Posted on

Middle-of-the-Road Policy Leads to Socialism

Economics deals with society’s fundamental problems; it concerns everyone and belongs to all. It is the main and proper study of every citizen (Ludwig von Mises, Human Action).

The following address was delivered before the University Club of New York, April 18, 1950, by Doctor Ludwig von Mises:

How Middle-of-the-Road Policy Leads to Socialism

The fundamental dogma of all brands of socialism and communism is that the market economy or capitalism is a system that hurts the vital interests of the immense majority of people for the sole benefit of a small minority of rugged individualists. It condemns the masses to progressing impoverishment. It brings about misery, slavery, oppression, degradation and exploitation of the working men, while it enriches a class of idle and useless parasites.

This doctrine was not the work of Karl Marx. It had been developed long before Marx entered the scene. Its most successful propagators were not the Marxian authors, but such men as Carlyle and Ruskin, the British Fabians, the German professors and the American Institutionalists. And it is a very significant fact that the correctness of this dogma was contested only by a few economists who were very soon silenced and barred from access to the universities, the press, the leadership of political parties and, first of all, public office. Public opinion by and large accepted the condemnation of capitalism without any reservation.

1. Socialism

But, of course, the practical political conclusions which people drew from this dogma were not uniform. One group declared that there is but one way to wipe out these evils, namely to abolish capitalism entirely. They advocate the substitution of public control of the means of production for private control. They aim at the establishment of what is called socialism, communism, planning, or state capitalism. All these terms signify the same thing. No longer should the consumers, by their buying and abstention from buying, determine what should be produced, in what quantity and of what quality. Henceforth a central authority alone should direct all production activities.

2. Interventionism, Allegedly a Middle-of-the-Road Policy

A second group seems to be less radical. They reject socialism no less than capitalism. They recommend a third system, which, as they say, is as far from capitalism as it is from socialism, which as a third system of society’s economic organization, stands midway between the two other systems, and while retaining the advantages of both, avoids the disadvantages inherent in each. This third system is known as the system of interventionism. In the terminology of American politics it is often referred to as the middle-of-the-road policy. What makes this third system popular with many people is the particular way they choose to look upon the problems involved. As they see it, two classes, the capitalists and entrepreneurs on the one hand and the wage earners on the other hand, are arguing about the distribution of the yield of capital and entrepreneurial activities. Both parties are claiming the whole cake for themselves. Now, suggest these mediators, let us make peace by splitting the disputed value equally between the two classes. The State as an impartial arbiter should interfere, and should curb the greed of the capitalists and assign a part of the profits to the working classes. Thus it will be possible to dethrone the moloch capitalism without enthroning the moloch of totalitarian socialism.

Yet this mode of judging the issue is entirely fallacious. The antagonism between capitalism and socialism is not a dispute about the distribution of booty. It is a controversy about which two schemes for society’s economic organization, capitalism or socialism, is conducive to the better attainment of those ends which all people consider as the ultimate aim of activities commonly called economic, viz., the best possible supply of useful commodities and services. Capitalism wants to attain these ends by private enterprise and initiative, subject to the supremacy of the public’s buying and abstention from buying on the market. The socialists want to substitute the unique plan of a central authority for the plans of the various individuals. They want to put in place of what Marx called the “anarchy of production” the exclusive monopoly of the government. The antagonism does not refer to the mode of distributing a fixed amount of amenities. It refers to the mode of producing all those goods which people want to enjoy.

The conflict of the two principles is irreconcilable and does not allow for any compromise. Control is indivisible. Either the consumers’ demand as manifested on the market decides for what purposes and how the factors of production should be employed, or the government takes care of these matters. There is nothing that could mitigate the opposition between these two contradictory principles. They preclude each other. Interventionism is not a golden mean between capitalism and socialism. It is the design of a third system of society’s economic organization and must be appreciated as such.

3. How Interventionism Works

It is not the task of today’s discussion to raise any questions about the merits either of capitalism or of socialism. I am dealing today with interventionism alone. And I do not intend to enter into an arbitrary evaluation of interventionism from any preconceived point of view. My only concern is to show how interventionism works and whether or not it can be considered as a pattern of a permanent system for society’s economic organization.

The interventionists emphasize that they plan to retain private ownership of the means of production, entrepreneurship and market exchange. But, they go on to say, it is peremptory to prevent these capitalist institutions from spreading havoc and unfairly exploiting the majority of people. It is the duty of government to restrain, by orders and prohibitions, the greed of the propertied classes lest their acquisitiveness harm the poorer classes. Unhampered or laissez-faire capitalism is an evil. But in order to eliminate its evils, there is no need to abolish capitalism entirely. It is possible to improve the capitalist system by government interference with the actions of the capitalists and entrepreneurs. Such government regulation and regimentation of business is the only method to keep off totalitarian socialism and to salvage those features of capitalism which are worth preserving.

On the ground of this philosophy, the interventionists advocate a galaxy of various measures. Let us pick out one of them, the very popular scheme of price control.

4. How Price Control Leads to Socialism

The government believes that the price of a definite commodity, e.g., milk, is too high. It wants to make it possible for the poor to give their children more milk. Thus it resorts to a price ceiling and fixes the price of milk at a lower rate than that prevailing on the free market. The result is that the marginal producers of milk, those producing at the highest cost, now incur losses. As no individual farmer or businessman can go on producing at a loss, these marginal producers stop producing and selling milk on the market. They will use their cows and their skill for other more profitable purposes. They will, for example, produce butter, cheese or meat. There will be less milk available for the consumers, not more.

This, or course, is contrary to the intentions of the government. It wanted to make it easier for some people to buy more milk. But, as an outcome of its interference, the supply available drops. The measure proves abortive from the very point of view of the government and the groups it was eager to favor. It brings about a state of affairs, which again, from the point of view of the government, is even less desirable than the previous state of affairs which it was designed to improve.

Now, the government is faced with an alternative. It can abrogate its decree and refrain from any further endeavors to control the price of milk. But if it insists upon its intention to
keep the price of milk below the rate the unhampered market would have determined and wants nonetheless to avoid a drop in the supply of milk, it must try to eliminate the causes
that render the marginal producers’ business unremunerative.

It must add to the first decree concerning only the price of milk a second decree fixing the prices of the factors of production necessary for the production of milk at such a low rate that the marginal producers of milk will no longer suffer losses and will therefore abstain from restricting output. But then the same story repeats itself on a remoter plane. The
supply of the factors of production required for the production of milk drops, and again the government is back where it started. If it does not want to admit defeat and to abstain from any meddling with prices, it must push further and fix the prices of those factors of production which are needed for the production of the factors necessary for the production of milk. Thus the government is forced to go further and further, fixing step by step the prices of all consumers’ goods and of all factors of production, both human, i.e., labor, and material, and to order every entrepreneur and every worker to continue work at these
prices and wages.

No branch of industry can be omitted from this all-round 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-round 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-round planning by the government, it is socialism.

Please read the rest of this brief but edifying essay here.

Posted on

Political Theory: Theory of Government

Political theory is the theory of government. It is a sub-branch of ethics, and economics, in turn, is a sub-branch of politics.

Ethics — the science of human action — precedes politics because politics is the science of human action in societies, and societies are composed only of individuals. For this reason, the individual has hierarchical primacy.

Capitalism, socialism, communism, anarchy — these are all a species of the genus ethics, as is any specific political theory.

Governments, properly defined, are the body politic that have the power to make and implement the laws of the land, and humans are the only species who possess them. But what ultimately gives rise to these political bodies, and do we really need them at all? If so, why?

Some 40,000 years ago, when Homo sapiens sapiens first emerged, we existed exclusively in bands and small tribes.

A band is the smallest of societies, consisting of five to seventy-five people, all of whom are related either by birth or marriage.

Tribes, the next size up, consist of hundreds of people, not all of whom are related, although everyone is known by everyone else.

It is for this reason that conflicts in band and tribal life are resolved without the need of government. Indeed, it’s a well-established fact among anthropologists that governments do not exist in societies of this size.

As Jared Diamond appositely explains it in his otherwise overrated Guns, Germs, and Steel:

“Those ties of relationships binding all tribal members make police, laws, and other conflict-resolving institutions of larger societies unnecessary, since any two villagers getting into an argument will share kin, who apply pressure on them to keep it from becoming violent.”

Homo sapiens lived for approximately 40,000 years in just such non-governmental societies.

Around 5,500 BC, however, chiefdoms arose.

Chiefdoms are one size up from tribes but still smaller than nations.

These societies have populations that number in the thousands or even tens of thousands, whereas nations consist of fifty thousand people or more.

It is at the stage of chiefdoms that the necessity of government begins; for when populations increase to this size, the potential for conflict and disorder increases proportionally.

And here we get a glimpse of government’s primary function: to protect against conflict.

As long as the potential for conflict exists among humans, the need for protection and adjudication exists as well.

“With the rise of chiefdoms around 7,500 years ago, people had to learn, for the first time in history, how to encounter strangers regularly without attempting to kill them…. Part of the solution to that problem was for one person, the chief, to exercise a monopoly on the right to use force” (Ibid, p. 273).

The legal use of force is the defining characteristic of government.

It is also the fundamental difference between governmental action and private action.

In the words of Auberon Herbert, speaking over 100 years ago:

Nobody has the moral right to seek his own advantage by force. That is the one unalterable, inviolable condition of a true society. Whether we are many, or whether we are few, we must learn only to use the weapons of reason, discussion, and persuasion…. As long as men are willing to make use of force for their own ends, or to make use of fraud, which is only force in disguise, wearing a mask, and evading our consent, just as force with violence openly disregards it – so long we must use force to restrain force. That is the one and only one right employment of force … force in the defense of the plain simple rights of property, public or private, in a world, of all the rights of self-ownership – force used defensively against force used aggressively (Auberon Herbert, The Principles of Voluntaryism, 1897).

Among individuals, the initiation of force is illegal, whether the force is directly used, as in rape, or indirectly used, as in extortion (a crucial distinction, incidentally, which Mr. Herbert notes in his fraud-is-force-in-disguise example above).

People can only infringe upon the rights of other people by means of (direct or indirect) force.

In this sense, government is an institution whose function is to protect the individual against the initiation of force.

In the words of Thomas Jefferson: “The legitimate functions of government extend to such acts only as are injurious to others” (Notes on the State of Virginia).

Around the same time that Thomas Jefferson was writing those words, another articulate fellow by the name of Wilhelm von Humboldt independently came to an almost identical conclusion:

Any State interference in private affairs, where there is no reference to violence done to individual rights, should be absolutely condemned…. To provide for the security of its citizens, the state must prohibit or restrict such actions, relating directly to the agents only, as imply in their consequences the infringement of others’ rights, or encroach on their freedom of property without their consent or against their will…. Beyond this every limitation of personal freedom lies outside the limits of state action (Wilhelm von Humboldt, The Limits of State Action, 1791).

What professor Jared Diamond incorrectly refers to as government’s “right to use force” (governments do not, strictly speaking, possess rights but only permissions) is a sentiment that has been stated more succinctly many times by Enlightenment thinkers, such as the best theoreticians among our Constitutional framers; but it was perhaps expressed most eloquently by the fiery political philosopher Isabel Paterson:

Government is solely an instrument or mechanism of appropriation, prohibition, compulsion, and extinction; in the nature of things it can be nothing else, and can operate to no other end…. Seen in this light, government is so horrific – and its actual operations in the past have been so horrible at times – that there is some excuse for a failure to realize its necessity (Isabel Paterson, The God of the Machine, 1943).

If, however, government only becomes necessary when societies reach the size of chiefdoms or beyond, what precipitated this sudden population leap, when for 40,000 years — by far the majority of our short history — human growth had remained relatively static?

Why, in other words, do we not still exist in bands and tribes, without the need of government?

The answer, it turns out, is food.

“We have seen that large or dense populations arise only under conditions of food production.… All states nourish their citizens by means of food production” (Jared Diamond, Guns, Germs, and Steel).

When survival is made easier, populations increase. When populations increase, societies become more complex. When food production increases, mankind increases, societies become increasingly complex, and governments become necessary to maintain order. So it is with increased food production that the science of economics is born.

At root, economics is indeed the science of production and exchange.

Money, in the form of currency, is nothing more, or less, than a symbol of production — an invaluable one, to be sure, since money simplifies so drastically the process of exchange.

It also creates the possibility to store and save over long time periods and makes usury possible, which in turn creates more wealth. This is a crux because it illustrates the deep connection between politics and economics.

Thus, increased food production equals increased population equals increased production equals more people equals more societal complexity, and so on, reciprocally.

This is the process whereby societies develop the need for government.

This is why the fact of government is inescapable.

Whatever a society’s original size, smaller ones only make that initial leap to larger by producing more food.

(If they don’t make it, they are absorbed either by the actual use of force or by its mere threat, by the societies that do produce more food. For this reason, bands and tribes have become all but obsolete today, with a few Amazonian and New Guinean exceptions, most of which are also being swiftly amalgamated.)

Thereafter, in order for that society to flourish, it must now continue to produce food, but it must also efficiently manage its size increase, with all that ensuing complexity. Countless societies have foundered at this stage, as they still do today (see, for example, present day Yugoslavia, or Turkey, or Russia).

Advancements in irrigation, the domestication of animals, the introduction of fertilizers and pesticides, these things begin to make societies complex, because they increase food production. But with this added complexity come new challenges:

To thrive, these societies must sort out and solve a host of additional problems, ranging from mass uprisings, to increasing economic developments, to internecine warfare, to the threat of governmental takeovers, to crime and punishment, to many, many other things as well.

In the final analysis, then, we can say that governments are unique to humans because humans are the only conceptual species. We produce our food, we build our homes, we create our medicine, we extract our energy, and we deal with one another not as animals, by brute force, but as humans, by agreement.

Trade is the natural drive of the conceptual mind.

So that at this point, our world without government would collapse into chaos — until, that is, the strongest faction seized control, forcefully, you can be sure, and then laid down its own version of order (see present day Somalia).

Who would stop them?

Other warring factions?

In the end, however necessary government may be, please never forget this:

“In its best state, government is but a necessary evil; in its worst state an intolerable one” (Thomas Paine, Common Sense).

“Government is not reason, it is not eloquence — it is force. Government is like fire, a dangerous servant and a fearful master.”

Government, in short, is inherently dangerous because it holds exclusive power over the people.

The task, then, is not necessarily to do away with government altogether but rather to limit government in the extreme: to build a government which protects its citizens without, at the same time, creating oppression of any kind, including taxation to the point of plunder under that mythical guise of a “right” to redistribute your money – which is the symbol of your work.

Posted on

Laissez Faire and Hong Kong


Laissez faire is a social system based upon private ownership of the means of production and the preeminence of the individual over the group.

The word capitalism was popularized by Karl Marx, in the 1850’s. Marx used it to denounce private ownership of the means of production and the autonomous workings of the free market.

Many people use “capitalism” to denote laissez faire, but the word capitalism has become a laden and loaded word, easily misunderstood with its opposite: crony capitalism.

Laissez faire is an entire political theory — not, as is sometimes supposed, merely economic. In this regard — and only in this regard — it is akin to communism.

The exclusively economic component of laissez-faire may be described as the right to life, liberty, and property applied to commerce and industry.

Pure laissez-faire, which does not exist now and has never existed fully, means that government removes itself from all commerce (and that includes healthcare), in the same way that government removes itself from your bedroom.

In addition to early America, there is at least one other society that has come close to laissez faire:

After the War Hong Kong had no minimum wage, low and simple taxes, zero tariffs, zero capital controls, and a stable legal environment. Postwar Hong Kong went as far with economic laissez faire as any other country in history. This resulted in economic development that benefited virtually all the people of Hong Kong. Living standards increased substantially even for the poorest people in Hong Kong (Stefan Karlsson, Inflation Leads to Protectionism, 2004).

Laissez faire means that commerce and industry are entirely privatized.

Corporations that receive government subsidies are not capitalistic. They’re the opposite: they’re mercantilistic.

The same is true of small businesses and farms that receive subsidies.

Trade tariffs are not capitalistic but mercantilistic.

Mercantilism is an ancient and more primitive form of socialism. It is socialism before Karl Marx.

Political theory is the theory of government, and government, properly defined, is the body politic that possesses rule over a certain geographic region.

Economics is the science of production and exchange, but production does not just mean agriculture, although that is certainly included.

Productive work is any kind of work geared toward the task of survival — survival in the fully human sense of the word, including, therefore, arts, sports, industry, and so on.

Thus the essential questions of government are these:

Do humans exist by right or by permission? Are we free by nature? If so, why? Are we free to produce, exchange, and exist, or do politicians, elected or not, have authority and jurisdiction over the lives of us — to any degree?

Obviously, there’s only one sane answer to all these questions; for to say that humans do not exist by right is the same as saying humans only exist when someone permits us to. But if that were true, we must then ask: who permits? And why? And who gives these people permission?

Fundamentally, political freedom can be achieved only through recognizing each and every single individual’s right to life.

If, then, you believe that we are each individuated and sovereign, and if you believe that our lives are entirely our own and not the government’s and not another’s, if, in short, you believe “we each have a property in our person,” as John Locke said, then you believe in the inalienable right to life, liberty, and property.

You believe, therefore, in laissez-faire capitalism.