Appendix B: “Collective Goods” and “External Benefits”: Two Arguments for Government Activity

One of the most important philosophical problems of recent centuries is whether ethics is a rational discipline, or instead a purely arbitrary, unscientific set of personal values. Whichever side one may take in this debate, it would certainly be generally agreed that economics—or praxeology—cannot by itself suffice to establish an ethical, or politico-ethical, doctrine. Economics per se is therefore a Wertfrei science, which does not engage in ethical judgments. Yet, while economists will generally agree to this flat statement, it is certainly curious how much energy they have spent trying to justify—in some tortuous, presumably scientific, and Wertfrei manner—various activities and expenditures of government. The consequence is the widespread smuggling of unanalyzed, undefended ethical judgments into a supposedly Wertfrei system of economics.¹⁴⁰,¹⁴¹

Two favorite, seemingly scientific, justifications for government activity and enterprise are (a) what we might call the argument of “external benefits” and (b) the argument of “collective goods” or “collective wants.” Stripped of seemingly scientific or quasi-mathematical trappings, the first argument reduces to the contention that A, B, and C do not seem to be able to do certain things without benefiting D, who may try to evade his “just share” of the payment. This and other “external benefit” arguments will be discussed shortly. The “collective goods” argument is, on its face, even more scientific; the economist simply asserts that some goods or services, by their very nature, must be supplied “collectively,” and “therefore” government must supply them out of tax revenue.

This seemingly simple, existential statement, however, cloaks a good many unanalyzed politico-ethical assumptions. In the first place, even if there were “collective goods,” it by no means follows either (1) that one agency must supply them or (2) that everyone in the collectivity must be forced to pay for them. In short, if X is a collective good, needed by most people in a certain community, and which can be supplied only to all, it by no means follows that every beneficiary must be forced to pay for the good, which, incidentally, he may not even want. In short, we are back squarely in the moral problem of external benefits, which we shall discuss below. The “collective goods” argument turns out, upon analysis, to reduce to the “external benefit” argument. Furthermore, even if only one agency must supply the good, it has not been proved that the government, rather than some voluntary agency, or even some private corporation, cannot supply that good.¹⁴²

Secondly, the very concept of “collective goods” is a highly dubious one. How, first of all, can a “collective” want, think, or act? Only an individual exists, and can do these things. There is no existential referent of the “collective” that supposedly wants and then receives goods. Many attempts have been made, nevertheless, to salvage the concept of the “collective” good, to provide a seemingly ironclad, scientific justification for government operations. Molinari, for example, trying to establish defense as a collective good, asserted: “A police force serves every inhabitant of the district in which it acts, but the mere establishment of a bakery does not appease their hunger.” But, on the contrary, there is no absolute necessity for a police force to defend every inhabitant of an area or, still more, to give each one the same degree of protection. Furthermore, an absolute pacifist, a believer in total nonviolence, living in the area, would not consider himself protected by, or receiving defense service from, the police. On the contrary, he would consider any police in his area a detriment to him. Hence, defense cannot be considered a “collective good” or “collective want.” Similarly for such projects as dams, which cannot be simply assumed to benefit everyone in the area.¹⁴³

Antonio De Viti De Marco defined “collective wants” as consisting of two categories: wants arising when an individual is not in isolation and wants connected with a conflict of interest. The first category, however, is so broad as to encompass most market products. There would be no point, for example, in putting on plays unless a certain number went to see them or in publishing newspapers without a certain wide market. Must all these industries therefore be nationalized and monopolized by the government? The second category is presumably meant to apply to defense. This, however, is incorrect. Defense, itself, does not reflect a conflict of interest, but a threat of invasion, against which defense is needed. Furthermore, it is hardly sensible to call “collective” that want which is precisely the least likely to be unanimous, since robbers will hardly desire it!¹⁴⁴ Other economists write as if defense is necessarily collective because it is an immaterial service, whereas bread, autos, etc., are materially divisible and salable to individuals. But “immaterial” services to individuals abound in the market. Must concert-giving be monopolized by the State because its services are immaterial?

In recent years, Professor Samuelson has offered his own definition of “collective consumption goods,” in a so-called “pure” theory of government expenditures. Collective consumption goods, according to Samuelson, are those “which all enjoy in common in the sense that each individual's consumption of such a good leads to no subtraction from any other individual's consumption of that good.” For some reason, these are supposed to be the proper goods (or at least these) for government, rather than the free market, to provide.¹⁴⁵ Samuelson's category has been attacked with due severity. Professor Enke, for example, pointed out that most governmental services simply do not fit Samuelson's classification—including highways, libraries, judicial services, police, fire, hospitals, and military protection. In fact, we may go further and state that no goods would ever fit into Samuelson's category of “collective consumption goods.” Margolis, for example, while critical of Samuelson, concedes the inclusion of national defense and lighthouses in this category. But “national defense” is surely not an absolute good with only one unit of supply. It consists of specific resources committed in certain definite and concrete ways—and these resources are necessarily scarce. A ring of defense bases around New York, for example, cuts down the amount possibly available around San Francisco. Furthermore, a lighthouse shines over a certain fixed area only. Not only does a ship within the area prevent others from entering the area at the same time, but also the construction of a lighthouse in one place limits its construction elsewhere. In fact, if a good is really technologically “collective” in Samuelson's sense, it is not a good at all, but a natural condition of human welfare, like air—superabundant to all, and therefore unowned by anyone. Indeed, it is not the lighthouse, but the ocean itself—when the lanes are not crowded—which is the “collective consumption good,” and which therefore remains unowned. Obviously, neither government nor anyone else is normally needed to produce or allocate the ocean.¹⁴⁶

Tiebout, conceding that there is no “pure” way to establish an optimum level for government expenditures, tries to salvage such a theory specifically for local government. Realizing that the taxing, and even voting, process precludes voluntary demonstration of consumer choice in the governmental field, he argues that decentralization and freedom of internal migration renders local government expenditures more or less optimal—as we can say that free market expenditures by firms are “optimal”—since the residents can move in and out as they please. Certainly, it is true that the consumer will be better off if he can move readily out of a high-tax, and into a low tax, community. But this helps the consumer only to a degree; it does not solve the problem of government expenditures, which remains otherwise the same. There are, indeed, other factors than government entering into a man's choice of residence, and enough people may be attached to a certain geographical area, for one reason or another, to permit a great deal of government depredation before they move. Furthermore, a major problem is that the world's total land area is fixed, and that governments have universally pre-empted all the land and thus universally burden consumers.¹⁴⁷

We come now to the problem of external benefits—the major justification for government activities expounded by economists.¹⁴⁸ Where individuals simply benefit themselves by their actions, many writers concede that the free market may be safely left unhampered. But men's actions may often, even inadvertently, benefit others. While one might think this a cause for rejoicing, critics charge that from this fact flow evils in abundance. A free exchange, where A and B mutually benefit, may be all very well, say these economists; but what if A does something voluntarily which benefits B as well as himself, but for which B pays nothing in exchange?

There are two general lines of attack on the free market, using external benefits as the point of criticism. Taken together, these arguments against the market and for governmental intervention or enterprise cancel each other out, but each must, in all fairness, be examined separately. The first type of criticism is to attack A for not doing enough for B. The benefactor is, in effect, denounced for taking his own selfish interests exclusively into account, and thereby neglecting the potential indirect recipient waiting silently in the wings.¹⁴⁹ The second line of attack is to denounce B for accepting a benefit without paying A in return. The recipient is denounced as an ingrate and a virtual thief for accepting the free gift. The free market, then, is accused of injustice and distortion by both groups of attackers: the first believes that the selfishness of man is such that A will not act enough in ways to benefit B; the second that B will receive too much “unearned increment” without paying for it. Either way, the call is for remedial State action; on the one hand, to use violence in order to force or induce A to act more in ways which will aid B; on the other, to force B to pay A for his gift.

Generally, these ethical views are clothed in the “scientific” opinion that, in these cases, free-market action is no longer optimal, but should be brought back into optimality by corrective State action. Such a view completely misconceives the way in which economic science asserts that free-market action is ever optimal. It is optimal, not from the standpoint of the personal ethical views of an economist, but from the standpoint of the free, voluntary actions of all participants and in satisfying the freely expressed needs of the consumers. Government interference, therefore, will necessarily and always move away from such an optimum.

It is amusing that while each line of attack is quite widespread, each can be rather successfully rebutted by using the essence of the other attack! Take, for example, the first—the attack on the benefactor. To denounce the benefactor and implicitly call for State punishment for insufficient good deeds is to advance a moral claim by the recipient upon the benefactor. We do not intend to argue ultimate values in this book. But it should be clearly understood that to adopt this position is to say that B is entitled peremptorily to call on A to do something to benefit him, and for which B does not pay anything in return. We do not have to go all the way with the second line of attack (on the “free rider”), but we can say perhaps that it is presumptuous of the free rider to assert his right to a post of majesty and command. For what the first line of attack asserts is the moral right of B to exact gifts from A, by force if necessary.

Compulsory thrift, or attacks on potential savers for not saving and investing enough, are examples of this line of attack. Another is an attack on the user of a natural resource that is being depleted. Anyone who uses such a resource at all, whatever the extent, “deprives” some future descendant of the use. “Conservationists,” therefore, call for lower present use of such resources in favor of greater future use. Not only is this compulsory benefaction an example of the first line of attack, but, if this argument is adopted, logically no resource subject to depletion could ever be used at all. For when the future generation comes of age, it too faces a future generation. This entire line of argument is therefore a peculiarly absurd one.

The second line of attack is of the opposite form—a denunciation of the recipient of the “gift.” The recipient is denounced as a “free rider,” as a man who wickedly enjoys the “unearned increment” of the productive actions of others. This, too, is a curious line of attack. It is an argument which has cogency only when directed against the first line of attack, i.e., against the free rider who wants compulsory free rides. But here we have a situation where A's actions, taken purely because they benefit himself, also have the happy effect of benefiting someone else. Are we to be indignant because happiness is being diffused throughout society? Are we to be critical because more than one person benefits from someone's actions? After all, the free rider did not ask for his ride. He received it, unasked, as a boon because A benefits from his own action. To adopt the second line of attack is to call in the gendarmes to apply punishment because too many people in the society are happy. In short, am I to be taxed for enjoying the view of my neighbor's well-kept garden?¹⁵⁰

One striking instance of this second line of attack is the nub of the Henry Georgist position: an attack on the “unearned increment” derived from a rise in the capital values of ground land. We have seen above that as the economy progresses, real land rents will rise with real wage rates, and the result will be increases in the real capital values of land. Growing capital structure, division of labor, and population tend to make site land relatively more scarce and hence cause the increase. The argument of the Georgists is that the landowner is not morally responsible for this rise, which comes about from events external to his landholding; yet he reaps the benefit. The landowner is therefore a free rider, and his “unearned increment” rightfully belongs to “society.” Setting aside the problem of the reality of society and whether “it” can own anything, we have here a moral attack on a free-rider situation.

The difficulty with this argument is that it proves far too much. For which one of us would earn anything like our present real income were it not for external benefits that we derive from the actions of others? Specifically, the great modern accumulation of capital goods is an inheritance from all the net savings of our ancestors. Without them, we would, regardless of the quality of our own moral character, be living in a primitive jungle. The inheritance of money capital from our ancestors is, of course, simply inheritance of shares in this capital structure. We are all, therefore, free riders on the past. We are also free riders on the present, because we benefit from the continuing investment of our fellow men and from their specialized skills on the market. Certainly the vast bulk of our wages, if they could be so imputed, would be due to this heritage on which we are free riders. The landowner has no more of an unearned increment than any one of us. Are all of us to suffer confiscation, therefore, and to be taxed for our happiness? And who then is to receive the loot? Our dead ancestors, who were our benefactors in investing the capital?¹⁵¹

An important case of external benefits is “external economies,” which could be reaped by investment in certain industries, but which would not accrue as profit to the entrepreneurs. There is no need to dwell on the lengthy discussion in the literature on the actual range of such external economies, although they are apparently negligible. The suggestion has been persistently advanced that the government subsidize these investments so that “society” can reap the external economies. Such is the Pigou argument for subsidizing external economies, as well as the old and still dominant “infant industries” argument for a protective tariff.

The call for state subsidization of external economy investments amounts to a third line of attack on the free market, i.e., that B, the potential beneficiaries, be forced to subsidize the benefactors A, so that the latter will produce the former's benefits. This third line is the favorite argument of economists for such proposals as government-aided dams or reclamations (recipients taxed to pay for their benefits) or compulsory schooling (the taxpayers will eventually benefit from others’ education), etc. The recipients are again bearing the onus of the policy; but here they are not criticized for free riding. They are now being “saved” from a situation in which they would not have obtained certain benefits. Since they would not have paid for them, it is difficult to understand exactly what they are being saved from. The third line of attack therefore agrees with the first that the free market does not, because of human selfishness, produce enough external-economy actions; but it joins the second line of attack in placing the cost of remedying the situation on the strangely unwilling recipients. If this subsidy takes place, it is obvious that the recipients are no longer free riders: indeed, they are simply being coerced into buying benefits for which, acting by free choice, they would not have paid.

The absurdity of the third approach may be revealed by pondering the question: Who benefits from the suggested policy? The benefactor A receives a subsidy, it is true. But it is often doubtful if he benefits, since he would otherwise have acted and invested profitably in some other direction. The State has simply compensated him for losses which he would have received and has adjusted the proceeds so that he receives the equivalent of an opportunity forgone. Therefore A, if a business firm, does not benefit. As for the recipients, they are being forced by the State to pay for benefits that they otherwise would not have purchased. How can we say that they “benefit”?

A standard reply is that the recipients “could not” have obtained the benefit even if they had wanted to buy it voluntarily. The first problem here is by what mysterious process the critics know that the recipients would have liked to purchase the “benefit.” Our only way of knowing the content of preference scales is to see them revealed in concrete choices. Since the choice concretely was not to buy the benefit, there is no justification for outsiders to assert that B's preference scale was “really” different from what was revealed in his actions.

Secondly, there is no reason why the prospective recipients could not have bought the benefit. In all cases a benefit produced can be sold on the market and earn its value product to consumers. The fact that producing the benefit would not be profitable to the investor signifies that the consumers do not value it as much as they value the uses of nonspecific factors in alternative lines of production. For costs to be higher than prospective selling price means that the nonspecific factors earn more in other channels of production. Furthermore, in possible cases where some consumers are not satisfied with the extent of the market production of some benefit, they are at perfect liberty to subsidize the investors themselves. Such a voluntary subsidy would be equivalent to paying a higher market price for the benefit and would reveal their willingness to pay that price. The fact that, in any case, such a subsidy has not emerged eliminates any justification for a coerced subsidy by the government. Rather than providing a benefit to the taxed “beneficiaries,” in fact, the coerced subsidy inflicts a loss upon them, for they could have spent their funds themselves on goods and services of greater utility.¹⁵²

---

¹Some economists, notably Edwin Cannan, have denied that economic analysis could be applied to acts of violent intervention. But, on the contrary, economics is the praxeological analysis of human actions, and violent interrelations are forms of action which can be analyzed.

²Is it, then, surprising that the early economists, all religious men, marveled at their epochal discovery of the harmony pervading the free market and tended to ascribe this beneficence to a “hidden hand” or divine harmony? It is easier for us to scoff at their enthusiasm than to realize that it does not detract from the validity of their analysis.

Conventional writers charge, for example, that the French “optimistic” school of the nineteenth century were engaging in a naïve Har-monielehre—a mystical idea of a divinely ordained harmony. But this charge ignores the fact that the French optimists were building on the very sound “welfare-economic” insight that voluntary exchanges on the free market conduce harmoniously to the benefit of all. For example, see About, Handbook of Social Economy, pp. 104–12.

³The study of the direct consequences for utility of intervention or nonintervention is peculiarly the realm of “welfare economics.” For a critique and outline of a reconstruction of welfare economics, see Rothbard, “Toward a Reconstruction of Utility and Welfare Economics.”

⁴Perhaps we may note here the German sociologist Franz Oppen-heimer's distinction between the free market and binary intervention as the “economic” as against the “political” means to the satisfaction of one's wants:

There are two fundamentally opposed means whereby man, requiring sustenance, is impelled to obtain the necessary means for satisfying his desires. These are work and robbery, one's own labor and the forcible appropriation of the labor of others. . . . I propose . . . to call one's own labor and the equivalent exchange of one's own labor for the labor of others, the “economic means” for the satisfaction of needs, while the unrequited appropriation of the labor of others will be called the “political means.” . . . The state is an organization of the political means. (Oppenheimer, The State, pp. 24–27)

⁵One of the roots of this fallacy is the idea that in an exchange the two things exchanged are or should be “equal” in value and that “inequality” of value demonstrates “exploitation.” We have seen, on the contrary, that any exchange involves inequality of the values of each commodity between buyer and seller, and that it is this very double inequality of values that brings about the exchange. An example of stress on this fallacy is the well-known work by Yves Simon, Philosophy of Democratic Government (Chicago: University of Chicago Press, 1951), chap. IV.

⁶It has become fashionable to assert that John C. Calhoun anticipated the Marxian doctrine of class exploitation, but actually, Calhoun's “classes” were castes: creatures of State intervention itself. In particular, Calhoun saw that the binary intervention of taxation must always be spent so that some people in the community become net payers of tax funds, and the others net recipients. Calhoun defined the latter as the “ruling class” and the former as the “ruled.” Thus:

Few, comparatively, as they are, the agents and employees of the government constitute that portion of the community who are the exclusive recipients of the proceeds of the taxes. . . . But as the recipients constitute only a portion of the community, it follows . . . that the action [of the fiscal process] must be unequal between the payers of the taxes and the recipients of their proceeds. Nor can it be otherwise; unless what is collected from each individual in the shape of taxes shall be returned to him in that of disbursements, which would make the process nugatory and absurd. . . . It must necessarily follow that some one portion of the community must pay in taxes more than it receives in disbursements, while another receives in disbursements more than it pays in taxes. It is, then, manifest . . . that taxes must be, in effect, bounties to that portion of the community which receives more in disbursements than it pays in taxes, while to the other which pays in taxes more than it receives in disbursements they are taxes in reality—burdens instead of bounties. This consequence is unavoidable. It results from the nature of the process, be the taxes ever so equally laid. . . .

The necessary result, then, of the unequal fiscal action of the government is to divide the community into two great classes: one consisting of those who, in reality, pay the taxes and, of course, bear exclusively the burden of supporting the government; and the other, of those who are the recipients of their proceeds through disbursements, and who are, in fact, supported by the government; or, the effect of this is to place them in antagonistic relations in reference to the fiscal action of the government. . . . For the greater the taxes and disbursements, the greater the gain of the one and the loss of the other, and vice versa. . . . (John C. Calhoun, A Disquisition on Government [New York: Liberal Arts Press, 1953], pp. 16–18)

⁷See Rothbard, “Toward a Reconstruction of Utility and Welfare Economics.” For an analysis of State action, see Gustave de Molinari, The Society of Tomorrow (New York: G.P. Putnam's Sons, 1904), pp. 19 ff., 65–96.

⁸We have seen above that praxeology may deal with utilities only as deduced from the concrete actions of human beings. Elsewhere we have named this concept “demonstrated preference,” have traced its history, and criticized competing concepts. Rothbard, “Toward a Reconstruction of Utility and Welfare Economics,” pp. 224 ff.

⁹For a critique of the first assumption, see Murray N. Rothbard, “The Mantle of Science” in Helmut Schoeck and James W. Wiggins, eds., Sci-entism and Values (Princeton, N.J.: D. Van Nostrand, 1960); on the latter arguments, see Rothbard, “Toward a Reconstruction of Utility and Welfare Economics,” pp. 256 ff.

¹⁰Schumpeter's insights on the fallacy of attributing a voluntary nature to the State deserve to be heeded:

. . . ever since the princes’ feudal incomes ceased to be of major importance, the State has been living on a revenue which was being produced in the private sphere for private purposes and had to be deflected from these purposes by political force. The theory which construes taxes on the analogy of club dues or of the purchase of the services of, say, a doctor only proves how far removed this part of the social sciences is from scientific habits of mind. (Schumpeter, Capitalism, Socialism and Democracy, p. 198 and 198 n.)

¹¹I am deeply indebted to Professor Ludwig M. Lachmann, Mr. L.D. Goldblatt, and other members of Professor Lachmann's Honours Seminar in Economics at the University of Witwatersrand, South Africa, for raising these questions in their discussion of my “Reconstruction” paper cited above.

¹²Neither are these contradictions removed by abandoning democracy in favor of dictatorship. For even if the mass of the public do not vote under a dictatorship, they must still consent to the rule of the dictator and his chosen experts, and therefore their unique competence in the political field as against other spheres of their daily life must still be assumed.

¹³See Rothbard, “Mises’ Human Action: Comment,” pp. 383–84. Also cf. George H. Hildebrand, “Consumer Sovereignty in Modern Times,” American Economic Review, Papers and Proceedings, May, 1951, p. 26.

¹⁴Cf. the excellent discussion of the contrast between daily life and politics in Schumpeter, Capitalism, Socialism and Democracy, pp. 258–60.

¹⁵Ibid., p. 263.

¹⁶Schuller, “Rejoinder,” p. 189.

¹⁷We might say that this insight underlies F.A. Hayek's famous chapter, “Why the Worst Get on Top” in The Road to Serfdom (Chicago: University of Chicago Press, 1944), chap. x. Also see the recent brief discussion by Jack Hirshleifer, “Capitalist Ethics—Tough or Soft?” Journal of Law and Economics, October, 1959, p. 118.

¹⁸Cf. the interesting definition of “democracy” in Heath, Citadel, Market, and Altar, p. 234.

¹⁹Of course, even a completely ineffective triangular control is likely to increase the government bureaucracy dealing with the matter and therefore increase the total amount of binary intervention over the taxpayer. But more on this below.

²⁰A “bribe” is only payment of the market price by a buyer.

²¹Ironically, the government's destruction of part of the people's money almost always takes place after the government has pumped in new money and used it for its own purposes. The injury that the government imposes on the public is twofold: (1) it takes resources away from the public by inflating the currency (see below); and (2) after the money has percolated down to the public, it destroys part of the money's usefulness.

²²In the present-day United States, much of the task of coercion has been assumed on the unions’ behalf by the government. This was the essence of the Wagner Act, the law of the land since 1935. (The Taft-Hartley Act was only a relatively unimportant amendment to the Wagner Act, which continues on the books.) The crucial provisions of this act are: (1) to coerce all workers in a certain production unit (arbitrarily defined ad hoc by the government) into being represented by a union in bargaining with an employer, if a majority of workers agree; (2) to prohibit the employer from refusing to hire union members or union organizers; and (3) to compel the employer to bargain with this union. Thus, unions have been invested with governmental authority, and the strong arm of the government uses coercion to force workers and employers alike to deal with the unions. On special coercive privilege granted to unions, see also Roscoe Pound, “Legal Immunities of Labor Unions” in Labor Unions and Public Policy (Washington, D.C.: American Enterprise Association, 1958), pp. 145–73; and Frank H. Knight, “Wages and Labor Union Action in the Light of Economic Analysis” in Bradley, Public Stake in Union Power, p. 43. Also see Petro, Power Unlimited, and chapter 10, pp. 714–15 above.

²³Mises, Human Action, pp. 432 n., 447, 469, 776.

²⁴It was notorious, for example, that the bootleggers, a caste created by Prohibition, were one of the main groups opposing repeal of Prohibition in America.

²⁵The workings of rationing (as well as the socialist system in general) have never been more vividly portrayed than in Henry Hazlitt's The Great Idea.

²⁶We might well call the latter an oligopoly grant, but this would engender hopeless confusion with existing oligopoly theory. On the latter, see chapter 10 above.

²⁷Monopoly privilege is granted by a government, which has power only over its own geographic area. Therefore, monopoly prices achieved within an area are always, on the market, subject to devastating competition from other countries. This is increasingly true as civilization advances and transportation costs decline, thus subjecting local monopolies to ever greater threats of competition from other areas. Hence, any domestic monopoly will tend to reach out to restrict foreign competition and block efficient interregional trade: It is no wonder that the tariff used to be called “The Mother of Trusts.”

We might note here that on a truly free market there would be no need for any separate “theory of international trade.” Nations become significant economically only with government intervention, either by way of monetary intervention or barriers to trade.

²⁸Monopolistic privileges to businesses may confer a monopoly price, depending on the elasticity of the firm's demand curve. Privileges to workers, on the other hand, always confer a higher, restrictionist price at lower than free-market output. The reason is that a business can expand or contract its production at will; if, then, a few firms are granted the privilege of producing in a certain field, they may expand production, if conditions are ripe, and not reduce total supply. On the other hand, aside from hours worked, which is not very flexible, restriction of entry into a labor market must always reduce the total supply of labor in that industry and therefore confer a restrictionist price. Of course, a direct restriction on production such as conservation laws always reduces supply and thereby confers a restrictionist price.

²⁹It will be more convenient to use dollars rather than gold ounces in this section; but we still assume complete equivalence of dollars and gold weights. We do not consider monetary intervention until the end of this chapter.

³⁰This does not mean that resources will flow directly out of jewelry and into paper. It is more likely that resources will flow into and out of industries similar to each other, occupationally and geographically, and that resources will readjust, step by step, from one industry to the next.

³¹In the long run of the ERE, of course, all firms in all industries earn a uniform interest return, and the bulk of the gains or losses are imputed back to the original specific factors.

³²For a further discussion of the economic effects of taxation, see the next section below.

³³A fourth method, revenue from sale of governmental goods or services, is a peculiar form of taxation; at the very least, to acquire the original assets for this “business,” taxation is needed.

³⁴In the less developed countries, where a money economy is still emerging from barter, any given amount of taxation will have a still more drastic effect: for it will make monetary incomes much less worthwhile and will shift people's efforts from trying to make money back to untaxed barter arrangements. Taxation can therefore decisively retard development from a barter to a monetary economy, or even reverse the process. See C. Lowell Harriss, “Public Finance” in Bernard F. Haley, ed., A Survey of Contemporary Economics (Homewood, Ill.: Richard D. Irwin, 1952), p. 264. For a practical application, see P.T. Bauer, “The Economic Development of Nigeria,” Journal of Political Economy, October, 1955, pp. 400 ff.

If any government taxes in kind, there is then no span of time between taxation and the extraction of physical resources from the private sector. Both take place in the same act.

³⁵For this shift to occur, the individual's real monetary assets must decline, not just the nominal amount in terms of money. If, then, instead of this tax, there is deflation in the society, and the value of the monetary unit increases roughly proportionately everywhere, then the nominal fall in each individual's money stock will not be a real fall, and hence effective time-preference ratios will remain unchanged. In the case of income taxation, deflation will not occur, since the government will spend the revenue rather than contract the money supply. (Even in the rare case where all the tax money is liquidated by the government, the individuals taxed will lose more than others and hence will lose some real monetary assets.)

³⁶Thus, cf. Irving and Herbert W. Fisher, Constructive Income Taxation (New York: Harper & Bros., 1942). “Double” is used in the sense of two instances, not arithmetically twice.

³⁷These economists generally conclude that not income, but only consumption, should be taxed as the only “real” income.

³⁸The bias in favor of investment, or “growth,” as against present consumption, is similar to the conservationist attack on present consumption. What is so worthy about future consumption and so unworthy about consuming in the present? Perhaps what we have here is an illicit smuggling of the less rational aspects of the “Protestant ethic” into economic science. Of the many problems involved, we may mention one here: What nonarbitrary quantitative standards for thrift can the economist establish once the free market's decision is overridden?

³⁹This is true if we also disregard the grave conceptual difficulties of arriving at a definition of “income,” in accounting for the imputed monetary value of work done within a household, of averaging fluctuating incomes over various years, etc.

⁴⁰We are not here conceding that “costs” determine “prices.” The general array of final prices determines the general array of cost prices, but then the viability of firms is determined by whether the price that people will pay for their particular products will be enough to cover the costs, which are determined throughout the market.

⁴¹Ever since Adam Smith, economists have tried, fallaciously, to use the benefit principle to justify proportional, and even progressive, taxation, on the ground that people benefit “from society” in proportion, or even more than in proportion, to their incomes. But it is clear that the rich benefit less from such services as police protection, since they could more afford to pay for their own than the poor. And the rich derive no benefit from welfare expenditures. Therefore, the rich derive fewer benefits, absolutely, from government than the poor, and the benefit principle cannot be used to justify proportional or progressive taxation.

But, it might be objected, can't we say that everyone derives proportional benefits to his income from “society,” though not from government? In the first place, this cannot be established. In fact, the opposite argument would be more accurate: for since both A and B participate in society and its benefits, any differential income between A and B must be due to their own particular worths rather than to society. Certainly equal benefits from society cannot be used to imply a proportional tax. And, furthermore, even if the argument were true, by what legerdemain can we say that “society” is equivalent to the State ? If A, B, C, producers on the market, benefit from each other's existence as “society,” how can G, the government, use this fact to establish its claim to their wealth?

⁴²For a critique of this doctrine, see E.R.A. Seligman, The Shifting and Incidence of Taxation (New York: Macmillan & Co., 1899), pp. 122–36.

⁴³Businessmen are particularly prone to this “passing on” argument—obviously in an attempt to convince consumers that they are really paying any tax on that industry. Yet the argument is clearly belied by the very zeal of each industry to have its taxes lowered and to fight against a tax increase. If taxes could really be shifted so easily and businessmen were simply unpaid collection agents for the government, they would never protest a tax on their industry. (Perhaps this is the reason why almost no businessmen have protested being collection agents for withholding taxes on their workers!)

⁴⁴It might be objected that the firms can pass along the sales tax because it is a general increase for all firms. Aside from the fact that no relevant general factor (supply, demand for money) has increased, the individual firm is still concerned only with its individual demand curve, and these curves have not shifted. A tax increase has done nothing to make a higher price more profitable than it was before.

⁴⁵Resources can now shift only from work into idleness (or into barter). This, of course, may and probably will happen; since, as we shall see further, a sales tax is a tax on incomes, the rise in opportunity cost of leisure may push some workers into idleness and thereby lower the quantity of goods produced. To this extent, prices will eventually rise, although hardly in the smooth, immediate, proportionate way of “shifting.” See the pioneering article by Harry Gunnison Brown, “The Incidence of a General Output or a General Sales Tax,” reprinted in R.A. Musgrave and C.S. Shoup, eds., Readings in the Economics of Taxation (Homewood, Ill.: Richard D. Irwin, 1959), pp. 330–39. While this was the first modern attack on the fallacy that sales taxes are shifted forward, Brown unfortunately weakened the implications of this thesis toward the end of his article.

⁴⁶Of course, if the money supply is increased after a wage rise, and credit expanded, prices can be raised so that money wages are again not above their discounted marginal value products.

⁴⁷Mr. Frank Chodorov, in his The Income Tax—Root of All Evil (New York: Devin-Adair, 1954), fails to indicate what other type of tax would be “better” from a free-market point of view, than the income tax. It is clear from our discussion that there are few taxes indeed that will not be as bad as the income tax from the viewpoint of the free market. Certainly sales or excise taxation will not fill the bill.

Mr. Chodorov, furthermore, is surely wrong when he terms income and inheritance taxes unique denials of the right of individual property. Any tax whatever infringes on property right, and there is nothing in an “indirect tax” which makes the infringement any less clear. It is true that an income tax forces the subject to keep records and disclose his personal dealings, thus imposing a further loss in his utility. The sales tax, however, also forces record-keeping; the difference again is one of degree rather than of kind, since here the directness covers only retail storekeepers instead of the bulk of the population.

⁴⁸Thus, even so eminent an economist as F.A. Hayek has recently written:

This scheme [the single tax] for the socialization of land is, in its logic, probably the most seductive and plausible of all socialist schemes. If the factual assumptions on which it is based were correct, i.e., if it were possible to distinguish clearly between the value of the “permanent and indestructible powers” of the soil . . . and . . . the value due to . . . improvement . . . the argument for its adoption would be very strong. (F.A. Hayek, The Constitution of Liberty [Chicago: University of Chicago Press, 1960], pp. 352–53)

Also see a somewhat similar concession by the Austrian economist von Wieser. Friedrich Freiherr von Wieser, “The Theory of Urban Ground Rent” in Louise Sommer, ed., Essays in European Economic Thought (Princeton, N.J.: D. Van Nostrand, 1960), pp. 78 ff.

⁴⁹I do not know anyone who has brought out the productivity of landowners as clearly as Mr. Spencer Heath, an ex-Georgist. See Spencer Heath, How Come That We Finance World Communism? (mimeographed MS., New York: Science of Society Foundation, 1953); idem, Rejoinder to ‘Vituperation Well Answered’ by Mr. Mason Gaffney (New York: Science of Society Foundation, 1953); idem, Progress and Poverty Reviewed (New York: The Freeman, 1952).

⁵⁰Spencer Heath comments on Henry George as follows:

Wherever the services of land owners are concerned he is firm in his dictum that all values are physical . . . In the exchange services performed by [landowners], their social distribution of sites and resources, no physical production is involved; hence he is unable to see that they are entitled to any share in the distribution of physical things and that the rent they receive . . . is but recompense for their non-coercive distributive or exchange services. . . . He rules out all creation of values by the services performed in [land] distribution by free contract and exchange, which is the sole alternative to either a violent and disorderly or an arbitrary and tyrannical distribution of land. (Heath, Progress and Poverty Reviewed, pp. 9–10)

⁵¹For the effects of the “single tax” and for other criticisms, see Murray N. Rothbard, The Single Tax: Economic and Moral Implications (Irving-ton-on-Hudson, N.Y.: Foundation for Economic Education, 1957); Rothbard, “A Reply to Georgist Criticisms” (mimeographed MS., Foundation for Economic Education, 1957); and Frank H. Knight, “The Fallacies in the ‘Single Tax,’ “ The Freeman, August 10, 1953, pp. 810–11. One of the more amusing objections is that of the dean of Georgist economists, Dr. Harry Gunnison Brown. Although the Geor-gists base much of their economic case on a sharp distinction between ownership of land and ownership of improvements on that land, Brown tries to refute the disruptive economic effects of the single tax by implicitly assuming that land and improvements are owned by the same people anyway! Actually, of course, the disruptive effects remain; vertical integration by individuals or firms does not remove the economic principle from either of the integrated stages of production. See Harry Gunnison Brown, “Foundations, Professors and ‘Economic Education,’” The American Journal of Economics and Sociology, January, 1958, pp. 150–52.

⁵²Government expenditures are made from government revenue. In the preceding section we have dealt with the major source of governmental revenue, taxation. Below we shall deal with inflation, or money creation, and in the present section a discussion of government “enterprise” is included. For a brief treatment of the final major source of government revenue—borrowing from the public—see Appendix A below.

⁵³It may be objected that while bureaucrats may not be producers, other “Pauls” who receive subsidies on occasion are basically producers on the market. To the extent that they receive subsidies from the government, however, they are being nonproductive and living off the producers by compulsion. What is relevant, in short, is the extent to which they are in a relation of State to their fellow men. We might add that, in this work, the term “State” is never meant in an anthropomorphic manner. “State” really means people acting toward one another in a systematically “stateish” relationship.

I am indebted to Mr. Ralph Raico, of the University of Chicago, for the “relation of State” concept.

⁵⁴Originally, Professor Simon Kuznets contended that only taxes should gauge the government's productive output, thus measuring product by revenue as in the case of private firms. But taxes, being compulsory, cannot be used as a productive gauge. In contrast to the present method of national income accounting, Kuznets would have eliminated all government deficits from its “productive contribution.”

⁵⁵Even for those who do not accept this analysis, any who believe, empirically, that waste in government exceeds 50 percent of its expenditures would have to agree that our assumption is more accurate than the current estimate of 100 percent productivity by the government.

⁵⁶If a waste asset owned by the government is sold to private enterprise, then all or part of it might become a capital good. But this potential does not make the good capital while used by the government. It might be objected that government purchases are genuine investments when used by a government “enterprise” that charges prices on the market. We shall see, however, that this is not really enterprise but playing at enterprise.

See below for a more detailed discussion of the waste involved in waste assets.

⁵⁷This is to be distinguished from the classical concept of “nonproductive consumption” as all consumption above that needed to maintain the productive capacity of the laborer.

⁵⁸As Thomas Mackay aptly stated: “We can have exactly as many paupers as the country chooses to pay for.” Thomas Mackay, Methods of Social Reform (London: John Murray, 1896), p. 210. Private charity to the poor, on the other hand, would not have the same vicious-circle effect, since the poor would not have a continuing compulsory claim on the rich. This is particularly true where private charity is given only to the “deserving” poor. On the nineteenth-century concept of the “deserving poor,” cf. Barbara Wootton, Social Science and Social Pathology (London: George Allen & Unwin, 1959), pp. 51, 55, and 268 ff.

⁵⁹The reader may gauge from the following anecdote by an admirer of such a drive just who was the true friend of the poor organ-grinder—his customer or the government:

During a similar campaign to clean up the streets of organ-grinders (most of whom were simply licensed beggars) a woman came up to LaGuardia at a social function and begged him not to deprive her of her favorite organ-grinder.

“Where do you live?” he asked her.

“On Park Avenue!”

LaGuardia successfully pushed through his plan to eliminate the organ-grinders and the peddlers, despite the pleas of the penthouse slummers. (Newbold Morris and Dana Lee Thomas, Let the Chips Fall [New York: Apple-ton-Century-Crofts, 1955], pp. 119–20)

⁶⁰See Murray N. Rothbard, “Government in Business” in Essays on Liberty (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1958), I V, 186 ff. It is therefore characteristic of government ownership and “enterprise” that the consumer becomes, not a “king” to be courted, but a troublesome fellow bent on using up the “social” product.

⁶¹Thus, the government official may select a road that will yield him or his allies more votes.

⁶²Cf. Ludwig von Mises, Bureaucracy (New Haven: Yale University Press, 1946), pp. 50, 53.

⁶³Various fallacious criteria have been advanced for deciding between private and state action. One common rule is to weigh “marginal social costs” and benefits against “marginal private costs” and benefits. Apart from other flaws, there is no such entity as “society” separate from constituent individuals, so that this preferred criterion is simply meaningless.

⁶⁴See the interesting pamphlet by Frank Chodorov, The Myth of the Post Office (Hinsdale, Ill.: Henry Regnery Co., 1948). On a similar situation in England, see Frederick Millar, “The Evils of State Trading as Illustrated by the Post Office” in Thomas Mackay, ed., A Plea for Liberty (New York: D. Appleton Co., 1891), pp. 305–25. For a portrayal of the political factors that have systematically distorted economic considerations in setting postal rates in the United States, see Jane Kennedy, “Development of Postal Rates: 1845–1955,” Land Economics, May, 1957, pp. 93–112; and Kennedy, “Structure and Policy in Postal Rates,” Journal of Political Economy, June, 1957, pp. 185–208.

⁶⁵Only governments can make self-satisfied announcements of cuts in service in order to effect economies. In private business, economies must be made as corollaries to improvements in service. A recent example of a cut in government service—in the midst of improving private services in most other fields—was the decline in American postal deliveries from two to one a day, coupled, of course, with perennial requests for higher rates.

When France nationalized the important Western Railway system in 1908, freight was increasingly damaged, trains slowed down, and accidents grew at such a pace that an economist caustically observed that the French government had added railway accidents to its growing list of monopolies. See Murray N. Rothbard, “The Railroads of France,” Ideas on Liberty, September, 1955, p. 42.

⁶⁶Ironically enough, the higher fares have driven many customers to buying and driving their own cars, thus aggravating the perennial traffic problem (shortage of government street space) even further. Another example of government intervention creating and multiplying its own difficulties! On the subways, see Ludwig von Mises, “The Agony of the Welfare State,” The Freeman, May 4, 1953, pp. 556–57.

⁶⁷It might be objected that individual stockholders of corporations cannot do this either, e.g., a General Motors stockholder is not allowed to seize a car in lieu of cash dividends or in exchange for his stock. Yet stockholders do own their company, and this example precisely proves our point. For the individual stockholder can contract out of his company; he can sell his aliquot shares of General Motors stock to someone else. The subject of government cannot contract out of that government; he cannot sell his “shares” in the post office, for example, because he has no such shares. As F.A. Harper has succintly stated: “The corollary of the right of ownership is the right of disownership. So if I cannot sell a thing, it is evident that I do not really own it.” Harper, Liberty: A Path to Its Recovery, pp. 106, 32. Also see Isabel Paterson, The God of the Machine (New York: Putnam's, 1943), pp. 179 ff., and T. Robert Ingram, Schools: Government or Public? (Houston: St. Thomas Press, n.d.).

⁶⁸It might be noted that even if all the fallacious planks of the Henry George structure were conceded, the Single Tax program would still not follow from the premises. As Benjamin Tucker brilliantly demonstrated years ago, the most that could possibly be established would be each man's “right” to his tiny aliquot part of the site value of every plot of land—not the State's right to the whole value. Tucker, Individual Liberty, pp. 241–43.

⁶⁹Those who object that private individuals are mortal, while “governments are immortal,” indulge in the fallacy of conceptual realism at its starkest. “Government” is not a real acting entity, but rather a type of interpersonal action adopted by actual individuals.

⁷⁰See the literature referred to in chapter 10, above, on the economics of socialism. Also John Jewkes, Ordeal by Planning (New York: Macmillan & Co., 1948). For application to Soviet practice, see Boris Brutzkus, Economic Planning in Soviet Russia (London: Routledge, 1935) and such recent material as G.F. Ray, “Industrial Planning in Hungary,” Scottish Journal of Political Economy, June, 1960; E. Stuart Kirby, “Economic Planning and Policy in Communist China,” International Affairs, April, 1958; P.J.D. Wiles, “Changing Economic Thought in Poland,” Oxford Economic Papers, June, 1957; Alec Nove, “The Politics of Economic Rationality,” Social Research, Summer, 1958; and especially, Nove, “The Problem of ‘Success Indicators’ in Soviet Industry,” Economica, February, 1958. See below on socialist planning in connection with growth and underdevelopment.

⁷¹A chief difference is that a formal Communist-style expropriation makes it far more difficult to desocialize later.

⁷²The first one to point this out was Ludwig von Mises, in his Human Action, pp. 698–99. It is particularly interesting to find an empirical confirmation in Wiles, dealing with Communist planning:

What actually happens is that “world prices,” i.e., capitalist world prices, are used in all intra-[Soviet] bloc trade.

They are translated into rubles . . . and entered into bilateral clearing accounts. To the question, “What would you do if there were no capitalist world?” came only the answer “We'll cross that bridge when we come to it.” In the case of electricity the bridge is already under their feet; there has been great difficulty in pricing it since there is no world market. (Wiles, “Changing Economic Thought in Poland,” pp. 202–03)

On the difficulties encountered by the Soviet bloc in using world market prices, see especially Horst Mendershausen, “The Terms of Soviet-Satellite Trade: A Broadened Analysis,” Review of Economics and Statistics, May, 1960, pp. 152–63.

⁷³For an interesting account of the recent growth of organized private enterprises in Soviet Russia, illegal but protected by local graft, see Edward Crankshaw, “Breaking the Law in a Police State: Regimentation Can't Curb Russians’ Anarchic Spirit,” New York Herald-Tribune, August 17, 1960.

⁷⁴Recent researches have shown the fallacy of the common view that modern inventions and applied technological developments can take place only in very large-scale, even centrally planned, laboratories. See particularly the brilliant work of John Jewkes, David Sawers, and Richard Stillerman, The Sources of Invention (London: Macmillan & Co., 1958). Also see John R. Baker, Science and the Planned State (New York: Macmil-lan & Co., 1945). For a useful summary of recent literature in this field, see Richard R. Nelson, “The Economics of Invention: A Survey of the Literature,” The Journal of Business, April, 1959, pp. 101–27. Soviet science has, of course, been able to copy the technical achievements of the West; yet, on the inefficiencies of Soviet science, see Baker, Science and the Planned State, and Baker, Science and the Sputniks (London: Society for Freedom in Science, December, 1958). Of interest on the inherent inefficiencies of governmental military research is the Hoover Commission Task Force Report: Subcommittee of the Commission on Organization of the Executive Branch of Government, Research Activities in the Department of Defense and Defense-Related Agencies (Washington, D.C.: April, 1955). On atomic energy and government, see, in addition to Jewkes, Sawers, and Stillerman, Alfred Bornemann, “Atomic Energy and Enterprise Economics,” Land Economics, August, 1954.

Virtually the central theme of Hayek's Constitution of Liberty is the importance of freedom for innovations and progress, in the widest sense.

⁷⁵Two of the arguments for government activity most favored by economists are the “collective goods” and “external benefit” arguments. For a critique, see Appendix B below.

⁷⁶This is the first line of argument for government intervention analyzed in Appendix B below.

⁷⁷In many cases, these “investments” are not simply bureaucratic errors; they pay welcome gains to government officials in “prestige.” Every “underdeveloped” government seems to insist on its steel mill or its dam, for example, regardless whether it is economic or not (therefore usually not). As Professor Friedman astutely points out:

The Pharaohs raised enormous sums of capital to build the Pyramids; this was capital formation on a grand scale; it certainly did not promote economic development in the fundamental sense of contributing to a self-sustaining growth in the standard of life of the Egyptian masses. Modern Egypt has under government auspices built a steel mill; this involves capital formation; but it is a drain on the economic resources of Egypt . . . since the cost of making steel in Egypt is very much greater than the cost of buying it elsewhere; it is simply a modern equivalent of the Pyramids, except that maintenance expenses are higher. (Milton Friedman, “Foreign Economic Aid: Means and Objectives,” Yale Review, Summer, 1958, p. 505)

⁷⁸Cf. L.M. Lachmann, Capital and Its Structure. Also see P.T. Bauer and B.S. Yamey, The Economics of Under-Developed Countries (London: James Nisbet and Co., 1957), pp. 129 ff.

⁷⁹On the subject of compulsory saving and government investment, see the noteworthy article of P.T. Bauer, “The Political Economy of

Non-Development” in James W. Wiggins and Helmut Schoeck, eds., Foreign Aid Re-examined (Washington, D.C.: Public Affairs Press, 1958), pp. 129–38. Bauer writes:

. . . if development has meaning as a desirable process, it must refer to an increase in desired output. Governmental collection and investment of saving effect production which is not subject to the test of voluntary purchase at market price. . . . Increased output through this method is at best an ambiguous indicator of economic improvement. . . . If the capital is not provided voluntarily, this suggests that the population prefers an alternative use of resources, whether current consumption or other forms of investment. (Ibid., pp. 133–34)

⁸⁰P.T. Bauer, Economic Analysis and Policy in Underdeveloped Countries (Durham, N.C.: Duke University Press, 1957), pp. 113 ff. On Soviet economic growth Bauer and Yamey make this salutary comment:

The meaning of national income, industrial output and capital formation is also debatable in an economy when so large a part of output is not governed by consumers’ choices in the market; the difficulties of interpretation are particularly obvious in connection with the huge capital expenditure undertaken by government without reference to the valuation of output by consumers. (Bauer and Yamey, Economics of Under-Developed Countries, p. 162)

Also see Friedman, “Foreign Economic Aid,” p. 510.

⁸¹For a critique of various metaphors illegitimately and misleadingly imported from the natural sciences into economics, see Rothbard, “The Mantle of Science.”

⁸²The presumably excessive growth of cancerous cells, for example, is generally overlooked.

⁸³The prolific writings of Professor Bauer are a particularly fruitful source of analysis of the problems of the underdeveloped countries. In addition to the references above, see especially Bauer's excellent United States Aid and Indian Economic Development (Washington, D.C.: American Enterprise Association, November, 1959); his West African Trade (Cambridge: Cambridge University Press, 1954); “Lewis’ Theory of Economic Growth,” American Economic Review, September, 1956, pp. 632–41; “A

Reply,” Journal of Political Economy, October, 1956, pp. 435–41; and P.T. Bauer and B.S. Yamey, “The Economics of Marketing Reform,” Journal of Political Economy, June, 1954, pp. 210–34.

The following quotation from Bauer's study on India is instructive for its analysis of central planning as well as development:

As a corollary of reserving a large (and increasing) sector of the economy for the government, private enterprise and investment, both Indian and foreign, are banned from a wide range of industrial and commercial activity. These restrictions and barriers affect not only private Indian investment, but also the entry of foreign capital, enterprise and skill, which inevitably retards economic development. Such measures are thus paradoxical in view of the alleged emphasis on economic advance. (Bauer, United States Aid, p. 43)

Bauer's chief defect is a tendency to underweigh the role of capital in economic development.

⁸⁴It is fascinating to discover, in 1925–26, before Soviet Russia became committed to full socialism and coerced industrialization, Soviet leaders and economists attacking central planning and forced industry and calling for economic reliance on private peasantry. After 1926, however, the Soviet planned economy deliberately planned uneconomically for forced heavy industry in order to establish an autarkic socialism. See Edward H. Carr, Socialism In One Country, 1921–1926 (New York: Macmillan & Co., 1958), I, 259 f., 316, 351, 503–13. On the Hungarian experience, see Ray, “Industrial Planning in Hungary,” pp. 134 ff.

⁸⁵Wiggins and Schoeck, Scientism and Values, p. v. This symposium has many illuminating articles on the whole problem of underdevelop-ment. In addition to the Bauer article cited above, see especially the contributions of Rippy, Groseclose, Stokes, Schoeck, Haberler and Wiggins. Also see the critique of the concept of underdevelopment in Jacob Viner, International Trade and Economic Development (Glencoe, Ill.: Free Press, 1952), pp. 120 ff.

⁸⁶W.W. Rostow, The Stages of Economic Growth (Cambridge: Cambridge University Press, 1960). Perhaps some of the popularity may be due to the term “take-off,” which is certainly in tune with our aeronautical and space-minded age.

⁸⁷On the complex of fallacies involved in the search for “laws of history,” see Ludwig von Mises, Theory and History (New Haven: Yale University Press, 1957); for a critique of earlier “stage theories” of economic history, see T.S. Ashton, “The Treatment of Capitalism by Historians” in F.A. Hayek, ed., Capitalism and the Historians (Chicago: University of Chicago Press, 1954), pp. 57–62. Some of the fallacies of the “social overhead” concept are refuted in Wilson Schmidt, “Social Overhead Mythology” in Wiggins and Schoeck, Scientism and Values, pp. 111–28, although Schmidt himself clings to several. On the superiority of private over government entrepreneurship and innovation, and in significance for development, see Yale Brozen, “Business Leadership and Technological Change,” American Journal of Economics and Sociology, 1954, pp. 13–30; and Brozen, “Technological Change, Ideology and Productivity,” Political Science Quarterly, December, 1955, pp. 522–42.

Another Rostow fallacy is the adoption of the late nineteenth-century German theory that a strong centralized state was a necessary precondition for the emergence of Western capitalism. For a partial critique, see Jelle C. Riemersma, “Economic Enterprise and Political Powers After the Reformation,” Economic Development and Cultural Change, July, 1955, pp. 297–308.

Finally, for a keen and pioneering discussion of many aspects of coerced development, see S. Herbert Frankel, The Economic Impact of Under-Developed Societies (Oxford: Basil Blackwell, 1953). For a contrasting case study of the free-market road to development, see F.C. Benham, “The Growth of Manufacturing in Hong Kong,” International Affairs, October, 1956, pp. 456–63.

⁸⁸For a critique of Rostow, stressing his mechanistic view of history and a technological determinism that neglects the vital ideas creating technology and political institutions, see David McCord Wright, “True Growth Must Come Through Freedom,” Fortune, December, 1959, pp. 137–38, 209–12.

⁸⁹This performance leads one to believe that Schumpeter was right when he declared:

. . . capitalism stands its trial before judges who have the sentence of death in their pockets. They are going to pass it, whatever the defense they may hear; the only success victorious defense may produce is a change in the indictment. (Schumpeter, Capitalism, Socialism and Democracy, p. 144)

⁹⁰John Kenneth Galbraith, The Affluent Society (Boston: Houghton Mifflin Co., 1958).

⁹¹“Fable for Our Times,” Wall Street Journal, April 21, 1960, p. 12. Thus Galbraith, ibid., deplores the government's failure to “invest more” in scientists and scientific research to promote our growth, while also attacking American affluence. It turns out, however, that Galbraith wants more of precisely that kind of research which can have no possible commercial application.

⁹²Galbraith's major rhetorical device may be called “the sustained sneer,” which includes (a) presenting an opposing argument so sardonically as to make it seem patently absurd, with no need for reasoned refutation; (b) coining and reiterating Veblenesque names of disparagement, e.g., “the conventional wisdom”; and (c) ridiculing the opposition further by psychological ad hominem attacks, i.e., accusing opponents of having a psychological vested interest in their absurd doctrines—this mode of attack being now more fashionable than older accusations of economic venality. The “conventional wisdom” encompasses just about everything with which Gal-braith disagrees.

⁹³In addition to wicked advertising, wants are also artificially created, according to Galbraith, by emulation of one's neighbor: “Keeping up with the Joneses.” But, in the first place, what is wrong with such emulation, except an unsupported ethical judgment of Galbraith's? Galbraith pretends to ground his theory, not on his private ethical judgment, but on the alleged creation of wants by production itself. Yet simple emulation would not be a function of producers, but of consumers themselves—unless emulation, too, were inspired by advertising. But this reduces to the criticism of advertising discussed in the text. And secondly, where did the original Jones obtain his wants? Regardless of how many people have wants purely in emulation of others, some person or persons must have originally had these wants as genuine needs of their very own. Otherwise the argument is hopelessly circular. Once this is conceded, it is impossible for economics to decide to what extent each want is pervaded by emulation.

⁹⁴For more on determinism and the sciences of human action, see Rothbard, “Mantle of Science,” and Mises, Theory and History.

⁹⁵Professor Abbott, in his important book on competition, quality of products, and the business system, put it this way:

The producers will generally find it easier and less costly to gain sales by adapting the product as closely as possible to existing tastes and by directing advertising to those whose wants it is already well equipped to satisfy than by attempting to alter human beings to fit the product. (Abbott, Quality and Competition, p. 74)

⁹⁶Recent writings by marketing experts on “the marketing revolution” now under way stress precisely this increasing competition for, and courting of, the favor and custom of the consumer. Thus, see Robert J. Keith, “The Marketing Revolution,” Journal of Marketing, January, 1960, pp. 35–38; Goldman, “Product Differentiation and Advertising: Some Lessons From Soviet Experience,” and Goldman, “Marketing—a Lesson for Marx,” Harvard Business Review, January–February, 1960, pp. 79–86.

⁹⁷On the alleged powers of business advertising, it is well to note these pungent comments of Ludwig von Mises:

It is a widespread fallacy that skillful advertising can talk the consumers into buying everything that the advertiser wants them to buy. . . . However, nobody believes that any kind of advertising would have succeeded in making the candlemakers hold the field against the electric bulb, the horse-drivers against the motorcars, the goose quill against the steel pen and later against the fountain pen. (Mises, Human Action, p. 317)

For a critique of the notion of the “hidden persuaders,” see Raymond A. Bauer, “Limits of Persuasion,” Harvard Business Review, September–October, 1958, pp. 105–10.

⁹⁸Galbraith, Affluent Society, p. 345. In proposing this large-scale creation of an intellectual class, Galbraith virtually ignores the artificiality of educating people beyond their interests, capacities, or job opportunities available.

⁹⁹Since this would take us far afield indeed, we can mention here only one reference: to the successful development of the road and canal networks of eighteenth-century England by private road, canal, and navigation improvement companies. See T.S. Ashton, An Economic History of England: The 18th Century (New York: Barnes and Noble, n.d.), pp. 72–81. On the fallacy of “collective goods,” only suppliable by the government, see Appendix B below.

¹⁰⁰Amidst the tangle of Galbraith's remaining fallacies and errors, we might mention one: his curious implication that Professor von Mises is a businessman. For first Galbraith talks of the age-old hostility between businessmen and intellectuals, backs this statement by quoting Mises as critical of many intellectuals, and then concedes that “most businessmen” would regard Mises as “rather extreme.” But since Mises is certainly not a businessman, it is odd to see his statements used as evidence for businessman-intellectual enmity. Galbraith, Affluent Society, pp. 184–85. This peculiar error is shared by Galbraith's Harvard colleagues, whose work he cites favorably, and who persist in quoting such nonbusinessmen as Henry Hazlitt and Dr. F.A. Harper as spokesmen for the “classical business creed.” See Francis X. Sutton, Seymour E. Harris, Carl Kaysen, and James Tobin, The American Business Creed (Cambridge: Harvard University Press, 1956).

The Affluent Society is a work that particularly lends itself to satire, and this has been cleverly supplied in “The Sumptuary Manifesto,” The Journal of Law and Economics, October, 1959, pp. 120–23.

¹⁰¹See pp. 944ff., of this chapter.

¹⁰²A brief, and therefore bald, version of Galbraith's thesis may be found in John Kenneth Galbraith, “Use of Income That Economic Growth Makes Possible . . .” in Problems of United States Economic Development (New York: Committee for Economic Development, January, 1958), pp. 201–06. In the same collection of essays there is in some ways a more extreme statement of the same position by Professor Moses Abramovitz, who presses even further to denounce leisure as threatening to deprive us of that “modicum of purposive, disciplined activity which . . . gives savor to our lives.” Moses Abramovitz, “Economic Goals and Social Welfare in the Next Generation,” ibid., p. 195. It is perhaps apropos to note a strong resemblance between coerced deprivation of leisure and slavery, as well as to remark that the only society that can genuinely “invest in men” is a society where slavery abounds. In fact, Galbraith writes almost wistfully of a slave system for this reason. Affluent Society, pp. 274–75.

In addition to Galbraith and Abramovitz, other “Galbraithian” papers in the CED Symposium are those of Professor David Riesman and especially Sir Roy Harrod, who is angry at “touts,” the British brand of advertiser. Like Galbraith, Harrod would also launch a massive government education program to “teach” people how to use their leisure in the properly refined and esthetic manner. This contrasts to Abramovitz, who would substitute a bracing discipline of work for expanding leisure. But then again, one suspects that the bulk of the people would find a coerced Harrodian esthetic just as disciplinary. Galbraith, Problems of United States Economic Development, I, 207–13, 223–34.

¹⁰³Hayek, Constitution of Liberty, pp. 42ff. As Hayek puts it:

A large part of the expenditure of the rich, though not intended for that end, thus serves to defray the cost of the experimentation with the new things that, as a result, can later be made available to the poor.

The important point is not merely that we gradually learn to make cheaply on a large scale what we already know how to make expensively in small quantities but that only from an advanced position does the next range of desires and possibilities become visible, so that the selection of new goals and the effort toward their achievement will begin long before the majority can strive for them. (Ibid., pp. 43–44)

Also see the similar point made by Mises 30 years before. Ludwig von Mises, “The Nationalization of Credit” in Sommer, Essays in European Economic Thought, pp. 111f. And see Bertrand de Jouvenel, The Ethics of Redistribution (Cambridge: Cambridge University Press, 1952), pp. 38 f.

¹⁰⁴De Jouvenel, Ethics of Redistribution, especially pp. 67 ff. If all housewives suddenly stopped doing their own housework and, instead, hired themselves out to their next-door neighbors, the supposed increase in national product, as measured by statistics, would be very great, even though the actual increase would be nil. For more on this point, see de Jouvenel, “The Political Economy of Gratuity,” The Virginia Quarterly Review, Autumn, 1959, pp. 515 ff.

¹⁰⁵Although it has obvious third-person effects, this type of intervention is essentially binary because the issuer, or intervener, gains at the expense of individual holders of legitimate money. The “lines of force” radiate from the interveners to each of those who suffer losses.

¹⁰⁶Inflation, in this work, is explicitly defined to exclude increases in the stock of specie. While these increases have such similar effects as raising the prices of goods, they also differ sharply in other effects: (a) simple increases in specie do not constitute an intervention in the free market, penalizing one group and subsidizing another; and (b) they do not lead to the processes of the business cycle.

¹⁰⁷Cf. Mises, Theory of Money and Credit, pp. 140–42.

¹⁰⁸The avowed goal of Keynes’ inflationist program was the “euthanasia of the rentier.” Did Keynes realize that he was advocating the not-so-merciful annihilation of some of the most unfit-for-labor groups in the entire population—groups whose marginal value productivity consisted almost exclusively in their savings? Keynes, General Theory, p. 376.

¹⁰⁹For an interesting discussion of some aspects of the accounting error, see W.T. Baxter, “The Accountant's Contribution to the Trade Cycle,” Economica, May, 1955, pp. 99–112. Also see Mises, Theory of Money and Credit, pp. 202–04; and Human Action, pp. 546 f.

¹¹⁰To the extent that the new money is loaned to consumers rather than businesses, the cycle effects discussed in this section do not occur.

¹¹¹See Mises, Human Action, p. 557.

¹¹²Since Knut Wicksell is one of the fathers of this business-cycle approach, it is important to stress that our usage of “natural rate” differs from his. Wicksell's “natural rate” was akin to our “free-market rate”; our “natural rate” is the rate of return earned by businesses on the existing market without considering loan interest. It corresponds to what has been misleadingly called the “normal profit rate,” but is actually the basic rate of interest. See chapter 6 above.

¹¹³If some readers are tempted to ask why credit contraction will not lead to the opposite type of malinvestment to that of the boom—overinvestment in lower-order capital goods and underinvestment in higher-order goods—the answer is that there is no arbitrary choice open of investing in higher-order or lower-order goods. Increased investment must be made in the higher-order goods—in lengthening the structure of production. A decreased amount of investment simply cuts down on higher-order investment. There will thus be no excess of investment in the lower orders, but simply a shorter structure than would otherwise be the case. Contraction, unlike expansion, does not create positive malin-vestments.

¹¹⁴If the economy is on a gold or silver standard, then many advocates of a free market will argue for credit contraction for the following additional reasons: (a) to preserve the principle of paying one's contractual obligations and (b) to punish the banks for their expansion and force them back toward a 100-percent-specie reserve policy.

¹¹⁵Mises first presented the “Austrian theory” in a notable section of his Theory of Money and Credit, pp. 346–66. For a more developed statement, see his Human Action, pp. 547–83. For F.A. Hayek's important contributions, see especially his Prices and Production, and also his Monetary Theory and the Trade Cycle (London: Jonathan Cape, 1933), and Profits, Interest, and Investment. Other works in the Misesian tradition include Robbins, The Great Depression, and Fritz Machlup, The Stock Market, Credit, and Capital Formation (New York: Macmillan & Co., 1940).

¹¹⁶See Mises, Human Action, pp. 577–78; and Hayek, Prices and Production, pp. 96–99.

¹¹⁷Perhaps one reason for continuing confidence in the banking system is that people generally believe that fraud is prosecuted by the government and that, therefore, any practice not so prosecuted must be sound. Governments, indeed (as we shall see below), always go out of their way to bolster the banking system.

¹¹⁸All this, of course, assumes no further government intervention in banking than permitting fractional-reserve banking. Since the advent of deposit “insurance” during the New Deal, for example, the bank-run limitation has been virtually eliminated by this act of special privilege.

¹¹⁹In the consolidated balance of payments of the clients, money income from sales to nonclients (exports) will decline, and money expenditures on the goods and services of nonclients (imports) will increase. The excess cash balances of the clients are transferred to non-clients.

¹²⁰Older economists also distinguished an “internal drain” as well as the “external drain,” but included in the former only the drain from bank users to those who insist on standard money.

¹²¹See Human Action, pp. 434–35.

¹²²For various views on free and central banking, see Vera C. Smith, The Rationale of Central Banking (London: P.S. King and Son, 1936).

¹²³Mises, Human Action, p. 444.

¹²⁴Amasa Walker, Science of Wealth, pp. 230–31.

¹²⁵There is a fourth way by which a central bank may increase bank reserves: in countries, such as the United States, where banks must keep a legally required minimum ratio of reserves to deposits, the bank may simply lower the required ratio.

¹²⁶Foreign central banks and governments are still permitted to redeem in gold bullion, but this is hardly a consolation for either foreign citizens or Americans. The result is that gold is still an ultimate “balancing” item between national governments, and therefore a kind of medium of exchange for governments and central banks in international transactions.

¹²⁷The transition from gold to fiat money will be greatly smoothed if the State has previously abandoned ounces, grams, grains, and other units of weight in naming its monetary units and substituted unique names, such as dollar, mark, franc, etc. It will then be far easier to eliminate the public's association of monetary units with weight and to teach the public to value the names themselves. Furthermore, if each national government sponsors its own unique name, it will be far easier for each State to control its own fiat issue absolutely.

¹²⁸Cf. the analysis by John Maynard Keynes in his A Tract on Monetary Reform (London: Macmillan & Co., 1923), chap. ii, section 1.

¹²⁹On runaway inflation, see Mises, Theory of Money and Credit, pp. 227–31.

¹³⁰Costantino Bresciani-Turroni, The Economics of Inflation (London: George Allen & Unwin, 1937), is a brilliant and definitive work on the German inflation.

¹³¹Inflation is here defined as any increase in the money supply greater than an increase in specie, not as a big change in that supply. As here defined, therefore, the terms “inflation” and “deflation” are praxeo-logical categories. See Mises, Human Action, pp. 419–20. But also see Mises’ remarks in Aaron Director, ed., Defense, Controls, and Inflation (Chicago: University of Chicago Press, 1952), p. 3 n.

¹³²See George Ferdinand, “Review of Albert G. Hart, Defense without Inflation,” Christian Economics, Vol. III, No. 19 (October 23, 1951).

¹³³See Mises in Director, Defense, Controls, and Inflation, p. 334.

¹³⁴See section 8F above.

¹³⁵A recent objection of this sort appears in James M. Buchanan, Public Principles of Public Debt (Homewood, Ill.: Richard D. Irwin, 1958), especially pp. 104–05.

¹³⁶It is incorrect, however, to say that government loans are “riskless” and therefore that the interest yield on government bonds may be taken to be the pure interest rate. Governments may always repudiate their obligations if they wish, or they may be overturned and their successors may refuse to honor the I.O.U.'s.

¹³⁷Hence, despite Buchanan's criticism, the classical economists such as Mill were right: the public debt is a double burden on the free market; in the present, because resources are withdrawn from private to unproductive governmental employment; and in the future, when private citizens are taxed to pay the debt. Indeed, for Buchanan to be right, and the public debt to be no burden, two extreme conditions would have to be met: (1) the bondholder would have to tear up his bond, so that the loan would be a genuinely voluntary contribution to the government; and (2) the government would have to be a totally voluntary institution, subsisting on voluntary payments alone, not just for this particular debt, but for all in transactions with the rest of society. Cf. Buchanan, Public Principles of Public Debt.

¹³⁸In the same way, we would have to assert that the Jews killed by the Nazis during World War II really committed suicide: “They did it to themselves.”

¹³⁹For the rare exception of a libertarian who recognizes the merit of repudiation from a free-market point of view, see Frank Chodorov, “Don't Buy Bonds,” analysis, Vol. I V, No. 9 (July, 1948), pp. 1–2.

¹⁴⁰One venerable example, used constantly in texts on public finance (an area particularly prone to camouflaged ethical judgments) is the “canons of justice” for taxation propounded by Adam Smith. For a critique of these supposedly “self-evident” canons, see Rothbard, “Mantle of Science.”

¹⁴¹The analysis of the economic nature and consequences of government ownership in this book is Wertfrei and does not involve ethical judgments. It is a mistake, for example, to believe that anyone, knowing the economic laws demonstrating the great inefficiencies of government ownership, would necessarily have to choose private over government ownership although, of course, he may well do so. Those who place a high moral value, for example, on social conflict or on poverty or on inefficiency, or those who greatly desire to wield bureaucratic power over others (or to see people subjected to bureaucratic power) may well opt even more enthusiastically for government ownership. Ultimate ethical principles and choices are outside the scope of this book. This, of course, does not mean that the present author deprecates their importance. On the contrary, he believes that ethics is a rational discipline.

¹⁴²Thus, cf. Molinari, Society of Tomorrow, pp. 47–95.

¹⁴³Ibid., p. 63. On the fallacy of collective goods, see S.R., “Spencer As His Own Critic,” Liberty, June, 1904, and Merlin H. Hunter and Harry K. Allen, Principles of Public Finance (New York: Harpers, 1940), p. 22. Moli-nari had not always believed in the existence of “collective goods,” as can be seen from his remarkable “De la production de la sécurité,” Journal des Economistes, February 15, 1849, and Molinari, “Onzième soirée” in Les soirées de la Rue Saint Lazare (Paris, 1849).

¹⁴⁴Antonio De Viti De Marco, First Principles of Public Finance (London: Jonathan Cape, 1936), pp. 37–41. Similar to De Viti's first category is Baumol's attempted criterion of “jointly” financed goods, for a critique of which see Rothbard, “Toward A Reconstruction of Utility and Welfare Economics,” pp. 255–60.

¹⁴⁵Paul A. Samuelson, “The Pure Theory of Public Expenditures,” Review of Economics and Statistics, November, 1954, pp. 387–89.

¹⁴⁶Stephen Enke, “More on the Misuse of Mathematics in Economics: A Rejoinder,” Review of Economics and Statistics, May, 1955, pp. 131–33; Julius Margolis, “A Comment On the Pure Theory of Public Expenditures,” Review of Economics and Statistics, November, 1955, pp. 347–49. In his reply to critics, Samuelson, after hastening to deny any possible implication that he wished to confine the sphere of government to collective goods alone, asserts that his category is really a “polar” concept. Goods in the real world are supposed to be only blends of the “polar extremes” of public and private goods. But these concepts, even in Sam-uelson's own terms, are decidedly not polar, but exhaustive. Either A's consumption of a good diminishes B's possible consumption, or it does not: these two alternatives are mutually exclusive and exhaust the possibilities. In effect, Samuelson has abandoned his category either as a theoretical or as a practical device. Paul A. Samuelson, “Diagrammatic Exposition of a Theory of Public Expenditure,” Review of Economics and Statistics, November, 1955, pp. 350–56.

¹⁴⁷Charles M. Tiebout, “A Pure Theory of Local Expenditures,” Journal of Political Economy, October, 1956, pp. 416–24. At one point, Tiebout seems to admit that his theory would be valid only if each person could somehow be “his own municipal government.” Ibid., p. 421.

In the course of an acute critique of the idea of competition in government, the Colorado Springs Gazette-Telegraph wrote as follows:

Were the taxpayer free to act as a customer, buying only those services he deemed useful to himself and which were priced within his reach, then this competition between governments would be a wonderful thing. But because the taxpayer is not a customer, but only the governed, he is not free to choose. He is only compelled to pay. . . . With government there is no producer-customer relationship. There is only the relation that always exists between those who rule and those who are ruled. The ruled are never free to refuse the services of the products of the ruler. . . . Instead of trying to see which government could best serve the governed, each government began to vie with every other government on the basis of its tax collections. . . . The victim of this competition is always the taxpayer. . . . The taxpayer is now set upon by the federal, state, school board, county and city governments. Each of these is competing for the last dollar he has. (Colorado Springs Gazette-Telegraph, July 16, 1958)

¹⁴⁸The problem of “external costs,” usually treated as symmetrical with external benefits, is not really related: it is a consequence of failure to enforce fully the rights of property. If A's actions injure B's property, and the government refuses to stop the act and enforce damages, property rights and hence the free market are not being fully defended and maintained. Hence, external costs (e.g., smoke damage) are failures to maintain a fully free market, rather than defects of that market. See Mises, Human Action, pp. 650–53; and de Jouvenel, “Political Economy of Gratuity,” pp. 522–26.

¹⁴⁹For some unexplained reason, the benefits worried over are only the indirect ones, where B benefits inadvertently from A's action. Direct gifts, or charity, where A simply donates money to B, are not attacked under the category of external benefit.

¹⁵⁰“If my neighbors hire private watchmen they benefit me indirectly and incidentally. If my neighbors build fine houses or cultivate gardens, they indirectly minister to my leisure. Are they entitled to tax me for these benefits because I cannot ‘surrender’ them?” (S.R., “Spencer As His Own Critic”).

¹⁵¹There is justice as well as bluntnesss in Benjamin Tucker's criticism:

“What gives value to land?” asks Rev. Hugh O. Pentecost [a Georgist]. And he answers: “The presence of population —the community. Then rent, or the value of land, morally belongs to the community.” What gives value to Mr. Pentecost's preaching? The presence of population—the community. Then Mr. Pentecost's salary, or the value of his preaching, morally belongs to the community. (Tucker, Instead of a Book, p. 357)

¹⁵²As Mises states:

. . . the means which a government needs in order to run a plant at a loss or to subsidize an unprofitable project must be withdrawn either from the taxpayers’ spending and investing power or from the loan market. . . . What the government spends more, the public spends less. Public works . . . are paid for by funds taken away from the citizens. If the government had not interfered, the citizens would have employed them for the realization of profit-promising projects the realization of which is neglected merely on account of the government's intervention. Yet this nonrealized project would have been profitable, i.e., it would have employed the scarce means of production in accordance with the most urgent needs of the consumers. From the point of view of the consumers the employment of these means of production for the realization of an unprofitable project is wasteful. It deprives them of satisfactions which they prefer to those which the government-sponsored project can furnish them. (Mises, Human Action, p. 655)

Ellis and Fellner, in their discussion of external economies, ignore the primordial fact that the subsidization of these economies must be at the expense of funds usable for greater satisfactions elsewhere. Ellis and Fellner do not realize that their refutation of the Pigou thesis that increasing-cost industries are over-expanded destroys any possible basis for a subsidy to the decreasing-cost industries. Howard S. Ellis and William Fellner, “External Economies and Diseconomies,” in Readings in Price Theory (Chicago: Blakiston Co., 1952), pp. 242–63.