The State as an Organization

0:00I'm really grateful and honored to be here. I'm not Austrian. I may be an Austrian, but I'm not Austrian. And I'm not an economist. I'm in finance. So some of what I have to say will probably be, undoubtedly will be old wine to many of you, but it may come in new bottles with a finance slant to it. And I find it helps me understand things, I hope it will help you understand things, put the concepts into a different framework. Franz Oppenheimer called the state the organization of the political means. Murray Rothbard defined the state as that organization in society which attempts to maintain a monopoly of the use of force and violence in a given territorial area.

0:53What they have in common is they both call the state an organization. And that's where I begin. I think since it's an organization, we should analyze it as an organization. There is theory of organizations, so why not apply theory of organizations to the state? It might help clarify how we think about it. First off, it's somewhat difficult to define an organization. By the way, what I'm going to say is work in progress. Some of it is off the top of my head. All the errors in here, all the omissions are solely mine. The only person who read this doesn't want to have any culpability at all. Anyway, so I define an organization as simply a group of individuals who order their acts together.

1:47They do that through understandings, agreements, sometimes contracts. They are either explicit or implicit. They may come into the organization with personal aims, but somehow in the organization they constrain their aims and they act jointly. They agree to act jointly. So therefore, all organizations have a few things in common. First of all, every organization has aims, even though sometimes we say well society doesn't exist or this organization doesn't literally exist, yet the organization has aims. The Ludwig von Mises Institute has aims and the people working for it have somehow gotten together and agreed to work in certain ways such that it has aims.

2:36There will be goals. They may not be stated. They may be unstated. They may not be understood. They may be dimly known, but nevertheless they're coordinated. Secondly, all organizations will have boundaries. Some people are in it, some people are not in it. So some people are in the state and some people are not in the state. Third, often times there will be capital in the organization and then there will be ownership of the capital. There will be people who own the capital. I will call those people the principles. They bear the risks of owning the capital. They often contract with other people who work with the capital. Those we will call agents.

3:21I'm going to be using, I'm going to bring in principal agent theory here and try to apply it to the state. Now fourth, in organizations there is always some kind of contracting going on. These will be the agreements or understandings, explicit or implicit, such that people will order their behavior. So the contracts will have principles and agents involved in them. And then there will be incentives. Every organization will have an incentive structure. It arises from the contracting. Now, most of that you've probably all heard of. The new element that came in 1976 was due to Michael C. Jensen and William Meckley.

4:14They pioneered the theory of agency costs. The way they describe agency costs are a composition of three elements. In order to reach understandings, there are costs of getting people together to reach agreements and contracts. So that's one agency cost. Secondly, inside an organization, people agree to do different things. That means that you have to monitor what they're doing and make sure they live up to their contract. So there are costs of monitoring them. Third, and most important of all, in organizations, human beings acting as agents, they do not fully live up to what they agree to do.

5:05Therefore, the failure to live up to their obligations leads to some more costs. and those are very important costs. I'll give some examples of these as we go along to make it clear. Now, it is impossible if there's a principal and the principal says to an agent, I want you to do something for me and the agent agrees and they have some sort of understanding or agreement. It's impossible to get the agent to work fully and to do what the principal wants them to do. There's always some slippage in there, some shirking or some inability of the agent to fully carry out what the principal wants. For example, in a firm owned by stockholders and managed by managers, we could say the managers are agents and the stockholders are the principals.

6:02We will see that the same person can be both a principal and an agent. So, for example, in a corporation, the stockholders are the principals, they supply the capital. The managers are supposed to do what for the stockholders, they're supposed to maximize the value of the firm, invest in good things and so on and so on. The managers also allocate capital to employees and in that role, the managers are the principals and the employees are the agents. So there are always levels of this principal agent problem where the agents do not live up to the expectations of the principles. So right now I'm saying the stockholders will experience perhaps some agency cost because they can't monitor the managers perfectly.

6:52The managers will waste resources inside a corporation. The reasons for this are that if they waste a dollar of assets, which is a one dollar loss to the shareholders, the managers personally lose less than a dollar. So to them it's not as important. The managers may get some gratification or utility basically from wasting that dollar, from having a fancy office, from having nice carpets, from having nice automobiles, jets and so on. and so on. So this is where your agency cost partly comes in. But the worst part of the agency cost there is that the managers will fail to make good investments.

7:37They may, why should they always risk their jobs? There may be some really good thing that comes along, but they decide not to do it. And that will also lower shareholder wealth. So there will be costs there. So, you have all these losses. The shareholders try to monitor the managers, try to get them to behave, but the managers don't act perfectly in the shareholder interest, and you have agency costs. Now, who bears those costs? This is the interesting thing. The shareholders actually do not bear these agency costs, if they have any brains in their head. Because this economics says people are rational. So if you're going to supply capital to somebody and if you think they're going to waste a certain amount of it, you exact a price at the outset.

8:28You want a higher return on your money before you give them the capital to compensate you for your prospective losses. But maybe the easiest way to see this is just think of bondholders, bondholders who lend money to corporations that are at risk. Say there's a higher risk of bankruptcy. You'll find that the bonds of that firm will pay a higher yield. That's to compensate the bondholders for the chance of bankruptcy. They price it in to begin with, knowing that there is a higher risk. So the reason people can sell bonds for firms that are very risky and micro-bankrupt is because they pay a higher rate of interest.

9:14So the bondholders do not bear the cost of bankruptcy. The borrower bears the cost of bankruptcy. And in the same way, the shareholders do not bear the agency cost. It's the entrepreneurs who want the money and who might waste it once they get it. or the managers who might want it, they bear the agency cost, the company basically bears the agency cost, not the capital, suppliers. Now, coming to the state, there are people who think about the state in the same terms as a corporation. I'll talk about a spectrum of possible states here. And at one end will be anarchy, and at the other end will be totalitarianism.

10:03And for those who are interested in these things, anarchy will be on the left, okay? Totalitarianism will be on the right. And somewhere as we go in from the left, we have the contractual state. and then we go further we have the predatory state and then more and more predatory we get to totalitarianism so the contractual state, it's a model conceptually it's like a publicly owned corporation the taxpayers are supposed to own the state they are in the state so to speak, they are members what they do is they engage the government to produce security and the state specializes in law, justice, and the taxpayers supply the capital.

10:55So the taxpayers are the principals, you see. The government employees and the officials, they're the agents. There will be agency costs now, the minute you set up anything like this, because the agents will not necessarily act on behalf of the principals. The principals are going to have to monitor them to make sure they behave, so there will Now, remember, the corporation, what happens is, the people who supply the capital, they don't bear the agency costs, the stockholders. It falls upon the entrepreneur who gets hands on the capital. But I say, when you have a state, what happens is, the state should be bearing the agency costs, but it doesn't. It's the taxpayers who bear the agency costs.

11:42And the reason is the state is able to impose taxes, so whatever costs happen within the state, whatever the state does that's bad, whatever bad investments it makes, the costs all fall back on the taxpayer. If a company makes bad investments, eventually the company is going to go broke. It's cost of capital will go up, the managers will get thrown out of their jobs, various things will happen. They can't simply push the cost back onto the shareholders. But in this case, the state will impose taxes, which makes up for all this misuse of capital. So it's perverse.

12:28Now, I mentioned you have also internal agency costs. This happens inside a company. The managers delegate decisions, the workers will shirk perhaps, you have to monitor them and so on and so forth. And for the same reason that the top managers don't behave perfectly, their employees don't behave perfectly either, the reasons are they don't receive fully the benefit of doing a good job. You get a salary, let's say. No matter whether you have a good idea or a bad idea, you get a salary. So, therefore, you don't necessarily come up with a lot of good ideas.

13:13The bosses can't constantly monitor their employees, so they will tend to goof off, do various things. You try to align their incentives, you see, with the shareholders, but it's not always possible. Now there are methods to reduce these agency costs. Human beings are not dumb. We know what's going on. So we try to reduce these costs. Inside companies what happens is you have budgeting, auditing, procedures, work procedures, orders, incentive plans and so on and so on that reduce the costs. And that way, actually, the employees can get paid a higher wage, because if it were known that they were going to steal stuff, walk off with stuff, shirk and so on, the managers would end up paying them a lower wage.

14:07In other words, the managers, knowing, we're going to have some agency costs from these employees, what they would then do would be pay a lower wage. and the cost of stealing and theft and shirking and inactivity and laziness and so on would fall upon the employees. Just as in the case where the managers were the agents, the cost fell on them too if they did badly. Now within the state, what I'm saying here is that the same things go on. and so on, you've got hierarchies of various kinds, legislators, they delegate funds to the executive branch, the top officials there, they delegate to the FEMA's and the HUD's, they delegate to lower level employees, so you've got layers and layers and layers of agency costs, all inside government, you have bureaus there, they're not profit seeking, they don't have the proper incentives, The tax payers don't control their agents. I often tell with my classes, just think about the situation here. I'm providing, I'm supposed to give you a good lecture. Supposing I don't. What are you going to do about it?

15:34What are you going to do about it? Look at the layers that are involved. They have my chairman or the chairman of the department. Then there's the dean. Then it goes to the provost and the president. Then it goes back to the legislatures, the legislator, SUNY system, and eventually the taxpayer. See, the taxpayer is footing the bill, but they have no control over what I do, basically. It's because I'm an agent, there are very high possible agency costs, only if I, you know, because of Mother Rosef, so I'm conscientious, right? But how about all the other people who are not so, but this temptation, you know, after a while maybe you're not so conscientious as you'd like to be.

16:22So you get lax and slack. In government I'm saying it's even worse because I'm saying the taxpayers don't control their agents, but what's worse is the state is able to shovel all the cost back on the taxpayer. So the fact that the taxpayers bear the agency cost of actually supplying the capital to the government, as far as I can see, is absolutely a fatal flaw in the taxpayer state arrangement. In other words, no taxpayer would rationally agree to fork over money in this situation unless they thought these costs would be either low or controllable or they thought the state would produce benefits for them that would offset the massive costs that they actually experience.

17:18Now, I don't know what taxpayers are thinking, but I do know this. We can go through and compare the state's institutions with the corporation and see that these agency costs are not well controlled. Now, so I'm going to do this one by one. For corporations, we know there are sometimes bad situations that arise even there. This morning there was a seminar on General Motors and very high agency costs inside a company like that. A lot of waste and bad decision making was made. Or we have Enron as another example of what can happen.

18:03But there are institutions that have been devised to lower these costs and control the behavior of the managers so that they do act in the interest of the capital suppliers. The first one is there's a product market, okay, product market. If the firm's prices are too high, if the quality of the product is too low, consumers simply quit, they exit their interaction with the firm. They lower their purchases. There is no comparable sanction against the state. If the state's product is lousy, I say voters cannot routinely or at low cost simply exit the state.

18:48You can do a lot of things, which may help some of these other things that will go on, but you can't exit at low cost. It's impossible for you and me to exit the Social Security program or Medicare program. What are we going to do? We're going to leave the country? That's not a low-cost method of controlling the product market. So if you don't like the product, there's nothing you can do about it. You take it or leave it, basically. So there's a doctrine called tacit consent, right? I think it's a totally false doctrine. It just tries to cover up this fault in the contractual state, it says basically, you all know what it says, it says basically if you don't like the product and you still stay in the country, that you are tacitly consenting to the product.

19:40Well you're not, the costs of exiting are very, very high, so it really isn't consent. The second thing in firms is there's a takeover market. If the company does badly, the stock goes down. Then entrepreneurs can come in and take over that company and put it right. This doesn't happen with states. When states are badly run, what happens? The only takeovers I can think of are invasions by other states Rebellions within the country, revolutions within the country, in other words, very high costs and difficult maneuvers comparable to a takeover.

20:29The third thing is, if companies do badly, have high agency costs, the financial markets provide sanctions. Investors raise the capital cost for firms that have high agency costs. Cost. Now, states, they have that sanction too. They borrow money and they could find their cost of borrowing going up. But they circumvent it. They have taxation and they have inflation. So they have ways of getting around this financial market constraint. The next thing is decision control. What stockholders and bondholders do is directly try to control Managers cannot simply try to control the manager's menu of decisions.

21:15Managers cannot simply say, we're going to take over some big firm, we're going to have a major investment some place. They have to meet certain covenants that are in the bonds. Bond covenants run hundreds of pages. So they are controlled. Bank lending agreements have many, many controls in them about what the managers can invest in, How much they can invest in, so things are very much controlled, even the corporate charter, which calls for votes on certain important matters such as mergers and require proxy statements and voting and so on and so on, There are ways of controlling the behavior of the management. Now, what do we have in the case of the state?

22:03Enumerated powers in the Constitution, at least in the United States. This is a superb idea. You see, it's exactly analogous to controlling the behavior of the corporate managers. We'll enumerate the powers, and that way we control their decisions. The problem is, the Supreme Court is part of the state, it interprets the Constitution. The Constitution has loopholes big enough to drive a truck through, such as the welfare clause. So the state is able to circumvent the enumerated powers by interpreting the powers itself. So therefore I'm saying that method of control over the years has proven to be not very good.

22:50All right, I can go on with more of these. Another one is companies actually bond themselves, bonding. What I mean by bonding is they pay dividends and they pay out interest on debt. And by doing that, they show they actually are generating the cash flows. And they're showing we're not just saying we have earnings, but we actually have money in the bank. in the Bank, we can afford to pay you dividends, we can pay off interest on our debt, this is a bonding mechanism which shows that we're doing something for real. States, well, states don't pay dividends, right, unless, well, they pay negative dividends, they pay interest, but I say they avoid the discipline because they can float debt and and the Federal Reserve will buy the debt, and they can just raise money by taxation.

23:52So the discipline is much lower. It's not that they're completely free to do anything, but it's lower than in a company. Monitoring. You have noticed that there are auditors who audit financial statements of corporations. There are security analysts who write about the corporations. There are credit rating agencies who talk about the debts of the corporations, they're all monitoring them and finding out what the characteristics are and how risky they are and so on. What do we have with regard to the state? We have citizen watchdog groups, we have the press, heaven help us, that's our equivalent of security analysts.

24:39The Federal Government audits itself. The GAO sometimes does some good stuff. But really they audit themselves. They hide as much information as they can. They understate costs. They overstate benefits. They don't have an incentive to monitor themselves. Why should they? If they do something bad, they just shift the cost to the taxpayer. They actually have an incentive to have a new program. We'll make it better now and cover up whatever mess occurred. So the monitoring process, that doesn't work well. Stock prices. Well, stock prices are a way to monitor companies because information gets reflected in the price.

25:27So a shareholder can look at the stock price and know something about how well the company is doing. They can compare it to other stock prices and see if they're doing better or worse. Taxpayers, what do they have? Well, they can sort of, some idea of how well am I doing? Am I standard of living going up or is it going down and so on? It's not quite as sharp. And furthermore, when that happens, they don't know whether the state is responsible or not. They can't discern whether the state is doing something that's affecting their welfare or not. Where the stockholder knows, if the stock goes down, chances are, sure, there's noise in the stock price.

26:15But you can compare it to some other stock prices and see, is my stock doing better or worse than somebody else? But when you're looking at the federal government, you have tremendous amount of noise in knowing what's going on. So, that's a monitoring mechanism that's absent. Now notice, when there is the ability to compare, when you can compare Texas to New York State, and you see, well, prices are cheaper in Texas, and work conditions are better, or whatever the case may be, that taxpayers will move from one area to another when they are capable of monitoring, or they'll move from one country to another. to the United States. So they do make these comparisons, but I'm saying it's not as good as it could be.

27:08All right, last I might mention the labor market. In a company, if the managers perform badly, the board of directors can fire the top managers. So there's a labor market sanction. And there's research showing that if you lose your job As a top manager, you have a hard time getting another comparable job. It's not so easy. What do we have with respect to the state? The voters can remove the politicians from office. That's basically what we have. And so that's supposed to be the ultimate controller of their bad behavior or the agency costs. However, the effectiveness of voting is really quite limited, that's my opinion, and it's been brought out of a number of presentations here, so I'm going to skip one large section where we can go through all the arguments why voting really doesn't work.

28:09It's not what it's cracked up to be. If you want to see a complete treatment, eventually I'll publish this. Maybe I'll break it up into sections and put it on LRC, if Lew will accept it. Anyway, to sum up so far, the contractual state, the voters are supposed to control their agents and control these agency costs, but they don't, for four reasons, and I have discussed two so far. The state can extract capital by force from the taxpayer, and secondly, there are institutional deficiencies in the methods to control the agency costs. We the taxpayer really have a lot of problems controlling our agents in government.

28:57Now, there are more than this. There are more problems here that I'll discuss further on. One is that there's an incentive for the state to destroy whatever institutions exist to control its behavior and agency costs. And fourth, there are weaknesses in the people and their incentives to prevent the state from gaining strength. Okay, now to get a broad perspective we should talk about society also and distinguish society from the state. I'll do that extremely briefly, just mention that basically society is not the state.

29:44Society, in my view, precedes the state. It's the society that creates the governance, not vice versa. And then, so society is really the principle, the governance organization is its agent. That's the idea in this contractual state. For those of you who might think maybe it would be nice to have a contractual state In a natural state where we firmly control our agents, it might be possible, for example, although I don't really think so, but a couple of things occur to me.

30:29You might have a state that has a monopoly on legal coercion, and then have a two-year sunset provision on all laws. So, you might build that into the Constitution. We'll have a sunset provision on every law you pass, it stops after a year or two. Or you might have it stop unless a super majority of the people approve of it, like three quarters, something like that. Something large, so that only if it really were in the public interest could it ever get passed again. Anyway, that's at one end of the spectrum, that's the watchman state, let us say. But, if the controls over your agents get weak enough, you then get the predatory state.

31:16The predatory state is a little different. Here, the citizens are no longer in the state. The predatory state, that's an autonomous organization. You think of it just as an autonomous group of people. It's like an owner-managed firm. There are no stockholders, okay? The owners own it and manage it. and the citizens don't own it. The citizens are the prey. So the state is a gang and it just preys on those under its control. That's the predatory state. And the totalitarian state is simply an extreme predatory state. The other end of the spectrum, anarchy or an anarchic society, there's no single governance organization.

32:02There's decentralized governance organizations, private justice, private enforcement of judgments, in other words, the defense agencies. Once you have that, companies that are supplying defense and they're competing with one another, then what happens is the agency costs shifts back onto those companies, Because if they misbehave, you can immediately move your business to some other company, some other defense agency. If somebody develops a bad reputation, some defense agency does something really horrendous, so starts passing bad judgments or itself becoming predatory, people will move their business elsewhere.

32:50So that's the product market sanction that's acting on those companies. I'm saying all the sanctions that act to lower agency costs for corporations, they will all work when you have multiple suppliers of law and order. That's why that will work, why you can't have an anarchic society. But once you move off that extreme, you start to get more and more agency costs and more and more inability of the agents to control their, their principles, the principles to control the agents. All right, I'll do some examples now. The third thing I said that goes wrong with the state is this.

33:39It has the incentive to destroy any institutions that are controlling the agency costs. It would like to shift them elsewhere. That's a destructive process. It's happened in America and it's still happening in America. It's happening right now in America. If a company tries to do that, it will fail. It can't do it. The competition will prevent it from doing it and all these other checks and balances. But states can do this. They can destroy the institutions that are put in place to control them. They can do it because they have the monopoly on making laws. So it gives them a one-sided advantage. They're the apex of society. They make the laws.

34:24Therefore, you'll see. So here's how I'm going to go through this. I'll just say that our founding fathers were well aware of agency costs. You could read the Federalist papers and reinterpret everything in terms of principal agent problems. They knew that there were these problems there. They tried to prevent these problems. That's why we have the checks and balances, or have them, excuse me. We could review U.S. history, and at each instance we'll see there was some institution there The first one, I would say for the first 85 years of its existence, the U.S. was more a contractual state and less of a predatory state.

35:13I would say it could not avoid being predatory, even at the outset it was predatory, by the structure and nature of the Constitution.

35:32Shay's Rebellion showed you the predatory nature immediately, or the Alien and Sedition Acts. However, that predation was rather low compared to later on. Later on, and the reason it was low, maybe it was partly ideology, Professor Higgs, but also it was because of institution. It was partly ideology because the people understood what was going on and they agreed with the constitution and the people in government at first interpreted it according to a certain and Philosophy. Anyway, now the war between the states, what did that do?

36:21There was one important agency control device that the principals thought was available to them and that was secession. The U.S. was set up as, in theory, the sovereignty was in the people, then you have the states, the individual states set up the United States. Now, just like a stockholder can exit a publicly held corporation by selling his stock, the state could considerably have exited the union by secession. That could have been a device to control agency costs. If the central state made decisions that imposed excessive costs on its member states or on the public, they might have exited the union. You know, if the tariffs were too high, exit the union. Therefore, you control the misbehavior of of Your Agents.

37:10So that threat restrained the actions of the central state. However, the Civil War, I don't want to insult anybody, but whatever you want to call it, the War of Northern Aggression, it wasn't actually a civil war, I understand. That became null and void. So within a generation, it only took a generation, the US accreted a lot more power and became more and more predatory. Lincoln did not save the Union, he destroyed the contract and the contractual state. What he did was save and augment the predatory state. Another control device was the election of senators by the state legislatures.

37:58That ended in 1913, replaced by direct election by the people. Now, just imagine that the stockholders of a company, suppose the managers of a company had various proposals they put in front of the stockholders, and then the stockholders directly elected those managers, okay? That's what direct election corresponds to. I say the companies would actually be worse off than the system we have now. What they do now is we elect the board of directors. The board of directors hires and fires the managers and says yes or no to the important managerial decisions. Why does that work? It's because the board of directors has special knowledge, a lot more knowledge than the stockholders do, about the affairs of that company.

38:53Furthermore, the board of directors often own large blocks of stock themselves, so they have an incentive to monitor these managers. That works. That's how the corporations actually work. So in an analogous way, citizens elected the state legislatures. That's like electing the board of directors. They elected the senators or selected the senators. The senators were beholden to the state legislatures, so there was a degree of control over their voting from the state legislatures who are somewhat specialized. They understand the politics, what's going on, better than the people do. Let's face it, the voters are rationally ignorant and they don't know half of what's going on, So, the minute you get rid of this procedure, it may direct election, you now have a diffuse electorate, very diffuse, all kinds of people, the control and the monitoring actually go down, what now happens is an interest group can get to the senator, the interest group can also try to sway the public, propagandize the public, so the system does not work as well

40:15Because when you have state legislatures electing the senators, the agency costs actually go up. What happens then is the senators become part of the central state. Instead of the senators being beholden to the state legislatures, they become more identified with the federal state. Alright, so that has been perverted, that mechanism has been lost. What else? Well, the civil service system, we used to have a sporial system and that's gone. What now happens is you have the important arms of the state, the bureaucracies have tenure basically.

41:04So, you used to be able to turn the employees over at an election, that's a device to control costs too, the misbehavior of the agents, the people could elect somebody, they would then get rid of all these underlings and put in a new crop, this no longer happens, so you lost another device to control your agents, they're ensconced right there, the bureaucracy, and whether it's Republican or Democrat, they're still there, and after a while they begin to Limited Taxation is actually a significant method of controlling agents behavior. If you only give them so much money, there's only so much they can waste.

41:53So, hey, that's good. The income tax undermined that, because now the revenues exploded, so the agency costs rose dramatically, and again, they're paid for by the public. So, we can continue onividely. The notion I'm putting forward here is that basically the mechanisms to control the agency costs have been systematically ravaged. Another one I would say would be the war-making power. It was lodged in Congress. That's like having the board of directors decide on an important investment.

42:39Shall we go ahead with it or should we not go ahead with it? The managers say, well, we'd like to build a new plan in Pakistan and put it right on the Afghanistan border, okay? And the board of directors say, no, I don't think this is really a good idea right now. Okay, now, Congress was given this job to do, decide whether war should be undertaken or not. It's like an important investment project, whether you have a war. But it apparently has abandoned that in the last 40, 50 years. Basically, why? Congress seems to actually want to consolidate power with the executive branch. That removes a check and a balance, you see? That consolidation, now we're facing one team against us.

43:29The Congress is no longer acting on behalf of we the people, or us the people, but now it's more consolidated with the President. This is not good. We lose that. Or if the President says that he wants plenary power, he wants to be beyond the judicial reach, what is he saying? Basically, he wants to overcome the check and balance and consolidate the separate branches. The more you see the consolidation of the separate branches, the worse things obviously get, because the agents, you have less and less control over your agents in government.

44:13So the outcome of all this is predictable, if you destroy the institutions that control agency costs, which is what we have done in America, then you move toward totalitarianism, You move more to a predatory behavior on the part of the state. So we, the people, we were supposed to control the behavior of our agents, we didn't do it. For various reasons, a lot of different reasons for this. But one reason is we had a blame, the American people had a blame. Each generation has come along, more ignorant, more weak, more suggestible, more drift from philosophic foundations, sound philosophic foundations, and they've blessed these changes actually.

44:59On the other hand, the state has outflanked and outmaneuvered the population because it has that lawmaking power at the apex of society. So that process actually is institutionalized now and it's so deep and it's affected the The ideology of so many Americans that I don't think it can be reversed by anything less. We would have to have revolutions in thought and deed in order to overcome that. There's no simple way to overcome this at the moment. So the predominance of the state, it seems to me, follows logically from its relationship with society.

45:45This is why I'm an anarchist for many, many reasons. The logic of it shows me that the state will win in most of these battles. So why is it that the state will overcome society? First of all, it has a monopoly over law and justice. Okay, fine. What does that do? That immediately, critically weakens society because what happens when injustice is done? What do you do? You don't have recourse to each other through private institutions, so the horizontal communication or ability to organize yourself and rectify some injustice is lessened. You have to go along with the rule of law, because that's the law-making organ and that's what you've made it.

46:38So therefore society no longer can overcome these issues easily. The state is strong, united and focused. Individuals, we're rather weak as individuals and isolated. In order to fight the state, hey, Hans spent a year just trying to fight University of Nevada, Las Vegas. It's very, very difficult to do this. And most of us, most people give in. Secondly, obviously, law is a very, very fundamental thing, and if it is so fundamental that if you're able to make law, you can twist society in a direction, move it in a direction you want to.

47:23And then if you control one part of society, then it gives you a wedge to control another part of society. So, third, I would say, once there is any state at all, then there are opportunities for gain. The members of the state will see that they can gain in various ways by making law or not making law. So they have an incentive to increase their domination over society because they can personally gain from it. Therefore, over time, economics will tell you they will exploit these gains, and therefore the state's power will grow.

48:08Fourth, in order to increase their domination, the states have an incentive to encourage society to deviate from the paths of righteousness. And society deviates on its own to begin with. So it's not that difficult to incentivize society to deviate. What do I mean by that? Failing to take responsibility for one's own life. Shifting burdens to other people. Extracting benefits you don't deserve. If people in society are excessively fearful, or if they're greedy, if they're ignorant, if they have any incapacity, if they want revenge, if they want to dominate other peoples, if they have prejudices, all the human weaknesses are just lying there on the table, and you've given the state all this power, what are they going to do? They're going to try to exploit these weaknesses that are inherent in all of us, because they gain from it, the members of the state will gain from it.

49:16I see this as a two-way street, a simultaneous process, the weakness of the people is always there, but if the state is powerful, it will try to exploit it, but then also once you get tyranny, it fosters societal weakness, once you have a social security program, or Medicare program, all kinds of programs where people become dependent, then the people become dependent. Some weak and they lose their ability, you know, the whole philosophy changes. So the tyranny fosters societal weakness. On the other hand, freedom fosters societal strength because you have to take responsibility for your acts.

50:06So the aims of the state are subject unto themselves. When you do have a state, what is it like when it's a predatory organization, for example, what happens within that organization? And running short of time, so let me skip. Another interesting topic is how the state maintains its power. And as I said, one way is to remove a lot of checks and balances. In doing that, the state is very clever, the members of the state are very clever. They are always enacting laws or undertaking projects that must harm society economically.

50:57They are not things that we would choose if we were free to choose them. They are not products, they are imposed on us. So, we only get to vote on them and that's not an efficient or effective way to say we like them or not. So, laws generally harm society. In other words, the state is always aggressing on us. And that means that it's lowering our standard of living, basically. So, people more or less realize this in one way or another. So the state has to therefore control, or tries to control, the population's resistance to these laws. In order to do that, they basically have to fool the people.

51:44That's the one method. Or use fear, another method. But the state will use many, many, many means in order to reduce the rebelliousness or the resistance of society to what it's doing. What are you doing? Violence? It'll stress them. Be law-abiding. Make examples out of law-breakers with long sentences. Imprison people. Imprison innocent people so that people will know you're powerful. Don't rehabilitate people. Spread propaganda, lies, sentience. Conceal your true aims. Conceal even what you're doing, what your actions are. Conceal the effects of your actions.

52:29blame others, blame businessmen, blame the rich, control education, break up families, spy on dissidents, inculcate values like obedience, raise fears, appeal to popular values like equality, I think that in my opinion one of the major things that has happened in America is that the doctrine of equality has firmly taken hold and that people identify equality as being a just thing. And obviously, if they believe that's just, then they want the state to enforce equality and therefore the state will do this, which is really unjust.

53:22So this is right in line with what the state wants, I believe. So, I could go on and on. The state has many, many, many tools. Disarming the population, portraying itself as crucial to law and order, society and order. They'll say things like this. Majority rule, voting, look, you've got to go along with what happens. Sometimes you get your way, sometimes the other gets his way, but we're all Americans, we're all I think it's worthwhile to look at the totalitarian state, because it's an extreme predatory state, and everything is very clear in a totalitarian state.

54:09I think it's worthwhile to look at the totalitarian state because it's an extreme predatory state and everything is very clear in a totalitarian state. The owners of the state, the clique who run it, they value control over the personal lives of their prey, not just their wealth but control, power per se. If they can educate them, feed them, give them welfare, they can turn them into compliant subjects. As time goes on, if you can control health education and welfare, that's a big foot in the door. After that, the totalitarian state likes to control employment, entertainment, art, expression and speech.

54:59But, the state does have some kind of natural limitations. I don't want to leave the impression that states are all powerful. Because, the more they control society, there are two things that happens. One is, there are more and more inefficiencies introduced into the system. So the population then will tend to go more and more resistance to what's happening. At the same time, the state has to control the population. The more things it tries to control, the higher its cost of control go. So what I'm saying is there's basically a demand curve for control and a cost curve for control.

55:49If the cost of control was zero, we would see totalitarian states everywhere, but we don't see them. So the cost at some point is substantial enough that the states cannot go any further. States make mistakes. Hitler went too far and that was the end of the Third Reich. Mao went too far, his successors couldn't continue what he did, Mussolini went too far, Stalin went too far, his successors couldn't continue controlling what he did. They do make mistakes. The more you try to control, the more you're raising your own costs of control.

56:34And then you're also providing incentives to your subjects to find ways around your regulations and rebel. The totalitarian state, in my view, helps us understand all states, because it's extreme. It's an organization in the state that always competes with society. It's always either the choices of the subjects versus the choices of the rulers. The state always seeks to suppress freedom. It always seeks control and domination. The rulers always try to impose their values, fulfill their values.

57:22The state is always opposed to society. Meanwhile, the characterization of the states, it depends on the institutions that society has in place to control their agents. There are large agency costs here. The power to tax is the exact opposite of an institution that will help control agency costs. It just plays right into the hands of the controllers. In other words, that's why I cannot see you can have a state and at the same time allow taxation. People end up not being able to control the level of taxation effectively and the state ends up being the master.

58:09So, in finance, what we would say is that totalitarian states are obviously negative net present value projects. A negative net present value project is an investment that destroys wealth or it destroys utility. But I would say all states are negative net present value projects. What that implies is that the difference between the current level of where we are and where we could be, there is unexploited gain to be made. If we could simply stop the state's policies, we would suddenly see a big gain in welfare and utility of the population.

59:00So that provides a pervasive, long-run incentive for states to be shrunk and eliminated. I'm actually a long-run optimist because I see, look, this is an arbitrage opportunity here. If we get rid of the states, if states were business firms, supposing they were corporations, they'd long ago have been taken over, sold off, spun off, restructured, cut back, merged, liquidated or dismantled. But we haven't done that. We the people haven't done that to our states for a variety of reasons mentioned earlier. I'll mention another one. There are cost barriers.

59:46One of the costs of getting rid of a state is the renegotiation of the contracts that have been made already. And that arises also when you have bankrupt companies. To redo the company, somebody has to decide how to renegotiate, change the contracts and pay off the debt holders and stockholders. Stockholders. Here's what I mean. Right now we have one third of all seniors receive all their income from Social Security. One third. Two thirds of all seniors receive 50 to 100 percent of their income from Social Security. They are going to resist shrinking the state until their income is secured. In other words, that's a big barrier. Now there are many other programs like that. So you see the state's programs have inherently There are certainly erected obstacles that discourage the restructuring.

1:00:46We'd like to restructure this situation, cut it back, get rid of it all together if we could, but that's not going to happen very quickly. But there are some clear obstacles here in that the population is going to resist this, If they like the idea, even if they think all the anarcho-capitalists are the New Kansians, so these guys really know what they're doing, let's do what they say, you're still going to have to figure out a way to compensate people or get them to go along, basically. All right, I'll conclude by briefly a section called The Fault, Dear Brutus, by saying that the contest, in my opinion, state is always in a contest with society, against society, but the outcome depends on society.

1:01:48If we show weakness, it presents an opportunity for the state to exploit, and they will try to exploit weaknesses. What is preferred to that is that we cooperate to ensure each other against violations of rights. That is our best chance of holding on to freedom, not to rely on the state to do this, but to do it for ourselves. In order to do that, we have to know what rights and justice actually are. So we need ethical codes as a bulwark against tyranny. Going beyond having multiple defense agencies, beyond vigilance or beyond an armed public, we need more than that. We need the right philosophy.

1:02:33The philosophy of relativism has spread too far. The American people no longer have the ability or the will to support natural right against natural wrong. I don't think they even know the difference between right and wrong, never mind natural right and natural wrong. Relativism, that gives a rationale for unethical and immoral behavior. And the doctrine of equality covers it up. up. If justice is defined as equality and if the state dispenses justice, then the state's aggressions become valid. So unlawfulness and furtherance of equality, that becomes right and praiseworthy. In other words, wrong becomes right. And people get very confused then about, they don't know the difference between right and wrong anymore. So in order In order to rescue society from tyranny, we need a lot of things.

1:03:36One revolution we need, we need to recover the ability simply to understand and distinguish right from wrong. Then we also need an understanding that it's the right behavior that brings peace and happiness. So, sooner or later, the American state will fail, just as the Soviet Empire failed. And I don't think we're prepared for it. We need a lot of preparation. When it happens, we will need to know the right remedies so we don't repeat the mistakes of the past. I think we will need a very strong understanding of why the state is defective. We will need to know exactly what went wrong so we don't make the same mistakes again.

1:04:23Society as the principle cannot control the state as the agent. If it grants the state irrevocable law-making power, including taxing power, we will bear the cost rather than the state. And no matter what institutions we devise to control the cost, the state will have the incentive to tear them down and tear society down. The state, very simply, is the enemy of society.

1:05:09Sure, questions? Take a few questions. Anybody wants to hang around? Right here. I would add one more institutional change to the list that you gave that included the income tax and the social security administration that was an extremely important empowerment of the state, and that was the Federal Reserve Act of 1930, which made it possible to tax without actually people knowing it. I totally agree. Yes. I would like for you to consider an alternative to your sub-setting idea of legislation dying after two years, because I can see that becoming standard practice in what you've done before.

1:05:56I think we'd be better off to say that new legislation requires a supermajority of two-thirds, 75%, but could be repealed with a simple majority. That one meant a small majority from enacting a great hardship on a sizeable majority. A good idea. Yes, it's further back behind. Michael, I think the first half of your speech was great. I love the theme of examining government as an organization, but you seem to veer into what I mean, maybe it's the optimism of youth, but little sentimentality, I think, saying that each generation is excessively ignorant. If you're at a starting point and each generation takes one successive step, I mean you can get to a pretty terrible spot and each generation is equally fault, but I tend to think that what we're really seeing is both the state and the people are actually getting more sophisticated over time.

1:07:02The State is doing some things now that it hadn't thought of a hundred years ago, but there's some things the State used to try to get away with a hundred years ago when it did, and now it doesn't get away with them. I think some of the foreign aggression might take a look at the Philippines, then take a look at Vietnam, then take a look at Iraq, and I think the public response to those has been a lot sharper and a lot sooner than the more recent ones.

1:07:32Why can't we go back to more contractual issues and contract with states who only provide a service and voluntarily join that service, or you don't, such as water, electric, gas, roads? Well, a more localized situation would be better. It would be much, much better. I just like the extreme left viewpoint because it's clear and it gives a good benchmark for thinking about all the problems and analyzing what's going on.

1:08:24Look, if we started even moving in that direction, I'd be happy, and if we got down to what you're saying, I'd be quite happy. Harry? Yeah. Professor, I think one other thing you could add is the establishment of the Federal Reserve. We don't really print money without gold. Yes. It's just one extra breaking the curve of the state of politics. I totally agree with that, sure. It seems like you presented us with two different models of the state, where at the end of your talk you had a monolithic state that you personified, sometimes with actual names like Stalin and Hitler and so forth, that's trying to do all this stuff to us, but at the beginning, when you talk about agency costs, you suggest that these agency problems are worse in the state than they are in the private sector, which would sort of lead you to believe that the state really couldn't accomplish these ends.

1:09:23I have one model of the state in my mind, which is, you can think of it as being, we're the principals, they're the agents, but the mechanisms to control their behavior varies significantly from state to state. So, if you have very good mechanisms to control what they are doing, then you'll have what I call a contractual state, but at some point, the members of the state begin to act on their own behalf, impose strictures and measures upon the public, and then I call that a predatory state.

1:10:15Any given state will have a kind of a mixture of these things in practice. So it's going to be, once you turn predatory, it will depend on how badly they are behaving. And as you continue on, you eventually come to a totalitarian state, which has extreme control over the population. They are no longer, the population is no longer the principles at all. They've basically lost control. But let me rephrase that. Because of these agency problems, if Stalin is the state, how can he accomplish anything? How can he get the people under him to accomplish his head, given the agency problems you cited at the beginning? The agency problem is that the principals cannot control their agents.

1:11:03So that meant the Russian population couldn't control Stalin. Stalin controlled them. And then he imposed costs on them. In the United States what happens is the costs are imposed on us through taxation, the draft, and various other things. He had his ways of imposing costs, which were the gulag and withholding food from peasants and so on. There's no agency problem in getting Stalin to control the gulag. No, he has agency problems too. Absolutely right. He did. There are many documentation where he didn't know what was going on during World War II and so on.

1:11:48Or even in the gulag sometimes. He didn't know. One last question. You mentioned that when the American state collapses, we have to be prepared in our next step, assuming for our vocabulary or something that doesn't repeat 1776. Would you mind elaborating on that because I feel that people who have this traditional mindset of going back to what we were have learned from the failures of the past.

1:12:43We shouldn't be cutting-edge. We are the scholars. We're focusing on these problems full-time or with a lot of brain power. We shouldn't be engaged in peripheral matters too much or get diverted, but we should try to focus on really building up a body of knowledge about what has happened, why it's happened, and then what to do about it. That alone is extremely challenging, you know, if you like, my prescription, I can't give you one really, how can I give you one? But I think the more widespread the understanding is of what has happened, why it has happened, what went wrong, the better off we are.

1:13:29And I'm just trying to contribute my little part to it, simply to understand, for example, the destruction of checks and balances. or the inherent problems in controlling layers and layers and layers of agents in government or the fact that they measure up poorly compared to controlling corporations. So maybe it will make an easier pathway for people to say, let's try... My own favorite thing is what we should do. My own prescription basically is privatize as many things as possible. We already have a big private police contingent, and we have some private courts, just keep pushing that more and more and more so that it goes into the fabric of society basically.

1:14:28But you know, it's very difficult because we're fighting against the expansion. The groups constantly try to expand the powers of government and so it's really an uphill battle as far as I can see.