Essays on Economics

7/27/2019 Essays on Economics

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ESSAYS ON ECONOMICS

Jonathan M. Giardina



CONTENTS

AggressionGovernment: A Terror to Evildoers?Capitalism and Slaver: A Comparative!Instit"tionsAnalsis#i$$eren%es: Epistemologi%al and otherViolence and Social Orders &oo' (evie)



Aggression

Poor Joan Baez. In her autobiography "Daybreak," an antagonist asks her, the pacifist,some tough "What would you do if...?" questions:

What would you do if someone were, say, attacking your grandmother?

Say you're driving a truck. You're on a narrow road with a sheer cliff on your side.

There's a little girl standing in the middle of the road. You're going too fast to stop. Whatwould you do?

After some verbal arm-wrestling, she eventually rebuts, "I'm really trying to say a coupleof things. One is that no one knows what he'll do in a moment of crisis. And that

hypothetical questions get hypothetical answers. I'm also hinting that you have made itimpossible for me to come out of the situation without having killed one or more people."

(Baez 1968, 131 - 134)

Perhaps one should, similarly, pity oneself when reading academic literature. Authors of

scholarly books are constantly pressuring us to advocate coercion. For example,Mancur Olson in "The Logic of Collective Action" claims that forced payments are"indispensable":

The state ... is very important economically. Almost any government is economically

beneficial to its citizens, in that the law and order it provides is a prerequisite of allcivilized economic activity. But despite the force of patriotism, the appeal of the national

ideology, the bond of common culture, and the indispensability of the system of law and

order, no major state in modern history has been able to support itself through voluntarydues or contributions. Philanthropic contributions are not even a significant source ofrevenue for most countries. Taxes, compulsory payments by definition, are needed.

(Olson [1965] 1971, 13, emphasis his)

To sum it up: "Law and order" is indispensable. "Law and order" won't be provided if

there is no coercion. Therefore, we must have coercion. Got it? You may have thoughtthat if people needed something that they would pay for it but Mr. Olson insists that this

is just not so. Common sense tells us one thing. The scholars tell us another. Someoneis wrong. Resolving this issue is one of the tasks that this essay is attempting to do.

#igression on Colle%tive A%tion

A "common, collective or public good" is defined by Mancur Olson as "any good such

that, if any person Xi in a group X1, ..., Xi, ..., Xn consumes it, it cannot feasibly bewithheld from the others in that group. In other words, those who do not purchase or pay

for any of the public or collective good cannot be excluded or kept from sharing in theconsumption of the good, as they can where noncollective goods are concerned."



(Olson [1965] 1971, 14 & 15) The people who do not pay but still benefit from theprovision of the collective good are often called "free riders." Any individual member of a

"typical large organization" can potentially become a "free rider." He "is in a positionanalogous to that of the firm in a perfectly competitive market, or the taxpayer in thestate: his own efforts will not have a noticaeable effect on the situation of his

organization, and he can enjoy any improvement brought about by others whether or nothe has worked in support of his organization." (Olson [1965] 1971, 16)

Organizations have peculiar characteristics. As Olson explained

Any group or organization, large or small, works for some collective benefit that by itsvery nature will benefit all of the members of the group in question. Though all of themembers of the group therefore have a common interest in obtaining this collective

benefit, they have no common interest in paying the cost of providing that collectivegood. Each would prefer that others pay the entire cost, and ordinarily would get any

benefit provided whether he had borne part of the cost or not ... If, in a reasonably smallorganization, a particular person stops paying for the collective good he enjoys, thecosts will rise noticeably for each of the others in the group; accordingly, they may then

refuse to continue making their contributions, and the collective good may no longer beprovided. However, the first person could realize that this might be the result of his

refusal to pay anything for the collective good, and that he would be worse off when thecollective good is not provided than when it was provided and he met part of the cost ...

In a large group in which no single individual's contribution makes a perceptibledifference to the group as a whole, or the burden or benefit of any single member of the

group, it is certain that a collective good will not be provided unless there is coercion orsome outside inducements that will lead the members of the large group to act in their

common interest. (Olson [1965] 1971, 21, 43 & 44)

Because coercion is used to get people to participate in collective action (and not "free-

ride"), this digression is necessary. Most people are aware of the commandments "Thoushalt not steal," "Thou shalt not kill," etc. In many economics books, getting something

for free while minding your own business is treated as a sin or crime that meritsretaliation:

The "latent" group ... is distinguished by the fact that, if one member does or does nothelp provide the collective good, no other one member will be significantly affected and

therefore none has any reason to react. Thus an individual in a "latent" group, bydefinition, cannot make a noticeable contribution to any group effort, and since no one in

the group will react if he makes no contribution, he has no incentive to contribute ... Onlya separate and "selective" incentive will stimulate a rational individual in a latent

group to act in a group-oriented way. In such circumstances group action can beobtained only through an incentive that operates, not indiscriminately, like the collective

good, upon the group as a whole, but rather selectively toward the individuals in the



group. The incentive must be "selective" so that those who do not join the organizationworking for the group's interest, or in other ways contribute to the attainment of the

group's interest, can be treated differently from those who do. These "selectiveincentives" can be either negative or positive, in that they can either coerce by

punishing those who fail to bear an allocated share of the costs of the group

action, or they can be positive inducements offered to those who act in the groupinterest. (Olson [1965] 1971, 50 & 51, latter emphasis added)

Before proceeding to a discussion of collective or public goods, let's take anunconventional (and optional) detour and get acquainted with some non-fictional

examples of punishment. First example:

It was April and the ground was still too wet for plowing, so farmer Valentine Byler

decided to haul rocks to fill a mudhole in his lane. He hitched his two bay mares to anold flatboat. Then he hitched the colt with them to help get it broken in. A short time later

two strangers approached. "This isn't going to be pleasant," said one of them. They tookthe reins. Byler was Amish and his religious beliefs forbade him to resist. The two menunhitched the team. "I couldn't watch," said Byler, "I went into the woods." The men ledthe horses away. The men were agents of the Internal Revenue Service. For reasons of

religious conviction Byler had refused to pay his Social Security taxes and the horseswere seized to satisfy the government claim. On May 1, 1961, the IRS sold the two

mares and the colt at auction for $460. The IRS took $308.96 for back taxes and$133.15 for "expenses." Byler got back $37.89. (Brown et al 1974, 1 & 2)

Second example: Billy hitchhiked to Carmel on a twenty-day AWOL from Fort Gordon,Georgia ... I met Billy at a little outdoor restaurant on a warm, sunny day - the last day of

his AWOL ... He looked no older than seventeen, about five-nine, with a grown-outcrewcut and bad complexion ... He was cheerful, undiscouraged, and only half awarethat he was about to go war against the entire United States Army ... I watched Billy'sface as he talked, and thought of the letters he'd been writing to me over the past four

months. They were teletyped on big yellow sheets of paper. The first one had simplyannounced that he's walked into the office of the head of command on base and said,

"Christ wouldn't kill. I won't either." He had listened to the inspector general deliver astring of patronizing lectures on God and Country, and realizing that they made no

sense, had saluted and walked out of the room ... "What's the best thing that couldhappen to you, Billy?" ... "What's the best thing that could happen to me? Well, I could

be put in alternative service ... That'd be the best. Believe me, I'd prefer that." "Towhat?" "Hard labor." "What does hard labor mean, exactly?" "Means you break rocks

and dump them in ditches and then take them out again and get beatings for it." (Baez1968, 84 -89)

*"+li% Goods

Nobel prize-winning economist James Buchanan explained public goods by telling a



story. At first, two men, Tizio and Caio, are on an island in the tropics. On this island, thepublic good is mosquito-repelling. This good "is purely public or purely collective"

because "the death of one mosquito benefits each man simultaneously, and is thusequally available to each man." (Buchanan [1968]1999, 12) Whether a good is private orpublic does not depend on whether it is supplied by the government or not. It depends,

instead, on the good's physical characteristics. As Buchanan explains,

With privately divisible goods ... the unit that is produced or supplied is dimensionallyequivalent to the unit that is consumed by some ultimate buyer. A single unit of

production implies the availability of a single unit for consumption, by some one person.And this person's ultimate act in consuming the unit removes all possibility of others' like

consumption of the same unit. It is the absence of this one-to-one relationship that is thebasis of the public-goods distinction. With a pure public good, a unit that is produced or

supplied is, by definition, simultaneously available for the consumption of all members ofthe relevant group. Hence, a unit that is supplied is wholly different in dimension from a

unit that is consumed. The consumption of a unit by one person does not reduce orremove the possibility of consumption by another person. This may be put in terms ofour simple illustration. A single unit of public-goods supply, mosquito repellent, amountsto two units of consumption, one for Tizio and one for Caio ... By the orthodox definition

a pure public good or service is equally available to all members of the relevantcommunity. A single unit of the good, as produced, provides a multiplicity of

consumption units, all of which are somehow identical. Once produced, it will not beefficient to exclude any person from the enjoyment (positive or negative) of its

availability ... The principle of exclusion characteristic of goods produced in the marketbreaks down here. Nonexclusion applies in the extreme or polar sense. Additional

consumers may be added at zero marginal cost.

The definition of a pure public good is "highly restrictive ... Strictly speaking, no good orservice fits the extreme or polar definition in any genuinely descriptive sense. In real-world fiscal systems, those goods and services that are financed publicly always exhibit

less than such pure publicness. The standard examples such as national defense comereasonably close to descriptive purity, but even here careful consideration normally

dictates some relaxation of the strict polar assumption." (Buchanan [1968] 1999, 32, 33,48 & 49)

Returning now to our island-dwellers:

Let us add Sempronio to the Tizio-Caio illustration. Suppose that Sempronio desires to

migrate to the island, and that he, like the others, will share equally in the benefits of anymosquito repelling activity. Tizio and Caio will not be willing to allow Sempronio to join

them unless he contributes some share in the costs of this public good, either throughdirect production on his own account or indirectly through transfers to them of private

goods.



Tizio and Caio cannot exclude Sempronio from the benefits that their mosquito repelling

provides. If he doesn't help provide the good, he gets a free ride. Tizio and Caio do notlike this and therefore they give Sempronio an ultimatum: Help us or leave. In thisillustration, Sempronio agrees to help them.

As the size of the group becomes larger, it becomes necessary to give more and morepeople the ultimatum: Pay for the public good or else. The reason for this is because it is

in every individual's interest to let his neighbor(s) provide the good while he "secures thebenefits without contributing toward the costs." Each individual finds himself in a

potential free-rider position: "Even if an individual should enter into ... a cost-sharingagreement, he will have a strong incentive to break his own contract, to chisel on theagreed terms." (Buchanan [1968] 1999, 80 & 83) Everyone has an incentive to get a

free-ride. This creates a dilemma: "When everyone tries to be a free rider there are norides for anyone." (Higgs 1987, 40) "Coercive arrangements, governmental in nature"

are advanced as a way of solving this dilemma. The government eliminates "thealternative of remaining outside the agreement, or remaining a free rider." Coercion isnecessary because "in the large-number case, the individual will not contribute

voluntarily to the costs of public goods, at least not in an amount sufficiently large togenerate optimal levels of provision." (Buchanan [1968] 1999, 84)

As long ago as 1776 Adam Smith wrote about "certain public works and certain publicinstitutions, which it can never be for the interest of any individual, or small number of

individuals, to erect and maintain; because the profit could never repay the expence toany individual or small number of individuals, though it may frequently do much morethan repay it to a great society." According to Smith, "the sovereign has only three duties

to attend to" and erecting and maintaining these "goods" was one of them. (Smith [1776]2003, 874) More recently, in their classic textbook, Armen Alchian and William Allenclaimed that "governments do some things that the market exchange of private-property

rights cannot do adequately." For example, "the use of roads under a market systemwould require a forbiddingly complex system of planning, collection, and enforcement

devices." It is argued that some will benefit if the government provides certain goodsand services by levying general taxes. According to Alchian and Allen, "some

government actions are designed to enable some people to pay for services they couldnot otherwise obtain so cheaply through private contractual arrangements - for example,

nearby public parks, better roads, sewers, police protection, sanitation, and protection

from disease, insect pests, and fire." (Alchian & Allen 1983, 392, 393 & 397)

Addressing the argument that "some essential services simply cannot be supplied bythe private sphere, and that therefore government supply of these services is

necessary", Murray Rothbard countered that "every single one of the services suppliedby government has been, in the past, successfully furnished by private enterprise."

(Rothbard 2011, 426) To the question "Are there some tasks that must be done, but that,



by their nature, cannot conceivably be done privately and must therefore continue to bedone by government?" David Friedman answered, "I believe not." He added, "I believe

that, although there are certain important tasks which for special reasons are difficult todo under institutions of total private property, these difficulties are in principle, and maybe in practice, soluble." However, he conceded that "there might be circumstances in

which voluntary institutions could not defend themselves against a foreign state."Friedman was humble. He acknowledged that "human beings and human societies arefar too complicated for us to have confidence in a priori predictions about how

institutions that have never been tried would work." (Friedman 1978, 24, 25 & 200) Whatwould be necessary then is an "experiment" - an "experiment" in the direction of liberty.

"Why," Rothbard asked, "must political experiments always be in the direction of moregovernment? Why not give the free market a county or even a state or two, and see

what it can accomplish?" (Rothbard 2011, 426) Sometimes you have to cross the line tofind out where it is.



&i+liograph

Alchian, Armen & Allen, William R. (1983) "Exchange and Production: Competition,Coordination, & Control" Third EditionBaez, Joan. (1968) "Daybreak"

Brown, Susan Love et al. (1974) "The Incredible Bread Machine"Buchanan, James. ([1968] 1999) "The Demand and Supply of Public Goods"Friedman, David. (1978) "The Machinery of Freedom"

Higgs, Robert. (1987) "Crisis and Leviathan"Olson, Mancur. ([1965] 1971) "The Logic ofCollective Action"

Rothbard, Murray N. (2011) "Economic Controversies"Smith, Adam. ([1776] 2003) "The Wealth of Nations"



Government: A Terror to Evildoers?

Let every person be subject to the governing authorities; for there is noauthority except from God, and those authorities that exist have been

instituted by God. Therefore whoever resists authority resists what God has

appointed, and those who resist will incur judgment. or rulers are not aterror to good conduct, but to bad. (Romans 13:1 - 3 NRSV)

,hat is Government?

According to Howard Zinn, "The greatest violence comes not from protesters and

revolutionaries but from governments." (Zinn 1997, 582) Indeed, he is correct. As Ludwigvon Mises wrote, "Government is beating into submission, imprisoning, and killing ... [A]

law to which no sanction is attached (is) an imperfect law." (Mises 1962) "We must havegovernment," claimed Robert Higgs. "Without government to defend us from externalaggression, preserve domestic order, define and enforce private property rights, few ofus could achieve much." (Higgs 1987, 3) Echoing Higgs, Armen Alchian and William

Allen wrote, "[W]ithout government the state of society would be intolerable, and therecould be neither exchange of private-property rights nor such rights. Because security

against foreign and domestic aggressors is not adequately organized by privatecontracts, the military, the police, and the courts are essential." (Alchian & Allen 1983,

392) Again, von Mises: "In stark reality, peaceful social cooperation is impossible if noprovision is made for violent prevention and suppression of antisocial action on the part

of refractory individuals and groups of individuals." (Mises [1949] 1998, 715) "In order topreserve peaceful cooperation, one must be ready to resort to violent suppression of

those disturbing the peace. Society cannot do without a social apparatus of coercion

and compulsion, i.e., without state and government." (Ebeling 1990, 303) "What isrequired for the attainment of an end aimed at is a means, the cost to be expended forits successful realization." (Mises [1949] 1998, 715) "[W]ithout (government) no lastingsocial cooperation and no civilization could be developed and preserved."

However, Mises warns, "It is a double-edged makeshift to entrust an individual or a

group of individuals with the authority to resort to violence. The enticement implied istoo tempting for a human being. The men who are to protect the community against

violent aggression easily turn into the most dangerous aggressors. They transgresstheir mandate. They misuse their power for the oppression of those whom they were

expected to defend against oppression." (Mises 1962) In Elaine Pagels book "The Originof Satan," she pointed out that Paul, the author of Romans, was probably executed by

order of a Roman magistrate and that Nero, a Roman emperor during the first century,had a group of Christians "hung up in his garden and burned alive as human torches."

(Pagels 1995, 113) If we consider Christian conduct to be good then, certainly, theserulers were terrors to good deeds or, as Pagels translates it, "to the one who (did) good."(Pagels [1975] 1992, 43) (We are assuming here that Christians experienced fear.) "Themain political problem," according to von Mises, "is how to prevent the police power from



becoming tyrannical." (Mises 1962) Tyrannical governments are terrors to those who dogood. They are exceptions to the rule. Unless we interpret the Christian teaching cited

above as a generalization, it is difficult to reconcile the words from Romans with Mises'analysis.

-ae' on Government

Perhaps more than any other economist, F. A. Hayek emphasized the singular and,perhaps, insupplantable function religious beliefs serve. In his last major work. he wrote,

"We owe it partly to mystical and religious beliefs, and, I believe, particularly to the mainmonotheistic ones, that beneficial traditions have been preserved and transmitted at

least long enough to enable those groups following them to grow, and to have theopportunity to spread by natural or cultural selection." (Hayek [1988] 1991, 136)

Decades early, Hayek's explication of religion's role in human affairs was almost fervent:

It is essential for the growth of reason that as individuals we should bow to forces and

obey principles which we cannot hope fully to understand, yet on which the advance andeven the preservation of civilisation depend. Historically this has been achieved by the

influence of the various religious creeds and by traditions and superstitions which mademan submit to those forces by an appeal to his emotions rather than to his reason.

(Hayek 2010)

Precisely which traditions Hayek is referring to we don't know. A Christian author

claimed that "Western civilization was built by Christianity" (D'Souza [2007] 2008, 43)but this is, for our purposes, ambiguous. What concerns us here is whether belief inChristian teachings on government is indispensable in the sense that rejection of them

would lead to the destruction of civilization.

Hayek's system of thought, which he referred to as "the antirationalist tradition," was"never antistate as such or anarchistic." (Hayek [1960] 2011) In this respect, Hayek's

political philosophy is compatible with the biblical passage cited above. Why would youwant the abolition of the state if it is a terror to evildoers? It's safe to say that Paul was

not an anarchist. Neither was Hayek but his position is relatively sophisticated. Initially,Hayek wrote, "[T]he spontaneous order of a free society will contain many organizations

(including the biggest organization, government)," implying that government is, bydefinition, a part of a free society. (Nishiyama & Luebe 1984, 366) Later, he refined his

position: Government is an organization "which regularly occupies a very specialposition" within "the Great Society ... Although it is conceivable that the spontaneous

order which we call society may exist without government, if the minimum of rulesrequired for the formation of such an order is observed without an organized apparatus

for their enforcement, in most circumstances the organization which we call governmentbecomes indispensable in order to assure that those rules are obeyed." (Hayek 2013,

45) The New Testament, as we have seen, preaches non-resistance to authority.Without authority or government, Hayek maintains, in most cases, certain rules would



not be obeyed. If certain rules are not obeyed, society would cease to exist. Therefore,non-resistance to government, if we follow his premises, is, almost always, a necessary

condition for the existence of civilization. ("Non-resistance" here means non-resistanceby enough people to insure that the amount of resistance is suppressible and anarchy isavoided.) It is not, however, a sufficient one. Government itself must obey rules also.

When government "successfully claims the monopoly of coercion and violence, itbecomes ... the chief threat to individual freedom." (Hayek 2013, 462) Here we see whatappears to be a divergence between Hayek and the New Testament. If government

violates long run rules that were intended to limit its functions and scope how cananyone claim that such a government was "instituted by God"? Has God appointed all

existing governments no matter how despotic? It depends on your interpretation. Theletter to the Romans was written nearly two thousand years ago. Assuming modern

translations are reliable, Paul is writing in the present tense. In these verses, he isreferring to rulers in his day not ours. This is our error when we delve into biblical

exegesis: We read the text as if the author is addressing us when he, in fact, was

addressing people who have been dead for centuries. Nonetheless, the passage isthought-provoking because it recognizes that government's role is to enforce rules ofconduct. What these rules should or should not be is the topic of the next section.

,hat ("les Sho"ld Government En$or%e?

!o you wish to have no fear of the authority Then do what is good, and youwill receive its approval; for it is God#s servant for your good. $ut if you do

what is wrong, you should be afraid.(3 & 4 NRSV)

Is "the existence of strongly and widely held moral convictions in any matter ... by itself a justification for their enforcement"? According to Hayek, "[W]ithin a spontaneous orderthe use of coercion can be justified only where this is necessary to secure the private

domain of the individual against interference by others ... [C]oercion should not be usedto interfere in that private sphere where this is not necessary to protect others. Law

serves a social order, i.e. the relations between individuals, and actions which affectnobody but the individuals who perform them ought not to be subject to the control of

law, however strongly they may be regulated by custom and morals." (Hayek 2013, 221)Of course, Hayek is a classical liberal or libertarian: "[T]o the (classical) liberal neither

moral nor religious ideals are proper objects of coercion ... [M]oral beliefs concerning

matters of conduct which do not directly interfere with the protected sphere of otherpersons do not justify coercion." (Hayek [1960] 2011) The New Testament says that theone who has authority "is the servant of God to execute wrath on the wrongdoer." (13:4NRSV) This, however, does not provide us with any principle to determine what lawsgovernment should enforce.

According to Hayek, it is inadvisable that obedience to all moral rules should be coercedby government. He argued, "The importance of ... (the) freedom of the individual ...



everywhere where his actions do not conflict with the aims of the actions of others, restsmainly on the fact that the development of custom and morals is an experimental

process, in a sense in which the enforcement of uniform rules of law cannot be - aprocess in which alternative rules compete and the more effective are selected by thesuccess of the group obeying them." (Hayek 2013, 221) Although he is convinced that

"freedom has never worked without deeply ingrained moral beliefs" and "coercion canbe reduced to a minimum only where individuals can be expected as a rule to conformvoluntarily to certain principles" he, nevertheless, insists that "there is an advantage in

obedience to such rules not being coerced ... [I]t is, in fact, often desirable that rulesshould be observed only in most instances and that the individual should be able to

transgress them when it seems to him worthwhile to incur the odium which this willcause." His grounds for supporting individual freedom and rejecting state coercion is

"the antirationalist, evolutionary tradition." (Hayek [1960] 2011) This anti-rationalisttheory of morals shows that, "so far as the creation of moral rules is concerned, 'reason

of itself is utterly impotent' and that 'the rules of morality, therefore, are not conclusions

of our reason' ... [O]ur moral beliefs are neither natural in the sense of innate, nor adeliberate invention of human reason, but ... a product of cultural evolution ... In thisprocess of evolution what proved conducive to more effective human effort survived,

and the less effective was superseded." (Hayek 1967, 111) Gradual evolution is possibleonly under limited government, only "with rules which are neither coercive nordeliberately imposed - rules which, though observing them is regarded as merit andthough they will be observed by the majority, can be broken by individuals who feel that

they have strong enough reasons to brave the censure of their fellows ... [R]ules of thiskind allow for gradual and experimental change. The existence of individuals and groups

simultaneously observing partially different rules provides the opportunity for theselection of the more effective ones." (Hayek [1960] 2011) Because "a rule of conduct

may unexpectedly be contradicted by new experience," it is recommended thatgovernment should enforce only some rules and not make all immoral behavior illegal.

(Nishiyama & Luebe 1984, xlii)

In his essay "Principles of a Liberal Social Order," Hayek specified the kind of rulesgovernment should enforce. He argued that the coercive activities of government should

be limited to the enforcement of universal rules of just conduct. Enforcement of suchrules will protect "a recognizable private domain of individuals." (Nishiyama & Luebe1984, 365) These rules "have essentially the nature of prohibitions" (There are

exceptions. Sometimes the rules of just conduct require positive action.) As to what the

protected or private domain of people should or should not include, Hayek doesn't sayexplicitly. It depends on what rules of just conduct the authorities enforce. That beingsaid, not all rules that governments enforce are rules of just conduct. Rules that regulate

behavior that doesn't infringe on the rights of others are not included in the rules of justconduct. As Hayek puts it, "[I]njustice is really the primary concept ... [T]he aim of rules

of just conduct is to prevent unjust action ... [T]he injustice to be prevented is theinfringement of the protected domain of one's fellow men, a domain which is to be



ascertained by means of these rules of justice." (Nishiyama & Luebe 1984, 369 & 370)



&i+liograph

Alchain, Armen A. & Allen, William R. (1983) "Exchange and Production"D'Souza, Dinesh. ([2007] 2008) "What's So Great About Christianity"Ebeling, Richard M., ed. (1990) "Money, Method, and the Market Process: Essays by

Ludwig von Mises"Hayek, F. A. ([1960] 2011) "The Constitution of Liberty"Hayek, F. A. (1967) "Studies in Philosophy, Politics, and Economics"

Hayek, F. A. ([1973, 1976, 1979] 2013) "Law, Legislation and Liberty"Hayek, F. A. ([1988] 1991) "The Fatal Conceit"

Hayek, F. A. (2010) "Studies on the Abuse and Decline of Reason"Higgs, Robert. (1987) "Crisis and Leviathan"

Mises, Ludwig von. ([1949] 1998) "Human Action"Mises, Ludwig von. (1962) "The Ultimate Foundation of Economic Science"

Nishiyama, Chiaki & Leube, Kurt R., ed. (1984) "The Essence of Hayek"

Pagels, Elaine. ([1975] 1992) "The Gnostic Paul"Pagels, Elaine. (1995) "The Origin of Satan"Zinn, Howard. (1997) "The Zinn Reader"



Capitalism and Slaver: A Comparative!Instit"tionsAnalsis

According to Thomas Sowell, slavery "is one of the oldest and most universal of allhuman institutions. (It) has existed among peoples around the world, as far back as

recorded history goes." (Sowell 2009, 20) Capitalism, on the other hand, is less than300 years old. (Mandel 1970, 30) They (capitalism and slavery) are not the same. Someauthors, however, have emphasized some rather tenuous similarities between the two tothe point of almost homogenizing them. This paper will address these arguments and

counter some false impressions that they may leave in people's minds.

or%ed /a+or: Tr"e and alse

Forty years ago it was claimed that a particular author was "probably the most influential

exponent of the political economy of scientific socialism in the Western world." (George

Novack in Mandel 1970, 3) Since then, he has become less well-known. The authorreferred to is the Marxist scholar Ernest Mandel. Mandel is perhaps best known for thetwo volume treatise "Marxist Economic Theory". What concerns us here are his musingson the subject of forced labor. Forced labor, involuntary servitude and slavery are terms

that are used interchangeably though they are not necessarily synonymous. (Slaveryimplies ownership of human beings and could conceivably exist without compulsorylabor.) For our purposes, what matters is that slavery and servitude are synonyms and

that they connote work performed by the dominated.

Mandel, being a Marxist, was a critic of capitalism. He predicted its ultimate demise:

"[C]apitalism ... is a product of history. It will perish in due course as it once was born."

(Marx [1976] 1990, 13) One of his more noteworthy excoriations is the following: [U]ndercapitalism, labour is fundamentally forced labour." (Marx [1976] 1990, 49, emphasis inoriginal) Mandel doesn't take credit for discovering this. It was Marx's insight. However, itis safe to assume that Mandel agrees. How could such an unsettling conclusion be

valid? To grasp his position we must first understand Mandel's concept of "economiccompulsion". We must, for the moment, think like a Marxist; we must not "accept'appearances' as they are, without looking for the basic forces and contradictions which

they tend to hide from the superficial and empiricist observer." (Marx [1976] 1990, 20)

Under chattel slavery, the reality of compulsion is obvious. The overseer brandishes a

whip or, perhaps, a gun. If the human cattle do not perform or attempt to escape, woebe unto them! Unlike bondage, capitalism involves voluntary exchange. The "forced

labor" that Mandel refers to is not necessarily the kind where someone is compelled towork for a specific individual or organization. It is, instead, the kind where people are

compelled to work, ultimately, for a member of a specific class of men. How did it comeabout that the worker has only one "sensible" choice? As Mandel explains it,



[T[here is an institutional inequality of conditions between capitalists and workers. Thecapitalist is not forced to buy labour-power on a continuous basis ... The worker, on the

other hand, is under economic compulsion to sell his labour-power. As he has noaccess to the means of production, including land, as he has no access to any large-

scale free stock of food, and as he has no reserves of money which enable him to

survive for any length of time while doing nothing, he must sell his labour-power to thecapitalist on a continuous basis and at the current rate. (Marx [1976] 1990, 47 & 48)

In his earlier work, Mandel expressed the same sentiment less thoroughly but more

pithily: "[O]nly a sufficient amount of property releases a man from the slavery of sellinghis labour-power to get the means of existence, from this condemnation to forced labour

... [T]he market is characterised by an institutional ine%uality , without which thecapitalist (system) could not last a single day: the monopoly of the means of production

in the hands of one social class; the obligation to which another social class is subjectto sell its labour-power, in order to be able to exist." (Mandel [1962] 1968, 685, 709 &

710, italics in original) One is free to dismiss Mandel as a polemicist and demagoguebut one would, arguably, be remiss for doing so when even an economist as eminent asJoan Robinson once wrote that in "the modern labour market ... the individual workerhas no opportunity to decide anything except whether it is better to work or to starve."

(Horowitz 1968, 150) If leaving a harsh critique of the market unanswered isn'tintellectual dereliction, what is?

Because of her prestige, we shall begin with Robinson's point first. She says,essentially, that the worker in a capitalist economy has two choices: work or starve.

What are her assumptions? For this we turn to Mandel:

1. The worker has no access to means of production (tools, land)2. The worker has no access to means of existence (food, clean water, medicine)3. The worker has no access to means of payment (currency, liquid assets)

There is another assumption than has not, thus far, been stated:

4. The worker cannot escape to a "better" territory.

This assumption, of course, will need to be clarified. If we wish to be rigorous, we oughtto split this assumption into two:

4a. The worker cannot escape.4b. The worker can escape but there is no "better" territory.

For the sake of simplicity, we'll just assume that the worker cannot escape. (If he can'tescape, it's irrelevant if a "better" territory exists. He's not going there except for in his

dreams.) This raises some interesting questions. Why can't the worker escape? He isnot someone's legal property. Even if he was, enforcement is never perfect. When



chattel slavery was legal, some slaves did escape. As Thomas Sowell informs us,"While permanent escape from a slave plantation was very rare - perhaps two percent

of the slaves made good their escape without being recaptured - escapes by urbanslaves were far more often permanently successful." (Sowell 2009, 42) Unlike thechattel slaves, the laws of the land do not forbid the worker under capitalism from

escaping. Why, then, can't he escape? It must be that, although escape is legal, it is not"feasible." In this scenario, escape is not guaranteed. Attempting it would be reckless.The trek is fraught with danger and discomfort. Some, if not most, will perish. A

"reasonable" person would have to cross "escape" off of his list of options. He is left withthe two that we began with: 1.) work; 2.) starve.

For the sake of argument, let's assume that these are the worker's only two options. Inthis case, is it valid to assert that the worker is being coerced? It depends on one's

understanding of the meaning of coercion. As F. A. Hayek expounded,

while we can legitimately say that we have been compelled by circumstances to do thisor that, we presuppose a human agent if we say that we have been coerced. Coercionoccurs when one man's actions are made to serve another man's will ... It is not that the

coerced does not choose at all ... Coercion implies ... that I still choose but that my mindis made someone else's tool, because the alternatives before me have been so

manipulated that the conduct that the coercer wants me to choose becomes for me theleast painful one. Although coerced, it is still I who decide which is the least evil under

the circumstances. (Hayek [1960] 2011)

If a worker is being coerced in the Hayekian sense, then it must be asked "Who is doingthe coercing?" The alternatives that the worker faces are both disagreeable but can it be

said that they have been manipulated by an identifiable individual or even a sinistercabal? Clearly not. The constraints that a solitary worker confronts in the market aremuch more closely related to the circumstances of the physical environment than they

are to the compulsion of a domineering agent because the data of the market is theresult of a process and was not consciously designed by an individual or group. When

authors use the phrase "the tyranny of a free market," they are unwittinglyacknowledging that if anything is leaving people with unsatisfactory courses of action it

is "the market". "The market," however, is the totality of the actions of everyoneparticipating in the market economy; not a conscious project pursuer. When Paul A.

Baran and Paul Sweezy referred to "the compulsions of the system," they also were

admitting that "the system" is doing the compelling. (Baran & Sweezy 1966, 364) If thisis true, then workers are not being coerced in the Hayekian sense because they are notbeing made to serve any man's will.

Even if we were to agree with Mandel that under capitalism, labor is forced labor it is notcorrect to assume that workers have only two options and that they choose to work

because that is the least bad one. They have an additional option that hasn't been



mentioned yet: illegal employment of violence. Recall the three means that the coercedlaborer lacks: of production, of existence, of payment. He could avoid work and

starvation by illegally appropriating enough of any of the three means. (Unless weconsider criminal appropriation to be a form of work.) It could be objected that breakingthe law is not a "serious" option but, for the sake of academic rigor, it will be briefly

covered.

Recall Mandel's argument that workers are compelled to sell labor power for food andthey are, in some sense, enslaved. Let's assume that they in fact are slaves. When

dealing with slavery, we are dealing with what Ludwig von Mises called a hegemonicbond. Concerning such a bond, Mises wrote

[N]o physical violence and compulsion can possibly force a man against his will to

remain in the status of the ward of a hegemonic order. What violence or the threat ofviolence brings about is a state of affairs in which subjection as a rule is considered

more desirable than rebellion. Faced with the choice between the consequences ofobedience and of disobedience, the ward prefers the former and thus integrates himselfinto the hegemonic bond. (Mises [1949] 1998, 197)

Under the most grotesque forms of slavery, suicide was an act of disobedience andmany, understandably, chose this over obedience. As Thomas Sowell informs us, "in

Peru (in the nineteenth century), ... guards were posted to prevent suicide among theChinese shovelling bird manure into sacks for export as fertilizer, under conditions of

stifling heat and stench." (Sowell 2009, 45) Among living slaves, disobedience must, ofcourse, take a different form. Disobedience presents us with a conundrum. Why would aslave disobey when the expected consequences are so horrible? Almost as perplexing

is why they would obey. The consequences of obedience can, also, be quite awful. Itwould be lazy for a social scientist to just assume that human beings rationally anddispassionately weigh the consequences of obedience with the consequences of its

antonym and reject the worse scenario. How one evaluates different outcomes willdepend on one's subjective value judgments and these value judgments, I suspect,

are, for better or worse, normally influenced by various non-rational and/or irrationalfactors. How an individual will assess his situation will be, in part, determined by what

social scientists label "ideology". ("Ideology" here means ideology in the pejorativesense.) In spite of this, we shall, for the moment, try to abstract from "ideology" and

endeavor to behold the pure, unvarnished facts of reality.

With this digression out of the way, we are now prepared to objectively record the traits

that capitalism has in common with slavery. Capitalism or the market economy, astraditionally defined, includes a state or government; it presupposes authority and

violence. "The state," according to Mises, "as an apparatus of compulsion and coercionis by necessity a hegemonic organization." (Mises [1949] 1998, 198) The application of

force is an element that is common to the social order known as capitalism and chattel



slavery. This is relevant because as long as violence is occurring there will bedisagreements about whether the violence is legitimate or not. If, as Mandel argued, the

violence meted out by the capitalist state leads to conditions that are morallyindistinguishable from slavery, then the legitimacy of the aforementioned violence is inquestion. As interesting as this moral dimension may be, this inquiry will leave these

concerns unaddressed and focus, instead, on the economic differences betweencapitalism and slavery. By abstracting from morality, a topic where viewpoints areinnumerable and consensus is rare, we can embark on a mission we are capable of:

deducing the objective dissimilarities between capitalism and slavery.

Even if we grant that under capitalism, labor is forced labor, the crucial distinction

between capitalism and slavery is that, unlike slaves, workers in a market economy arenot forced to work for a particular firm or employer. Slaves, on the other hand are the

property of some consumer. These institutional variances have significant effects oncompensation. As Murray Rothbard explained,

Since the masters own the slaves, they indeed only pay them their subsistence wage:enough to live on and reproduce, while the masters pocket the surplus of the slaves'

marginal product over their cost of subsistence. This surplus value extracted from theslave constitutes the profits of the masters from slave-ownership. In the free society, in

contrast, the workers, owning their own bodies and their own labour, pocket their fullmarginal product (discounted ... by the interest return the labourers freely and willingly

pay to the capitalists for advancing them the value of their production now rather thanwait until after the product is produced and sold.) (Rothbard [1995] 2006)

While Mandel's "worker" can't effectively quit wor&ing (because if he does he will

starve) the slave can't legally quit his job. Regarding slavery, Walter Block wrote, jokingly, "[T]he only thing wrong with that curious institution was that you couldn't quit.Otherwise, it wasn't so bad; you got to pick cotton, sing songs, eat pretty well as much

mush as you wanted..." (Block & Four Arrows 2011, 131) The worker in a capitalistcountry is not only not legally bound to work for a specific employer he is also not legally

bound to remain a worker. While slaves are members of a caste, workers are merely themembers of a class. There is a fundamental difference between the two and this

distinction is at the root of the major divergences between capitalism and slavery.Castes are either legally privileged or legally disadvantaged while members of classes

have the same rights as members of other classes. This discovery was made by Ludwig

von Mises:

Where status and caste differences prevail, all members of every caste but the mostprivileged have one interest in common, viz. to wipe out the legal disabilities of their own

caste. All slaves, for instance, are united in having a stake in the abolition of slavery. Butno such conflicts are present in a society in which all citizens are equal before the law.

No logical objection can be advanced against distinguishing various classes among the



members of such a society. Any classification is logically permissible, however arbitrarilythe mark of distinction may be chosen. But it is nonsensical to classify the members of a

capitalistic society according to their position in the framework of the social division oflabor and them to identify these classes with the castes of a status society ... In the

unhampered market economy there are no privileges, no protection of vested interests,

no barriers preventing anybody from striving after any prize. (Mises [1957] 2005, 76 &77)

Con%l"sion

Even if we concede that laborers are forced to work for wages, it would be inaccurate to

say that they are enslaved. Slavery presupposes both ownership of human beings and astatus or caste society. Capitalism and slavery are not mutually exclusive. Slavery can

exist within a capitalist society. So can caste privileges and disabilities. Hegemonicrelations are a part of capitalism, as commonly understood, and slavery. It may be

tautological to say that how coercion is used and how much will determine what socialphenomena will exist but statements such as these send, in an admittedly pleonasticway, the important message that economic events have human causes. Undercapitalism, private property rights are enforced by the state. If enforcement of such

rights in effect compels workers to sell their labor power, it does so indirectly. Underslavery, the overseer directly forces the slaves to work. The choice set is different in the

two situations. The choice set is a "function" of the kind and amount of intervention. It isconceivable that the matrix of intervention can be fine-tuned to the point where the

choice set of an individual is greatly limited. Man-made obstacles, including governmentintervention in the market, may leave some castes with few options but there is still a

difference in kind between forbidding someone to perform an action and commanding

someone to perform one. In a capitalistic economy, the government both commandsand forbids. On a slave plantation, the master does the same. In this respect, they aresimilar but, ultimately, one features the hiring of workers and the other features the

owning of human beings. Either someone is someone's property or he isn't.



&i+liograph

Baran, Paul A. & Sweezy, Paul M. ([1966] 1968) "Monopoly Capital"Block, Walter & Four Arrows (2011) "Differing Worldviews in Higher Education"Hayek, F. A. ([1960] 2011) "The Constitution of Liberty"

Horowitz, David, ed. (1968) "Marx and Modern Economics"Marx, Karl. ([1976] 1990) "Capital" Volume IMandel, Ernest. ([1962] 1968) "Marxist Economic Theory"

Mandel, Ernest. (1970) "An Introduction to Marxist Economic Theory"von Mises, Ludwig. ([1949] 1998) "Human Action"

von Mises, Ludwig. ([1957] 2005) "Theory and History"Rothbard, Murray. ([1995] 2006) "Classical Economics"

Sowell, Thomas. (2009) "Applied Economics"



#i$$eren%es: Epistemologi%al and other

People can disagree with each other for various reasons. What concerns us here aredisagreements that stem from differences in epistemology and methodology. Whetherone's motives are noble or ignoble, it is critical that one is cognizant of reality. Deceiving

others may be immoral but deceiving oneself is impractical. Unwittingly deceivingoneself by utilizing unsuitable epistemological methods may be unavoidable as long asmen are fallible and time-constrained. It is not necessarily careless to be unaware of

different methodologies. However, the consequences of unsound reasoning, drawingfalse conclusions and accepting erroneous "common sense" are not always minor.

Before we scoff or attribute sinister motives to people who make claims that are counter-intuitive, we ought to remember that "common sense tells us that the world is flat, that

the sun goes around the earth, that heavy bodies always fall faster than light bodies,that boats made of iron will sink." (Chase 1956, 4)

Theor and #ata

The late Nobel-Prize winning economist James Buchanan made a stunning confession.Speaking at a conference, he said, "I have suggested that the principle of spontaneous

order is 'scientific' in the sense that it embodies a logically coherent argument. But doesthe economist who considers his main role to be that of teaching this principle to his

students necessarily plead guilty to the charge that he is imposing an ideology? In onesense the answer is yes." (Buchanan 1979, 89) "Ideology" ... "impose." To the

unsympathetic, this must sound conspiratorial. Ideology is a word that can havenegative connotations. It can conjure up images of vested interests using propaganda to

manipulate the public. Ideologue is not today usually a term of approbation. Referring to

oneself as one is done with misgivings. "Ideology" in the sense that cynics use the wordis what we want to avoid.

Marxists believe in class struggle. Part of this class struggle involves intellectuals whopreach doctrines for the sake of the capitalists. According to the Marxist Ernest Mandel,"If we consider objectively the entire realm in which ideas are shaped and defended, weshall not be able to deny that a fair number of cynics and careerists are to be met

therein, people who sell their pens and their brains to the highest bidder, or who subtlymodify the direction taken by their thought if it risks prejudicing their promotion." (Mandel

[1962] 1968, 13 & 14) The charge that what is taught is taught because it aids the

powerful is a familiar one. Professor Noam Chomsky insinuated this:

Pursuit of what Adam Smith called the "vile maxim of the masters of mankind" ["All forourselves, and nothing for other people."] has followed much the same course over and

over again in (the last two centuries), always suffused with self-righteousness, inspiredby the holy doctrines of a version of economic theory that is immune to abundant - one

might perhaps argue, consistent - empirical refutation, and that has the miraculous



quality of invariably benefitting the masters, who are also the paymasters, a suggestivefact that is rarely explored. (Chomsky [1994] 1996, 5 & 118)

If "moneybags" (to borrow a term from Marx) is influencing which theories are beingdisseminated amongst the people then this complicates matters. Of course, whether a

theory is palatable to the oligarchs or not has no bearing on whether the theory is true.How beliefs came to be canonical or why they remain so should not concern us. If a

doctrine is true then it cannot be rejected on scientific grounds. Our challenges aredistinguishing science from non-science and selecting the appropriate methodology for

our chosen inquiry.

Turning now to the substance of the quotation from Chomsky, we should take note oftwo subjects: theory and empirical data. He says that data can refute theory. John

Maynard Keynes argued this way. He wrote, "Professional economists ... wereapparently unmoved by the lack of correspondence between the results of their theory

and the facts of observation." (Keynes [1953] 1964, 33) Nearly two hundred years ago,William Godwin called experience "the pole-star of truth" and was hesitant about usingcomplicated chains of reasoning. He wrote,

There are two principal methods according to which truth may be investigated. The first

is by laying down one or two simple principles, which seem scarcely to be exposed tothe hazard of refutation; and then developing them, applying them to a number of

points, and following them into a variety of inferences. From this method of investigation,the first thing we are led to hope is that there will result a system consentaneous to

itself; and, secondly, that, if all the parts shall thus be brought into agreement with a fewprinciples, and if those principles be themselves true, the whole will be found

conformable to truth ... An enquiry thus pursued is undoubtedly in the highest style ofman. But it is liable to many disadvantages; and, though there be nothing that it involves

too high for our pride, it is perhaps a method of investigation incommensurate to ourpowers. A mistake in the commencement is fatal. An error in almost any part of the

process is attended with extensive injury; where every thing is connected, as it were, inan indissoluble chain, and an oversight in one step vitiates all that are to follow. The

intellectual eye of man, perhaps, is formed rather for the inspection of minute and nearthan of immense and distant objects. We proceed most safely when we enter upon each

portion of our process, as it were, de novo; and there is danger, if we are too exclusivelyanxious about consistency of system, that we may forget the perpetual attention we owe

to experience. (Godwin 1797, v -vi)

The economist Stuart Chase identified six methods for obtaining knowledge. They are:

1. Appeal to the supernatural2. Appeal to worldly authority - the older the better

3. Intuition



4. Common sense5. Pure logic

6. The scientific method

He wrote that "only the last furnishes a cumulative storehouse of dependable and

consistent knowledge." (Chase 1956, 3) Let's assume he is correct. This presents uswith a problem: How can we do experiments in the social realm? The social sciences

present us with difficulties. According to Ernest Nagel, "Perhaps the most frequentlymentioned source of difficulty is the allegedly narrow range of possibilities for controlled

experiments on social subject matter." In a controlled experiment,

the experimenter can manipulate at will ... certain features in a situation (oftendesignated as "variables" or "factors") which are assumed to constitute the relevant

conditions for the occurrence of the phenomena under study, so that by repeatedlyvarying some of them (in the ideal case, by varying just one) but keeping the others

constant, the observer can study the effects of such changes upon the phenomenonand discover the constant relations of dependence between the phenomenon and thevariable. (Nagel 1979, 450 & 451)

According to Nagel, John Stuart Mill, the nineteenth century philosopher, "was aforemost advocate ... for employing the logical methods of the natural sciences in social

inquiry." However, "he was convinced that experimentation directed toward establishinggeneral laws was not feasible in the social sciences ... His contention is based in part on

the supposition that controlled experimentation ... requires the occurrence of variation in just one (relevant) factor at a time." According to his Method of Difference, "twosituations are required, the phenomenon being present in one and not in the other, that

are alike in all respects but one (which may ... be identified as the "cause" or "effect" ofthe phenomenon)." (Nagel 1979, 454) Nagel conceded that controlled experiment

can apparently be performed at best only rarely in the social sciences, and perhaps

never in connection with any phenomenon which involves the participation of severalgenerations and large numbers of men ... Since a given change introduced into a social

situation may produce (and usually does produce) an irreversible modification inrelevant variables, a repetition of the change to determine whether or not its observed

effects are constant will be upon variables that are not in the same initial conditions ateach of the repeated trials. In consequence, since it may thus be uncertain whether the

observed constancies or differences in the effects are to be attributed to differences inthe initial states of the variables or to differences in other circumstances of the

experiment, it may be impossible to decide by experimental means whether a givenalteration in a social phenomenon can be rightly imputed to a given type of change in a

certain variable. (Nagel 1979, 451)

Because time travel is not an option, "no laboratory experiments can be performed with



regard to human action. We are never in a position to observe the change in oneelement only, all other conditions of the event being equal to a case in which the

element concerned did not change." (Mises [1949] 1998, 31)

If the scientific method is not useful when studying social phenomena, it is because, as

Ludwig von Mises demonstrated, "all knowledge of human action rests onmethodological dualism, on a profound difference between the study of human beingson the one hand, and stones, molecules, or atoms, on the other." von Mises used a

methodology that Godwin was dismissive of. He started with the "axiom of action". Theaxiom of action simply means that "individual human beings are conscious, that they

adopt values and make choices - act - on the basis of trying to attain those values andgoals." This axiom is self-evident because it "cannot be refuted without self-

contradiction; that is without using the axiom in any attempt to refute it." As MurrayRothbard, an economist in the Misesian tradition, explains, "since the axiom of action is

self-evidently true, any logical deductions or implications from that action must be

absolutely, uncompromisingly, 'apodictically,' true as well." Recall how Keynes andChomsky said that economic theory had been contradicted by the facts. Rothbard,however, believed that the body of economic theory that derived from the self-evident

axiom of action is "absolutely true" and that "any talk about testing its truth is absurd andmeaningless. Moreover, no testing can take place since historical events are not, as arenatural events in the laboratory, homogenous, replicable, and controllable. instead, allhistorical events are heterogeneous, not replicable, and the result of complex causes."

(Holcombe 1999, 158) According to Hans-Hermann Hoppe, another Misesianeconomist, "true synthetic a priori propositions are grounded in self-evident axioms

and ... these axioms have to be understood by reflection upon ourselves rather thanbeing in any meaningful sense 'observable'." These propositions "can be validated

independently of observations and thus cannot possibly be falsified by any observationwhatsoever." (Hoppe [1995] 2007, 20 & 24)

The science of human action, according to von Mises, is called praxeology. Praxeology,

according to Hoppe, says that "all economic propositions which claim to be true must beshown to be deducible by means of formal logic from the incontestably true material

knowledge regarding the meaning of action ... Provided there is no flaw in the processof deduction, the conclusions ... must be valid a priori because their validity wouldultimately go back to nothing but the indisputable axiom of action." (Hoppe [1995] 2007,

25 & 26) As briefly noted, according to the Misesian method, "economic theories cannot

be 'tested' by historical or statistical facts ... There are always many causal factorsimpinging on each other to form historical facts. Only causal theories a priori to these

facts can be used to isolate and identify the causal strands ... The only test of a theoryis the correctness of the premises and of the logical chain of reasoning." Rothbard's

defense of praxeology is an essential tool in our toolkit and deserves to be quoted atlength.



Suppose a theory asserts that a certain policy will cure a depression. The government,obedient to the theory, puts the policy into effect. The depression is not cured. The

critics and advocates of the theory now leap to the fore with interpretations. The criticssay that the failure proves the theory incorrect. The advocates say that the government

erred in not pursuing the theory boldly enough, and that what is needed is stronger

measures in the same direction. Now the point is that empirically there is no possible way of deciding between them. Where is the empirical "test" to resolvethe debate? How can the government rationally decide upon its next step? Clearly, the

only possible way of resolving the issue is in the realm of pure theory - by examining theconflicting premises and chains of reasoning. (Rothbard [1963] 2000)



&i+liograph

Buchanan, James. (1979) "What Should Economists Do?"Chase, Stuart. (1956) "The Proper Study of Mankind" Revised EditionChomsky, Noam. ([1994] 1996) "World Orders: Old and New"

Godwin, William (1797) "The Enquirer"Holcombe, Randall G., ed. (1999) "15 Great Austrian Economists"Hoppe, Hans-Hermann. ([1995] 2007) "Economic Science and the Austrian Method"

Keynes, John Maynard. ([19530 1964) "The General Theory of Employment, Interest,and Money"

Mandel, Ernest. ([1962] 1968) "Marxist Economic Theory"von Mises, Ludwig. ([1949] 1998) "Human Action"

Nagel, Ernest. (1979) "The Structure of Science"Rothbard, Murray ([1963] 2000) "America's Great Depression" Fifth Edition



Violence and Social Orders &oo' (evie)

"Violence and Social Orders" by Douglass North, John Wallis and Barry Weingast is anexcellent book loaded with many surprising facts. It both challenges many assumptionsand reinforces economists' beliefs about decentralization and competition.

The book compares "natural states" to "open access societies." While natural states

"regulate economic competition" in order to control violence and "establish socialcooperation," open access societies "regulate economic and political competition in a

way that uses the entry and competition to order social relations." (North et al 2009, xi)One of the characteristics of open access societies is "bigger, more decentralized

governments." According to the authors, "High-income countries create and sustain amuch denser network of subnational government organizations." (North et al 2009, 11)

In countries with per capita incomes between $300 and $2000 annually, the subnationalgovernment percent of all government is only 4% while in countries with per capita

income of over $20,000 annually, the same figure is 30%. This data is consistent withthe theories of the Austrian economist F. A. Hayek. According to Hayek, becauseknowledge is dispersed, decisionmaking should be decentralized. The problem of thedivision of knowledge, he wrote, "seems to me to be the really central problem of

economics as a social science." (Hayek 1948, 50) The central question of all socialsciences is "How can the combination of fragments of knowledge existing in different

minds bring about results which, if they were to be brought about deliberately, wouldrequire a knowledge on the part of the directing mind which no single person can

possess?" (Hayek 1946, 54)

Incredibly, "income and the size of the central government are not related." What reallymatters is the size of the subnational governments: "[T]he strongest pattern is the

positive relationship between income and the size of subnational governments." (Northet al 2009, 11) Could Hayek's analysis explain this data? Statements like the followingsuggest that it explains quite a lot:

Open access orders appear to be better at coping with change over the long run.Decision makers in an open access society are widely decentralized and include

leaders in economic and political organizations. They reach decentralized decisionswithin the organizations they represent. (North et al 2009, 253)

Because knowledge is divided among the population, no one person or one group hasall the facts. As Hayek put it, "The peculiar character of the problem of a rational

economic order is determined precisely by the fact that the knowledge of thecircumstances of which we must make use never exists in concentrated or integrated

form but solely as the dispersed bits of incomplete and frequently contradictoryknowledge which all the separate individuals possess." (Hayek 1948, 77) In open

access societies, "all the separate individuals" have a wide discretion when it comes to



the plans that they make and the revisions of those plans. The alternative to this systemof "decentralized planning by many separate persons" is central planning - "direction of

the whole economic system according to one unified plan." (Hayek 1948, 79) Hayekargued that central planning would be inefficient because "the economic problem ofsociety is mainly one of rapid adaptation to changes in the particular circumstances of

time and place." For this reason, "it would seem to follow that the ultimate decisionsmust be left to the people who are familiar with these circumstances, who know directlyof the relevant changes and of the resources immediately available to meet them. We

cannot except that this problem will be solved by first communicating all this knowledgeto a central board which, after integrating all this knowledge, issues its orders." (Hayek

1948, 83 & 84) Hayek instead advocated the price mechanism as a way to coordinateeconomic activity.

By depending on the price mechanism instead of central planning, open access ordersare able to function more efficiently. "Planning" would be unfeasible for any given

population but would be even more difficult for a heterogeneous population. As Hayekargued,

Planning, or central direction of economic activity, presupposes the existence ofcommon ideals and common values; and the degree to which planning can be carried is

limited to the extent to which agreement on such a common scale of values can beobtained or enforced ... It is, after all, only common sense that the central government in

a federation composed of many different people will have to be restricted in scope if it isto avoid meeting an increasing resistance on the part of the various groups which it

includes ... There seems to be little possible doubt that the scope for the regulation ofeconomic life will be much narrower for the central government of the federation than for

national states. (Hayek 1948, 264 & 265)

According to North, Wallis and Weingast, the scope of the federal government in the

nineteenth century was small compared to what it is today. They wrote,

[T]hroughout most of the nineteenth century, economic regulation in the United States

was undertaken by the states rather than the national government. ... Focusing on thenational government ... leads to the erroneous conclusion that laissez-faire government

policies promoted economic development. The conclusion depends on the inaction ofthe national government (laissez faire by default rather than by design) and on ignoring

state governments that were not laissez faire but that actively promoted both democracyand economic growth.

This system had its advantages: "The system of federalism induced competition amongthe states, including competition for solutions to common problems." (North et al 2009

120 & 229) In the market economy, intense competition leads to innovations. Similarly,competition among political units puts at least some check on the behavior of rulers and



may even spur more enlightened ones to do what is in the public interest. As we'll see,conventional wisdom among economists concerning competition can be used as a tool

for understanding historical events.

In the market economy, the profit motive incentivizes businessmen to please their

customers and serve them better still in the future. Israel Kirzner explained this process:

[I]n the course of the market process the participants are continually testing their

competitors. Each inches ahead by offering opportunities a little more attractive thantheirs. His competitors, in turn, once they become aware of what they are competing

against, are forced to sweeten still further the opportunities they make available to themarket; and so on. (Kirzner 1973, 12)

Competition of a different kind on the world scene, likewise, resulted in, from thestandpoint of free market economics, good policies such as more secure property rights

and freer competition:

International military competition has two closely related effects. The first is economic:

thriving markets in open access orders provide the resource base from which thesesocieties sustain longterm international struggles with hostile rivals. Open access ordersthat compromise their economies also compromise their ability to survive against hostile

international rivals. (North et al 2009, 131)

When it comes to raising revenue for armed conflict, natural states are at adisadvantage. According to the authors, they have a "schizophrenic relationship ... to

specialization and division of labor." As long ago as 1776, Adam Smith explained how

specialization and division of labor made abundance possible. Natural states, however,have to balance their need for revenue with their desire to keep the peace among thedifferent factions. "[I]ncreasing specialization and division of labor," the authors explain,

"often requires opening entry and access, and doing so dissipates rents, thusthreatening the stability of the dominant coalition." (North et al 2009, 41) According to

the economist Joseph Schumpeter, "the important kind of competition in the marketsystem is competition from the new commodity, technology, source of supply and type oforganization." (Kirzner 1973, 125) Similarly, competition among hostile nations iscompetition from new military technology and organization. Understanding this, it should

not be surprising that "opening access was not forced on elites, but was in part driven

by elites who found it in their interest to expand access." (North et al 2009, 131) As theauthors put it, "states had to grow or die ... Increasing military scale created demandsfor more resources. Better enforcement of property rights for capital and commerce

emerged as political elites realized that they could capture more resources from cities inexchange for honoring rights and privileges. The economic success that followed

allowed more resources to be devoted to the military." (North et al 2009, 178)

Even more analogous to the marketplace is a democratic election. The phrase "vote



with their dollars" has been used by numerous economists. In theory, officials are heldaccountable for their actions by voters on election day just as businessmen are held

accountable by consumers by their abstention from buying. According to Kirzner, "Thepure entrepreneur ... proceeds by his alertness to discover and exploit situations inwhich he is able to sell for high prices that which he can buy for low prices." (Kirzner

1973, 48) The entrepreneur is not "a source of innovative ideas ex nihilo" but is "alert toopportunities that exist already and are waiting to be noticed." (Kirzner 1973, 74)"Political entrepreneurs who lead parties," on the other hand, "seek to advance new

ideas and programs in ways that increase the likelihood of success over their rivals."(North et al 2009, 116) What separates entrepreneurs in the market from political

"entrepreneurs" is what they are competing for: one for customers, the other for power.The competition for customers drives managers to keep costs down and even reduce

them if it is wise to do so. Price competition, according to Hayek, is "one of the mostimportant forces which in a truly competitive economy brings about the reduction of

costs to the minimum discoverable." Cost curves, as he points out, are not objectively

given facts:

[T]he method which under given conditions is the cheapest is a thing which has to bediscovered, and to be discovered anew, sometimes almost from day to day, by the

entrepreneur ... The force which in a competitive society brings about the reduction ofprice to the lowest cost at which the quantity salable at that cost can be produced is the

opportunity for anybody who knows a cheaper method to come in at his own risk and toattract customers by underbidding the other producers. (Hayek 1948, 196)

Contrast this with the scenario facing politicians in liberal democracies:

Democracy in open access orders sustains competition among political parties for theexercise of power. Competition for power induces parties to offer competing visions for

addressing the society's principal problems. As with other forms of competition,

innovators who devise more attractive ways of dealing with problems have advantagesover those who do not. (North et al 2009, 125)

This, of course, is the ideal version of democracy. It is in their discussion of democracywhere their grasp of economics leads them astray. Politicians are not businessmen.

While the incentives of the capitalist system do cause businesses to "build bettermousetraps," it is far from obvious that the incentives of the democratic system cause

politicians to "devise more attractive ways of dealing with problems." The history of theUnited States seems to be telling us a quite different story. While the statement

"Competition for power induces parties to offer competing visions for addressing thesociety's principal problems" can be interpreted as true, it nevertheless white washes

most of the history of the twentieth century. Competition for power has more often thannot induced parties to label as many situations as possible crises in order to grab more

power (Higgs 1987), to fume about "unscrupulous money changers" and "economic



royalists" (Murphy 2009, 116 & 118) and to engage in appalling dirty tricks andskullduggery (Jamieson 1992, 279), among other things.

To be fair to the authors, it isn't untrue that when there is a problem, "[p]oliticalcompetition ... provides those in power with strong incentives to adapt policy in ways

that address the problem; failing to do so risks losing power." (North et al 2009,145)However, as Thomas Sowell made clear, democratic institutions have a serious defect:

"Political systems provide some feedback via the electoral process, so that laws can beamended, repealed, or given varying amounts of financial support. This feedback is

neither as fast nor as universal, nor as immediately coercive as in economic marketprocesses." (Sowell 1980, 36) While comparing the market with democracy may be a

useful teaching tool, the similarities should not be exaggerated.



&i+liograph

Hayek, F. A. (1948) "Individualism and Economic Order"Higgs, Robert. (1987) "Crisis and Leviathan"Jamieson, Kathleen Hall. (1992) "Packaging the Presidency" Second Edition

Kirzner, Israel M. (1973) "Competition and Entrepreneurship"Murphy, Robert P. (2009) "The Politically Incorrect Guide to the Great Depression andthe New Deal"

North, Douglass C., Wallis, John Joseph and Weingast, Barry R. (2009) "Violence andSocial Orders"

Sowell, Thomas. (1980) "Knowledge and Decisions"

Essays on Economics

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