The Case Against Government Child Care

American families need more affordable child care. But the answer is not more government involvement. When child care is run, funded, and regulated by the government, it can only make the existing problem worse. And it’s bad for our liberty as well.

Promoters of more government intervention claim it will make “quality child care” more available to poor and middle income families. But such programs decrease the legal options that working families have, and the high costs of compliance with regulations drive informal child care underground. Most important, government interference in child care threatens the independence of the family and the long-term interests of children.

Young couples with children may think they want government child care. But they don’t realize that Americans like themselves will be the biggest losers in this Faustian bargain with the State. They risk losing their right to raise their children as they—and not bureaucrats—see fit.

It is not difficult to see why calls for action on child care have grown to a deafening level. Half the married mothers with children under five are working, twice the number who did in 1970. By 1995 two-thirds of all preschool children are expected to have working mothers.

Licensed, regulated child care costs an average of $3,000 per child per year. Most families can’t afford that, especially single-parent families whose annual incomes are less than $10,000. Many of these families now make unofficial arrangements in the black (i.e. free) market, which includes relatives, neighbors, and other unlicensed child-care providers.

It’s already illegal in most states to provide more than 20 hours a week of child care in your home without government permission. Yet legislators are proposing to federalize these laws and make them harsher. Their prime vehicle is the “ABC bill,” the Act for Better Child Care Services, sponsored by Senator Christopher Dodd (D-CT) and Representative Dale Kildee (D-MI).

The ABC bill would create a brand-new, full-blown federal “entitlement” program, complete with subsidies, grants, licenses, loans, regulations, certificates, and inspections. The program would be administered by the states but overseen by a federal child-care administrator backed by an army of bureaucrats.

ABC would authorize $2.5 billion in the first year and “such sums as may be necessary” thereafter. If licensed child care costs $3,000 per child per year and 16 million children are eligible, simple multiplication tells us that the program will cost at least $48 billion annually. And knowing how government programs work, after that, the sky is the limit.

The ABC bill would only be the first step. We can expect pressure groups to launch a full-time effort to make sure there’s no turning back. That’s why Senator Orrin Hatch’s (R-UT) bill isn’t much better. He proposes a “conservative” alternative (i.e. more regulation, some tax credits, and vouchers), but with its direct tax subsidies in the form of vouchers—not to speak of its regulations—it too would encourage powerful lobbying groups to make sure it leads to total federal control.

Advocates of more regulation cite the case of Jessica McClure, the 18-month-old Texas girl who fell down a well last year. According to the misnamed Children’s Defense Fund, Jessica fell because she attended an “unregulated Texas family day-care program.” Stamp out unregulated family day care, CDF says, and such accidents would end. This is nonsense, of course. Regulated industries are much less responsive to consumer demands than unregulated ones. And actual government agencies are even worse. Private child-care centers, on the other hand, are accountable to parents and subject to market competition. They are therefore far more likely to look after the safety of their client’s children.

Advocates of government child care claim they want child care to be more available, yet at the same time they want rigid and federalized regulations. Regulations can only lessen the number of child-care centers because fewer providers will have the time, resources, labor, and facilities to qualify under Washington’s official rules.

Regulations will not improve the quality of child care. They will restrict competition and establish a cartel of the largest firms, which are the only ones that can afford the costs of dealing with the government. It’s no coincidence that the big businesses in the industry are actively lobbying for regulations which will crush small firms.

Another bad idea would force businesses to provide child care for employees’ children. Such programs would be very costly for private firms, which would cover their losses by laying off workers. Moreover, they would avoid hiring young women with children. The very people that such programs are allegedly designed to help—young working mothers—would be the ones most hurt.

Some activists would even nationalize child-care centers. But government-run child-care centers will be no different from other government agencies. Would we want our children to be cared for by post office workers or bureaucrats at the department of motor vehicles? The workers could get special training in child care, but that’s not what really matters. More important are the rewards and penalties a job offers.

Once a profit-making enterprise is turned over to the government, its entire character changes. It is no longer concerned about profit and loss. Like all bureaucracies, it’s run for the benefit of the bureaucrats. Employees can’t be fired, they waste money, and customers become an interference rather than a blessing. Such a system would have to work against the best interests of children.

In a private child-care center, the customer is king, employees have reason to work hard, and resources are used efficiently. Profits can only come through providing quality child care at an affordable price.

As a social worker, I work daily with poor mothers who use the underground market to secure child care. And I heartily approve. These mothers know far better than the D.C. government what’s best for their children. In one case, a poor working mother had a loving neighbor take care of her child for three years. It was illegal (no license, no minimum wage, no inspections, etc.), but everyone benefited from the arrangement. Then in July, an informer turned her in, and the government shut down the neighbor’s business. The result: this mother now has to spend half her paycheck on inferior government-approved child care. Everyone is worse off but the government itself, which has increased its power over family life.

Since government can only make things worse, I have a three-point plan guaranteed to increase the availability of quality, affordable child care. First, repeal all regulations and licenses, which would make much more care available. Second, grant unlimited tax credits to families who use child-care services, making them more affordable. And third, repeal the minimum wage law, which would dramatically increase the number of officially employable child-care workers.
I grant that my proposal would have little chance of passing, given the pressure groups stampeding to Washington. But the alternative will be an ominous and bipartisan increase in bureaucratic power over families and children.

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The Conservative Sanctification of Big Government

The most disheartening aspect of the Reagan years has been the Inside-the-Beltway conservative love affair with big government.
Education Secretary William Bennett has been nagging Stanford University for changing its core curriculum. As a cultural conservative, I agree with much of what he says. But am I the only person on the Right who thinks federal bureaucrats have no business telling universities what to teach?
Where are all my conservative friends, who used to denounce federal interference in education, now that Washington is dictating a national curriculum? Or did their denunciations apply only when they weren’t doing the interfering?
In December 1980, Ed Meese called the Department of Education “a ridiculous bureaucratic joke.” And he was right. From the day Jimmy Carter established it—as a payoff to the leftist NEA teachers union—it has been an expensive, intrusive, unconstitutional, and centralizing instrument of state power.
The 1980 Republican platform promised to abolish the Education Department, and Ronald Reagan campaigned on the pledge. But—like so much else—both were forgotten when the cash and jobs could be directed to “our” side.
Instead of abolition, we’ve seen distension, with the administration and Congress increasing the Department’s budget from $10 billion in Carter’s last year to $22 billion in 1988. The head cheerleader for more spending on “education” (actually, anti-education, of course) has been Bennett. At the direction of his ideological control, Irving Kristol, Bennett has lobbied furiously for more spending, and criticized those with a “budget-driven agenda” (i.e. benighted folks who think government already spends too much).
The giant Department of Education runs a complicated array of programs, each with its own budget, its own interest groups, its own bureaucrats, and its own regulatory mandates and prohibitions, which have to be interpreted, explained, and enforced. It is an immense burden on schools and teachers, not to speak of taxpayers.
Bennett—with conservatives rooting him on—has centralized control over teaching methods, teacher selection, pay, promotion, textbooks, and a host of other areas that are none of the federal government’s business. And he has increased the federal bias against private education. It is all reminiscent of the neoconservative Napoleonic “reforms” of French education, designed to support an authoritarian state and force all children into a politically approved mold.
Since liberals have always favored federal control of education, we now have no organized opposition in Washington to school centralization. Federal control of education has been sanctified, so long as it is used to promote “conservative values” (which presumably don’t include parental control of childrens’ education).
And this is no isolated incident. The same thing has happened with the National Endowments for the Humanities and Arts, the Department of Energy, the Federal Trade Commission, OSHA, EPA, and a host of other agencies. Conservatives denounced them when Carter was in office, but now that they offer jobs and grants for the boys, there isn’t a peep.
Washington conservatives defended Ed Meese until he fired his movement-conservative press secretary. Then they attacked the Attorney General too. How dare he, top conservatives sputtered: that press aide was “one of us.”
Lord Bolingbroke, writing more than 200 years ago, said that politics consists of rewarding one’s friends, punishing one’s enemies, and lining one’s pockets. Nothing much has changed, of course. But there were those who thought the conservatives might be different.

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Lies, Damned Lies, and Social Security

The feds may call “Social Security” a retirement program, but it’s actually an unsound, unfair, unworkable, and immoral system of wealth redistribution. It’s bankrupting America and destroying rather than creating financial security.
Franklin D. Roosevelt introduced Social Security in 1936. Congress, which as usual was only too happy to go along with executive violations of the Constitution, promised that Social Security would “provide safeguards against all of the hazards leading to destitution and dependency.” Instead of safeguarding against dependency, Social Security has increased it.
Like earthquakes which announce themselves with small tremors, the burden of Social Security was at first almost un-noticeable. In 1937, the tax rate was 1% on the first $3,000 in earnings; the maximum was thus $30 a year, to be matched by the employer.
In the post-war years Social Security grew as Congress and presidents added more benefits until the program became an Omnibus Vote-Buying Act. Congress passed across-the-board benefit increases of 7% (1965), 13% (1967), 15% (1969), and then in 1972 tied benefits to the Consumer Price Index, yielding an annual “cost-of-living adjustment.”
The SS taxes also grew larger, of course. In 1937 the maximum was $30 annually. By 1970 it was $374.40, an increase of over 1,000%. In 1971 Abraham Ellis—author of the prescient Social Security Fraud was called a right-wing alarmist for predicting that by 1987 the tax would rise to 5.9% of the first $15,000, or $885. He was wrong; actual 1987 rates were 7.15% of the first $43,800, or $3,131. Even this pessimist was 300% too optimistic.
When the program began, there were 100 workers paying into the system for every three people drawing benefits. By 1985 those 100 workers supported 32 retirees. Barring drastic changes in the birthrate, by 2030 there will be 52 retirees drawing benefits for every 100 workers paying in. Over time, then, the ratio of workers to retirees has shifted from 33-1 to 3-1, with worse to come.
In July 1987 the median age was 32.1 years in the United States, the highest ever. The fastest-growing group was that between 35-44 years: the baby boomers. By 2010 the first of these will be retiring. Will there be any benefits to collect? Maybe, but only at tremendous cost to the rest of us.
Then there is the Social Security “trust fund.” It works like this: your employer, acting as an unpaid tax collector, deducts 7.5% of your wages up to $45,000 a year, matches this amount, and sends it all to Washington. The Social Security Administration deposits it into the Treasury, and in return receives IOUs (Treasury Bonds) payable sometime in the future. Congress and the president then spend the cash on endive research and other incumbency enhancement schemes.
What happens in 20 or 30 years when the IOUs are due? The U.S. government has no money of its own, of course. It can pay back the Social Security trust fund only through more taxes, more borrowing, or more inflating. All three come out of the people’s pocketbook.
The first person to retire under Social Security was Miss Ida Fuller. When she retired in 1939, she had paid in only $22. On January 31, 1940, she got her first check: $22.54. Ida Fuller lived to be 100 years old, and the checks kept coming, just as FDR promised. In 34 years of retirement they totaled over $20,000.
Once long-lived people like Ida Fuller were the exception. Now they are the rule. Yet while more and more people live into their 80s and even 90s, the official retirement age remains 65. Why? Because in the 1880s the authoritarian German Chancellor Otto von Bismarck set 65 as the retirement age for his Social Security program. But the average life expectancy in Germany was then 45.
A child born in America in 1776 would, on average, die at 35. Even in 1950, people 65 and over made up only 7.7% of the population. Now that figure stands at 12%, and by 2020 should be 17.3%.
Neil Howe writing in the American Spectator says there are no believable projections for public health-care spending in the next century. Even conservative estimates are off the charts. However, he thinks we could easily see 20 or 30% payroll taxes 40 years from now, just to pay for Medicare and Medicaid! Add in the cash benefits and you could lose half your paycheck even before income tax is deducted. No one seriously believes we will see such taxes. More likely we will either change the system drastically or go through an economic collapse.
Social Security is built on lies, thievery, and coercion. Notice that Social Security check stubs refer to FICA (Federal Insurance Contributions Act). In truth Social Security is a tax. You are required by law to pay; if you refuse the government puts you in jail. But they call it a “contribution” as if we were giving to the United Way. Nor is there any “insurance.” If a private insurance policy were as unsound as Social Security, its sellers would go to jail.
Private con games like the classic “Ponzi scheme” are illegal. But when the government runs them, they become social and secure. Charles Ponzi was a 1920s swindler whose trick was to sell people an investment that promised a big return, then take their money, pay off earlier customers, and move on. The supply of such investors is finite, so while those who got in early did well, sooner or later it had to come to a screeching halt.
Social Security works the same way, except that the “investors” have no choice. Even Ponzi didn’t force people to invest at the point of a gun. The government does. The law makes a distinction between fraud and robbery based on coercion. Since the state has a monopoly on legal coercion, and can ultimately bring deadly force to bear on those who resist it, can we call the required “investment” in Social Security anything less than robbery?
The semantical games don’t end there. The government says that employees pay the FICA tax and employers match it. But this is an accounting trick. The economic reality is that the worker pays it all because the matching payment is just another cost of labor.
Social Security injures the nation’s economy and therefore hurts everyone. If the billions drained away by Social Security every year were put to productive use, our economy would be much less troubled than it is today. Instead, capital is wasted on nonproductive government projects.
Keynesians tell us that government spending creates jobs and stimulates the economy. But they forget to look at how the money would have been used otherwise. Taxation destroys jobs, and by taxing employment, Social Security creates unemployment and hurts small business.
What should we do about this dinosaur in our midst? Several plans have been offered. Unfortunately they range from the patch-up Lee Smith outlined in Fortune last year to the gradualist scheme offered by Peter Ferrara which calls for government to force people to invest in a “Financial Security Account” or stay in the Social Security system. Free marketeers must oppose both in principle. Only a principled stand has any chance of surviving the lobbying of the American Association of Retired Persons.
In the meantime, we should take care of ourselves and not rely on Social Security, support those who want to change it for the better, warn of the present system’s dangers and immorality, and oppose inflationary fix-it schemes and every other intervention in the economy. Advancing lasting solutions based on liberty is the only chance we have of abolishing rip-offs like Social Security.

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Cancel the Postal Monopoly

In the 18th century, as he had for millennia, the urban peddler went from door to door with a sack on his back. When we see this antique method of economic organization, not in a museum setting at Colonial Williamsburg but daily on the streets of every city and town in America, we know the government is in charge.
The Post Office has been a federal agency since 1775. And since 1872 it has been illegal for anyone but government employees to deliver a letter. In that year, at Post Office behest, Congress outlawed the low-priced, fast delivery of the Pony Express. It was to be the last express service available to regular mail customers.
A few years ago, a Rochester, New York, teenager offered his neighbors same-day bicycle delivery at 10¢ each for Christmas cards in his subdivision. Soon Postal Inspectors—who seem to be the only fastmoving part of the “service”—arrived at his house and threatened to arrest and jail him unless he stopped.
Somehow, even from just a common-sense viewpoint, this doesn’t look like something that should be illegal. But indeed he was violating two parts of the postal laws. He was delivering first class mail—which is a federal monopoly—and he was leaving his mail in mailboxes.
By law, all “mail receiving devices” belong to the Postal Service and can be used only by it. That is, the mailbox which you buy and install on your property belongs to the U.S. government. (Note: it belongs to the government in the sense that your silverware belongs to the burglar who just took it at the point of a gun. Property can be owned only by those who acquire it honestly and voluntarily though production or trade.)
The penalty this teenager faced was a $500 fine and six months in jail for each count of the potential indictment, i.e. for each letter delivered. This is from the same government that thinks nothing of freeing murderers and rapists after “rehabilitating” them for a year or two. But then the government has always taken “crimes” against itself far more seriously than actual crimes against the people.
With the government in charge, the bureaucratized service keeps getting worse. It takes longer and longer for mail to arrive. And the Post Office long ago abolished twice-a-day delivery and is working on ending door-to-door delivery as well. Most big offices have the mail dumped in a pile at their front door; postal workers used to sort and distribute it. Then there’s the “cluster box” system for residential areas, where rows of boxes are placed far away from homes in a place convenient for the postal workers.
Typical of government, as the service declines, the price of stamps keeps going up, from 22¢ to 25¢ most recently. That makes a total increase of 675% since 1958, more than twice as fast as the general price level, which has gone up 300% (thanks to another government monopoly, the Federal Reserve). In addition, the Post Office gets billions a year in direct subsidies.
Where does all this money go? Mostly to the bureaucrats themselves. The postal system spends 84% of its budget on its 746,000 employees, 100,000 of them added during the austere years of the Reagan administration.
The average postal employee—who is an unskilled worker by private sector standards—earns $30,000 a year in wages and perks. And a GAO study found that this same average worker takes 50 days of paid leave a year (vacation, “sick” time, holidays, etc.). That’s 10 weeks of repose, although considering the pace of work in the Post Office, it may be hard to tell the difference.
There’s an old story about a UPS delivery man meeting a friend who worked for the Post Office during Christmas time. “How are you doing?” asked the government employee. “Just great!” said his UPS friend. “Business has never been better. Volume is way up. How about you?”
“Terrible,” said the postal employee. “There’s too much mail!”
In a government enterprise, customers are at best a nuisance. If the Post Office could get away with it, it would prefer no mail and no customers. That’s why, during lunch hour, only one window is open, and why the P.O. takes every opportunity to cut service. The recent abolition of Saturday window hours is only the latest example.
There is only one answer to the Post Office problem, and UPS and Federal Express show us the way: privatization, i.e. repealing the laws which give the Post Office a monopoly. However, real privatization means letting the free market decide, not contracting out to politically connected businesses as advocated by the President’s Commission on Privatization. Such a process leaves the bureaucrats in charge and is an invitation to political corruption.
We cannot know what kinds of communications services free-market entrepreneurs would provide for us. We can only know that they would be far more efficient than the present apparatus, that they would make use of new electronic and computer technology, and that they would be pro-consumer.
The Post Office charges that this would not work. It claims, for example, that rates would go up. Coming from the biggest champion of higher rates, I find this unconvincing. But certainly the rate structure would change. There would be a whole array of alternatives available, varying in price according to distance, speed, handling, etc.
The Post Office says that we would no longer be able to mail a letter from Washington, D.C., to Hawaii for 25¢. But why should it cost the same amount to send a letter across town as across the continent? This is typical government pricing: one high price for everything, which a bureaucracy can administer much more easily than a rational rate schedule. It rightly costs more to ship freight or make a phone call over long distances, and postal service should be no different.
The Post Office also says that rural delivery would stop. That’s nonsense, of course, but people in sparsely populated areas might have to pay more for some services, just as city dwellers have to pay more for fresh vegetables and firewood. The free market would reduce the difference to transportation costs, however, thanks to arbitrage and entrepreneurship, and there would be constant competition to make transportation cheaper. And UPS delivers 25% of its packages to rural routes and makes a profit at it.
The Post Office also claims that only the U.S. government can secure our privacy and guarantee access to the mails. But this is Newspeak. Government is the great invader of our privacy, mail and otherwise. In the 1970s, the CIA routinely opened mail. And the same thing is happening now to opponents of the administration’s foreign policy. And the Post Office claims the right to search the mails for “contraband,” a practice that would never occur to UPS or Federal Express.
As to freedom of access to the mail service, the Post Office frequently claims the right to decide what can be mailed. It’s banned novels, refused to deliver National Health Federation booklets because they conflicted with the “weight of scientific opinion,” and censored advertising.
Mail, says the Post Office, is a “natural monopoly.” But there is no such thing, only the natural tendency of people who want to live off the taxpayers through monopoly to claim there is. If any monopoly were actually natural, it wouldn’t need a government gun to enforce it.
The Post Office is a socialist organization. It is inconsistent with the American vision of liberty. It’s time to end socialized mail delivery and allow free-market competition.

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Abolish the SEC

Official academics call the Securities and Exchange Commission (SEC) a savior of capitalism. In fact, it is an enemy of the free market.

The SEC was set up in 1934 by Franklin D. Roosevelt to regulate securities markets. There was almost no public opposition. Official opinion of all sorts agreed with the first New Dealer, Herbert Hoover, that falling stock prices were caused by “sinister, systematic bear raids . . . , vicious pools . . . pounding down” stock prices so traders could “profit from the losses of other people.”
Similar sentiments prevail today among the politicians who advocate more power for the SEC. But rather than giving the SEC more money and power, Congress should abolish it. Here are just some of the reasons why.

One: The SEC Erects Barriers to Competition.

Thanks to the SEC, raising capital through the issuance of new stock is an extremely time-consuming, highly technical, and costly process. It requires a mountain of paperwork, the filing and refiling of documents, and very expensive CPAs and lawyers. Many small companies—which don’t have the resources and knowledge to negotiate this bureaucratic maze—can’t raise new money and grow. Large, established firms do just fine, however, and they like the lessened competition.

Two: The SEC is Anti-Shareholder.

The SEC defends the interests of entrenched, old-line corporate management over the true owners of companies, the shareholders, by hampering corporate “raiders.” Raiders seek to make a profit by buying out a firm’s owners, firing top-heavy and inefficient management, and installing people who will make the company more profitable.

The SEC requires “raiders” to file public reports after they acquire five percent or more of a company’s stock, in accordance with the Williams Act, which was devised by the SEC and corporate lobbyists. These filings are designed to tip off management about possible tender offers, thus giving them plenty of time to scheme a takeover defense to secure their jobs at shareholder expense.
Three: The SEC Turns Innocent People into Criminals.

Last year’s biggest scapegoat was the insider trader, who committed the “crime” of buying or selling stock on the basis of non-public information. But it is the SEC’s own complicated and time-consuming takeover rules that make inside information valuable in the first place. Without the filing requirements, “raiders” would quietly acquire shares voluntarily in the market from people who want to sell. Without SEC-mandated delays, there would be no “inside information” to capitalize on.

There is nothing wrong with using inside information. In fact, insider trading is economically beneficial in the sense that it causes security prices to adjust faster to critical new information. Insider trading is a victimless crime. There is no moral requirement to tell the owner of the property you’re buying that you know how to make a profit out of it. No stockholder was ever forced to sell shares against his will.
Four: The SEC Protects the Brokerage Industry Cartel.

Since the SEC restricts entry into the brokerage industry, it is the enforcer of a highly profitable cartel. With brokerage houses as its constituents, it’s not surprising to see the SEC campaigning against the recent efforts to repeal the Glass-Steagall Act, which restricts competition.
Five: The SEC Profits From Its Blunders.

As Ludwig von Mises observed; government regulation generates unforeseen problems, which excuses more regulation, which causes still more unforeseen problems. The SEC has a history of growing and profiting from crises. It has, for example, capitalized on the 1986 insider-trading scandal by getting a bigger budget and more staff, the dream of every D.C. bureaucrat. In fact, its budget is 62% higher today than in 1982. And today, it’s busy using the Crash of 1987 to justify more regulation, especially of the competitors of Wall Street in the futures and options markets.
Six: The SEC Favors Price Controls.

The SEC is pushing for the power to shut down the financial markets in times of “emergency.” SEC chairman David Ruder also endorses the idea of daily trading limits on stocks, which would halt trading once a stock price hits its SEC-set maximum daily limit. It is very damaging—even in government-caused emergencies—to prevent willing sellers and buyers from making a trade.
Seven: The SEC Invades Privacy.

Acting on behalf of the SEC, the U.S. government pressured Switzerland, England, Japan, and others, to swap information on the stock market dealings of private citizens.

For all these reasons the SEC should be abolished and the laws backing it repealed. This would dramatically simplify selling new stock and thus be a boost for new businesses, competition, and the free market. And industry self-regulation and normal police agencies will protect against fraud.
The securities industry is not problem-free, of course, and never will be. But it will function better without the Big Problem, Washington, D.C., in charge of it.

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Privatize the Roads

If the government demanded the sacrifice of 50,000 citizens each year, an outraged public would revolt. If a religious sect planned to immolate 523,335 in the next decade, it would be toppled. If a Manson-type cult murdered 790 people to celebrate Memorial Day, the press would demand the greatest manhunt in this country’s history.

If we learned of a disease that killed 2,077 children under the age of five each year, or a nursing home that allowed 7,346 elderly people to die each year, no stone would be left unturned to combat the enemy.

If private enterprise were responsible for this butchery, a cataclysmic reaction would ensue: Congressmen would appoint investigative panels, the Justice Department would seek out antitrust violations, corporate executives would be jailed, and there would be growing cries for nationalization.
In fact, the government is indeed responsible for a real-life slaughter of these exact proportions: the toll taken on our nation’s roadways. Whether at the local, state, regional, or national level, it is government that builds, runs, manages, administers, repairs, and plans the road network.

While many blame alcohol and excessive speed as causes of highway accidents, they ignore the more fundamental reason of government ownership and control. Ignoring this is like blaming a snafu in a restaurant on the fact that a poorly maintained oven went out, or that the waiter fell on a greasy floor with a loaded tray. Of course the proximate causes of customer dissatisfaction are uncooked meat or food in their laps. Yet how can these factors be blamed by themselves, while the role of the restaurant’s management is ignored?

It is the restaurant manager’s job to insure that the ovens are performing satisfactorily, and that the floors are properly maintained. If he fails, the blame rests on his shoulders, not on the ovens or floors. We hold responsible for the murder, the finger on the trigger, not the bullet. If unsafe conditions prevail in a private, multi-story parking lot, or in a shopping mall, the entrepreneur in question is held accountable.

Why then is there apathy to the continuing atrocity of government roads? Why is there no public outcry? Probably because most people do not see any alternative to government ownership. Just as no one “opposes” or “protests” a volcano, which is believed to be beyond the control of man, there are few who oppose governmental roadway control. But it is my contention that to virtually eliminate highway deaths we need to put ownership and control of roads into private hands, and let the entire service be guided by the free market.

The notion of a fully private market in roads, streets, and highways is likely to be rejected out of hand because people feel that government road management is inevitable. Governments have always owned roads, so any other system is unthinkable.

But there is nothing unique about transportation: the economic principles we accept as a matter of course in practically every other arena of human experience apply here too. As always, the advantage enjoyed by the market is the automatic reward and penalty system imposed by profits and losses. When customers are pleased, they continue patronizing those merchants who have served them well. Businesses that succeed in satisfying consumers earn a profit, while entrepreneurs who fail to satisfy them are soon driven to bankruptcy.

The market process governs the production of the bulk of our consumer goods and capital equipment. This same process that brings us fountain pens, frisbees, and fishsticks can also bring us roads.
Why would a company or individual want to build a road or buy an already existing one? For the same reason as in any other business: to earn a profit. The necessary funds would be raised in a similar manner: by floating and issuance of stock, by borrowing, or from past savings of the owner. The risks would be the same: attracting customers and prospering, or failing to do so and going bankrupt. Just as private enterprise rarely gives burgers away for free, use of road space would require payment. A road enterprise would face virtually all of the same problems shared by other businesses: attracting a labor force, subcontracting, keeping customers satisfied, meeting the price of competitors, innovating, borrowing money, expanding, etc.

The road entrepreneur would have to try to contain congestion, reduce traffic accidents, and plan and design new facilities in coordination with already existing highways, as well as in conjunction with the plans of others for new expansion. He would also take over the jobs the government does now like (sometimes) filling potholes, installing road signs and guard rails, maintaining lane markings, repairing traffic signals, and so on for the myriad of “road furniture” that keeps traffic moving.
Under the present system, a road manager has nothing to lose if an accident happens and several people are killed on a government turnpike. A civil servant draws his annual salary regardless of the accident toll piled up on his domain. But if he were a private owner and he had to compete with other road owners, sovereign consumers who care about safety would not patronize his road, and thus the owner would lose money and go bankrupt.

A common objection to private roads is the specter of having to halt every few feet and toss a coin into a tollbox. This simply would not occur on the market. Imagine acommercial golf course operating on a similar procedure: forcing the golfers to wait in line at every hole, or demanding payment every time they took a swipe at the ball. Such an enterprise would very rapidly lose customers and go broke. Private roads would create economies of scale, where it would pay entrepreneurs to buy the toll collections rights from the millions of holders, in order to rationalize the system into one in which fewer toll gates blocked the roads.

One scenario would follow the shopping center model: a single owner or builder would buy a section of territory and build roads and houses. Just as many shopping center builders maintain control over parking lots, malls, and other common areas, the entrepreneur would continue the operation of common areas such as the roads, sidewalks, etc. Tolls for residents, guests, and deliveries might be pegged at low levels, or be entirely lacking, as in modern shopping centers.

Consider a road on which traffic must continuously be moving. If it’s owned by one person or company, who either built it or bought the rights of passage from the previous owners, it would be foolish for him to install dozens of toll-gates per mile. There now exists inexpensive electrical devices which can register the car or truck passing by any fixed point on the road. As the vehicle passes the check point, an electrical impulse can be transmitted to a computer that can produce one monthly bill for all roads use, and even mail it out automatically. Road payments could be facilitated in as unobtrusive a manner as utility bills are now.

It is impossible to predict the exact shape of an industry that does not exist. I am in no position to set up the blueprint for a future private market in transport. I cannot tell how many road owners there will be, what kind of rules of the road they will set up, how much it will cost per mile, etc. I can say that a competitive market process would lead highway entrepreneurs to seek newer and better ways of providing services to their customers.

Now we come back to the question of safety. Government road managers are doing a terrible job. Consider what transpires when safety is questioned in other forms of transportation to see a corollary. When an airline experiences an accident, passengers think twice before flying that airline and typically it loses customers. Airlines with excellent safety records have discovered that the public is aware of safety and make choices based upon it. An “exploding Pinto” wouldn’t stay on a private road long, nor would reckless drivers and potholes.

I don’t know all the details of how a future free-market road system might work. But I do know that “there has to be a better way.” And it is the free market.

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Government vs. Natural Resources

It is a common myth that the near-disappearance of the whale and of various species of fish was caused by “capitalist greed,” which, in a short-sighted grab for profits, despoiled the natural resources—the geese that laid the golden eggs—from which those profits used to flow. Hence, the call for government to step in and either seize the ownership of these resources, or at least to regulate strictly their use and development.
It is private enterprise, however, not government, that we can rely on to take the long and not the short view. For example, if a private investor or business firm owns a natural resource, say, a forest, it knows that every tree cut down and sold for short-run profits will have to be balanced by a decline in the capital value of the forest remaining. Every firm, then, must balance short-run returns as against the loss of capital assets. Therefore, private owners have every economic incentive to be far-sighted, to replant trees for every tree cut down, to increase the productivity and to maintain the resource, etc. It is precisely government—or firms allowed to rent but not own government—whose every incentive is to be short-run. Since government bureaucrats control but do not own the resource “owned” by government, they have no incentive to maximize or even consider the long-run value of the resource. Their every incentive is to loot the resource as quickly as possible.
And so it should not be surprising that every instance of “overuse” and destruction of a natural resource has been caused, not by private property rights in natural resources, but by government intervention or crippling of such a market. Destruction of the grass cover in the West in the late 19th-century was caused by the Federal government’s failure to recognize homesteading of land in large-enough technological units to be feasible. The 160-acre legal maximum for private homesteading imposed during the Civil War made sense for the wet agriculture of the East; but it made no sense in the dry area of the West, where no farm of less than one or two thousand acres was feasible. As a result, grassland and cattle ranches became land owned by the federal government but used by or leased to private firms. The private firms had no incentive to develop the land resource, since it could be invaded by other firms or could revert to the government. In fact, their incentive was to use up the land resource quickly to destroy the grass cover, because they were prevented from owning it.
Water, rivers, parts of oceans, have been in far worse shape than land, since private individuals and firms have been almost universally prevented from owning parts of that water, from owning schools of fish, etc. In short, since homesteading private property rights has generally not been permitted in parts of the ocean, the oceans and other water resources have remained in a primitive state, much as land had been in the days before private property in land was permitted and recognized. Then, land was only in a hunting-and-gathering stage, where people were permitted to own or transform the land itself. Only private ownership in the land itself can permit the emergence of agriculture—the transformation and cultivation of the land itself—bringing about an enormous growth in productivity and increase in everyone’s standard of living.
The world has accepted agriculture, and the marvelous fruits of such ownership and cultivation. It is high time to expand the dominion of man to one of the last frontiers on earth: aquaculture. Already, private property rights are being developed in water and ocean resources, and we are just beginning to glimpse the wonders in store. More and more, in oceans and rivers, fish are being “farmed” instead of relying on random supply by nature. Whereas only three percent of all seafood produced in the United States in 1975 came from fish-farms, this proportion tripled to twelve percent by 1984.
In Buhl, Idaho, the Clear Springs Trout Company, a fish-farm, has become the single largest trout producer in the world, expanding its trout production from 10 million pounds per year in 1981 to 14 million pounds this year. Furthermore, Clear Springs is not content to follow nature blindly; as all farmers try to do, it improves on nature by breeding better and more productive trout. Thus, two years ago Clear Springs trout converted two pounds of food into one pound of edible flesh; now Clear Springs scientists have developed trout that will convert only 1.3 pounds of food into one pound of flesh. And Clear Springs researchers are in the process of developing that long-desired paradise for consumers: a boneless trout.
At this point, indeed, all rainbow trout sold commercially in the United States are produced in farms, as well as 40% of the nation’s oysters, and 95% of commercial catfish.
Aquaculture, the wave of the future, is already here to stay, not only in fishery but also in such activities as off-shore oil drilling and the mining of manganese nodules on the ocean floor. What aquaculture needs above all is the expansion of private property rights and ownership to all useful parts of the oceans and other water resources. Fortunately, the Reagan Administration rejected the Law of the Sea Treaty, which would have permanently subjected the world’s ocean resources to ownership and control by a world-government body under the aegis of the United Nations. With that threat over, it is high time to seize the opportunity to allow the expansion of private property in one of its last frontiers.

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Airport Congestion—A Case of Market Failure?

The press touted it as yet another chapter in the unending success story of “government-business cooperation.” The traditional tale is that a glaring problem arises, caused by the unchecked and selfish actions of capitalist greed. And that then a wise and far-sighted government agency, seeing deeply and having only the public interest at heart, steps in and corrects the failure, its sage regulations gently but firmly bending private actions to the common good.
The latest chapter began in the summer of 1984 when it came to light that the public was suffering under a 73% increase in the number of delayed flights compared to the previous year. To the Federal Aviation Agency (FAA) and other agencies of government, the villain of the piece was clear. Its own imposed quotas on the number of flights at the nation’s airports had been lifted at the beginning of the year, and, in response to this deregulation, the short-sighted airlines, each pursuing its own profits, over-scheduled their flights in the highly remunerative peak hours of the day. The congestion and delays occurred at these hours, largely at the biggest and most used airports. The FAA soon made it clear that it was prepared to impose detailed, minute-by-minute maximum limits on takeoffs and landings at each airport, and threatened to do so if the airlines themselves did not come up with an acceptable plan. Under this bludgeoning, the airlines came up with a “voluntary” plan that was duly approved at the end of October, a plan that imposed maximum quotas of flights at the peak hours. Government-business cooperation had supposedly triumphed once more.
The real saga, however, is considerably less cheering. From the beginning of the airline industry until 1978, the Civil Aeronautics Board (CAB) imposed a coerced cartelization on the industry, parcelling out routes to favored airlines, thus severely limiting competition, and keeping fares far over the free-market price. Largely due to the efforts of CAB chairman and economist Alfred E. Kahn, the Airline Deregulation Act was passed in 1978, deregulating routes, flights, and prices, and abolishing the CAB at the end of 1984.
What has really happened is that the FAA, previously limited to safety regulation and the nationalization of air traffic control services, has since then moved in to take up the torch of cartelization lost by the CAB. When President Reagan fired the air-controllers during the PATCO strike in 1981, a little-heralded consequence was that the FAA stepped in to impose coerced maxima of flights at the various airports, all in the name of rationing scarce air-control services. An end of the air-controller crisis led the FAA to remove the controls in early 1984, but now here they are, more than back again, as a result of the congestion.
Furthermore, the quotas are now in force at the six top airports. Leading the parade in calling for the controls was Eastern Airlines, whose services using Kennedy and LaGuardia airports have, in recent years, been outcompeted by scrappy new People’s Express, whose operations have vaulted Newark Airport from a virtual ghost airport to one of the top six (along with LaGuardia, Kennedy, Denver, Atlanta, and O’Hare at Chicago). In imposing the “voluntary” quotas, it does not seem accidental that the peak hour flights at Newark Airport were drastically reduced (from 100 to 68), while the LaGuardia and Kennedy peak hour flights were actually increased.
But, in any case, was the peak hour congestion a case of market failure? Whenever economists see a shortage, they are trained to look immediately for the maximum price control below the free-market. And sure enough, this is what has happened. We must realize that all commercial airports in this country are government-owned and operated—all by local governments except Dulles and National, owned by the federal government. And governments are not interested, as is private enterprise, in rational pricing, that is, in a pricing that achieves the greatest profits. Other political considerations invariably take over. And so every airport charges fees for its “slots” (landing and takeoff spots on its runways) far below the market-clearing price that would be achieved under private ownership. Hence congestion occurs at valuable peak hours, with private corporate jets taking up space from which they would obviously be out-competed by the large commercial airliners. The only genuine solution to airport congestion is to impose market-clearing pricing, with far higher slot fees at peak than at non-peak hours. And this would accomplish the task while encouraging rather than crippling competition by the compulsory rating of underpriced slots imposed by the FAA. But such rational pricing will only be achieved when airports are privatized—taken out of the inefficient and political control of government.
There is also another important area to be privatized. Air control services are a compulsory monopoly of the federal government, under the aegis of the FAA. Even though the FAA promised to be back to pre-strike air control capacity by 1983, it still employs 19% fewer air controllers than before the strike, all trying to handle 6% greater traffic.
Once again, the genuine solution is to privatize air-traffic control. There is no real reason why pilots, aircraft companies, and all other aspects of the airline industry can be private, but that somehow air control must always remain a nationalized service. Upon the privatization of air control, it will be possible to send the FAA to join the CAB in the forgotten scrap heap of history.

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PRIVATIZATION VS. GOVERNMENT OWNERSHIP

Privatization

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.

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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.

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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.

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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.

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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.

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