Ludwig von Mises, without a doubt one of the most rigorous defenders of a social system of laissez faire unhampered by any governmental intervention in the history of economic thought, admits to two and only two deficiencies of a pure market system. While according to Mises it is generally true that a market economy produces the highest possible standard of living, this will not happen if any firm succeeds in securing monopoly prices for its goods, and the market cannot itself produce the goods of law and order. Law and order, or the protection of the legal framework underlying the market order, are considered by Mises, in current terminology, as “public goods,” whose production must be undertaken by the state, which is not itself subject to the discipline of the market, but instead relies on coercion, in particular on compulsory taxation.
When Murray N. Rothbard entered the scene in 1962 with his Man, Economy, and State, he not only immediately became the foremost student of his revered teacher Ludwig von Mises, but standing on the shoulders of this giant, he also established himself at the age of 36 as an intellectual giant in his own right, going, in truly Misesian spirit, beyond Mises himself. He recognized Mises’s position regarding the exceptional character of monopoly prices and public goods as incompatible with the very edifice of subjectivist economic theory laid down in Human Action, and presented for the first time a complete and fully consistent economic defense of a pure market system.
Regarding the problem of monopoly prices, Rothbard demonstrated that on the free market no price whatever can be identified as monopolistic or competitive, either by the “monopolist” himself or by any “neutral” outside observer. Economic orthodoxy, which includes Misesian Austrian economics, teaches that monopolistic prices are higher prices attained by restricting production, at which prices sales then bring higher returns than those to be gained by selling an unrestricted output at lower competitive prices. And, so the story continues, since such restrictive measures which the profit motive impels the monopolist to use would imply that the consumers would pay more for less, the existence of monopoly prices provides for the possibility of market failures. As Rothbard points out, there are two related fallacies involved in this reasoning.
First, it must be noted that every restrictive action must, by definition, have a complementary expansionary aspect. The factors of production which the monopolist releases from employment in some production line A do not simply disappear. Rather, they must be used otherwise: either for the production of other exchange goods or for an expansion in the production of the good of leisure for an owner of a labor factor. Now suppose the monopolist restricts production in line A at time k as compared with t1, and prices and returns indeed go up. Following orthodoxy this would make the higher price at t2 a monopoly price and the consumers worse off. But is this really the case? Can this situation be distinguished from a situation in which the demand for the product in question changed from t1 to t2 (the demand curve shifted to the right)? The answer, of course, is no, since demand curves are never simply “given” for any good. Because of the change in demand for the good in question, the competitive price at t1 has become subcompetitive at t2, and the higher price at t2 is simply a move from this subcompetitive to the new competitive price. The restrictive move of the monopolist also does not imply a worsening of the situation of the consumers since, by necessity, it must be coupled with a complementary expansionary move in other production lines. The monopolist’s restrictive action could not be distinguished from any “normal” change in the production structure that was caused by relative changes in the consumer demand for various goods, including leisure.
“There is no way whatever” writes Rothbard, to distinguish such a “restriction” and corollary expansion from the alleged “monopoly-price” situation. But if a concept has no possible grounding in reality, then it is an empty and illusory, and not a meaningful, concept. On the free market there is no way of distinguishing a “monopoly price” from a “competitive price” or a “subcompetitive price” or of establishing any changes as movements from one to the other. No criteria can be found for making such distinctions. The concept is therefore untenable. We can speak only of the free-market price.
Regarding the second alleged imperfection of markets, the problem of public goods and in particular of the good of law and order, Rothbard demonstrates that the advocates of this position do not succeed in establishing their claim that there are two categorically different types of economic goods—public and private—for which categorically different types of economic analysis would apply. Even if this distinction were assumed to hold water, they also can not furnish any economic reason why such public goods must be supplied by the state. Orthodoxy holds that certain goods and services, of which law and order are usually considered to be the prototypes, have the special characteristic that their enjoyment cannot be restricted to those persons who actually finance their provision. Such goods are called public goods. As they cannot be provided by markets (at least not in sufficient quantity or quality) because of this “free rider” problem connected with them, but are nonetheless valued goods, the state has to jump in to secure their production, so the argument goes. In his refutation of this reasoning Rothbard first makes us aware of the following: for something to be an economic good at all, it must be scarce and must be realized as scarce by someone. In other words, something is not a good-as-such, but goods are goods only in the eyes of some beholder. But when goods are never goods-as-such, when no physico-chemical analysis can establish something as an economic good, then there is also no fixed, objective criterion for classifying goods as public or private. They can never be private or public goods as such; their private or public character depends on how few or how many people consider them goods (or for that matter, bads), with the degree to which they are private or public changing as these evaluations change and ranging from 1 to infinity. Even seemingly completely private things like the interior of my apartment or the color of my underwear thus can become public goods as soon as somebody starts caring about them. And seemingly public goods like the exterior of my house or the color of my overalls can become extremely private goods as soon as other people stop caring about them. Moreover, every good can change its characteristics again and again; it can even turn from a public or private good to a public or private bad and vice versa, depending solely on the changes in this caring and uncaring. However, if this is so, no decision can be based on the classification of goods as private or public: in fact, if this were done, it would not only become necessary to ask virtually each individual person with respect to every single good, whether or not he happened to care about it, and if so, to what extent, in order to find out who might profit from what and should hence participate in its financing. It would also become necessary to monitor all changes in such evaluation continually, with the result being that no definite decision could ever be made regarding the production of anything, and all of us would be long dead as a consequence of such a nonsensical theory.
Second, even if all these difficulties were set aside, the conclusion reached by the public goods theorists is a glaring non sequitur, as Rothbard shows. For one thing, to come to the conclusion that the state has to provide public goods that otherwise would not be produced, one must smuggle a norm into one’s chain of reasoning. Otherwise, from the statement that because of some special characteristics certain goods would not be produced, one could never reach the conclusion that these goods should be produced. With a norm required to justify their conclusion, the public goods theorists clearly have left the bounds of economics as a positive science and transgressed into the field of ethics. None of them, however, offers anything faintly resembling a clear system of ethics. Moreover, even the utilitarian reasoning employed by them is blatantly wrong. It might well be that it would be better to have these public goods than not to have them, though it should not be ignored that there is no a priori reason that even this must be so, as it is clearly possible, and even known to be a fact, that an anarchist exists who abhors any state action and would rather prefer not to have the so-called public goods at all if the alternative is to have them provided by the state. But even if the argument thus far is conceded, the conclusion drawn is still invalid. Since in order to finance the supposedly desirable goods resources must be withdrawn from possible alternative uses, the only relevant question is whether or not these alternative uses to which the resources could have been put are more valuable than the value that is attached to the public goods. The answer to this question is perfectly clear: In terms of consumer evaluations, the value of the public goods is relatively lower than that of the competing private goods because if one leaves the choice to the consumers, they evidently will prefer different ways of spending their money (otherwise no coercion would have been necessary in the first place). This proves that the resources used up for the provision of public goods are wasted in providing consumers with goods and services which are at best only of secondary importance. In short, even if one assumes that public goods exist, they will stand in competition to private ones. To find out if they are more urgently desired or not and to what extent, there is only one method: analyzing the profit and loss accounts of freely competing private enterprises. Hence, regarding the provision of law and order, the conclusion is reached that even if it is a public good, the only way to make sure that its production does not take place at the expense of more highly valued private goods and that the kind of law and order that is supplied is indeed the most highly valued one, law and order, like any other good, must be provided by a market of freely competing firms. Rothbard sums it up as follows:
[The] view [that free-market action must be brought back into optimality by corrective State action] 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 view 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.