Tuesday, April 30, 2013



Murray N. Rothbard

Privatization” is a new in-term, on local, state, and federal levels of government. Even functions that our civic textbooks tell us can only be performed by government, such as prisons, are being accomplished successfully, and far more efficiently, by private enterprise. For once, a fashionable concept contains a great deal of sense.
Privatization is a great and important good in itself. Another name for it is “desocialization.” Privatization is the reversal of the deadly socialist process that had been proceeding unchecked for almost a century. It has the great virtue of taking resources from the coercive sector, the sector of politicians and bureaucrats—in short, the non-producers—and turning them over to the voluntary sector of creators and producers. The more resources remain in the private, productive sector, the less a deadweight of parasitism will burden the producers and cripple the standard of living of consumers.
In a narrower sense, the private sector will always be more efficient than the governmental because income in the private sector is only a function of efficient service to the consumers. The more efficient that service, the higher the income and profits. In the government sector, in contrast, income is unrelated to efficiency or service to the consumer. Income is extracted coercively from the taxpayers (or, by inflation, from the pockets of consumers). In the government sector, the consumer is not someone to be served and courted; he or she is an unwelcome “waster” of scarce resources owned or controlled by the bureaucracy.
Anything and everything is fair game for privatization. Socialists used to argue that all they wish to do is to convert the entire economy to function like one huge Post Office. No socialist would dare argue that today, so much of a disgrace is the monopolized governmental Postal Service. One standard argument is that the government “should only do what private firms or citizens cannot do.” But what can’t they do? Every good or service now supplied by government has, at one time or another, been successfully supplied by private enterprise. Another argument is that some activities are “too large” to be performed well by private enterprise. But the capital market is enormous, and has successfully financed far more expensive undertakings than most governmental activities. Besides the government has no capital of its own; everything it has, it has taxed away from private producers.
Privatization is becoming politically popular now as a means of financing the huge federal deficit. It is certainly true that a deficit may be reduced not only by cutting expenditures and raising taxes, but also by selling assets to the private sector. Those economists who have tried to justify deficits by pointing to the growth of government assets backing those deficits can now be requested to put up or shut up: in other words, to start selling those assets as a way of bringing the deficits down.
Fine. There is a huge amount of assets that have been hoarded, for decades, by the federal government. Most of the land of the Western states has been locked up by the federal government and held permanently out of use. In effect, the federal government has acted like a giant monopolist: permanently keeping out of use an enormous amount of valuable and productive assets: land, water, minerals, and forests. By locking up assets, the federal government has been reducing the productivity and the standard of living of every one of us. It has also been acting as a giant land and natural resource cartelist—artificially keeping up the prices of those resources by withholding their supply. Productivity would rise, and prices would fall, and the real income of all of us would greatly increase, if government assets were privatized and thereby allowed to enter the productive system.
Reduce the deficit by selling assets? Sure, let’s go full steam. But let’s not insist on too high a price for these assets. Sell, sell, at whatever the assets will bring. If the revenue is not enough to end the deficit, sell yet again.
A few years ago, at an international gathering of free-market economists, Sir Keith Joseph, Minister of Industry and alleged free-market advocate in the Thatcher government, was asked why the government, despite lip-service to privatization, had taken no steps to privatize the steel industry, which had been nationalized by the Labor government. Sir Keith explained that the steel industry was losing money in government hands, and “therefore” could not command a price if put up for sale. At which point, one prominent free-market American economist leaped to his feet, and shouted, waving a dollar bill in the air, “I hereby bid one dollar for the British steel industry!”
Indeed. There is no such thing as no price. Even a bankrupt industry would sell, readily, for its plant and equipment to be used by productive private firms.
And so even a low price should not stop the federal government in its quest to balance the budget by privatization. Those dollars will mount up. Just give freedom and private enterprise a chance.

Monday, April 29, 2013

The Collapse of Socialism

We are now living thorough the most significant and exciting event of the 20th century: nothing less than the collapse of socialism.
Before the rise of the new idea of socialism in the mid and late 19th century, the great struggle of social and political philosophy was crystal-clear. On one side was the exciting and liberating idea of classical liberalism, emerging since the 17th century: of free trade and free markets, individual liberty, separation of Church and State, minimal government, and international peace. This was the movement that ushered in and championed the Industrial Revolution, which, for the first time in human history, created an economy geared to the desires of and abundance for the great mass of consumers.
On the other side were the forces of Tory statism, of the Old Order of Throne and Altar, of feudalism, absolutism, and mercantilism, of special privileges and cartels granted by Big Government, of war, and impoverishment for the mass of their subjects.
In the field of ideas, and in action and in institutions, the classical liberals were rapidly on the way to winning this battle. The world had come to realize that freedom, and the growth of industry and standards of living for all, must go hand in hand.
Then, in the 19th century, the onward march of freedom and classical liberalism was derailed by the growth of a new idea: socialism. Rather than rejecting industrialism and the welfare of the masses of people as the Tories had done, socialists professed that they could and would do far better by the masses and bring about “genuine freedom” by creating a state more coercive and totalitarian than the Tories had ever contemplated. Through “scientific” central planning, socialism could and would usher in a world of freedom and superabundance for all.
The 20th century put the triumphant idealism of the 19th into practice, and so our century became the Age of Socialism. Half the world became fully and consistently socialist, and the other half came fairly close to that ideal. And now, after decades of calling themselves the wave of the future, and deriding all their opponents as hopelessly “reactionary” (i.e. not in tune with modern thinking), “paleolithic,” and “Neanderthal,” socialism, throughout the world, has been rapidly packing it in. For that is what glasnost and perestroika amount to.
Ludwig von Mises, at the dawn of the Socialist Century, warned, in a famous article, that socialism simply could not work: that it could not run an industrial economy, and could not even satisfy the goals of the central planners themselves, much less of the mass of consumers in whose name they speak. For decades Mises was derided, and discredited, and various mathematical models were worked out in alleged “refutation” of his lucid and elegant demonstration.
And now, in the leading socialist countries throughout the world: in Soviet Russia, in Hungary, in China, in Yugoslavia, governments are rushing to abandon socialism. Decentralization, markets, profit and loss tests, allowing inefficient firms to go bankrupt, all are being adopted. And why are the socialist countries willing to go through this enormous and truly revolutionary upheaval? Because they are really saying that Mises was right, after all, that socialism doesn’t work, and that only desocialized free markets can run a modern economy.
Some are even willing to give up some political power, allow greater criticism, secret ballots and elections, and even, as in Soviet Estonia, to allow a one-and-one half party system, because they are implicitly conceding that Mises was right: that you can’t have economic freedom and private property without intellectual and political freedom, that you can’t have perestroika without glasnost.
It is truly inspiring to see how freedom exerts its own “domino effect.” Country after socialist country has been trying to top each other to see how far and how fast each one can go down the road of freedom and desocialization.
But much of this gripping drama has been concealed from the American public because, for the last 40 years, our opinion-molders have told us that the only enemy is Communism. Our leaders have shifted the focus away from socialism itself to a variant that is different only because it is more militant and consistent.
This has enabled modern liberals, who share many of the same statist ideas, to separate competing groups of socialists from the horrors of socialism in action. Thus, Trotskyists, Social Democrats, democratic socialists, or whatever, are able to pass themselves off as anti-Communist good guys, while the blame for the Gulag or Cambodian genocide is removed from socialism itself.
Now it is clear that none of this will wash. The enemy of freedom, of prosperity, of truly rational economics is socialism period, and not just one specific group of socialists.
As even the “socialist bloc” begins to throw in the towel, there are virtually no Russians or Chinese or Hungarians or Yugoslavs left who have any use for socialism. The only genuine socialists these days are intellectuals in the West who are enjoying a comfortable and even luxurious living within the supposed bastions of capitalism.

Sunday, April 28, 2013

Massachusetts and the Mussolinization of America

Official socialism has probably never been a threat in America, but the corporate state has. And is.
It all began in 1919 when ex-Marxist Benito Mussolini wrote the Fascist Party platform, calling for central planning through a “partnership” of government, business, and labor. By 1925 he was in total power.
Not all of Mussolini’s admirers were in Italy. The cover story of the New York Times Magazine for October 24, 1926, gushed:
The most approachable as well as the most interesting statesman in Europe. He is a voracious learner who never makes the same mistake twice. . . . The whole country is keyed up by his energy. . . .
The whole economic structure of the nation has been charted out in a graph that shows it as a huge corporation with the Government as the directorate. He explains it clearly and patiently, reminding you that he started his career as a teacher.
An earlier New York Times editorial (October 31, 1922) had explained:
In Italy as everywhere the great complaint against democracy today is its inefficiency. . . . Neither the failures nor the successes of (Russia’s) Bolshevist Government offer much of an example to the Western world. Dr. Mussolini’s experiment will perhaps tell us something more about the possibilities of oligarchic administration.
Although Herbert Hoover in many ways prefigured him, it was Franklin D. Roosevelt who first tried to create an explicit corporate state in America with his National Recovery Administration (NRA). With its fascist-style Blue Eagle emblem, the NRA coordinated big business and labor in a central plan, and outlawed competition. The NRA even employed vigilante groups to spy on smaller businesses and report if they violated the plan.
Just as in Mussolini’s Italy, the beneficiaries of the U.S. corporate state were—in addition to the government itself—established economic interest groups. NRA cheerleaders included the National Association of Manufacturers, the U.S. Chamber of Commerce, the American Bar Association, the United Mine Workers, the Amalgamated Clothing Workers, and—above all—Gerard Swope of General Electric, who helped draft the NRA act.
Only the courage of the Supreme Court, which ruled that the NRA was unconstitutional, prevented the establishment of a fascist economy in our country. FDR denounced the “nine old men” and tried to pack the court with NRA proponents. But the American people, including most of his supporters, opposed the power grab, and he lost. That did not end the battle, however.
Today, there are many elements of a corporate state in Washington. But in Massachusetts, Michael Dukakis has come closest to actually establishing one. Wrote the Washington Post recently:
Corporate Massachusetts is in a de facto alliance with the state and a host of potentially conflicting interests, including . . . organized labor . . . , all of whom serve on agency boards and are also recipients of agency grants. . . .
Not only has Dukakis drawn these business leaders into what amounts to limited partnerships with state government, with the governor as the dominant general partner, but also these quasi-public agencies have formed a web of financial arrangements with at least 3,000 corporations across the state. The state government effectively has been entrenched in almost every nook and cranny of the private sector.
The tools Dukakis used to create this alliance for central planning included a larger bureaucracy; subsidized loans, bailouts, and outright grants for big businesses; and guaranteed high wages for unions.
Those on the Massachusetts gravy line include the insurance industry, especially John Hancock Mutual Life; high-tech corporations like our old friend GE, Digital Equipment Corp., and Raytheon; and banks like the Bank of Boston. Each is represented on the boards of the Massachusetts Capital Resources Corp., the Massachusetts Industrial Finance Agency, and similar corporate-statist entities. And all march in profitable lock-step with the state. The only losers are taxpayers, consumers, and businesses without political connections.
The Post notes that Dukakis’s policies “diverge sharply from the more traditional type of partisan politics emphasizing ideological splits between business and labor.”

With guaranteed profits, corporations are partially liberated from consumer control. In return, they agree to pay the above-market wages that labor unions demand, and otherwise cooperate with the state. But what will be the economic result?
In 1920, Ludwig von Mises showed in “Economic Calculation in the Socialist Commonwealth” that there can be no rational central planning.
In a free market, consumers’ spending decisions tell producers what and how much to produce. If consumers prefer Fords to Chevrolets, they tell Ford Motor Company to make more cars by buying more of them, thereby driving up the price of Fords relative to Chevrolets and attracting more investment to Ford. Because of the free market in capital goods, Ford is able to devote more resources to production than Chevrolet.
This process enables firms to rationally calculate the “structure of production” from the beginning to the end, to use scarce resources to satisfy the most highly valued goals of consumers.
Mises showed that under socialism, economic calculation is impossible. Since capital goods are owned collectively, they cannot be bought or sold and therefore can have no money prices. Therefore, the desires of consumers cannot be served, no matter what the intentions of the producers. This is why the Soviet shoe factory is incapable of making the styles, colors, or numbers of shoes that consumers want, no matter how hard the managers try.
But Mises’s argument must also apply to the corporate state. To the extent that some corporations enjoy state-privileged positions, they are partially protected from competition. Their capital goods have money prices, unlike under socialism, but they are not freely set prices. Thanks to state favoritism, competitors have less opportunity to bid those resources away, so consumers’ desires cannot be fully served.
We saw an example of this with the Chrysler bailout. Consumers sought to divert resources from the Chrysler Corp. to other car manufacturers, which produced better products at better prices. So in response to the pressure group composed of Chrysler executives, union workers, large shareholders, and big bank creditors, politicians gave the company massive federal financing. Consumers wanted rational economic calculation, but the government prevented it, thereby making the rest of us poorer.
The bigger the corporate state becomes, the less consumers’ desires will be satisfied. As Misesian analysis shows, the corporate state must be an economic failure, no matter what miracles are claimed. Tragically, fascism is all too often a political success.

Saturday, April 27, 2013

Why Socialism Must Fail

By Hans-Hermann Hoppe
Socialism and capitalism offer radically different solutions to the problem posed by scarcity: everybody can’t have everything they want when they want it, so how can we effectively decide who will own and control the resources we have? The chosen solution has profound implications. It can mean the difference between prosperity and impoverishment, voluntary exchange and political coercion, even totalitarianism and liberty.
The capitalist system solves the problem of scarcity by recognizing the right of private property. The first one to use a good is its owner. Others can acquire it only through trade and voluntary contracts. But until the owner of the property decides to make a contract to trade his property, he can do whatever he wants with it, so long as he does not interfere with or physically damage the property owned by others.
The socialist system attempts to solve the problem of ownership in a completely different way. Just as in capitalism, people can own consumer products. But in socialism, property which serves as the means of production are collectively owned. No person can own the machines and other resources which go into producing consumption goods. Mankind, so to speak, owns them. If people use the means of production, they can do so only as caretakers for the entire community.
Economic law guarantees that harmful economic and sociological effects will always follow the socialization of the means of production. The socialist experiment will always end in failure.
First, socialism results in less investment, less saving, and lower standards of living. When socialism is initially imposed, property must be redistributed. The means of production are taken away from current users and producers and given to the community of caretakers. Even though the owners and users of the means of production acquired them through mutual consent from previous users, they are transferred to people who, at best, become users and producers of things they didn’t own previously.
Under this system, previous owners are penalized in favor of new owners. The non-users, non-producers, and non-contractors of the means of production are favored by being promoted to the rank of caretaker over property which they had not previously used, produced, or contracted to use. Thus the income for the non-user, non-producer, and non-contractor rises. It is the same for the non-saver who benefits at the expense of the saver from whom the saved property is confiscated.
Clearly, then, if socialism favors the non-user, non-producer, non-contractor, and non-saver, it raises the costs that have to be born by users, producers, contractors, and savers. It is easy to see why there will be fewer people in these latter roles. There will be less original appropriation of natural resources, less production of new factors of production, and less contracting. There will be less preparation for the future because everyone’s investment outlets dry up. There will be less saving and more consuming, less work and more leisure.
This adds up to fewer consumption goods being available for exchange, which reduces everyone’s standard of living. If people are willing to take the risk, they will have to go underground to compensate for these losses.
Second, socialism results in inefficiencies, shortages, and prodigious waste. This is the insight of Ludwig von Mises who discovered that rational economic calculation is impossible under socialism. He showed that capital goods under socialism are at best used in the production of second-rate needs, and at worst, in production that satisfies no needs whatsoever.
Mises’s insight is simple but extremely important: because the means of production under socialism cannot be sold, there are no market prices for them. The socialist caretaker cannot establish the monetary costs involved in using the resources or in making changes in the length of production processes. Nor can he compare these costs with the monetary income from sales. He is not allowed to take offers from others who want to use his means of production, so he cannot know what his foregone opportunities are. Without knowing foregone opportunities, he cannot know his costs. He cannot even know if the way he produces is efficient or inefficient, desired or undesired, rational or irrational. He cannot know whether he is satisfying less or more urgent needs of consumers.
In capitalism, money prices and free markets provide this information to the producer. But in socialism, there are no prices for capital goods and no opportunities for exchange. The caretaker is left in the dark. And because he can’t know the status of his current production strategy, he can’t know how to improve it. The less producers are able to calculate and engage in improvement, the more likely wastes and shortages become. In an economy where the consumer market for his products is very large, the producer’s dilemma is even worse. It hardly needs to be pointed out: when there is no rational economic calculation, society will sink into progressively worsening impoverishment.
Third, socialism results in over-utilization of the factors of production until they fall into disrepair and become vandalized. A private owner in capitalism has the right to sell his factor of production at any time and keep the revenues derived from the sale. So it is to his advantage to avoid lowering its capital value. Because he owns it, his objective is to maximize the value of the factor responsible for producing the goods and services he sells.
The status of the socialist caretaker is entirely different. He cannot sell his factor of production, so he has little or no incentive to insure that it retains its value. His incentive will instead be to increase the output of his factor of production without regard to its dwindling value. There is also the chance that if the caretaker perceives opportunities of employing the means of production for private purposes—like making goods for the black market—he will be encouraged to increase the output at the expense of capital values. No matter which way you look at it, under socialism without private ownership and free markets, producers will be inclined to consume capital values by over-using them. Capital consumption leads to impoverishment.
Fourth, socialism leads to a reduction in the quality of goods and services available for the consumer. Under capitalism, an individual businessman can maintain and expand his firm only if he recovers his costs of production. And since the demand for the firm’s products depends on consumer evaluations of price and quality (price being one criterion of quality), product quality must be a constant concern of producers. This is only possible with private ownership and market exchange.
Things are entirely different under socialism. Not only are the means of production collectively owned, but so too is the income derived from the sale of the output. This is another way of saying that the producer’s income has little or no connection with consumer evaluation of the producer’s work. This fact, of course, is known by every producer.
The producer has no reason to make a special effort to improve the quality of his product. He will instead devote relatively less time and effort to producing what consumers want and spend more time doing what he wants. Socialism is a system that incites the producer to be lazy.
Fifth, socialism leads to the politicization of society. Hardly anything can be worse for the production of wealth.
Socialism, at least its Marxist version, says its goal is complete equality. The Marxists observe that once you allow private property in the means of production, you allow differences. If I own resource A, then you do not own it and our relationship toward resource A becomes different and unequal. By abolishing private property in the means of production with one stroke, say the Marxists, everyone becomes co-owner of everything. This reflects everyone’s equal standing as a human being.
The reality is much different. Declaring everyone a co-owner of everything only nominally solves differences in ownership. It does not solve the real underlying problem: there remain differences in the power to control what is done with resources.
In capitalism, the person who owns a resource can also control what is done with it. In a socialized economy, this isn’t true because there is no longer any owner. Nonetheless the problem of control remains. Who is going to decide what is to be done with what? Under socialism, there is only one way: people settle their disagreements over the control of property by superimposing one will upon another. As long as there are differences, people will settle them through political means.
If people want to improve their income under socialism they have to move toward a more highly valued position in the hierarchy of caretakers. That takes political talent. Under such a system, people will have to spend less time and effort developing their productive skills and more time and effort improving their political talents.
As people shift out of their roles as producers and users of resources, we find that their personalities change. They no longer cultivate the ability to anticipate situations of scarcity, to take up productive opportunities, to be aware of technological possibilities, to anticipate changes in consumer demand, and to develop strategies of marketing. They no longer have to be able to initiate, to work, and to respond to the needs of others.
Instead, people develop the ability to assemble public support for their own position and opinion through means of persuasion, demagoguery, and intrigue, through promises, bribes, and threats. Different people rise to the top under socialism than under capitalism. The higher on the socialist hierarchy you look, the more you will find people who are too incompetent to do the job they are supposed to do. It is no hindrance in a caretaker-politician’s career to be dumb, indolent, inefficient, and uncaring. He only needs superior political skills. This too contributes to the impoverishment of society.
The United States is not fully socialized, but already we see the disastrous effects of a politicized society as our own politicians continue to encroach on the rights of private property owners. All the impoverishing effects of socialism are with us in the U.S.: reduced levels of investment and saving, the misallocation of resources, the overutilization and vandalization of factors of production, and the inferior quality of products and services. And these are only tastes of life under total socialism.

Friday, April 26, 2013

Freedom vs. Planning

By Richard Ebeling

As the 20th century began, the most widely held vision of the future was socialist: capitalism would be replaced by central planning and the state would own all the means of production.
The 20th century is ending with the socialist ideal in complete disarray. The heads of socialist governments everywhere declare that economic progress requires individual initiative and private enterprise. They admit that only competition and a market price system can bring economic coordination to a complex system of division of labor.
All of this was anticipated by Ludwig von Mises almost 70 years ago in his famous 1920 article, “Economic Calculation in the Socialist Commonwealth” and in his monumental treatise, Socialism: An Economic and Sociological Analysis (1922).
Mises conclusively demonstrated that without market-generated prices, expressed in terms of a common medium of exchange, it is impossible to use society’s scarce resources in a rational manner. A central planner might know the technological potentials of the resources at his disposal, but he has no way to know what economic values to assign to those resources. He cannot know how to allocate resources among alternative lines of production, and thus cannot rationally service consumers’ demands. This insight means that our choice of economic systems can only be between free-market capitalism and “planned chaos.” “There is no third solution, no middle way,” says Mises.
It is clear that socialism has lost the war on the battlefield of ideas. But free-market capitalism has not yet won. Both in the United States and around the world, policy-makers promote the “mixed economy,” a hodgepodge of competition and state control. Intellectuals on both the collectivist left and the conservative right have enshrined the idea of state intervention.
Capitalism delivers the goods, they say, but the distribution of these goods is “unfair.” The profit motive is a powerful engine for individual initiative and creativity, but too often the commodities produced are “socially undesirable” and exist only at the expense of the good society. And while competition is desirable to keep producers on their toes, too much of a good thing can be bad. Thus government needs to protect competitors from “unfair” competition, domestic and foreign.
Free market replies to every one of these arguments for state intervention can be found in the writings of Ludwig von Mises: in Liberalism (1927), Critique of Interventionism (1929), Human Action (1949), Planning for Freedom (1952), The Anti-capitalist Mentality (1956), and Economic Policy (1979).
What about the argument that capitalism “unfairly” distributes the goods produced by it? Mises demonstrates that the argument is based on a false conception of the free-market process. Production and distribution are two sides of the same coin. Production requires the combined use of various factors of production, and labor is one of those resources. Each resource is offered a price, through entrepreneurial judgments, for its service equal to its relative value as a contribution to the production of commodities. Each factor of production contracts for the services it will render before there is a product available for sale.
The entrepreneur develops expectations about what consumers would be willing to pay in the future for the product being considered, and offers wages to laborers and payment for services of other resources.
But who are the consumers? Ultimately, they are the very same laborers and resource owners whom the entrepreneur is considering hiring. It is thus the laborers and resource owners, in their roles as consumers, who determine what their own relative income shares will be. They do so through their decisions about what they wish to buy and what prices they are willing to pay for them.
Thus, if some groups of workers believe they are “unfairly” paid, they have no one to accuse but themselves and the other laborers. They have failed to spend a greater percentage of their income on the particular products that the workers produce.
“Producers” and “consumers” are really the same people. And because this is always true in the free market, the second charge against free-market capitalism, that it produces “socially undesirable” products, also fails.
First, as Mises forcefully argued, there is no dichotomy between “society” and the individuals comprising it. Nothing happens to or for “society” that doesn’t originate with the individuals whose actions create societal relationships.
Second, in the free market, competition makes the entrepreneur the servant and not the master of the economic process. The entrepreneur must ultimately supply what individuals in their role as consumers demand. An entrepreneur who fails to do this will be driven from business and other entrepreneurs more sensitive to consumer wishes will replace him.
Finally, when people say that some product is “socially undesirable,” they really mean that people in society are demanding things of which they disapprove. But rather than attempt to use reason to persuade others to change their buying preferences, they want to use government to coerce them into abstinence. To answer this, Mises argued that freedom is indivisible. Once it is admitted that government has the right to infringe on the peaceful and personal preferences of individuals in one area, state interference cannot logically be excluded from other spheres. At the end of this road is the totalitarian state (see Liberalism, pp. 52-57).
In Human Action, Mises showed that free markets mean social cooperation, not social conflict. It is through this process of competition that we know who, among the various suppliers, can most successfully satisfy consumers’ demands at the least cost and, therefore, at the lowest price. And through this process each individual finds his most efficient and profitable place in the social system of the division of labor.
He who asks for state protection from the rigors of competition, Mises explains, is asking for special privilege at the expense of the other members of society. He is demanding special regulations, tariffs, or subsidies in order to receive a higher relative income than what others in the free-market economy are willing to pay him for his products or services.
If the government grants the special privilege, the results are disruptive of the peaceful free market process of economic change and progress. When other members of society begin to obtain government privileges and protections, the cumulative effect is declining production, less innovation, higher prices, and a lower standard of living for the members of the whole society.
Mises’s most important contribution to understanding the fallacies of state intervention is his demonstration that “the Middle-of-the-Road Leads to Socialism.” All government interventions and regulations are inherently destabilizing and disruptive. And the logical consequences of one set of interventions is that the government will extend its controls to more and more sectors of the economy to “repair” the damage created by the first set of controls.
If, for example, the government imposes price controls in one part of the economy, the controls will distort the existing free-market relationships between prices and the costs of production. If the controlled price is set below the costs of production, sellers in that part of the economy will no longer be able to produce the same amount of the product as before. If the government wants high production levels, it must extend the price controls to the prices of the factors that go into making that product. But those factors of production have, in turn, been produced with other resources whose prices will also have to be controlled.
The interdependency of all prices and all markets in a system of division of labor means that if the government decides to control one part of the economy, it must end up controlling all of it. Finally, when the controls and regulations pervade every portion of the economy, the free market is completely supplanted by the state, and socialism replaces capitalism through piecemeal interventionism. In short, as Mises says, “the middle-of-the-road policy is not an economic system that can last. It is a method for the realization of socialism by installments.”
But what would logically happen if government remains on the interventionist road is different from what must happen.
Mises repeatedly observed that the Western world was moving toward collectivism. But he also emphasized that “the trend can be reversed as was the case with many other trends in history.” In the realm of human action no choices are “inevitable.” History is made by men, and men are ultimately guided by ideas.
A victory for free-market capitalism is possible. Just as theory and experience refuted the case for socialism, the same can happen to state intervention and the “mixed economy.”
In fact, in terms of practical results, state intervention is already defunct. But people must be shown how to read the signs left behind by a controlled, taxed, and welfarist “mixed economy.” People must understand why it happened and what it demonstrates, that if we want peace, prosperity, and liberty, there is no alternative to free-market capitalism.
Thanks to Ludwig von Mises, we have the arguments and insights to lead us in the battle of ideas.

Thursday, April 25, 2013

Mises and the Soviet Free Market

By Lawrence W. Reed
Not many Soviet citizens have ever read Ludwig von Mises’s great Socialism. The Soviet government doesn’t want the people to know the truth about a command economy. They are supposed to be good, little citizens—pacified and rendered docile by the benevolence of the omnipotent state.
But even if the Soviet public doesn’t understand exactly why the official economy doesn’t work, they want as little to do with it as possible. In their own actions, they show consistent preference for free markets over government markets, even though demonstrating that preference is risky.
The reason that Soviet socialism has flopped is—as Mises proved in 1922—that all centrally “planned” economies must, by their very nature, fail.
Given the fact of nature that everybody can’t have everything they want—that is, that there is economic scarcity—there must be some means of directing resources to their most efficient uses.
One way to do this is to have central planners set prices and production, telling people what to buy, how much to buy, and when to buy. But, as Mises pointed out in Socialism:
In any social order, even under Socialism, it can very easily be decided which kind and what number of consumption goods should be produced. No one has ever denied that. But once this decision has been made, there still remains the problem of ascertaining how the existing means of production can be used most effectively to produce these goods in question. In order to solve this problem it is necessary that there should be economic calculation. And economic calculation can only take place by means of money prices established in the market for production goods in a society resting on private property in the means of production. That is to say, there must exist money prices of land, raw materials, semimanufactures; that is to say, there must be money wages and interest rates.
For calculation to occur, says Mises, there must be money prices. Those can only come from free markets, never governments. Socialism is thus always doomed to fail.
The problem of this argument for socialists is it doesn’t rely on ethical standards or political ideologies. Neither does it say, like so many arguments in favor of markets, that markets are better because they make people richer. (Although it is, of course, true that socialism is immoral, and that it makes people poor.) It rather says of socialism the most damning thing of all to these alleged scientists: that their “scientific socialism” makes rational economic calculation impossible.
Mises simply argues that all exchange relationships established by the government are necessarily arbitrary. In fact, any government intervention hinders economic calculation, and makes the allocation of resources an irrational process.
We take the miracle of market pricing for granted. But notice what happens when government hampers the pricing mechanism. Think of the times that the U.S. government has put price controls on goods like oil. Pandemonium ensues. The Soviet economy is under constant price controls. How do they know, for example, in clothing production what the proper ratio is between ties and socks? The only way to know is to allow people to freely buy and sell, thus expressing their own subjective valuations and personal preferences, and allow the market to establish the proper ratio.
If there is a problem at the tie-sock level, how could a socialist economy run? It has no pricing system upon which to base judgments about production. How do you make any decisions without market pricing? How are production costs figured? How do you know if you’re making profits or losses? There is no way without a market. Prices in the Soviet Union are approximated from their own black market or from other countries.
A spokesman for the Soviet Foreign Ministry, in an unintended tribute to Mises, recently told some visiting Americans that his dream was to have “the entire world Communist. Except New Zealand.” Why the exception? “We have to have somebody to tell us the prices.”
Mises wrote his critique in 1922. It was the most telling blow socialism ever received, and socialists are still trying to answer it. Mises forced socialists to think about how socialism works in practice. After more than 65 years, he has not been answered.
Socialists of all stripes, from Marx to Galbraith, typically wax eloquent on the alleged evils of capitalism, but never spell out how their version of society would operate. If the economy is to be planned, what’s the plan? This is the socialist mystery of the missing blueprints, and Mises was the first to call their bluff.

Whatever kind of economy they want, socialists inevitably claim that the Soviet economy isn’t it. That’s not real socialism, they say. But no matter what socialists want, when the means of production are put in the hands of the state, the Soviet economy is what they’re going to get: rich politicians, impoverished masses, and irrational use of resources. The Soviet Union is socialism in action.
I have visited the Soviet Union three times since March 1985, and I have always been impressed by the size and vitality of the underground economy, the vast and murky world of the “black” market—the free network of illegal production and trade that enables millions of dissatisfied comrades to meet their needs.
Ordinary Russians have taught themselves to dodge and weave around the state with surprising skill and daring, as Hedrick Smith notes in his bestseller, The Russians:
This counter-economy has become an integral part of the Soviet system, a built-in permanent feature of Soviet society. It encompasses everything from petty bribing, black marketing, wholesale thieving from the state, and underground private manufacturing, all the way up to a full-fledged godfather operation which was exposed and led to the downfall of a high Communist Party figure. . . . It operates on an almost oriental scale and with a brazen normality that would undoubtedly incense the original Bolshevik revolutionaries.
On more than one occasion, I have been propositioned for my blue jeans or tennis shoes (once even in Red Square) by young Russians who seem to appear out of nowhere, quickly arrange a time and place to consummate the transaction, then disappear into the crowd.
A vast market in American dollars bubbles beneath the surface of official life in Russia, despite harsh penalties. A short walk down the street from one’s hotel usually brings one or two currency traders to your side, whispering “rubles for dollars” at three and four times the legal rate.
One young man in Leningrad told me he earns about 400 rubles a month, but less than a quarter of it is legal. The rest he earns by marketing contraband books and other items smuggled in from the West. Last year he bought a car—rarely a private possession in the workers’ paradise—for about 8,000 rubles. He registered it in his father’s name, so the state wouldn’t question where he got the money.
Russian dentists, he told me, do not use Novocain, even when pulling teeth, thanks to state misallocation. But he pays his dentist a little extra under the table. Many dentists have their own illegal private practices—complete with painkillers—during off-hours, and that’s when the quality of care goes up.
American movies are popular in the Soviet underground. People duplicate copies and sell dozens all over Leningrad. If you’re caught, you get years in the slammer.
Practically everybody in the Soviet Union is trading and exchanging on the free market. Still, empty official slogans are plastered on buildings or mounted on rooftops all over the place proclaiming “The Plan of the 27th Party Congress Will Be Fulfilled” or, even more laughable, “The Party and the People Are One!”
The Soviet state has been successful so far in keeping articles and books by Ludwig von Mises and other free-market thinkers extremely rare. Still people grumble about the state, then go about their private and profitable affairs. But I’d like to change that. If the insights of Socialism became widely known, Gorbachev would be staring a real revolution in the face.

Wednesday, April 24, 2013

Mises and Gorbachev: Why Socialism Still Doesn’t Work

By Tom Bethell
Last summer, the following headline appeared over a page-one story by Dusko Doder in the Washington Post:
Gorbachev’s Vigor Raises ExpectationsNew Soviet Leader Focuses on Economy
Mr. Doder proceeded to inform us that the new Soviet “leader” (what an odd word to use, by the way) had been showing an “almost breathtaking determination to make changes in the Soviet economy.”
Two weeks later Serge Schmemann of the New York Times wrote of “the depth of excitement and hope that Mr. Gorbachev seems to have tapped across the land in his first 100 days in office.”
Since Gorbachev’s accession, there have been many similar stories, conveying a ventriloquized media enthusiasm for the new “leader.” There can be no doubt that, in the opinion of many U.S. journalists, the socialist economic system of state-controlled resources and central command has not worked well lately in the Soviet Union because the men in charge have been elderly and incompetent. In other words, there is nothing wrong with the system itself—provided it is managed by a skillful, vigorous elite.
Robert Kaiser of the Washington Post put it this way in an article headlined “Now Russia Will Change.” Gorbachev, he said, is a “new kind of Soviet man.” He is “young, well-educated, vital, relaxed and by all outward appearances self-confident.” True, Kaiser conceded, there were problems in the economy—“corruption,” for example, and “inefficiency.” Also an “entrenched bureaucracy.” But all this would no doubt soon change with the vigorous Mr. G. at the helm.
Well, Mr. Kaiser (who was the Post’s correspondent in Moscow in the early 1970s) is in for a big disappointment. And so are the poor, long-suffering Russian people. Nothing is likely to change, although it is possible that Gorbachev will make things worse.
The great difficulty for Mr. Gorbachev is this: socialist economies all have a serious defect which cannot be resolved by vigor or good intentions. This defect was spelled out by Ludwig von Mises as long ago as 1920—before the evidence of socialist failure was available. His analysis amounted to a prediction that has been verified.
The problem is this: It is one thing for central planners to draw up a plan of production. It is quite another thing to carry it out. Here we encounter the famous “problem of economic calculation” formulated by Mises. How can you (the planners) know what should be produced, before you know what people want? And people cannot know what they want unless they first know the price of things. But prices themselves can only be established when people are permitted to own things and to exchange them among themselves. But people do not have these rights in centrally planned economies.
The planners can, of course, decide beforehand what goods are to be manufactured, whether or not the people really want them. But as Trygve Hoff points out in his book Economic Calculation in the Socialist Society, only the most primitive planning can proceed in this way. In real life the planners and their subordinate factory managers bump up against the central fact of economic life—scarcity. There is not enough of everything to go around. One is tempted to say that there is not enough of anything to go around—if it is both desirable and free. (Air seems to be the only exception.)
It is worth noting that when, in the 1920s and 1930s economists tried to rebut Mises, some of them went so far as to challenge the assumption of scarcity, suggesting that it was a chimera stage-managed by nefarious monopolists. But if we assume that scarcity is a reality, as we must, then we are forced to conclude that goods must be priced. And yet the central planners do not know how to price them in the absence of markets.
Prices depend for their formation on the real possibility of personal profit or loss. Try to imagine a serious game of poker played with Monopoly money. All psychological incentive is removed by the knowledge that at the end of the evening, no one playing is really going to lose or gain anything.
In The Foundations of Morality, Henry Hazlitt made one of the clearest statements of the problem of socialist pricing:
“If I am a government commissar selling something I don’t really own, and you are another government commissar buying it with money that isn’t really yours, then neither of us really cares what the price is. When, as in a socialist or communist country, the heads of mines and factories, or stores and collective farms, are mere salaried government bureaucrats, and sell their finished products to still other bureaucrats, the so-called prices at which they buy and sell are mere book-keeping fictions. Such bureaucrats are merely playing an artificial game called ‘free market.’ They cannot make a socialist system work like a free-market system merely by imitating prices while ignoring private property.”
The Polish economist Oskar Lange tried to save the day for the socialist by claiming that prices could be established by trial and error: set prices at a given level and then move it up or down depending on whether it yields a shortage or a surplus. But here the socialist run into their second great difficulty—the transmission of information to the central planning authority. How do the central planners know where things are in shortage and where they are in surplus? (This problem was first elucidated by F. A. Hayek.) The point is that it is difficult and expensive to move information to a central point.
Alternatively, one could say that only a comparatively small amount of information can be crammed into a central point. Here we may think of another analogy. How do you get a message onto President Reagan’s desk? Obviously you can’t just call him up, and if you write, your message will compete with the thousands of letters that arrive each day. A lot of money is spent in Washington trying to solve this problem. The same problem exists for Soviet commissars trying to get the attention of the people in Moscow who have decision-making authority.
In response to these various difficulties there are, I believe, three options open to the planning authority (over which Mr. Gorbachev presides). It can turn a blind eye on the various underling officials and managers as they make transactions and exchanges among themselves without getting permission from Moscow. This option—de facto decentralization—is labeled “corruption,” however, and it is very unpopular with those who think that socialism should be made to work according to the prescriptions of Lenin. Leonid Brezhnev evidently used the “blind-eye” method. But with Yuri Andropov there was a crackdown. Various officials were shot to discourage the others.
“Crackdown” is in fact the second option, and the one preferred by reformers everywhere, including, of course, American liberals. Gorbachev is Andropov’s protégé and he may well try to go this route. Apparently he already tried it in agriculture, over which he earlier presided. Grain production declined from 237 million tons in 1978 to 170 million tons in 1984. (Such declines are normally attributed to “bad weather.”) Nonetheless Gorbachev was promoted, and he may well now attempt a more general crackdown. If he does, he would provoke a more general decline in Soviet production.
The third option is for Gorbachev to attempt to decentralize the system—i.e. to legalize many of the actions previously labeled corrupt. This in effect is a movement away from socialism. It would be the best thing Gorbachev could attempt, but here he will run up against the “entrenched bureaucracy” that Robert Kaiser alluded to. Decentralizing the Soviet economy depends on issuing orders that are the functional equivalent of telling captains that they no longer need to obey majors, and corporals that they are on a par with sergeants.
The point is that it is very difficult to get such unpopular orders to pass down the chain of command. Colonels will always find ways of obstructing commands that have the effects of denying their own authority. (In the reverse direction, the Soviet economy suffers from an equally serious problem: just as unpopular orders won’t travel downhill, so unpopular information won’t travel uphill. Reports of unfulfilled plans and quotas tend to be ameliorated as they move closer to the center.)
Of the various problems associated with the Soviet economy (and all socialist economies) the “entrenched bureaucracy” is the one that U.S. journalists are beginning to appreciate and describe. For example in late May David Ignatius wrote in the Wall Street Journal:
It may prove impossible to both increase the independence of individual Soviet enterprises and retain full central control of the economy. Says Arnold Horelick, the director of the Rand-UCLA Center for the Study of Soviet International Behaviour: “I would describe Gorbachev’s reforms as trying to have his cake and eat it, too.”
Maybe China will prove me wrong. I hope so. But at present the evident suggests that communism cannot be reformed from within. My guess is that of the three options listed here, the “Brezhnev-blind-eye” is the only one that is remotely workable—not that it produces brilliant results—and Mr. Gorbachev will almost certainly resort to it if he stays in his office for any length of time.

Tuesday, April 23, 2013

The Politics of Famine

By Murray N. Rothbard

The media focuses primarily on the horrifying shots of the starving children, and secondarily on the charges and counter-charges about which governments—the Western or the Ethiopian—are responsible for relief not getting to the starving thousands on time. In the midst of the media blitz, the important and basic questions get lost in the shuffle. For example, why does Nature seem to frown only on socialist countries? If the problem is drought, why do the rains only elude countries that are socialist or heavily statist? Why does the United States never suffer from poor climate?
The root of famine lies not in the gods or in our stars but in the actions of man. Climate is not the reason that Russia before Communism was a heavy exporter of grain, while now the Soviet Union is a grain importer. Nature is not responsible for the fact that, of all the countries of East Africa, the Marxist-Leninist nations of Ethiopia and Mozambique are now the major sufferers from mass famine and starvation. Given causes yield given effects, and it is an ineluctable law of nature and of man that if agriculture is systematically crippled and exploited, food production will collapse, and famine will be the result.
The root of the problem is the Third World, where (a) agriculture is overwhelmingly the most important industry, and (b) the people are not affluent enough, in any crisis, to purchase food from abroad. Hence, to Third World people, agriculture is the most precious activity, and it becomes particularly important that it not be hobbled or discouraged in any way. Yet, wherever there is production, there are also parasitic classes living off the producers. The Third World in our century has been the favorite arena for applied Marxism, for revolutions, coups, or domination by Marxist intellectuals. Whenever such new ruling classes have taken over, and have imposed statist or full socialist rule, the class most looted, exploited, and oppressed has been the major productive class: the farmers or peasantry. Literally tens of millions of the most productive farmers were slaughtered by the Russian and Chinese Communist regimes, and the remainder were forced off their private lands and onto cooperative or state farms, where their productivity plummeted, and food production gravely declined.
And even in those countries where land was not directly nationalized, the new burgeoning state apparatus flourished on the backs of the peasantry, by levying heavy taxes and by forcing peasants to sell grain to the state at far below market prices. The artificially cheap food was then used to subsidize foods supplies for the urban population which formed the major base of support for the new bureaucratic class. The standard paradigm in African and in Asian countries has been as follows: British, French, Portuguese, or whatever imperialism carved out artificial boundaries of what they dubbed “colonies,” and established capital cities to administer and rule over the mass of peasantry. The new class of higher and lower bureaucrats lived off the peasants by taxing them and forcing them to sell their produce artificially cheaply to the state. When the imperial powers pulled out, they turned over these new nations to the tender mercies of Marxist intellectuals, generally trained in London, Paris, or Lisbon, who imposed socialism or far greater statism, thereby aggravating the problem enormously. Furthermore, a vicious spiral was set up, similar to the one that brought the Roman Empire to its knees. The oppressed and exploited peasantry, tired of being looted for the sake of the urban sector, decided to leave the farm and go sign up in the welfare state provided in the capital city. This makes the farmer’s lot still worse, hence more of them leave the farm, despite brutal measures trying to prevent them from leaving. The result of this spiral is famine.
Thus, most African governments force farmers to sell all their crops to the state at only a half or even a third of market value. Ethiopia, as a Marxist-Leninist government, also forced the farmers onto highly inefficient state farms, and tried to keep them working there by brutal oppression.
The answer to famine in Ethiopia or elsewhere is not international food relief. Since relief is invariably under the control of the recipient government, the food generally gets diverted from the farms to line the pockets of government officials to subsidize the already well-fed urban population. The answer to famine is to liberate the peasantry of the Third World from the brutality and exploitation of the state ruling class. The answer to famine is freedom and private property.

Monday, April 22, 2013

Protectionism and the Destruction of Prosperity

By Murray N. Rothbard

Protectionism, often refuted and seemingly abandoned, has returned, and with a vengeance. The Japanese, who bounced back from grievous losses in World War II to astound the world by producing innovative, high-quality products at low prices, are serving as the convenient butt of protectionist propaganda. Memories of wartime myths, mixed with discrete anti-Oriental racism, can prove a heady brew, as protectionists warn about this new “Japanese imperialism,” even “worse than Pearl Harbor.” This “imperialism” turns out to consist of selling Americans wonderful Sony TV sets, autos, microchips, etc. at prices more than competitive with backward and lumbering American firms.
Is this “flood” of Japanese products really a menace, to be combated by the U.S. government? Or is the new Japan a godsend to American consumers?
In taking our stand on this issue, we should recognize that all government action means coercion, so that calling upon the U.S. government to intervene means urging it to use force and violence to restrain peaceful trade. One trusts that the protectionists are not willing to pursue their logic of force to the ultimate in the form of another Hiroshima and Nagasaki.
Keep Your Eye on the Consumer
As we unravel the tangled web of protectionist argument, we should keep our eye on two essential points: 1) protectionism means force in restraint of trade; and 2) the key is what happens to the consumer. Invariably, we will find that the protectionists are out to cripple, exploit, and impose severe losses not only on foreign consumers but especially on Americans. And since each and every one of us is a consumer, this means that protectionism is out to mulct all of us for the benefit of a specially privileged, subsidized few—and an inefficient few at that: people who cannot make it in a free and unhampered market.
Take, for example, the alleged Japanese menace. All trade is mutually beneficial to both parties—in this case Japanese producers and American consumers—otherwise they would not engage in the exchange. In trying to stop this trade, protectionists are trying to stop American consumers from enjoying high living standards by buying cheap and high-quality Japanese products. Instead, we are to be forced by government to return to the inefficient, higher-priced products we have already rejected. In short, inefficient producers are trying to deprive all of us of products we desire so that we will have to turn to inefficient firms. American consumers are to be plundered.
How To Look at Tariffs and Quotas
The best way to look at tariffs or import quotas or other protectionist restraints is to forget about political boundaries. Political boundaries of nations may be important for other reasons, but they have no economic meaning whatever. Suppose, for example, that each state of the United States were a separate nation. Then we would hear a lot of protectionist bellyaching that we are now fortunately spared. Think of the howls by inefficient, high-priced New York or Rhode Island textile manufacturers who would then be complaining about the “unfair,” “cheap labor” competition from various low-type “foreigners” from Tennessee or North Carolina, or vice versa.
Fortunately, the absurdity of worrying about the balance of payments is made evident by focusing on interstate trade. For nobody worries about the balance of payments between New York and New Jersey, or, for that matter, between Manhattan and Brooklyn, because there are no customs officials recording such trade and such balances.
If we think about it, it is clear that a call by New York firms for a tariff against North Carolina is a pure ripoff of New York (as well as North Carolina) consumers, a naked grab for coerced special privilege by inefficient business firms. If the 50 states were separate nations, the protectionists would then be able to use the trappings of patriotism, and distrust of foreigners, to camouflage and get away with their looting the consumers of their own region.
Fortunately, interstate tariff’s are unconstitutional. But even with this clear barrier, and even without being able to wrap themselves in the cloak of nationalism, protectionists have been able to impose interstate tariffs in another guise. Part of the drive for continuing increases in the federal minimum wage law is to impose a protectionist device against lower-wage, lower-labor-cost competition from North Carolina and other southern states against their New England and New York competitors.
During the 1966 Congressional battle over a higher federal minimum wage, for example, the late Senator Jacob Javits (R-NY) freely admitted that one of his main reasons for supporting the bill was to cripple the southern competitors of New York textile firms. Since southern wages are generally lower than in the north, the business firms (and the workers struck by unemployment) hardest hit by an increased minimum wage will be located in the south.
Another way in which interstate trade restrictions have been imposed has been in the fashionable name of “safety.” Government-organized state milk cartels in New York, for example, have prevented importation of milk from nearby New Jersey under the patently spurious grounds that the trip across the Hudson would render New Jersey milk “unsafe.”
If tariffs and restraints on trade are good for a country, then why not indeed for a state or region? The principle is precisely the same. In America’s first great depression, the Panic of 1819, Detroit was a tiny frontier town of only a few hundred people. Yet protectionist cries arose—fortunately not fulfilled—to prohibit all “imports” from outside of Detroit, and citizens were exhorted to “buy only Detroit.” If this nonsense had been put into effect, general starvation and death would have ended all other economic problems for Detroiters.
So why not restrict and even prohibit trade, i.e. “imports,” into a city, or a neighborhood, or even on a block, or, to boil it down to its logical conclusion, to one family? Why shouldn’t the Jones family issue a decree that from now on, no member of the family can buy any goods or services produced outside the family house? Starvation would quickly wipe out this ludicrous drive for self-sufficiency.
And yet we must realize that this absurdity is inherent in the logic of protectionism. Standard protectionism is just as preposterous, but the rhetoric of nationalism and national boundaries has been able to obscure this vital fact.
The upshot is that protectionism is not only nonsense, but dangerous nonsense, destructive of all economic prosperity. We are not, if we were ever, a world of self-sufficient farmers. The market economy is one vast latticework throughout the world, in which each individual, each region, each country, produces what he or it is best at, most relatively efficient in, and exchanges that product for the goods and services of others. Without the division of labor and the trade based upon that division, the entire world would starve. Coerced restraints on trade—such as protectionism—cripple, hobble, and destroy trade, the source of life and prosperity. Protectionism is simply a plea that consumers, as well as general prosperity, be hurt so as to confer permanent special privilege upon groups of inefficient producers, at the expense of competent firms and of consumers. But it is a peculiarly destructive kind of bailout, because it permanently shackles trade under the cloak of patriotism.
The Negative Railroad
Protectionism is also peculiarly destructive because it acts as a coerced and artificial increase in the cost of transportation between regions. One of the great features of the Industrial Revolution, one of the ways in which it brought prosperity to the starving masses, was by reducing drastically the cost of transportation. The development of railroads in the early 19th century, for example, meant that for the first time in the history of the human race, goods could be transported cheaply over land. Before that, water—rivers and oceans—was the only economically viable means of transport. By making land transport accessible and cheap, railroads allowed interregional land transportation to break up expensive inefficient local monopolies. The result was an enormous improvement in living standards for all consumers. And what the protectionists want to do is lay an axe to this wonderous principle of progress.
It is no wonder that Frederic Bastiat, the great French laissez-faire economist of the mid-19th century, called a tariff a “negative railroad.” Protectionists are just as economically destructive as if they were physically chopping up railroads, or planes, or ships, and forcing us to revert to the costly transport of the past—mountain trails, rafts, or sailing ships.
“Fair” Trade
Let us now turn to some of the leading protectionist arguments. Take, for example, the standard complaint that while the protectionist “welcomes competition,” this competition must be “fair.” Whenever someone starts talking about “fair competition” or indeed, about “fairness” in general, it is time to keep a sharp eye on your wallet, for it is about to be picked. For the genuinely “fair” is simply the voluntary terms of exchange, mutually agreed upon by buyer and seller. As most of the medieval scholastics were able to figure out, there is no “just” (or “fair”) price outside of the market price.
So what could be “unfair” about the free-market price? One common protectionist charge is that it is “unfair” for an American firm to compete with, say, a Taiwanese firm which needs to pay only one-half the wages of the American competitor. The U.S. government is called upon to step in and “equalize” the wage rates by imposing an equivalent tariff upon the Taiwanese. But does this mean that consumers can never patronize low-cost firms because it is “unfair” for them to have lower costs than inefficient competitors? This is the same argument that would be used by a New York firm trying to cripple its North Carolina competitor.
What the protectionists don’t bother to explain is why U.S. wage rates are so much higher than Taiwan. They are not imposed by Providence. Wage rates are high in the U.S. because American employers have bid these rates up. Like all other prices on the market, wage rates are determined by supply and demand, and the increased demand by U.S. employers has bid wages up. What determines this demand? The “marginal productivity” of labor.
The demand for any factor of production, including labor, is constituted by the productivity of that factor, the amount of revenue that the worker, or the pound of cement or acre of land, is expected to bring to the brim. The more productive the factory, the greater the demand by employers, and the higher its price or wage rate. American labor is more costly than Taiwanese because it is far more productive. What makes it productive? To some extent, the comparative qualities of labor, skill, and education. But most of the difference is not due to the personal qualities of the laborers themselves, but to the fact that the American laborer, on the whole, is equipped with more and better capital equipment than his Taiwanese counterparts. The more and better the capital investment per worker, the greater the worker’s productivity, and therefore the higher the wage rate.
In short, if the American wage rate is twice that of the Taiwanese, it is because the American laborer is more heavily capitalized, is equipped with more and better tools, and is therefore, on the average, twice as productive. In a sense, I suppose, it is not “fair” for the American worker to make more than the Taiwanese, not because of his personal qualities, but because savers and investors have supplied him with more tools. But a wage rate is determined not just by personal quality but also by relative scarcity, and in the United States the worker is far scarcer compared to capital than he is in Taiwan.
Putting it another way, the fact that American wage rates are on the average twice that of the Taiwanese, does not make the cost of labor in the U.S. twice that of Taiwan. Since U.S. labor is twice as productive, this means that the double wage rate in the U.S. is offset by the double productivity, so that the cost of labor per unit product in the U.S. and Taiwan tends, on the average, to be the same. One of the major protectionist fallacies is to confuse the price of labor (wage rates) with its cost, which also depends on its relative productivity.
Thus, the problem faced by American employers is not really with the “cheap labor” in Taiwan, because “expensive labor” in the U.S. is precisely the result of the bidding for scarce labor by U.S. employers. The problem faced by inefficient U.S. textile or auto firms is not so much cheap labor in Taiwan or Japan, but the fact that other U.S. industries are efficient enough to afford it, because they bid wages that high in the first place.
So, by imposing protective tariffs and quotas to save, bail out, and keep in place inefficient U.S. textile or auto or microchip firms, the protectionists are injuring the American consumer. They are also harming efficient U.S. firms and industries, which are prevented from employing resources now locked into incompetent firms, and who would otherwise be able to expand and sell their efficient products at home and abroad.
Another contradictory line of protectionist assault on the free market asserts that the problem is not so much the low costs enjoyed by foreign firms, as the “unfairness” of selling their products “below costs” to American consumers, and thereby engaging in the pernicious and sinful practice of “dumping.” By such dumping they are able to exert unfair advantage over American firms who presumably never engage in such practices and make sure that their prices are always high enough to cover costs. But if selling below costs is such a powerful weapon, why isn’t it ever pursued by business firms within a country?
Our first response to this charge is, once again, to keep our eye on consumers in general and on American consumers in particular. Why should it be a matter of complaint when consumers so clearly benefit? Suppose, for example, that Sony is willing to injure American competitors by selling TV sets to Americans for a penny apiece. Shouldn’t we rejoice at such an absurd policy of suffering severe losses by subsidizing us, the American consumers? And shouldn’t our response be: “Come on, Sony, subsidize us some more!” As far as consumers are concerned, the more “dumping” that takes place, the better.
But what of the poor American TV firms, whose sales will suffer so long as Sony is virtually willing to give their sets away? Well, surely, the sensible policy for RCA, Zenith, etc. would be to hold back production and sales until Sony drives itself into bankruptcy. But suppose that the worst happens, and RCA, Zenith, etc. are themselves driven into bankruptcy by the Sony price war? Well, in that case, we the consumers will still be better off, since the plants of the bankrupt firms, which would still be in existence, would be picked up for a song at auction, and the American buyers at auction would be able to enter the TV business and outcompete Sony because they now enjoy far lower capital costs.
For decades, indeed, opponents of the free market have claimed that many businesses gained their powerful status on the market by what is called “predatory price-cutting,” that is, by driving their smaller competitors into bankruptcy by selling their goods below cost, and then reaping the reward of their unfair methods by raising their prices and thereby charging “monopoly prices” to the consumers. The claim is that while consumers may gain in the short-run by price wars, “dumping,” and selling below costs, they lose in the long-run from the alleged monopoly. But, as we have seen, economic theory shows that this would be a mug’s game, losing money for the “dumping” firms, and never really achieving a monopoly price. And sure enough, historical investigation has not turned up a single case where predatory pricing, when tried, was successful, and there are actually very few cases where it has even been tried.
Another charge claims that Japanese or other foreign firms can afford to engage in dumping because their governments are willing to subsidize their losses. But again, we should still welcome such an absurd policy. If the Japanese government is really willing to waste scarce resources subsidizing American purchases of Sony’s, so much the better! Their policy would be just as self-defeating as if the losses were private.
There is yet another problem with the charge of “dumping,” even when it is made by economists or other alleged “experts” sitting on impartial tariff commissions and government bureaus, there is no way whatever that outside observers, be they economists, businessmen, or other experts, can decide what some other firm’s “costs” may be. “Costs” are not objective entities that can be gauged or measured. Costs are subjective to the businessman himself, and they vary continually, depending on the businessman’s time horizon or the stage of production or selling process he happens to be dealing with at any given time.
Suppose, for example, a fruit dealer has purchased a case of pears for $20, amounting to $1 a pound. He hopes and expects to sell those pears for $1.50 a pound. But something has happened to the pear market, and he finds it impossible to sell most of the pears at anything near that price. In fact, he finds that he must sell the pears at whatever price he can get before they become overripe. Suppose he finds that he can only sell his stock of pears at 70 cents a pound. The outside observer might say that the fruit dealer has, perhaps “unfairly,” sold his pears “below costs,” figuring that the dealer’s costs were $1 a pound.
“Infant” Industries
Economists agree on very little. But economists agree virtually unanimously on one thing: their oppostion to protectionism. Classically, they made one unfortunate exception, an exception which the specially privileged were able to use and magnify to become an enormous hole in the free-trade case. This argument held that the government should provide a temporary protective tariff to aid, or to bring into being, an “infant industry.” Then, when the industry was well established, the government would and should remove the tariff and toss the now “mature” industry into the competitive swim.
The theory was fallacious, and the policy proved disastrous in practice. For there is no more need for government to protect a new, young, industry from foreign competition than there is to protect it from domestic competition.
In the last few decades, the “infant” plastics, television, and computer industries made out very well without such protection. Any government subsidizing of a new industry will funnel too many resources into that industry as compared to older firms, and will also inaugurate distortions that may persist and render the firm or industry permanently inefficient and vulnerable to competition. As a result, “infant-industry” tariffs have tended to become permanent, regardless of the “maturity” of the industry. The proponents were carried away by a misleading biological analogy to “infants” who need adult care. But a business firm is not a person, young or old.
Older Industries
Indeed, in recent years, older industries that are notoriously inefficient have been using what might be called a “senile-industry” argument for protectionism. Steel, auto, and other outcompeted industries have been complaining that they “need a breathing space” to retool and become competitive with foreign rivals, and that this breather could be provided by several years of tariffs or import quotas. This argument is just as full of holes as the hoary infant-industry approach, except that it will be even more difficult to figure out when the “senile” industry will have become magically rejuvenated. In fact, the steel industry has been inefficient ever since its inception, and its chronological age seems to make no difference. The first protectionist movement in the U.S. was launched in 1820, headed by the Pennsylvania iron (later iron and steel) industry, artificially force-fed by the War of 1812 and already in grave danger from far more efficient foreign competitors.
The Non-Problem of the Balance of Payments
A final set of arguments, or rather alarms, centers on the mysteries of the balance of payments. Protectionists focus on the horrors of imports being greater than exports, implying that if market forces continued unchecked, Americans might wind up buying everything from abroad, while selling foreigners nothing, so that American consumers will have engorged themselves to the permanent ruin of American business firms. But if the exports really fell to somewhere near zero, where in the world would Americans still find the money to purchase foreign products? The balance of payments, as we said earlier, is a pseudo-problem created by the existence of customs statistics.
During the day of the gold standard, a deficit in the national balance of payments was a problem, but only because of the nature of the fractional-reserve banking system. If U.S. banks, spurred on by the Fed or previous forms of central banks, inflated money and credit, the American inflation would lead to higher prices in the U.S., and this would discourage exports and encourage imports. The resulting deficit had to be paid for in some way, and during the gold standard era this meant being paid for in gold, the international money. So as bank credit expanded, gold began to flow out of the country, which put the fractional-reserve banks in even shakier shape. To meet the threat to their solvency posed by the gold outflow, the banks eventually were forced to contract credit, precipitating a recession and reversing the balance of payment deficits, thus bringing gold back into the country.
But now, in the fiat-money era, balance of payments deficits are truly meaningless. For gold is no longer a “balancing item.” In effect, there is no deficit in the balance of payments. It is true that in the last few years, imports have been greater than exports by $150 billion or so per year. But no gold flowed out of the country. Neither did dollars “leak” out. The alleged “deficit” was paid for by foreigners investing the equivalent amount of money in American dollars: in real estate, capital goods, U.S. securities, and bank accounts.
In effect, in the last couple of years, foreigners have been investing enough of their own funds in dollars to keep the dollar high, enabling us to purchase cheap imports. Instead of worrying and complaining about this development, we should rejoice that foreign investors are willing to finance our cheap imports. The only problem is that this bonanza is already coming to an end, with the dollar becoming cheaper and exports more expensive.
We conclude that the sheaf of protectionist arguments, many plausible at first glance, are really a tissue of egregious fallacies. They betray a complete ignorance of the most basic economic analysis. Indeed, some of the arguments are almost embarrassing replies of the most ridiculous claims of 17th century mercantilism: for example, that it is somehow a calamitous problem that the U.S. has a balance of trade deficit, not overall, but merely with one specific country, e.g. Japan.
Must we even relearn the rebuttals of the more sophisticated mercantilists of the 18th century: namely, that balance with individual countries will cancel each other out, and therefore that we should only concern ourselves with the overall balance? (Let alone realize that the overall balance is no problem either.) But we need not reread the economic literature from Adam Smith to the present-day to realize that the impetus for protectionism comes not from preposterous theories, but from the quest for coerced special privilege and restraint of trade at the expense of efficient competitors and consumers.
In the host of special interests using the political process to repress and loot the rest of us, the protectionists are among the most venerable. It is high time that we get them, once and for all, off our backs, and treat them with the righteous indignation they so richly deserve.

Sunday, April 21, 2013

Economic Warfare Hurts Us More Than Them

By Robert Higgs and Charlotte Twight

During the past decade the United States has repeatedly waged war, not with guns, missiles, and bombs, but with economic sanctions restricting the international transactions and travel of Americans.
Economic warfare—prohibitions of travel and commercial and financial dealings imposed selectively in order to alter the behavior of other governments—has been waged at one time or another since 1979 against Iran, Libya, Nicaragua, South Africa, and Syria as well as various communist countries.
Sanctions usually fail to attain their ostensible objective: they do not alter the conduct of other governments. But they do have significant domestic consequences. Americans suffer economic losses, both short-term and long-term. In effect, sanctions impose the costs of U.S. foreign policy on Americans interested in certain international commercial and financial deals or travel to certain countries.
Sanctions imposed after the Iranians took American hostages in Tehran in 1979 illustrate the erratic and arbitrary character of this instrument of foreign policy. President Carter first blocked all Iranian property in the United States and forbade most commercial and financial dealings with Iran. Then, as part of the deal to gain freedom for the hostages, Carter rescinded the sanctions, nullified attachments of Iranian property issued by federal courts, and suspended the legal claims of Americans against Iran. An Iran-United States Claims Tribunal was established in the Netherlands, and Americans were forbidden to press their claims in U.S. courts.
This extraordinary setting-aside of the judicial system by the president was challenged in an important 1981 Supreme Court case, Dames & Moore V. Regan. The Court’s decision gave broad scope to the president’s powers under the International Emergency Economic Powers Act, sustaining his nullification of courts’ attachments of Iranian property. Moreover, the Court held that, even without explicit statutory authority, the president has constitutional power to suspend American claims in federal courts because of “a history of congressional acquiescence” in similar instances. Whatever Executive action Congress has never overtly disapproved, it has implicitly approved—a doctrine that would have astonished the Founding Fathers.
In making regulations to implement sanctions, the bureaucrats of the Treasury’s Office of Foreign Assets Control (OFAC) have extraordinary discretion—the power to act arbitrarily and capriciously. Licenses may be denied, granted, or revoked at will. OFAC is not bound by the Administrative Procedure Act with regard to notice of proposed rule making, opportunity for public participation, or delay in effective date. OFAC officials may, and sometimes do, abruptly alter the rules solely at their pleasure. They often create loopholes for privileged parties, such as wholly-owned foreign subsidiaries of American oil companies that continue business as usual with Libya, notwithstanding the president’s order that Americans cease operations in that country. Administrative officials may, as in the Iranian case, set aside the protections normally afforded private property rights by the U.S. judicial system.
Economic warfare rarely promotes the national interest effectively. Rather, it is a costly form of political theater. Only governmental officials, especially the president, normally benefit from it; and even that benefit is fleeting.
A president wages economic warfare because it enhances his popularity, if only momentarily. It diverts attention from intractable domestic problems and creates an image that he is strong, that he is “doing something” to defend or promote American interests beyond our borders.
The image has little substance. The governments of Iran, Libya, Nicaragua, South Africa, and Syria have not been visibly moved by U.S. sanctions against them. But American citizens have been hurt. Although some firms have found ways to circumvent the sanctions, important business has been lost—computer sales to South Africa, aircraft sales to Syria, all exports to Nicaragua. American reputations for reliable service have suffered in the world market, where alternative foreign suppliers are usually happy to take on the business denied Americans by their own government.
More importantly, economic warfare has shifted rights from private hands into the hands of governmental officials who are free to exercise their newly acquired powers with virtually unchecked discretion. Nothing of genuine public importance has been gained; bad political and legal precedents have become established; a little more liberty has been lost. As Ludwig von Mises pointed out in The Free and Prosperous Commonwealth: “Nationalist policies, which always begin by aiming at the ruination of one’s neighbor, must, in the final analysis, lead to the ruination of all.”