the Principles of the System (Reprint, New York: Augustus M. Kelley, [1833] 1968), pp. 94–101.

Even those citizens who are blessed with the knowledge, time, and luck to protect the substance of their savings cannot evade inflation’s harmful impact, because they have to adopt habits that are at odds with moral and spiritual health. Inflation forces them to spend much more time thinking about their money than they otherwise would. We have noticed already that the old way for ordinary citizens to make savings was the accumulation of cash. Under fiat inflation this strategy is suicidal. They must invest in assets the value of which grows during the inflation; the most practical way to do this is to buy stocks and bonds. But this entails many hours spent on comparing and selecting appropriate issues. And it compels them to be ever watchful and concerned about their money for the rest of their lives. They need to follow the financial news and monitor the price quotations on the financial markets.

Similarly, people will tend to prolong the phase of their life in which they strive to earn money. And they will place relatively greater emphasis on monetary returns than on any other criterion for choosing their profession. For example, some of those who would rather be inclined to gardening will nevertheless seek an industrial employment if the latter offers greater long-run monetary returns. And more people will accept employment far from home, if it allows them to earn a little additional money, than under a natural monetary system.

The spiritual dimension of these inflation-induced habits seems obvious. Money and financial questions come to play an exaggerated role in the life of man. Inflation makes society materialistic. More and more people strive for money income at the expense of other things important for personal happiness. Inflation-induced geographical mobility artificially weakens family bonds and patriotic loyalty. Many of those who tend to be greedy, envious, and niggardly anyway fall prey to sin. Even those who are not so inclined by their natures will be exposed to temptations they would not otherwise have felt. And because the vagaries of the financial markets also provide a ready excuse for an excessively parsimonious use of one’s money, donations for charitable institutions decline.

Then there is the fact that perennial inflation tends to deteriorate product quality. Every seller knows that it is difficult to sell the same physical product at higher prices than in previous years. But increasing money prices are unavoidable when the money supply is subject to relentless growth. So what do sellers do? In many cases the rescue comes through technological innovation, which allows a cheaper production of the product, thus neutralizing or even overcompensating the countervailing influence of inflation. This is for example the case with personal computers and other products made with large inputs of information technology. But in other industries, technological progress plays a much smaller role. Here the sellers confront the above-mentioned problem. They then fabricate an inferior product and sell it under the same name, along with the euphemisms that have become customary in commercial marketing. For example, they might offer their customers “light” coffee and “non-spicy” vegetables — which translates into thin coffee and vegetables that have lost any trace of flavor. Similar product deterioration can be observed in the construction business. Countries plagued by perennial inflation seem to have a greater share of houses and streets that are in constant need of repair than other countries.

In such an environment, people develop a more than sloppy attitude toward their language. If everything is whatever it is called, then it is difficult to explain the difference between truth and lie. Inflation tempts people to lie about their products, and perennial inflation encourages the habit of routine lying. We have already pointed out that routine lying plays a great role in fractional-reserve banking, the basic institution of the fiat money system. Fiat inflation seems to spread this habit like a cancer over the rest of the economy.The relationship between fiat inflation on the one hand, and misperceptions and misrepresentations of reality on the other hand has been brilliantly discussed in Paul Cantor's case study on “Hyperinflation and Hyperreality: Thomas Mann in Light of Austrian Economics,” Review of Austrian Economics 7, no. 1 (1994).

In most countries, the growth of the welfare state has been financed through the accumulation of public debt on a scale that would have been unthinkable without fiat inflation. A cursory glance at the historical record shows that the exponential growth of the welfare state, which in Europe started in the early 1970s, went hand in hand with the explosion of public debt. It is widely known that this development has been a major factor in the decline of the family. But it is commonly overlooked that the ultimate cause of this decline is fiat inflation. Perennial inflation slowly but assuredly destroys the family, thus suffocating the earthly flame of morals. Indeed, the family is the most important “producer” of a certain type of morals.

Family life is possible only if all members endorse norms such as the legitimacy of authority, and the prohibition of incest. And Christian families are based on additional precepts such as the heterosexual union between man and woman, love of the spouses for one another and for their offspring, the respect of children for their parents, as well as belief in the reality of the Triune God and of the truth of the Christian faith, etc. Parents constantly repeat, emphasize, and live these norms and precepts. Thus all family members come to accept them as the normal state of affairs. In the wider social sphere, then, these persons act as advocates of the same norms in business associations, clubs, and politics.

Friends and foes of the traditional family agree on these facts. It is among other things because they recognize the family’s effectiveness in establishing social norms that Christians seek to protect it. And it is precisely for the same reason that advocates of moral license seek to undermine it. The welfare state has been their preferred tool in the past thirty years. Today, the welfare state provides a great number of services that in former times have been provided by families (and which would, we may assume, still be provided to a large extent by families if the welfare state ceased to exist). Education of the young, care for the elderly and the sick, assistance in times of emergencies — all of these services are today effectively “outsourced” to the state. The families have been degraded into small production units that share utility bills, cars, refrigerators, and of course the tax bill. The tax-financed welfare state then provides them with education and care.In many countries it is today possible for families to deduct expenses for private care and private education from the annual tax bill. But iron-ically (or maybe not quite so ironically) this trend has reinforced the ero-sion of the family. For example, recent provisions of the U.S. tax code allow family budgets to increase through such deductions — but only if the deductible services are not provided by family members, but bought from other people.

From an economic point of view, this arrangement is a pure waste of money. The fact is that the welfare state is inefficient; it provides comparatively lousy services at comparatively high costs. We need not dwell on the inability of government welfare agencies to provide the emotional and spiritual assistance that only springs from charity. Compassion cannot be bought. But the welfare state is also inefficient in purely economic terms. It operates through large bureaucracies and is therefore liable to lack incentives and economic criteria that would prevent wasting money. In the words of Pope John Paul II:

By intervening directly and depriving society of its responsibility, the Social Assistance State leads to a loss of human energies and an inordinate increase of public agencies, which are dominated more by bureaucratic ways of thinking than by concern for serving their clients, and which are accompanied by an enormous increase in spending. In fact, it would appear that needs are best understood and satisfied by people who are closest to them and who act as neighbors to those in need. It should be added that certain kinds of demands often call for a response which is not simply material but which is capable of perceiving the deeper human need.John Paul II, Centesimus Annus, §48.

Everyone knows this from first-hand experience, and a great number of scientific studies drive home the same point. It is precisely because the welfare state is an inefficient economic arrangement that it must rely on taxes. If it had to compete with families on equal terms, it could not stay in business for any length of time. It has driven the family and private charities out of the “welfare market” because people are forced to pay for it anyway. They are forced to pay taxes, and they cannot prevent the government from floating ever-new loans, which absorb the capital that otherwise would be used for the production of different goods and services.

The excessive welfare state of our day is an all-out direct attack on the producers of morals. But it weakens these morals also in indirect ways, most notably by subsidizing bad moral examples. The fact is that libertine “lifestyles” carry great economic risks. The welfare state socializes the costs of morally reckless behavior and therefore gives it far greater prominence than it would have in a free society. Rather than carrying an economic penalty, licentiousness might then actually go hand in hand with economic advantages, because it frees the protagonists from the costs of family life (for example, the costs associated with raising children). With the backing of the welfare state, these protagonists may mock conservative morals as some sort of superstition that has no real-life impact. The welfare state systematically exposes people to the temptation of believing that there are no time-tested moral precepts at all.

Let us emphasize that the point of the preceding observations was not to attack welfare services, which are in fact an essential component of society. Neither is it here our intention to attack the notion that welfare services should be provided through government. The point is, rather, that fiat inflation destroys the democratic control over the provision of these services; that this invariably leads to excessive growth of the aggregate welfare system and to excessive forms of welfare; and that this in turn is not without consequences for the moral and spiritual character of the population.

The considerations presented in this chapter are by no means an exhaustive account of the cultural and spiritual legacy of fiat inflation. But they should suffice to substantiate the main point: that fiat inflation is a juggernaut of social, economic, cultural, and spiritual destruction.Our study seems to suggest that there is definitely something diabol-ical in fiat inflation. But we feel incompetent to deal with this question and leave its analysis for another time, or for other scholars. It is cer-tainly significant that a great poet such as Goethe would portray paper money as a creation of the devil. See Faust, part II, Lustgartenszene. Let us now turn to complement our analysis with a look at the historical evolution of monetary systems.

Both types of socialism, to be sure, derive from the same ideological sources.Cf. L. Kolakowski, Main Currents of Marxism (Oxford, 1978), 3 vols.; also W. Leonhard, Sovietideologie heute. Die politischen Lehren (Frankfurt/M., 1963). Both are egalitarian in motivation, at least in theory,Cf. note 16 below on the assessment of the somewhat different practice. and both have essentially the same ultimate goal: the abolishment of capitalism as a social system based on private ownership and the establishment of a new society, characterized by brotherly solidarity and the eradication of scarcity; a society in which everyone is paid “according to his needs.”

From the very beginnings of the socialist movement in the mid-nineteenth century, though, there have been conflicting ideas on the methods best suited for achieving these goals. While generally there was agreement on the necessity of socializing the means of production, there were always diverging opinions on how to proceed. On the one hand, within the socialist movement there were the advocates of a revolutionary course of action. They propagated the violent overthrow of the existing governments, the complete expropriation of all capitalists in one stroke, and the temporary (i.e., until scarcity would indeed, as promised, be eradicated) dictatorship of the proletariat, i.e., of those who were not capitalists but who had to sell their labor services, in order to stabilize the new order.

On the other hand there were the reformists who advocated a gradualist approach. They reasoned that with the enlargement of the franchise, and ultimately with a system of universal suffrage, socialism’s victory could be attained through democratic, parliamentary action. This would be so because capitalism, according to common socialist doctrine, would bring about a tendency toward the proletarization of society, i.e., a tendency for fewer people to be self-employed and more to become employees instead. And in accordance with common socialist beliefs, this tendency would in turn produce an increasingly uniform proletarian class consciousness which then would lead to a swelling voter turnout for the socialist party. And, so they reasoned, as this strategy was much more in line with public opinion (more appealing to the mostly peacefully-minded workers and at the same time less frightening to the capitalists), by adopting it, socialism’s ultimate success would only become more assured.

Both of these forces co-existed within the socialist movement, though their relationship was at times quite strained, until the Bolshevik Revolution of October 1917, in Russia. In practice, the socialist movement generally took the reformist path, while in the field of ideological debate the revolutionaries dominated.Cf. E. Bernstein, Die Voraussetzungen des Sozialismus und die Aufgaben der Sozialdemokratie (Bonn, 1975), as a major expositor of the reformist-revisionist course; K. Kautsky, Bernstein und das sozialdemokratische Programm (Bonn, 1976), as exponent of the Marxist orthodoxy. The Russian events changed this.

With Lenin in the lead, for the first time the revolutionary socialists realized their program and the socialist movement as a whole had to take a stand vis-à-vis the Russian experiment. As a consequence, the socialist movement split into two branches with two separate parties: a communist party either more or less in favor of the Russian events, and a socialist or social-democratic party with reservations, or against them. Still, the split was not over the issue of socialization; both were in favor of that. It was an open split over the issue of revolutionary vs. democratic parliamentary change.

Faced with the actual experience of the Russian revolution — the violence, the bloodshed, the practice of uncontrolled expropriation, the fact that thousands of new leaders, very often of questionable reputation or simply shady, inferior characters, were being swept to the political helm — the social democrats, in their attempt to gain public support, felt they had to abandon their revolutionary image and become, not only in practice but in theory as well, a decidedly reformist, democratic party. And even some of the communist parties of the West, dedicated as they were to a theory of revolutionary change, but just as much in need of public support, felt they had to find some fault, at least, with the peculiar Bolshevik way of implementing the revolution. They, too, increasingly thought it necessary to play the reformist, democratic game, if only in practice.

However, this was only the first step in the transformation of the socialist movement effected by the experience of the Russian revolution. The next step, as indicated, was forced upon it by the dim experience with Soviet Russia’s economic performance. Regardless of their differing views on the desirability of revolutionary changes and equally unfamiliar with or unable or unwilling to grasp abstract economic reasoning, socialists and communists alike could still, during a sort of honeymoon period which they felt the new experiment deserved, entertain the most illusory hopes about the economic achievements of a policy of socialization. But this period could not last forever, and the facts had to be faced and the results evaluated after some time had elapsed.

For every decently neutral observer of things, and later for every alert visitor and traveler, it became evident that socialism Russian-style did not mean more but rather less wealth and that it was a system above all, that in having to allow even small niches of private capital formation, had in fact already admitted its own economic inferiority, if only implicitly.

As this experience became more widely known, and in particular when after World War II the Soviet experiment was repeated in the East European countries, producing the very same dim results and thus disproving the thesis that the Soviet mess was only due to a special Asian mentality of the people, in their race for public support the socialist, i.e., the social-democratic and communist, parties of the West were forced to modify their programs further. The communists now saw various flaws in the Russian implementation of the socialization program as well, and increasingly toyed with the idea of more decentralized planning and decision-making and of partial socialization, i.e., socialization only of major firms and industries, although they never entirely abandoned the idea of socialized production.On the idea of a “market-socialism” cf. one of its leading representatives, O. Lange, “On the Economic Theory of Socialism,” in M. I. Goldman, ed., Comparative Economic Systems (New York, 1971).

The socialist or social-democratic parties, on the other hand, less sympathetic from the beginning toward the Russian model of socialism and through their decidedly reformist-democratic policy already inclined to accept compromises such as partial socialization, had to make a further adaptive move. These parties, in response to the Russian and East European experiences, increasingly gave up the notion of socialized production altogether and instead put more and more emphasis on the idea of income taxation and equalization, and, in another move, on equalization of opportunity, as being the true cornerstones of socialism.

While this shift from Russian-type socialism toward a social-democratic one took place, and still is taking place in all Western societies, it was not equally strong everywhere. Roughly speaking and only looking at Europe, the displacement of the old by the new kind of socialism has been more pronounced, the more immediate and direct the experience with Russian-type socialism for the population in which the socialist and/or communist parties had to find supporters and voters.

Of all the major countries, in West Germany, where the contact with this type of socialism is the most direct, where millions of people still have ample opportunities to see with their own eyes the mischief that has been done to the people in East Germany, this displacement was the most complete. Here, in 1959, the social democrats adopted (or rather were forced by public opinion to adopt) a new party program in which all obvious traces of a Marxist past were conspicuously absent, that rather explicitly mentioned the importance of private ownership and markets, that talked about socialization only as a mere possibility, and that instead heavily stressed the importance of redistributive measures. Here, the protagonists of a policy of socialization of the means of production within the social-democratic party have been considerably outnumbered ever since; and here the communist parties, even when they are only in favor of peaceful and partial socialization, have been reduced to insignificance.On the ideology of the German Social Democrats cf. T. Meyer, ed., Demokratischer Sozialismus (Muenchen, 1980); G. Schwan, ed., Demokratischer Sozialismus fuer Industriegesellschaften (Frankfurt/M., 1979).

In countries further removed from the iron curtain, like France, Italy, Spain, and also Great Britain, this change has been less dramatic. Nonetheless, it is safe to say that today only social-democratic socialism, as represented most typically by the German social-democrats, can claim widespread popularity in the West. As a matter of fact, due partly to the influence of the Socialist International — the association of socialist and social-democratic parties — social-democratic socialism can now be said to be one of the most widespread ideologies of our age, increasingly shaping the political programs and actual policies not only of explicitly socialist parties, and to a lesser degree those of the western communists, but also of groups and parties who would not even in their most far-fetched dreams call themselves socialists, like the east coast “liberal” Democrats in the United States.Indicators for the social-democratization of the socialist movement are the rise of the socialist party and the corresponding decline of the orthodox communist party in France; the emergence of a social-democratic party as a rival to the more orthodox labor party in Great Britain; the moderation of the communists in Italy as the only remaining powerful communist party in Western Europe toward an increasingly social-democratic policy; and the growth of the socialist-social-democratic parties in Spain and Portugal under Gonzales and Soares, both with close ties to the German SPD. Furthermore, the socialist parties of Scandinavia, which traditionally had closely followed the German path and which later provided safe haven to a number of prominent socialists during the Nazi persecution (most notably W. Brandt and B. Kreisky), have long given credence to the revisionist beliefs. And in the field of international politics the ideas of social-democratic socialism, in particular of a redistributive approach toward these-called North-South conflict, have almost become something like the official position among all “well-informed” and “well-intentioned” men; a consensus extending far beyond those who think of themselves as socialists.On the social-democratic position regarding the North-South conflict cf. North-South: A Programme for Survival, Independent Commission on International Development Issues (Chair: W. Brandt), 1980. What are the central features of socialism social-democratic-style?

There are basically two characteristics. First, in positive contradistinction to the traditional Marxist-style socialism, social-democratic socialism does not outlaw private ownership in the means of production and it even accepts the idea of all means of production being privately owned — with the exception only of education, traffic and communication, central banking, and the police and courts. In principle, everyone has the right to privately appropriate and own means of production, to sell, buy, or newly produce them, to give them away as a present, or to rent them out to someone else under a contractual arrangement. But secondly, no owner of means of production rightfully owns all of the income that can be derived from the usage of his means of production and no owner is left to decide how much of the total income from production to allocate to consumption and investment. Instead, part of the income from production rightfully belongs to society, has to be handed over to it, and is then, according to ideas of egalitarianism or distributive justice, redistributed to its individual members. Furthermore, though the respective income-shares that go to the producer and to society might be fixed at any given point in time, the share that rightfully belongs to the producer is in principle flexible and the determination of its size, as well as that of society’s share, is not up to the producer, but rightfully belongs to society.Note again that this characterization of social-democratic socialism has the status of an “ideal type” (cf. chapter 3, n. 2). It is not to be taken as a description of the policy or ideology of any actual party. Rather, it should be understood as the attempt to reconstruct what has become the essence of modern social-democratic style socialism, underlying a much more diverse reality of programs and policies of various parties or movements of different names as the ideologically unifying core.

Seen from the point of view of the natural theory of property — the theory underlying capitalism — the adoption of these rules implies that the rights of the natural owner have been aggressively invaded. According to this theory of property, it should be recalled, the user-owner of the means of production can do whatever he wants with them; and whatever the outcome of his usage, it is his own private income, which he can use again as he pleases, as long as he does not change the physical integrity of someone else’s property and exclusively relies on contractual exchanges.

From the standpoint of the natural theory of property, there are not two separate processes — the production of income and then, after income is produced, its distribution. There is only one process: in producing income it is automatically distributed; the producer is the owner. As compared with this, socialism social-democratic style advocates the partial expropriation of the natural owner by redistributing part of the income from production to people who, whatever their merits otherwise, definitely did not produce the income in question and definitely did not have any contractual claims to it, and who, in addition, have the right to determine unilaterally, i.e., without having to wait for the affected producer’s consent, how far this partial expropriation can go.

It should be clear from this description that, contrary to the impression which socialism social-democratic style is intended to generate among the public, the difference between both types of socialism is not of a categorical nature. Rather, it is only a matter of degree. Certainly, the first mentioned rule seems to inaugurate a fundamental difference in that it allows private ownership. But then the second rule in principle allows the expropriation of all of the producer’s income from production and thus reduces his ownership right to a purely nominal one. Of course, social-democratic socialism does not have to go as far as reducing private ownership to one in name only. And admittedly, as the income-share that the producer is forced to hand over to society can in fact be quite moderate, this, in practice, can make a tremendous difference as regards economic performance. But still, it must be realized that from the standpoint of the nonproducing fellowmen, the degree of expropriation of private producers’ income is a matter of expediency, which suffices to reduce the difference between both types of socialism — Russian and social-democratic style — once and for all to a difference only of degree.

It should be apparent what this important fact implies for a producer. It means that however low the presently fixed degree of expropriation might be, his productive efforts take place under the ever-present threat that in the future the income-share which must be handed over to society will be raised unilaterally. It does not need much comment to see how this increases the risk, or the cost of producing, and hence lowers the rate of investment.

With this statement a first step in the analysis that follows has already been taken. What are the economic, in the colloquial sense of the term, consequences of adopting a system of social-democratic socialism? After what has just been said, it is probably no longer altogether surprising to hear that at least as regards the general direction of the effects, they are quite similar to those of traditional Marxist-type socialism. Still, to the extent that social-democratic socialism settles for partial expropriation and the redistribution of producer incomes, some of the impoverishment effects that result from a policy of fully socializing means of production can be circumvented.

Since these resources can still be bought and sold, the problem most typical of a caretaker economy — that no market prices for means of production exist and hence neither monetary calculation nor accounting are possible, with ensuing misallocations and the waste of scarce resources in usages that are at best of only secondary importance — is avoided. In addition, the problem of overutilization is at least reduced. Also, since private investment and capital formation is still possible to the extent that some portion of income from production is left with the producer to use at his discretion, under socialism social-democratic style there is a relatively higher incentive to work, to save, and to invest.

Nonetheless, by no means can all impoverishment effects be avoided. Socialism social-democratic style, however good it might look in comparison with Russian-type socialism, still necessarily leads to a reduction in investment and thus in future wealth as compared with that under capitalism.On the following cf. L. v. Mises, Socialism (Indianapolis, 1981), esp. part V; Human Action (Auburn, Ala., 2008), esp. part 6. By taking part of the income from production away from the owner-producer, however small that part may be, and giving it to people who did not produce the income in question, the costs of production (which are never zero, as producing, appropriating, contracting always imply at least the use of time, which could be used otherwise, for leisure, consumption, or underground work, for instance) rise, and, mutatis mutandis, the costs of non-producing and/or underground production fall, however slightly.

As a consequence there will be relatively less production and investment, even though, for reasons to be discussed shortly, the absolute level of production and wealth might still rise. There will be relatively more leisure, more consumption, and more moonlighting, and hence, all in all, relative impoverishment. And this tendency will be more pronounced the higher the income from production that is redistributed, and the more imminent the likelihood that it will be raised in the future by unilateral, noncontractual societal decision.

For a long time by far the most popular idea for implementing the general policy goal of social-democratic socialism was to redistribute monetary income by means of income taxation or a general sales tax levied on producers. A look at this particular technique shall further clarify our point and avoid some frequently encountered misunderstandings and misconceptions about the general effect of relative impoverishment.

What is the economic effect of introducing income or sales taxation where there has been none before, or of raising an existing level of taxation to a new height?Cf. M. N. Rothbard, Man, Economy, and State with Power and Market (Auburn, Ala., 2009). In answering this, I will further ignore the complications that result from the different possible ways of redistributing tax money to different individuals or groups of individuals — these shall be discussed later.

Here we will only take into account the general fact, true by definition for all redistributive systems, that any redistribution of tax money is a transfer from monetary income producers and contractual money recipients to people in their capacity as nonproducers and nonrecipients of contractual money incomes. Introducing or raising taxation thus implies that monetary income flowing from production is reduced for the producer and increased for people in their roles as nonproducers and noncontractors. This changes the relative costs of production for monetary return versus nonproduction and production for nonmonetary returns.

Accordingly, insofar as this change is perceived by people, they will increasingly resort to leisurely consumption and/or production for the purpose of barter, simultaneously reducing their productive efforts undertaken for monetary rewards. In any case, the output of goods to be purchased with money will fall, which is to say the purchasing power of money decreases, and hence the general standard of living will decline.

Against this reasoning it is sometimes argued that it has been frequently observed empirically that a rise in the level of taxation was actually accompanied by a rise (not a fall) in the gross national product (GNP), and that the above reasoning, however plausible, must thus be considered empirically invalid. This alleged counterargument exhibits a simple misunderstanding: a confusion between absolute and relative reduction.

In the above analysis the conclusion is reached that the effect of higher taxes is a relative reduction in production for monetary returns; a reduction, that is, as compared with the level of production that would have been attained had the degree of taxation not been altered. It does not say or imply anything with respect to the absolute level of output produced.

As a matter of fact, absolute growth of GNP is not only compatible with our analysis but can be seen as a perfectly normal phenomenon to the extent that advances in productivity are possible and actually take place. If it has become possible, through improvement in the technology of production, to produce a higher output with an identical input (in terms of costs), or a physically identical output with a reduced input, then the coincidence of increased taxation and increased output is anything but surprising. But, to be sure, this does not at all affect the validity of what has been stated about relative impoverishment resulting from taxation.

Another objection that enjoys some popularity is that raising taxes leads to a reduction in monetary income, and that this reduction raises the marginal utility of money as compared with other forms of income (like leisure) and thus, instead of lowering it, actually helps to increase the tendency to work for monetary return.

This observation, to be sure, is perfectly true. But it is a misconception to believe that it does anything to invalidate the relative impoverishment thesis. First of all, in order to get the full picture it should be noted that through taxation, not only the monetary income for some people (the producers) is reduced but simultaneously monetary income for other people (nonproducers) is increased, and for these people the marginal utility of money and hence their inclination to work for monetary return would be reduced. But this is by no means all that need be said, as this might still leave the impression that taxation simply does not affect the output of exchangeable goods at all — since it will reduce the marginal utility of money income for some and increase it for others, with both effects cancelling each other out. But this impression would be wrong.

As a matter of fact, this would be a denial of what has been assumed at the outset: that a tax hike, i.e., a higher monetary contribution forced upon disapproving income producers, has actually taken place and has been perceived as such — and would hence involve a logical contradiction. Intuitively, the flaw in the belief that taxation is “neutral” as regards output becomes apparent as soon as the argument is carried to its ultimate extreme.

It would then amount to the statement that even complete expropriation of all of the producers’ monetary income and the transfer of it to a group of nonproducers would not make any difference, since the increased laziness of the nonproducers resulting from this redistribution would be fully compensated by an increased workaholism on the part of the producers (which is certainly absurd).

What is overlooked in this sort of reasoning is that the introduction of taxation or the rise in any given level of taxation does not only imply favoring nonproducers at the expense of producers, it also simultaneously changes, for producers and nonproducers of monetary income alike, the cost attached to different methods of achieving an (increasing) monetary income. For it is now relatively less costly to attain additional monetary income through nonproductive means, i.e., not through actually producing more goods but by participating in the process of noncontractual acquisitions of goods already produced. Even if producers are indeed more intent upon attaining additional money as a consequence of a higher tax, they will increasingly do so not by intensifying their productive efforts but rather through exploitative methods.

This explains why taxation is not, and never can be, neutral.

With (increased) taxation a different legal incentive structure is institutionalized: one that changes the relative costs of production for monetary income versus nonproduction, including nonproduction for leisurely purposes and nonproduction for monetary return, and also versus production for nonmonetary return (barter). And if such a different incentive structure is applied to one and the same population, then, and necessarily so, a decrease in the output of goods produced for monetary return must result.In addition, it should not be overlooked that even if it led to increased work by those taxed, a higher degree of taxation would in any case reduce the amount of leisure available to them and thereby reduce their standard of living. Cf. M.N. Rothbard, Man, Economy, and State with Power and Market (Auburn, Ala., 2009), pp. 1164 f. While income and sales taxation are the most common techniques, they do not exhaust social-democratic socialism’s repertoire of redistributive methods.

No matter how the taxes are redistributed to the individuals composing a given society, no matter, for instance, to what extent monetary income is equalized, since these individuals can and do lead different lifestyles and since they allocate different portions of the monetary income assigned to them to consumption or to the formation of nonproductively used private wealth, sooner or later significant differences between people will again emerge, if not with respect to their monetary income, then with respect to private wealth. And not surprisingly, these differences will steadily become more pronounced if a purely contractual inheritance law exists. Hence, social-democratic socialism, motivated as it is by egalitarian zeal, includes private wealth in its policy schemes and imposes a tax on it, too, and in particular imposes an inheritance tax in order to satisfy the popular outcry over “unearned riches” falling upon heirs.

Economically, these measures immediately reduce the amount of private wealth formation. As the enjoyment of private wealth is made relatively more costly by the tax, less wealth will be newly created, increased consumption will ensue — including that of existing stocks of nonproductively used riches — and the overall standard of living, which of course also depends on the comforts derived from private wealth, will sink.

Similar conclusions about impoverishment effects are reached when the third major field of tax policies — that of “natural assets” — is analyzed. For reasons to be discussed below, this field, next to the two traditional fields of monetary income and private wealth taxation, has gained more prominence over time under the heading of opportunity equalization. It did not take much to discover that a person’s position in life does not depend exclusively on monetary income or the wealth of nonproductively used goods. There are other things that are important in life and which bring additional income, even though it may not be in the form of money or other exchange goods: a nice family, an education, health, good looks, etc. I will call these nonexchangeable goods from which (psychic) income can be derived “natural assets.”

Redistributive socialism, led by egalitarian ideals, is also irritated by existing differences in such assets, and tries, if not to eradicate, then at least to moderate them. But these assets, being nonexchangeable goods, cannot be easily expropriated and the proceeds then redistributed. It is also not very practical, to say the least, to achieve this goal by directly reducing the nonmonetary income from natural assets of higher income people to the level of lower income people by, for instance, ruining the health of the healthy and so making them equal to the sick, or by smashing the good-looking people’s faces to make them look like their less fortunate bad-looking fellows.A fictional account of the implementation of such a policy, supervised by “The unceasing vigilance of agents of the United States Handicapper General” has been given by K. Vonnegut in “Harrison Bergeron,” in K. Vonnegut, Welcome to the Monkey House (New York, 1970).

Thus, the common method social-democratic socialism advocates in order to create “equality of opportunity” is taxation of natural assets. Those people who are thought to receive a relatively higher nonmonetary income from some asset, like health, are subject to an additional tax, to be paid in money. This tax is then redistributed to those people whose respective income is relatively low to help compensate them for this fact.

An additional tax, for instance, is levied on the healthy to help the unhealthy pay their doctor bills, or on the good looking to help the ugly pay for plastic surgery or to buy themselves a drink so that they can forget about their lot.

The economic consequences of such redistributive schemes should be clear.

Insofar as the psychic income, represented by health, for instance, requires some productive, time and cost-consuming effort, and as people can, in principle, shift from productive roles into nonproductive ones, or channel their productive efforts into different, non- or less heavily taxed lines of nonexchangeable or exchangeable goods production, they will do so because of the increased costs involved in the production of personal health.

The overall production of the wealth in question will fall, the general standard of health, that is, will be reduced. And even with truly natural assets, like intelligence, about which people can admittedly do little or nothing, consequences of the same kind will result, though only with a time lag of one generation. Realizing that it has become relatively more costly to be intelligent and less so to be nonintelligent, and wanting as much income (of all sorts) as possible for one’s offspring, the incentive for intelligent people to produce offspring has been lowered and for nonintelligent ones raised.

Given the laws of genetics, the result will be a population that is all in all less intelligent. And besides, in any case of taxation of natural assets, true for the example of health as well as for that of intelligence, because monetary income is taxed, a tendency similar to the one resulting from income taxation will set in, i.e., a tendency to reduce one’s efforts for monetary return and instead increasingly engage in productive activity for nonmonetary return or in all sorts of nonproductive enterprises. And, of course, all this once again reduces the general standard of living.

But this is still not all that has to be said about the consequences of socialism social-democratic-style, as it will also have remote yet nonetheless highly important effects on the social-moral structure of society, which will become visible when one considers the long-term effects of introducing redistributive policies. It probably no longer comes as a surprise that in this regard, too, the difference between Russian-type socialism and socialism social-democratic style, while highly interesting in some details, is not of a principal kind.

As should be recalled, the effect of the former on the formation of personality types was twofold, reducing the incentive to develop productive skills, and favoring at the same time the development of political talents. This precisely is also the overall consequence of social-democratic socialism.

As social-democratic socialism favors nonproductive roles as well as productive ones that escape public notice and so cannot be reached by taxation, the character of the population changes accordingly. This process might be slow, but as long as the peculiar incentive structure established by redistributive policies lasts, it is constantly operative.

Less investment in the development and improvement of one’s productive skills will take place and, as a consequence, people will become increasingly unable to secure their income on their own, by producing or contracting. And as the degree of taxation rises and the circle of taxed income widens, people will increasingly develop personalities as inconspicuous, as uniform, and as mediocre as is possible — at least as far as public appearance is concerned.

At the same time, as a person’s income simultaneously becomes dependent on Politics, i.e., on society’s decision on how to redistribute taxes (which is reached, to be sure, not by contracting, but rather by superimposing one person’s will on another’s recalcitrant one!), the more dependent it becomes, the more people will have to politicalize, i.e., the more time and energy they will have to invest in the development of their special talents for achieving personal advantages at the expense (i.e., in a noncontractual way) of others or of preventing such exploitation from occurring.

The difference between both types of socialism lies (only) in the following: under Russian-type socialism society’s control over the means of production, and hence over the income produced with them, is complete, and so far there seems to be no more room to engage in political debate about the proper degree of politicalization of society. The issue is settled — just as it is settled at the other end of the spectrum, under pure capitalism, where there is no room for politics at all and all relations are exclusively contractual.

Under social-democratic socialism, on the other hand, social control over income produced privately is actually only partial, and increased or full control exists only as society’s not yet actualized right, making only for a potential threat hanging over the heads of private producers. But living with the threat of being fully taxed rather than actually being so taxed explains an interesting feature of social-democratic socialism as regards the general development toward increasingly politicalized characters.

It explains why under a system of social-democratic socialism the sort of politicalization is different from that under Russian-type socialism. Under the latter, time and effort is spent nonproductively, discussing how to distribute the socially owned income; under the former, to be sure, this is also done, but time and effort are also used for political quarrels over the issue of how large or small the socially administered income-shares should actually be. Under a system of socialized means of production where this issue is settled once and for all, there is then relatively more withdrawal from public life, resignation, and cynicism to be observed.

Social-democratic socialism, on the other hand, where the question is still open, and where producers and nonproducers alike can still entertain some hope of improving their position by decreasing or increasing taxation, has less of such privatization and, instead, more often has people actively engaged in political agitation either in favor of increasing society’s control of privately produced incomes, or against it.On the phenomenon of politicalization cf. also K. S. Templeton, ed., The Politicalization of Society (Indianapolis, 1977). With the general similarity as well as this specific difference between both types of socialism explained, the task remains of presenting a brief analysis of some modifying forces influencing the general development toward unproductive politicalized personalities.

These are effected by differing approaches to the desirable pattern of income distribution.

Russian and social-democratic socialism alike are faced with the question of how to distribute income that happens to be socially controlled. For Russian-type socialism it is a matter of what salaries to pay to individuals who have been assigned to various positions in the caretaker economy. For redistributive socialism it is the question of how much tax to allocate to whom. While there are in principle innumerable ways to do this, the egalitarian philosophy of both kinds of socialism effectively reduces the available options to three general types.On the concern of orthodox and social-democratic socialism for equality cf. S. Lukes, “Socialism and Equality,” in: L. Kolakowski and S. Hampshire, eds., The Socialist Idea (New York, 1974); also B. Williams, “The Idea of Equality,” in P. Laslett and W. G. Runciman, eds., Philosophy, Politics, and Society, 2nd series (Oxford, 1962). For a critique of the socialist concept of equality cf. M. N. Rothbard, “Freedom, Inequality, Primitivism and the Division of Labor,” in K. S. Templeton, ed., The Politicalization of Society (Indianapolis, 1977); and Egalitarianism as a Revolt Against Nature and Other Essays, 2nd ed. (title essay; Auburn, Ala., 2000); H. Schoeck, Envy (New York, 1966); and 1st Leistung unanstaendig? (Osnabrueck, 1971); A. Flew, The Politics of Procrustes (London, 1980); and Sociology, Equality and Education (New York, 1976).

The first one is the method of more or less equalizing everybody’s monetary income (and possibly also private, nonproductively used wealth).

Teachers, doctors, construction workers and miners, factory managers and cleaning ladies all earn pretty much the same salary, or the difference between them is at least considerably reduced.Traditionally, this approach has been favored, at least in theory, by orthodox Marxist socialism — in line with Marx’s famous dictum in his “Critique of the Gotha Programme” (K. Marx, Selected Works, vol. 2 [London, 1942], p. 566), “from each according to his ability, to each according to his needs.” Economic reality, however, has forced the Russian-style countries to make considerable concessions in practice. Generally speaking, an effort has indeed been made to equalize the (assumedly highly visible) monetary income for various occupations, but in order to keep the economy going, considerable difference in (assumedly less visible) nonmonetary rewards (such as special privileges regarding travel, education, housing, shopping, etc.) have had to be introduced.     Surveying the literature, P. Gregory and R. Stuart (Comparative Economic Systems [Boston, 1985]), state: “… earnings are more equally distributed in Eastern Europe, Yugoslavia and the Soviet Union than in the United States. For the USSR, this appears to be a relatively new phenomenon, for as late as 1957, Soviet earnings were more unequal than the United States.” However, in Soviet-style countries “a relatively larger volume of resources … is provided on an extra market bases …” (p. 502). In conclusion: “Income is distributed more unequally in the capitalist countries in which the state plays a relatively minor redistributive role … (United States, Italy, Canada). Yet even where the state plays a major redistributive role (United Kingdom, Sweden), the distribution of incomes appears to be slightly more unequal than in the planned socialist countries (Hungary, Czechoslovakia, Bulgaria). The Soviet Union in 1966 appears to have a less egalitarian distribution of income than its East European counterparts” (p. 504). Cf. also, F. Parkin, Class Inequality and Political Order (New York, 1971), esp. chap. 6. It does not need much comment to realize that this approach reduces the incentive to work most drastically, for it no longer makes much difference — salary-wise — if one works diligently all day or fools around most of the time. Hence, disutility of labor being a fact of life, people will increasingly fool around, with the average income that everyone seems to be guaranteed constantly falling, in relative terms. Thus, this approach relatively strengthens the tendency toward withdrawal, disillusionment, cynicism, and mutatis mutandis, contributes to a relative reduction in the general atmosphere of politicalization.

The second approach has the more moderate aim of guaranteeing a minimum income which, though normally somehow linked to average income, falls well below it.This approach is traditionally most typical for social-democratic socialism. In recent years it has been given much publicized support — from the side of the economics profession — by M. Friedman with his proposal for a “negative income tax” (Friedman, Capitalism and Freedom, Chicago, 1962, chap. 12); and by J. Rawls — from the philosophical side — with his “difference principle” (Rawls, A Theory of Justice [Cambridge, 1971], pp. 60, 75 ff., 83). Accordingly, both authors have received much attention from social-democratic party intellectuals. Generally, Friedman was only found “guilty” of not wanting to set the minimum income high enough — but then, he had no principled criterion for setting it at any specific point anyway. Rawls, who wants to coerce the “most advantaged person” into letting the “least advantaged one” share in his fortune whenever he happens to improve his own position, was at times even found to have gone too far with his egalitarianism. Cf. G. Schwan, Sozialismus in der Demokratie. Theorie eine konsequent sozialdemokratischen Politik (Stuttgart, 1982), chap. 3.

This, too, reduces the incentive to work, since, to the extent that they are only marginal income producers with incomes from production only slightly above the minimum, people will now be more inclined to reduce or even stop their work, enjoy leisure instead, and settle for the minimum income. Thus more people than otherwise will fall below the minimum line, or more people than otherwise will keep or acquire those characteristics on whose existence payment of minimum salaries is bound, and as a consequence, again, the average income to which the minimum salary is linked will fall below the level that it otherwise would have reached. But, of course, the incentive to work is reduced to a smaller degree under the second than the first scheme.

On the other hand, the second approach will lead to a relatively higher degree of active politicalization (and less of resigned withdrawal), because, unlike average income, which can be objectively ascertained, the level at which the minimum income is fixed is a completely subjective, arbitrary affair, which is thus particularly prone to becoming a permanent political issue.

Undoubtedly, the highest degree of active politicalization is reached when the third distributional approach is chosen. Its goal, gaining more and more prominence for social democracy, is to achieve equality of opportunity.A representative example of social-democratically inclined research on equality of opportunity, in particular regarding education, is C. Jencks, and others, Inequality (London, 1973); the increasing prominence of the idea of equalizing opportunity also explains the flood of sociological studies on “quality of life” and “social indicators” that has appeared since the late 1960s. Cf. for instance, A. Szalai and F. Andrews, eds., The Quality of Life (London, 1980).

The idea is to create, through redistributional measures, a situation in which everyone’s chance of achieving any possible (income) position in life is equal — very much as in a lottery where each ticket has the same chance of being a winner or a loser — and, in addition, to have a corrective mechanism which helps rectify situations of “undeserved bad luck” (whatever that may be) which might occur in the course of the ongoing game of chance. Taken literally, of course, this idea is absurd: there is no way of equalizing the opportunity of someone living in the Alps and someone residing at the seaside.

In addition, it seems quite clear that the idea of a corrective mechanism is simply incompatible with the lottery idea. Yet it is precisely this high degree of vagueness and confusion which contributes to the popular appeal of this concept.

What constitutes an opportunity, what makes an opportunity different or the same, worse or better, how much and what kind of compensation is needed to equalize opportunities which admittedly cannot be equalized in physical terms (as in the Alps/seaside example), what is undeserved bad luck and what a rectification, are all completely subjective matters. They are dependent on subjective evaluations, changing as they do, and there is then — if one indeed applies the equality of opportunity concept — an unlimited reservoir of all sorts of distributional demands, for all sorts of reasons and for all sorts of people.

This is so, in particular, because equalizing opportunity is compatible with demands for differences in monetary income or private wealth. A and B might have the same income and might both be equally rich, but A might be black, or a woman, or have bad eyesight, or be a resident of Texas, or may have ten children, or no husband, or be over 65, whereas B might be none of these but something else, and hence A might argue that his opportunities to attain everything possible in life are different, or rather worse, than B’s, and that he should somehow be compensated for this, thus making their monetary incomes, which were the same before, now different. And B, of course, could argue in exactly the same way by simply reversing the implied evaluation of opportunities. As a consequence, an unheard of degree of politicalization will ensue.

Everything seems fair now, and producers and nonproducers alike, the former for defensive and the latter for aggressive purposes, will be driven into spending more and more time in the role of raising, destroying, and countering distributional demands. And to be sure, this activity, like the engagement in leisurely activities, is not only nonproductive but in clear contrast to the role of enjoying leisure, implies spending time for the very purpose of actually disrupting the undisturbed enjoyment of wealth produced, as well as its new production.

But not only is increased politicalization stimulated (above and beyond the level implied by socialism generally) by promoting the idea of equalizing opportunity. There is once more, and this is perhaps one of the most interesting features of new social-democratic-socialism as compared with its traditional Marxist form, a new and different character to the kind of politicalization implied by it. Under any policy of distribution, there must be people who support and promote it. And normally, though not exclusively so, this is done by those who profit most from it.

Thus, under a system of income and wealth-equalization and also under that of a minimum income policy, it is mainly the “have-nots” who are the supporters of the politicalization of social life. Given the fact that on the average they happen to be those with relatively lower intellectual, in particular verbal capabilities, this makes for politics which appears to lack much intellectual sophistication, to say the least. Put more bluntly, politics tends to be outright dull, dumb, and appalling, even to a considerable number of the have-nots themselves.

On the other hand, in adopting the idea of equalizing opportunity, differences in monetary income and wealth are not only allowed to exist but even become quite pronounced, provided that this is justifiable by some underlying discrepancies in the opportunity structure for which the former differences help compensate. Now in this sort of politics the haves can participate, too.

As a matter of fact, being the ones who on the average command superior verbal skills, and the task of defining opportunities as better or worse being essentially one of persuasive rhetorical powers, this is exactly their sort of game. Thus the haves will now become the dominant force in sustaining the process of politicalization. Increasingly it will be people from their ranks that move to the top of the socialist party organization, and accordingly the appearance and rhetoric of socialist politics will take on a different shape, becoming more and more intellectualized, changing its appeal and attracting a new class of supporters.

With this I have reached the stage in the analysis of social-democratic socialism where only a few remarks and observations are needed which will help illustrate the validity of the above theoretical considerations.

Though it does not at all affect the validity of the conclusions reached above, depending as they do exclusively on the truth of the premises and the correctness of the deductions, there unfortunately exists no nearly perfect, quasi-experimental case to illustrate the workings of social-democratic socialism as compared with capitalism, as there was in the case of East and West Germany regarding Russian-type socialism. Illustrating the point would involve a comparison of manifestly different societies where the ceteris are clearly not paribus, and thus it would no longer be possible to neatly match certain causes with certain effects.

Often, experiments in social-democratic socialism simply have not lasted long enough, or have been interrupted repeatedly by policies that could not definitely be classified as social-democratic socialism. Or else from the very beginning, they have been mixed with such different — and even inconsistent — policies as a result of political compromising, that in reality different causes and effects are so entangled that no striking illustrative evidence can be produced for any thesis of some degree of specificity. The task of disentangling causes and effects then becomes a genuinely theoretical one again, lacking the peculiar persuasiveness that characterizes experimentally produced evidence.

Nonetheless some evidence exists, if only of a more dubious quality. First, on the level of highly global observations, the general thesis about relative impoverishment brought about by redistributive socialism is illustrated by the fact that the standard of living is relatively higher and has become more so over time in the United States of America than in Western Europe, or, more specifically, than in the countries of the European Community (EC).

Both regions are roughly comparable with respect to population size, ethnic and cultural diversity, tradition and heritage, and also with respect to natural endowments, but the United States is comparatively more capitalist and Europe more socialist. Every neutral observer will hardly fail to notice this point, as indicated also by such global measures as state expenditure as percent of GNP, which is roughly 35 percent in the United States as compared to about 50 percent or more in Western Europe.

It also fits into the picture that the European countries (in particular Great Britain) exhibited more impressive rates of economic growth in the nineteenth century, which has been described repeatedly by historians as the period of classical liberalism, than in the twentieth, which, in contrast, has been termed that of socialism and statism. In the same way the validity of the theory is illustrated by the fact that Western Europe has been increasingly surpassed in rates of economic growth by some of the Pacific countries, such as Japan, Hong Kong, Singapore, and Malaysia; and that the latter, in adopting a relatively more capitalist course, have meanwhile achieved a much higher standard of living than socialistically inclined countries which started at about the same time with roughly the same basis of economic development, such as India.

Coming then to more specific observations, there are the recent experiences of Portugal, where in 1974 the autocratic Salazar regime of conservative socialism (another type of socialism), which had kept Portugal one of the poorest countries in Europe, was supplanted in an upheaval by redistributive socialism (with elements of nationalization) and where since then the standard of living has fallen even further, literally turning the country into a third world region.

There is also the socialist experiment of Mitterand’s France, which produced an immediate deterioration of the economic situation, so noticeable — most conspicuous being a drastic rise in unemployment and repeated currency devaluations — that after less than two years, sharply reduced public support for the government forced a reversal in policy, which was almost comic in that it amounted to a complete denial of what only a few weeks before had been advocated as its dearest convictions.

The most instructive case, though, might again be provided by Germany and, this time, West Germany.On the following cf. also R. Merklein, Griff in die eigene Tasche (Hamburg, 1980); and Die Deutschen werden aermer (Hamburg, 1982).

From 1949 to 1966 a liberal-conservative government which showed a remarkable commitment to the principles of a market economy existed, even though from the very beginning there was a considerable degree of conservative-socialist elements mixed in and these elements gained more importance over time. In any case, of all the major European nations, during this period West Germany was, in relative terms, definitely the most capitalist country, and the result of this was that it became Europe’s most prosperous society, with growth rates that surpassed those of all its neighbors.

Until 1961, millions of German refugees, and afterward millions of foreign workers from southern European countries became integrated into its expanding economy, and unemployment and inflation were almost unknown. Then, after a brief transition period, from 1969 to 1982 (almost an equal time span) a social-democratically led socialist-liberal government took over. It raised taxes and social security contributions considerably, increased the number of public employees, poured additional tax funds into existing social programs and  created new ones, and significantly increased spending on all sorts of so-called “public goods,” thereby allegedly equalizing opportunities and enhancing the overall “quality of life.”

By resorting to a Keynesian policy of deficit spending and unanticipated inflation, the effects of raising the socially guaranteed minimum provisions for nonproducers at the expense of more heavily taxed producers could be delayed for a few years (the motto of the economic policy of former West German Chancellor Helmut Schmidt was “rather 5% inflation than 5% unemployment”). They were only to become more drastic somewhat later, however, as unanticipated inflation and credit expansion had created and prolonged the over- or rather malinvestment typical of a boom.

As a result, not only was there much more than 5 percent inflation, but unemployment also rose steadily and approached 10 percent; the growth of GNP became slower and slower until it actually fell in absolute terms during the last few years of the period. Instead of being an expanding economy, the absolute number of people employed decreased; more and more pressure was generated on foreign workers to leave the country and the immigration barriers were simultaneously raised to ever higher levels. All of this happened while the importance of the underground economy grew steadily.

But these were only the more evident effects of a narrowly defined economic kind. There were other effects of a different sort, which were actually of more lasting importance. With the new socialist-liberal government the idea of equalizing opportunity came to the ideological forefront. And as has been predicted theoretically, it was in particular the official spreading of the idea mehr Demokratie wagen (“risk more Democracy”) — initially one of the most popular slogans of the new (Willy Brandt) era — that led to a degree of politicalization unheard of before.

All sorts of demands were raised in the name of equality of opportunity; and there was hardly any sphere of life, from childhood to old age, from leisure to work conditions, that was not examined intensely for possible differences that it offered to different people with regard to opportunities defined as relevant. Not surprisingly, such opportunities and such differences were found constantly,Cf. as a representative example, W. Zapf, ed., Lebensbedingungen in der Bundesrepublik (Frankfurt/M., 1978). and, accordingly, the realm of politics seemed to expand almost daily. “There is no question that is not a political one” could be heard more and more often.

In order to stay ahead of this development the parties in power had to change, too. In particular the Social Democrats, traditionally a blue-collar workers’ party, had to develop a new image.

With the idea of equalizing opportunity gaining ground, it increasingly became, as could be predicted, the party of the (verbal) intelligentsia, of social scientists and of teachers. And this “new” party, almost as if to prove the point that a process of politicalization will be sustained mainly by those who can profit from its distributional schemes and that the job of defining opportunities is essentially arbitrary and a matter of rhetorical power, then made it one of its central concerns to channel the most diverse political energies set in motion into the field of equalizing, above all, educational opportunities.

In particular, they “equalized” the opportunities for a high school and university education, by offering the respective services not only free of charge but by literally paying large groups of students to take advantage of them. This not only increased the demand for educators, teachers, and social scientists, whose payment naturally had to come from taxes. It also amounted, somewhat ironically for a socialist party which argued that equalizing educational opportunities would imply an income transfer from the rich to the poor, in effect to a subsidy paid to the more intelligent at the expense of a complementary income reduction for the less intelligent, and, to the extent that there are higher numbers of intelligent people among the middle and upper social classes than among the lower, a subsidy to the haves paid by the have-nots.Cf. on this A. Alchian, “The Economic and Social Impact of Free Tuition” in A. Alchian, Economic Forces at Work (Indianapolis, 1977).

As a result of this process of politicalization led by increased numbers of tax-paid educators gaining influence over increased numbers of students, there emerged (as could be predicted) a change in the mentality of the people. It was increasingly considered completely normal to satisfy all sorts of demands through political means, and to claim all sorts of alleged rights against other supposedly better-situated people and their property; and for a whole generation of people raised during this period, it became less and less natural to think of improving one’s lot by productive effort or by contracting. Thus, when the actual economic crisis, necessitated by the redistributionist policy, arose, the people were less equipped than ever to overcome it, because over time the same policy had weakened precisely those skills and talents which were now most urgently required.

Revealingly enough, when the socialist-liberal government was ousted in 1982, mainly because of its obviously miserable economic performance, it was still the prevalent opinion that the crisis should be resolved not by eliminating the causes, i.e., the swollen minimum provisions for nonproducers or noncontractors, but rather by another redistributive measure: by forcibly equalizing the available work — time for employed and unemployed people.

And in line with this spirit the new conservative-liberal government in fact did no more than slow down the rate of growth of taxation.

The “nation,” of course, is not the same thing as the state, a difference that earlier libertarians and classical liberals such as Ludwig von Mises and Albert Jay Nock understood full well. Contemporary libertarians often assume, mistakenly, that individuals are bound to each other only by the nexus of market exchange. They forget that everyone is necessarily born into a family, a language, and a culture. Every person is born into one or several overlapping communities, usually including an ethnic group, with specific values, cultures, religious beliefs, and traditions. He is generally born into a “country.” He is always born into a specific historical context of time and place, meaning neighborhood and land area.

The modern European nation-state, the typical “major power,” began not as a nation at all, but as an “imperial” conquest of one nationality — usually at the “center” of the resulting country, and based in the capital city — over other nationalities at the periphery. Since a “nation” is a complex of subjective feelings of nationality based on objective realities, the imperial central states have had varying degrees of success in forging among their subject nationalities at the periphery a sense of national unity incorporating submission to the imperial center. In Great Britain, the English have never truly eradicated national aspirations among the submerged Celtic nationalities, the Scots and the Welsh, although Cornish nationalism seems to have been mostly stamped out. In Spain, the conquering Castilians, based in Madrid, have never managed — as the world saw at the Barcelona Olympics — to erase nationalism among the Catalans, the Basques, or even the Galicians or Andalusians. The French, moving out from their base in Paris, have never totally tamed the Bretons, the Basques, or the people of the Languedoc.

It is now well known that the collapse of the centralizing and imperial Russian Soviet Union has lifted the lid on the dozens of previously suppressed nationalisms within the former USSR, and it is now becoming clear that Russia itself, or rather “the Russian Federated Republic,” is simply a slightly older imperial formation in which the Russians, moving out from their Moscow center, forcibly incorporated many nationalities including the Tartars, the Yakuts, the Chechens, and many others. Much of the USSR stemmed from imperial Russian conquest in the nineteenth century, during which the clashing Russians and British managed to carve up much of central Asia.

The “nation” cannot be precisely defined; it is a complex and varying constellation of different forms of communities, languages, ethnic groups, or religions. Some nations or nationalities, such as the Slovenes, are both a separate ethnic group and a language; others, such as the warring groups in Bosnia, are the same ethnic group whose language is the same but who differ in the form of alphabet, and who clash fiercely on religion (the Eastern Orthodox Serbs, the Catholic Croats, and the Bosnian Muslims, who, to make matters more complicated, were originally champions of the Manichaean Bogomil heresy).

The question of nationality is made more complex by the interplay of objectively existing reality and subjective perceptions. In some cases, such as Eastern European nationalities under the Habsburgs or the Irish under the British, nationalisms, including submerged and sometimes dying languages, had to be consciously preserved, generated, and expanded. In the nineteenth century this was done by a determined intellectual elite, struggling to revive peripheries living under, and partially absorbed by, the imperial center.

The problem of the nation has been aggravated in the twentieth century by the overriding influence of Wilsonianism on US and world-wide foreign policy. I refer not to the idea of “national self-determination,” observed mainly in the breach after World War I, but to the concept of “collective security against aggression.” The fatal flaw in this seductive concept is that it treats nation-states by an analogy with individual aggressors, with the “world community” in the guise of a cop-on-the-corner. The cop, for example, sees A aggressing against, or stealing the property of, B; the cop naturally rushes to defend B’s private property, in his person or possessions. In the same way, wars between two nations or states are assumed to have a similar aspect: State A invades, or “aggresses against,” State B; State A is promptly designated “the aggressor” by the “international policeman” or his presumptive surrogate, be it the League of Nations, the United Nations, the US president or secretary of state, or the editorial writer of the august New York Times. Then the world police force, whatever it may be, is supposed to swing promptly into action to stop the “principle of aggression,” or to prevent the “aggressor,” be it Saddam Hussein or the Serbian guerrillas in Bosnia, from fulfilling their presumed goals of swimming across the Atlantic and murdering every resident of New York or Washington, DC.

A crucial flaw in this popular line of argument goes deeper than the usual discussion of whether or not American air power or troops can really eradicate Iraqis or Serbs without too much difficulty. The crucial flaw is the implicit assumption of the entire analysis: that every nation-state “owns” its entire geographical area in the same just and proper way that every individual property owner owns his person and the property that he has inherited, worked for, or gained in voluntary exchange. Is the boundary of the typical nation-state really as just or as beyond cavil as your or my house, estate, or factory?

It seems to me that not only the classical liberal or the libertarian, but anyone of good sense who thinks about this problem, must answer a resounding “No.”It is absurd to designate every nation-state, with its self-proclaimed boundary as it exists at any one time, as somehow right and sacrosanct, each with its “territorial integrity” to remain as spotless and unbreached as your or my bodily person or private property. Invariably, of course, these boundaries have been acquired by force and violence, or by interstate agreement above and beyond the heads of the inhabitants on the spot, and invariably these boundaries shift a great deal over time in ways that make proclamations of “territorial integrity” truly ludicrous.

Take, for example, the current mess in Bosnia. Only a couple of years ago, Establishment opinion, Received Opinion of Left, Right, or Center, loudly proclaimed the importance of maintaining “the territorial integrity” of Yugoslavia, and bitterly denounced all secession movements. Now, only a short time later, the same Establishment, only recently defending the Serbs as champions of “the Yugoslav nation” against vicious secessionist movements trying to destroy that “integrity,” now reviles and wishes to crush the Serbs for “aggression” against the “territorial integrity” of “Bosnia” or “Bosnia-Herzegovina,” a trumped-up “nation” that had no more existence than the “nation of Nebraska” before 1991. But these are the pitfalls in which we are bound to fall if we remain trapped by the mythology of the “nation-state” whose chance boundary at time t must be upheld as a property-owning entity with its own sacred and inviolable “rights,” in a deeply flawed analogy with the rights of private property.

To adopt an excellent stratagem of Ludwig von Mises in abstracting from contemporary emotions: Let us postulate two contiguous nation States, “Ruritania” and “Fredonia.” Let us assume that Ruritania has suddenly invaded eastern Fredonia, and claims it as its own. Must we automatically condemn Ruritania for its evil “act of aggression” against Fredonia, and send troops, either literally or metaphorically, against the brutal Ruritanians and in behalf of “brave, little” Fredonia? By no means. For it is very possible that, say, two years ago, eastern Fredonia had been part and parcel of Ruritania, was indeed western Ruritania, and that the Rurs, ethnic and national denizens of the land, have been crying out for the past two years against Fredonian oppression. In short, in international disputes in particular, in the immortal words of W. S. Gilbert:

Things are seldom what they seem,Skim milk masquerades as cream.

The Beloved international cop, whether it be Boutros Boutros-Ghali or US troops or the New York Times editorialist had best think more than twice before leaping into the fray.

Americans are especially unsuited for their self-proclaimed Wilsonian role as world moralists and policemen. Nationalism in the US is peculiarly recent, and is more of an idea than it is rooted in long-standing ethnic or nationality groups or struggles. Add to that deadly mix the fact that Americans have virtually no historical memory, and this makes Americans peculiarly unsuited to barreling in to intervene in the Balkans, where who took what side at what place in the war against the Turkish invaders in the fifteenth century is far more intensely real to most of the contenders than is yesterday’s dinner.

Libertarians and classical liberals, who are particularly well-equipped to rethink the entire muddled area of the nation-state and foreign affairs, have been too wrapped up in the Cold War against communism and the Soviet Union to engage in fundamental thinking on these issues. Now that the Soviet Union has collapsed and the Cold War is over, perhaps classical liberals will feel free to think anew about these critically important problems.

First, we can conclude that not all state boundaries are just. One goal for libertarians should be to transform existing nation-states into national entities whose boundaries could be called just, in the same sense that private property boundaries are just; that is, to decompose existing coercive nation-states into genuine nations, or nations by consent.

In the case, for example, of the eastern Fredonians, the inhabitants should be able to secede voluntarily from Fredonia and join their comrades in Ruritania. Again, classical liberals should resist the impulse to say that national boundaries “don’t make any difference.” It’s true, of course, as classical liberals have long proclaimed, that the less the degree of government intervention in either Fredonia or Ruritania, the less difference such a boundary will make. But even under a minimal state, national boundaries would still make a difference, often a big one to the inhabitants of the area. For in what language — Fredonian or both? — will be the street signs, telephone books, court proceedings, or school classes of the area?

In short, every group, every nationality, should be allowed to secede from any nation-state and to join any other nation-state that agrees to have it. That simple reform would go a long way toward establishing nations by consent. The Scots, if they want to, should be allowed by the English to leave the United Kingdom, and to become independent, and even to join a Gaelic Confederation, if the constituents so desire.

A common response to a world of proliferating nations is to worry about the multitude of trade barriers that might be erected. But, other things being equal, the greater the number of new nations, and the smaller the size of each, the better. For it would be far more difficult to sow the illusion of self-sufficiency if the slogan were “Buy North Dakotan” or even “Buy 56th Street” than it now is to convince the public to “Buy American.” Similarly, “Down with South Dakota,” or a fortiori​, “Down with 55th Street,” would be a more difficult sell than spreading fear or hatred of the Japanese. Similarly, the absurdities and the unfortunate consequences of fiat paper money would be far more evident if each province or each neighborhood or street block were to print its own currency. A more decentralized world would be far more likely to turn to sound market commodities, such as gold or silver, for its money.

I raise the pure anarcho-capitalist model in this here, not so much to advocate the model per se as to propose it as a guide for settling vexed current disputes about nationality. The pure model, simply, is that no land areas, no square footage in the world, shall remain “public”; every square foot of land area, be they streets, squares, or neighborhoods, is privatized. Total privatization would help solve nationality problems, often in surprising ways, and I suggest that existing states, or classical liberal states, try to approach such a system even while some land areas remain in the governmental sphere.

Open Borders, or the Camp-of-the Saints Problem

The question of open borders, or free immigration, has become an accelerating problem for classical liberals. This is first, because the welfare state increasingly subsidizes immigrants to enter and receive permanent assistance, and second, because cultural boundaries have become increasingly swamped. I began to rethink my views on immigration when, as the Soviet Union collapsed, it became clear that ethnic Russians had been encouraged to flood into Estonia and Latvia in order to destroy the cultures and languages of these peoples. Previously, it had been easy to dismiss as unrealistic Jean Raspail’s anti-immigration novel The Camp of the Saints, in which virtually the entire population of India decides to move, in small boats, into France, and the French, infected by liberal ideology, cannot summon the will to prevent economic and cultural national destruction. As cultural and welfare-state problems have intensified, it became impossible to dismiss Raspail’s concerns any longer.

However, on rethinking immigration on the basis of the anarcho-capitalist model, it became clear to me that a totally privatized country would not have “open borders” at all. If every piece of land in a country were owned by some person, group, or corporation, this would mean that no immigrant could enter there unless invited to enter and allowed to rent, or purchase, property. A totally privatized country would be as “closed” as the particular inhabitants and property owners desire. It seems clear, then, that the regime of open borders that exists de facto in the US really amounts to a compulsory opening by the central state, the state in charge of all streets and public land areas, and does not genuinely reflect the wishes of the proprietors.

Under total privatization, many local conflicts and “externality” problems — not merely the immigration problem — would be neatly settled. With every locale and neighborhood owned by private firms, corporations, or contractual communities, true diversity would reign, in accordance with the preferences of each community. Some neighborhoods would be ethnically or economically diverse, while others would be ethnically or economically homogeneous. Some localities would permit pornography or prostitution or drugs or abortions, others would prohibit any or all of them. The prohibitions would not be state imposed, but would simply be requirements for residence or use of some person’s or community’s land area. While statists who have the itch to impose their values on everyone else would be disappointed, every group or interest would at least have the satisfaction of living in neighborhoods of people who share its values and preferences. While neighborhood ownership would not provide Utopia or a panacea for all conflicts, it would at least provide a “second-best” solution that most people might be willing to live with.

Enclaves and Exclaves

One obvious problem with the secession of nationalities from centralized states concerns mixed areas, or enclaves and exclaves. Decomposing the swollen central nation-State of Yugoslavia into constituent parts has solved many conflicts by providing independent nationhood for Slovenes, Serbs, and Croats, but what about Bosnia, where many towns and villages are mixed? One solution is to encourage more of the same, through still more decentralization. If, for example, eastern Sarajevo is Serb and western Sarajevo is Muslim, then they become parts of their respective separate nations.

But this of course will result in a large number of enclaves, parts of nations surrounded by other nations. How can this be solved? In the first place, the enclave/exclave problem exists right now. One of the most vicious existing conflicts, in which the US has not yet meddled because it has not yet been shown on CNN, is the problem of Nagorno-Karabakh, an Armenian exclave totally surrounded by, and therefore formally within, Azerbaijan. Nagorno-Karabakh should clearly be part of Armenia. But, how then, will Armenians of Karabakh avoid their present fate of blockade by Azeris, and how will they avoid military battles in trying to keep open a land corridor to Armenia?

Under total privatization, of course, these problems would disappear. Nowadays, no one in the US buys land without making sure that his title to the land is clear; in the same way, in a fully privatized world, access rights would obviously be a crucial part of land ownership. In such a world, then, Karabakh property owners would make sure that they had purchased access rights through an Azeri land corridor.

Decentralization also provides a workable solution for the seemingly insoluble permanent conflict in Northern Ireland. When the British partitioned Ireland in the early 1920s, they agreed to perform a second, a more micro-managed, partition. They never carried through on this promise. If the British would permit a detailed, parish by parish, partition vote in Northern Ireland, however, most of the land area, which is majority Catholic, would probably hive off and join the Republic: such counties as Tyrone and Fermanagh, southern Down, and southern Armagh, for example. The Protestants would probably be left with Belfast, county Antrim, and other areas north of Belfast. The major remaining problem would be the Catholic enclave within the city of Belfast, but  again, an approach to the anarcho-capitalist model could be attained by permitting the purchase of access rights to the enclave.

Pending total privatization, it is clear that our model could be approached, and conflicts minimized, by permitting secessions and local control, down to the micro-neighborhood level, and by developing contractual access rights for enclaves and exclaves. In the US, it becomes important, in moving toward such radical decentralization, for libertarians and classical liberals — indeed, for many other minority or dissident groups — to begin to lay the greatest stress on the forgotten Tenth Amendment and to try to decompose the role and power of the centralizing Supreme Court. Rather than trying to get people of one’s own ideological persuasion on the Supreme Court, its power should be rolled back and minimized as far as possible, and its power decomposed into state, or even local, judicial bodies.

Citizenship and Voting Rights

One vexing current problem centers on who becomes the citizen of a given country, since citizenship confers voting rights. The Anglo-American model, in which every baby born in the country’s land area automatically becomes a citizen, clearly invites welfare immigration by expectant parents. In the US, for example, a current problem is illegal immigrants whose babies, if born on American soil, automatically become citizens and therefore entitle themselves and their parents to permanent welfare payments and free medical care. Clearly the French system, in which one has to be born to a citizen to become an automatic citizen, is far closer to the idea of a nation-by-consent.

It is also important to rethink the entire concept and function of voting. Should anyone have a “right” to vote? Rose Wilder Lane, the mid-twentieth century US libertarian theorist, was once asked if she believed in womens’ suffrage. “No,” she replied, “and I’m against male suffrage as well.” The Latvians and Estonians have cogently tackled the problem of Russian immigrants by allowing them to continue permanently as residents, but not granting them citizenship or therefore the right to vote. The Swiss welcome temporary guest-workers, but severely discourage permanent immigration, and, a fortiori, citizenship and voting.

Let us turn for enlightenment, once again, to the anarcho-capitalist model. What would voting be like in a totally privatized society? Not only would voting be diverse, but more importantly, who would really care? Probably the most deeply satisfying form of voting to an economist is the corporation, or joint-stock company, in which voting is proportionate to one’s share of ownership of the firm’s assets. But also there are, and would be, a myriad of private clubs of all sorts. It is usually assumed that club decisions are made on the basis of one vote per member, but that is generally untrue. Undoubtedly, the best-run and most pleasant clubs are those run by a small, self-perpetuating oligarchy of the ablest and most interested, a system most pleasant for the rank-and-file nonvoting member as well as for the elite. If I am a rank-and-file member of, say a chess club, why should I worry about voting if I am satisfied with the way the club is run? And if I am interested in running things, I would probably be asked to join the ruling elite by the grateful oligarchy, always on the lookout for energetic members. And finally, if I am unhappy about the way the club is run, I can readily quit and join another club, or even form one of my own. That, of course, is one of the great virtues of a free and privatized society, whether we are considering a chess club or a contractual neighborhood community.

Clearly, as we begin to work toward the pure model, as more and more areas and parts of life become either privatized or micro-decentralized, the less important voting will become. Of course, we are a long way from this goal. But it is important to begin, and particularly to change our political culture, which treats “democracy,” or the “right” to vote, as the supreme political good. In fact, the voting process should be considered trivial and unimportant at best, and never a “right,” apart from a possible mechanism stemming from a consensual contract. In the modern world, democracy or voting is only important either to join in or ratify the use of the government to control others, or to use it as a way of preventing one’s self or one’s group from being controlled. Voting, however, is at best, an inefficient instrument for self-defense, and it is far better to replace it by breaking up central government power altogether.

In sum, if we proceed with the decomposition and decentralization of the modern centralizing and coercive nation-state, deconstructing that state into constituent nationalities and neighborhoods, we shall at one and the same time reduce the scope of government power, the scope and importance of voting and the extent of social conflict. The scope of private contract, and of voluntary consent, will be enhanced, and the brutal and repressive state will be gradually dissolved into a harmonious and increasingly prosperous social order.

The writings collected in this book are mostly addresses given in Bodrum to the Property and Freedom Society, of which Professor Hoppe is both Founder and President. I was fortunate to hear them read out to the gathering, and I am deeply honoured to have been asked to provide an Introduction to the published versions.

I will divide my Introduction into three sections. First, I will give a brief overview of Hoppe’s early life and intellectual development. Second, I will write at greater length about the academic work that has placed him at the head of the international libertarian movement. Third, I will discuss the main theme or themes that emerge from the present collection.

Hans-Hermann Hoppe was born on the 2nd September 1949 in Peine, a town in the British Sector of occupied Germany. After attending various local schools, he first went to the University of Saarland in Saarbrücken and from here moved to the Goethe University in Frankfurt, where he studied under the notable neo-Marxist Jürgen Habermas, who also served as the principal advisor for Hoppe’s doctoral dissertation in Philosophy on David Hume and Immanuel Kant. In those days, Hoppe was himself a Marxist, and had no serious differences with his master. He said later: “What I … liked about Marxism is that it made the attempt to provide a rigorous, deductively derived system.”“The Private Property Order: An Interview with Hans-Hermann Hoppe,” Austrian Economics Newsletter 18, no. 1 (2014). Available here: https://mises.org/library/private-property-order-interview-hans-hermann-hoppe — checked, November 2015. To any external observer, he was following a path followed by many thousands of his generation. It should, in the normal course of things, have ended in a tenured post in which his duty, under cover of spreading disaffection, was to preach conformity to the new order of things in West Germany.

However, what he soon disliked about Marxism was its failure as an intellectual system. His disenchantment was a gradual process, and he went through a period in which he was influenced by Karl Popper, and was even a social democrat in politics. His final break with leftism came while writing his habilitation thesis on the foundations of sociology and economics. He began with the notion that, while certain truths about the world can be known a priori, the laws of Economics and Sociology are at least largely known by induction. He then rejected this, moving to the view that Economics, in contrast to Sociology, is an entirely deductive science. This, then, led him to the discovery of Ludwig von Mises. Here was a system that made the same ambitious claims as Marxism. Austrianism was a set of interlocking and largely deductive theories of Economics, Politics, Law, and much else. Unlike Marxism, it held together intellectually. It also generated true knowledge about the world. The last step remaining on this new and unpredicted path was to discover Murray Rothbard. Hoppe ended the 1970s as a radical free market libertarian. No longer welcome at any West German university, in 1985 he left for the United States.

Until 1986, he taught in New York under Rothbard’s supervision, “working and living side-by-side with him, in constant and immediate personal contact.” They then moved together to teach at the University of Nevada in Las Vegas. Here, they stood at the centre of what became “the Las Vegas Circle” — a grouping of libertarian economists and philosophers as brilliant and productive as any in the entire history of the libertarian movement. Other members of the Circle included Yuri Maltsev, Doug French, and Lee Iglody. Hoppe remained in Las Vegas as a Professor until 2008. But he admits that nothing was ever the same after Rothbard’s untimely death in 1995. He saw Rothbard as his “principal teacher, mentor and master,” and as his “dearest fatherly friend.”

Though he produced much other work during his time with Rothbard and after, his most important contribution, both to libertarianism and to Philosophy in general, is probably his work on what he calls Argumentation Ethics. Every secular ideology appears to rest on shaky foundations. Free market libertarianism is no exception. Why should people be left alone? Why should they be free? We can argue that freedom allows people to make themselves happier than they would otherwise be. We can argue that it lets them become richer. The response is to ask why people should be happy or rich. These may be self-evident goods, but are not always so regarded. A further objection is to start picking holes in the definition and measurement of happiness. Or we can claim that every human being is born with certain natural and inalienable rights, and that these include the rights to life, liberty, and property. The objection here is to ask how, without God as their grantor, these claimed rights are other than an exercise in verbal flatulence.

Hayek and von Mises, the two men who did most during the middle of the twentieth century to keep classical liberalism alive as an ideology, were various kinds of utilitarian. Rothbard, who took Austrian Economics and fused it with native American radicalism to create the modern libertarian movement, shared a belief with Ayn Rand in natural rights. For many years, until more practical disputes emerged after the end of the Cold War, almost every libertarian gathering involved a rehearsal of the differences between the two schools of foundation.

What Hoppe tries with his Argumentation Ethics, is to transcend this debate. In doing this, he draws on his early work with Habermas, on the Kantian tradition of German Philosophy, and on the ethical writings of Rothbard. He begins with the observation that there are two ways of settling any dispute. One is force. The other is argument. Any one party to a dispute who chooses force has stepped outside the norms of civilization, which include the avoidance of aggressive force, and has no right to complain if he is used very harshly. Anyone who chooses argument, on the other hand, has accepted these norms. If he then argues for the rightness of force as a means of getting what he wants from others, he is engaging in logical contradiction. In short, whoever rejects the libertarian non-aggression principle is necessarily also rejecting the norms of rational discourse. Whoever claims to accept these norms must also accept the non-aggression principle.ee, for example, Hans-Hermann Hoppe, “The Ultimate Justification of the Private Property Ethic,” Liberty, September 1988. Available here: http://www.hanshoppe.com/wp-content/uploads/publications/hoppe_ult_just_liberty.pdf — checked November 2015.

Speaking long after first publication, Hoppe denied that this was a retreat from natural rights:

I was attempting to make the first two chapters of Rothbard’s Ethics of Liberty stronger than they were. That in turn would provide more weight to everything that followed. I had some dissatisfaction with [the] rigor with which the initial ethical assumptions of libertarian political theory had been arrived at. Intuitively, they seemed plausible. But I could see that a slightly different approach might be stronger. Murray never considered my revisions to be a threat. His only concern was: does this ultimately make the case? Ultimately, he agreed that it did.“The Private Property Order.”

Indeed, Rothbard gave the theory his highest praise. He called it

a dazzling breakthrough for political philosophy in general and for libertarianism in particular. … [Hoppe] has managed to transcend the famous is/ought, fact/value dichotomy that has plagued philosophy since the days of the Scholastics, and that had brought modern libertarianism into a tiresome deadlock.Symposium, “Hans-Hermann Hoppe’s Argumentation Ethics: Breakthrough or Buncombe?” Liberty, November 1988. Available at http://www.libertyunbound.com/sites/files/printarchive/Liberty_Magazine_November_1988.pdf - checked November 2015.

If Rothbard was the obvious leading intellectual of the libertarian movement, Hoppe was his obvious and chosen successor. By the time of Rothbard’s death, he had made solid contributions not only to foundational ethics, but also to Economics, Politics and Law. He was an inspiring teacher and a public speaker in demand all over the world. There was no one in America or in the world at large better qualified to take up where Rothbard had left off. He now became the editor of The Journal of Libertarian Studies, and a co-editor of the Quarterly Journal of Austrian Economics.

Rothbard himself, though, was not universally accepted within the libertarian movement. One of his numerous talents had been for making enemies. He had many reasons for making, or just for attracting, enemies. He was an isolationist in an age when the American Right defined itself by opposition to Communism and the Soviet Union. He was sceptical of big business in a movement that was largely in love with American capitalism. He was an anarchist among economists who were feeling their way towards privatisation and deregulation. He saw every step of America’s ascent to world power as a betrayal of the American Way. He was variously in alliance with leftists and with ultra-conservatives. He was at open war with the utilitarian statists and soft money advocates of the Chicago School. He was soon out of sorts with the Cato Institute which he had done much to found. He was scathing in his contempt for political correctness and the very idea of a universal equality that went beyond an equality of negative rights.

Hoppe is a still more divisive figure. An avowed cultural conservative, he has no time for the more hedonistic or leftist strains of libertarianism. From the beginning, his libertarianism has placed more emphasis on property rights than on tolerance. In the Democracy: The God that Failed, he writes that, in his ideal community,

[t]here would be little or no “tolerance” and “openmindedness” so dear to left-libertarians. Instead, one would be on the right path toward restoring the freedom of association and exclusion implied in the institution of private property.Hans-Hermann Hoppe, Democracy: The God that Failed (New Brunswick, N.J.: Transaction Publishers, 2001), p. 211.

He adds:

In a covenant concluded among proprietor and community tenants for the purpose of protecting their private property, no such thing as a right to free (unlimited) speech exists, not even to unlimited speech on one’s own tenant-property. One may say innumerable things and promote almost any idea under the sun, but naturally no one is permitted to advocate ideas contrary to the very purpose of the covenant of preserving and protecting private property, such as democracy and communism. There can be no tolerance toward democrats and communists in a libertarian social order. They will have to be physically separated and expelled from society. Likewise, in a covenant founded for the purpose of protecting family and kin, there can be no tolerance toward those habitually promoting lifestyles incompatible with this goal. They — the advocates of alternative, non-family and kin-centered lifestyles such as, for instance, individual hedonism, parasitism, nature-environment worship, homosexuality, or communism — will have to be physically removed from society, too, if one is to maintain a libertarian order.Ibid., pp. 216–17.

These statements and others of their kind have been and remain wildly controversial within the libertarian movement. I think it no exaggeration to say that just about everyone in the Movement, since about 2000, has defined himself by what he thinks of Hoppe. Some regard him as the greatest living libertarian, others as The Devil. The only point of agreement is that he is a thinker who cannot be ignored.

This being so, the present collection will be useful as a brief statement of where Hoppe stands on the most important issues within the Movement — and the most important issues of our age. I am sensible of the truth that, while many skip over Introductions, others judge a book by its Introduction. I am therefore more than usually sensible of the need for a brief and accurate summary and discussion of the contents that follow my Introduction.

In several places, Hoppe restates and emphasises his view that the basics of libertarianism are derived by a chain of deductive reasoning from undeniable premises. We live in a world of scarcity. Either resources are scarce, or the time in which to use them is scarce. We all have different ideas on how these resources are to be used. Therefore, if we wish to live in a world where conflict over resources is minimised, we must agree on rights of ownership and transfer.

It must be taken for granted that we own ourselves. To claim the opposite leads to obvious inhumanity. It raises at least the potential for unlimited conflict over who owns whom. Where external resources are concerned, the ideal solution is that they belong to whoever first appropriates them from the State of Nature, and that they are then transferred by consent — that is, by sale or by gift or by inheritance. This is, of course, the ideal solution. In much of the world, landed property has been possessed for thousands of years, and has been repeatedly confiscated and reassigned. There is not a square inch of England or Western Europe the title to which derives from its original appropriator. The practical solution, then, is a rebuttable presumption in favour of existing titles — the rebuttal being good evidence of title derived from an earlier chain of possession. The exception is state property. This should be restituted to the holders of its last reasonable title.

Either this is irrefutable, or denying it leads to greater conflict than leaving things as they are. Here, though, the self-evident nature of libertarianism ends. Certain further propositions derived from Economics continue the chain of self-evident truth. But other discussions of the approach to, or the shape of, a libertarian society involve questions of pragmatic engagement.

If the entire human race looked alike and thought more or less alike, libertarian activism would be a matter of unvaried and undiscriminating outreach. But the human race, as it exists, is endlessly diverse. There are differences of appearance, differences of ability, differences of belief and expectation. These differences are plain between individuals. They are plain between different groups of individuals. We are not some tabula rasa, on which the Spirit of the Age may write as it will. We are born different. We grow more different still in how we respond to whatever is meant by the Spirit of the Age.

In the long term, Hoppe and his critics are in full agreement. They look forward to a single humanity, united in respect for life, liberty, and property, all enriched from the cultural and material benefits that derive from a world of universal freedom. For the moment, this single humanity does not exist — nor is it likely to exist. Either we must take account of these facts of difference, or we will not. If we will not, then we shall become useless intellectuals — endlessly talking to each other, and to nobody else, about the relationship between the non-aggression principle and the doctrine of contractual frustration. Or we shall become dangerous intellectuals — advocating policies, in the name of the non-aggression principle, that do not reduce but increase the likelihood of conflict over resources. If we do choose to take account of these differences, then we find ourselves firmly on the unpopular side of nearly all the questions that define the age in which we live.

If there is room for debate over the causes, one fact is plain. This is that the freest and most prosperous societies ever to exist are those dominated by broadly heterosexual males descended from the hunter-gatherers who settled Western and Central Europe and Northern Asia. Indeed, if there is room for debate over causes, the most likely cause — something deniable usually by the products of a long and expensive university education — is something inherent to these peoples, rather than some set of contingent circumstances local to the past few thousand years.

This is not to say that these groups are “better” than others in any abstract sense. It is not to say that all members of these groups show equal aptitude to preserve their traditional or acquired social orders. Nor is it to say that all members of other groups are equally unable to acquire or preserve the relevant social orders. It is certainly not to invite us to think ill of those other groups. Hoppe has always been clear on this, and his Bodrum conferences are nothing if not diverse. It is simply a matter of facing general facts. There are bearded women. There are men with breasts. Not every Englishman keeps his appointments. Not every Nigerian ignores them. Even so, basing our conduct on exceptions rather than generalities is bound, sooner or later, to prove inconvenient.

One consequence of this approach is that Hoppe opposes anti-discrimination laws. If there were a law that only white Christian heterosexual males were allowed to practise as doctors, he would denounce this — just as he has, at the outset of his system, denounced any kind of chattel slavery. Such laws violate the negative corollary of the right to freedom of association. If we are to be free to associate as we choose, so we are to be free not to associate. Sometimes, our decisions will be grounded in the social realities just mentioned, sometimes not. In any event, they are our decisions, and they should not be prevented by law.

A second consequence is that there should be an end to “regime change” and “nation-building” in other parts of the world. In this present collection, Hoppe mentions his opposition to our Middle Eastern interventions in passing. But his opposition is profound and firm. The alleged reasons of these interventions are all proven or probable lies. Even otherwise, the project of exporting our ways to places where there is neither desire for them nor aptitude to receive them can only lead to more bloodshed than leaving people with their own ways.

The third consequence is that he is opposed to open borders. This returns me to Hoppe’s point about the pragmatic application of libertarian theory. There are libertarians who memorise some pithy statement of the non-aggression principle, and immediately conclude that all borders are immoral. This approach ignores the present realities. Mass-immigration from outside the regions mentioned above has plainly negative effects. It increases crime and disorder. It greatly expands the roll of welfare claimants. It provides a growing constituency for politicians whose careers are one long attack on life, liberty, and property. Open borders in themselves at the moment — and especially open borders plus a welfare state and our endless wars of aggression that produce endless waves of refugees — are an attack on civilisation.

Nor is there any reason to believe that a truly libertarian society would allow what now passes for open borders. People have the right to trade with each other, not settle where and how they please. One of the central claims of libertarian theory is that all costs can and should be privatised. Well, any entrant to a libertarian community may impose costs that outweigh the benefits of his presence. If so, it is the undeniable right of the property-owners in such a community to deter new entrants they regard — for whatever reason — as undesirable. Those who choose not to will be open to tort actions for allowing a nuisance on their property. A libertarian world would be a patchwork of communities. These would provide for every conceivable taste. Most of them, however, would probably be rather exclusive in their entry policies. There would be room for communities that welcomed all-comers with open arms. Hoppe’s view, however, is that these would be a minority of communities, and that their failure would be an example to others.

Now, this is an argument about a world that does not exist, and may not exist for a very long time. We live in a world of nation-states, all with borders. What is to be done about immigration in such a world? Hoppe accepts the basic illegitimacy of the present order of things, but accepts that it is the present order. If civilisation is to survive in even its present defective condition, it is necessary to insist that states should act as trustees for those who fund them. This does not mean a total ban on immigration or hostility to individuals on the basis of their appearance. But it does mean strict control of borders and the deportation of undesirable entrants. It also means higher charges for the use of public property on those who have contributed nothing to its development. It means no access to such welfare as may — however unwisely — be available to the settled population. Anything less than that is best described not as “equality” or “anti-discrimination,” but as “forced integration.”

Most of Hoppe’s polemical attacks in recent years have been on the self-described left-libertarians. These combine an acceptance of leftist notions of equality and anti-discrimination with some belief in free markets. At the same time, he does not regard himself in any sense as a leader of what is called the Alt-Right. This is a broad coalition of national socialists, white nationalists, conservatives of various kinds, and disenchanted libertarians. It came to prominence in 2016 for its support of Donald Trump. It became notorious in 2017 for the riotous assembly it provoked at the Charlottesville Rally.

Hoppe accepts that the Alt-Right and libertarians share an opposition to the bloated, malevolent, warmongering elites who rule most Western countries. He has opened a dialogue with some of the more reasonable Alt-Right leaders. But he remains wary of the Alt-Right as a whole. He dislikes its frequent mysticism — its appeals to a “higher wisdom” than the cautious rationalism of the Enlightenment. He dislikes its obsession with race rather than a clear view of actual differences between individuals and groups of individuals. He particularly dislikes its concessions to socialism — socialism, so long as its “beneficiaries” are white people. If the Alt-Right evolves into a broad attack on undeniable evils, so much the better. If, as seems likely, it will become a coalition of totalitarian or semi-totalitarian cults, he wants nothing to do with it.

Hoppe mentions several times in this collection that he is growing older, and that he will continue working so long as his health allows. I hope he will continue for many years to come. But let us allow that all life is uncertain, and accept that he may be taken from us tomorrow. This would be a terrible loss. At the same time, I have not the slightest doubt that, on the basis of what he has achieved so far, the intellectual world has been made a better place by Hoppe’s presence within it. And I both hope and believe that the inspiration his work provides will one day contribute to the emergence of a better world for all humanity. If this short collection of his writings, and if my brief Introduction, can form part of this contribution, it will not have been published in vain.

Advancing social ideas that do not demand obedience or compliance requires far more personal patience than simply forcing others to comply via the political ballot box. The widely held idea that dicta and force can serve a useful purpose will eventually fade into backward thinking in the so-called public sector as it has in the private sector. Time, nature, reason, and the human spirit will see to that. Irrespective of good intentions or the approval by consensus, nature's unrelenting feedback will gradually drive ruling political authorities to extinction.

Liberty is a self-actualized mindset of seeing and enjoying the grandeur of nature and humanity in a way that is not accessible to those adhering to politics and government. As miraculous as the universe is, it is not beyond the workings of nature, and to expect political governments to be able to defy its laws with dicta and force is to expect the unnatural.

A fundamental yet simple tenet of liberty and life is that no one owes you anything! That includes kindness, food, healthcare, education, and respect. The beauty of this tenet is that others, when left to their own devices, are inclined to respond with kindness, food, healthcare, education, and respect, without even being asked. My endless gratitude goes to all those minding their own business while caring for my every need. The belief that government can force these benefactors to take better care of me (and you) is a deep-seated, fallacious, and detrimental notion that those in the political world embrace.

Chapter 1, “The Political Box,” discusses why so many people remain trapped in a political box, holding firmly to the illusion that politics and government serve a beneficial social function.

Chapter 2, “Barbaric Civility,” discusses the duality of standards of conduct in which people condone dastardly conduct in public (political) matters that they would never think of using in their personal affairs.

Chapter 3, “Doing Good: Nice Guys Finish First,” discusses the selfish nature of living organisms and the natural selection of human cooperation over force as a more adaptive behavior for surviving and propagating.

Chapter 4, “Fairness and Equality,” discusses the nonsense and divisiveness of the political use of “fairness” and “equality” to disguise acts of inhumanity as moral in order to gain votes and power, while reducing the potential welfare of all.

Chapter 5, “Discrimination, Beliefs, and Expressions,” discusses the importance of discrimination and how political laws prohibiting selective associations — as well as disassociations — are inhumane. The nonpolitical world is an individual one where relationships are voluntary, joint ventures based on preferences.

Chapter 6, “Tragedy of the Commons and Human Behavior,” discusses how individuals achieve results that are “better than rational” when seeking ways to manage the resources of the commons, and how government intervention only obstructs the process.

Chapter 7, “Obedience to Authority,” discusses the degree to which the most compassionate people can become desensitized and conduct themselves in abhorrent ways when they are obedient to authority.

Chapter 8, “Complexity, Adaption, and Order: Visualizing the Invisible Hand,” discusses the multifaceted, revolutionary new science of complexity theory (also called chaos theory) that shows why the political top-down ordering of society is disruptive to social order.

Chapter 9, “Political Democracy,” explores the inherent inhumanity of political democracy as a social scheme in which common sense and goodwill are scorned and individual predation upon others is praised.

Chapter 10, “A Better Life — A Better World,” concludes the discussion and considers finding purpose in life while trying to make the world a better place.

Economic freedom is the right of individuals to pursue their interests through voluntary exchanges of private property under the rule of law. This freedom forms the foundation of market economies. The premise of this report is simple: Most Americans do not realize what the restrictions on their economic freedom are costing them. Americans would likely demand more economic freedom, and be willing to pay a higher price to achieve it, if they knew about the benefits that would flow to them in return.

Because of advances in research, there is now a large body of scholarship that has quantified the benefits of economic freedom to individuals and to civil society generally. This report describes in easy-to-understand language the benefits of more economic freedom and the costs of imposing more restrictions on free enterprise and consumer choice.

The benefits of greater economic liberty include:

• Higher personal income• Less unemployment• Faster economic growth• More macroeconomic stability• Greater capital investment and productivity• More business startups• More entrepreneurship and innovation• A better-educated workforce• Less poverty and inequality• Better health• Greater population inflows• A cleaner environment• Better quality of life• More democracy and peace

The benefits of greater economic freedom are sweeping and substantial for individuals and societies. In the future, Americans might still vote for restrictions on economic freedom, but this study will allow them to cast educated votes. They will know what they are losing through having less economic freedom and what they would gain from having more economic freedom. The price of infringements on economic freedom is substantial, though often not easily or immediately seen by citizens, voters, and taxpayers — or by their lawmakers. This does not mean the costs are any less real. Understanding the trade-offs is especially important in a slowing economy, when jobs are scarcer and incomes are falling.

In the wake of the financial crisis of 2008, the economics profession suffered a blow to what reputation it had. But unlike most of his colleagues, Mark Thornton was vindicated by 2008. Mark has been a voice of sanity at times when the wild interventions of the Federal Reserve have caused otherwise sensible people to lose their minds.

One rule of thumb I’ve adopted is: whenever the idea that the business cycle may have been tamed forever starts to become mainstream, the bust is around the corner.

After reading this book, you’ll see why. Mark discusses the very different records of Irving Fisher and Ludwig von Mises in the 1920s, with the former saying (in late 1929!) that stock prices had reached a “permanently high plateau” and Mises warning that all the artificial credit creation of the world’s central banks meant a reckoning was coming.

At the end of the 1960s, presidential economic adviser Arthur Okun announced that wise fiscal and monetary policy was making boom and bust a thing of the past. One month after his book on the subject was released, the United States was officially in recession.

The dot-com bubble of the 1990s continued the pattern. Federal Reserve chairman Alan Greenspan even speculated that we had entered an age in which booms no longer necessarily had to be followed by busts.

I trust you know what happened next.

The most recent financial crisis, which was connected to an especially destructive housing bubble, yielded the same kind of crazy commentary: why, real estate prices never fall!

I trust you know what happened next.

In fact, Mark Thornton was one of a handful of economists to warn — as early as 2004 — of a housing bubble and its inevitable consequence. That was a lonely position to adopt in those days. Nobody wanted to hear the words “unsustainable” or “bubble” when buying multiple properties and sitting on them seemed to be a path to certain riches. Of course, Mark was the voice that would have done them the most good had they bothered to listen, because they might thereby have limited their exposure to the bust that was surely coming.

But when all so-called respectable voices are assuring everyone that all is well, it is the wise man who appears to be the crank.

Now had Mark been known for nothing more than being a conscientious historian of these earlier business cycles and an accurate prognosticator of the housing bust and financial crisis, that would be ample reason to respect him as a scholar worthy of our attention and respect.

But of course Mark has done much more than this. In this book, for instance, you will encounter Mark’s work on the so-called “skyscraper curse.” I shall not here disclose Mark’s thesis on the matter; the author of a foreword ought to know his place, and stealing the author’s thunder is rather unbecoming.

For now, I can say this: although a correlation between the setting of new skyscraper records on the one hand and plunges into recession on the other had been noted by certain writers, the connection had been generally dismissed as little more than a curious coincidence. Mark, on the other hand, has shown how the two phenomena are connected — not that tall skyscrapers cause the business cycle, of course, but rather that they embody numerous features of the boom period described by Austrian business cycle theory.

Austrian business cycle theory, in turn, is probably the most important piece of economic information and understanding for Americans and indeed the world to understand right now. Again I shall leave the full exposition to Mark. For now, what matters is that according to economists of the Austrian school, the familiar pattern of economic boom and bust is not an inherent feature of the market economy, but instead the product of intervention into the economy by the monetary authority. When the central bank lowers interest rates below what they would have reached on the market, it sets in motion a series of responses by investors and consumers that will prove to be incompatible. The result is the recession, which is the economy’s return to health: the economy’s unsustainable configuration is unwound, and resources (including labor) are reallocated to lines of production that make sense in terms of resource availability and consumer preferences.

In the pages that follow, Mark explains the theory, applies it to various historical (and present) cases, and rebuts the most common objections.

In short, this collection serves the valuable purpose of defending the market economy against the conventional view that freedom has failed us and we need still more controls. We had plenty of rules and bureaucrats on the eve of the financial crisis. A lot of good that did us. Pretty much none of them saw any problems on the horizon, and the sheafs of rules and regulations were aimed in the wrong direction: while the private sector operated in the equivalent of a Kafka novel, the Federal Reserve was able to carry out its mischief unimpeded.

Here’s a crazy thought: maybe this time we might consider a real free market, with sound money and market interest rates, and abolish the giant bubble machine once and for all. Read Mark Thornton and you’ll entertain this and other forbidden thoughts.

This collection serves the valuable purpose of defending the market economy against the conventional view that freedom has failed us and we need still more controls. We had plenty of rules and bureaucrats on the eve of the financial crisis. A lot of good that did us. Pretty much none of them saw any problems on the horizon.

Maybe we should consider a real free market, with sound money and market interest rates, and abolish the giant bubble machine once and for all. Read Mark Thornton and you’ll entertain this and other forbidden thoughts.

From the Foreword by Thomas E. Woods, Jr.

This volume explores, develops, and critiques the rich literature on costs, examining some of the many ways cost remains relevant in economic theory and practice. The book especially studies costs from the perspective of the Austrian or “causal-realist” approach to economics. The chapters integrate the history of economic thought with contemporary research, finding valuable crossroads between numerous traditions in economics. They examine the role of costs in theories of choice and opportunity costs; demand and income effects; production and distribution; risk and interest rates; uncertainty and production; monopsony; Post-Keynesianism; transaction costs; socialism and management; and social entrepreneurship.

Together, these papers represent an update and restatement of a central element in the economic way of thinking. Each chapter reveals how the Austrian, causalrealist approach to costs can be used to solve an important problem or debate in economics. These chapters are not only useful for students learning these concepts for the first time: they are also valuable for researchers seeking to understand the unique Austrian perspective and those who want to apply it to new problems.

The real difference between Byron and Shelley is this; those who understand and love them rejoice that Byron died at thirty-six, because if he had lived he would have become a reactionary bourgeois; they grieve that Shelley died at twenty-nine, because he was essentially a revolutionist and he would always have been one of the advanced guard of socialism. — Karl MarxThe epigraph is taken from Edward Aveling and Eleanor Marx Aveling, Shelley’s Socialism (1888; rpt. London: Journeyman, 1975), p. 16. There is some debate over the authenticity of this quotation; see Paul Foot, Red Shelley (London: Sidgwick & Jackson, 1980), pp. 227–28. After surveying the evidence, Foot concludes: “Eleanor Marx, however, is unlikely to have put her name to a quotation from her father which she knew to be invented” (p. 228).

Was the English Romantic poet, Percy Shelley, a socialist?This question may sound odd, since according to the Oxford English Dictionary the word socialist was not even coined until 1833, that is, 11 years after Shelley died.George Watson, The Lost Literature of Socialism (Cambridge, U.K.: Lutterworth, 1998), pp. 62–63, moves the date back but still places it five years after Shelley’s death; he claims that “socialism was first used as a term by Robert Owen in the Cooperative Magazine in 1827.” Yet despite the fact that Shelley could not have been aware of what we normally think of as socialist ideas, later socialists have claimed him for their lineage. Marx himself admired Shelley, and British socialists of the late nineteenth century looked back upon him as a kind of patron saint of their movement.This development was reflected in the history of the Shelley Society, founded in England in 1886, which was divided, broadly speaking, between those who championed the poet for literary reasons and those who championed him for ideological reasons. The dispute centered on the status of Shelley’s early poem, Queen Mab, which the first faction thought “should be relegated to Shelley’s juvenilia,” while the socialists in the society revered “Queen Mab as the bible of the new order” (Robert Metcalf Smith, The Shelley Legend [New York: Charles Scribner’s Sons, 1945], p. 268). The dispute culminated in a speech by A.G. Ross, in which he chastised the socialist members of the society, charging that “the blatant and cruel socialism of the street” was trying to “use the lofty and sublime socialism of the study for its own base purposes.” Coming to the defense of the socialist view of Shelley, George Bernard Shaw called this speech “the most astonishing one he had heard” (Smith, Shelley Legend, p. 271). But note that even Ross makes the concession that Shelley is in some sense a socialist. Michael Henry Scrivener, in his Radical Shelley: The Philosophical Anarchism and Utopian Thought of Percy Bysshe Shelley (Princeton, N.J.: Princeton University Press, 1982), p. 67, writes that “Queen Mab became a part of socialist culture” in Victorian England. For a detailed discussion of Shelley’s posthumous reputation among British and other socialists, see Foot, Red Shelley, pp. 227–73. H.G. Wells, for example, rewrote Shelley’s Prometheus Unbound in the form of a science fiction novel called In the Days of the Comet. Today, many Shelley scholars regard him as left-wing in his politics, perhaps a proto-socialist, if not a full-fledged member of the movement.For a serious attempt to present Shelley as a forerunner of Marx, see Terence Allan Hoagwood, Skepticism & Ideology: Shelley’s Political Prose and Its Philosophical Context from Bacon to Marx (Iowa City: University of Iowa Press, 1988), especially pp. 79–138. For other discussions of Shelley as a socialist, see Aveling and Marx, Shelley’s Socialism and Kenneth Neill Cameron, “Shelley and Marx,” The Wordsworth Circle 10 (1979): 234–39. In his Red Shelley, Foot presents the poet as a left-wing radical, with many affinities to Marx, but ultimately concludes: “Shelley was not a socialist. Shelley was a leveller” (p. 96). Similarly, Scrivener argues that Shelley “anticipates ... a number of radical tendencies, including the socialism of Marx,” but he also sees a strong “libertarian” element in Shelley (Radical Shelley, p. 318), which ultimately leads him to conclude that the poet is best understood as a “philosophical anarchist.” In his The Unacknowledged Legislator: Shelley and Politics (Oxford: Clarendon Press, 1980), P.M.S. Dawson also places Shelley in the tradition of philosophical anarchism. Shelley’s personal and philosophical links to William Godwin lend credence to these attempts to place him in the anarchist camp. In both his poetry and his prose, he is constantly championing the poor against the rich, and critics assume that this means he would have been in favor of socialist policies, for example, schemes for redistributing wealth. There is in fact no question that by the standards of his day, Shelley was an economic and political radical. But what did “radicalism” mean in Shelley’s day? Studying the case of Shelley gives us a chance to consider whether early nineteenth-century radicalism can be identified with what we think of as socialism today.

Insofar as Shelley’s poetry deals with political and economic issues, it is visionary and utopian, offering nightmare images of a world enslaved in the present and dream images of a world liberated in the future. The very poetic quality of Shelley’s vision makes it difficult to determine precisely where he stands on concrete issues. Thus, one text among all Shelley’s writings is central to an examination of his political and economic views, a prose treatise called A Philosophical View of Reform, by far his most sustained and systematic effort to develop his understanding of the problems facing England in the early nineteenth century. He wrote this extended essay early in 1820, in direct response to the political agitation in England in 1819 that culminated in the infamous Peterloo Massacre, agitation that seemed to augur the out-break of violent revolution. The essay has come down to us in unfinished form; it was never published in Shelley’s lifetime; indeed it was deemed so radical in content that it was not published until 1920.I quote A Philosophical View of Reform from the Julian edition, Roger Ingpen and Walter E. Peck, eds., The Complete Works of Percy Bysshe Shelley (London: Ernest Benn, 1930), vol. 7. For the history of and problems with the text of the work, see vol. 7, pp. 332–33. As its title indicates, the essay was a response to the ongoing and heated debate in Britain during the nineteenth century concerning parliamentary reform, a dispute that produced the famous series of Reform Bills that progressively extended the voting franchise and thereby made the British regime more democratic. Before this process began, Shelley offered a powerful argument for why it was not just desirable but also inevitable, claiming that only parliamentary reform could save England from the disaster of armed insurrection and civil war.

But despite Shelley’s title, parliamentary reform is not the sole concern of his essay. Shelley presents political reform as necessary ultimately for the sake of economic reform.On this point, see Gerald McNiece, Shelley and the Revolutionary Idea (Cambridge, Mass.: Harvard University Press, 1969), p. 84. He argues that the common people of England must seek to be more fully represented in Parliament in order to end the economic oppression they suffer at the hands of the rich and powerful. And what, according to Shelley, is the nature of this oppression? Does he complain about the emerging factory system and the new working conditions it imposed upon English laborers? Does he indict pollution, cutthroat competition, unemployment, dehumanizing mechanization, or any of the other supposed effects of the Industrial Revolution normally cited as having ruined the lives of the English working class in the early nineteenth century? The answer to all these questions is a surprising “no,” surprising, that is, if one accepts the standard view of what the Romantics objected to in the Britain of their day.

Shelley attacks one principal target in A Philosophical View of Reform: the national debt of Great Britain. He holds the newly created system of deficit financing largely responsible for the economic woes of the English people.As we shall see, Shelley was by no means alone in this opinion. For an insightful and comprehensive treatment of the tradition in which Shelley was operating, see Patrick Brantlinger, Fictions of State: Culture and Credit in Britain, 1694–1994 (Ithaca, N.Y.: Cornell University Press, 1996), especially the chapter on eighteenth-century critics of the emergence of the Whig financial system, pp. 48–87, and the chapter on Shelley’s contemporaries, pp. 88–135, which includes a section on Shelley himself (pp. 114–18). Many of the traditional critics of modern money and banking systems Brantlinger discusses anticipate Austrian views on the subject. Brantlinger seems to be embarrassed to find himself in agreement with Friedrich Hayek at one point, but he makes sure to distance himself from the Austrian by labeling him as “ultraconservative” (p. 25), even though his position on government oppression turns out to be identical to that of the ultraradical Shelley. In particular, he condemns the British government’s substitution of paper money for the precious metal currency that had prevailed in the country, a change that caused inflation and thereby impoverished its citizenry. In short, in his one detailed attempt to grapple with the economic problems facing England, Shelley does not in socialist fashion call for increased government intervention in the market. On the contrary, he finds the root of England’s problems precisely in a form of government intervention, namely manipulation of the currency in particular and financial policies in general calculated to benefit the government and its cronies at the expense of the population as a whole. In A Philosophical View of Reform, Shelley’s radicalism takes the form of advocating free market rather than socialist policies.

Shelley’s argument begins from the premise that a sound currency is the foundation of a sound economy. Gold and silver have traditionally provided this foundation, and the government’s sole responsibility in this area is to certify the weights and measures of a metallic currency:

The precious metals have been from the earliest records of civilization employed as the signs of labour and the titles to an unequal distribution of its produce. The [Government of] a country is necessarily entrusted with the affixing to certain portions of these metals a stamp, by which to mark their genuineness; no other is considered as current coin, nor can be a legal tender. The reason of this is that no alloyed coin should pass current, and thereby depreciate the genuine, and by augmenting the price of the articles which are the produce of labour defraud the holders of that which is genuine of the advantages legally belonging to them.Philosophical View, pp. 25–26.

From the beginning Shelley views inflation as the chief economic problem. Increasing the amount of currency in circulation by debasing coinage increases the general level of prices and thus deprives people of the amount of wealth to which their money originally entitled them.

Thus, for Shelley a government abrogates its chief financial responsibility to its people when it participates in inflationary manipulation of its coinage:

If the Government itself abuses the trust reposed in it to debase the coin, in order that it may derive advantage from the unlimited multiplication of the mark entitling the holder to command the labour and property of others, the gradations by which it sinks, as labour rises, to the level of their comparative values, produces public confusion and misery.Ibid., p. 26.

As Shelley points out, debasing the coinage was a ruse well-known to governments in the ancient world, and hence one increasingly difficult to get away with in the modern. In the late seventeenth and early eighteenth centuries, the British government gradually developed the modern system of public finance, which Shelley regards as a massive and insidious scheme for defrauding the British people:

At the epoch adverted to, the device of public credit was first systematically applied as an instrument of government. ... The rich, no longer being able to rule by force, have invented this scheme that they may rule by fraud. ... The most despotic governments of antiquity were strangers to this invention, which is a compendious method of extorting from the people far more than praetorian guards, and arbitrary tribunals, ... could ever wring. Neither the Persian monarchy nor the Roman empire, where the will of one person was acknowledged as unappealable law, ever extorted a twentieth part the proportion now extorted from the property and labour of the inhabitants of Great Britain.Ibid., p. 25.

Shelley sees that the heart of the British government’s new financial policy was the monetization of debt.One of Shelley’s chief sources for his economic information, William Cobbett, does an excellent job of explaining this phenomenon, namely, how banknotes get into circulation. See Cobbett, Paper Against Gold (London: Cobbett, 1817), pp. 84–85. For the influence of Cobbett on Shelley’s essay, see Kenneth Neill Cameron, “Shelley, Cobbett, and the National Debt,” The Journal of English and Germanic Philology 42 (1943): 197–209, McNiece, Shelley, pp. 84–87, and Brantlinger, Fictions of State, pp. 114–16. Shelley mentions Cobbett in his 1819 poem The Mask of Anarchy (line 153) and refers his readers to Paper Against Gold in a bracketed passage in the manuscript of A Philosophical View of Reform, which Ingpen and Peck print in their notes (The Complete Works, vol. 7, p. 338). Dawson (Unacknowledged Legislator, pp. 47–48) questions Shelley’s knowledge of economics: “He lacked however the conceptual equipment to analyse the economic structure of his society, and his distaste for the study of political economy condemned his utterances on the subject to remain on the level of a callow moralism.” Dawson blames Shelley’s ignorance of economics specifically on his reliance on Cobbett: “The writer on whom Shelley drew most deeply for his economic views was, unfortunately, William Cobbett. Cobbett’s no-nonsense analysis of the economic structure of English society was clearly far more congenial to Shelley than the complexities of the political economists” (p. 49). Dawson evidently prefers “nonsense” economics to “no-nonsense” economics. The “political economists” he refers to were the apologists for the Bank of England, many of them in fact Directors of the Bank. In fact, Cobbett had no less a political economist than David Ricardo on his side of the argument, and events soon vindicated his understanding of the British banking system. Although Cobbett expressed his views with journalistic verve, they were in fact quite cogent and insightful economically, and Paper Against Gold can be profitably read to this day. Once paper claims to gold and silver on deposit began to circulate and be accepted in place of the underlying precious metals, it became possible to substitute a paper currency for a metallic. For Shelley this development began when the British government chartered the Bank of England in 1694.For brief but good summaries of the development of banking and finance in eighteenth-century England, see Elie Halévy, A History of the English People in 1815 (1924; rpt. London: Routledge & Kegan Paul, 1987), pp. 296–323 and T.S. Ashton, An Economic History of England: The 18th Century (London: Methuen, 1955), pp. 167–200. This institution was created for the chief purpose of financing and managing the government’s debt, which grew exponentially in the course of the eighteenth century, chiefly as a result of its wars on the Continent and in America. Bills of exchange that carried the official seal of the Bank of England encouraged people to accept paper instead of gold and silver as money. Shelley understood the enormous potential for abuse inherent in the new credit economy established and fostered by the British government:

The modern scheme of public credit is a far subtler and more complicated contrivance of misrule. All great transactions of personal property in England are managed by signs and that is by the authority of the possessor expressed upon paper, thus representing in a compendious form his right to so much gold, which represents his right to so much labour. A man may write on a piece of paper what he pleases; he may say he is worth a thousand when he is not worth a hundred pounds. If he can make others believe this, he has credit for the sum to which his name is attached. And so long as this credit lasts, he can enjoy all the advantages which would arise out of the actual possession of the sum he is believed to possess. He can lend two hundred to this man and three to that other, and his bills, among those who believe that he possesses this sum, pass like money.Philosophical View, p. 26.

Shelley grasps how this new financial system made it much easier for the government to inflate the currency:

The existing government of England in substituting a currency of paper [for] one of gold has had no need to depreciate the currency by alloying the coin of the country; they have merely fabricated pieces of paper on which they promise to pay a certain sum.Ibid., p. 27.

Shelley understood the great magic trick the British government had managed to pull off in the course of the eighteenth century. It used the Bank of England and the money market institutions that grew up along with it to finance its increasing debts, and then monetized the debt, thereby performing the seeming miracle of turning debt into wealth.See Brantlinger, Fictions of State, pp. 3, 22. Banknotes, which are only promises to pay, began to be accepted in Britain as payment for goods and debts—and thus as money substitutes, indeed the forerunner of a paper currency. Shelley dramatizes this process in his satiric play Oedipus Tyrannus or Swellfoot the Tyrant (1820), when a character aptly named Mammon proclaims on behalf of the King of Thebes:

Does money fail?—come to my mint—coin paper,Till gold be at a discount, and, ashamedTo show his bilious face, go purge himself,In emulation of her vestal whiteness.Quoted from the text in the Julian edition, vol. 3, p. 327 (Act I, lines 107–10).

Thus, Shelley shows a tyrannical British government attempting to solve its financial problems by going into debt and in effect printing money. The government’s scheme hinged on its unquestioned ability to meet the interest payments on its loans, unquestioned because of its virtually unlimited authority to tax its people. Throughout the essay Shelley complains bitterly about the excessive taxes imposed upon the British public to pay the interest on the ever-increasing national debt, interest payments that had reached the then astronomical figure of £45,000,000 annually.Philosophical View, p. 40. Shelley is already calling for a tax revolt:

The taxgatherer ought to be compelled in every practicable instance to distrain, whilst the right to impose taxes ... is formally contested by an overwhelming multitude of defendants before the courts of common law. Confound the subtlety of lawyers with the subtlety of the law.Ibid., p. 51.

But as troubled as Shelley is by the open taxation of the British public, he is even more disturbed by the hidden tax they are forced to pay under the new financial system, what we today would call an inflation tax.In his Classical Economics: An Austrian Perspective on the History of Economic Thought (Cheltenham, U.K.: Edward Elgar, 1995), vol. 2, p. 182, Murray Rothbard points out that one of Shelley’s contemporaries, Lord King, referred to the depreciation of currency as “an indirect tax ... imposed upon the community.” Confronted with the new system of public finance, Shelley is a pure monetarist; he has no doubt that the rise in the general level of prices in England is to be traced directly and solely to the increase in the quantity of money in circulation that resulted from the monetization of the enormous and ever-increasing national debt.For this point, Shelley relied heavily on Cobbett; see Paper Against Gold, pp. 324–25, 331–32, especially p. 331: “Yes: we talk about dearness; we talk of high prices; we talk of things rising in value; but, the fact is, that the change has been in the money and not in the articles bought and sold; the articles remain the same in value, but the money, from its abundance, has fallen in value” (Cobbett’s italics). For historical support for this claim, see Halévy, History of the English People, p. 306 and T.S. Ashton, The Industrial Revolution 1760–1830 (London: Oxford University Press, 1948), p. 103. Shelley knows what happens in a paper currency economy when more money starts chasing fewer goods, rendering nominal increases in wages meaningless, since prices increase just as fast or faster:

Of course, in the same proportion as bills of this sort, beyond the actual goods or gold and silver possessed by the drawer, pass current, they defraud those who have gold and silver and goods of the advantages legally attached to the possession of them, and they defraud the labourer and artizan of the advantage attached to increasing the nominal price of labour.Philosophical View, p. 26.

For Shelley, the last straw in British financial policy was the government’s suspension of the convertibility of Bank of England notes to gold and silver, thus instituting a pure paper currency:For discussions of this important episode in British economic history, which led to the so-called bullionist controversy, see Friedrich Hayek, The Trend of Economic Thinking: Essays on Political Economists and Economic History, vol. 3 of his Collected Works (Chicago: University of Chicago Press, 1991), pp. 177–215; John F. Chown, A History of Money: From AD 800 (London: Routledge, 1994), pp. 232–45, and Rothbard, Classical Economics, vol. 2, pp. 157–224. For an attempt to relate this economic episode to literary developments, see Kevin Barry, “Paper Money and English Romanticism: Literary side-effects of the last invasion of Britain,” Times Literary Supplement, Feb. 21, 1997, pp. 13–16.

The holders of these papers came for payment in some representation of property universally exchangeable. They [the government] then declared that the persons who hold the office for that payment could not be forced by law to pay. They declared subsequently that these pieces of paper were the legal coin of the country.Philosophical View, p. 26.

Severing the British currency from any link to precious metals further increased the capacity of the government to engineer inflation.On this point, see Cobbett, Paper Against Gold, pp. 5–8. Shelley’s passionate defense of the gold standard as the foundation of a sound monetary system is probably the aspect of his economic thinking that would seem most peculiar to those who try to categorize him as a socialist. The gold standard is supposed to be the obsession of capitalists. And in his early poetry, Shelley does seem to view gold negatively, as in this passage from Queen Mab: “Commerce has set the mark of selfishness,/ The signet of its all-enslaving power/ Upon a shining ore, and called it gold” (quoted from the text in Donald H. Reiman and Sharon B. Powers, eds., Shelley’s Poetry and Prose [New York: W.W. Norton, 1977], p. 40 [section V, lines 53–55]). But Shelley is using the word gold poetically in this passage—as a metonym for the mad pursuit of wealth and the greed that inspires it. Queen Mab is filled with hostile statements about “commerce” and even a sarcastic reference to Adam Smith’s concept of “the wealth of nations” (Act 5, l. 80). One has to bear in mind that Queen Mab is one of Shelley’s earliest poems (written 1812–13) and his reading of Cobbett’s Paper Against Gold evidently changed his mind about the precious metal as the basis for a currency. Contemporary scholars may find it hard to believe that Cobbett was a populist and yet championed the gold standard against paper currency. With the Free Silver movement in mind, and William Jennings Bryan’s famous “Cross of Gold” speech, modern Americans tend to think of opposition to the gold standard as the populist position. But as Cobbett’s treatise reminds us, there was a time when the gold standard was defended precisely as a way of protecting common people against the currency manipulations of a financial elite. In A Philosophical View of Reform, Shelley champions the gold standard because he is championing the common people. For a member of Shelley’s circle who continued his polemic against paper money and in favor of gold, see Thomas Love Peacock’s Paper Money Lyrics (written 1825–26). The spirit of these humorous poems is captured in the opening lines of the first poem:       The Country banks are breaking:       The London banks are shaking:       Suspicion is awaking:       E’en quakers now are quaking:       Experience seems to settle,       That paper is not metal,       And promises of payment       Are neither food nor raiment.Quoted from The Works of Thomas Love Peacock (London: Richard Bentley, 1875), vol. 3, p. 222. On Peacock’s attack on paper money, see Brantlinger, Fictions of State, pp. 118–23. This section also includes four examples of James Gilray’s marvelous cartoons satirizing the reign of paper money in Britain. In Swellfoot the Tyrant, Shelley portrays this process as the height of the British government’s perfidiousness. The Arch-Priest of Famine, Mammon, rejects his son, who defends a precious metal currency, and embraces his daughter, who represents the inflationary cause of paper money:

[I have] DisinheritedMy eldest son Chrysaor, because heAttended public meetings, and would alwaysStand prating there of commerce, public faith, Economy, and unadulterate coin,And other topics, ultra-radical;Notice that Shelley regards a defense of sound money, the gold standard, and government financial retrenchment as “ultra-radical.” We see here in fact what the word radical meant to Shelley.And have entailed my estate, called the Fool’s Paradise, And funds, in fairy-money, bonds, and bills,Upon my accomplished daughter Banknotina,And married her to the Gallows.Julian edition, vol. 2, pp. 329–30 (Act I, lines 198–207).

Shelley portrays paper currency as “fairy-money” and the world of inflation as a “Fool’s Paradise.” Unlike some economists, he does not make the mistake of viewing inflation as having a neutral impact on the economy, as if the rise in prices affects everybody equally. Rather, he sees inflation “benefiting at the expense of the community the speculators in this traffic.”Philosophical View, p. 27. Although this brief comment does not reflect a full understanding of how inflation redistributes wealth, Shelley does have an inkling of the importance of the fact that inflated currency necessarily enters the economy at one point and not another. Thus, those who first have access to the money reap the benefits of spending it before it has had time to increase prices for everyone else.Shelley may have known about this point from reading David Hume’s essay “Of Money” in Essays: Moral, Political and Literary (1741–42; rpt. London: Oxford University Press, 1963), pp. 291–92. For Shelley’s knowledge of Hume’s Essays, see Cameron, “Shelley, Cobbett,” p. 200. For more on the understanding in Shelley’s day of the uneven effects of inflation, see Rothbard, Classical Economics, vol. 2, pp. 182, 210. In one of his poems responding to the political crisis of 1819, Peter Bell the Third, Shelley characterizes the “public debt” as a kind of Robin Hood scheme in reverse, robbing the poor and giving to the rich:

Which last is a scheme of Paper money,     And means—being interpreted—“Bees, keep your wax—give us the honeyAnd we will plant while skies are sunny     Flowers, which in winter serve instead.”Peter Bell the Third, lines 166–71 (Reiman and Powers, Shelley’s Poetry, p. 331.

Hence, Shelley views inflation as an unmitigated disaster for the majority of people in England, who see the purchasing power of their money eroded, perhaps even cut in half. As Shelley sarcastically writes:

One of the vaunted effects of this system is to increase the national industry. That is, to increase the labours of the poor and those luxuries of the rich which they supply. To make a manufacturer [an industrial laborer] work 16 hours where he only worked 8. To turn children into lifeless and bloodless machines at an age when otherwise they would be at play before the cottage doors of their parents.Philosophical View, p. 27.

Here Shelley finally begins to talk about the horrors of working conditions in early nineteenth-century England, but contrary to conventional opinion about the economic attitudes of the Romantics, he attributes the problems not to the Industrial Revolution but to the financial policies of the British government and specifically to its suspension of gold and silver convertibility. It is particularly noteworthy that Shelley blames child labor not on the rapacity of English industrialists but on the fraudulent monetary policies of the government. The point is sufficiently important to Shelley for him to repeat it:

Since the institution of this [system] ... , they have often worked not ten but twenty hours a day. Not that all the poor have rigidly worked twenty hours, but that the worth of the labour of twenty hours now, in food and clothing, is equivalent to the worth of ten hours then. And because twenty hours’ labour cannot, from the nature of the human frame, be exacted from those who before performed ten, the aged and the sickly are compelled either to work or starve. Children who were exempted from labour are put in requisition, and the vigorous promise of the coming generation blighted by premature exertion. For fourteen hours’ labour, which they do perform, they receive—no matter in what nominal amount—the price of seven. They eat less bread, wear worse clothes, are more ignorant, immoral, miserable and desperate.Ibid., p. 30. Foot (Red Shelley, p. 91) cites this passage as an illustration of the Marxist theory of wage exploitation, as if Shelley were talking about workers who perform fourteen hours of labor but are paid for only seven, rather than workers who find that the depreciation of the currency means that the wage for fourteen hours of labor now has the purchasing power that the wage for seven used to have. Foot tries to attribute to capitalist exploiters the harmful effects that Shelley in fact attributes to government engineered inflation.

Thus, in another one of Shelley’s 1819 political poems, The Mask of Anarchy, he defines the slavery of the British people in terms of their subjection to a paper money system:

Tis to let the Ghost of GoldTake from Toil a thousand foldMore than e’er its substance couldIn the tyrannies of old.

Paper coin—that forgeryOf the title deeds, which yeHold to something of the worthOf the inheritance of Earth.The Mark of Anarchy, lines 176–183 (Reiman and Powers, Shelley’s Poetry, p. 306).

I am not claiming that Shelley was right in blaming all the economic woes of early nineteenth-century England on the government’s monetary policies.Scrivener, Radical Shelley, p. 136, argues that Shelley’s fixation on the national debt was merely an example of “rhetorical duplicity,” adopted from Cobbett. Scrivener would rather blame the misery Shelley discusses on the “industrial revolution” (p. 215). Although Shelley was perfectly capable of disguising his views, it is difficult to see how following “Cobbett’s tactic of concentrating the public wrath on the fundholders” (Scrivener, p. 136) against his better judgment would have aided Shelley’s cause. If anything, attacking the public funding system got him in trouble; see McNiece, Shelley, p. 8: “Apparently his doctrines were alarming his friends in Italy with money invested in the funds.” There does seem to be something almost monomaniacal about his seizing upon deficit financing as the sole cause of working class poverty, although one should never underestimate the corrosive effects of inflation on any economy, and statistics do bear out Shelley’s claims. Prices in England did in fact roughly double between 1790 and 1815.See the data in Norman J. Silberling, “British Prices and Business Cycles, 1779–1850,” The Review of Economic Statistics 5 (1923): 223–47, especially the graphs on pp. 230, 234, and 235. Rothbard, Classical Economics, vol. 2, p. 160 points out that during the same period the money supply in England also roughly doubled. As economists like David Ricardo argued at the time, the rise in prices was directly linked to the suspension of the convertibility of banknotes to gold. Brantlinger makes the odd claim: “Even during the paper money era of 1797–1821, the bank note issues of the Bank of England remained relatively stable and uninflationary” (Fictions of State, p. 140). Even by modern standards, a doubling of the money supply and the price level in roughly 20 years is inflationary. But I am not using Shelley to make a point about English economic history; I am trying to make a point about attitudes toward English economic history. Whether or not Shelley correctly identified the cause of economic misery in his day, we can learn something about the nature of his radicalism by observing what he chose to focus on. And here Shelley could not be more explicit in stating his conclusion: “The cause of this peculiar misery is the unequal distribution which, under the form of the national debt, has been surreptitiously made of the products of their labour and the products of the labour of their ancestors.”Philosophical View, p. 31. Shelley is so obsessed with the problem of the national debt that he even argues that had it been solved, the issue of reforming Parliament might not have come up:

At the peace, the people would have been contented with strict economy and severe retrenchment, and some direct and intelligible plan for producing that equilibrium between the capitalists and the landholders which is delusively styled the payment of the national debt: had this system been adopted, they probably would have refrained from exacting Parliamentary Reform, the only secure guarantee that it would have been pursued.Ibid., p. 45.

Shelley focuses on the national debt as the origin of England’s economic problems, and he also focuses on it when proposing solutions to those problems. Readers expecting Shelley to suggest socialist remedies will be sorely disappointed by A Philosophical View of Reform. Faced with the poverty of the working class, he does not call for the nationalization of industry or the expropriation of capital.Shelley does consider the possibility of a one-time tax on capital to liquidate the national debt; the fact that David Ricardo advocated the same policy suggests that this is not a particularly “socialist” position. For the relation between Shelley and Ricardo on this issue, see Cameron, “Shelley, Cobbett,” pp. 207–9 and McNiece, Shelley, pp. 88–89. He does not suggest using the tax system to redistribute wealth.Modern literary critics keep imputing their own economic opinions to Shelley. Cameron feels a need to supplement Shelley’s analysis of the eco-nomic misery of his day: “For another important reason for the increased hardships on the poor in these years and one which Shelley doubtless had in mind, we must turn to the financial history of the time. This was the abolition of the income tax in 1816” (“Shelley, Cobbett,” p. 205). Writing in the wake of the New Deal, Cameron could not understand how any intelligent person could fail to be in favor of progressive income taxation, but in fact Shelley never once complains about the abolition of the income tax; for the reasons why, see Halévy, History of the English People, pp. 326–28, who concludes: “the income tax was in universal disfavour” (p. 327). As we have seen, far from lamenting the abolition of the income tax, Shelley was calling in 1820 for a further tax revolt. Shelley’s thinking on taxation resembles the position of some modern economists. In Swellfoot the Tyrant, Shelley even anticipates the famous Laffer Curve in his criticism of the British tax system: “till at length, by glorious steps,/ All the land’s produce will be merged in taxes,/ And the revenue will amount to—nothing!” (Julian edition, vol. 2, p. 337, II.i.15–17) He does not even propose laws to regulate working conditions in factories, to limit hours, for example, or forbid child labor. Far from calling for increased government intervention in the economy, Shelley wants to get the government out of the market as much as possible. Here is the sum total of Shelley’s “economic program”:

We would abolish the national debt.We would disband the standing army.We would, with every possible regard to the existing interests of the holders, abolish sinecures.

We would, with every possible regard to the existing interests of the holders, abolish tithes, and make all religions, all forms of opinions, respecting the origin and government of the Universe, equal in the eye of the law.

We would make justice cheap, certain and speedy, and extend the institution of juries to every possible occasion of jurisprudence.Philosophical View, p. 34.

This is not a pro-socialist but a pro-capitalist program; like a laissez-faire economist, Shelley is chiefly concerned with getting the government out of the way of legitimate and spontaneous economic activity. He wants to simplify the court system and to eliminate any remaining vestiges of feudal privilege in England, including government sinecures and established church benefices. In general, he directs his hostility not at entrepreneurs, who create wealth by their own efforts, but at aristocrats, whose wealth is derived solely from privileges granted them by the government. Indeed, Shelley views capitalism as a genuine advance over the system that preceded it, feudalism and its late incarnation in mercantilism:

Feudal manners and institutions having become obliterated, monopolies and patents having been abolished, property and personal liberty having been rendered secure, the nation advanced rapidly towards the acquirement of the elements of national prosperity. Population increased, a greater number of hands were employed in the labours of agriculture and commerce, towns arose where villages had been.Ibid., p. 22.

Like Adam Smith, Shelley does not object to business as such, but only to the alliance between business and government that was at the core of the mercantilist system. Shelley gets angry only when a government grants some businessmen privileges at the expense of others, when, for example, it confers a monopoly on one particular company that has curried its favor.

How does Shelley connect the issue of the national debt with the issue of monopoly? In his view, the Bank of England was the greatest of all government monopolies, gradually given more and more exclusive privileges that allowed it to work to the financial advantage of the British crown.On the monopoly status of the Bank of England, see Halévy, History of the English People, p. 302; Ashton, Economic History, pp. 178–79, 183; Chown, History of Money, p. 234; and Rothbard, Classical Economics, vol. 2, pp. 159, 183. The way the Bank was set up ensured that banking and finance in England did not develop along laissez-faire lines; rather the state maintained a massive presence in, influence on, and even control over all financial markets. Shelley’s deepest insight in A Philosophical View of Reform is his understanding of the sinister alliance that developed between government and business interests with the growth of public finance in eighteenth-century England. Indeed, the most brilliant part of the essay is a sociological analysis of the new alignment of economic and political forces in the eighteenth-century British regime.The best analysis I know of the nature of this regime is Harvey C. Mansfield, Jr., “Party Government and the Settlement of 1688,” The American Political Science Review 58 (1964): 933–46, which does an excellent job of relating the financial policies of the Whigs to their fundamental political program.

In analyzing the origins of the national debt, Shelley points out:

It was employed at the accession of William III less as a resource of meeting the financial exigencies of the state than as a bond to connect those in the possession of property with those who had, by taking advantage of an accident of party, acceded to power.Philosophical View, p. 25.

The British government needed money to finance its wars with France and its rebellious colonies in America. As Shelley writes: “The national debt was chiefly contracted in two liberticide wars, undertaken by the privileged classes of the country.”Ibid., p. 34. See Cobbett, Paper Against Gold, p. 424. For a general historical account of the connection between British war policy and the development of deficit financing, see John Brewer, The Sinews of Power: War, Money and the English State 1688–1783 (Cambridge, Mass.: Harvard University Press, 1988). It was easier for the British government to borrow money to finance its wars than to raise it by taxation (governments never want their citizens to have a clear idea of what military operations cost). But Shelley suggests a hidden political agenda behind the system of public credit the British developed—it forged a bond between the government and the financial interests in the nation. Bankers and other moneyholders were eager to lend to the government because of the security of such loans. When a banker lends to private businessmen, he is hoping that their businesses will produce sufficient revenue to meet the interest payments on the loans and eventually to repay the principal. But governments are not dependent on the vicissitudes of the market; to make their interest payments, they rely on their ability to raise money by taxes, and if all else fails, in the era of paper currency they can always just print the money to meet their financial obligations. That is why governments have an advantage over private businesses in credit markets and can usually obtain loans at favorable rates of interest. More importantly from Shelley’s perspective, once the monied interests began to lend large amounts to the British government, they became tied to its fortunes. They would hardly work for the overthrow of a government heavily indebted to them and a chief source of their steady and secure income.Hume makes this point in his important essay “Of Public Credit” (Essays, pp. 359–60). Brantlinger shows that Jonathan Swift argued similarly earlier in the eighteenth century (Fictions of State, p. 39). Thus, as Shelley points out, by means of the new public credit system, the landed aristocrats who created and dominated the eighteenth-century British regime gradually cemented support for their rule from the financial interests in the city of London.

Shelley clarifies what is really involved in the complicated and confusing national debt situation:

The fact is that the national debt is a debt not contracted by the whole nation towards a portion of it, but a debt contracted by the whole mass of the privileged classes towards one particular portion of those classes. ... As it is, the interest is chiefly paid by those who had no hand in the borrowing, and who are sufferers in other respects from the consequences of those transactions in which the money was spent. The payment of the principal of what is called the national debt, which it is pretended is so difficult a problem, is only difficult to those who do not see who is the creditor, and who the debtor, and who the wretched sufferers from whom they both wring the taxes which under the form of interest is given by the [latter] and accepted by the [former].Philosophical View, pp. 35–36.

Shelley exposes the scam the British government developed that has served as a model to all governments since. The ruling powers in England got the money they needed to finance their enterprises, chiefly war. The monied interests found a profitable and secure way of placing loans, with a virtually guaranteed steady stream of interest income. And all this was paid for by the majority of honest, hard-working Englishmen, either in the form of direct taxation, or in the indirect form of an inflation tax, whenever the government debt was monetized, thus increasing the currency in circulation and raising prices. As Shelley indicates, this system worked only because the interested parties were able to hide the reality of what was going on from the general populace. The intricacies of the banking system mystified the public and obscured the truth about the national debt. Shelley’s aim in A Philosophical View of Reform was to demystify the public finance system in England and reveal it for what it was—a massive scheme to defraud the people of England, to get the poor to pay for servicing the debt of the rich.Shelley learned the need for such demystification from Cobbett; see Paper Against Gold, pp. 8–9, and especially p. 421:One would really suppose, that the general creed was, that the Bank Directors were the Gods of the country, that they were our Sustainers if not actually our Makers, that from them we derived the breath in our nostrils, that in and through them we lived, moved, and had our being.On the issue of public credit and mystification, see Brantlinger, Fictions of State, pp. 88–89.

Those who still wish to believe in a proto-socialist Shelley might take comfort from the fact that he employs the rhetoric of rich versus poor, as if class warfare were at the center of his economic doctrine. But unfortunately for any Marxist appropriation of Shelley, when he speaks of “the rich,” he does not mean what Marxists do by the term. Shelley is in fact careful to explain the restricted range of the term in his vocabulary:

When I speak of persons of property I mean not every man who possesses any right of property; I mean the rich. Every man whose scope in society has a plebeian and intelligible utility, whose personal exertions are more valuable to him than his capital; every tradesman who is not a monopolist, all surgeons and physicians and those mechanics and editors and literary men and artists, and farmers, all those persons whose profits spring from honourably and honestly exerting their own skill and wisdom or strength in greater abundance than from the employment of money to take advantage of the necessity of the starvation of their fellow-citizens for their profit, are those who pay, as well as those more obviously understood by the labouring classes, the interest of the national debt. It is in the interest of all these persons as well as that of the poor to insist upon the payment of the principal.Philosophical View, pp. 36–37.

This passage is crucial for understanding what is distinctive in Shelley’s formulation of England’s economic problems. He does not categorize class conflict in England in the terms that Marx and his followers were soon to employ.Most people think that the idea of class conflict originates with Marx, and are unaware that he developed his views on the subject in response to the work of prior thinkers, particularly among the French, who categorized classes and class conflict differently. On this important subject, see Ralph Raico, “Classical Liberal Roots of the Marxist Doctrine of Classes,” in Yuri N. Maltsev, ed., Requiem for Marx (Auburn, Ala.: Ludwig von Mises Institute, 1993), pp. 188–220, and especially pp. 202–04 for an analysis of the class interest of government clients similar to Shelley’s. See also Rothbard, Classical Economics, vol. 2, pp. 385–91 and Watson, Lost Literature, pp. 8, 19–28, and especially p. 22, where he quotes Marx himself saying in a letter to Georg Weydemeyer, March 5, 1852:No credit is due me for discovering the existence of classes in modern society or the struggle between them. Long before me bourgeois historians had described the historical development of the class struggle, and bourgeois econo-mists the economic anatomy of the classes. Shelley does not think in terms of a sharp opposition between the bourgeoisie and the proletariat; that is not his definition of rich versus poor. In fact, Shelley argues that a large portion of the middle class should make common cause with the working class over the issue of the national debt; both are being taken advantage of by the aristocracy in alliance with a small portion of the middle class.

Shelley’s argument hinges on his distinction between two subsets, as it were, of the middle class. He distinguishes between those who are in effect clients of the government—those who benefit financially from its operation—and those who, through taxes and other forms of government appropriation, are net losers in the system. The latter class includes the majority of what we would call middle-class professionals—doctors, for example—but it also includes businessmen who are not the beneficiaries of government interference in the free market—”every tradesman who is not a monopolist.” What defines this subset of the middle class for Shelley is that they are not linked to the government by accepting grants, subsidies, monopolies, or any other form of economic privilege. The other subset of the middle class consists of all those professionals who have sprung up in connection with the new system of public finance—the bankers, the bond traders, the stockbrokers—a new category of men who have become dependent on the government to enrich them. Shelley has such contempt for all who derive their wealth from serving the ruling powers in England that he insists upon calling them aristocrats.On the status of the new species of financial professionals, especially the stockbrokers, see Halévy, History of the English People, pp. 314–16; Halévy himself refers to them as “aristocrats” (pp. 299, 314). As he formulates the point, England is now burdened with two aristocracies: the old one, consisting chiefly of the great landowners and long established merchant families, and a new one, consisting of all the satellites and beneficiaries of the system of public finance.Cameron, “Shelley, Cobbett,” pp. 201–02, claims that Shelley derived the idea of the two aristocracies from Cobbett, but, as Cameron himself admits (p. 209), Shelley’s analysis of the situation is considerably more complex and subtle than Cobbett’s. And for Shelley, this new aristocracy is worse than the old, mean-spirited and grasping, whereas the old one at least had a certain nobility and largeness of vision:Hume offers a similar analysis of the ignobility of the new class of financial professionals in his “Of Public Credit,” Essays, p. 363.

The other is an aristocracy of attornies and excisemen and directors and government pensioners, usurers, stock jobbers, country bankers. ... These are a set of pelting wretches in whose employment there is nothing to exercise ... the more majestic faculties of the soul. Though at the bottom it is all trick, there is something frank and magnificent in the chivalrous disdain of infamy connected with a gentleman. ... But in the habits and lives of this new aristocracy created out of an increase [in] the public calamities ... there is nothing to qualify our disapprobation. They eat and drink and sleep, and in the interval ... they cringe and lie.Philosophical View, pp. 28–29.

Shelley negatively characterizes the segment of the middle class that developed to make the system of public finance work, professionals who came to have an interest in seeing the national debt grow (since they in effect earned their living from it) and who therefore wanted to see government activities expand in general.The one seemingly “Marxist” aspect of Shelley’s essay is his tendency to explain people’s opinions in terms of their underlying economic interests. Yet ultimately Shelley is not a Marxist because he does not apply this principle mechanically. In another passage Ingpen and Peck relegate to their notes (p. 336), Shelley explicitly denies the Marxist principle that economic interests strictly determine political opinions: “It is not alledged that every person whose interest is directly or indirectly in the maintaining things as they are, is therefore necessarily interested. There are individuals who can be just judges even against themselves, and by study and self-examination have established a severe tribunal within themselves to which these principles which demand the advantage of the greater number are admitted to appeal.” Hoagwood (Skepticism & Ideology, pp. 85–86) unaccountably offers this passage as an example of Shelley’s Marxist thinking, as if Marxism allowed individuals within a class to be exempt from class consciousness. Shelley thus shows how the ruling powers in England forged an alliance with a segment of the rising middle class: “the hereditary aristocracy who held the political administration of affairs took the measures which created this other [aristocracy] for purposes peculiarly its own.”Philosophical View, p. 29.

The subtle way in which Shelley distinguishes between elements of the middle class provides a good warning against applying Marxist terminology or analysis indiscriminately to authors, especially to authors who wrote before Marx. Whenever someone takes the side of the poor against the rich, it is tempting to classify him as a socialist. But Shelley’s case reminds us that there is more than one way to champion the poor or attack the rich.Attempts to portray Shelley as a socialist ultimately reduce to a syllogism like this: (1) Shelley was concerned with social justice and helping the poor. (2) The only way to achieve social justice and help the poor is through socialism. (3) Therefore, Shelley must have been a socialist. This logic is most clearly at work in Aveling and Marx, Shelley’s Socialism, especially pp. 36–38. What essays like this fail to show is that Shelley ever called for identifiably socialist policies to remedy the economic evils he identified in Britain. Critics with socialist leanings themselves cannot imagine that anyone could believe that allowing the market to operate freely could help the poor. And yet that is just what Shelley argues in A Philosophical View of Reform. Indeed, as we have seen, Shelley means something quite distinctive, even idiosyncratic, when he uses the term “rich.” For Shelley, how much money one has in the end is less important than how one made that money in the first place. He defines the “rich” as only those whose wealth is the result of political privilege, whether based in aristocratic inheritance or monopoly grants from the government. Shelley does not object to wealth when it is derived from the independent operation of the free market, when it results from hard work or entrepreneurial spirit. In this regard, his radicalism resembles that of the original British champions of the free market, such as Adam Smith. Shelley defends the poor not against capitalists but against mercantilists, that is, businessmen in league with the government to defraud and exploit both the poor and a large portion of the middle class.

When Shelley turns to the issue of equality of property, he is dealing with the heart of socialist doctrine, but in fact rejects it. He does hold up equality of wealth as an ideal, but he also insists that political attempts to achieve such equality are ill-advised, at least under current conditions. Thus, even when Shelley sounds most like a socialist, he explicitly repudiates socialist economic policies:

The broad principle of political reform is the natural equality of men, not with relation to their property but to their rights. That equality in possessions which Jesus Christ so passionately taught is a moral rather than a political truth and is such as social institutions cannot without mischief inflexibly secure. ... Equality in possessions must be the last result of the utmost refinements of civilization; it is one of the conditions of that system of society, towards which with whatever hope of ultimate success, it is our duty to tend. We may and ought to advert to it as to the elementary principle, as to the goal, unattainable, perhaps, by us, but which, as it were, we revive in our posterity to pursue. ... But our present business is with the difficult and unbending realities of actual life, and when we have drawn inspiration from the great object of our hopes it becomes us with patience and resolution to apply ourselves to accommodating our theories to immediate practice.Philosophical View, pp. 42–43.

Shelley presents equality of wealth as a purely utopian principle. It is an ideal we may ultimately aim at, but not one we can reasonably expect to achieve, certainly under present conditions and possibly never at all. All that Shelley is willing to endorse is the political principle of the equality of rights, which is why he argues for parliamentary reform to extend the voting franchise. But he is not willing to promote the principle of economic equality, and explicitly states that any attempt to bring it about by political means would have pernicious consequences. This passage helps to explain the relation of Shelley’s poetic to his prose statements of his principles. Works like Prometheus Unbound allow him to present the ideal and utopian vision of which he speaks here, the image of a classless society, based on political and economic equality. But for Shelley, such a poetic vision is not a blueprint for concrete political action; rather it merely provides inspiration for working to improve the human condition in much more practical and limited ways. Shelley’s poetry inspires us to make life better; prose works like A Philosophical View of Reform show us how it can actually be done.On this point, see McNiece, Shelley, pp. 93–94, 265. In his poetry, Shelley may seem like a wild-eyed idealist; what is striking about A Philosophical View of Reform is how fully grounded Shelley’s concrete proposals are in economic reality and, above all, how well he understands the way markets, including financial markets, really work.

Thus, when Shelley analyzes the issue of property, he defends the institution in terms familiar in defenses of the free market. Characteristically, he distinguishes between property acquired as a result of participation in the free market and property obtained only as a result of government intervention in the market. Shelley has no objection to property acquired by honest economic effort, whether it is the result of working class labor or middle-class entrepreneurship:Generally regarded as one of the most radical thinkers of his day, Cobbett, Paper Against Gold, p. 34, takes, if anything, a more generous view of the right of the middle and upper classes to property:Physicians, Parsons, Lawyers, and others of the higher callings in life, do, in fact, labour; and it is right that there should be persons of great estate, and without any profession at all; but then, you will find, that these persons do not live upon the earnings of others: they all of them give something in return for what they receive. Those of the learned profession give the use of their talents and skill; and the landlord gives the use of his land or his houses. (Cobbett’s italics)

Labour, industry, economy, skill, genius, or any similar powers honourably and innocently exerted are the foundations of one description of property, and all true political institutions ought to defend every man in the exercise of his discretion with respect to property so acquired. Of this kind is the principal part of the property enjoyed by those who are but one degree removed from the class which subsists by daily labour.Philosophical View, p. 37.

Once again Shelley claims that the working class and the industrious portion of the middle class share a common interest, this time in maintaining the right to property and thus to enjoy the fruits of their exertions. Shelley does not like the idea that this right includes the right of inheritance, because that confers property on people who did not earn it by their own efforts. But in the end he is willing to defend even inheritance rights:

Property thus acquired men leave to their children. Absolute right becomes weakened by descent, ... because it is only to avoid the greater evil of arbitrarily interfering with the discretion of any man in matters of property that the great evil of acknowledging any person to have an exclusive right to property who has not created it by his skill or labour is admitted.Ibid.

In Shelley’s view, one may object to the way in which the right to property in a free market distributes wealth, but before tampering with this system, one must consider carefully whether any alternative system will distribute wealth more justly. In fact, as arbitrary as the distribution of wealth in the free market may seem, Shelley suggests that to allow a political authority to substitute its judgment for the market’s will only result in greater arbitrariness and hence injustice.In this argument, Shelley was following the teaching of his father-in-law, William Godwin. See Book 8, “Of Property,” in his Enquiry Concerning Political Justice (1798; rpt. Harmondsworth, U.K.: Penguin Books, 1976), especially chapter 2, pp. 711–19, 755:we should, at all times, be free to cultivate the individuality, and follow the dictates, of our own judgement. If there be anything in the idea of equality that infringes this principle, the objection ought probably to be conclusive. If the scheme be, as it has often been represented, a scheme of government, constraint and regulation, it is, no doubt, in direct hostility with the principles of this work. But the truth is that a system of equality requires no restrictions or superintendence. There is no need of common labour, meals or magazines.This clear warning against what have become socialist economic policies is a good indication that, despite the view of many intellectual historians, Godwin, just like his son-in-law, does not belong in the camp of proto-socialists. For the contrary view, see Scrivener, Radical Shelley, p. 36: “If Shelley adumbrates Marx, so does Godwin.”

Thus, Shelley is willing to take his chances with the free market. He realizes that the right to acquire property in a free market is inseparably bound up with the “right” to lose it. If the heirs of industrious people are not themselves industrious, their inherited wealth will soon pass into the hands of those who are:

The privilege of disposing of property by will ... exerted merely by those who have acquired property by industry or who have preserved it by economy, would never produce any great and invidious inequality of fortune. A thousand accidents would perpetually tend to level the accidental elevation, and the signs of property would perpetually recur to those whose deserving skill might attract or whose labour might create it.Philosophical View, p. 38.

Shelley could not be further from Marxism or any socialist doctrine here; he argues that the free market actually works toward equalizing wealth, and above all directs it to the most productive sectors of the economy.Godwin again makes the same argument; see Political Justice, pp. 791–92.

For Shelley, the only force that can produce great inequality of wealth is the government. Hence he condemns all those rights to property conferred solely by government intervention in the economy. It is to this source and this source alone that he traces any massive concentration of wealth:Once again, see Godwin, Political Justice, pp. 719–20.

They were either grants from the feudal sovereigns whose right to what they granted was founded upon conquest or oppression, both a denial of all right; or they were the lands of the antient Catholic clergy which according to the most acknowledged principles of public justice reverted to the nation at their suppression, or they were the products of patents and monopolies, an exercise of sovereignty most pernicious that [does] direct violence to the interests of a commercial nation; or in later times such property as has been accumulated by dishonourable cunning and the taking advantage of a fictitious paper currency to obtain an unfair power over labour and the fruits of labour.Philosophical View, pp. 38–39.

Having carefully analyzed the objections to the right of property, Shelley in the end comes out unequivocally in favor of it, provided the property results from the operation of the free market:

Labour and skill and the immediate wages of labour and skill is a property of the most sacred and indisputable right, and the foundation of all other property. And the right of a man [to] property in the exertion of his own bodily and mental faculties, or to the produce and free reward from and for that exertion is the most [inalienable of rights].Ibid., p. 39. In passages such as this, Shelley seems to subscribe to the labor theory of value. He is even more explicit on the point in the notes to Queen Mab: “There is no real wealth but the labor of man” (David Lee Clark, ed., Shelley’s Prose or The Trumpet of a Prophecy [Albuquerque: University of New Mexico Press, 1954], p. 113). Shelley’s belief in the labor theory of value would seem to be strong evidence for regarding him as a proto-Marxist, and it is cited as such in Aveling and Marx, Shelley’s Socialism, p. 30 and Cameron, “Shelley and Marx,” p. 237. But contrary to a common misconception, Marx did not invent the labor theory of value. It actually can be traced back to the British classical economists, and was developed by Adam Smith and fully elaborated by David Ricardo—from whom Marx directly derived his notions on the subject. Thus, if believing in the labor theory of value ipso facto makes one a socialist, we are left with the curious claim that the most famous defenders of the free market in Britain, Smith and Ricardo, were socialists. And notice that in A Philosophical View of Reform, Shelley is always careful to offer a much broader definition of “labor” than Marxists usually do—he explicitly includes mental work, such as the efforts of entrepreneurs.

This spirited defense of the right to private property should put an end to the myth of Shelley the socialist.The fact that it should does not of course mean that it will. Foot manages to present Shelley’s treatment of the issue of property in A Philosophical View of Reform as an example of his socialist thinking. To do so, Foot must treat Shelley’s analysis as “rough-and-ready” and “groping,” implying strongly that the poet is simply confused; in particular, Foot describes Shelley’s clear-cut distinction between earned and unearned property this way: “Shelley’s line between the two was vague” (Red Shelley, pp. 94–95). Foot’s Marxist prejudices repeatedly blind him to the literal meaning of Shelley’s prose. Shelley even translated his argument for private property and inheritance rights into poetic form in an 1819 fragment:

What men gain fairly—that they should possess,And children may inherit idleness,From him who earns it. This is understood;Private injustice may be general good.But he who gains by base and armèd wrong,Or guilty fraud, or base compliances,May be despoiled; even as a stolen dressIs stript from a convicted thief, and heLeft in the nakedness of infancy.Quoted from the text in the Julian edition, vol. 3, pp. 290–91.

Once again we see Shelley distinguishing between wealth accumulated by illegitimate means and wealth accumulated by honest effort, whether in labor or in commerce. In claiming that “private injustice may be general good,” Shelley is drawing upon a defense of market activity that can be traced back to Bernard Mandeville’s The Fable of the Bees (1714) and its famous subtitle, “Private Vices, Publick Benefits”—a formula completely at odds with socialism.

Studying carefully what Shelley actually argues in A Philosophical View of Reform and the way it has been misread by literary critics over the years provides a cautionary tale. Contemporary critics have a tendency to project their own ideas back into literary history. When they look for the economic position of an earlier author, they often unconsciously assume that to be economically progressive or radical has always meant to lean toward socialism. But even in terms of Marx’s system, this understanding must be judged incorrect. For Marx there was a time when capitalism was the progressive force in history, namely when it worked to undermine and overthrow feudalism. The socialist tradition in Britain, with its roots in authors like John Ruskin and William Morris, has often been mixed up with a profound nostalgia for the Middle Ages.On this subject, see Watson, Lost Literature, pp. 43–52. But Marx would have none of this anti-modern longing for the days of feudalism. For all his passionate criticism of capitalism, he still viewed it as an advance beyond feudalism and, together with his colleague Friedrich Engels, he even celebrates the progressive character of the bourgeoisie in ringing terms in The Communist Manifesto:

The bourgeoisie, historically, has played a most revolutionary part. The bourgeoisie, wherever it has got the upper hand, has put an end to all feudal, patriarchal, idyllic relations. It has pitilessly torn asunder the motley feudal ties that bound man to his “natural superiors.” ... The bourgeoisie has disclosed how it came to pass that the brutal display of vigor in the Middle Ages, which reactionists so much admire, found its fitting complement in the most slothful indolence. It has been the first to show what man’s activity can bring about. It has accomplished wonders far surpassing Egyptian pyramids, Roman aqueducts, and Gothic cathedrals. ... The bourgeoisie, during its rule of scarce one hundred years, has created more massive and more colossal productive forces than have all preceding generations together.Karl Marx and Friedrich Engels, “Manifesto of the Communist Party” (English edition of 1888) in Lewis S. Feuer, ed., Basic Writings on Politics and Philosophy: Karl Marx and Friedrich Engels (Garden City, N.Y.: Doubleday Anchor, 1959), pp. 9, 10, 12.

Notice that Marx regards anyone who admires the Middle Ages as reactionary; hence he would have regarded Shelley’s arguments for the superiority of capitalism over feudalism as progressive in their historical context. Evidently his hope was that, since Shelley supported capitalism when it was appropriate to do so, had he lived, he would have learned to support socialism when historical circumstances dictated that position. Such a convoluted argument is the only way to salvage the idea of Shelley as “socialist.”This is in fact how Cameron actually tries to make the argument; see “Shelley and Marx,” pp. 238–39. But even this Marxist reading leaves us with a Shelley who in his own day supported capitalism. For him, the great enemy is not capitalism but feudalism and its late incarnation, mercantilism. Shelley argues that to the extent that the government intervention in the economy characteristic of feudalism and mercantilism was eliminated, and free market forces were allowed to come into play, the welfare of England increased, and the gap between the rich and the poor began to decrease. For Shelley, this progress was thwarted only by mercantilist survivals in the British financial system, and above all a bank given monopoly privileges by the government.

Thus, reading Shelley’s A Philosophical View of Reform should force us to rethink the common view that the English Romantic poets were left-wing in the contemporary understanding of the term. Of course, I do not wish to make too much of a single essay by a single author. Shelley does not speak for all the Romantics in any of his writings, and certainly not in A Philosophical View of Reform. One cannot conclude from this one work that all the Romantics supported the free market. Nevertheless, Shelley’s essay does provide an important test case. He is generally regarded as the most politically committed of the English Romantics and the one with the most radical economic views. As for A Philosophical View of Reform, with the possible exception of some of Coleridge’s prose works, it is the most significant essay on economic matters produced by any of the English Romantics.Hoagwood calls A Philosophical View of Reform “one of the most advanced and sophisticated documents of political philosophy in the nineteenth century” (Skepticism & Ideology, p. 209). Foot says that “it ranks in style and in content with the most famous radical pamphlets of our history,” including those “of Bentham or Robert Owen or Marx and Engels” (Red Shelley, pp. 10–11). In his Literature & the Marketplace: Romantic Writers and Their Audiences in Great Britain and the United States (Lincoln: University of Nebraska Press, 1996), p. 89, William G. Rowland, Jr. calls the essay “the most sustained and impressive political treatise written by a romantic poet.” Thus, one cannot easily dismiss what we have seen in Shelley’s essay. While it does not allow us to generalize about what all the Romantics believed, it does effectively refute the generalization that all the Romantics were anti-capitalist and proto-socialist.The case of Shelley suggests that rethinking the standard view of the economic opinions of the Romantic generation is in order. The Industrial Revolution does not appear to have been as much of an issue for them as critics’ obsession with the “dark Satanic mills” of the Preface to Blake’s Milton would suggest (Harold Bloom insists that even these mills “have nothing to do with industrialism”; see his Blake’s Apocalypse: A Study in Poetic Argument [Garden City, N.Y.: Anchor Books, 1965], p. 335). Many critics in effect impute Victorian views back into the Romantic era. In the early nineteenth century, the Industrial Revolution had not yet broadly transformed the English landscape. It took the development of railroads, beginning in the 1830s, to spread the Industrial Revolution throughout the land. Given the critical focus on Romantic reactions against the Industrial Revolution, it is surprising to discover how seldom the subject actually comes up in Romantic poetry or prose. When the other Romantics criticize economic conditions in early nineteenth-century England, they tend to focus, as Shelley does, on the related issues of high taxes and the government’s war policy (see, for example, Wordsworth’s The Ruined Cottage). Like Shelley, the other Romantics tend to rail against the actions of the monarch, the aristocrats, and government officials, rather than those of businessmen and industrialists. Brantlinger is clear on the contrast between Romantic and Victorian economic concerns: “The shared concerns expressed in Cobbett’s Paper Against Gold and Peacock’s Paper Money Lyrics suggest a pre-1832 moment when working- and middle-class politics more or less coincided around taxation and monetary issues. The Reform Bill of 1832 marks a part-ing of the ways” (Fictions of State, p. 134). In Joseph Bizup’s comprehensive study of nineteenth-century attitudes toward industrialization in Britain, he begins his discussion of the critique of industry with Robert Southey’s Sir Thomas More: or, Colloquies on the Progress and Prospects of Society, which was not published until 1829—toward the end of the Romantic Era if not after its demise (Manufacturing Culture: Vindications of Early Victorian Industry [Charlottesville: University of Virginia Press, 2003], p. 1). It conclusively shows that for one Romantic, championing liberty in his day meant supporting the free market and the right to private property, while condemning government intervention in the economy.Scrivener, Radical Shelley, p. 9, grants the point that in the early nineteenth-century laissez-faire capitalism “was a progressive, antiaristocratic position.” One Marxist critic, Christopher Caudwell (pseudonym of Christopher St. John Sprigg), recognizes clearly that Shelley was a spokesman for the middle class and the new economic freedom it pursued:He speaks for the bourgeoisie who, at this stage of history, feel themselves the dynamic force of society and therefore voice demands not merely for themselves but for the whole of suffering humanity. It seems to them that if only they could realise themselves, that is, bring into being the conditions necessary for their own freedom, this would of itself ensure the freedom of all. ... The bourgeois trammelled by the restraints of the era of mercantilism is Prometheus, bringer of fire, fit symbol of the machine-wielding capitalist. Free him and the world is free. ... Shelley is the most revolutionary of the bourgeois poets of this era because Prometheus Unbound is not an excursion into the past, but a revolutionary programme for the present. It tallies with Shelley’s own intimate participation in the bourgeois-democratic revolutionary movement of his day. (Illusion and Reality: A Study of the Sources of Poetry [New York: International Publishers, 1947], pp. 91–92)

But I do not wish to leave the impression that Shelley’s argument is historically contingent or limited by the horizons of his era. Shelley makes a powerful case for the right to property under any historical circumstances, and his analysis of the negative effects of deficit financing, monetization of debt, paper currency, and government inflationary policies remains valid, and has been confirmed by subsequent economic history and developments in later economic theory, such as the Austrian theory of money, credit, and the business cycle.For the classic exposition of the Austrian theory of the business cycle, see Ludwig von Mises, Human Action (New Haven, Conn.: Yale University Press, 1949), pp. 535–83. Perhaps the most interesting and enduring aspect of Shelley’s argument is his distinction between two groups within the middle class, those who make their living independent of the government and those who are crucially dependent on it for their livelihood. With this analysis, Shelley makes an important contribution to our understanding of why governments were able to exert insidious and invidious control over the economy even in the supposedly laissez-faire economic era. More generally, Shelley shows how the forces of feudalism and mercantilism were able to survive into the era of capitalism by hiding behind the system of banking and finance. One of the great failings of classical economics was its inability to understand the phenomena of money and banking. Shelley does not himself supply that understanding, but at least he grasps the fact that the British financial system was not the product of free market evolution. It was instead heavily influenced by government intervention. Even at the height of the so-called laissez-faire era of capitalism, England did not have free banking, but rather in effect a central bank, with all that such an institution implies for government control of currency and finance.

Thus, in criticizing the British financial system, Shelley is condemning, not capitalism, but rather a mercantilist survival into the capitalist era, indeed that greatest of all chartered monopolies, the Bank of England.In another bracketed passage, which Ingpen and Peck place in their notes (p. 338), Shelley writes: “the present miseries of our country are nothing necessarily inherent in the stage of civilization at which we have arrived.” For Shelley the problem is not that England has become capitalist, but that it has not become fully capitalist, that is, elements of the mercantilist system are still in place. As Shelley’s analysis reminds us, capitalism is often blamed precisely for the results of anti-capitalist government policies. In particular, literary critics habitually confuse capitalism with mercantilism—the very system it was supposed to replace. For example, Brantlinger twice simply identifies “mercantilism” with “early capitalism” (Fictions of State, pp. 31, 75). For a good example of this kind of obfuscation, see Aveling and Marx, Shelley’s Socialism, p. 31, where they offer as evidence of Shelley’s hostility to capitalism a passage from his unfinished play Charles the First. Since this play is set in the first half of the seventeenth century, it necessarily portrays the negative effects of mercantilism, not capitalism. This fact is evident in the very passage Aveling and Marx quote (scene I, lines 151–52), in which the Second Citizen talks of “Nobles, and sons of nobles, patentees,/Monopolists, and stewards of this poor farm” (Julian edition, vol. 4, p. 145). Avel-ing and Marx are evidently attracted by the word monopolists, which they anachronistically interpret in the light of the Marxist theory of monopoly capitalism. But Shelley is obviously dwelling on his familiar theme—the evil of monopolies created by royal patents—exactly the sort of mercantilist practices proponents of capitalism like Adam Smith attacked. He shows that the alignment of economic forces in the early nineteenth century was not as simply polarized as Marxist and other socialist thought often assumes, and especially that the bourgeoisie did not constitute a homogeneous class with a unified economic interest and hence, in Marxist terms, a unified ideology. Shelley brilliantly analyzes how the old aristocracy in England, in order to maintain its power, played off one part of the middle class against another, effectively splitting the bourgeoisie by giving one element of it reason to support state power.For modern supporters of this view, see Brantlinger, Fictions of State, pp. 236–37. A glance at the legions of middle-class professionals employed by the vast bureaucratic states of today reminds us that Shelley’s analysis is, if anything, more valid in our world. Sometimes poets have something to teach economists.

It would take hours to point out how common misunderstandings developed, which writers were responsible, and how political conditions contributed. it is more important to enumerate the misunderstandings and discuss the consequences of their acceptance by the public.

This first misunderstanding is the belief that economics does not deal with the way men really live and act, but with a specter created by economics, a phantom that has no counterpart in real life. The criticism is made that real man is different from the specter of the “economic man.” once this first misunderstanding is removed, a second misunderstanding arises—the belief that economics supposes that people are driven by one ambition and intention only—to improve their material conditions and their own well-being. Critics of this belief say that not all men are egoistic.

A third misunderstanding is that economics assumes all men to be reasonable, rational, and guided by reason only, while in fact, the critics maintain, people may be guided by “irrational” forces.

These three misunderstandings are based on entirely false assumptions. Economics does not suppose that economic man is different from what man is in everyday life. The only supposition of economics is that there are conditions in the world with regard to which man is not neutral, and that he wants to change the situation by purposeful action. So far as man is neutral, indifferent, content, he takes no action, he does not act. But when a man distinguishes between states of various affairs and sees an opportunity to improve conditions from his point of view, he acts.

Action is the search for improvement of conditions from the point of view of the personal value judgments of the individual concerned. This does not mean improvement from a metaphysical view, nor from God’s point of view. Man’s aim is to substitute what he considers a better state of affairs for a less satisfactory one. He strives for the substitution of a more satisfactory state of affairs in place of a less satisfactory state of affairs. And in the satisfaction of this desire, he becomes happier than he was before. This implies nothing with reference to the content of the action, nor whether he acts for egoistic or altruistic reasons.

To eliminate the misunderstanding that arises when a distinction is attempted between “rationalism” and “irrationalism,” it must be realized that what man does consciously is done under the influence of some force or power which we call reason. Any action aimed at a definite goal is in this sense “rational.” The popular distinction between “rational” and “irrational” is entirely without meaning. Examples of “irrationalism” cited are patriotism or the purchase of a new coat or a symphony ticket when something else might have appeared a more sensible action. The theoretical science of human action presupposes only one thing—that there is action, i.e., the conscious striving of individuals to remove uneasiness and to substitute a more satisfactory state of affairs for one that is less satisfactory. No judgment of value is made as to the reason or content of the action. Economics is neutral. Economics deals with the results of value judgments, but economics itself is neutral.

Nor is there any sense in trying to distinguish between “economic” and “non-economic” actions. Some actions deal with the preservation of man’s own vital senses and necessities—food, shelter, and so on. Others are considered to be driven by “higher” motivations. But the value placed on these various goals vary from man to man, and differ for the same man from time to time. Economics deals merely with the action; it is the task of history to describe the differences in goals.

Our knowledge of economic laws is derived from reason and cannot be learned from historical experience because historical experience is always complex and cannot be studied as in a laboratory experiment. The source of economic facts is man’s own reason, i.e., which we call in epistemology a priori knowledge, what one knows already; a priori knowledge is distinguished from a posteriori knowledge, knowledge which is derived from experience.

Regarding a priori knowledge, the English philosopher John Locke [1632–1704] developed the theory that the human mind is born a blank slate on which experience writes. He said there was no such thing as inherent knowledge. Gottfried Wilhelm von Leibniz [1646–1716], a German philosopher and mathematician, made an exception in the case of the intellect itself. According to Leibniz, experience does not write on empty white pages in the human mind; there is a mental apparatus present in the human mind, a mental apparatus that does not exist in the minds of animals, which makes it possible for men to convert experience into human knowledge.

I am not going to enter into the argument between “rationalism” and “empiricism,” the distinction between experience and knowledge, which the British philosopher and economist John Stuart Mill [1806–1873] called a prioristic knowledge. However, even Mill and the American pragmatists believed that a prioristic knowledge comes in some way from experience.

The way in which economic knowledge, economic theory, and so on relate to economic history and everyday life is the same as the relation of logic and mathematics to our grasp of the natural sciences. Therefore, we can eliminate this anti-egoism and accept the fact that the teachings of economic theory are derived from reason. Logic and mathematics are derived in a similar way from reason; there is no such thing as experiment and laboratory research in the field of mathematics. According to one mathematician, the only equipment a mathematician needs is a pencil, a piece of paper, and a wastebasket—his tools are mental.

But, we may ask, how is it possible for mathematics, which is something developed purely from the human mind without reference to the external world and reality, to be used for a grasp of the physical universe that exists and operates outside of our mind? Answers to this question have been offered by the French mathematician Henri Poincaré [1854–1912] and physicist Albert Einstein [1879–1955]. Economists can ask the same question about economics. How is it possible that something developed exclusively from our own reason, from our own mind, while sitting in an armchair, can be used for a grasp of what is taking place on the market and in the world?

The activities of every individual—all actions—stem from reason, the same source from which come our theories. Man’s actions on the market, in the government, at work, at leisure, in buying and selling, are all guided by reason, guided by choice between what a person prefers as against what he does not prefer. Reason is the method by which a solution (whether good or bad) is reached. Every action can be called an exchange insofar as it means substituting one state of affairs for another. Hopefully the actor is substituting a situation he prefers for one which he likes less.

The starting points for the natural sciences are the various facts established by experiment. From these facts, theories are built to more and more abstractions, to more and more generalities. Final theories are so abstract that they are practically inaccessible to the general multitude. That doesn’t make them less valuable; it is enough that they are accessible to the few scientists.

In an a prioristic science, we start with a general supposition—action is taken to substitute one state of affairs for another. This theory—meaningless to many—leads to other ideas that become more and more understandable and less abstract.

Natural sciences progress from the less general to the more general; economics proceeds in the opposite direction. Natural sciences are in a position to establish constant relations of magnitude. In the field of human action, no such constant relations prevail, so there is no opportunity for measurement. The value judgments which spur men to act, which lead to prices and market activity, do not measure; they establish distinctions of degree; they grade. They do not say “A” is equal to, or is more or less than “B.” They say, “I prefer A to B.” They don’t establish judgments. This has been misunderstood for 2000 years. Even today there are many persons, even eminent philosophers, who misunderstand this completely. It is from the system of values and preferences that the price system of the market arises.

Aristotle wrote, among other things, about the various attributes of men and women. He was often mistaken. Had he asked Mrs. Aristotle about women, he would have found he was mistaken in some respects; he would have learned differently. He was also mistaken in stating that if two things were to be exchanged on the market, they must have something in common, that they were being exchanged because they were equal. Now if they were equal, why was it necessary to exchange them? If you have a dime and I have a dime, we don’t exchange them because they are the same. It follows, therefore, that if there is an exchange, there must be some inequality in the items being traded, not equality.

Karl Marx [1818–1883] based his theory of value on this fallacy. In Capital and Interest, by Eugen von Böhm-Bawerk [1851–1914], see Chapter XII dealing with Marx (“The Exploitation Theory” in Volume I, History and Critique of Interest Theories). Long after Marx, Henri Bergson, in a much-admired book about the two sources of morals in religion, accepted the same fallacy—if two things are exchanged on the market they must be equal in some way. But things that are “equal” are not exchanged; exchanges take place only because things are unequal. You take the trouble of going to the market because you value the loaf of bread more highly than the money you give for it. People exchange things because at that time they prefer other things to money. An exchange never occurs with the intention of a loss. The acting man is never pessimistic because his action is inspired by the idea that conditions can be improved.

The aim of action is to substitute a state of affairs better suiting the men taking the action than the previous situation. The value of any change in their situation is called a “gain” if it is positive, a “loss” if it is negative. This value is purely psychic, it cannot be measured. You can say only that it is greater or less. It becomes measurable only insofar as things are exchanged on the market against money. As far as the action itself is concerned, it has no mathematical value.

But, you say, this contradicts our daily experience. Yes, because our social environment makes calculations possible insofar as things are exchanged for a common medium of exchange, money. When things are exchanged against money, it is possible to use monetary terms for economic calculations, but only when three conditions are filled:

1. There must be private ownership, not only of the products, but also of the means of production;

2. There must be division of labor and, therefore, production for the needs of others;

3. There must be indirect exchange in the terms of a common denominator.

By and large, given these three conditions some mathematical values may be established, although not precisely. These measurements are not exact because they deal with what took place yesterday, historically. Business financial statements may look precise, but even the money value of an inventory entered at “so many dollars” is a speculative value of future anticipations; the value credited to equipment and other assets also is speculative. The real problem of inflation is that it falsifies these calculations and brings about tragic problems.

Monetary calculations do not necessarily exist in all kinds of organizations or societies. They did not exist when economics began. The earliest humans acted; humans have always acted; but it was thousands of years before the evolution of the division of labor and of a financial apparatus made monetary calculations possible. Monetary calculations developed step by step during the Middle Ages. In their early development they lacked many features we think of today as necessary. (In a socialist system, these conditions would again disappear and make such calculations and measurements impossible.)

The quantitative nature of the natural sciences enables mechanics to make plans and build bridges. If you know what must be built, technology based on the knowledge of the natural sciences is sufficient. The questions are, however: What should be constructed? What should be done? Technologists cannot answer these questions.

In life the materials of production are scarce. No matter what we do there will always be other projects for which the necessary factors of production cannot be spared. There will always be other urgent demands. This is the factor that businessmen take into account in calculating loss and success. When a businessman decides against a certain project because the cost is too high, it means the public is not prepared to pay the price to use raw materials in that manner. Use is made of the available factors of production for the realization of the greatest number of those projects that satisfy the most urgent needs without wasting factors of production by withdrawing them from more urgent to less urgent employment.

To establish this it is necessary to be in a position to compare the outlays of various factors of production. For example, let it be assumed that it is necessary to build a railroad between two towns—A and B. Let us assume that there is a mountain between A and B. There are three possibilities—to go over, through, or around the mountain. A common denominator is necessary to calculate the comparative value. But this can give only a picture of the monetary situation; it is not a measurement. It is an evaluation in the light of present-day needs and situations. Tomorrow conditions will be different. The success or failure of every business project depends upon its success in anticipating future possibilities.

The problem with trying to develop a quantitative science of economics is that many persons imagine that theoretical economics must follow the evolution of other branches of science. The natural sciences developed from being qualitative to being quantitative in nature and many people are inclined to believe that the same trend must take place in economics also. However, there are no constant relationships in economics, so no measurement is possible. And without measurement, the quantitative development of economics cannot take place. Quantitative facts in economics belong to economic history—not to economic theory.

A book titled Measurement of the Elasticity of Demand was reviewed recently by a man now in the U.S. Senate, Paul Douglas [1892–1976], who may even be hoping for higher political office sometime. Douglas said economics should become an exact science with fixed values like atomic weights in chemistry. But this book itself does not refer to fixed values; it refers to the economic history of one definite period of time in one particular country, the United States. The results would have been different if another period of time or if another country had been considered. Within the framework of the universe in which we operate, atomic weights do not change from one period of time or from one country to another. On the other hand, economic values and economic quantities do change from time to time and from place to place.

Economics is the theory of human action. It is a historical fact of great importance, for example, that the usefulness of the potato was discovered by the natives of Mexico, brought to Europe by a British gentleman, and that its use spread all over the world. This historical fact has had important effects on Ireland, for instance, but from the point of view of economic theory it was just an accident.

When you introduce figures into economics you are no longer in the field of economic theory, but in the field of economic history. Economic history is also, of course, a very important field. Statistics in the field of human action is a method of historical study. Statistics give a description of a fact, but they cannot prove any more than that fact. (It is true that some statisticians are “swindlers” and, as a matter of fact, some statisticians in the government were probably appointed merely for that purpose.)

Some people may misinterpret these statements and conclude that the purpose of economics, being a purely a prioristic science, is to develop a program for a future science, and that economics is a theory practiced only by “armchair gentlemen.” Both these statements are wrong. Economics is not a program for a science that doesn’t yet exist. And it is not a science merely for purists. Therefore, we must reject the ideas of some people that one must learn history to study human action. History is important. But you cannot deal with present-day conditions by studying the past. Conditions change.

As an example of what I mean. The National Bureau of Economic Research published a report on the subject of installment selling which appeared on the eve of World War II, on the eve of inflation, and on the eve of government credit restrictions. At the moment when the study was made, it was already “dead”; it dealt with matters that were already past. I don’t mean to say that it was useless. With good brains one can learn a lot from it. But don’t forget it is not economics—it is economic history. What they were really studying was the economic history of the most recent past.

Darwin realized this too. He saw that in studying animals, the animal was killed at the moment when it was dissected for study, so that one could never actually study the animal—one can never study life itself.

The same is true of economics. One cannot describe the present economic system—one can only describe the past. One cannot predict about the future as a result of studying the past. Very often economic historians teach history under the label of “economics.” Even though you know everything about the past, you know nothing about the future.

In the natural sciences knowledge comes from experiment; a fact is something experimentally established. Natural scientists, in contrast to students of human action, are in a position of being able to control changes. They can isolate the various factors involved, as in a laboratory experiment, and observe changes when one factor is changed. The theory of a natural science must conform to these experiments—they must never contradict such an established fact. Should they contradict such a fact, a new explanation must be sought. In the field of human action, we are never in a position of being able to control experiments. We can never talk of facts in the field of social sciences in the same sense in which we refer to facts in the natural sciences. Experience in the field of human action is complicated, produced by the cooperation of various factors, all effecting change.

In the field of nature we have no knowledge of final causes. We do not know the ends for which some “power” is striving. Some persons have attempted to explain the universe as if it had been intended for the use of man. But questions can then be raised: What is the value to man of flies, for instance, or of germs? In the natural sciences we know nothing but experience. We are familiar with certain phenomena and on the basis of experiments a science of mechanics has been developed. But we do not know what electricity is. We don’t know why things happen the way they do; we don’t ask. And if we do ask, we don’t receive an answer. To say we know the answer implies that we have ideas of “God.” To assert that we can find the reason implies that we have certain “God-like” characteristics.

There is always a point beyond which the human mind can go—a realm into which inquiry brings no more information. Through the years this frontier has been pushed farther and farther back. Natural forces have been traced back beyond what was formerly considered “ultimate” human knowledge. But human knowledge must always stop at some “ultimate given.” The French physiologist Claude Bernard [1813–1878] said in his book on experimental science that life itself is something “ultimately given”; biology can only establish the fact that there is such a phenomenon as life, but it can say nothing more about it.

The situation is different in the field of history or of human action. There we can trace our knowledge back to something behind the action; we can trace it back to the motive. Human actions imply that men are aiming at definite goals. The “ultimate given” in the field of human action is the point at which an individual or a group of individuals, inspired by definite judgments of value and by definite ideas as to the procedures to be applied to attain a chosen end, acted. This “ultimate given” is individuality.

Being human we know something about human evaluations, doctrines, and theories concerning the methods used to reach these ends. We know there is some purpose behind the various moves of individuals. We know there is conscious action on the part of each person. We know there is a sense, a reason. We can establish that there are definite judgments of value, definite ends aimed at, and definite means applied in the attempt to gain these ends. For example a stranger, dropped suddenly into a primitive tribe, although ignorant of the language, can nevertheless interpret the actions of the people about him to some extent, the ends toward which they are working, and the means used to attain the ends. Through logic he interprets their running around building fires and putting objects in kettles as preparing food for dinner.

Dealing with judgments of value and methods is not peculiar to the science of human action. The logic of the scientist, the brainwork, is no different from the logic practiced by everybody in his daily life. The tools are the same. The aim is not peculiar to social scientists. Even a child crying and screaming has a motive and is acting to get something he wants. Businessmen also act to get things they want. They understand the science of human action and in dealing with their fellowmen they act on that understanding every day, especially in planning for the future.

This epistemological interpretation of the experience of understanding is not the invention of a new method. It is only the discovery of knowledge everybody has been using since time began. Economist Philip H. Wicksteed [1844–1927], who published The Common Sense of Political Economy, chose for his motto a quotation from Goethe: Ein jeder lebt’s, nicht vielen ist’s bekannt. (“We are all doing it; very few of us understand what we are doing.”)

According to the French philosopher Henri Bergson [1859–1941], understanding, l’intelligence sympathique, is the basis of the historical sciences. The historian collects his materials to assist his interpretation just as a policeman seeks the facts to enable him to reach a decision in court. The historian, the judge, the entrepreneur, all begin work when they have collected as much information as possible.

Auguste Comte, who contributed nothing to the development of the natural sciences, described what he believed to be the task of all sciences: he said that to be able to forecast and to act it was necessary to know. The natural sciences give us definite methods for accomplishing this. With the aid of the various branches of physics, chemistry, and so on, mechanics are able to design buildings and machines and to forecast the results of their operations. If a bridge collapses, it will be recognized that an error was made. In human action, no such definite error may be recognized, and this Comte considered a failing.

Auguste Comte considered history to be non-scientific and consequently valueless. In his mind, there was a certain hierarchy of the various sciences. According to him, scientific study began with the simplest science and progressed to the more complicated; the most complicated science was still to be developed. Comte said history was the raw material out of which this complicated study was to develop. This new study was to be a science of laws, equivalent to the laws of mechanics developed by scientists. He called this new science “sociology.” His new word “sociology,” has had enormous success; people in all parts of the world now study and write about sociology.

Comte knew very well that a general science of human action had been developed during the previous hundred years—the science of economics, political economy. But Comte didn’t like its conclusions; he wasn’t in a position to refute them, nor to refute the basic laws from which they were derived. So he ignored them. This hostility or ignorance was also displayed by the sociologists who followed Comte.

Comte had in mind the development of scientific laws. He blamed history for dealing only with individual instances, with events that happened in a definite period of history and in a specific geographical environment. History did not deal with things done by men in general, Comte said, but with things done by individuals. But sociologists have not done what Comte said they should; they have not developed general knowledge. What they have done is just what Comte considered worthless, they have dealt with individual events and not with generalities. For instance, a sociological report was published on “Leisure in Westchester.” Sociologists have also studied juvenile delinquency, methods of punishment, forms of property, and so on. They have written an enormous amount of material about the customs of primitive people. True, this literature does not deal with kings or wars; it deals principally with the “common man.” But still it doesn’t deal with scientific laws; it deals with historical facts, with historical investigations of what happened at one spot at a certain time. Such sociological studies are valuable, however, precisely because they deal with historical investigations, investigations of various aspects of human everyday life often neglected by other historians.

Comte’s program is self-contradictory because no general laws can be determined from the study of history. Observations of history are always complex phenomena, interconnected in such a way that it is impossible to assign to specific causes, with unquestioned accuracy, a certain part of the final result. Therefore, the method of the historian has nothing in common with the methods of the natural scientist.

The program of Auguste Comte to develop scientific laws from history has never been realized. So-called “sociology” is either history or psychology. By psychology I do not mean the natural sciences of perception. I mean the literary psychology described by the philosopher George Santayana [1863–1952] as the science of the understanding of historical facts, human evaluations dealing with human strivings.

Max Weber [1864–1920] called himself a sociologist, but he was a great historian. His book Gesammelte Aufsätze zur Religionssoziologie (Sociology of the Great Religions) deals in the first part, “The Protestant Ethic and the Spirit of Capitalism,” with the origin of capitalism. He attributed the development of capitalism to Calvinism and he wrote very interestingly about it. But whether his theory can be logically supported is another question.

One essay on “the town”—which has not been translated into English[The first English edition, The City, was translated and edited by Don Martindale and Gertrud Neuwirth (Glencoe, Illinois, Free Press, 1958).—Ed.]—aimed at treating the city or town as such, at trying to give ideas about the town in general. He was very explicit in one regard, however, namely in maintaining that this approach was more valuable than dealing with the history of one town at a specific time. As a matter of fact, the situation may be the very opposite; it may be that the more general historical information is, the less material of value it contains.

With respect to the future, we must form certain opinions about the understanding of future events. The statesman, the entrepreneur, and, to a certain extent, everyone is in the same position. Each of us must deal with uncertain future conditions that cannot be anticipated. The statesman, the politician, the entrepreneur, and so on, are, so to speak, “historians of the future.”

There exist in nature constant quantitative relationships—specific weights, and so on, which may be established in the laboratory. Thus we are in a position to measure and assign quantities of magnitudes to various physical objects. With the advance of the natural sciences, their study has become more and more quantitative—viz., the development of quantitative from qualitative chemistry. As Comte said, “Science is measurement.”

In the field of human action, however, especially in the field of economics, there are no such constant relationships between magnitudes. Opinions to the contrary have been maintained, however, and even today many people fail to see that accurate quantitative explanations in the field of economics are impossible. In the field of human action, we can make explanations only with specific reference to individual cases.

Take the French Revolution, for instance. Historians search for explanations of the factors which brought it about. Many factors cooperated. They assign values to each factor—the financial situation, the queen, her influence on the weak king, and so on. All may be suggested as contributing. Through the use of mental tools, historians attempt to understand the several factors and to assign to each a definite relevance. But how much each of the various factors influenced the outcome cannot be answered precisely.

In the natural sciences, the establishment of experimental facts does not depend on the judgment of individuals. Nor on the idiosyncrasies, or individuality, of the specific scientist. A judgment in the field of human action is colored by the personality of the man doing the understanding and offering the explanation. I do not speak of biased persons, nor of those who are politically partial, nor of persons who attempt to falsify facts. I refer only to those who are personally sincere. I do not refer to differences due to developments in other sciences that affect historical facts. I do not refer to changes in knowledge which affect historical interpretations. Nor am I concerned with differences influencing men due to scientific, philosophical, or theological points of view. I am dealing only with how two historians, who agree in every other regard, may nevertheless have different opinions, for instance, as to the relevance of the factors which brought about the French Revolution. The same unanimity will not be attained in the field of human action as there will be, for instance, with respect to the atomic weight of a certain metal. And with regard to the understanding of the future operations of an entrepreneur or a politician, only later events will prove whether certain prognostications based on their evaluations were, or were not, correct.

There are two functions involved in understanding: to establish the values, the judgments of people, their aims, their goals; and to establish the methods which they use to attain their ends. The relevance of the various factors and the way in which they influence results can only be matters of value judgments. In a discussion of the Crusades, for instance, it would appear that the principal causes were religious. But there were other causes. For example, Venice profited by establishing her commercial supremacy. It is the historian’s task to decide the relevance of the various factors involved in a course of events.

The historical school of economics wanted to apply to economics the same general rules that Comte aimed at in sociology. There were people who recommended substituting something else for history—a science of laws derived from experience in the same way physics acquires knowledge in the laboratory. It was also held that the historical method was the only method for dealing with problems in the field of human action.

In the late eighteenth century, some reformers wanted to revise the existing system of laws. They pointed to the lack of success and shortcomings of the existing system. They wanted government to substitute new codes for old laws. They recommended reforms in conformity with “natural law.” The idea developed that laws cannot be written, that they originate in the nature of individuals. This theory was personified by Britain’s Edmund Burke [1729–1797], who took the side of the colonies and who later became a radical opponent of the French Revolution. In Germany, the Prussian jurist Friedrich Karl von Savigny [1779–1861] was the advocate of this mode of thinking. With reference to the soul of the people, this group of reactionaries agreed with the school of Burke. This program was executed to some extent, and sometimes very well, in many European countries—Prussia, France, Austria, and finally in 1900 in the German Reich. In time opposition developed to this desire to write new laws. Yet these groups were the forerunners of the present-day world.

The school of the historical method says that if you want to study a problem, you must study its history. There are no general laws. Historical investigation is the study of the problem as it exists. One must first know the facts. To study free trade or protection, you can only study the history of its development. This is the opposite approach from that advocated by Comte.

All this is not to disparage history. To say that history is not theory, nor theory history, disparages neither history nor theory. It is only necessary to point out the difference. If a historian studies a problem he discovers that there are certain trends in history that prevailed in the past. But nothing can be said as to the future.

Men are individuals and, therefore, unpredictable. Mathematical laws of probability tell us nothing about any specific case. Nor does mass psychology tell us anything but that crowds are made up of individuals. They are not homogeneous masses. As a result of the study of masses of people and crowds it has been learned that a small change can bring about important and far-reaching results. For example, if someone yells “Fire!” in a crowded hall, the results are different from what they would have been in a small group. Also in a crowd, the prestige of the police and the threat of the penal code and of the penal courts are less powerful. But if we can’t deal with individuals, we can’t deal with masses.

If a historian establishes that a trend existed, it doesn’t mean that the trend is good or bad. The establishment of a trend and its evaluation are two different things. Some historians have said that what is in agreement with the trends of evolution is “good,” even moral. But the fact that there is an evolutionary trend today in the United States toward more divorces than formerly, or the fact that there is a trend toward increased literacy, for instance, doesn’t make either trend “good,” just because it is evolutionary.

Although this approach is familiar to us, a new point of view toward social philosophy, the sciences, economics, and praxeology has developed during the last hundred years. Plato had said that a leader is called on by “Providence” or by his own eminence, to reorganize and to construct the world in the same way that a builder constructs a building—without bothering with the wishes of his fellowmen. Plato’s philosophy was that most men are “tools” and “stones” to be worked with for the construction of a new social entity by the “superman” in control. The cooperation of the “subjects” is unimportant for the success of the plan. The only requirement is that the dictator have the requisite power to force the people. Plato assigns to himself the specific task of being adviser to the dictator, the specialist, the “social engineer” reconstructing the world according to his plan. A comparable situation today may be seen in the position of the college professor who goes to Washington.

The Platonic pattern remained the same for almost 2,000 years. All the books of that era were written from this point of view. Each author was convinced that men were merely pawns in the hands of the princes, the police, and so on. Anything could be done, provided the government was strong enough. Strength was considered the greatest asset of government.

An indication of the success of this thinking may be realized in reading the adventures of Télémaque by Bishop Fénelon [François de Salignac de la Mothe Fénelon, 1651–1715]. Bishop Fénelon, a contemporary of Louis XIV, was an eminent and great philosopher, a critic of government, and tutor to the Duke of Burgoyne, heir to the French throne. Télémaque, written for the young Duke’s education, was used in French schools until recently. The book tells of world travels. In each country visited, all that is good is credited to the police; everything of value is attributed to the government. This is known as the “science of the police”—or in German Polizeiwissenschaft.

The eighteenth century saw a new discovery—the discovery of a different approach to social problems. The idea developed that there was a regularity in the sequence of social problems similar to the regularity in the sequence of natural phenomena. It was learned that legal decrees and their enforcement alone would not remove an ill. The regular sequence or concatenation of social phenomena must be studied to find out what can be done, and what should be done. Although regularity had been recognized in the field of the natural sciences, the existence of order and of regular sequences also in the field of social problems had not been recognized before.

The Utopian conditions of the natural state, as described by Jean Jacques Rousseau [1712–1778], are transformed, it was held, by “wicked” men and by their evil social institutions to produce the destitution and misery that exists. It was believed that the happiest man—the one living under the most satisfactory conditions—was the Indian of North America. North American Indians were idealized in European literature of that time; they were considered happy because they were not acquainted with modern civilization.

Then came Thomas Robert Malthus [1766–1834] with the discovery that nature does not provide the means of existence for everybody. Malthus pointed out that there prevails for all humans a scarcity of the requirements of subsistence. All men are in competition for the means of survival and for a share of the world’s wealth. The aim of man was to remove the scarcity and make it possible for a greater number of persons to survive.

Competition leads to the division of labor and to the development of cooperation. The discovery that the division of labor is more productive than isolated labor was the happy accident that made social cooperation, social institutions, and civilization possible.

If all production is consumed immediately, any improvement of conditions would be impossible. Improvement is possible only because some production is saved for use in later production—that is only if capital is accumulated. Savings are important!

In the eyes of all reformers such as Plato, the “body politic” could not operate without interference from the top. Intervention by the “king,” by government, and by the police was necessary to obtain action and results. Remember that this was also the theory of Fénelon; he described the streets, factories, and all progress as being due to the police.

In the eighteenth century, it was discovered that even in the absence of the police—even if no one gives orders—people naturally act in such a way that the fruits of production finally appear. Adam Smith [1723–1790] cited the shoemaker. The shoemaker doesn’t make shoes from an altruistic motive; the shoemaker provides us with shoes because of his own selfish interest. Shoemakers produce shoes because they want the products of others which they can get in exchange for shoes. Every man, in serving himself, of necessity serves the interest of others. The “king” doesn’t have to issue orders. Action is brought about, therefore, by the autonomous actions of people in the market.

The eighteenth century’s discoveries with respect to social problems were closely connected with, and inseparable from, the political changes brought about during that period—the substitution of representative for autocratic government, free trade for protection, the tendency toward international peace instead of aggressiveness, the abolition of serfdom and slavery, and so on. The new political philosophy also led to substituting liberty for monarchism and absolutism. And it brought about changes in industrial life and social life which altered the fact of the world in a very short time. This transformation is customarily called the Industrial Revolution. And this “revolution” resulted in changes in the whole structure of the world, populations multiplied, the average length of life expectancy increased, and standards of living rose.

With specific reference to the population, it is four times greater today [1951] than it was more than 250 years ago. If Asia and Africa are eliminated, the growth is even more startling. Great Britain, Germany, and Italy, three countries that were completely settled and where every bit of land was already in use by 1800, found room to support 107 million more people by 1925. (This seems all the more remarkable when compared with the United States—many times the area of these three countries—which increased its population by only 109 million in that same period.) At the same time, the standard of living was raised everywhere as a result of the Industrial Revolution by the introduction of mass production.

Of course, there are still unsatisfactory conditions; there are still situations that can be improved. To this, the new philosophy responds: There is only one way to improve the standard of living of the population—increase capital accumulation as against the increase in population. Increase the amount of capital invested per capita.

Although this new doctrine of economic theory was true, it was unpopular for many reasons with certain groups—monarchs, despots, and nobles—because it endangered their vested interests. In the nineteenth and twentieth centuries, these opponents of this eighteenth-century philosophy developed a number of objections, epistemological objections which attacked the basic foundation of the new philosophy and raised many very serious and important problems. Their attack was more or less a philosophical attack, directed at the epistemological foundations of the new science. Almost all their criticism was motivated by political bias; it was not brought forth by searchers for the truth. However, this does not alter the fact that we should study seriously the objections to the various truths of the eighteenth century—sound philosophy and economics—without reference to the motives of those who bring them forth. Some were well founded.

During the last hundred years, opposition to sound economics has arisen. This is a very serious matter. The objections raised have been used as arguments against the whole bourgeois civilization. These objections cannot be simply called “ridiculous” and dismissed. They must be studied and critically analyzed. As far as the political problem is concerned, some people who supported sound economics did so in order to justify, or to defend, the bourgeois civilization. But these defenders didn’t know the whole story. They limited their fighting to a very small territory, similar to the situation today in Korea where one army is forbidden to attack the strongholds of the other army.[After the capture of the North Korean stronghold, Pyongyang, it became evident that the armies of Communist China were amassing for attack north of the Yalu River, the boundary between North Korea and Communist-controlled Manchuria. Yet requests by General Douglas MacArthur to do anything to forestall an attack were denied; his planes were not allowed to bomb the bridges over the Yalu; and the Red Chinese forces were even granted a five-mile-deep sanctuary south of the Yalu where they could assemble.—Ed.] In the intellectual struggle, the same situation exists; the defenders are fighting without attacking the real foundation of their adversaries. We must not be content to deal with the external paraphernalia of a doctrine; we must attack the basic philosophical problem.

The distinction between “left” and “right” in politics is absolutely worthless. This distinction has been inadequate from the very beginning and has brought about a lot of misunderstanding. Even objections to the basic philosophy are classified from that point of view.

Auguste Comte [1798–1857] was one of the most influential philosophers of the nineteenth century, and probably one of the most influential men of the last hundred years. In my own private opinion, he was a lunatic as well. Although the ideas he expounded were not even his own, we must deal with his writings because he was influential and especially because he was hostile to the Christian church. He invented his own church, with its own holidays. He advocated “real freedom,” more freedom, he said, than was offered by the bourgeoisie. According to his books, he had no use for metaphysics, for freedom of science, for freedom of the press, or for freedom of thought. All these were very important in the past because they gave him the opportunity to write his books, but in the future there would be no need for such freedom because his books had already been written. So the police must repress these freedoms.

This opposition to freedom, the Marxian attitude, is typical of those on the “left” or “progressive” side. People are surprised to learn that the so-called “liberals” are not in favor of freedom. Georg Wilhelm Friedrich Hegel [1770–1831], the famous German philosopher, gave rise to two schools—the “left” Hegelians and the “right” Hegelians. Karl Marx [1818–1883] was the most important of the “left” Hegelians. The Nazis came from the “right” Hegelians.

The problem is to study basic philosophy. One good question is why have the Marxists been to a certain extent familiar with the great philosophical struggle, while the defenders of freedom were not? The failure of the defenders of freedom to recognize the basic philosophical issue explains why they have not been successful. We must first understand the basis for the disagreement; if we do, then the answers will come. We will now proceed to the objections that have been raised to the eighteenth-century philosophy of freedom.

How was this deed accomplished? Keynes and his followers would answer, of course, that the profession simply accepted a starkly self-evident truth. And yet The General Theory was not truly revolutionary at all but merely old and oft -refuted mercantilist and inflationist fallacies dressed up in shiny new garb, replete with newly constructed and largely incomprehensible jargon. How, then, the swift success?

Part of the reason, as Schumpeter has pointed out, is that governments as well as the intellectual climate of the l930s were ripe for such conversion. Governments are always seeking new sources of revenue and new ways to spend money, often with no little desperation; yet economic science, for over a century, had sourly warned against inflation and deficit spending, even in times of recession.

Economists— whom Keynes was to lump into one category and sneeringly disparage as “classical’ in The General Theory — were the grouches at the picnic, throwing a damper of gloom over attempts by governments to increase their spending. Now along came Keynes, with his modern “scientific” economics, saying that the old “classical” economists had it all wrong: that, on the contrary , it was the government’s moral and scientific duty to spend, spend, and spend; to incur deficit upon deficit, in order to save the economy from such vices as thrift and balanced budgets and unfettered capitalism; and to generate recovery from the depression. How welcome Keynesian economics was to the governments of the world!

In addition, intellectuals throughout the world were becoming convinced that laissez-faire capitalism could not work and that it was responsible for the Great Depression. Communism, fascism, and various forms of socialism and controlled economy became popular for that reason during the 1930s. Keynesianism was perfectly suited to this intellectual climate.

But there were also strong internal reasons for the success of The General Theory. By dressing up his new theory in impenetrable jargon, Keynes created an atmosphere in which only brave young economists could possibly understand the new science; no economist over the age of thirty could grasp the New Economics. Older economists, who, understandably, had no patience for the new complexities, tended to dismiss The General Theory as nonsense and refused to tackle the formidably incomprehensible work. On the other hand, young economists and graduate students, socialistically inclined, seized on the new opportunities and bent themselves to the rewarding task of figuring out what The General Theory was all about.Harry Johnson put the strategy perceptively: “In this process, it helps greatly to give old concepts new and confusing names. … [T]he new theory had to have the appropriate degree of diffi culty to understand. Th is is a complex problem in the design of new theories. Th e new theory had to be so diffi cult to understand that senior academic colleagues would fi nd it neither easy nor worthwhile to study, so that they would waste their eff orts on peripheral theoretical issues, and so off er themselves as easy market for criticism and dismissal by their younger and hungrier colleagues. At the same time, the new theory had to appear both diffi cult enough to challenge the intellectual interest of young colleagues and students, but actually easy enough for them to master adequately with a suffi cient investment of intellectual endeavor. Th ese objectives Keynes’s General Th eory managed to achieve: it neatly shelves the old and established scholars, like Pigou and Robertson, enabled the most enterprising middle-and lower-middle-aged like Hansen, Hicks, and Joan Robinson to jump on and drive the bandwagon, and permitted a whole generation of students … to escape from the slow and soul-destroying process  of acquiring wisdom by osmosis from their elders and the literature into an intellectual realm in which youthful iconoclasm could quickly earn its just reward (in its own eyes at least) by the demolition of the intellectual pretensions of its academic seniors and predecessors. Economics, delightfully, could be reconstructed from scratch on the basis of a little Keynesian understanding and a loft y contempt for the existing literature—and so it was” (1978, pp. 188–89). 

Paul Samuelson has written of the joy of being under 30 when The General Theory was published in 1936, exulting, with Wordsworth, “Bliss was it in that dawn to be alive, but to be young was very heaven.” Yet this same Samuelson who enthusiastically accepted the new revelation also admitted that The General Theory

is a badly written book; poorly organized. … It abounds in mares’ nests of confusions. … I think I am giving away no secrets when I solemnly aver—upon the basis of vivid personal recollection—that no one else in Cambridge, Massachusetts, really knew what it was all about for some twelve to eighteen months aft er publication. Samuelson, Paul A. 1948 [1946]. “Lord Keynes and the General Theory,” in Harris 1948. Orig inally appeared in Econometrica (July 1946).Hodge, Ian. 1986. Baptized Infl ation. Tyler, Tex.: Institute for Christian Economics.

It must be remembered that the now-familiar Keynesian cross, IS-LM diagrams, and the system of equations were not available to those trying desperately to understand The General Theory when the book was published; indeed, it took 10 to 15 years of countless hours of manpower to figure out the Keynesian system. Oft en, as in the case of both Ricardo and Keynes, the more obscure the content, the more successful the book, as younger scholars flock to it, becoming acolytes.

Also important to the success of The General Theory was the fact that, just as a major war creates a large number of generals, so did the Keynesian revolution and its rude thrusting aside of the older generation of economists create a greater number of openings for younger Keynesians in both the profession and the government.

Another crucial factor in the sudden and overwhelming success of The General Theory was its origin in the most insular university of the most dominant economic national center in the world. For a century and a half, Great Britain had arrogated to itself the role of dominance in economics, with Smith, Ricardo, and Mill all aggrandizing this tradition. We have seen how Marshall established his dominance at Cambridge and that the economics he developed was essentially a return to the classical Ricardo/Mill tradition.

As a prominent Cambridge economist and student of Marshall, Keynes had an important advantage in furthering the success of the ideas in The General Theory. It is safe to say that if Keynes had been an obscure economics teacher at a small, Midwestern American college, his work, in the unlikely event that it even found a publisher, would have been totally ignored.

In those days before World War II, Britain, not the United States, was the most prestigious world center for economic thought. While Austrian economics had flourished in the United States before World War I (in the works of David Green, Frank A. Fetter, and Herbert J. Davenport), the 1920s to early 1930s was largely a barren period for economic theory. Anti-theoretical institutionalists dominated American economics during this period, leaving a vacuum that was easy for Keynes to fill.

Also important to his success was Keynes’s tremendous stature as an intellectual and politicoeconomic leader in Britain, including his prominent role as a participant in, and then severe critic of, the Versailles treaty. As a Bloomsbury member, he was also important in British cultural and artistic circles.

Moreover, we must realize that in pre-World War II days only a small minority in each country went to college and that the number of universities was both small and geographically concentrated in Great Britain. As a result, there were very few British economists or economics teachers, and they all knew each other. This created considerable room for personality and charisma to help convert the profession to Keynesian doctrine.

The importance of such external factors as personal charisma, politics, and career opportunism was particularly strong among the disciples of F.A. Hayek at the London School of Economics. During the early 1930s, Hayek at the LSE and Keynes at Cambridge were the polar antipodes in British economics, with Hayek converting many of Britain’s leading young economists to Austrian (that is, Misesian) monetary, capital, and business-cycle theory.

Additionally, Hayek, in a series of articles, had brilliantly demolished Keynes’s earlier work, his two-volume Treatise on Money, and many of the fallacies Hayek exposed applied equally well to The General TheoryHayek, Friedrich A. 1931a. “Reflections on the Pure Theory of Money of Mr. J. M. Keynes.” Economica 11. ​,Hayek, Friedrich A. 1931b. “A Rejoinder to Mr. Keynes.” Economica 11. ​,Hayek, Friedrich A. 1932. “Reflections on the Pure Theory of Money of Mr. J.M. Keynes (continued).” Economica 12. For Hayek’s students and followers, then, it must be said that they knew better. In the realm of theory, they had already been inoculated against The General Theory. And yet, by the end of the 1930s, every one of Hayek’s followers had jumped on the Keynesian bandwagon, including Lionel Robbins, John R. Hicks, Abba P. Lerner, Nicholas Kaldor, G.L.S. Shackle, and Kenneth E. Boulding.

Perhaps the most astonishing conversion was that of Lionel Robbins. Not only had Robbins been a convert to Misesian methodology as well as to monetary and business-cycle theory, but he had also been a diehard pro-Austrian activist. A convert since his attendance at the Mises privatseminar in Vienna in the 1920s, Robbins, highly infl uential in the economics department at LSE, had succeeded in bringing Hayek to LSE in 1931 and in translating and publishing Hayek’s and Mises’s works.

Despite being a longtime critic of Keynesian doctrine before The General Theory, Robbins’s conversion to Keynesianism was apparently solidifi ed when he served as Keynes’s colleague in wartime economic planning. There is in Robbins’s diary a decided note of ecstatic rapture that perhaps accounts for his astonishing abasement in repudiating his Misesian work, The Great Depression (1934).

Robbins’s repudiation was published in his 1971 Autobiography: “I shall always regard this aspect of my dispute with Keynes as the greatest mistake of my professional career, and the book, The Great Depression, which I subsequently wrote, partly in justification of this attitude, as something which I would willingly see forgotten”Robbins, Lionel, Autobiography of an Economist. London: Macmillan. . Robbins’s diary entries on Keynes during World War II can only be considered an absurdly rapturous personal view. Here is Robbins at a June 1944 pre–Bretton Woods draft conference in Atlantic City:

Keynes was in his most lucid and persuasive mood: and the effect was irresistible… . Keynes must be one of the most remarkable men that have ever lived—the quick logic, the wide vision, above all the incomparable sense of the fitness of words, all combine to make something several degrees beyond the limit of ordinary human achievement. Only Churchill, Robbins goes on to say, is of comparable stature. But Keynes is greater, for he uses the classical style of our life and language, it is true, but it is shot through with something which is not traditional, a unique unearthly quality of which one can only say that it’s pure genius. The Americans sat entranced as the godlike visitor sang and the golden light played all around.Hession, Charles H. 1984. John Maynard Keynes. New York: Macmillan. 

This sort of fawning can only mean that Keynes possessed some sort of strong personal magnetism to which Robbins was susceptible.Robbin’s biographer, D.P. O’Brien, labors hard to maintain that, despite what he admits is Robbins’s “elaborate” and “exaggerated contrition,” Robbins never really, deep down, converted to Keynesianism. But O’Brien is unconvincing, even aft er he tries to show how Robbins waffl ed on some issues. Moreover, O’Brien admits that Robbins dropped his Misesian macro approach, and he fails to mention Robbins’s astonishing treatment of Keynes as “godlike” (O’Brien 1988, pp. 14–16, 117–20).

Central to Keynes’s strategy in putting The General Theory over were two claims: first, that he was revolutionizing economic theory, and second, that he was the first economist—aside from a few “underworld” characters, such as Silvio Gesell—to concentrate on the problem of unemployment. All previous economists, whom he lumped together as “classical,” he said, assumed full employment and insisted that money was but a “veil” for real processes and was therefore not a truly disturbing presence in the economy.

One of Keynes’s most unfortunate effects was his misconceiving of the history of economic thought, since his devoted legion of followers accepted Keynes’s faulty views in The General Theory as the last word on the subject. Some of Keynes’s highly influential errors may be attributed to ignorance, since he was little trained in the subject and mostly read work by his fellow Cantabrigians. For example, in his grossly distorted summary of Say’s law (“supply creates its own demand”), he sets up a straw man and proceeds to demolish it with ease.

This erroneous and misleading restatement of Say’s law was subsequently repeated (without quoting Say or any of the other champions of the law) by Joseph Schumpeter, Mark Blaug, Axel Leijonhufvud, Thomas Sowell, and others. A better formulation o fthe law is that the supply of one good constitutes demand for one or more other goods.Hutt, William H. 1974. A Rehabilitation of Say’s Law. Columbus: Ohio State University Press. 

But ignorance cannot account for Keynes’s claim that he was the first economist to try to explain unemployment or to transcend the assumption that money is a mere veil exerting no important influence on the business cycle or the economy. Here we must ascribe to Keynes a deliberate campaign of mendacity and deception—what would now be called euphemistically “disinformation.”

Keynes knew all too well of the existence of the Austrian and LSE Schools, which had flourished in London as early as the 1920s and more obviously since 1931. He himself had personally debated Hayek, the chief Austrian at LSE, in the pages of Economica, the LSE journal. The Austrians in London attributed continuing large scale unemployment to wage rates kept above the free-market wage by combining union and government action (e.g., in extraordinarily generous unemployment-insurance payments).

Recessions and business cycles were ascribed to bank credit and monetary expansion, as fueled by the central bank, which pushed interest rates below genuine time-preference levels and created overinvestment in higher-order capital goods. These then had to be liquidated by a recession, which in turn would emerge as soon as the credit expansion stopped. Even if he had not agreed with this analysis, it was unconscionable for Keynes to ignore the very existence of this school of thought then prominent in Great Britain, a school which could never be construed as ignoring the impact of monetary expansion on the real state of the economy.

In order to conquer the world of economics with his new theory, it was critical for Keynes to destroy his rivals within Cambridge itself. In his mind, he who controlled Cambridge controlled the world. His most dangerous rival was Marshall’s handpicked successor and Keynes’s former teacher, Arthur C. Pigou. Keynes began his systematic campaign of destruction against Pigou when Pigou rejected his previous approach in the Treatise on Money, at which point Keynes also broke with his former student and close friend, Dennis H. Robertson, for refusing to join the lineup against Pigou.

The most glaring misstatement in The General Theory, and one which his disciples accepted without question, is the outrageous presentation of Pigou’s views on money and unemployment in Keynes’s identification of Pigou as the major contemporary “classical” economist who allegedly believed that there is always full employment and that money is merely a veil causing no disruptions in the economy—this about a man who wrote Industrial Fluctuations in 1927 and Theory of Unemployment in 1933, which discuss at length the problem of unemployment! Moreover, in the latter book, Pigou explicitly repudiates the money veil theory and stresses the crucial centrality of money in economic activity.

Thus, Keynes lambasted Pigou for allegedly holding the “conviction…that money makes no real difference except frictionally and that the theory of unemployment can be worked out…as being based on ‘real’ exchanges.” An entire appendix to chapter 19 of The General Theory is devoted to an assault on Pigou, including the claim that he wrote only in terms of real exchanges and real wages, not money wages, and that he assumed only flexible wage rates.

But, as Andrew Rutten notes, Pigou conducted a “real” analysis only in the first part of his book; in the second part, he not only brought money in, but pointed out that any abstraction from money distorts the analysis and that money is crucial to any analysis of the exchange system. Money, he says, cannot be abstracted away and cannot act in a neutral manner, so “the task of the present part must be to determine in what way the monetary factor causes the average amount of, and the fluctuation in, employment to be different from what they otherwise would have been.”

Therefore, added Pigou, “it is illegitimate to abstract money away [and] leave everything else the same. The abstraction proposed is of the same type that would be involved in thinking away oxygen from the earth and supposing that human life continues to exist”Pigou, A.C. 1933. The Theory of Unemployment. London: Macmillan. . Pigou extensively analyzed the interaction of monetary expansion and interest rates along with changes in expectations, and he explicitly discussed the problem of money wages and “sticky” prices and wages.

Thus, it is clear that Keynes seriously misrepresented Pigou’s position and that this misrepresentation was deliberate, since, if Keynes read any economists carefully, he certainly read such prominent Cantabrigians as Pigou. Yet, as Rutten writes, “These conclusions should not come as a surprise, since there is plenty of evidence that Keynes and his followers misrepresented their predecessors”Rutten, Andrew. 1989. “Mr. Keynes on the Classics: A Suggestive Misinterpretation?” Unpublished manuscript. . The fact that Keynes engaged in this systematic deception and that his followers continue to repeat the fairy tale about Pigou’s blind “classicism” shows that there is a deeper reason for the popularity of this legend in Keynesian circles. As Rutten writes,

There is one plausible explanation for the repetition of the story of Keynes and the classics.…This is that the standard account is popular because it offers simultaneously an explanation of, and a justification for, Keynes’s success: without the General Theory, we would still be in the economic dark ages. In other words, the story of Keynes and the Classics is evidence for the General Theory. Indeed, its use suggests that it may be the most compelling evidence available. In this case, proof that Pigou did not hold the position attributed to him is … evidence against Keynes. … [This conclusion] raises the … serious question of the methodological status of a theory that relies so heavily on falsified evidence.

In his review of The General Theory, Pigou was properly scornful of Keynes’s “macédoine of misrepresentations,” and yet such was the power of the tide of opinion (or of the charisma of Keynes) that, by 1950, aft er Keynes’s death, Pigou had engaged in the sort of abject recantation indulged in by Lionel Robbins, which Keynes had long tried to wrest from himPigou, A.C. 1950. Keynes’s General Theory: A Retrospective View. London: Macmillan.,Johnson, Elizabeth, and Harry G. Johnson. 1978. Th e Shadow of Keynes. Oxford: Basil Blackwell. ,Corry, Bernard. 1986. “Keynes’s Economics: A Revolution in Economic Th eory or Economic Policy?” in R.D. Collison Black, ed., Ideas in Economics. Totowa, N.J.: Barnes and Noble.

But Keynes used tactics in the selling of The Genera Theory other than reliance on his charisma and on systematic deception. He curried favor with his students by praising them extravagantly, and he set them deliberately against non-Keynesians on the Cambridge faculty by ridiculing his colleagues in front of these students and by encouraging them to harass his faculty colleagues. For example, Keynes incited his students with particular viciousness against Dennis Robertson, his former close friend.

As Keynes knew all too well, Robertson was painfully and extraordinarily shy, even to the point of communicating with his faithful, longtime secretary, whose office was next to his own, only by written memoranda. Robertson’s lectures were completely written out in advance, and because of his shyness he refused to answer any questions or engage in any discussion with either his students or his colleagues. And so it was a particularly diabolic torture for Keynes’s radical disciples, led by Joan Robinson and Richard Kahn, to have baited and taunted Robertson, harassing him with spiteful questions and challenging him to debate.Johnson, Elizabeth, and Harry G. Johnson. 1978. Th e Shadow of Keynes. Oxford: Basil Blackwell. 

Acting man transfers the valuation of ends he aims at to the means. Other things being equal, he assigns to the total amount of the various means the same value he attaches to the end which they are fit to bring about. For the moment we may disregard the time needed for production of the end and its influence upon the relation between the value of the ends and that of the means.

The gradation of the means is, like that of the ends, a process of preferring a to b. It is preferring and setting aside. It is manifestation of a judgment that a is more intensely desired than is b. It opens a field for application of ordinal numbers, but it is not open to application of cardinal numbers and arithmetical operations based on them. If somebody gives me the choice among three tickets entitling one to attend the operas Aïda, Falstaff, and Traviata and I take, if I can only take one of them, Aïda, and if I can take one more, Falstaff also, I have made a choice. That means: under given conditions I prefer Aïda and Falstaff to Traviata; if I could only choose one of them, I would prefer Aïda and renounce Falstaff. If I call the admission to Aïda a, that to Falstaff b and that to Traviata c, I can say: I prefer a to b and b to c.

The immediate goal of acting is frequently the acquisition of countable and measurable supplies of tangible things. Then acting man has to choose between countable quantities; he prefers, for example, 15 r to 7 p; but if he had to choose between 15 r and 8 p, he might prefer 8 p. We can express this state of affairs by declaring that he values 15 r less than 8 p, but higher than 7 p. This is tantamount to the statement that he prefers a to b and b to c. The substitution of 8 p for a, of 15 r for b and of 7 p for c changes neither the meaning of the statement nor the fact that it describes. It certainly does not render reckoning with cardinal numbers possible. It does not open a field for economic calculation and the mental operations based upon such calculation.

The elaboration of economic theory is heuristically dependent on the logical processes of reckoning to such an extent that the economists failed to realize the fundamental problem involved in the methods of economic calculation. They were prone to take economic calculation as a matter of course; they did not see that it is not an ultimate given, but a derivative requiring reduction to more elementary phenomena. They misconstrued economic calculation. They took it for a category of all human action and ignored the fact that it is only a category inherent in acting under special conditions. They were fully aware of the fact that interpersonal exchange, and consequently market exchange effected by the intermediary of a common medium of exchange — money, and therefore prices, are special features of a certain state of society's economic organization which did not exist in primitive civilizations and could possibly disappear in the further course of historical change.The German Historical School expressed this by asserting that private ownership of the means of production, market exchange, and money are "historical categories." But they did not comprehend that money prices are the only vehicle of economic calculation. Thus most of their studies are of little use. Even the writings of the most eminent economists are vitiated to some extent by the fallacies implied in their ideas about economic calculation.

The modern theory of value and prices shows how the choices of individuals, their preferring of some things and setting aside of other things, result, in the sphere of interpersonal exchange, in the emergence of market prices.Cf. especially Eugen von Böhm-Bawerk, Kapital and Kapitalzins, Pt. II, Bk. III These masterful expositions are unsatisfactory in some minor points and disfigured by unsuitable expressions. But they are essentially irrefutable. As far as they need to be amended, it must be done by a consistent elaboration of the fundamental thoughts of their authors rather than by a refutation of their reasoning.

In order to trace back the phenomena of the market to the universal category of preferring a to b, the elementary theory of value and prices is bound to use some imaginary constructions. The use of imaginary constructions to which nothing corresponds in reality is an indispensable tool of thinking. No other method would have contributed anything to the interpretation of reality. But one of the most important problems of science is to avoid the fallacies which ill-considered employment of such constructions can entail.

The elementary theory of value and prices employs, apart from other imaginary constructions to be dealt with later,See below, pp. 237-257. the construction of a market in which all transactions are performed in direct exchange. There is no money; goods and services are directly bartered against other goods and services. This imaginary construction is necessary. One must disregard the intermediary role played by money in order to realize that what is ultimately exchanged is always economic goods of the first order against other such goods. Money is nothing but a medium of interpersonal exchange. But one must carefully guard oneself against the delusions which this construction of a market with direct exchange can easily engender.

A serious blunder that owes its origin and its tenacity to a misinterpretation of this imaginary construction was the assumption that the medium of exchange is a neutral factor only. According to this opinion the only difference between direct and indirect exchange was that only in the latter was a medium of exchange used. The interpolation of money into the transaction, it was asserted, did not affect the main features of the business. One did not ignore the fact that, in the course of history, tremendous alterations in the purchasing power of money have occurred and that these fluctuations often convulsed the whole system of exchange. But it was believed that such events were exceptional facts caused by inappropriate policies. Only "bad" money can bring about such disarrangements. In addition people misunderstood the causes and effects of these disturbances. They tacitly assumed that changes in purchasing power occur with regard to all goods and services at the same time and to the same extent. This is, of course, what the fable of money's neutrality implies. The whole theory of catallactics, it was held, can be elaborated under the assumption that there is direct exchange only. If this is once achieved, the only thing to be added is the "simple" insertion of money terms into the complex of theorems concerning direct exchange. However, this final completion of the catallactic system was considered of minor importance only. It was not believed that it could alter anything essential in the structure of economic teachings. The main task of economics was study of direct exchange. What remained to be done besides this was at best only a scrutiny of the problems of "bad" money.

Complying with this opinion economists neglected to lay due stress upon the problems of indirect exchange. Their treatment of monetary problems was superficial; it was only loosely connected with the main body of their scrutiny of the market process. About the turn of the nineteenth and twentieth centuries, the problems of indirect exchange were by and large relegated to a subordinate place. There were treatises on catallactics which dealt only incidentally and cursorily with monetary matters, and there were books on currency and banking which did not even attempt to integrate their subject into the structure of a catallactic system. At the universities of the Anglo-Saxon countries there were separate chairs for economics and for currency and banking, and at most of the German universities monetary problems were almost entirely disregarded.Neglect of the problems of indirect exchange was certainly influenced by political prepossessions. People did not want to give up the thesis according to which economic depressions are an evil inherent in the capitalist mode of production and are in no way caused by attempts to lower the rate of interest by credit expansion. Fashionable teachers of economics deemed it "unscientific" to explain depressions as a phenomenon originating "only" out of events in the sphere of money and credit. There were even surveys of the history of business cycle theory which omitted any discussion of the monetary thesis. Cf., e.g., Eugen von Bergmann, Geschichte der nationalökonomischen Krisentheorien (Stuttgart, 1895). Only later economists realized that some of the most important and most intricate problems of catallactics are to be found in the field of indirect exchange and that an economic theory which does not pay full regard to them is lamentably defective. The coming into vogue of investigations concerning the relation between the "natural rate of interest" and the "money rate of interest," the ascendancy of the monetary theory of the trade cycle, and the entire demolition of the doctrine of the simultaneousness and evenness of the changes in the purchasing power of money were marks of the new tenor of economic thought. Of course, these new ideas were essentially a continuation of the work gloriously begun by David Hume, the British Currency School, John Stuart Mill and Cairnes.

Still more detrimental was a second error which emerged from the careless use of the imaginary construction of a market with direct exchange.

An inveterate fallacy asserted that things and services exchanged are of equal value. Value was considered as objective, as an intrinsic quality inherent in things and not merely as the expression of various people's eagerness to acquire them. People, it was assumed, first established the magnitude of value proper to goods and services by an act of measurement and then proceeded to barter them against quantities of goods and services of the same amount of value. This fallacy frustrated Aristotle's approach to economic problems and, for almost two thousand years, the reasoning of all those for whom Aristotle's opinions were authoritative. It seriously vitiated the marvelous achievements of the classical economists and rendered the writings of their epigones, especially those of Marx and the Marxian school, entirely futile. The basis of modern economics is the cognition that it is precisely the disparity in the value attached to the objects exchanged that results in their being exchanged. People buy and sell only because they appraise the things given up less than those received. Thus the notion of a measurement of value is vain. An act of exchange is neither preceded nor accompanied by any process which could be called a measuring of value. An individual may attach the same value to two things; but then no exchange can result. But if there is a diversity in valuation, all that can be asserted with regard to it is that one a is valued higher, that it is preferred to one b. Values and valuations are intensive quantities and not extensive quantities. They are not susceptible to mental grasp by the application of cardinal numbers.

However, the spurious idea that values are measurable and are really measured in the conduct of economic transactions was so deeply rooted that even eminent economists fell victim to the fallacy implied. Even Friedrich von Wieser and Irving Fisher took it for granted that there must be something like measurement of value and that economics must be able to indicate and to explain the method by which such measurement is effected.For a critical analysis and refutation of Fisher's argument, cf. Mises, The Theory of Money and Credit, trans. by H. E. Batson (London, 1934), pp. 42-44; for the same with regard to Wieser's argument, Mises, Nationalökonomie (Geneva, 1940), pp. 192-194. Most of the lesser economists simply maintained that money serves "as a measure of values."

Now, we must realize that valuing means to prefer a to b. There is — logically, epistemologically, psychologically, and praxeologically — only one pattern of preferring. It does not matter whether a lover prefers one girl to other girls, a man one friend to other people, an amateur one painting to other paintings, or a consumer a loaf of bread to a piece of candy. Preferring always means to love or to desire a more than b. Just as there is no standard and no measurement of sexual love, of friendship and sympathy, and of aesthetic enjoyment, so there is no measurement of the value of commodities. If a man exchanges two pounds of butter for a shirt, all that we can assert with regard to this transaction is that he — at the instant of the transaction and under the conditions which this instant offers to him — prefers one shirt to two pounds of butter. It is certain that every act of preferring is characterized by a definite psychic intensity of the feelings it implies. There are grades in the intensity of the desire to attain a definite goal and this intensity determines the psychic profit which the successful action brings to the acting individual. But psychic quantities can only be felt. They are entirely personal, and there is no semantic means to express their intensity and to convey information about them to other people.

There is no method available to construct a unit of value. Let us remember that two units of a homogeneous supply are necessarily valued differently. The value attached to the nth unit is lower than that attached to the (n-1)th unit.

In the market society there are money prices. Economic calculation is calculation in terms of money prices. The various quantities of goods and services enter into this calculation with the amount of money for which they are bought and sold on the market or for which they could prospectively be bought and sold. It is a fictitious assumption that an isolated self-sufficient individual or the general manager of a socialist system, i.e., a system in which there is no market for means of production, could calculate. There is no way which could lead one from the money computation of a market economy to any kind of computation in a nonmarket system.

The Theory of Value and Socialism

Socialists, Institutionalists and the Historical School have blamed economists for having employed the imaginary construction of an isolated individual's thinking and acting. This Robinson Crusoe pattern, it is asserted, is of no use for the study of the conditions of a market economy. The rebuke is somewhat justified. Imaginary constructions of an isolated individual and of a planned economy without market exchange become utilizable only through the implication of the fictitious assumption, self-contradictory in thought and contrary to reality, that economic calculation is possible also within a system without a market for the means of production.

It was certainly a serious blunder that economists did not become aware of this difference between the conditions of a market economy and a non-market economy. Yet the socialists had little reason for criticizing this fault. For it consisted precisely in the fact that the economists tacitly implied the assumption that a socialist order of society could also resort to economic calculation and that they thus asserted the possibility of the realization of the socialist plans.

The classical economists and their epigones could not, of course, recognize the problems involved. If it were true that the value of things is determined by the quantity of labor required for their production or reproduction, then there is no further problem of economic calculation. The supporters of the labor theory of value cannot be blamed for having misconstrued the problems of a socialist system. Their fateful failure was their untenable doctrine of value. That some of them were ready to consider the imaginary construction of a socialist economy as a useful and realizable pattern for a thorough reform of social organization did not contradict the essential content of their theoretical analysis. But it was different with subjective catallactics. It was unpardonable for the modern economists to have failed to recognize the problems involved.

Wieser was right when he once declared that many economists have unwittingly dealt with the value theory of communism and have on that account neglected to elaborate that of the present state of society.Cf. Friedrich von Wieser, Der natürliche Wert (Vienna, 1889),p. 60, n. 3. It is tragic that he himself did not avoid this failure.

The illusion that a rational order of economic management is possible in a society based on public ownership of the means of production owed its origin to the value theory of the classical economists and its tenacity to the failure of many modern economists to think through consistently to its ultimate conclusions the fundamental theorem of the subjectivist theory. Thus the socialist utopias were generated and preserved by the shortcomings of those schools of thought which the Marxians reject as "an ideological disguise of the selfish class interest of the exploiting bourgeoisie." In truth it was the errors of these schools that made the socialist ideas thrive. This fact clearly demonstrates the emptiness of the Marxian teachings concerning "ideologies" and its modern offshoot, the sociology of knowledge.

Acting man uses knowledge provided by the natural sciences for the elaboration of technology, the applied science of action possible in the field of external events. Technology shows what could be achieved if one wanted to achieve it, and how it could be achieved provided people were prepared to employ the means indicated. With the progress of the natural sciences, technology progressed too; many would prefer to say that the desire to improve technological methods prompted the progress of the natural sciences. The quantification of the natural sciences made technology quantitative. Modern technology is essentially the applied art of quantitative prediction of the outcome of possible action. One calculates with a reasonable degree of precision the outcome of planned actions, and one calculates in order to arrange an action in such a way that a definite result emerges.

However, the mere information conveyed by technology would suffice for the performance of calculation only if all means of production — both material and human — could be perfectly substituted for one another according to definite ratios, or if they all were absolutely specific. In the former case, all means of production would be fit, although according to different ratios, for the attainment of all ends whatever; things would be as if only one kind of means — one kind of economic good of a higher order existed. In the latter case each means could be employed for the attainment of one end only; one would attach to each group of complementary factors of production the value attached to the respective good of the first order. (Here again we disregard provisionally the modifications brought about by the time factor.) Neither of these two conditions is present in the universe in which man acts. The means can only be substituted for one another within narrow limits; they are more or less specific means for the attainment of various ends. But, on the other hand, most means are not absolutely specific; most of them are fit for various purposes.

The facts that there are different classes of means, that most of the means are better suited for the realization of some ends, less suited for the attainment of some other ends and absolutely useless for the production of a third group of ends, and that therefore the various means allow for various uses, set man the tasks of allocating them to those employments in which they can render the best service. Here computation in kind as applied by technology is of no avail. Technology operates with countable and measurable quantities of external things and effects; it knows causal relations between them, but it is foreign to their relevance to human wants and desires. Its field is that of objective use-value only. It judges all problems from the disinterested point of view of a neutral observer of physical, chemical, and biological events. For the notion of subjective use-value, for the specifically human angle, and for the dilemmas of acting man, there is no room in the teachings of technology. It ignores the economic problem: to employ the available means in such a way that no want more urgently felt should remain unsatisfied because the means suitable for its attainment were employed — wasted — for the attainment of a want less urgently felt.

For the solution of such problems technology and its methods of counting and measuring are unfit. Technology tells how a given end could be attained by the employment of various means which can be used together in various combinations, or how various available means could be employed for certain purposes. But it is at a loss to tell man which procedures he should choose out of the infinite variety of imaginable and possible modes of production. What acting man wants to know is how he must employ the available means for the best possible — the most economic — removal of felt uneasiness. But technology provides him with nothing more than statements about causal relations between external things. It tells, for example, 7 a + 3 b + 5 c + … xn are liable to bring about 8 P. But although it knows the value attached by acting man to the various goods of the first order, it cannot decide whether this precept or any other out of the infinite multitude of similarly constructed precepts best serves the attainment of the ends sought by acting man.

The art of engineering can establish how a bridge must be built in order to span a river at a given point and to carry definite loads. But it cannot answer the question whether or not the construction of such a bridge would withdraw material factors of production and labor from an employment in which they could satisfy needs more urgently felt. It cannot tell whether or not the bridge should be built at all, where it should be built, what capacity for bearing burdens it should have, and which of the many possibilities for its construction should be chosen. Technological computation can establish relations between various classes of means only to the extent that they can be substituted for one another in the attempts to attain a definite goal. But action is bound to discover relations among all means, however dissimilar they may be, without any regard to the question whether or not they can replace one another in performing the same services.

Technology and the considerations derived from it would be of little use for acting man if it were impossible to introduce into their schemes the money prices of goods and services. The projects and designs of engineers would be purely academic if they could not compare input and output on a common basis. The lofty theorist in the seclusion of his laboratory does not bother about such trifling things; what he is searching for is causal relations between various elements of the universe. But the practical man, eager to improve human conditions by removing uneasiness as far as possible, must know whether, under given conditions, what he is planning is the best method, or even a method, to make people less uneasy. He must know whether what he wants to achieve will be an improvement when compared with the present state of affairs and with the advantages to be expected from the execution of other technically realizable projects which cannot be put into execution if the project he has in mind absorbs the available means. Such comparisons can only be made by the use of money prices.

Thus money becomes the vehicle of economic calculation. This is not a separate function of money. Money is the universally used medium of exchange, nothing else. Only because money is the common medium of exchange, because most goods and services can be sold and bought on the market against money, and only as far as this is the case, can men use money prices in reckoning. The exchange ratios between money and the various goods and services as established on the market of the past and as expected to be established on the market of the future are the mental tools of economic planning. Where there are no money prices, there are no such things as economic quantities. There are only various quantitative relations between various causes and effects in the external world. There is no means for man to find out what kind of action would best serve his endeavors to remove uneasiness as far as possible.

There is no need to dwell upon the primitive conditions of the household economy of self-sufficient farmers. These people performed only very simple processes of production. For them no calculation was needed, as they could directly compare input and output. If they wanted shirts, they grew hemp, they spun, wove, and sewed. They could, without any calculation, easily make up their minds whether or not the toil and trouble expended were compensated by the product. But for civilized mankind a return to such a life is out of the question.

The quantitative treatment of economic problems must not be confused with the quantitative methods applied in dealing with the problems of the external universe of physical and chemical events. The distinctive mark of economic calculation is that it is neither based upon nor related to anything which could be characterized as measurement.

A process of measurement consists in the establishment of the numerical relation of an object with regard to another object, viz., the unit of the measurement. The ultimate source of measurement is that of spatial dimensions. With the aid of the unit defined in reference to extension one measures energy and potentiality, the power of a thing to bring about changes in other things and relations, and the passing of time. A pointer-reading is directly indicative of a spatial relation and only indirectly of other quantities. The assumption underlying measurement is the immutability of the unit. The unit of length is the rock upon which all measurement is based. It is assumed that man cannot help considering it immutable.

The last decades have witnessed a revolution in the traditional epistemological setting of physics, chemistry, and mathematics. We are on the eve of innovations whose scope cannot be foreseen. It may be that the coming generations of physicists will have to face problems in some way similar to those with which praxeology must deal. Perhaps they will be forced to drop the idea that there is something unaffected by cosmic changes which the observer can use as a standard of measurement. But however that may come, the logical structure of the measurement of earthly entities in the macroscopic or molar field of physics will not alter. Measurement in the orbit of microscopic physics too is made with meter scales, micrometers, spectrographs-ultimately with the gross sense organs of man, the observer and experimenter, who himself is molar.Cf. A. Eddington, The Philosophy of Physical Science, pp. 7-79, 168-169. It cannot free itself from Euclidian geometry and from the notion of an unchangeable standard.

There are monetary units and there are measurable physical units of various economic goods and of many — but not of all — services bought and sold. But the exchange ratios which we have to deal with are permanently fluctuating. There is nothing constant and invariable in them. They defy any attempt to measure them. They are not facts in the sense in which a physicist calls the establishment of the weight of a quantity of copper a fact. They are historical events, expressive of what happened once at a definite instant and under definite circumstances. The same numerical exchange ratio may appear again, but it is by no means certain whether this will really happen and, if it happens, the question is open whether this identical result was the outcome of preservation of the same circumstances or of a return to them rather than the outcome of the interplay of a very different constellation of price-determining factors. Numbers applied by acting man in economic calculation do not refer to quantities measured but to exchange ratios as they are expected — on the basis of understanding — to be realized on the markets of the future to which alone all acting is directed and which alone counts for acting man.

We are not dealing at this point of our investigation with the problem of a "quantitative science of economics," but with the analysis of the mental processes performed by acting man in applying quantitative distinctions when planning conduct. As action is always directed toward influencing a future state of affairs, economic calculation always deals with the future. As far as it takes past events and exchange ratios of the past into consideration, it does so only for the sake of an arrangement of future action.

The task which acting man wants to achieve by economic calculation is to establish the outcome of acting by contrasting input and output. Economic calculation is either an estimate of the expected outcome of future action or the establishment of the outcome of past action. But the latter does not serve merely historical and didactic aims. Its practical meaning is to show how much one is free to consume without impairing the future capacity to produce. It is with regard to this problem that the fundamental notions of economic calculation — capital and income, profit and loss, spending and saving, cost and yield — are developed. The practical employment of these notions and of all notions derived from them is inseparably linked with the operation of a market in which goods and services of all orders are exchanged against a universally used medium of exchange, viz., money. They would be merely academic, without any relevance for acting within a world with a different structure of action.

The reproach of individualism is commonly leveled against economics on the basis of an alleged irreconcilable conflict between the interests of society and those of the individual. Classical and subjectivist economics, it is said, give an undue priority to the interests of the individual over those of society and generally contend, in conscious denial of the facts, that a harmony of interests prevails between them. It would be the task of genuine science to show that the whole is superior to the parts and that the individual has to subordinate himself to, and conduct himself for, the benefit of society and to sacrifice his selfish private interests to the common good.

In the eyes of those who hold this point of view society must appear as a means designed by Providence to attain ends that are hidden from us. The individual must bow to the will of Providence and must sacrifice his own interests so that its will may be done. His greatest duty is obedience. He must subordinate himself to the leaders and live just as they command.

But who, one must ask, is to be the leader? For many want to lead, and, of course, in different directions and toward different goals. The collectivists, who never cease to pour scorn and derision on the liberal theory of the harmony of interests, pass over in silence the fact that there are various forms of collectivism and that their interests are in irreconcilable conflict. They laud the Middle Ages and its culture of community and solidarity, and with romantic sentimentality they wax ecstatic over the communal associations "in which the individual was included, and in which he was kept warm and protected like fruit in its rind." But they forget that papacy and empire, for example, opposed each other for hundreds of years and that every individual could find himself at any time in the position of having to choose between them. Were the inhabitants of Milan also "kept warm and protected like fruit in its rind" when they had to hand over their city to Frederick Barbarossa? Are there not various factions fighting today on German soil with bitter anger, each of which claims to represent the only true collectivism? And do not the Marxian socialists, the national socialists, the church, and many other parties approach every individual with the demand: join us, for you belong in our ranks, and fight to the death the "false" forms of collectivism? A collectivist social philosophy that did not designate a definite form of collectivism as true and either treat all others as subordinate to it or condemn them as false would be meaningless and vain. It must always tell the individual: Here you have an unquestionably given goal, because an inner voice has revealed it to me; to it you must sacrifice everything else, yourself above all. Fight to victory or death under the banner of this ideal, and concern yourself with nothing else.

Collectivism, in fact, can be stated in no other way than as partisan dogma in which the commitment to a definite ideal and the condemnation of all others are equally necessary. Loyola did not preach just any faith, but that of the Church of Rome. Lagarde did not advocate nationalism, but what he regarded as German nationalism. Church, nation, state in abstracto are concepts of nominalistic science. The collectivists idolize only the one true church, only the "great" nation — the "chosen" people who have been entrusted by Providence with a special mission — only the true state; everything else they condemn.

For that reason all collectivist doctrines are harbingers of irreconcilable hatred and war to the death.

The decks were now cleared for the McKinley administration to submit its bill, and the Congress that met in December 1899 quickly passed the measure; Congress then passed the conference report of the Gold Standard Act in March 1900.

The currency reformers had gotten their way. It is well known that the Gold Standard Act provided for a single gold standard, with no retention of silver money except as tokens. Less well known are the clauses that began the march toward a more “elastic” currency. As Lyman Gage had suggested in 1897, national banks, previously confined to large cities, were now made possible with a small amount of capital in small towns and rural areas. And it was made far easier for national banks to issue notes. The object of these clauses, as one historian put it, was to satisfy an “increased demand for money at crop-moving time, and to meet popular cries for ‘more money’ by encouraging the organization of national banks in comparatively undeveloped regions.”Livingston, Origins, p. 123

The reformers exulted over the passage of the Gold Standard Act, but took the line that this was only the first step on the much-needed path to fundamental banking reform. Thus, Professor Frank W. Taussig of Harvard praised the act, and greeted the emergence of a new social and ideological alignment, caused by “strong pressure from the business community” through the Indianapolis Monetary Convention. He particularly welcomed the fact that the Gold Standard Act “treats the national banks not as grasping and dangerous corporations but as useful institutions deserving the fostering care of the legislature.” But such tender legislative care was not enough; fundamental banking reform was needed. For, Taussig declared, “The changes in banking legislation are not such as to make possible any considerable expansion of the national system or to enable it to render the community the full service of which it is capable.” In short, the changes allowed for more and greater expansion of bank credit and the supply of money. Therefore, Taussig concluded, “It is well nigh certain that eventually Congress will have to consider once more the further remodeling of the national bank system.”Frank W. Taussig, “The Currency Act of 1900,” Quarterly Journal of Economics 14 (May 1900): 415.

In fact, the Gold Standard Act of 1900 was only the opening gun of the banking reform movement. Three friends and financial journalists, two from Chicago, were to play a large role in the development of that movement. Massachusetts-born Charles A. Conant (1861–1915), a leading historian of banking, wrote A History of Modern Banks of Issue in 1896, while still a Washington correspondent for the New York Journal of Commerce and an editor of Bankers Magazine. After his stint of public relations work and lobbying for the Indianapolis convention, Conant moved to New York in 1902 to become treasurer of the Morgan-oriented Morton Trust Company. The two Chicagoans, both friends of Lyman Gage, were, along with Gage, in the Rockefeller ambit: Frank A. Vanderlip was picked by Gage as his assistant secretary of the Treasury, and when Gage left office, Vanderlip came to New York as a top executive at the flagship commercial bank of the Rockefeller interests, the National City Bank of New York. Meanwhile, Vanderlip’s close friend and mentor at the Chicago Tribune, Joseph French Johnson, had also moved east to become professor of finance at the Wharton School of the University of Pennsylvania. But no sooner had the Gold Standard Act been passed when Joseph Johnson sounded the trump by calling for more fundamental reform.

Professor Johnson stated flatly that the existing bank note system was weak in not “responding to the needs of the money market,” that is, not supplying a sufficient amount of money. Since the national banking system was incapable of supplying those needs, Johnson opined, there was no reason to continue it. Johnson deplored the U.S. banking system as the worst in the world, and pointed to the glorious central banking system as existed in Britain and France.Joseph French Johnson, “The Currency Act of March 14, 1900,” Political Science Quarterly 15 (1900): 482–507. Johnson, however, deplored the one fl y in the Bank of England ointment—the remnant of the hard-money Peel’s Bank Act of 1844 that placed restrictions on the quantity of bank note issue. Ibid., p. 496. But no such centralized banking system yet existed in the United States:

In the United States, however, there is no single business institution, and no group of large institutions, in which self-interest, responsibility, and power naturally unite and conspire for the protection of the monetary system against twists and strains.

In short, there was far too much freedom and decentralization in the system. In consequence, our massive deposit credit system “trembles whenever the foundations are disturbed,” that is, whenever the chickens of inflationary credit expansion came home to roost in demands for cash or gold. The result of the inelasticity of money, and of the impossibility of interbank cooperation, Johnson opined, was that we were in danger of losing gold abroad just at the time when gold was needed to sustain confidence in the nation’s banking system.Ibid., pp. 497f.

After 1900, the banking community was split on the question of reform, the small and rural bankers preferring the status quo. But the large bankers, headed by A. Barton Hepburn of Morgan’s Chase National Bank, drew up a bill as head of a commission of the American Bankers Association, and presented it in late 1901 to Representative Charles N. Fowler of New Jersey, chairman of the House Banking and Currency Committee, who had introduced one of the bills that had led to the Gold Standard Act. The Hepburn proposal was reported out of committee in April 1902 as the Fowler Bill.Kolko, Triumph, pp. 149–50.

The Fowler Bill contained three basic clauses. One allowed the further expansion of national bank notes based on broader assets than government bonds. The second, a favorite of the big banks, was to allow national banks to establish branches at home and abroad, a step illegal under the existing system due to fierce opposition by the small country bankers. While branch banking is consonant with a free market and provides a sound and efficient system for calling on other banks for redemption, the big banks had little interest in branch banking unless accompanied by centralization of the banking system. Thus, the Fowler Bill proposed to create a three-member board of control within the Treasury Department to supervise the creation of the new bank notes and to establish clearinghouse associations under its aegis. This provision was designed to be the first step toward the establishment of a full-fledged central bank.See Livingston, Origins, pp. 150–54.

Although they could not control the American Bankers Association, the multitude of country bankers, up in arms against the proposed competition of big banks in the form of branch banking, put fierce pressure upon Congress and managed to kill the Fowler Bill in the House during 1902, despite the agitation of the executive committee and staff of the Indianapolis Monetary Convention.

With the defeat of the Fowler Bill, the big bankers decided to settle for more modest goals for the time being. Senator Nelson W. Aldrich of Rhode Island, perennial Republican leader of the U.S. Senate and Rockefeller’s man in Congress,Nelson W. Aldrich, who entered the Senate a moderately wealthy wholesale grocer and left years later a multimillionaire, was the father-in-law of John D. Rockefeller, Jr. His grandson and namesake, Nelson Aldrich Rockefeller, later became vice president of the United States, and head of the “corporate liberal” wing of the Republican Party. submitted the Aldrich Bill the following year, allowing the large national banks in New York to issue “emergency currency” based on municipal and railroad bonds. But even this bill was defeated.

Meeting setbacks in Congress, the big bankers decided to regroup and turn temporarily to the executive branch. Foreshadowing a later, more elaborate collaboration, two powerful representatives each from the Morgan and Rockefeller banking interests met with Comptroller of the Currency William B. Ridgely in January 1903, to try to persuade him, by administrative fi at, to restrict the volume of loans made by the country banks in the New York money market. The two Morgan men at the meeting were J.P. Morgan and George F. Baker, Morgan’s closest friend and associate in the banking business.Baker was head of the Morgan-dominated First National Bank of New York, and served as a director of virtually every important Morgan-run enterprise, including: Chase National Bank, Guaranty Trust Company, Morton Trust Company, Mutual Life Insurance Company, AT&T, Consolidated Gas Company of New York, Erie Railroad, New York Central Railroad, Pullman Company, and United States Steel. See Burch, Elites, pp. 190, 229. The two Rockefeller men were Frank Vanderlip and James Stillman, longtime chairman of the board of the National City Bank.On the meeting, see Livingston, Origins, p. 155. The close Rockefeller-Stillman alliance was cemented by the marriage of the two daughters of Stillman to the two sons of William Rockefeller, brother of John D. Rockefeller, Sr., and longtime board member of the National City Bank.Burch, Elites, pp. 134–35.

The meeting with the comptroller did not bear fruit, but the lead instead was taken by the secretary of the Treasury himself, Leslie Shaw, formerly presiding officer at the second Indianapolis Monetary Convention, whom President Roosevelt appointed to replace Lyman Gage. The unexpected and sudden shift from McKinley to Roosevelt in the presidency meant more than just a turnover of personnel; it meant a fundamental shift from a Rockefeller-dominated to a Morgan-dominated administration. In the same way, the shift from Gage to Shaw was one of the many Rockefeller-to-Morgan displacements.

On monetary and banking matters, however, the Rockefeller and Morgan camps were as one. Secretary Shaw attempted to continue and expand Gage’s experiments in trying to make the Treasury function like a central bank, particularly in making open market purchases in recessions, and in using Treasury deposits to bolster the banks and expand the money supply. Shaw violated the statutory institution of the independent Treasury, which had tried to confine government revenues and expenditures to its own coffers. Instead, he expanded the practice of depositing Treasury funds in favored big national banks. Indeed, even banking reformers denounced the deposit of Treasury funds to pet banks as artificially lowering interest rates and leading to artificial expansion of credit. Furthermore, any government deficit would obviously throw a system dependent on a flow of new government revenues into chaos. All in all, the reformers agreed increasingly with the verdict of economist Alexander Purves, that “the uncertainty as to the Secretary’s power to control the banks by arbitrary decisions and orders, and the fact that at some future time the country may be unfortunate in its chief Treasury official … [has] led many to doubt the wisdom” of using the Treasury as a form of central bank.Livingston, Origins, p. 156. See also ibid., pp. 161–62. In his last annual report of 1906, Secretary Shaw urged that he be given total power to regulate all the nation’s banks. But the game was up, and by then it was clear to the reformers that Shaw’s as well as Gage’s proto–central bank manipulations had failed. It was time to undertake a struggle for a fundamental legislative overhaul of the American banking system to bring it under central banking control.On Gage’s and Shaw’s manipulations, see Rothbard, “Federal Reserve,” pp. 94–96; and Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 1867–1960 (Princeton, N.J.: National Bureau of Economic Research, 1963), pp. 148–56.

The stimulating methodological controversy between Professors Machlup and Hutchison proves that there are sometimes more than two sides to every question.Terence W. Hutchison, “Professor Machlup on Verification in Economics,” Southern Economic Journal (April 1956): 476–83; Fritz Machlup, “Rejoinder to a Reluctant Ultra-Empiricist,” ibid., pp. 483–93. In many ways, the two are debating at cross-purposes: Professor Hutchison is primarily tilting against the methodological (and political) views of Professor Ludwig von Mises; his most serious charge is that Professor Machlup’s entire position is, at bottom, an attempt to cloak the Misesian heresy in the garments of epistemological respectability. Professor Machlup’s reply, quite properly, barely mentions Mises; for, in fact, their methodological views are poles apart. (Machlup’s position is close to the central “positivist” tradition of economic methodology.) But, in the meanwhile, we find that Professor Mises and “extreme apriorism” go undefended in the debate. Perhaps an extreme apriorist’s contribution to this discussion may prove helpful.

First, it should be made clear that neither Professor Machlup nor Professor Hutchison is what Mises calls a praxeologist, that is, neither believes (a) that the fundamental axioms and premises of economics are absolutely true; (b) that the theorems and conclusions deduced by the laws of logic from these postulates are therefore absolutely true; (c) that there is consequently no need for empirical “testing,” either of the premises or the conclusions; and (d) that the deduced theorems could not be tested even if it were desirable.he praxeological tradition, though named only recently, has a long and honored place in the history of economic thought. In the first great methodological controversy in our science, John Stuart Mill was the positivist and Nassau Senior the praxeologist, with J.E. Cairnes wavering between the two positions. Later on, the praxeologic method was further developed by the early Austrians, by Wicksteed, and by Richard Strigl, reaching its full culmination in the works of Ludwig von Mises. Mises’s views may be found in Human Action (New Haven, Conn: Yale University Press, 1949), and in his earlier Grundprobleme der Nationalökonomie [translated into English as Epistemological Problems of Economics (Princeton, N.J.: D. Van Nostrand, 1960]. On the similarity between Senior and Mises, see Marian Bowley, Nassau Senior and Classical Economics (New York: Augustus M. Kelley, 1949), chap. 1, esp. pp. 64–65. Lionel Robbin’s Essay on the Nature and Significance of Economic Science was emphatically praxeologic, although it did not delve into the more complex methodological problems. Both disputants are eager to test economic laws empirically.

The crucial difference is that Professor Machlup adheres to the orthodox positivist position that the assumptions need not be verified so long as their deduced consequents may be proven true — essentially the position of Professor Milton Friedman — while Professor Hutchison, wary of shaky assumptions takes the more empirical — or institutionalist — approach that the assumptions had better be verified as well.

Strange as it may seem for an ultra-apriorist, Hutchison’s position strikes me as the better of the two. If one must choose between two brands of empiricism, it seems like folly to put one’s trust in procedures for testing only conclusions by fact. Far better to make sure that the assumptions also are correct. Here I must salute Professor Hutchison’s charge that the positivists rest their case on misleading analogies from the epistemology of physics.  

This is precisely the nub of the issue. All the positivist procedures are based on the physical sciences.On the differences between the methodologies of praxeology and physics, see Murray N. Rothbard, “Toward a Reconstruction of Utility and Welfare Economics,” in On Freedom and Free Enterprise: Essays in Honor of Ludwig von Mises, Mary Sennholz, ed., (Princeton, N.J.: D. Van Nostrand, 1956), pp. 226ff). It is physics that knows or can know its “facts” and can test its conclusions against these facts, while being completely ignorant of its ultimate assumptions. In the sciences of human action, on the other hand, it is impossible to test conclusions. There is no laboratory where facts can be isolated and controlled; the “facts” of human history are complex ones, resultants of many causes. These causes can only be isolated by theory, theory that is necessarily a priori to these historical (including statistical) facts. Of course, Professor Hutchison would not go this far in rejecting empirical testing of theorems; but, being commendably skeptical of the possibilities of testing (though not of its desirability), he insists that the assumptions be verified as well.

In physics, the ultimate assumptions cannot be verified directly, because we know nothing directly of the explanatory laws or causal factors. Hence the good sense of not attempting to do so, of using false assumptions such as the absence of friction, and so on. But false assumptions are the reverse of appropriate in economics. For human action is not like physics; here, the ultimate assumptions are what is clearly known, and it is precisely from these given axioms that the corpus of economic science is deduced. False or dubious assumptions in economics wreak havoc, while often proving useful in physics.This holds also for Professor Machlup’s “heuristic principles” which area allegedly “empirically meaningful” without being verifiable as true.     I do not wish to deny that false assumptions are useful in economic theory, but only when they are used as auxiliary constructs, not as premises from which empirical theories can be deduced. The most important such construct is the evenly-rotating economy, or “equilibrium.” It is not intended that this state be considered as real, either actual or potential. On the contrary, the empirically impossible ERE is constructed precisely in order to analyze theoretically a state of no-change. Only by analyzing a fictive changeless state can we arrive at a proper analysis of the changing real economic world. However, this is not a “false” assumption in the sense used by the positivists, because it is an absolutely true theory of a changeless state, if such a state could exist.

Hence, Professor Hutchison is correct in wishing to establish the assumptions themselves. But these premises do not have to be (indeed, cannot be) verified by appeal to statistical fact. They are established, in praxeology, on a far more certain and permanent basis as definitely true. How, then, are these postulates obtained? Actually, despite the “extreme a priori” label, praxeology contains one Fundamental Axiom — the axiom of action — which may be called a priori, and a few subsidiary postulates which are actually empirical. Incredible as it may seem to those versed in the positivist tradition, from this tiny handful of premises the whole of economics is deduced — and deduced as absolutely true. Setting aside the Fundamental Axiom for a moment, the empirical postulates are: (a) small in number, and (b) so broadly based as to be hardly “empirical” in the empiricist sense of the term. To put it differently, they are so generally true as to be self-evident, as to be seen by all to be obviously true once they are stated, and hence they are not in practice empirically falsifiable and therefore not “operationally meaningful.” What are these propositions? We may consider them in decreasing order of their generality: (1) the most fundamental — variety of resources, both natural and human. From this follows directly the division of labor, the market, etc.; (2) less important, that leisure is a consumer good. These are actually the only postulates needed. Two other postulates simply introduce limiting subdivisions into the analysis. Thus, economics can deductively elaborate from the Fundamental Axiom and Postulates (1) and (2) (actually, only Postulate 1 is necessary) an analysis of Crusoe economics, of barter, and of a monetary economy. All these elaborated laws are absolutely true. They are only applicable in concrete cases, however, where the particular limiting conditions apply. There is nothing, of course, remarkable about this; we can enunciate as a law that an apple, unsupported, will drop to the ground. But the law is applicable only in those cases where an apple is actually dropped. Thus, the economics of Crusoe, of barter, and of a monetary economy are applicable when these conditions obtain. It is the task of the historian, or “applied economist,” to decide which conditions apply in the specific situations to be analyzed. It is obvious that making these particular identifications is simplicity itself.

When we analyze the economics of indirect exchange, therefore, we make the simple and obvious limiting condition (Postulate 3) that indirect exchanges are being made. It should be clear that by making this simple identification we are not “testing the theory”; we are simply choosing that theory which applies to the reality we wish to explain.

The fourth — and by far the least fundamental — postulate for a theory of the market is the one which Professors Hutchison and Machlup consider crucial — that firms always aim at maximization of their money profits. As will become clearer when I treat the Fundamental Axiom below, this assumption is by no means a necessary part of economic theory. From our Axiom is derived this absolute truth: that every firm aims always at maximizing its psychic profit. This may or may not involve maximizing its money profit. Often it may not, and no praxeologist would deny this fact. When an entrepreneur deliberately accepts lower money profits in order to give a good job to a ne’er-do-well nephew, the praxeologist is not confounded. The entrepreneur simply has chosen to take a certain cut in monetary profit in order to satisfy his consumption — satisfaction of seeing his nephew well provided. The assumption that firms aim at maximizing their money profits is simply a convenience of analysis; it permits the elaboration of a framework of catallactics (economics of the market) which could not otherwise be developed. The praxeologist always has in mind the proviso that where this subsidiary postulate does not apply — as in the case of the ne’er-do-well — his deduced theories will not be applicable. He simply believes that enough entrepreneurs follow monetary aims enough of the time to make his theory highly useful in explaining the real market.I do not mean to endorse here the recent strictures that have been made against the monetary-profit maximization assumption — most of which ignore long-run as opposed to short-run maximization.     The curious idea that failure to pursue monetary goals is “irrational,” or refutes economics, is similar to the old notion that consumers were being irrational, or “uneconomic,” when they preferred to pay higher prices in stores nearer to them, or with a more congenial atmosphere.

We turn now to the Fundamental Axiom (the nub of praxeology): the existence of human action. From this absolutely true axiom can be spun almost the whole fabric of economic theory. Some of the immediate logical implications that flow from this premise are: the means-ends relationship, the time-structure of production, time-preference, the law of diminishing marginal utility, the law of optimum returns, etc. It is this crucial axiom that separates praxeology from the other methodological viewpoints — and it is this axiom that supplies the critical “a priori” element in economics.

First, it must be emphasized that whatever role “rationality” may play in Professor Machlup’s theory, it plays no role whatever for Professor Mises. Hutchison charges that Mises claims  “all economic action was (or must be) ‘rational.’”Hutchison, “Professor Machlup on Verification in Economics,” p. 483. This is flatly incorrect. Mises assumes nothing whatever about the rationality of human action (in fact, Mises does not use the concept at all). He assumes nothing about the wisdom of man’s ends or about the correctness of his means. He “assumes” only that men act, that is, that they have some ends, and use some means to try to attain them. This is Mises’s Fundamental Axiom, and it is this axiom that gives the whole praxeological structure of economic theory built upon it its absolute and apodictic certainty.

Now the crucial question arises: how have we obtained the truth of this axiom? Is our knowledge a priori or empirical, “synthetic” or “analytic”? In a sense, such questions are a waste of time, because the all-important fact is that the axiom is self-evidently true, self-evident to a far greater and broader extent than the other postulates. For this Axiom is true for all human beings, everywhere, at any time, and could not even conceivably be violated. In short, we may conceive of a world where resources are not varied, but not of one where human beings exist but do not act. We have seen that the other postulates, while “empirical,” are so obvious and acceptable that they can hardly be called “falsifiable” in the usual empiricist sense. How much more is this true of the Axiom, which is not even conceivably falsifiable!

Postivists of all shades boggle at self-evident propositions. And yet, what is the vaunted “evidence” of the empiricists but the bringing of a hitherto obscure proposition into evident view? But some propositions need only to be stated to become at once evident to the self, and the action axiom is just such a proposition.

Whether we consider the Action Axiom “a priori” or “empirical” depends on our ultimate philosophical position. Professor Mises, in the neo-Kantian tradition, considers this axiom a law of thought and therefore a categorical truth a priori to all experience. My own epistemological position rests on Aristotle and St. Thomas rather than Kant, and hence I would interpret the proposition differently. I would consider the axiom a law of reality rather than a law of thought, and hence “empirical” rather than “a priori.” But it should be obvious that this type of “empiricism” is so out of step with modern empiricism that I may just as well continue to call it a priori for present purposes. For (1) it is a law of reality that is not conceivably falsifiable, and yet is empirically meaningful and true; (2) it rests on universal inner experience, and not simply on external experience, that is, its evidence is reflective rather than physicalSee Professor Knight’s critique of Hutchison’s Significance and Basic Postulates of Economic Theory. Frank H. Knight, “What is Truth in Economics?” Journal of Political Economy (February 1940): 1–32. ; and (3) it is clearly a priori to complex historical events.Professor Hutchison may have had me in mind when he says that in recent years followers of Professor Mises try to defend him by saying he really meant “empirical” when saying “a priori.” Thus, see my “Praxeology, Replay to Mr. Schuller,” American Economic Review (December 1951): 943–44. What I meant is that Mises’s fundamental axiom may be called “a priori” or “empirical” according to one’s philosophical position, but is in any case a priori for the practical purposes of economic methodology. 

The epistemological pigeon-holing of self-evident propositions has always been a knotty problem. Thus, two such accomplished Thomists as Father Toohey and Father Copleston, while resting on the same philosophical position, differ on whether self-evident propositions should be classified as “a posteriori” or “a priori,” since they define the two categories differently.Thus, Copleston calls self-evident principles “synthetic propositions a priori” (though not in the Kantian sense) — synthetic as conveying information about reality not contained logically in previous premises; and a priori as being necessary and universal. Toohey virtually obliterates the distinctions and terms self-evident propositions synthetic — a posteriori, because, while being necessary and universals, they are derived from experience. See F.C. Copleston, S.J., Aquinas (London: Penguin Books, 1955), pp. 28 and 19–41; John J.H. Toohey, S.J., Notes on Epistemology (Washington, D.C.: Georgetown University, 1952), pp. 46–55. All this raises the question of the usefulness of the whole “analytic-synthetic” dichotomy, despite the prominence implicitly given it in Hutchison’s Significance and Basic Postulates of Economic Theory. For a refreshing skepticism on its validity, and for a critique of its typical use of dispose of difficult-to-refute theories as either disguised definitions or debatable hypotheses, see Hao Wang, Notes on the Analytic-Synthetic Distinction,” Theoria 21 (Parts 2–3, 1955): 158ff. 

From the Fundamental Axiom is derived the truth that everyone tries always to maximize his utility. Contrary to Professor Hutchison, this law is not a disguised definition — that they maximize what they maximize. It is true that utility has no concrete content, because economics is concerned not with the content of a man’s ends, but with the fact that he has ends. And this fact, being deduced directly from the Action Axiom, is absolutely true.See Hutchison, “Professor Machlup on Verification Economics,” p. 480. Alan Sweezy fell into the same error when he charged that Irving Fisher’s dictum: “each individual acts as he desires,” since not meant as a testable proposition in psychology, must reduce to the empty “each individual acts as he acts.” On the contrary, the dictum is deducible directly from the Action Axiom, and is therefore both empirically meaningful and apodictically true. See Rothbard, “Toward a Reconstruction of Utility and Welfare Economics,” pp. 225–28.

We come finally to Mises’s ultimate heresy in the eyes of Professor Hutchison: his alleged logical deduction of “wholesale political conclusions” from the axioms of economic science. Such a charge is completely fallacious, particularly if we realize that Professor Mises is an uncompromising champion of “Wertfreiheit” not only in economics, but also for all the sciences. Even a careful reading of Hutchison’s selected quotations from Mises will reveal no such illegitimate deductions.Thus: “Liberalism starts from the pure sciences of political economy and sociology which within their systems make no valuations and say nothing about what ought to be or what is good or bad, but only ascertain what is and how it is.” Quoted by Hutchison, “Professor Machlup on Verification Economics,” p. 483n. Indeed, Mises’s economics is unrivalled for its avoidance of unanalyzed ad hoc value judgments, slipped into the corpus of economic analysis.

Dean Rappard has posed the question: how can Mises be at the same time a champion of “Wertfreiheit in economics and of laissez-faire” liberalism, a “dilemma” which leads Professor Hutchison to accuse Mises of making political deductions from economic theory?William E. Rappard, “On Reading von Mises,” in On Freedom and Free Enterprise, M. Sennholz, pp. 17–33.

The following passages from Mises give the clue to this puzzle:

Liberalism is a political doctrine. ... As a political doctrine liberalism (in contrast to economic science) is not neutral with regard to values and ultimate ends sought by action. It assumes that all men or at least the majority of people are intent upon attaining certain goals. It gives them information about the means suitable to the realization of their plans. The champions of liberal doctrines are fully aware of the fact that their teachings are valid only for people who are committed to their valuational principles. While praxeology, and therefore economics too, uses the terms happiness and removal of uneasiness in a purely formal sense, liberalism attaches to them a concrete meaning. It presupposes that people prefer life to death, health to sickness ... abundance to poverty. It teaches men how to act in accordance with these valuations.Mises, Human Action, pp. 153–54; also see pp. 879–81.

Economic science, in short, establishes existential laws, of the type: if A, then B. Mises demonstrates that this science asserts that laissez-faire policy leads to peace and higher standards of living for all, while statism leads to conflict and lower living standards. Then, Mises as a citizen chooses laissez-faire liberalism because he is interested in achieving these ends. The only sense in which Mises considers liberalism as “scientific” is to the extent that people unite on the goal of abundance and mutual benefit. Perhaps Mises is overly sanguine in judging the extent of such unity, but he never links the valuational and the scientific: when he says that a price control is “bad” he means bad not from his point of view as an economist, but from the point of view of those in society who desire abundance. Those who choose contrasting goals — who favor price controls, for example, as a route to bureaucratic power over their fellow men, or who, through envy, judge social equality as more worthwhile than general abundance or liberty — would certainly not accept liberalism, and Mises would certainly never say that economic science proves them wrong. He never goes beyond saying that economics furnishes men with the knowledge of the consequences of various political actions; and that it is the citizen’s province, knowing these consequences, to choose his political course.

World War I was the apotheosis of the growing notion of intellectuals as servants of the State and junior partners in State rule. In the new fusion of intellectuals and State, each was of powerful aid to the other. Intellectuals could serve the State by apologizing for and supplying rationales for its deeds. Intellectuals were also needed to staff important positions as planners and controllers of the society and economy. The State could also serve intellectuals by restricting entry into, and thereby raising the income and the prestige of, the various occupations and professions. During World War I, historians were of particular importance in supplying the government with war propaganda, convincing the public of the unique evil of Germans throughout history and of the satanic designs of the Kaiser. Economists, particularly empirical economists and statisticians, were of great importance in the planning and control of the nation's wartime economy. Historians playing preeminent roles in the war propaganda machine have been studied fairly extensively; economists and statisticians, playing a less blatant and allegedly "value-free" role, have received far less attention.For a refreshingly acidulous portrayal of the actions of the historians in World War I, see C. Hartley Grattan, "The Historians Cut Loose," American Mercury, August 1927, reprinted in Haw Elmer Barnes, In Quest of Truth and Justice, 2nd ed. (Colorado Springs: Ralph Myles Publisher, 1972), pp. 142–164. A more extended account is George T. Blakey, Historians on the Homefront: American Propagandists for the Great War (Lexington: University Press of Kentucky, 1970). Gruber, Mars and Minerva, deals with academia and social scientism, but concentrates an historians. James R. Mock and Cedric Larson, Words that Won the War (Princeton University Press, 1939), presents the story of the "Creel Committee," the Committee on Public Information, the official propaganda ministry during the war.

Although it is an outworn generalization to say that nineteenth century economists were stalwart champions of laissez faire, it is still true that deductive economic theory proved to be a mighty bulwark against government intervention. For, basically, economic theory showed the harmony and order inherent in the free market, as well as the counterproductive distortions and economic shackles imposed by state intervention. In order for statism to dominate the economics profession, then, it was important to discredit deductive theory. One of the most important ways of doing so was to advance the notion that, to be "genuinely scientific," economics had to eschew generalization and deductive laws and simply engage in empirical inquiry into the facts of history and historical institutions, hoping that somehow laws would eventually arise from these detailed investigations.

Thus the German Historical School, which managed to seize control of the economics discipline in Germany, fiercely proclaimed not only its devotion to statism and government control, but also its opposition to the "abstract" deductive laws of political economy. This was the first major group within the economics profession to champion what Ludwig von Mises was later to call "anti-economics." Gustav Schmoller, the leader of the Historical School, proudly declared that his and his colleagues' major task at the University of Berlin was to form "the intellectual bodyguard of the House of Hohenzollern."

During the 1880s and 1890s bright young graduate students in history and the social sciences went to Germany, the home of the PhD degree, to obtain their doctorates. Almost to a man, they returned to the United States to teach in colleges and in the newly created graduate schools, imbued with the excitement of the "new" economics and political science. It was a "new" social science that lauded the German and Bismarckian development of a powerful welfare-warfare State, a State seemingly above all social classes, that fused the nation into an integrated and allegedly harmonious whole. The new society and polity was to be run by a powerful central government, cartelizing, dictating, arbitrating, and controlling, thereby eliminating competitive laissez-faire capitalism on the one hand and the threat of proletarian socialism on the other. And at or near the head of the new dispensation was to be the new breed of intellectuals, technocrats, and planners, directing, staffing, propagandizing, and "selflessly" promoting the common good while ruling and lording over the rest of society. In short, doing well by doing good. To the new breed of progressive and statist intellectuals in America, this was a heady vision indeed.

Richard T. Ely, virtually the founder of this new breed, was the leading progressive economist and also the teacher of most of the others. As an ardent postmillennialist pietist, Ely was convinced that he was serving God and Christ as well. Like so many pietists, Ely was born (in 1854) of solid Yankee and old Puritan stock, again in the midst of the fanatical Burned-Over District of western New York. Ely's father, Ezra, was an extreme Sabbatarian, preventing his family from playing games or reading books on Sunday, and so ardent a prohibitionist that, even though an impoverished, marginal farmer, he refused to grow barley, a crop uniquely suitable to his soil, because it would have been used to make that monstrously sinful product, beer.See the useful biography of Ely, Benjamin G. Rader, The Academic Mind and Reform: The Influence of Richard T. Ely in American Life (Lexington: University Press of Kentucky, 1966). Having been graduated from Columbia College in 1876, Ely went to Germany and received his PhD from Heidelberg in 1879. In several decades of teaching at Johns Hopkins and then at Wisconsin, the energetic and empire-building Ely became enormously influential in American thought and politics. At Johns Hopkins he turned out a gallery of influential students and statist disciples in all fields of the social sciences as well as economics. These disciples were headed by the pro-union institutionalist economist John R. Commons, and included the social-control sociologists Edward Alsworth Ross and Albion W. Small; John H. Finlay, President of City College of New York; Dr. Albert Shaw, editor of the Review of Reviews and influential adviser and theoretician to Theodore Roosevelt; the municipal reformer Frederick C. Howe; and the historians Frederick Jackson Turner and J. Franklin Jameson. Newton D. Baker was trained by Ely at Hopkins, and Woodrow Wilson was also his student there, although there is no direct evidence of intellectual influence.

In the mid-1880s Richard Ely founded the American Economic Association in a conscious attempt to commit the economics profession to statism as against the older laissez-faire economists grouped in the Political Economy Club. Ely continued as secretary-treasurer of the AEA for seven years, until his reformer allies decided to weaken the association's commitment to statism in order to induce the laissez-faire economists to join the organization. At that point, Ely, in high dudgeon, left the AEA.

At Wisconsin in 1892, Ely formed a new School of Economics, Political Science, and History, surrounded himself with former students, and gave birth to the Wisconsin Idea which, with the help of John Commons, succeeded in passing a host of progressive measures for government regulation in Wisconsin. Ely and the others formed an unofficial but powerful brain trust for the progressive regime of Wisconsin Governor Robert M. La Follette, who got his start in Wisconsin politics as an advocate of prohibition. Though never a classroom student of Ely's, La Follette always referred to Ely as his teacher and as the molder of the Wisconsin Idea. And Theodore Roosevelt once declared that Ely "first introduced me to radicalism in economics and then made me sane in my radicalism."Sidney Fine, Laissez Faire and the General-Welfare State: A Study of Conflict in American Thought 1865–1901 (Ann Arbor: Univenity of Michigan Press, 1956), pp.239–240.

Ely was also one of the most prominent postmillennialist intellectuals of the era. He fervently believed that the State is God's chosen instrument for reforming and Christianizing the social order so that eventually Jesus would arrive and put an end to history. The State, declared Ely, "is religious in its essence," and, furthermore, "God works through the State in carrying out His purposes more universally than through any other institution." The task of the church is to guide the State and utilize it in these needed reforms.Fine, Laissez Faire, pp. 180–181.

An inveterate activist and organizer, Ely was prominent in the evangelical Chautauqua movement, and he founded there the "Christian Sociology" summer school, which infused the influential Chautauqua operation with the concepts and the personnel of the Social Gospel movement. Ely was a friend and close associate of Social Gospel leaders Revs. Washington Gladden, Walter Rauschenbusch, and Josiah Strong. With Strong and Commons, Ely organized the Institute of Christian Sociology.John Rogers Commons was of old Yankee stock, descendant of John Rogers, Puritan martyr in England, and born in the Yankee area of the Western Reserve in Ohio and reared in Indiana. His Vermont mother was a graduate of the hotbed of pietism, Oberlin College, and she sent John to Oberlin in the hopes that he would become a minister. While in college, Commons and his mother launched a prohibitionist publication at the request of the Anti-Saloon League. After graduation, Commons went to Johns Hopkins to study under Ely, but flunked out of graduate school. See John R. Commons, Myself (Madison, Wisc.: University of Wisconsin Press, 1964). Also see Joseph Dorfman, The Economic Mind in American Civilization (New York: Viking, 1949), vol. 3. 276–277; Mary O. Furner, Advocacy and Objectivity: A Crisis in the Professionalization of American Social Science, 1865–1905 (Lexington: University Press of Kentucky, 1975), pp. 198–204. Ely also founded and became the secretary of the Christian Social Union of the Episcopal Church, along with Christian Socialist W.D.P. Bliss. All of these activities were infused with postmillennial statism. Thus, the Institute of Christian Sociology was pledged to present God's "kingdom as the complete ideal of human society to be realized on earth." Moreover,

Ely viewed the state as the greatest redemptive force in society. In Ely's eyes, government was the God-given instrument through which we had to work. Its preeminence as a divine instrument was based on the post-Reformation abolition of the division between the sacred and the secular and on the State's power to implement ethical solutions to public problems. The same identification of sacred and secular which took place among liberal clergy enabled Ely to both divinize the state and socialize Christianity: he thought of government as God's main instrument of redemption….Quandt, "Religion and Social Thought," pp. 402–403. Ely did not expect the millennial Kingdom to be far off. He believed that it was the task of the universities and of the social sciences "to teach the complexities of the Christian duty of brotherhood in order to arrive at the New Jerusalem "which we are all eagerly awaiting." The church's mission was to attack every evil institution, "until the earth becomes a new earth, and all its cities, cities of God."

When war came, Richard Ely was for some reason (perhaps because he was in his sixties) left out of the excitement of war work and economic planning in Washington. He bitterly regretted that "I have not had a more active part then I have had in this greatest war in the world's history."Gruber, Mars and Minerva, p. 114. But Ely made up for his lack as best he could; virtually from the start of the European war, he whooped it up for militarism, war, the "discipline" of conscription, and the suppression of dissent and "disloyalty" at home. A lifelong militarist, Ely had tried to volunteer for war service in the Spanish-American War, had called for the suppression of the Philippine insurrection, and was particularly eager for conscription and for forced labor for "loafers" during World War I. By 1915 Ely was agitating for immediate compulsory military service, and the following year he joined the ardently pro-war and heavily big business–influenced National Security League, where he called for the liberation of the German people from "autocracy."See Rader, Academic Mind, pp. 181–191. On top big business affiliations of National Security League leaders, especially J.P. Morgan and others in the Morgan ambit, see C. Hartley Grattan, Why We Fought (New York Vanguard Press, 1929) pp. 117–118, and Robert D. Ward, "The Origin and Activities of the National Security League, 1914–1919," Mississippi Valley Historical Review, 47 (June 1960): 51–65.

In advocating conscription, Ely was neatly able to combine moral, economic, and prohibitionist arguments for the draft: "The moral effect of taking boys off street corners and out of saloons and drilling them is excellent, and the economic effects are likewise beneficial."The Chamber of Commerce of the United States spelled out the long-run economic benefit of conscription, that for America's youth it would "substitute a period of helpful discipline for a period of demoralizing freedom from restraint." John Patrick Finnegan, Against the Specter of Dragon: The Campaign for American Military Preparedness, 1914–1917 (Westport, Conn.: Greenwood Press, 1974), p. 110. On the broad and enthusiastic support given to the draft by the Chamber of Commerce, see Chase C. Mooney and Martha E. Layman, "Some Phases of the Compulsory Military Training Movement, 1914–1920," Mississippi Historical Review 38 (March 1952): 640. Indeed, conscription for Ely served almost as a panacea for all ills. So enthusiastic was he about the World War I experience that Ely again prescribed his favorite cure-all to alleviate the 1929 depression. He proposed a permanent peacetime "industrial army" engaged in public works and manned by conscripting youth for strenuous physical labor. This conscription would instill into America's youth the essential "military ideals of hardihood and discipline," a discipline once provided by life on the farm but unavailable to the bulk of the populace now growing up in the effete cities. This small, standing conscript army could then speedily absorb the unemployed during depressions. Under the command of "an economic general staff," the industrial army would "go to work to relieve distress with all the vigor and resources of brain and brawn that we employed in the World War."Richard T. Ely, Hard Times: The Way in and the Way Out (1931), cited in Joseph Dorfman, The Economic Mind in American Civilization (New Yark: Viking, 1949). vol. 5, p. 671; and in Leuchtenburg, "The New Deal," p. 94.

Deprived of a position in Washington, Ely made the stamping out of "disloyalty" at home his major contribution to the war effort. He called for the total suspension of academic freedom for the duration. Any professor, he declared, who stated "opinions which hinder us in this awful struggle" should be "fired" if not indeed "shot." The particular focus of Ely's formidable energy was a zealous campaign to try to get his old ally in Wisconsin politics, Robert M. La Follette, expelled from the US Senate for continuing to oppose America's participation in the war. Ely declared that his "blood boils" at La Follette's "treason" and attacks on war profiteering. Throwing himself into the battle, Ely founded and became president of the Madison chapter of the Wisconsin Loyalty Legion and mounted a campaign to expel La Follette.Ely drew up a super-patriotic pledge for the Madison chapter of the Loyalty Legion, pledging its members to "stamp out disloyalty." The pledge also expressed unqualified support for the Espionage Act and vowed to "work against La Follettism in all its anti-war forms." Rader, Academic Mind, pp. 183ff. The campaign was meant to mobilize the Wisconsin faculty and to support the ultrapatriotic and ultrahawkish activities of Theodore Roosevelt. Ely wrote to TR that "we must crush La Follettism." In his unremitting campaign against the Wisconsin Senator, Ely thundered that La Follette "has been of more help to the Kaiser than a quarter of a million troops."Gruber, Mars and Minerva, p. 207.  "Empiricism" rampant.

The faculty of the University of Wisconsin was stung by charges throughout the state and the country that its failure to denounce La Follette was proof that the university — long affiliated with La Follette in state politics — supported his disloyal antiwar policies. Prodded by Ely, Commons, and others, the university's War Committee drew up and circulated a petition, signed by the university president, all the deans, and over 90 percent of the faculty, that provided one of the more striking examples in United States history of academic truckling to the State apparatus. None too subtly using the constitutional verbiage for treason, the petition protested "against those utterances and actions of Senator La Follette which have given aid and comfort to Germany and her allies in the present war; we deplore his failure loyally to support the government in the prosecution of the war."Ibid., p. 207.

Behind the scenes, Ely tried his best to mobilize America's historians against La Follette, to demonstrate that he had given aid and comfort to the enemy. Ely was able to enlist the services of the National Board of Historical Service, the propaganda agency established by professional historians for the duration of the war, and of the government's own propaganda arm, the Committee on Public Information. Warning that the effort must remain secret, Ely mobilized historians under the aegis of these organizations to research German and Austrian newspapers and journals to try to build a record of La Follette's alleged influence, "indicating the encouragement he has given Germany." The historian E. Merton Coulter revealed the objective spirit animating these researches: "I understand it is to be an unbiased and candid account of the Senator's [La Follette's] course and its effect — but we all know it can lead but to one conclusion — something little short of treason."Ibid., pp. 208n.

Professor Gruber well notes that this campaign to get La Follette was "a remarkable example of the uses of scholarship for espionage. It was a far cry from the disinterested search for truth for a group of professors to mobilize a secret research campaign to find ammunition to destroy the political career of a United States senator who did not share their view of the war."Ibid., pp. 209–210. In his autobiography, written in 1938, Richard Ely rewrote history to cover up his ignominious role in the get–La Follette campaign. He acknowledged signing the faculty petition, but then had the temerity to claim that he "was not one of the ring-leaders, as La Follette thought, in circulating this petition…." There is no mention of his secret research campaign against La Follette. In any event, no evidence was turned up, the movement failed, and the Wisconsin professoriat began to move away in distrust from the Loyalty Legion.For more an the anti-La Follette campaign, see H.C. Peterson and Gilbert C. Fite, Opponents of War: 1917–1918 (Madison: University of Wisconsin Press, 1957), pp. 68–72; Paul L. Murphy, World War I and the Origin of Civil Liberties in the United States (New York: W.W. Norton, 1979), p. 120; and Belle Case La Follette and Fola La Follette, Robert M. LaFollette (New York: Macmillan, 1953), volume 2.

After the menace of the Kaiser had been extirpated, the Armistice found Professor Ely, along with his compatriots in the National Security League, ready to segue into the next round of patriotic repression. During Ely's anti–La Follette research campaign he had urged investigation of "the kind of influence which he [La Follette] has exerted against our country in Russia." Ely pointed out that modem "democracy" requires a "high degree of conformity" and that therefore the "most serious menace" of Bolshevism, which Ely depicted as "social disease germs," must be fought "with repressive measures."

By 1924, however, Richard T. Ely's career of repression was over, and what is more, in a rare instance of the workings of poetic justice, he was hoisted with his own petard. In 1922 the much-traduced Robert La Follette was reelected to the Senate and also swept the Progressives back into power in the state of Wisconsin. By 1924 the Progressives had gained control of the Board of Regents, and they moved to cut off the water of their former academic ally and empire-builder. Ely then felt it prudent to move out of Wisconsin together with his Institute, and while he lingered for some years at Northwestern, the heyday of Ely's fame and fortune was over.

Mises’s exposition of economic science differed decisively from all modern authors in that it drew a sharp line between praxeology and psychology. This has remained a defining feature of the works of his disciples.

Mises did not contest that the psychological background of a person, his worldview, knowledge, conscious motivations, subconscious urges, and so on have an immediate impact on his behavior. Neither did he ignore the important psychological problems that his friend F.A. Hayek began to stress in those years, in particular, that of knowledge acquisition. Mises’s point was that there were also laws of human behavior that exist in complete independence of these psychological dispositions.

For example, in chapter 4, Mises discusses ends and means, scales of values, and scales of needs. He does not deal with the question of how or why people select ends and means, or how or why they have certain values and certain needs. He argues that in every human action we do use means to attain ends, and that needs and values can be rankedMurray Rothbard later argued that as a consequence of the mere fact that people rank their choice alternatives, it follows that demand curves must slope downward to the right. See Murray N. Rothbard, Man, Economy, and State, 3rd ed. (Auburn, Ala.: Ludwig von Mises Institute, 1993), chap. 2. Mises made no such inference. He was skeptical about the use of graphical methods in exact analysis (he did accept them as pedagogical devices). In chapter 15 (“The Market”) he points out that consumers are sovereign because their buying decisions steer the market.Mises, Human Action, p. 270. This is obviously true, irrespective of what consumers buy or the reason why they make these purchases. Therefore he does not deal with these questions. In chapter 16 (“Prices”) Mises states that the number of market participants determines how narrow the margins are within which prices are determined. Yet this implies that the number of market participants has no influence on how prices are formed. Irrespective of the number of market participants, market prices are always determined by the decisions of marginal buyers and sellers.Ibid., p. 324. Thus, all prices can be explained as a result of the mere fact that market participants prefer one good A to another good B.Ibid., pp. 328f.

Praxeology is the science of these laws. It examines the ramifications of the mere fact that a man makes this or that choice. Considering the relationship between a choice and its consequences, praxeology examines the suitability of different means to attain particular ends. In praxeological analysis, the ends are “given,” not in the sense that human beings cannot choose them or that the choice of the right end is not problematic, but in the sense that the choice of ends is outside the scope of this particular science.Mises would later discuss the irrelevance of homooeconomicus for modern economics in Human Action, pp. 62ff. He concluded that "theorems concerning commodity prices, wage rates, and interest rates refer to all these phenomena without any regard to the motives causing people to buy or to sell or to abstain from buying or selling" (p. 64).

With respect to the knowledge of market participants, Mises emphasized the fact that the individual market participants are not equally well informed. Yet even if they all had the same information they would appraise this information differently.Ibid., p. 325.

As to equilibrium, he stated again and again that the market never reaches such a state, that it is a mere mental construct the only function of which is to analyze profits and losses. That is, the equilibrium construct is needed to explain a particular component of price spreads. It is not required to explain prices (wages, interest, commodity prices) as such.Ibid., pp. 245ff.

Consequently, in Mises’s view, equilibrium is not the right benchmark for the evaluation of the market. To critics of economic science who complain that the market never produces a perfect balance between different goods and services, Mises replies in two steps.Ibid., p. 647, for example. First, he points out that this fact of imbalance does not refute economic doctrine because economic science explains any state of affairs as it results from the fact that consumers make certain valuations. Second, he observes that the relevant benchmark for the market is government intervention. And because government officials are not supermen, one cannot make the a priori assumption that entrusting them with the maintenance of the market will bring improvement. As the analysis of government interventionism shows, the very opposite is the case.

It was through the writings of Carl Menger and Eugen von Böhm-Bawerk that Mises had come to understand the market economy as a rational social order in which all factors of production are geared toward the satisfaction of consumer wants. Not only the allocation of the production factors, but also the incomes of the owners of these factors ultimately depended exclusively on their relative contribution to the satisfaction of human wants. All values, all prices, as Frank Fetter had put it, depend on a daily referendum in the market democracy.“The market is a democracy where every penny gives a right of vote.” Frank A. Fetter, The Principles of Economics (New York: The Century Co., 1905), p. 395. A few pages later he states: “So each is measuring the services of all others, and all are valuing each. It is the democracy of valuation” (p. 410).

But in none of his predecessors did Mises find a satisfactory account of the process through which the structure of production was brought in line with consumer preferences. His fellow Böhm-Bawerk seminar member, Joseph Schumpeter, had brilliantly shown how entrepreneurs drive the market. According to Schumpeter’s Theory of Economic Development,Joseph A. Schumpeter, Theorie der wirtschaftlichen Entwicklung (Munich: Duncker & Humblot, 1911). entrepreneurs are innovators who constantly interrupt the smooth operation of an inert economy.

Schumpeter had a point. Innovation does play a central role in the market economy. But how does this fit with the Mengerian picture of the market economy as a rational social order? Was there a contradiction between the Schumpeterian notion that entrepreneurs reap profits for innovation and the Mengerian insight that all incomes depend on consumer wishes? In Nationalökonomie, Mises reconciles Schumpeter with Menger. From Schumpeter, he adopted the idea that entrepreneurs are the motor of the market process. But they cannot earn a profit for innovation per se — only for innovations that improve the satisfaction of consumer wants.

Entrepreneurs constantly adjust the structure of production to what they expect will be the future preferences of consumers. The different entrepreneurs act in effect as advocates for different consumer needs. Based on their estimates of what they expect to obtain for an imagined product in the future, they go to the factor markets where they compete with other entrepreneurs, bidding up prices for the available factors of production—workers and material supplies. This pricing process determines the incomes of all factors of production, and it ensures that only the most important investment projects (“important” in terms of future consumer spending) will be realized.

The driving force of entrepreneurship is the profit motive. Profit is the specific remuneration a person receives for bearing uncertainty. In the market economy, entrepreneurs act with due caution and responsibility because they are personally liable for any wrong decisions. Loss is the punishment for unsuccessful entrepreneurship. Profit and loss are together the measure of entrepreneurship.

Are all businessmen entrepreneurs? Are all entrepreneurs businessmen? If not, how could entrepreneurs be distinguished from “regular” businessmen and other market participants? Mises answered these difficult questions by defining entrepreneurship as a social function, namely, as the function of assuming responsibility for the uncertainty of the future. The entrepreneur in Mises’s theory is not a person but a role played by people — and it is not at all limited to businessmen. Ultimately anyone can be an entrepreneur to the extent that he assumes the repercussions of uncertainty. Profits and losses do not only determine the income of businessmen, but also of wage-earners and capitalists. They always come mixed with specific factor incomes such as wages and interest.

One of the great problems Mises had to solve in this theory was to give a precise definition of profit and loss. In particular, he had to distinguish profit and loss from interest. His solution was that profit and loss were the results of human error. In other words, profits and losses can only exist in situations of disequilibrium. In contrast, money interest ultimately springs from time preference and has nothing to do with whether the market participants make good or bad decisions. Money interest exists both in general equilibrium and in disequilibrium, whereas profit and loss exist only in the latter case.

But then this line of argument makes it necessary to clarify the precise meaning of general equilibrium, as well as its role in economic analysis. Mises argued that general equilibrium — which he called the stationary economy (stationäre Wirtschaft)In Human Action, he called it the “evenly rotating economy,” pp. 246–47. — is a purely methodological device. It is an imaginary construct (Gedankenbild) that has no counterpart in the real world. Its only purpose is for the definition of profit and loss.

This doctrine was not the work of Karl Marx. It had been developed long before Marx entered the scene. Its most successful propagators were not the Marxian authors, but such men as Carlyle and Ruskin, the British Fabians, the German professors, and the American Institutionalists. And it is a very significant fact that the correctness of this dogma was contested only by a few economists who were very soon silenced and barred from access to the universities, the press, the leadership of political parties and, first of all, public office. Public opinion by and large accepted the condemnation of capitalism without any reservation.

But, of course, the practical political conclusions which people drew from this dogma were not uniform. One group declared that there is but one way to wipe out these evils, namely to abolish capitalism entirely. They advocate the substitution of public control of the means of production for private control. They aim at the establishment of what is called socialism, communism, planning, or state capitalism. All these terms signify the same thing. No longer should the consumers, by their buying and abstention from buying, determine what should be produced, in what quantity and of what quality. Henceforth a central authority alone should direct all production activities.

A second group seems to be less radical. They reject socialism no less than capitalism. They recommend a third system, which, as they say, is as far from capitalism as it is from socialism, which as a third system of society’s economic organization, stands midway between the two other systems, and while retaining the advantages of both, avoids the disadvantages inherent in each. This third system is known as the system of interventionism. In the terminology of American politics it is often referred to as the middle-of-the-road policy.

What makes this third system popular with many people is the particular way they choose to look upon the problems involved. As they see it, two classes, the capitalists and entrepreneurs on the one hand and the wage earners on the other hand, are arguing about the distribution of the yield of capital and entrepreneurial activities. Both parties are claiming the whole cake for themselves. Now, suggest these mediators, let us make peace by splitting the disputed value equally between the two classes. The State as an impartial arbiter should interfere, and should curb the greed of the capitalists and assign a part of the profits to the working classes. Thus it will be possible to dethrone the moloch capitalism without enthroning the moloch of totalitarian socialism.

Yet this mode of judging the issue is entirely fallacious. The antagonism between capitalism and socialism is not a dispute about the distribution of booty. It is a controversy about which two schemes for society’s economic organization, capitalism or socialism, is conducive to the better attainment of those ends which all people consider as the ultimate aim of activities commonly called economic, viz., the best possible supply of useful commodities and services. Capitalism wants to attain these ends by private enterprise and initiative, subject to the supremacy of the public’s buying and abstention from buying on the market. The socialists want to substitute the unique plan of a central authority for the plans of the various individuals. They want to put in place of what Marx called the “anarchy of production” the exclusive monopoly of the government. The antagonism does not refer to the mode of distributing a fixed amount of amenities. It refers to the mode of producing all those goods which people want to enjoy.

The conflict of the two principles is irreconcilable and does not allow for any compromise. Control is indivisible. Either the consumers’ demand as manifested on the market decides for what purposes and how the factors of production should be employed, or the government takes care of these matters. There is nothing that could mitigate the opposition between these two contradictory principles. They preclude each other. Interventionism is not a golden mean between capitalism and socialism. It is the design of a third system of society’s economic organization and must be appreciated as such.

It is not the task of today’s discussion to raise any questions about the merits either of capitalism or of socialism. I am dealing today with interventionism alone. And I do not intend to enter into an arbitrary evaluation of interventionism from any preconceived point of view. My only concern is to show how interventionism works and whether or not it can be considered as a pattern of a permanent system for society’s economic organization.

The interventionists emphasize that they plan to retain private ownership of the means of production, entrepreneurship and market exchange. But, they go on to say, it is peremptory to prevent these capitalist institutions from spreading havoc and unfairly exploiting the majority of people. It is the duty of government to restrain, by orders and prohibitions, the greed of the propertied classes lest their acquisitiveness harm the poorer classes. Unhampered or laissez-faire capitalism is an evil. But in order to eliminate its evils, there is no need to abolish capitalism entirely. It is possible to improve the capitalist system by government interference with the actions of the capitalists and entrepreneurs. Such government regulation and regimentation of business is the only method to keep off totalitarian socialism and to salvage those features of capitalism which are worth preserving. On the ground of this philosophy, the interventionists advocate a galaxy of various measures. Let us pick out one of them, the very popular scheme of price control.

The government believes that the price of a definite commodity, e.g., milk, is too high. It wants to make it possible for the poor to give their children more milk. Thus it resorts to a price ceiling and fixes the price of milk at a lower rate than that prevailing on the free market. The result is that the marginal producers of milk, those producing at the highest cost, now incur losses. As no individual farmer or businessman can go on producing at a loss, these marginal producers stop producing and selling milk on the market. They will use their cows and their skill for other more profitable purposes. They will, for example, produce butter, cheese or meat. There will be less milk available for the consumers, not more. This, or course, is contrary to the intentions of the government. It wanted to make it easier for some people to buy more milk. But, as an outcome of its interference, the supply available drops. The measure proves abortive from the very point of view of the government and the groups it was eager to favor. It brings about a state of affairs, which — again from the point of view of the government — is even less desirable than the previous state of affairs which it was designed to improve.

Now, the government is faced with an alternative. It can abrogate its decree and refrain from any further endeavors to control the price of milk. But if it insists upon its intention to keep the price of milk below the rate the unhampered market would have determined and wants nonetheless to avoid a drop in the supply of milk, it must try to eliminate the causes that render the marginal producers’ business unremunerative. It must add to the first decree concerning only the price of milk a second decree fixing the prices of the factors of production necessary for the production of milk at such a low rate that the marginal producers of milk will no longer suffer losses and will therefore abstain from restricting output. But then the same story repeats itself on a remoter plane. The supply of the factors of production required for the production of milk drops, and again the government is back where it started. If it does not want to admit defeat and to abstain from any meddling with prices, it must push further and fix the prices of those factors of production which are needed for the production of the factors necessary for the production of milk. Thus the government is forced to go further and further, fixing step by step the prices of all consumers’ goods and of all factors of production — both human, i.e., labor, and material — and to order every entrepreneur and every worker to continue work at these prices and wages. No branch of industry can be omitted from this all-around fixing of prices and wages and from this obligation to produce those quantities which the government wants to see produced. If some branches were to be left free out of regard for the fact that they produce only goods qualified as non-vital or even as luxuries, capital and labor would tend to flow into them and the result would be a drop in the supply of those goods, the prices of which government has fixed precisely because it considers them as indispensable for the satisfaction of the needs of the masses.

But when this state of all-around control of business is attained, there can no longer be any question of a market economy. No longer do the citizens by their buying and abstention from buying determine what should be produced and how. The power to decide these matters has devolved upon the government. This is no longer capitalism; it is all-around planning by the government, it is socialism.

It is, of course, true that this type of socialism preserves some of the labels and the outward appearance of capitalism. It maintains, seemingly and nominally, private ownership of the means of production, prices, wages, interest rates and profits. In fact, however, nothing counts but the government’s unrestricted autocracy. The government tells the entrepreneurs and capitalists what to produce and in what quantity and quality, at what prices to buy and from whom, at what prices to sell and to whom. It decrees at what wages and where the workers must work. Market exchange is but a sham. All the prices, wages, and interest rates are determined by the authority. They are prices, wages, and interest rates in appearance only; in fact they are merely quantity relations in the government’s orders. The government, not the consumers, directs production. The government determines each citizen’s income, it assigns to everybody the position in which he has to work. This is socialism in the outward guise of capitalism. It is the Zwangswirtschaft of Hitler’s German Reich and the planned economy of Great Britain.

For the scheme of social transformation which I have depicted is not merely a theoretical construction. It is a realistic portrayal of the succession of events that brought about socialism in Germany, in Great Britain, and in some other countries.

The Germans, in the First World War, began with price ceilings for a small group of consumers’ goods considered as vital necessities. It was the inevitable failure of these measures that impelled them to go further and further until, in the second period of the war, they designed the Hindenburg plan. In the context of the Hindenburg plan no room whatever was left for a free choice on the part of the consumers and for initiative action on the part of business. All economic activities were unconditionally subordinated to the exclusive jurisdiction of the authorities. The total defeat of the Kaiser swept the whole imperial apparatus of administration away and with it went also the grandiose plan. But when in 1931 Chancellor Brüning embarked anew on a policy of price control and his successors, first of all Hitler, obstinately clung to it, the same story repeated itself.

Great Britain and all the other countries which in the First World War adopted measures of price control, had to experience the same failure. They too were pushed further and further in their attempts to make the initial decrees work. But they were still at a rudimentary stage of this development when the victory and the opposition of the public brushed away all schemes for controlling prices.

It was different in the Second World War. Then Great Britain again resorted to price ceilings for a few vital commodities and had to run the whole gamut proceeding further and further until it had substituted all-around planning of the country’s whole economy for economic freedom. When the war came to an end, Great Britain was a socialist commonwealth.

It is noteworthy to remember that British socialism was not an achievement of Mr. Attlee’s Labor Government, but of the war cabinet of Mr. Winston Churchill. What the Labor Party did was not the establishment of socialism in a free country, but retaining socialism as it had developed during the war and in the post-war period. The fact has been obscured by the great sensation made about the nationalization of the Bank of England, the coal mines, and other branches of business. However, Great Britain is to be called a socialist country not because certain enterprises have been formally expropriated and nationalized, but because all the economic activities of all citizens are subject to full control of the government and its agencies. The authorities direct the allocation of capital and of manpower to the various branches of business. They determine what should be produced. Supremacy in all business activities is exclusively vested in the government. The people are reduced to the status of wards, unconditionally bound to obey orders. To the businessmen, the former entrepreneurs, merely ancillary functions are left. All that they are free to do is to carry into effect, within a nearly circumscribed narrow field, the decisions of the government departments.

What we have to realize is that price ceilings affecting only a few commodities fail to attain the ends sought. On the contrary. They produce effects which from the point of view of the government are even worse than the previous state of affairs which the government wanted to alter. If the government, in order to eliminate these inevitable but unwelcome consequences, pursues its course further and further, it finally transforms the system of capitalism and free enterprise into socialism of the Hindenburg pattern.

The same is true of all other types of meddling with the market phenomena. Minimum wage rates, whether decreed and enforced by the government or by labor union pressure and violence, result in mass unemployment prolonged year after year as soon as they try to raise wage rates above the height of the unhampered market. The attempts to lower interest rates by credit expansion generate, it is true, a period of booming business. But the prosperity thus created is only an artificial hot-house product and must inexorably lead to the slump and to the depression. People must pay heavily for the easy-money orgy of a few years of credit expansion and inflation.

The recurrence of periods of depression and mass unemployment has discredited capitalism in the opinion of injudicious people. Yet these events are not the outcome of the operation of the free market. They are on the contrary the result of well-intentioned but ill-advised government interference with the market. There are no means by which the height of wage rates and the general standard of living can be raised other than by accelerating the increase of capital as compared with population. The only means to raise wage rates permanently for all those seeking jobs and eager to earn wages is to raise the productivity of the industrial effort by increasing the per-head quota of capital invested. What makes American wage rates by far exceed the wage rates of Europe and Asia is the fact that the American worker’s toil and trouble is aided by more and better tools. All that good government can do to improve the material well-being of the people is to establish and to preserve an institutional order in which there are no obstacles to the progressing accumulation of new capital required for the improvement of technological methods of production. This is what capitalism did achieve in the past and will achieve in the future too if not sabotaged by a bad policy.

Interventionism cannot be considered as an economic system destined to stay. It is a method for the transformation of capitalism into socialism by a series of successive steps. It is as such different from the endeavors of the communists to bring about socialism at one stroke. The difference does not refer to the ultimate end of the political movement; it refers mainly to the tactics to be resorted to for the attainment of an end that both groups are aiming at.

Karl Marx and Friedrich Engels recommended successively each of these two ways for the realization of socialism. In 1848, in the Communist Manifesto, they outlined a plan for the step-by-step transformation of capitalism into socialism. The proletariat should be raised to the position of the ruling class and use its political supremacy “to wrest, by degrees, all capital from the bourgeoisie.” This, they declare, “cannot be effected except by means of despotic inroads on the rights of property and on the conditions of bourgeois production; by means of measures, therefore, which appear economically insufficient and untenable, but which in the course of the movement outstrip themselves, necessitate further inroads upon the old social order, and are unavoidable as a means of entirely revolutionizing the mode of production.” In this vein they enumerate by way of example ten measures.

In later years Marx and Engels changed their minds. In his main treatise, Das Capital, first published in 1867, Marx saw things in a different way. Socialism is bound to come “with the inexorability of a law of nature.” But it cannot appear before capitalism has reached its full maturity. There is but one road to the collapse of capitalism, namely the progressive evolution of capitalism itself. Then only will the great final revolt of the working class give it the finishing stroke and inaugurate the everlasting age of abundance.

From the point of view of this later doctrine Marx and the school of orthodox Marxism reject all policies that pretend to restrain, to regulate and to improve capitalism. Such policies, they declare, are not only futile, but outright harmful. For they rather delay the coming of age of capitalism, its maturity, and thereby also its collapse. They are therefore not progressive, but reactionary. It was this idea that led the German Social Democratic party to vote against Bismarck’s social security legislation and to frustrate Bismarck’s plan to nationalize the German tobacco industry. From the point of view of the same doctrine, the communists branded the American New Deal as a reactionary plot extremely detrimental to the true interests of the working people.

What we must realize is that the antagonism between the interventionists and the communists is a manifestation of the conflict between the two doctrines of the early Marxism and of the late Marxism. It is the conflict between the Marx of 1848, the author of the Communist Manifesto, and the Marx of 1867, the author of Das Capital. And it is paradoxical indeed that the document in which Marx endorsed the policies of the present-day self-styled anti-communists is called the Communist Manifesto.

There are two methods available for the transformation of capitalism into socialism. One is to expropriate all farms, plants, and shops and to operate them by a bureaucratic apparatus as departments of the government. The whole of society, says Lenin, becomes “one office and one factory, with equal work and equal pay,”Cf. V.I. Lenin, State and Revolution (Little Lenin Library No. 14, New York, 1932), p. 84. the whole economy will be organized “like the postal system.”Ibid., p. 44. The second method is the method of the Hindenburg plan, the originally German pattern of the welfare state and of planning. It forces every firm and every individual to comply strictly with the orders issued by the government’s central board of production management. Such was the intention of the National Industrial Recovery Act of 1933 which the resistance of business frustrated and the Supreme Court declared unconstitutional. Such is the idea implied in the endeavors to substitute planning for private enterprise.

The foremost vehicle for the realization of this second type of socialism in industrial countries like Germany and Great Britain is foreign exchange control. These countries cannot feed and clothe their people out of domestic resources. They must import large quantities of food and raw materials. In order to pay for these badly needed imports, they must export manufactures, most of them produced out of imported raw material. In such countries almost every business transaction directly or indirectly is conditioned either by exporting or importing or by both exporting and importing. Hence the government’s monopoly of buying and selling foreign exchange makes every kind of business activity depend on the discretion of the agency entrusted with foreign exchange control. In this country matters are different. The volume of foreign trade is rather small when compared with the total volume of the nation’s trade. Foreign exchange control would only slightly affect the much greater part of American business. This is the reason why in the schemes of our planners there is hardly any question of foreign exchange control. Their pursuits are directed toward the control of prices, wages, and interest rates, toward the control of investment and the limitation of profits and incomes.

Looking backward on the evolution of income tax rates from the beginning of the Federal income tax in 1913 until the present day, one can hardly expect that the tax will not one day absorb 100 percent of all surplus above the income of the average voter. It is this that Marx and Engels had in mind when in the Communist Manifesto they recommended “a heavy progressive or graduated income tax.”

Another of the suggestions of the Communist Manifesto was “abolition of all right of inheritance.” Now, neither in Great Britain nor in this country have the laws gone up to this point. But again, looking backward upon the past history of the estate taxes, we have to realize that they more and more have approached the goal set by Marx. Estate taxes of the height they have already attained for the upper brackets are no longer to be qualified as taxes. They are measures of expropriation.

The philosophy underlying the system of progressive taxation is that the income and the wealth of the well-to-do classes can be freely tapped. What the advocates of these tax rates fail to realize is that the greater part of the income taxed away would not have been consumed but saved and invested. In fact, this fiscal policy does not only prevent the further accumulation of new capital. It brings about capital decumulation. This is certainly today the state of affairs in Great Britain.

The course of events in the past thirty years shows a continuous, although sometimes interrupted progress toward the establishment in this country of socialism of the British and German pattern. The United States embarked later than these two other countries upon this decline and is today still farther away from its end. But if the trend of this policy will not change, the final result will only in accidental and negligible points differ from what happened in the England of Attlee and in the Germany of Hitler. The middle-of-the-road policy is not an economic system that can last. It is a method for the realization of socialism by installments.

Many people object. They stress the fact that most of the laws which aim at planning or at expropriation by means of progressive taxation have left some loopholes which offer to private enterprise a margin within which it can go on. That such loopholes still exist and that thanks to them this country is still a free country is certainly true. But this “loopholes capitalism” is not a lasting system. It is a respite. Powerful forces are at work to close these loopholes. From day to day the field in which private enterprise is free to operate is narrowed down.

Of course, this outcome is not inevitable. The trend can be reversed as was the case with many other trends in history. The Marxian dogma according to which socialism is bound to come “with the inexorability of a law of nature” is just an arbitrary surmise devoid of any proof.

But the prestige which this vain prognostic enjoys not only with the Marxians, but with many self-styled non-Marxians, is the main instrument of the progress of socialism. It spreads defeatism among those who otherwise would gallantly fight the socialist menace. The most powerful ally of Soviet Russia is the doctrine that the “wave of the future” carries us toward socialism and that it is therefore “progressive” to sympathize with all measures that restrict more and more the operation of the market economy.

Even in this country which owes to a century of “rugged individualism” the highest standard of living ever attained by any nation, public opinion condemns laissez-faire. In the last fifty years, thousands of books have been published to indict capitalism and to advocate radical interventionism, the welfare state, and socialism. The few books which tried to explain adequately the working of the free-market economy were hardly noticed by the public. Their authors remained obscure, while such authors as Veblen, Commons, John Dewey, and Laski were exuberantly praised. It is a well-known fact that the legitimate stage as well as the Hollywood industry are no less radically critical of free enterprise than are many novels. There are in this country many periodicals which in every issue furiously attack economic freedom. There is hardly any magazine of opinion that would plead for the system that supplied the immense majority of the people with good food and shelter, with cars, refrigerators, radio sets, and other things which the subjects of other countries call luxuries.

The impact of this state of affairs is that practically very little is done to preserve the system of private enterprise. There are only middle-of-the-roaders who think they have been successful when they have delayed for some time an especially ruinous measure. They are always in retreat. They put up today with measures which only ten or twenty years ago they would have considered as undiscussable. They will in a few years acquiesce in other measures which they today consider as simply out of the question. What can prevent the coming of totalitarian socialism is only a thorough change in ideologies.

What we need is neither anti-socialism nor anti-communism but an open positive endorsement of that system to which we owe all the wealth that distinguishes our age from the comparatively straitened conditions of ages gone by.

[This address was delivered before the University Club of New York, April 18, 1950. First printed by Commercial and Financial Chronicle, May 4, 1950; reprinted as a chapter in Planning for Freedom.]

Review by Paul Gottfried

David Gordon, from the Foreword:

Shortly after Murray Rothbard’s lamented death in January, 1995, Lew Rockwell telephoned me. He asked me to write a book review journal for the Mises Institute, covering new books in philosophy, history, politics, and economics. Moreover, he wanted the first issue in one month. I managed to meet the deadline and continued to write the journal for a number of years. Articles from The Mises Review form the bulk of the material included in these volumes; but a few reviews from other sources are here as well. Ever since I first read Man, Economy, and State in 1962, I have been a convinced Rothbardian, and it is from this standpoint that I have written my articles.

Napoleon Bonaparte decreed that the standards and flags of the French army be dressed in mourning crepe. The flags of the British Channel Fleet were lowered to half-mast to honor the fallen hero. Talleyrand, the French minister of foreign affairs, ... [called] for a statue of Washington to be erected in Paris.Matthew Spalding and Patrick J. Garrity, A Sacred Union of Citizens (Lanham, Md.: Rowman and Littlefield, 1996), p. 189.</p>

Poets likewise sang his praises.

Washington achieved mythic status in his own lifetime, receiving poetic encomia from English poets as different as William Blake and Byron, who contrasted Washington favorably with the despotic Napoleon. ... His contemporaries were impressed by the fact that the general who led a successful revolution did not establish a personal dictatorship.Michael Lind, ed., Hamilton’s Republic (New York: The Free Press, 1997), p. 99.

Were the effects of the influence that accompanied this prestige good or bad for liberty? This chapter shall endeavor to show that in two instances, these effects were bad; in one case, though, Washington’s fame led to fortunate consequences for individual freedom. Washington, though not a principal author of the Constitution, supported calling a convention to revise the Articles of Confederation. At the convention itself, he strongly backed Madison’s plans for centralized control.

On assuming power, Washington soon faced a division of opinion in his cabinet. Secretary of the Treasury Alexander Hamilton was not satisfied with the centralization already achieved by the Constitution. He called for a national bank and a governmentally directed program of industrial development. Thomas Jefferson raised a decisive objection to Hamilton’s proposal: Did it not entirely exceed the bounds of power granted the central government by the new Constitution? The constitutional issue did not faze Hamilton, who produced an analysis that granted the central government broad power to do whatever Hamilton thought best. In this conflict, Washington once again weighed in on the side of the centralizers.

In his Farewell Address, though, Washington at least partially redeemed himself, from a classical-liberal standpoint. He cautioned against America’s involvement in European power politics, with which the United States had no concern. His warning against permanent alliances guided much of American foreign policy in the nineteenth century; and, in the twentieth, opponents of the bellicose policies of Woodrow Wilson and Franklin Roosevelt appealed to it. Washington’s prestige for once had beneficial results.

We have spoken of whether Washington’s influence was “good” or “bad” for liberty. By what standard are these judgments made? This author writes from a classical-liberal perspective, in which the growth of government is viewed as an unmitigated disaster and expansionist foreign policy is resolutely opposed. Thus, “states’ rights” receive support as against increases in federal authority, and wars, except in cases of exercising self-determination or repelling direct invasion, are opposed.A classical-liberal analysis of just wars has been well set forth by Murray Rothbard in “America’s Two Just Wars: 1775 and 1861” in The Costs of War, John V. Denson, ed., 2nd ed. (New Brunswick, N.J.: Transaction Publishers, 1999), pp. 119–33.

One might object to the proposed criterion in this way. The goal of classical liberalism is to promote individual liberty. Why then tie it down to the specific policies indicated?

In certain cases, may not the federal government serve better to protect the individual than the states?For a defense of this position, see Clint Bolick, The Affirmative Action Fraud (Washington, D.C.: The Cato Institute, 1996). See also my criticisms in The Mises Review 2, no. 2 (Summer 1996): 13–17. Further, even if local control is in ideal circumstances best, may not a decentralized polity prove no match for a strong opponent? Along the same lines, why must a realistic foreign policy be confined to defense of the national territory? In some cases, may not the best defense be to strike at a prospective enemy first?Walter Lippmann opposed “isolationist” policy during the 1930s, charging it with unrealistically ignoring the increasing power of Germany. For a criticism of his views, see my “A Common Design: Propaganda and World War” in The Costs of War, John V. Denson, ed., 2nd ed. (New Brunswick, N.J.: Transaction Publishers, 1999), pp. 312–19.

These worries cannot be addressed in detail here. Suffice it to say that a good rule-utilitarian case can be constructed for spurning federal interventions that allegedly aim at promoting liberty. In like fashion, aggressive war shackles us with devastation and restriction of liberty in order to combat speculative dangers.For a strong historical case showing that war has led to growth in government, see Robert Higgs, Crisis and Leviathan (New York: Oxford University Press, 1987).

These remarks have at least the appearance of dogmatism, and they are advanced rather to indicate a viewpoint than to make a case. One illustration of how such a case would proceed is taken from Murray Rothbard. The Articles of Confederation established a much less centralized system than the Constitution. Yet because ratification by all the states was required for the Articles to come into effect, most of the American Revolution was fought with no written structure of authority over the states at all. As Rothbard notes,

The Articles were not exactly received with huzzahs; rather, they were greeted quietly and dutifully, as a needed part of the war effort against Britain. One of the keenest critiques of the Articles, as might be expected, came from Thomas Burke, who warned that, under cover of the war emergency, eager power-seekers were trying to impose a central government upon the states. ... [t]he Articles of Confederation were not to be ratified and go into effect until 1781, when the Revolutionary War would be all but over.Murray N. Rothbard, Conceived in Liberty, vol. 4, The Revolutionary War, 1775–1784 (Auburn, Ala.: The Mises Institute, 1999), pp. 255–56. Donald W. Livingston argues that David Hume saw a confederation of small republics as the solution to the defense problem. Further, Livingston argues that Hume influenced the American founders. See his Philosophical Melancholy and Delirium (Chicago: University of Chicago Press, 1998), pp. 317–32.

So much for the supposed necessity for a strong central government to combat other nations.

However much supporters of localism might view even the Articles as going too far in the wrong direction, Washington held a decidedly different view. In 1783, he wrote to Alexander Hamilton: “It is clearly my opinion, unless Congress have powers competent to all general purposes, that the distresses we have encountered, the expense we have incurred, and the blood we have spilt, will avail nothing.”W.E. Woodward, George Washington: The Image and the Man (New York: Horace Liveright, 1962), p. 411.

Among the “distresses” of which Washington spoke, one may speculate that personal considerations loomed large. Throughout his adult life, Washington avidly sought land. “His family had first speculated in Ohio Valley land decades ago [before the 1780s], and Washington owned nearly sixty thousand acres.”Richard Brookhiser, Founding Father: Rediscovering George Washington (New York: The Free Press, 1996), p. 49.

A project that aroused his interest offered a chance to appreciate greatly the value of his land. “If a canal could be pushed over the mountains to link up with the Allegheny river system, then all the future produce of the Ohio Valley could flow through Virginia land, (not coincidentally, past Mount Vernon).”Ibid., p. 48.

A crucial obstacle confronted Washington’s hopes for a Potomac Canal. Under the Articles of Confederation, a state had the right to levy fees on the use of waterways that passed through its boundaries. If the states bordering the Potomac were to do so, the proposed canal might generate no profit for him. One can readily see why the great general was “distressed.” As one observer notes, “[h]e was drawn to the plan by important private and public interests, and the political steps he took to fulfill it led directly to the Constitutional Convention, if not a canal.”Ibid., p. 49. A strong central government would remove the threat of interstate taxation.

This is not to suggest that Washington’s economic interests determined his support for a stronger central government. To do so would be to fall into the fallacy that wrecked Charles Beard’s An Economic Interpretation of the Constitution. Nevertheless, personal interest cannot be neglected in an explanation of Washington’s policy.

Regardless of Washington’s motives, the fact that someone of his probity and reputation advocated a Constitutional Convention eased the doubts of those who feared centralization. How could one suspect the proposed convention of aims destructive of liberty if Washington, the Cincinnatus who had spurned dictatorship, endorsed the call for it? Was not the case for the good intentions of the proposed convention conclusively made once it became known that Washington himself had agreed to serve as a delegate to it? Richard Brookhiser puts the essential point well:

Much of the political class was happy with the current arrangements. ... Supporters of change would have to make the case that a new government would not threaten liberty. ... Washington’s presence would help immeasurably to make that case. He had already held more power than any man in America, and after eight and half years, he had surrendered it. He was the most conspicuous example of moderation and disinterestedness that the nation could supply.Ibid., p. 56.

At the convention, Washington’s primary aim was not to enact a particular plan of government. The need rather was to act immediately, so that centralization could be secured as fast as possible.

During the constitutional debates, Washington insisted that the Articles of Confederation be overhauled quickly. “Otherwise,” he wrote, “like a house on fire, whilst the most regular mode of extinguishing it is contended for, the building is reduced to ashes.” What was needed, Washington thought, was any solid national government.Russell Hardin, Liberalism, Constitutionalism, and Democracy (New York: Oxford University Press, 1999), p. 273, citing a letter from Washington to Henry Knox, February 3, 1787.

Washington was quite willing to push his argument to extremes. So essential did he deem centralization that he contemplated a monarchy for America, should the Constitutional Convention fail. He was not himself a monarchist—far from it. But a letter of March 31, 1787, to James Madison shows that conceivable circumstances might change him into one.

In his definitive study of James Madison’s political thought, Lance Banning summarizes Washington’s thoughts in this vital letter:

No one could deny the indispensability of a complete reform of the existing system, which he hoped the Constitutional Convention would attempt. But only if complete reform were tried, and the resulting system still proved inefficient, would a belief in the necessity of greater change begin to spread “among all classes of the people. Then, and not till then is my [Washington’s] opinion, can it [monarchy] be attempted without involving all the evils of civil discord.”Russell Hardin, Liberalism, Constitutionalism, and Democracy (New York: Oxford University Press, 1999), p. 273, citing a letter from Washington to Henry Knox, February 3, 1787.

One wonders how those whose fears of the convention had been calmed by Washington’s endorsement would have reacted had they known of this letter. But of course the convention, by its own lights, did not fail; and the fact that Washington contemplated monarchy remained hidden.

Any centralized form of government, Washington held, was desirable so long as it could be quickly established. But it does not follow from this that Washington was indifferent to the type of centralized government established. He soon fell in with the radical nationalism of Madison’s Virginia Plan.

To Madison, Washington’s presence at the convention was essential: It was “an invitation to the most select characters from every part of the Confederacy.”Gary Rosen, American Compact: James Madison and the Problem of Founding (Lawrence: University Press of Kansas, 1999), p. 85, citing a letter from Madison to Washington, December 7, 1786. Madison reported that Washington arrived at the Philadelphia convention “amidst the acclamations of the people, as more sober marks of the affection and veneration which continue to be felt for his character.”Ibid., p. 86, citing a letter from Madison to Thomas Jefferson, May 15, 1787.

With Washington present, Madison hoped to achieve his aims. One political theorist, a disciple of Leo Strauss, summarizes these aims in this way: Washington’s presence and the presence of “lesser figures of impeccable republican credentials allowed the convention to rebut the charge of being an aristocratic conspiracy while conferring on it the opportunity to behave like one.”Ibid.

Strong words, but the details of Madison’s plans bear out the interpretation that the Straussian Gary Rosen has advanced. Madison and other extreme nationalists sought to eviscerate entirely the power of the states to thwart the will of the nation.

Under the Virginia Plan, which Madison submitted to Washington before the convention opened, Congress could veto any law enacted by a state legislature that it deemed unconstitutional.

It called, as Washington’s summary of Madison’s draft put it, for a “due supremacy of the national authority,” including “local authorities [only] whenever they can be subordinately useful.” ... Madison had originally called for an even more sweeping national power over state laws, a “negative in all cases whatever.”Brookhiser, Founding Father, p. 63.

In fairness to Washington, he did not vote in favor of Madison’s radical proposal of an unlimited congressional veto. But neither did he oppose the plan. Madison noted that

Gen. W. was “not consulted.” How could he not have been consulted? He never missed a session. Most probably, Gen. W. had been consulted privately, and the result of the consultation was that, since Madison had the voters anyway, Washington chose not to take a public stand on an inflamed issue.Ibid., p. 64.

It seems quite clear that opposition by Washington would have at once ended so far-reaching a plan, but it was not forthcoming. Surely then he cannot have been very strongly against it. Had he been, he need only have spoken a word. But why speculate on Washington’s private opinion of Madison’s proposal? Its importance for our purposes is this: Many of those who feared that the convention would strike a fatal blow at states’ rights were reassured by Washington’s presence. But, unknown to them, he was at least a fellow traveler of radical centralism. His image as a Cincinnatus averse to power led many into error. It did not follow from Washington’s personal reluctance to hold office that he was not an opponent of states’ rights, as this concept was understood in the 1780s.

Fortunately, for those opposed to centralism, no version of the congressional veto survived into the Constitution’s final draft. But the Constitution, even without it, was far more centralizing than the Articles; and Washington’s image once again proved useful when the Constitution came up for ratification. Just as before, skeptics could be reassured: Would Washington support a regime inimical to liberty? Thus, in Virginia, opposition to the Constitution was in part disarmed by Washington’s prestige. “Few, if any of Virginia’s revolutionary leaders questioned Madison’s republican credentials. All, no doubt, were comforted by their awareness that George Washington would head the federal government if it were put into effect.”Banning, The Sacred Fire of Liberty, p. 253.

By no means is this meant to suggest a monocausal view, in which Washington’s image sufficed to quell all opposition to the new document. Quite the contrary, in the very passage just cited, Lance Banning maintains that Madison’s skill at argument was needed to win over the recalcitrant. Confidence in Washington was not enough because in 1788, “quite unlike today, few believed that the executive would set the federal government’s directions.”Ibid. Nevertheless, the importance of the “Washington-image factor” cannot be gainsaid.

The Constitution did not in all respects settle the nature of the American system. What sort of government would result from it? Would its provisions be interpreted loosely, to enable the central government to seize as much power from the states as possible? Two conflicting approaches to government split Washington’s cabinet, one favored by Alexander Hamilton and the other by Thomas Jefferson.

These divergent views have been ably summarized by Forrest McDonald.

In Federalist Essay number 70, Hamilton had said that “energy in the executive is a leading ingredient in the definition of good government.” ... In essays 71 and 73, he made his position clearer: “It is one thing,” he said, for the executive “to be subordinate to the laws, and another to be dependent on the legislative body.” In other words, the executive authority must operate independently and with a wide range of discretion in its field, the Constitution and laws providing only broad guidelines and rules.Forrest McDonald, The Presidency of George Washington (Lawrence: University Press of Kansas, 1974), pp. 94–95.

Jefferson and his followers saw matters entirely otherwise.

In Jefferson’s view, and that of most Republicans, such discretionary authority was inherently dangerous and smacked of monarchy. ... A society would grow better ... by stripping social and governmental institutions to the bare minimum so that the natural aristocracy might rise to the top.Ibid., pp. 95–96.

The differences between Hamilton and Jefferson were not confined to abstract argument, but quietly became manifest in practical affairs. Although Hamilton considered himself a student of economics, his views embodied the discredited doctrines of mercantilism.

One of the duties of the federal government, according to the Hamilton philosophy, is the active promotion of a dynamic industrial capitalist economy ... by establishment of sound public finance, public investment in infrastructure, and promotion of new industrial sectors unlikely to be profitable in their early stages.

As Hamilton wrote in The Report on Manufactures:

Capital is wayward and timid in leading itself to new undertakings, and the state ought to excite the confidence of capitalists, who are ever cautious and sagacious, by aiding them to overcome the obstacles that lie in the way of all experiments.Lind, ed., Hamilton’s Republic, p. 5, quoting Hamilton’s Report.

Where the State would acquire the requisite understanding to direct the economy, Hamilton neglected to inform his readers; and Jefferson and his followers were reluctant to take the matter on faith. In particular, the Jeffersonians rejected Hamilton’s plan, as part of reforming public finance, to establish a national bank.

In this opposition they had a seemingly irrefutable argument. Hamilton’s plan for a bank clearly violated the Constitution. Nowhere does that document give Congress the power to charter a national bank. So small a matter did not deter Hamilton from avid pursuit of his scheme.

In response to a request by Washington, Hamilton delivered a “Defense of the Constitutionality of the Bank” to him on February 23, 1791.

The well-known part of the defense spelled out the “loose constructionist” doctrine of the Constitution. The Constitution, said Hamilton, defined only in general terms the broad purposes for which the federal government was created. ... If Congress determined to achieve an end authorized by the Constitution, it was empowered by the final clause in Article I, Section 8 [the “necessary and proper” clause] ... to use any means that were not prohibited by the Constitution.McDonald, The Presidency of George Washington, p. 77.

Hamilton’s argument by far exceeded in importance the matter of the bank, though that in itself was no small thing. If Hamilton’s views were accepted, little of limited government could remain. Given the vaguest aims, for example, the promotion of “the general welfare,” the government had the power, Hamilton alleged, to do whatever it thought was needed to attain them.

Faced with so blatant a challenge to constitutional rule, what did Washington do? He accepted Hamilton’s opinion, refusing Madison’s advance to veto the bank bill. Hamilton’s “defense convinced Washington, and on February 25 [1791], he signed the bank bill into law.”Ibid., p. 26.

Once again Washington lent his prestige and authority to the cause of a strong central state. From a classical-liberal perspective, his course of action was a disastrous blunder.

But the record is not all black. So far Washington has been presented as an opponent of the libertarian tradition. He used his fame to secure unwarranted credence for a convention that aimed to strengthen the central government. At that convention, he gave the most extreme centralizers at least tacit support. And, as we have just seen, he accepted an argument that freed the government from all constitutional restraint. Nevertheless, from the classical-liberal perspective, Washington almost redeemed himself.

In his Farewell Address, Washington set forward principles of foreign policy that, if followed, would virtually immunize America from involvement in foreign wars. (The Address was not delivered as a speech. It was a circular published in The American Daily Advertiser, September 19, 1796.)Spalding and Garrity, A Sacred Union of Citizens, p. 57. For the controversy about Hamilton’s role in drafting the Address, see pp. 55ff.

In the Address, Washington sharply separated European affairs from those of the United States.

Europe has a set of primary interests, which to us have none or a very remote relation. Hence she must be engaged in frequent controversies, the causes of which are essentially foreign to our concerns. Hence therefore it must be unwise in us to implicate ourselves, by artificialities, in ... the ordinary combinations and collisions of her friendships, or enmities.Ibid., p. 186, quoting the text of the Address.

But, interventionists such as Walter Lippmann were later to object, does not the argument of the Address wrongly take for granted that European politics do not concern America? What if a single power dominated the continent? Would this not threaten us? If so, should we not be concerned actively to prevent such domination?

Washington rejected this contention in advance.

Our detached and distant situation invites and enables us to pursue a different course. If we remain in one People, under an efficient government, the period is not far off, when we may defy material injury from external annoyance. . . . Why forego the advantages of so peculiar a situation? Why quit our own to stand upon foreign ground.Ibid.

Here Washington adopts the much maligned Fortress America stance so derided by critics of isolation. Given the manifest perils of war, will not a classical-liberal system take advantage of a favorable geographic position to steer clear of foreign entanglements? Such, at any rate, was Washington’s argument; and for once, his immense prestige aided the cause of liberty.For a contemporary defense of the soundness of the foreign policy prescriptions of the Address, see Eric Nordlinger, Isolationism Reconfigured (Princeton, N.J.: Princeton University Press, 1995).

Opponents of American entry into the world wars frequently appealed to the Address. If they were ultimately unsuccessful, at least the fame of the Address and its author helped slow the race toward war and statism.

[This is chapter 2 from Reassessing the Presidency: The Rise of the Executive State and the Decline of Freedom, edited by John V. Denson. Buy it in hardcover for $12.95.]

It appears likely that Prince Smith's acquaintance with economic literature, while still a young man in England, was not extensive and that he taught himself the elements of the discipline after he had settled in Germany.Wolff, John Prince Smith: Eine Lebensskizze, p. 215. He claimed that Bentham's utilitarianism exerted a strong influence on his thinking.Ibid. As we shall see, however, his commitment to laissez faire was considerably more "doctrinaire" (or consistent) than Bentham's. Prince Smith's interest in economic questions may also have been stimulated through personal acquaintance with some of the leaders of the anti-corn law agitation which was occurring in England at the time and which he followed closely.

While still a teacher at the Elbing Gymnasium, Prince Smith contributed articles to the local paper, including one, in 1835, on the question of how wages are determined. In this piece he presented an "optimistic" view, that is, suggesting a steady, long-range improvement in living standards for working people in a free market economy. That he was already in some wider sense a liberal by the mid-1830s is shown by his attitude towards the "Göttingen Seven," the professors at the University of Göttingen who in 1837 protested the revocation of the Hanoverian constitution and were accordingly dismissed.Ibid., pp. 226–27. Göttingen University had been a main center for the spread of the free trade ideas of Adam Smith throughout Germany in the last decades of the eighteenth century; see, Wilhelm Treue, "Adam Smith in Deutschland: Zum Problem des 'Politischen Professors' zwischen 1776 und 1810," in Johannes U. Ruth Muhle, ed., Deutscheland und Europa: Historische Studien zur Völker-und Staatenord-nung des Abendlandes (Dusseldorf: Droste, 1951), p. 102. Prince Smith attempted to stir up a protest in Elbing, eliciting a stinging reprimand from the office of the Prussian minister of the interior. Further difficulties with the educational administration (stemming in part from his lack of any talent for teaching twelve and thirteen year olds) led to his leaving his post in 1840. He turned to free-lance journalism full-time.

His first production was a series of articles entitled, "Apology for Industrial Freedom," in which he dealt, among other subjects, with the source of pauperism. This he attributed mainly to the costs of a bloated military establishment.Wolff, John Prince Smith: Eine Lebensskizze, pp. 234–35. Prince Smith's anti-militarist and anti-war attitudes remained constant, at least until the last years of his life, when the heady Prussian triumphs over Austria and Franceseem to have affected him as they did so many other liberals. Twenty years after this early work, in 1863, he wrote in his essay, "The Market":

The great evil for the workers lies in this, that the profit on capital and capital accumulation are to such a great extent diminished by state expenditures on unproductive purposes—the capitalists would be able to give to the people who work for them much more to consume, if they did not have to support so many peace-time soldiers besides, whose consumption is not reimbursed through labor. If the Swiss militia system were introduced in all European states, in a short time capital would so increase, wages would so rise, that there would be no more question of want in the working class. Here lies the solution of the worker-question.John Prince Smith, Gesemmelte Schriften, I, Otto Michaelis, ed. (Berlin: Herbig, 1877), p. 20.

It may be remarked that the proposal to replace the Prussian standing army with a citizens' militia would tend to cast Prince Smith as a much more politically radical thinker than has usually been supposed. For one thing, the consequences for the Prussian authoritarian (obrigkeitlich) monarchy would have been incalculable and perhaps fatal.

In 1843 Prince Smith published a pamphlet, in Königsberg, "On Hostility to Trade," a major event in the history of the free trade movement in Germany. Here he placed the cause of free trade in a historical and sociological context more reminiscent of the industrialist school of French thinkers of the early nineteenth century than of Bentham. He already had to submit to attacks as "the Englishman,"Later his protectionist enemies spread the story that he was in the pay of English interests. Georg Mayer, Die Freihandeblehre in Deutschland: Ein Beitrag zur Gesellschaftslehre des wirtschaftlichen Liberalismus (Jena: Gustav Fischer, 1927), p. 53. although by this time he had become in spirit and legal fact a Prussian. An Address (sic) to Robert Peel which Prince Smith composed and which he and several of his associates sent in 1846 congratulated the British Prime Minister on his work in connection with the income tax, the bank act, and, above all, repeal of the Corn Law. Peel replied, which created something of a cause célèbre and thereby fostered public discussion of the free trade question. Later that year, Prince Smith moved to Berlin.

By now a crusading free trader,Prince Smith used the term "free trade" in a wide sense, as in his assertion in Rentzsch's Handwörterbuch der Volkswirtschaftslehre that "To the state free trade assigns no other task than just this: the production of security." Cited in Becker, Das Deutsche Manchestertum, p. 103 (emphasis added). It may be of importance that Prince Smith makes use of the term popularized by Charles Dunoyer and other of the French school of liberal economists. his aim was to establish a movement on the model of the Anti-Corn Law League, and lead it to victory. In December 1846 he gathered a number of business leaders and scholars together to consider the formation of a German Free Trade Union (Deutscher Freihandelsverein). Despite some harassment from the police, the organizing meeting took place the next March in the Hall of the Berlin Stock Exchange, where about 200 people, the great majority of them businessmen, were present (among them a Mendelssohn).Wolff, John Prince Smith, pp. 267–68. Some of those attending objected to Prince Smith's concept of an association devoted to propagating free trade ideas, preferring one that would discuss the question of free trade versus protectionism. In deference to this group, the name "Scientific Union for Trade and Industry" (Wissenschaftlicher Verein für Handel und Gewerbe) was adopted; very soon, however, the organization came to be referred to simply as the Free Trade Union (Freihandelsverein). Branches were set up in Hamburg, Stettin, and other German towns.

Prince Smith led the German delegation to the famous Free Trade Congress that met in Brussels on September 16, 1847, at the invitation of the Belgian Free Trade Union. His biographer, Otto Wolff, characterized the banquet that concluded the conference as "the high point of that first period of the European free trade movement, which had celebrated its greatest triumph in the reform of the English tariff and which doubtless would even then have led to practical free trade reforms in a great part of the continent, if the revolution of 1848 and its consequences had not intervened."Ibid., p. 273.

Prince Smith seems to have remained comparatively unaffected by the great movement for liberal constitutional reform and national unification of 1848; his efforts were, and continued to be, focused instead on economic reform in a free trade direction. He addressed a petition to the National Assembly in Frankfurt on "Protection Against the Limitation of Trade," outlining his views on the current state of affairs.Ibid., p. 286. The European situation, in his view, was one of "armed peace," characterized by the maintenance of standing armies, excessive governmental power, "monstrous" taxes, mass impoverishment, and threats to the social order. The cause he identified as the ambitions of the political power, which has become an end in itself. Free trade and maximum economic freedom were the remedies.

The petition, however, attracted little interest or support from the liberals at the Paulskirche, who were concentrating their efforts precisely on the issues Prince Smith considered secondary. By now he had married Auguste Sommerbrod, the daughter of an affluent Berlin banker and settled in quarters on Unter den Linden; after the revolutionary turmoil died down, he turned to renewed activity on behalf of his cause.

His chief goal was to establish a free trade association that would cover all of Germany, and, probably with the experience of the Anti-Corn Law League in mind, he was very conscious of the need for substantial amounts of money to achieve this end. Money was needed to publish brochures and books, to arrange to

have articles sent to the newspapers, and to train talented journalists in the principles of political economy. An organization was formed, the Central Union for Freedom of Trade (Zentralbund für Handelsfreiheit), which did not, however, succeed in attracting any considerable support. It was chiefly helpful in tunneling contributions from free trade circles in seacoast cities like Hamburg and Stettin to Prince Smith for use in propaganda. The plan to train journalists fell through for lack of suitable candidates. (In the 1860s and early 70s, free trade views came to dominate the German press.) Prince Smith was active, however, in disseminating good translations of the works of Frederic Bastiat and in gathering about him a circle of like-minded enthusiasts. Ibid., pp. 296–97, 309–11.

A good deal of his activity in this period consisted in persuading the German political liberals of the desirability of free trade. Many of the leading liberals of southern and western Germany, such as Robert von Mohl, were protectionists. As Becker notes:

At that time liberal and free-trader were indeed so little identical that the south-German liberals were the most interested representatives of the protective tariff system, while conversely the conservative farmers of the north and east figured as the chief supporters of the free trade party ... as a consequence of later political constellations, the appearance has emerged that political liberalism was always Manchesterite and that Manchesterism was always liberal-democratic. Nothing is as false as this view.Becker, Das Deutsche Manchestertum, pp. 33–34.

In order to influence liberal and radical opinion, Prince Smith, along with his friend and fellow free-trader Julius Faucher, collaborated on the Berlin newspaper, the Demokratische Zeitung (later the Abendpost). It would seem that it was in this period that the polarization of liberal and free trader on the one side and socialist and collectivist on the other began to form.Prince Smith was aware of the danger socialism posed for his cherished social system as early as 1850, and wrote to a friend on how crucial the need to "conquer the masses" for free trade. Wolff, John Prince Smith, p. 315. When the Abendpost was closed down by the censors. Prince Smith wrote:

The purpose of my collaboration on the Abendpost has to a great extent been achieved. I have brought respect for the free trade doctrine to the most extreme left. Free trade and bureaucracy, or competition and exploitation no longer count as identical with the party whose absurd conception of property made it dangerous. I have demonstrated that the doctrine of economic freedom is much more progressive [freisinnig] than all the projects and teachings of ordinances on property and earnings that are arbitrary and realizable only through barbaric force and that, moreover, could not in the long run be implemented by any conceivable force.Ibid., pp. 315–16.

The extension of the Zollverein, or German customs union, was proceeding apace at this time, and Prince Smith, who was acquainted with a number of the Prussian leaders, including the chief minister, Manteuffel, probably influenced them in the free trade direction. At any rate, his preference was always for working to persuade those in power, rather than adopting an oppositional stance. Continuing his agitation, he composed a declaration on behalf of commercial and landed associations in West and East Prussia that were calling for occupational freedom (Gewerbefreiheit) and free trade. This declaration is of political interest, since it shows the strong support for free trade principles in the regions of Prussia most "backward" from the point of view of political liberalism. Its theoretical interest stems from the fact that in it he associated "protectionism" with "systematic socialism," a linkage that was standard in the writings of Bastiat.It would be desirable to know more about Prince Smith's connections with the French liberals of his time. He was perfectly fluent in French and contributed to the Journal des Économistes. Ibid., p. 335. In 1858, the Kongress deutscher Volkswirte (Congress of German Economists) was founded, assembling the chief believers in the cause, many of whom had been led to it by Prince Smith during his previous twenty years of labors. Now there were many others to join him in his propagandistic and agitational work. Although Prince Smith did not assume the presidency of the Congress (evidently for various reasons), he participated in the yearly meetings, submitting papers such as the one at the 1860 gathering in Cologne against the legal limitation on interest rates. At the 1863 meeting in Dresden he spoke against patents, and the next year, in Hanover, he attacked "unredeemable paper money with so-called compulsory exchange-rate."Ibid., pp. 337, 346–47. He also kept closely involved with the Congress's various activities, which continued to promote laissez faire until the end. (Its last meeting was held in 1885.) Those members who grew increasingly disenchanted with the Congress's position on the "social question" left and, with others, founded the Verein für Socialpolitik, in 1872, in Eisenach. In his opening address at this conference, Gustav Schmoller testified to the influence of the movement that Prince Smith had created when he referred to "the economic doctrines which unconditionally dominate the day's market, those which have found expression in the Congress.Becker, Das Deutsche Manchestertum, p. 100.

From 1860 until his death Prince Smith was the head of the Economic Society (Volkswirtschaftliche Gesellschaft), the successor to the Free Trade Union. His home in Berlin became a meeting place for Prussian politicians, some of whom went onto (sic) form the Progressive Party (Fortschrittspartei) soon after.Wolff, John Prince Smith, p. 339. In 1863, the Vierteljahrschrift für Volkswirtschaft, Politik, und Kulturgeschichte (Quarterly Journal for Economy, Politics, and Cultural History) began to appear in Berlin, under the editorship of Julius Faucher, perhaps Prince Smith's closest collaborator. The chief theoretical organ of classical liberalism in Germany, this periodical continued to be published for the next thirty years. Prince Smith was an important contributor to the Vierteljahrschrift, and a number of his most important essays were first printed there.

The quarterly journal, the Berlin society, the congress of economists, and the informal influencing of politicians and officials were all elements of the same movement, facets of the same activism, and all fired by the spirit of John Prince Smith. This was the case also with the Handwörterbuch der Volkswirtschaftslehre (Concise Dictionary of Economics), edited by H. Rentzsch, published in 1866.Becker, Das Deutsche Manchestertum, p. 100. According to Becker, Rentzsch later gave up free trade. Ibid., p. 108. This work is similar in many respects to the one edited by Coquelin and Guillaumin in France. For the Handwörterbuch, it was Prince Smith who was selected to write the article on "Freedom of Trade-Free Traders."

The article presents his characteristic views on economics and politics. "Liberalism," he writes, "only recognizes one task which the State can perform, namely, the production of security."Quoted in Charles Gide and Charles Rist, A History of Economic Doctrines from the Time of the Physiocrats to the Present Day, trans. R. Richards (Boston/New York/ Chicago: D. C. Heath, n.d.), p. 439n. Gide and Rist, perhaps relying too heavily on anti-liberal German sources, comment that "Liberalism had nowhere assumed such extravagant proportions as it had in Germany. Prince Smith, who is the best-known representative of Liberalism after Dunoyer [sic], was convinced that the State had nothing to do beyond guaranteeing security, and denied that there was any element of solidarity between economic agents save such as results from the existence of a common market."Ibid., p. 439. At any rate, Prince Smith's "minimalist" view of the functions of the state goes considerably beyond Bentham's "agenda."On Bentham, see Lionel Robbins, The Theory of Economic Policy in English Classical Political Economy (London: Macmillan, 1953), pp. 38–43.

From 1862 to 1866, Prince Smith represented Stettin in the Prussian House of Deputies, where he was not an outstanding figure, addressing the House only seldom and then mainly on economic questions. This was the period of the bitter—and ultimately decisive—constitutional struggles between Bismarck and the German liberals, whose vanguard had formed the Progressive Party in 1861. Prince Smith's political views had always been "moderate," and as the liberals became radicalized in the face of what they viewed as the government's arbitrary and unconstitutional actions, he distanced himself from them increasingly. In 1866, he declined to stand for reelection. With Königgratz and the crushing Prussian victory over Austria, Bismarck scored a victory over the recalcitrant liberals as well, one that some believe sealed the fate of German liberalism before Reich was even formed.Ludwig von Mises, Omnipotent Government (New Haven: Yale University Press, 1944), pp. 27–28.

Prince Smith was elected to the German Reichstag from Anhalt-Zerbst, but failing health prevented him from taking any but a negligible part in the proceedings, except for addressing the body on two occasions, in November 1871, on the question of currency reform.

He died in 1874, his patriotism and economic liberalism both gratified by the reality of a Germany united and committed to free trade. In Becker's words:

He had the luck, which is granted to few men in public life, to die at a moment when the definitive victory of the ideas he represented seemed to be a question of only a short time, and when the few contrary signs still, by a long way, gave no hint of how quickly the whole splendor would collapse.Becker, Das Deutsche Manchestertum, p. 41.

This is not, however, entirely correct. In his history of German economic thought (published in the same year as Prince Smith's death), Wilhelm Roscher, after mentioning some of the practical achievements of the German free trade school, was moved to write: "But also theoretically I must warn as much against the underestimation of this school, which now is frequent, as against that overestimation which permitted it at an earlier time to be mistaken for economics altogether."Roscher, Geschichte der National-Oekonomik in Deutschland, p. 1017.

There is little doubt that in historical retrospect Prince Smith—as well as German liberalism as a whole—has suffered from the rout of the system he fought for. The eclipse of liberalism by national-social and imperialist currents and by Marxist (later pseudo-Marxist) socialism has tended to relegate the entschieden liberalsThe term is standard; see, e.g., Ina Susanne Lorenz, Eugen Richter: Der entschiedene Liberalismus in wilhelminischer Zelt 1871 bis 1906 (Husum: Matthiesen, 1981). Entschieden means "determined" or "firm." of nineteenth century Germany to the class of historical curiosities, even of creatures absurdly out of their natural element. Yet, the thinking of John Prince Smith deserves consideration, from a number of points of view.

For example. Prince Smith's famous essay, "On the So-Called Worker-Question,"John Prince Smith, G. S., I, pp. 26–42. was for decades after its first publication, in 1864, the target of harsh attacks,Besides Becker, Das Deutsche Manchestertum, pp. 81–86; see Heinrich Herkner, Die Arbeiterfrage: Eine Einführung (Berlin: J. Guttentag, 1908), pp. 512–17; Werner Sombart, Sozialismus und Soziale Bewegung (Jena: Gustav Fisher, 1908), p. 192, where Prince Smith's essay is dismissed as "pitiable"; and Hans Gehrig, Die sozialpolitischen Anschauungen der deutschen Freihandelsschule (Jena: Gustav Fisher, 1909), pp. 19–21. Gehrig at least concedes what many critics have not, that there was an ethical basis to Manchesterism and Prince Smith's position: "Because we are ourselves responsible, therefore we must be free: so runs the argumentation of a teaching that has often enough been reproached with materialism, and in characterizing which only the negative sides, as the 'theory of the nightwatchman state,' have been emphasized." Ibid., p. 24. Contrast with Becker, Das Deutsche Manchestertum, pp. 106–07, who asks whether Ferdinand Lassalle was not "completely correct" when he wrote of the "Manchester men": "Those modern barbarians who hate the state, not this or that state, not this or that state-form, but the state altogether. And who, as they now and again clearly have admitted, would most prefer to abolish the state, auction off justice and police to the cheapest suppliers, and have war run by joint-stock companies, so that there should nowhere in all of creation still be an ethical point from which resistance could be offered to their capital-armed mania for exploitation." for which its contentious title probably bears some responsibility. Yet there can be little doubt that the essay is motivated by a genuine good will toward workers and a desire to aid in the improvement of their living standards; furthermore, it is at least arguable that it is informed with an intelligent appreciation of how that improvement is most likely to be effected.

The reference to [the] "so-called" worker-question should not be taken to indicate any "heartlessness" on the part of Pri[n]ce-Smith to what he well knew to be the stringent conditions of the laboring class. The cause of the sarcasm (if that is what it is) stems form his belief that: "By 'worker-question' one understands namely the question: 'How can the economic situation of workers be suddenly improved, independently of the general rise of the economy, which one does not wish to wait for?'" John Prince Smith, G.S., p. 29. Prince Smith held that:

For a scarcity in the means of satisfying wants there is obviously no other remedy than increased production. And evidently more can only be produced by increasing knowledge, skill, industriousness, and above all capital. Ibid., p. 27. The unsupported assumption of most of his critics in this area seems to be that the "social question" in the mid-nineteenth century could have been "solved" by trade-unionism and the redistribution of wealth from capitalists to workers.

To the "iron law of wages" proclaimed by Lassalle, Prince Smith opposed a "golden law," which affirmed the steady, long-range improvement in living standards of working people.Ibid., pp. 21, 32–33. As for the poor:

The ones really in want are those whose labor power lacks nearly any support through capital and therefore produces correspondingly little, those who have remained on a pre-economic level, and for whose integration into genuine economic enterprise the available capital is still insufficient. Yet all the capital sufficient for full employment can easily and even quickly be created with full freedom of economic action—as long as the state does not devour too much of what is created."Der Markt," in ibid., pp. 21–22. A curious feature of the essay on the working class is Prince Smith's discussion of the underclass of modern society, "an old and entrenched hereditary derelict culture," from which "most of the criminals proceed." "As ineradicable lichen and fungi coat every lightless, damp surface, so these demoralized ones nestle and multiply in all the unclean recesses of human dwelling places. ... Against proliferating demoralization there is only one remedy: it must be exterminated, as dry-rot is exterminated, by letting in the air and light of civilization down to the deepest and most hidden spaces of the social edifice, and where possible snatch the children from their moldy birthplaces." Ibid., p. 37.

A field in which greater originality has been claimed for Prince Smith is historical sociology. In the view of Georg Mayer, Prince Smith's early essay, "On the Political Progress of Prussia" (1843), shows a surprising resemblance to historical materialism; for Prince Smith, "it is exclusively changes in the economic structure that are considered as the ultimate motives of events." Because of economic developments, Prussia is entering the stage in which the feudal element must necessarily dwindle internally and peaceful commercial relations become the rule in foreign affairs.Georg Mayer, Die Freihandelslehre in Deutschland, pp. 56–57.

Although Mayer emphasizes the "Marxist" overtones of this essay,The dependence of both political evolution and the structure of ideas on economic change in Prince Smith's thought is also emphasized by Julius Paul Kohler, Staat und Gesellschaft in der deutschen Theorie des auswärtigen Wirtschaftspolitik und des intemationalen Hahdels van Schlettwein bis auf Fr. List und Prince Smith (Stuttgart: W. Kohlhammer, 1926), pp. 118–23. Köhler, however, does not link this to the thought of Marx, stating simply that it "reflects contemporary sociologies," p. 123. it appears that Prince Smith's thinking here bears a much greater resemblance to the ideas of the French Industrialist school and of the Benjamin Constant of De l’esprit de conquéte. (It is likely that by the 1920s, when Mayer was writing, these writers had been completely lost sight of in Germany.) There would perhaps be a place for a study on Prince Smith and his historical sociology, which would serve also to draw attention to the French writers mentioned above. At the same time it would help correct [the] commonly accepted legend of Marxism's monopoly on the idea of the "priority of the economic over the political."

[Chapter 23 from Man, Economy, and Liberty: Essays in Honor of Murray N. Rothbard, eds. Walter Block and Llewellyn H. Rockwell Jr. (1988).]

From the Preface by Murray N. Rothbard

When I was in my junior and senior years at Princeton studying history in the early 1970s, I became fascinated with the Progressive Era. It attracted me at a time when America rejected as profoundly as it did under Lincoln and the Radical Republicans and even under FDR, the libertarian first principles of the American Revolution.

To pursue this interest, I volunteered to take a course in the Graduate School, a procedure permitted for a few undergraduates at the time. The course was an advanced look at Progressive intellectual thought taught by Woodrow Wilson’s biographer and hagiographer, Professor Arthur S. Link. The readings were all pro-Progressive as were all the other students in the class. We studied Professor Link’s works and the claptrap by his colleague William E. Leuchtenberg.

In my search for a rational understanding of the Era — and for ammunition to use in the classroom where I was regularly beaten up — I asked Professor Link if any academic had made the argument effectively that the Progressives were power-hungry charlatans in the guise of noble businessmen, selfless politicians, and honest academics.

He told me of a young fellow named Rothbard, of whose work he had only heard, but had not read. This advice sent me to Man, Economy, and State, which I devoured; and my ideological odyssey was off to the races.

Like many of Rothbard’s student admirers, I also devoured For a New Liberty, all four volumes of Conceived in Liberty, and The Mystery of Banking. As any student of human freedom in general or of the Austrian school specifically, knows, these must-reads are all a joy to read. And we also know that in those works and others, Rothbard established himself as the great interpreter of Ludwig von Mises.

While he was writing those books and lecturing nationally and producing many ground-breaking articles and essays on human freedom, he began to write discrete chapters of a book he would not live to publish on the Progressive Era.

One of his great young interpreters, Florida Southern College professor and Mises Fellow Patrick Newman, has picked up where our hero left off. Professor Newman is a brilliant interpreter of Rothbard. His assemblage of these heretofore unpublished chapters, and the vast notes he has added to them have produced a masterpiece that might actually have made Murray Rothbard blush.

Readers of The Progressive Era will carry away an overwhelming impression that history is “a comprehensive resurrection of the past.” Rothbard was never satisfied with the presentation of a general thesis or the sketch of a historical period, which is why readers will find detailed accounts of an enormous number of people. Only a historian of Rothbard’s immense intellectual energy and knowledge could have written what would become The Progressive Era.

Rothbard did not amass details merely to give readers a sense of the Progressive Era, from the 1880s to the 1920s. Rather, he uses these details to support a revolutionary new interpretation. Many people view the Progressives as reformers who fought against corruption and modernized our laws and institutions. Rothbard proves to the hilt that this common opinion is false.

The Progressives aimed to displace a 19th-century America that respected individual rights based on natural law. They claimed that natural law and a free economy were outmoded and unscientific ideas; and argued that through applying science to politics, they could replace a corrupt and stagnant old order with a State-ordered more prosperous and egalitarian one.

Rothbard dissents:

Briefly, the thesis is that the rapid upsurge of statism in this period was propelled by a coalition of two broad groups: (a) certain big business groups, anxious to replace a roughly laissez-faire economy by a new form of mercantilism, cartelized and controlled and subsidized by a strong government under their influence and control; and (b) newly burgeoning groups of intellectuals, technocrats, and professionals: economists, writers, engineers, planners, physicians, etc., anxious for power and lucrative employment at the hands of the State. Since America had been born in an antimonopoly tradition, it became important to put over the new system of cartelization as a “progressive” curbing of big business by a humanitarian government; intellectuals were relied on for this selling job. These two groups were inspired by Bismarck’s creation of a monopolized welfare-warfare state in Prussia and Germany.

Rothbard constantly overturns accepted ideas as he argues for his interpretation. Most of us have heard of the furor early in the 20th century over conditions in the Chicago meat packing industry, set off by Upton Sinclair’s novel The Jungle. Few people are aware, however, that Sinclair’s sensationalism was fiction, in direct contradiction to what contemporary inspections of the meat packing plants revealed.

Rothbard goes much further. He shows how, beginning in the 1880s, the large meat packing plants lobbied for greater regulation themselves.

Unfortunately for the myth, [about The Jungle’s influence] the drive for federal meat inspection actually began more than two decades earlier, and was launched mainly by the big meat packers themselves. The spur was the urge to penetrate the European market for meat, something which the large meat packers thought could be done if the government would certify the quality of meat, and thereby make American meat more highly rated abroad. Not coincidentally, as in all Colbertist mercantilist legislation over the centuries, a governmentally-coerced upgrading of quality would serve to cartelize: to lower production, restrict competition, and raise prices to the consumers.

Rothbard sees in postmillennial pietism a key to the entire Progressive Era. The postmillennials preached that Jesus would inaugurate His kingdom only after the world had been reformed, and they accordingly saw a religious mandate to institute the social reforms they favored.

Their influence was pervasive. For example, Rothbard draws an unexpected connection between their ideas and eugenics:

One way of correcting the increasingly pro-Catholic demographics ... often promoted in the name of “science,” was eugenics, an increasingly popular doctrine of the progressive movement. Broadly, eugenics may be defined as encouraging the breeding of the “fit” and discouraging the breeding of the “unfit,” the criteria of “fitness” often coinciding with the cleavage between native, white Protestants and the foreign born or Catholics — or the white-black cleavage. In extreme cases, the unfit were to be coercively sterilized.

Theodore Roosevelt was the quintessential Progressive, and Rothbard shows in convincing fashion how his analytic framework helps explain that bizarre and flamboyant figure. Roosevelt was allied with the banking interests of the House of Morgan. His “trust busting” activities were very selective. Only the trusts opposed to Morgan control were in Roosevelt’s crosshairs. He supported “good” trusts, i.e., ones allied with the Morgan interests. Besides his Morgan alliance, Roosevelt was dominated by a bellicosity of maniacal proportions. “All his life Theodore Roosevelt had thirsted for war — any war — and military glory.”

War and the Progressives were natural allies. War brought centralized control of the economy, and this allowed the Progressives to put their plans into effect. Rothbard writes:

The wartime collectivism also held forth a model to the nation’s liberal intellectuals; for here was seemingly a system that replaced laissez-faire not by the rigors and class hatreds of proletarian Marxism, but by a new strong State, planning and organizing the economy in harmony with all leading economic groups. It was, not coincidentally, to be a neomercantilism, a “mixed economy,” heavily staffed by these selfsame liberal intellectuals.

     And finally, both big business and the liberals saw in the wartime model a way to organize and integrate the often unruly labor force as a junior partner in the corporatist system — a force to be disciplined by their own “responsible” leadership of the labor unions.

I have addressed only a few of the themes analyzed in this vast book. Readers have many insights in store for them, including the origin of the Federal Reserve System, Herbert Hoover’s activities as a Progressive, and the role of the Rockefellers in promoting Social Security. Nor does Rothbard shy away from the constitutional implications in all this, planted by Roosevelt and nurtured by his personal enemy but ideological comrade Woodrow Wilson. Rothbard notes that, the War Between the States aside, the Madisonian model — the federal government may only lawfully do what the Constitution directly permits — prevailed in government from 1789 to the 1880s. After the Progressive Era, the Wilsonian model — the federal government may do whatever there is a political will to do except that which the Constitution expressly prohibits — continues to prevail up to the present day.

We owe the appearance of The Progressive Era to the masterful detective work and patient labor of the good and youthful Professor Newman. In his “Introduction,” he tells the dramatic tale of how Rothbard’s book was discovered and assembled; and he has planted many teasers for the Rothbardian gems to come.

Rothbard’s posthumous masterpiece is the definitive book on the Progressives. Only Murray Rothbard, with his unique scholarship, penetrating intelligence, prodigious work ethic, infectious love of life, and indefatigable devotion to liberty, could have written this book. It will soon be the must read study of this dreadful time in our past.

The people of the world stand under the principle of power. The whole social entity is governed by power, this being the highest value peoples aspire to and by which they counted, weighed, and judged. But, contrary to what is usually assumed, it is not external power which determines everything, but fundamentally internal power is the core of the power phenomenon. As this core gradually matures over time, it bursts open the shell of external power under whose protection it grows to maturity.