Tag Archives: forex trading

The Living Reality of Military-Economic Fascism

“The business of buying weapons that takes place in the Pentagon is a corrupt business — ethically and morally corrupt from top to bottom. The process is dominated by advocacy, with few, if any, checks and balances. Most people in power like this system of doing business and do not want it changed.” – Colonel James G. Burton (1993, 232)

In countries such as the United States, whose economies are commonly, though inaccurately, described as “capitalist” or “free-market,” war and preparation for war systematically corrupt both parties to the state-private transactions by which the government obtains the bulk of its military goods and services.

On one side, business interests seek to bend the state’s decisions in their favor by corrupting official decision-makers with outright and de facto bribes. The former include cash, gifts in kind, loans, entertainment, transportation, lodging, prostitutes’ services, inside information about personal investment opportunities, overly generous speaking fees, and promises of future employment or “consulting” patronage for officials or their family members, whereas the latter include campaign contributions (sometimes legal, sometimes illegal), sponsorship of political fund-raising events, and donations to charities or other causes favored by the relevant government officials.

Reports of this sort of corruption appear from time to time in the press under the rubric of “military scandal” (see, for example, Biddle 1985, Wines 1989, Hinds 1992, “National Briefing” 2003, Pasztor and Karp 2004, Colarusso 2004, Calbreath and Kammer 2005, Wood 2005, Babcock 2006, Ross 2006, and “Defense Contractor Guilty in Bribe Case” 2006). On the other, much more important side, the state corrupts business people by effectively turning them into co-conspirators in and beneficiaries of its most fundamental activity — plundering the general public.

Participants in the military-industrial-congressional complex (MICC) are routinely blamed for “mismanagement,” not infrequently they are accused of “waste, fraud, and abuse,” and from time to time a few of them are indicted for criminal offenses (Higgs 1988, 1990, xx-xxiii, 2004; Fitzgerald 1989; Kovacic 1990a, 1990b).

All of these unsavory actions, however, are typically viewed as aberrations — misfeasances to be rectified or malfeasances to be punished while retaining the basic system of state-private cooperation in the production of military goods and services (for an explicit example of the “aberration” claim, see Fitzgerald 1989, 197–98). I maintain, in contrast, that these offenses and even more serious ones are not simply unfortunate blemishes on a basically sound arrangement, but superficial expressions of a thoroughgoing, intrinsic rottenness in the entire setup.

It is regrettable in any event for people to suffer under the weight of a state and its military apparatus, but the present arrangement — a system of military-economic fascism as instantiated in the United States by the MICC — is worse than full-fledged military-economic socialism. In the latter, the people are oppressed, because they are taxed, conscripted, and regimented, but they are not co-opted and corrupted by joining forces with their rapacious rulers; a clear line separates them from the predators on the “dark side.”

With military-economic fascism, however, the line becomes blurred, and a substantial number of people actively hop back and forth across it: advisory committees, such as the Defense Science Board and the Defense Policy Board and university administrators meet regularly with Pentagon officials (see Borger 2003 for a report of an especially remarkable meeting), and the revolving door spins furiously — according to a September 2002 report, “[t]hirty-two major Bush appointees are former executives, consultants, or major shareholders of top weapons contractors” (Ciarrocca 2002, 2; see also Hamburger 2003, Doward 2003, Stubbing 1986, 90, 96, and Kotz 1988, 230), and a much greater number cross the line at lower levels.

Moreover, military-economic fascism, by empowering and enriching wealthy, intelligent, and influential members of the public, removes them from the ranks of potential opponents and resisters of the state and thereby helps to perpetuate the state’s existence and its intrinsic class exploitation of people outside the state. Thus, military-economic fascism simultaneously strengthens the state and weakens civil society, even as it creates the illusion of a vibrant private sector patriotically engaged in supplying goods and services to the heroic military establishment (the Boeing Company’s slickly produced television ads, among others, splendidly illustrate this propagandistically encouraged illusion).

Garden-variety Military-Economic Corruption of Government Officials

We need not dwell long on the logic of garden-variety military-economic corruption. As pots of honey attract flies, so pots of money attract thieves and con men. No organization has more money at its disposal than the US government, which attracts thieves and con men at least in full proportion to its control of wealth. Unscrupulous private parties who desire to gain a slice of the government’s booty converge on the morally dismal swamp known as Washington, DC, and take whatever actions they expect will divert a portion of the loot into their own hands. Anyone who expects honor among thieves will be sorely disappointed by the details of these sordid activities.

Although headlines alone cannot convey the resplendently lurid details, they can suggest the varieties of putrid sloughs that drain into the swamp:

  • Audit Cites Pentagon Contractors [for widespread abuse of overhead charges]
  • Ex-Unisys Official Admits Paying Bribes to Get Pentagon Contracts
  • Top Republican on a House Panel Is Charged With Accepting Bribes
  • Ex-Pentagon Officials Sentenced [for taking monetary bribes and accepting prostitutes’ services from contractors]
  • Northrop Papers Indicate Coverup: Documents from ’80s Show Accounting Irregularities Were Hidden from Pentagon
  • Revolving Door Leads to Jail: Former Acquisition Official Convicted of Steering Business to Boeing for Personal Gain
  • Contractor “Knew How to Grease the Wheels”: ADCS Founder Spent Years Cultivating Political Contacts
  • Graft Lurks within Pentagon’s “Black Budget”: Top-secret Items Escape Oversight
  • Contractor Pleads Guilty to Corruption: Probe Extends Beyond Bribes to Congressman
  • From Cash to Yachts: Congressman’s Bribe Menu; Court Documents Show Randall “Duke” Cunningham Set Bribery Rates
  • Defense Contractor Guilty in Bribe Case

(Sources for these headlines appear, respectively, in the citations given in the third paragraph of this article.) Anyone who cares to accumulate all such news articles may look forward to full employment for the rest of his life.

Yet, notwithstanding the many culprits who are caught in the act, one must realistically assume that a far greater number get away scot-free. As Ernest Fitzgerald, an extraordinarily knowledgeable authority with extensive personal experience, has observed, the entire system of military procurement is pervaded by dishonesty: “Government officials, from the majestic office of the president to the lowest, sleaziest procurement office, lie routinely and with impunity in defense of the system,” and “the combination of loose procurement rules and government acquiescence in rip-offs leaves many a crook untouched” (1989, 312, 290).

Among the instructive cases now making their way through the justice system are several related to recently convicted congressman Randall “Duke” Cunningham, a war hero and longtime titan of the MICC who currently resides in a federal penitentiary. Chief among the persons under continuing investigation by the Federal Bureau of Investigation is Brent Wilkes, a DC high-flyer who is alleged to have been involved tangentially in events leading to the recent sacking of former congressman and Director of Central Intelligence Porter Goss. According to a May 7, 2006, report in the New York Daily News, ongoing FBI and CIA investigations of Kyle (Dusty) Foggo, formerly the third-ranking official at the Central Intelligence Agency (CIA), who resigned in May 2006 amid a swirl of allegations,

have focused on the Watergate poker parties thrown by defense contractor Brent Wilkes, a high-school buddy of Foggo’s, that were attended by disgraced former Rep. Randy (Duke) Cunningham and other lawmakers.

Foggo has claimed he went to the parties “just for poker” amid allegations that Wilkes, a top GOP fund-raiser and a member of the $100,000 “Pioneers” of Bush’s 2004 reelection campaign, provided prostitutes, limos and hotel suites to Cunningham.

Cunningham is serving an eight-year sentence after pleading to taking $2.4 million in bribes to steer defense contracts to cronies.

Wilkes hosted regular parties for 15 years at the Watergate and Westin Grand Hotels for lawmakers and lobbyists. Intelligence sources said Goss has denied attending the parties as CIA director, but that left open whether he may have attended as a Republican congressman from Florida who was head of the House Intelligence Committee. (Sisk 2006)

In your mind, multiply this squalid little scenario by one thousand, and you will begin to gain a vision of what goes on in the MICC’s higher reaches. Evidently, the daily routine there is not all wailing and gnashing of teeth over how to defend the country against Osama bin Laden and his horde of murderous maniacs — our country’s leaders require frequent periods of rest and recreation. If this sort of fun and games at taxpayer expense is your idea of responsible government, then you ought to answer “yes” when the pollster calls to ask whether you favor an increase in the defense budget. Our government is clearly at work — at work making chumps out of its loyal subjects and laughing at these rubes all the way to the bank.

Legal Corruption of Government Officials

The truly big bucks, of course, need not be compromised in the least by this sweaty species of fraud and workaday corruption (Kovacic 1990a,89–90, 103 n197; 1990b, 118, 130 n94–101). Just as someone who kills one person is a murderer, whereas someone who kills a million persons is a statesman, so the government officials who steer hundreds of billions of dollars, perhaps without violating any law or regulation, to the Star Wars contractors and the producers of other big-ticket weapon systems account for the bulk of the swag laundered through the Department of Defense and the Department of Homeland Security. (Lest the latter organization be overlooked, see the enormously revealing account by Bennett 2006.)

I am not saying that this huge component of the MICC is squeaky clean — far from it — but only that the corruption in this area, in dollar terms, falls mainly under the heading of legal theft, or at least in the gray area (Stubbing 1986, 407). As a Lockheed employee once wrote to Fitzgerald, “the government doesn’t really need this stuff. It’s just the best way to get rich quick. If they really needed all these nuclear bombs and killer satellites, they wouldn’t run this place the way they do” (qtd. in Fitzgerald 1989, 313; see also Meyer 2002). I personally recall Fitzgerald’s saying to me twenty years ago at Lafayette College, “A defense contract is just a license to steal.”

Absence of Proper Accounting Invites Theft

Indeed, Fitzgerald appeared as a witness at Senator Chuck Grassley’s September 1998 hearings titled “License to Steal: Administrative Oversight of Financial Control Failures at the Department of Defense.” At those hearings, Grassley released two new audit reports prepared by the General Accounting Office and another report prepared by his staff in cooperation with the Air Force Office of Financial Management. According to Grassley’s September 21, 1998, press release, “These reports consistently show that sloppy accounting procedures and ineffective or nonexistent internal controls leave DoD’s accounts vulnerable to theft and abuse. Failure by the DoD to exercise proper accounting procedures has resulted in fraud and mismanagement of the taxpayers’ money.”

Although this sort of complaint has become an annual ritual, dutifully reported in the press, the Pentagon has never managed to put its accounts into a form that can even be audited. Like Dick Cheney, who chose not to fight in the Vietnam War, the military brass seems to have had other priorities, even though for more than a decade the Defense Department has invariably stood in violation of the 1994 federal statute that requires every government department to make a financial audit (Higgs 2005, 55–61).

Testifying before a congressional committee on August 3, 2006, Thomas F. Gimble, the department’s acting inspector general, emphasized “financial management problems that are long standing, pervasive, and deeply rooted in virtually all operations.”

Expanding on this general observation with specific reference to the fiscal year 2005 agency-wide principal financial statements, he stated: “We issued a disclaimer of opinion for the statements because numerous deficiencies continue to exist related to the quality of data, adequacy of reporting systems, and reliability of internal controls.”

Of the nine organizational components “required by the Office of Management and Budget (OMB) to prepare and obtain an audit opinion on their FY 2005 financial statements,” only one received an unqualified opinion and one a qualified opinion. “All the others, including the agency-wide financial statements, received a disclaimer of opinion, as they have every year in the past…. The weaknesses that affect the auditability of the financial statements also impact other DoD programs and operations and contribute to waste, mismanagement, and inefficient use of DoD resources. These weaknesses affect the safeguarding of assets and proper use of funds and impair the prevention and identification of fraud, waste, and abuse” (US Department of Defense, Office of the Inspector General 2006, 1–2, emphasis added).

In Iraq since the US invasion in 2003, billions of dollars have simply disappeared without leaving a trace (“Audit: US Lost Track” 2005, Krane 2006). Surely they did not all evaporate in the hot desert sun. The accounts at Homeland Security are in equally horrible condition (Bennett 2006, 110–11).

No one knows how much money or specific property is missing from the military and homeland-security departments or where the missing assets have gone. If a public corporation kept its accounts this atrociously, the Securities and Exchange Commission would shut it down overnight. Government officials, however, need not worry about obedience to the laws they make to assure their credulous subjects that everything is hunky-dory inside the walls. When they are of a mind, they simply flout those laws with impunity.

PAC Contributions to Politicians and Their Parties Are Bribes

Political action committees (PACs) evolved and eventually obtained legal validation as vehicles for making lawful bribes to candidates for federal offices and to their political parties. Candidates now count on them for a large share of their campaign funds, and everyone over eleven years of age with an IQ above 70 understands that these contributions are made with an understanding that they will elicit a quid pro quo from the recipients who win the elections.

Military-economic interests have not been timid about forming PACs and transferring huge sums of money through them to the candidates. According to the Center for Responsive Politics, “defense” PACs transferred more than $70 million to candidates and parties in the election cycles from 1990 to 2006. Individuals and soft-money contributors (before soft-money contributions were outlawed after the 2002 elections) in the “defense” sector added more than $37 million, bringing the total to nearly $108 million (the figures are available here).

No one knows how much was added by illegal and hence unrecorded contributions made by military interests, but the addition might well have been substantial, if we may judge by the many accounts of individual instances of such contributions that have been brought to light over the years.

Figure 1 shows the amounts transferred during the past nine election cycles.

Figure 1. Contributions by “Defense” Interests in Federal Elections, 1990–2006

pac-military_0.png

Source: Center for Responsive Politics Note: Soft money contributions (defined as those that do not explicitly urge voters to cast their ballots for specific candidates) after the 2002 elections were banned by the Bipartisan Campaign Finance Reform Act.

One may deny, of course, that PAC contributions constitute a form of corruption, inasmuch as they are legal within the statutorily specified limits, but such a denial would elevate form over substance. Both the givers and the receivers understand these payments in exactly the same way that they understand illegal forms of bribery, even though they never admit this understanding in public — political decorum must be served, if only to protect the children.

How Government Corrupts Business

A brief review of the history of US military contracting helps to clarify my claim that military-economic transactions tend to corrupt business. The most important historical fact is that before 1940, except during wartime, such dealings amounted to very little. The United States had only a tiny standing army and no standing munitions industry worthy of the name. When wars occurred, the government supplemented the products of its own arsenals and navy yards with goods and services purchased from private contractors, but most such items were off-the-shelf civilian goods, such as boots, clothing, food, and transportation services.

To be sure, plenty of occasions arose for garden-variety corruption in these dealings — bribes, kickbacks, provision of shoddy goods, and so forth (Brandes 1997) – but such malfeasances were usually one-shot or fleeting transgressions, because the demobilizations that followed the conclusion of each war removed the opportunity for such corruption to become institutionalized to a significant degree in law, persistent organizations, or ongoing practice.

Like gaudy fireworks, these sporadic outbursts of corruption flared brightly and then turned to dead cinders. No substantial peacetime contracting existed to fuel enduring corruption of the military’s private suppliers, and much of the contracting that did take place occurred within the constraints of rigid solicitations and sealed-bid offers, which made cozy deals between a military buyer and a private seller difficult to arrange. At late as fiscal year 1940, the War Department made 87 percent of its purchases through advertising and invitations to bid (Higgs 2006a, 39).

All this changed abruptly and forever in 1940, and the situation that existed during the so-called defense period of 1940–41, before the United States became a declared belligerent in World War II, and the manner in which it was resolved had an enduring effect in shaping the contours of the MICC and hence in establishing its characteristic corruption of business.

The Roosevelt administration, desperate to build up the nation’s capacity for war after the breathtaking German triumphs in the spring of 1940, made an abrupt about-face, abandoning its relentless flagellation of businessmen and investors and instead courting their favor as prime movers in the buildup of the munitions industries. Most businessmen, however, having been anathematized and legislatively pummeled for the past six years, were reluctant to enter into such deals, for a variety of reasons, chief among them being their fear and distrust of the federal government (Higgs 2006a, 36–38).

To placate the leery businessmen by shifting the risks from them onto the taxpayers, the government adopted several important changes in its procurement laws and regulations. These included negotiated cost-plus-fixed-fee contracts, instead of contracts arrived at within the solicitation-and-sealed-bid system; various forms of tax breaks; government loan guarantees; direct government funding of plants, equipment, and materials; and provision of advance and progress payments, sparing the contractors the need to obtain and pay interest on bank loans.

All of these arrangements, with greater or lesser variations in their details from time to time, became permanent features of the MICC (US Senate, Committee on Armed Services 1985, 35, 42, 553–67).

Even more important, as the new system operated on a vast scale during World War II, the dealings between the military purchasers and the private suppliers took on a fundamentally new style. As described by Wilberton Smith, the official historian of the Army’s economic mobilization during the war:

The relationship between the government and its contractors was gradually transformed from an “arm’s length” relationship between two more or less equal parties in a business transaction into an undefined but intimate relationship — partly business, partly fiduciary, and partly unilateral — in which the financial, contractual, statutory, and other instruments and assumptions of economic activity were reshaped to meet the ultimate requirements of victory in war. Under the new conditions, contracts ceased to be completely binding; fixed prices in contracts often became only tentative and provisional prices; excessive profits received by contractors were recoverable by the government; and potential losses resulting from many causes — including errors, poor judgments, and performance failures on the part of contractors — were averted by modification and amendment of contracts, with or without legal “consideration,” whenever required by the exigencies of the war effort. (1959, 312, emphasis added)

Although Smith was describing the system as it came to operate during World War II, almost everything he said fits the postwar MICC as well (Higgs 2006a, 31–33), especially his depiction of the buyer-seller dealings as constituting “an undefined but intimate relationship” and his recognition that “contracts ceased to be completely binding.”

Thus, the institutional changes made in 1940–41 and the wartime operation of the military-industrial complex in the context of these new rules put permanently in place the essential features of the modern procurement system, which has repeatedly demonstrated its imperviousness to reform for the past sixty years — it was too good a deal to give up even after the demise of the USSR and the end of the Cold War, and with breathtaking chutzpah, the system’s kingpins parlayed the box-cutter attacks of 9/11 into an excuse to pour hundreds of billions of additional dollars into purchases of Cold War weaponry (Sapolsky and Gholz 2001, Isenberg and Eland 2002, Higgs 2004, Makinson 2004).

Under the old, pre-1940 system, a private business rarely had anything to gain by wining and dining military buyers or congressmen. Unless a firm made the lowest-priced sealed-bid offer to supply a carefully specified good, it would not get the contract. The military buyer knew what he needed, and he had a tightly limited budget with which to get it. After 1940, however, the newly established “intimate relationship” opened up a whole new world for wheeling and dealing on both sides of the deal — often it was difficult to say whether the government agent was shaking down the businessman or the businessman was bribing the government agent.

In fact, until the military purchasing agency certified a company as qualified, the firm could not make a valid offer, even in the context of competitive bidding. In the post-1940 era, only a small fraction of all contracts emerged from formally advertised, sealed-bid competition, and most contracts were negotiated without any kind of price competition (Higgs 2006a, 39; Stubbing 1986, 226, 411).

Deals came to turn not on price, but on technical and scientific capabilities, size, experience, and established reputation as a military supplier — vaguer attributes that are easier to fudge for one’s friends. From time to time, deals also turned on the perceived need to keep a big firm from going under. For example, Fen Hampson observes that in the early 1970s, “The bidding [for production of the C-4 (Trident I) missile] was not opened to other companies because Lockheed was encountering financial difficulties at the time and desperately needed the business” (1989, 92).

Indeed, scholars have identified an extensive pattern of rotating major contracts that has been dubbed a “follow-on imperative” or a “bailout imperative,” a virtual guarantee against bankruptcy, regardless of mismanagement or other corporate ineptitude (Nieburg 1966, 201, 269; Kurth 1973, 142–44; Kaufman 1972, 289; Dumas 1977, 458; Gansler 1980, 49, 172, 227; Stubbing 1986, 185–89, 200–04).

Subcontracts could also be used to prop up failing firms, and in nearly every large-scale project they served as the principal means of spreading the political patronage across many congressional districts (Kotz 1988, 128–29; Mayer 1990, 218–31). In truth, deals — especially the many important changes introduced into them after their initial formulation (“contract nourishment”), permitting contractors to “buy in now, get well later” (Stubbing 1986, 179–84) — came to turn in substantial part on “who you know.” In Richard Stubbing’s words, “Often it is raw politics, not military considerations, which ultimately determines the winner” (1986, 165).

All the successful major prime contractorssuch as Lockheed Martin (see Cummings 2007), General Dynamics (see Franklin 1986), Rockwell (see Kotz 1988), Bechtel (see McCartney 1988), and Halliburton (see Briody 2004), for exampledemonstrated beyond any doubt that in the MICC, cultivating friends in high places yields a high rate of return. Indeed, without such friends, a firm may be hard pressed to survive in this sector at all.

The tight budget constraints of the pre-1940 peacetime periods became vastly looser as trillions of dollars poured out of the congressional appropriations process during the endless national emergency of the Cold War and its sequel, the so-called war on terror. As Nick Kotz observed, “Now that the stakes in profits and jobs were far higher than those of any government program in history, dividing the spoils ensured that the game of politics would be played on a grand scale” (1988, 50). (Of course, the game of politics in reality, as distinct from the high-school-civics idealization, is essentially the game of corruption.) In fiscal year 2007, for example, the Department of Defense anticipates outlays of approximately $90 billion for procurement, $162 billion for operations and maintenance, $72 billion for research, development, testing, and evaluation, and $8 billion for military construction — components that sum to $332 billion (US Department of Defense, Office of the Under Secretary of Defense 2006, 15). Nearly all of this loot will end up in the pockets of private contractors; military personnel costs are separate from these accounts.

With plenty of money to go around, all that a would-be contractor needs is an old buddy in the upper reaches of a military bureaucracy or a friend on the House military appropriations subcommittee or in the Senate. (Nowadays, more than ever before, a single member of Congress can create magnificent gifts for his friends by making “earmarks,” furtive amendments to an appropriations bill that everyone understands to be nothing but an individual legislator’s pound of flesh taken out of the taxpayer’s unfortunate corpus.)

If one does not have such a friend in high places, one can acquire him (or her, as the infamous Darleen Druyun illustrates [see Colarusso 2004]) by ponying up the various forms of bribes to which many Pentagon officials and members of Congress have shown themselves to be highly receptive. After all, it’s not as if the bureaucrat or the member of Congress is giving away his own money.

To keep this gravy train on the track, contractors and their trade associations, as well as the armed forces themselves, devote great efforts to increasing the amount of money Congress appropriates in total for “defense,” and now also for “homeland security.” Their campaign contributions and other favors go predominantly to the incumbent barons — congressional leaders and committee chairmen — and to the “hawks” who’ve never met a defense budget big enough to please them. As Fitzgerald notes, “In Washington you can get away with anything as long as you have the high moguls of Congress as accessories before and after the fact” (1989, 91).

Furthermore, as Kotz observes, “[t]here is a multiplier effect as the different military services, members of Congress, presidential administrations, and defense industries trade support for each other’s projects” (1989, 235). In other words, the defense budget is not simply the biggest logroll in Congress (Stubbing 1986, 98), but the biggest logroll in Washington, DC. Fen Hampson remarks: “bureaucratic and political interests approach weapons acquisition and defense budget issues as non-zero-sum games; that is, as games where there are rewards and payoffs to all parties from cooperation or collusion” (1989, 282). Only the taxpayers lose, but their interests don’t count: they are not “players” in this game, but victims.

To give the public a seeming interest in the whole wretched racket, the contractors also spend substantial amounts of money cultivating the public’s yearning to have the military dish out death and destruction to designated human quarry around the world — commies, gooks, ragheads, Islamo-fascists, narco-terrorists, and so forth — who are said to threaten the precious “American way of life.”

For example, Rockwell, a military contractor whose massive secret contributions helped to reelect Richard Nixon in 1972 (Kotz 1988, 103–04, Fitzgerald 1989, 84), once mounted “a secret grass-roots campaign code-named Operation Common Sense” that included “a massive letter-writing campaign … solicitation of support from national organizations … and production of films and advertisements as well as prepared articles, columns, and editorials that willing editors could print in newspapers and magazines” (Kotz 1988, 134–35) — all the news that’s fit to print, so to speak.

Much money goes into producing glorification of the armed forces, and reports of those forces’ stupidities and brutalities in exotic climes are dismissed as nothing but the fabrications of leftists and appeasers or, if they cannot plausibly be denied, alleged to be nothing more than the isolated misbehavior of a few “bad apples” (Higgs 2006b).

Lest the armed forces themselves prove insufficiently imaginative in conceiving of new and even more expensive projects for the lucky suppliers to carry out, the contractors hire battalions of mad geniuses to design the superweapons of the future and regiments of former generals and admirals to market these magnificent creations to their old friends and subordinates currently holding down desks at the Pentagon.

Thus, as General James P. Mullins, former commander of the Air Force Logistics Command, has written, “the prime contractors are where the babies really come from.” He explains: “[T]he contractor has already often determined what it wants to produce before the formal acquisition process begins…. The contractor validates the design through the process of marketing it to one of the services. If successful, the contractor gets a contract. Thus, to a substantial degree, the weapon capabilities devised by contractors create military requirements” (1986, 91; see also Stubbing 1986, 174).

In sum, the military-supply firms exemplify a fundamentally corrupt type of organization. Their income comes to them only after it has first been extorted from the taxpayers at gunpoint — hence their compensation amounts to receiving stolen property. They are hardly unwitting or unwilling recipients, however, because they are not drafted to do what they do. No wallflowers at this dance of death, they eagerly devote strenuous efforts to encouraging government officials to wring ever greater amounts from the taxpayers and to distribute the loot in ways that enrich the contractors, their suppliers, and their employees.

These efforts include both the licit and the illicit measures I have described, spanning the full range from making a legal campaign contribution to providing prostitutes to serve the congressman or the Pentagon bigwig after he has become bored with playing poker in the contractor’s suite at a plush DC hotel.

(Note well: such “entertainment” expenses are likely to be accounted “allowable costs” by the defense contractor who bears them, and with only routine audacity he may add to them an “overhead” charge — the entire sum to be reimbursed ultimately by the taxpayers. [In general, “overhead proves to be a huge moneymaker for defense firms” (Stubbing 1986, 205).] Kotz [1988, 137], describes Rockwell’s billing for entertainment, public relations, and lobbying in connection with its contract to build the B-1 bomber. Fitzgerald [1989, 197, 198–99] describes similar charges by General Dynamics, as well as boarding expenses for an executive’s dog, and by Pratt and Whitney, including $7,085 for hors d’oeuvres at a Palm Beach golf resort and $2,735 for strolling musicians at another bash. Sometimes the contractors billed the government twice for the same outrageous expenses.)

Can Anything Be Done?

The short answer is “probably not.” The MICC is deeply entrenched in the US political economy, which itself has been moving steadily closer to complete economic fascism for more than a century (Higgs 1987, 2007). Decades of studies, investigations, blue ribbon commission reports, congressional hearings and staff studies, and news media exposés detailing its workings from A to Z have scarcely dented it (Higgs 2004). For the most part, the official scrutiny is just for show, whereas the unofficial scrutiny is easily dismissed as the work of outsiders who don’t know what they are talking about, not to mention that they are “America haters.”

Official evaluations, at their frankest, conclude that “[p]ast mistakes — whether in the procurement of a weapon system or in the employment of forces during a crisis — do not receive the critical review that would prevent them from recurring…. The lessons go unlearned, and the mistakes are repeated” (US Senate, Committee on Armed Services 1985, 8). Such evaluations, though seemingly forthright and penetrating, strike me as far-fetched. Of course, people sometimes makes mistakes, but if people with the power to change an arrangement refrain from doing so for decades on end, the most reasonable conclusion is that they prefer things as they are — that is, as a rule, there are no long-lasting “failed policies,” properly speaking.

To apply here what I wrote twelve years ago in regard to several other kinds of policies: “Government policies succeed in doing exactly what they are supposed to do: channeling resources bilked from the general public to politically organized and influential interest groups” (Higgs 1995; see also Kotz 1989, 242–45).

Therefore, one must conclude that the MICC serves its intended purposes well, however much its chronic crimes and intrinsic corruption sully its self-proclaimed nobility. What you and I call corruption is, after all, precisely what the military-economic movers and shakers call the good life.

Ultimately, the most significant factor is that the post-World War II US foreign policy of global hegemony and recurrent military intervention places a strong floor beneath the MICC and serves as an all-purpose excuse for its many malfeasances (Eland 2004, Johnson 2004).

As Ludwig von Mises observed, “The root of the evil is not the construction of new, more dreadful weapons. It is the spirit of conquest…. The main thing is to discard the ideology that generates war” (1966, 832; see also Higgs and Close 2007). Until the scope of the US government’s geopolitical ambitions and hence the scale of its military activities are drastically reduced, not much opportunity will exist for making its system of military-economic fascism less rapacious and corrupt.

Forex stock trading

Politicians Make the Promises —You and Your Children Pay for Them

Democratic governments, almost all of them, are normally run by career pols. They have ravenous appetites for wealth. They almost always have big plans to expand the government, which means they always want more money. (I remember Hillary Clinton’s recent book, What Happened. Here she spoke about her plans for a presidency and said she likes “to think big”.) Most popular governments, faced with money problems, will usually pretend they’re only after the wealth of the rich, but it is the great middle class that is bloodied.

Why?

In a typical democracy the first order of business of the pols is get elected. The second order is get re-elected.

Winning elections usually means making huge, sometimes insane, promises about creating or expanding programs. Here is an example.

Back in 1972, for example, the president, Republican Richard Nixon, and a Congress controlled by the opposition party, the Democrats, were running for re-election. They started trying to outdo each other over which party could out-promise the other in raising Social Security benefits since the elderly were, and remain, a key voting block. Many elderly were delighted to receive higher benefit checks just before they went to the voting booths. They were so happy that they re-elected both the president and most Democrats in Congress. (The president and Congress started arguing over who deserved more credit for the benefit hikes.)

The problem was later the bills came due. And payroll taxes funding Social Security programs started soaring. Most pols didn’t care. They won elections. I wrote about this here in “The Disastrous Deal of 1972.”

Given the risk of new “Disastrous Deals, the only way to minimize risk of financial ruin under these political conditions is to amass as much wealth as possible. The risk that government will be spending and taxing much more in the near future — despite what Trump and others say — is simply too high to ignore. It is business as usual for most pols to make promises on the hustings, then forget to mention the bills that come due after the elections.

For instance, in its a glowing endorsement of Hillary Clinton for president, even The New York Times wrote this of her and her many promises of new or expanded government programs: “Mrs. Clinton and her team have produced detailed proposals on crime, policing and race relations, debt-free college and small-business incentives, climate change and affordable broadband. Most of these proposals would benefit from further elaboration on how to pay for them, beyond taxing the wealthiest Americans.”

Indeed.

There was no way she could have ever kept all her promises by just taxing the rich. In almost any modern welfare democracy there are never enough rich people to pay all the bills of an ever-expanding state. Mind you, The Times said these things in endorsing Clinton, who lost in part because many Americans didn’t trust her promises of bigger government with only the rich paying more.

Political promises usually are paid for in one way or another either directly through taxes or through money printing and inflation. The political promises of 1972 led to red ink in the Social Security system. A few years later Social Security taxes had to be raised. And benefits, sometimes in subtle ways, were cut. One example: At one time, you never paid taxes on Social Security payments. Why? By the time you get Social Social Security, you typically pay into the system for decades. Paying taxes on your payments constitutes double taxation.

Inflation is a subtler, but no less destructive tax that affects almost everyone. But luckily for governments most people don‘t understand how it happens so they rarely become angry with our spendthrift political ruling classes and mainstream media that enables them. Too much spending leads to persistent cycles of more and more taxes until they can become almost unbearable and you get the stagflation of the 1970s. Too late, the average person understands what inflation does as the value of the currency shockingly deteriorates.

The never ending government spending combined with taxation, along with a rampant “I‘ve got to have it now consumerism,” have ruined many a life. Many of these people now have broken financial lives.

Yet, at some point, they made good money — sometimes very good money — and often for decades. They were people we once envied.

Indeed, they ended up with nothing or just barely surviving in their last years, partly because when you make good money you usually are murdered on taxes. The Magnificent Ambersons end up in the same place as famous talk show second banana Ed McMahon — a man who likely made over $100 million in his storied career. They all ended up broke.

[This article is adapted from the book MoneySense: A Libertarian View of Money Management, now available at Amazon.]

Forex stock trading

Jim Bovard on the Terrible Politicization of America

We take a break from economics this week to welcome our old friend Jim Bovard for an unflinching look at the disastrous politicization of everything in America. The nasty fight over Brett Kavanaugh’s Supreme Court confirmation is only the latest example of a trend Rothbard identified decades ago, one that intensifies in the Trump era. Can we ever make politics matter less again? Can we ever stop filtering everything that happens through a noxious lens of race, sex, class, oppression, and intersectionality? And can we ever stop seeking to vanquish people politically?

Forex stock trading

3 Ways Marxists Get Capitalism Wrong

Only for a short while did the collapse of the Soviet Union silence Marxism. The fatal attraction of the thoughts of Karl Marx has returned — not because they are right but because they are wrong. Marxism serves to convert resentment into a social problem. Marxism is attractive because this ideology offers a huge arsenal of bile to fire up personal ire and to transform wrath into a political agenda. Here we shall address just a few of the wrong ideas of Marxism: the role of the capitalist and of inequality in a market economy and the function of profit and loss.

One: The Role of the Capitalist

The capitalist is the dark bogeyman of the market economy for the Marxists. He is the incarnation of all the evils of the capitalist system. Karl Marx fully misunderstood the role played by the capitalist. He identified the capitalist as someone who, like it was the case with his collaborator Friedrich Engels, owns a fortune and receives dividends and interest payments a rentier without an accomplishment of his own.

Biographers of the communist labor movement leader claim that Marx never saw a factory from within. Friedrich Engels, the financial sponsor of the Marxist project to conquer the world, was the heir of a fortune that his father had accumulated, and that the son would spend not only as a supporter of Karl Marx and the socialist movement but also as a playboy. Engels kept Karl Marx financially above water, particularly in the period after the socialist author had squandered the inheritance from his father and then of his wife.

Marx and his successors ignore that the capitalists pre-finance and preserve the capital structure of the economy. Capital formation requires, before everything else, abstention from using one’s full potential of consumption. The capitalists are those who do this by financing the production processes until the commodity reaches the consumer as the finished product ready for use.

In order to understand the role of the capitalists in the market economy, one must consider that each product runs through a lengthy production process until it reaches the consumers. This production process extends from the planning process onward through the different processing stages until the goods get to the warehouses and the exhibition and sales rooms up to the marketing to sell the goods. The receipts come only with the sale of the final good.

[RELATED: “What are Capitalists Good For?” by Antony P. Mueller]

By the time when the capitalist receives income from the consumer, time passes, and the entire process is subject to risk and uncertainty. The capitalists receive their reward because of waiting and of bearing risks and uncertainties while the wage earners receive their remuneration regularly long before the product reaches the final consumer.

Two: Inequality

The inequality of income and wealth in capitalism as an injustice is a constant point of accusation of the socialists. Marx misunderstood the essence of inequality in a market economy and put the capitalist property into the same category as wealth holds under feudalism. Marx did not recognize that the market process creates inequality because the failed projects vanish.

The socialists see those who have accumulated a fortune. They lament the inequality and ignore the fact that the capitalist process is an elimination process that roots out the losers of the game. In a competitive market economy, the expression ‘successful entrepreneur’ represents a pleonasm because businessmen who have no success are forced to leave and must make room for those entrepreneurs who better serve their customers.

The market competition works as a continuous process of correcting errors. Under market competition, only the successful entrepreneurs, those who master the challenges of satisfying the wants of the customers, will remain in business. Failed businesses must disappear. Bankruptcies make capitalism productive and are a sign that the markets function. In the reality of the market economy, the Marxist construct of a ‘capitalist class’ does not exist because each member must struggle for his membership every day and under free capitalism, both the entry and the exit doors are wide open.

The inequality in capitalism is the result of an elimination process. The failed entrepreneurs disappear from the market together with their projects and their associated firms.

Three: Profit and Loss

Socialists denounce capitalism as a “profit economy.” They indict making profits as the prime secular sin. By ignoring loss as the counterpart of profit, the socialist misjudge the role of profit in a market economy. Profit and loss, which arise from the difference between sales and costs, inform the business owner about the profitability of the company. If profit and loss disappear, the indicator of how well production serves the consumers vanishes with it. Without such signals, production takes place by happenstance and production may cost more than the goods are worth. Therefore, the production in socialist economies absorbs more material and human resources than the result will generate in utility. The lamented ‘exploitation’ of human labor, which socialist blame to exist in capitalism, is the systematic reality under socialism.

In the Soviet efforts to industrialize Russia, this negative-sum economy of socialism cost a colossal toll in human lives and labor. In the second decade of the new millennium, this exploration of the masses continuous in Cuba, North Korea, and Venezuela. Karl Marx accused the market economy of the anarchy of production, yet it is, in fact, the socialist economic system, which suffers from chaos.

Planners can provide schemes to produce consumers goods based on surveys of the conditions among the population. For example, planners could try to determine how many pairs of shoes the population needs. Yet the planners cannot achieve these goals because they have no reliable and detailed knowledge about what consumers want but also do not have the guidelines as to the costs that producing the shoes would absorb in relation to satisfy urgent consumer wants, such as clothing, housing, and food.

The Central Role of Ordinary People in the Market Economy

In a market economy, the solution to this problem lies not in the hands of one central planning authority, but all market participants cooperate in the assessment process and delegate the production of the goods to different entrepreneurial units according to the specific capabilities of these individual companies that the market competition reveals. Each individual consumer expresses his subjective valuation in the act of purchase. The prices and the sold quantities are signals and incentives.

In a capitalist market economy, the owners of the means of production are involved at each stage of the production process to solve the valuation problem. But in the end, the valuation of the consumers determines the value of the capital that is employed in the production process.

Forex stock trading

Median Household Wealth in America Is Going Nowhere

Today’s headline at The Wall Street Journal looks wonderful: “U.S. Household Net Worth Neared $107 Trillion in Second Quarter.” The journal is reporting on a new report from the Federal Reserve.

Unfortunately, the fact that the aggregate national net worth is up doesn’t tell us much about how Americans are faring right now. The “$107 trillion” number is just one big number of all assets added up minus debts. Marketwatch sums it up:

It’s important to stress that the Fed report doesn’t represent the experience for the typical household — this is a report about the aggregate. A separate Fed survey from 2016 showed a little more than half of all families owned stocks, while about two-thirds of households owned homes.

For the sizable portion of Americans who don’t own homes or a substantial amount of stocks, the report only illustrates, yet again, that asset price inflation mostly benefits people who already own a sizable amount of assets. If you’re a young person looking to build a portfolio — or a prospective first-time home buyer, you’re facing some very high prices right now.

Moreover, not even every homeowner benefits, since the data suggests that homeowners in stylish housing markets are the primary beneficiaries of home price inflation. Americans who own property in less fashionable cities in flyover country aren’t seeing nearly as much growth in their net worth.

This is familiar territory for those who have been monitoring the inflationary practices of central banks over the past decade. Asset price inflation is great for those who already own plenty of assets. Everyone else isn’t quite so lucky. In other words, the rich are getting richer faster. The non-rich are probably just holding steady.

How About All Households?

It looks like those with plenty of stocks and real estate are doing well. On the other hand, median household net worth in the United States doesn’t look so good.

According to a 2017 report by Edward Wolff, median net worth in the United States, at least as late as 2016, was nowhere near returning to where it had been before the last financial crisis. In fact, in 2016, median net worth was about where it had been in 1983, more than three decades ago1:

wolff1.PNG

In this report, Wolff was updating previous research from 2014 which showed that median wealth in 2013 was still at 1969 levels2:

networth_graph.png

Median wealth has increased significantly from 2013 to 2016, but as of 2016 it remained down 33 percent from where it was in 2007.

It’s possible that in 2018, a full decade after the financial crisis, net wealth has recovered to its previous peak. We don’t know. But, even if median wealth finally recovers around 2018, what will happen to median wealth in the next recession if stock prices and home prices decline?

As Wolff shows in his report, the majority of wealth held by Americans (56 percent) is in the form of a principal residence, financial securities, and pension funds — which are themselves largely composed of financial securities.

Will it also take a decade to recover from the next recession? Let’s hope not. But if the past decade is any indicator, we could be looking at 20 years of sideways movement in median wealth if something doesn’t change. Sure, overall aggregate wealth will continue to increase as the wealthy continue to see ongoing increases in the prices of their assets. Central-bank-fueled asset-price inflation will contribute to this.

Moreover, inflationary monetary policy directly benefits the politically well-connected at the expense of others, as recently explained by Thorsten Polleit:

There is an additional severe problem with central banks’ fiat money: It affects income and wealth distribution, and it does so in a non-merit-based, anti-free market way. To understand this, we have to consider that if and when the quantity of money increases in an economy, the prices of different goods will be affected at different points in time and to a different degree. In other words: A rise in the quantity of money changes — and necessarily so — peoples’ relative income and wealth position.

The early receivers of the new money will be the beneficiaries, for they can purchase goods at still unchanged prices with their fresh money. As the new money is passed from hand to hand, prices are rising. The late receivers are put at a disadvantage: They can purchase only goods at elevated prices with their new money. In other words: The early receivers of the new money get rich(er), the late receivers get poor(er). Needless to say, those who do not receive any of the new money will be worst off.

If we want to see better growth in wealth for ordinary people, it’s clear that the “stimulus” strategies of the past decade aren’t cutting it.

In fact, according to banking-industry researcher Karen Petrou, “Post-crisis [i.e., post-2008] monetary and regulatory policy had an unintended but nonetheless dramatic impact on the income and wealth divides.” In a recent interview with Petrou at Bloomberg, Petrou explains how new banking regulations have driven banks toward catering to the wealthy:

[C]apital requirements imposed after the banking crisis make it a lot more expensive for banks to do a startup small-business loan than go into wealth management. Startup loans are riskier than wealth management, of course, but the capital costs have become prohibitive, and banks don’t lose money on purpose. … it’s basically impossible for banks to make mortgage loans to anyone but wealthy customers.

This wouldn’t be the first time that government regulations benefit a small number of wealthy at the expense of everyone else. But combine this with inflationary monetary policy and we get at least a few insights into why median wealth in the United States is so sluggish.

  • 1. “Household Wealth Trends in the United States, 1962 to 2016: Has Middle Class Wealth Recovered?” by Edward N. Wolff. NBER Working Paper No. 24085, Issued in November 2017 (http://www.nber.org/papers/w24085)
  • 2. “Household Wealth Trends in the United States, 1962-2013: What Happened over the Great Recession?” by Edward N. Wolff. NBER Working Paper No. 20733, Issued in December 2014. (http://www.nber.org/papers/w20733)
Forex stock trading

Does Justice Qualify as An Economic Good?: A Böhm-Bawerkian Perspective

Volume 2, No. 1 (Spring 1999)

 

One of the most dependable ways of demonstrating the inconsistency of a general principle, theory, or proposition is to deduce some necessarily contradictory consequences from its major premises. In 1849, Gustave de Molinari confronted his fellows at the Journal Des Economistes—a bastion of free-market thought—with this Aristotelian truth using a disturbing alternative. Either the laissez-faire principle is firmly grounded and thus always applies to the production of every good, and hence must apply to the administration of justice, or this principle is partial and relative, which is to say, it is not a principle at all. Either it is logical and true that the production of security should remain subject, in the interest of the consumers, to the law of free competition, or “the principles on which economic science is based are invalid” (Molinari 1849, p. 280).

Molinari was challenging the premises on which the economic functionality of the state (including the public provision of adjudication) is based. He was addressing the legitimacy of a dichotomy which is still prevalent in economics today.

Indeed, this statement from the first modern libertarian (Hart 1981a,b; 1982; and Hoppe 1989) brilliantly underscores the tension that results from the coexistence of different analytical standards within the same logical framework. Moreover, this seemingly provocative proposition hides a more fundamental question: What is an economic good?

This elementary problem of where to draw the borders of the realm of economic analysis should elicit a common solution within the profession, but it does not. Hence, a restatement of the essential features of what constitutes an economic good may help to clarify some fundamental controversies such as whether markets can provide justice and security. Therefore, this article aims to show that these controversies are rooted in incompatible definitions of a good or, more accurately, of what makes a good an economic good.

What is at stake in the definition of an economic good goes well beyond semantics; it goes to the heart of crucial analytical and normative issues. On the one hand, the identification of what constitutes an economic good confers on economic propositions their epistemological status and thereafter marks out the field of application of the laws of economics. On the other hand, because of the beneficial normative implications of things identified with the very word good, more clearly delineating its meaning may help economists to avoid the temptation of overuse, especially when discussing policy prescriptions.

In 1881, Eugen von Böhm-Bawerk attempted an explicit and extensive answer to this question in his article “Whether Legal Rights and Relationships Are Economic Goods.”1 After presenting Böhm-Bawerk’s definition, it will be used as a tool for critically examining some of the core concepts of modern welfare economics, namely the concept of collective goods, external benefits, and transaction costs. Because these arguments are at the forefront of the discussions attempting to justify the public provision of collective services (including adjudication), a critical reappraisal allows a refutation of the orthodox position on a primary, i.e., conceptual, level. Then the position of Böhm-Bawerk will be recast to be more consistent with his underlying theory of goods.

When analyzing the nature of the state and of its agencies for the administration of justice, Böhm-Bawerk abandoned the ironclad standard of a good to which he had been led by his detailed inquiry. Nevertheless, it is argued here that, because he had so firmly established the subjectivist framework of methodological individualism upon which the analytical basis of Austrian market theory rests, his contribution to libertarian political economy generally deserves to be seen in a positive light.

Fundamentals of Economic Goods

This article focuses on the fundamentals of an economic good, drawing upon the 1881 formulation by Böhm-Bawerk. As a guide to the proper method in the quest to characterize an economic good, it might be considered that the purpose of a definition is to distinguish the things subsumed under a single concept from all other things in existence; the defining characteristic must be that essential characteristic which distinguishes them from everything else. Instead of taking for granted an a priori definition, this article begins, along with Böhm-Bawerk, with the broadest sense in which ordinary language warrants the use of the term “good.” By eliminating irrelevant or vague categories, an attempt is made to discover the discriminating “good-character” in the strictly economic sense.

In its broadest sense, the ordinary linguistic usage includes things that are, to be sure, “goods” but not means to an end. These consist mainly of goods which are desired, not as means to achieve ends, but as ends in themselves. Böhm-Bawerk (1962, p. 45) delivered an illustrative sample of this category: “Pre-eminent among such things are ethical, religious, and many other kinds of spiritual goods’, such as virtue, happiness, contentment, peace of mind, and the like.”2

Therefore, economic goods are, as a first distinctive feature, means. At the end of the nineteenth century, this statement was not controversial and writers on economics had seldom been divided as to this basic approach: goods are “those things, which serve human beings as the means or tools for the attainment of their personal well-being” (Böhm-Bawerk 1962, p. 39; emphasis in original).

This definition excludes certain things that enter into the causal chain of actions that lead to well-being but must, nevertheless, be barred from identification as an economic good. Those things are, for instance, the superabundant elements of the environment and the invariant qualities of the physical universe. The sun and the air, in most situations, are in unlimited abundance. Hence, they don’t have to be allocated to the satisfaction of ends since they are sufficiently abundant for all human requirements. They are consequently not means and are not employed as means to the fulfillment of ends. Though they are indispensable for life, they can not serve as the object of attention of any human actor. It is in this specific sense that they are not means but general conditions of human action and human welfare (Rothbard 1993, p. 4).3

While scarcity is commonly referred to as an essential feature of an economic good, this must not be understood purely in a physical sense, i.e., a fewer number of items compared to the quantity of others. Indeed, if all means are scarce by definition, it is specifically because they are limited with respect to the actual ends that they are capable of satisfying. If, for some reason, it happens that an end disappears, the good-character of all the things that served exclusively for its achievement disappears, too. Therefore, the characteristics of a good are not inherent in things and not a property of things, but merely a relationship between certain things and men, the things obviously ceasing to be goods with the disappearance of this relationship:

Whatever importance we accord to the corporeal objects of the world of economic goods derives from the importance we attach to the satisfaction of our wants and the attainment of our purposes. The natural unit of means-of-satisfaction will be the one that corresponds to the means of satisfying one unit of our wants or to the attainment of one unit of our purposes. . . . [whatever] we accord, in the form of an estimation of value, to the means to well-being is merely a reflection and a further development of the importance we accord to our wants and our purposes. Where there is no want and where, rightly or wrongly, there is no approved purpose, there is also no value. (Böhm-Bawerk 1962, pp. 74–75)

One good does not equal another good by its physical characteristics but by the equal serviceability of its units to the actor.4 Moreover,

[t]he only reason at all why men desire corporeal goods ties in the prospect they afford of renditions of service. And these renditions of service are capable of attaining economic independence aside from the goods themselves. Furthermore, this characteristic is not something that is a purely incidental and secondary matter. On the contrary, it is the renditions of service rather than the goods themselves which, as a matter of principle, constitute the primary basic units of our economic transactions. And it is only from the renditions of service that the goods, secondarily, derive their own significance. (Böhm-Bawerk 1962, p. 73; emphasis in original)5

Then, as a matter of consequence,

it is not goods, but it is in very truth the renditions of service which emanate from those goods which constitute the smallest independent units of our economy and that the former (i.e., goods) constitute only complexes of the latter, that goods are therefore of secondary category. (p. 77)6

One other necessary, although often neglected, prerequisite for being a good is that it must be known as a good. Someone must have the knowledge (or at least the presumption) of a causal connection between some characteristics of a thing and the satisfaction of a need (strictly “of an end”) for this thing to become a good.

Because knowledge is neither common nor floating in the air, it must be held by someone. Because there is no way to observe this knowledge directly, the ultimate proof for the social scientist that this relevant knowledge rests upon the demonstration of its usefulness through a course of action in which it is involved. Surprisingly, this crucial point has been judged secondary, according to a large part of academic literature.7

Also, and more importantly for this study, it is not enough that a thing be known as a potential good to deserve the name of economic good. It is necessary that the thing in question be disposable or available to us. We must possess the full power of disposal over it if we are really to command its power to satisfy our wants. Marvelous plots of land on Jupiter or Venus are for me not goods, nor are the things permanently threatened with destruction by natural disasters or spoliation by animals. Indeed, the possession of a good cannot simply be decreed: either you possess effective control over it or not.

At this stage in Böhm-Bawerk’s argument, his important point is that other human beings may struggle for control of a good. Thereafter, he raises the issue of the legitimacy of possession, and underscores that: “This legitimate possession is something apart from and in addition to physical possession. And yet, for the attainment of man’s economic ends, only physical possession, is economically speaking, indispensable” (p. 57; emphasis in original). Therefore, legal enforcement is only complementary to the effective power of disposal, and merely extends the latter in scope:

[If] legal rights carry economic significance only if and to the extent that they embody physical control, or at least imply a means of acquiring such control, then we are safe in setting down the following conclusions: in the first place: (1) Legitimate power of control, however distinct it may be from ordinary physical control (based on possession or backed by the owner’s power of brute strength), needs to be characterized by a quality akin to the power of physical control and indeed, needs, by its nature to be convertible into physical force; and in the second place: (2) This very characteristic (the absence of which reduces all law to impotence, to a desiccated form sans content) constitutes the essential quality which endows legitimate rights with economic value, or, indeed with economic character. (Böhm-Bawerk 1962, p. 58; emphasis in original)

So, if legal rights gain their economic significance from the fact that they embody effective control, their content cannot be conceived apart from or in addition to the existing thing concerned: “what is actually being acquired or conveyed is the things to which the right of ownership applies” (p. 82; emphasis in original).

At first glance, this may seem an obvious statement, but what we may call the “integration assertion” is an equally cogent refutation of all past and current attempts to introduce artificial cleavage such as those opposing productive and unproductive activities as different economic categories (Hirschleifer 1995). In some modern economic models, the activities focusing on the defense of private property are considered unproductive, whereas by enforcing control, they make (through control) a thing to be a genuine good in the first place: “Legal title to a thing, like the physical possession of it, does not develop outside of, and in addition to the good to which it applies, so as to become a second, independent good. It simply helps to make the thing a good in the first place” (p. 62).

Consequently, there is no separation at all between the enjoyment and the direct control of a thing. In the same way that Böhm-Bawerk integrates the physical thing and its economic qualities,8 he achieves the integration of the legal right to a thing and of the effective possession of the thing itself, which brings his point to the forefront of the modern debate on the issue of the institutional framework of economic activities.

Last but not least, a crucial point must be set down here, one that was rarely emphasized since the time it was expounded by Böhm-Bawerk:

[E]very good can be a good only for those definite economic subjects with respect to whom every one of the subjective economic “conditions precedent” [those explained above] is fulfilled. Only for those persons who feel or experience the particular want to the satisfaction of which a given thing is adapted; only those persons who are aware of the thing’s adaptability; only those who possess the knowledge or skill necessary to use the given thing; and, finally, only those persons who possess the actual power of disposal over the thing—only for these persons is the given thing a good. (p. 43; emphasis in original)

Strictly speaking, then, one should never speak simply of goods as such, but only of goods for Mr. X, Ms. Y or Z, or other specific economic subjects. As it is underscored by Böhm-Bawerk (1962, p. 43), the most important difference here that comes into play is the difference “between the individual economic subject’s point of view and the economic community’s point of view.”9

From a methodological point of view, the value judgment of the observer is irrelevant for identifying the economic preference of another individual. Only one particular individual can experience and recognize as goods the things that are suitable for the satisfaction of his wants. The singularity of the knowledge concerning the multitude of his ends, whether immediate or remote, can only be the object of speculation from the point of view of an external impartial observer, whether economist or not.10

Just as every good must be a good for something, so also it must be a good for somebody. This last circumstance markedly restricts the area of things that are genuine economic goods.11

Let’s summarize the essential features selected by Böhm-Bawerk: (1) There must be a human need, or more precisely and less restrictively, a purpose to be achieved. (2) The thing named a good must have useful properties, which is not to be understood in a strictly physical sense (“one man’s meat is another’s poison”). (3) The potential or actual possessor of the good must know these useful properties. (4) This actor must have the ability to utilize the thing: he may know the usefulness of a thing without being able to use it himself. According to Böhm-Bawerk, this condition was lacking in Carl Menger’s (1994, p. 52) enumeration. (5) Finally, this individual must possess effective power of disposal over the thing, with special emphasis on the fact that things belonging to someone else are for him not goods.

At first glance, the fourth point may be considered redundant with the fifth, if the concept of effective power of disposal is extended to knowledge, i.e., if the control is not only physical. Nevertheless, Böhm-Bawerk explicitly justifies this distinction in calling the former purely subjective, whereas the latter is considered to be “external.”12

After having disencumbered the category of goods from pleonastic and superfluous elements, Böhm-Bawerk provided more than a mere definition. Indeed, Böhm-Bawerk launched, through this definition, both an operational discriminating set of criteria and a genuine subjectivist framework for methodological individualism.

A Critical Reappraisal of Elements of Welfare Economics

In light of this clear-cut set of criteria, some of the most important analytical tools of modern welfare economics hardly appear sustainable. Two traditional concepts, in particular, because of their explicit use of positive connotations, will be subjected to detailed examination: “collective goods” and “positive externalities.” The concept of “transaction costs” which is central to the tradition of the law and economics movement and which plays a crucial role in claims for public intervention deserves, in this respect, special attention.

Collective Goods

Collective goods, which often become public goods due to the alleged necessity that they be produced by government, are considered to have special features that other goods do not possess. According to Cowen,

A public good involves two elements: non-excludability and non-rivalrous consumption. Non-excludability refers to the impossibility of preventing non-paying individuals from enjoying the benefits of a good or service. Non-rivalrous consumption refers to cases in which individuals’ ability to consume a good or service is not diminished by allowing additional individuals to consume it. (1988, pp. 3–4)

In light of Böhm-Bawerk’s definition, what is to be concluded concerning this traditional notion, beyond its surface of analytical sophistication? Given the explicit necessity of a good being a good for someone, the notion of a collective good would have appeared rather incongruous to Böhm-Bawerk. It was clear to him that a good cannot be a good per se, whether collective or not, if it is not deemed to be so by individuals: “[f]or the whole category we are dealing with concerns not the existence of goods but only the connection of goods with individuals, or it concerns the assignment of reasons for subjective good-qualities” (Böhm-Bawerk 1962, p. 134).

Furthermore, what could non-excludability mean except that the power of disposal over this collective good would be drastically reduced by the impossibility of excluding others from its enjoyment? Obviously enough, it cannot be a good at all if it is defined as uncontrollable.

Non-rivalrous consumption does not seem to be better suited for the characterization of a genuine economic good. Indeed, if its consumption is non-rivalrous, it simply means that it is in unlimited abundance, and, therefore, that it cannot be the object of any human action.13 Once again, it cannot be a good at all if it is defined as a general condition of human action.14

Unfortunately, even though an orthodox critical appraisal (Brubaker 1975) has attempted to overcome these difficulties, it never goes beyond superficial arguments, stressing that the production of public goods

results in “forced riding” by individuals who are coerced into expressing non-existent “demands” for collective goods. Or worse a “good” in fact may be a bad, in some views, from which it is economically not feasible for the individual to exclude himself, and for which compensation may be appropriate. (Brubaker 1975, p. 157)

These circumlocutions merely admit that the production of collective goods in no way results in goods production, but instead, in enforced redistribution, i.e., in common language, spoliation.

Positive Externalities or External Benefits

The supposed problem of external benefits is a major justification for governmental activities. Though not directly using the word, Böhm-Bawerk alluded to the concept. A non-controversial definition of external benefits explains the issue as follows: “an externality exists whenever an individual’s actions affect the utility of another individual. Positive externalities are those that benefit others” (Cowen 1988, p. 2), and its normative corollary: “Such benefits are not accounted for in the market and a subsidy is required to correct this defect” (Brownstein 1980, p. 93).

A candid Böhm-Bawerkian might raise two questions: Benefits for whom, and a subsidy to be taken from whom and required by which standard? According to Böhm-Bawerk’s approach, the only valid problem is the problem of control. Typically, contracts allow the internalization of externalities, since they aim at insuring control of a stream of services, as in the famous example of the beekeeper and the tree grower. For the beekeeper, the presence of the actions of his neighbor are, among many other things, a general condition of his own actions. If he wants to secure his production, making it less dependent upon the whims of his neighbor, he can buy the whole land, or set up a simple agreement with the neighbor to engage in production for several years. In short, he can buy more control over these things. This long-term contract is nothing more than a capital good in the sense identified by Böhm-Bawerk (1962, p. 100), i.e., a good of remote order.15 In this particular case, it is the contract that (through control) transforms a general condition of action for the beekeeper into the category of genuine economic good.

Nevertheless, another famous line of attack has been advanced by Paul Samuelson, according to whom the existence of externalities annihilates the realm of the private sphere: “What are we left with? . . . With a knife-edge pole of the private good case, and with all the rest of the world in the public good domain by virtue of involving some ‘consumption externality’” (Samuelson 1969).

The difficulty with this position is that it proves too much: every action leads to externalities. Indeed, we are all benefactors of others’ actions, present and past.

For instance, Rothbard (1993, p. 888) asks, “which one of us would earn anything like our present real income were it not for external benefits that we derive from the actions of others?”

As a matter of fact, the external benefits argument is double-sided: On the one hand, the recipient is charged with free riding. He doesn’t pay for the benefits he gains from the actions of others. The recipient is denounced as a “free rider,” a man who wickedly enjoys the “unearned increment” of the productive actions of others. This line of reasoning is a perfect illustration of self-contradictory concepts. Insofar as these words make sense, in order for somebody to give something, he must own the thing, i.e., according to Böhm-Bawerk, have the power of control over it. But externalities are precisely the non-controlled results of one’s action. So, in no way can anyone make a gift of them.16 Furthermore, how can there be such a thing as “compulsory benefaction?”

On the other hand, the benefactor is suspected of underproducing the external benefits that are worth so much to others. Here again, some slight self-criticism can be found, but it is not based on conceptual grounds. Kenneth Goldin (1977, pp. 53–71), for instance, advocates as a source of misconception an unconvincing lack of imagination: “for many years, exclusion from the services of lighthouses and bees was asserted to be impossible, not because it actually was, but because economists lacked the imagination or empirical studies to show otherwise.”

Along with Böhm-Bawerk, I would say that they rather lacked a single cogent and unambiguous analytic standard of what constitutes an economic good.

Transaction Costs

The concept of transaction costs is sometimes used in conjunction with the common externality argument in order to argue that neighbors may not coordinate spontaneously because of “high transaction costs.” It is a concept which encompasses many different features: “transaction costs are defined as obstacles to market exchanges that interfere with or discourage the process of transacting. In the presence of transaction costs, externalities are often considered a source of market failure” (Cowen 1988, pp. 2–3). Their reduction then becomes an economic imperative. Indeed, “In the absence of transaction costs, externalities are not a source of market failures, because the relevant parties can bargain their way to the optimum” (p. 2).

Let us assume, for the sake of the argument, that transaction costs are barriers to exchange. But, even so, in what sense is an exchange an end in itself? In order for an exchange to take place, each party must consider the thing owned by the other as a “better economic good” than his own. Therefore, the knowledge of the existence and the availability of a good is an imperative condition for this thing to be a good. How could there be frustrated potential exchangers if they are not even aware of the existence of a psychic profit opportunity? Moreover, in what sense can a transaction be satisfactory if it is not voluntary? For whom and by what standard?

We are drawn back to Böhm-Bawerk’s emphasis on the difference between the individual point of view and the economic-community point of view.

Regarding the issue of forgone opportunities, this static view of the market underestimates (if not ignores) the central part played by the entrepreneur within the real world. It is precisely because people disagree about what constitutes the most profitable use of resources that entrepreneurs make profits and become actors in this discovery process called the market.17 Finally, with collective goods, external benefits, and transaction costs, we have eliminated from the category of goods—groups of things which are as extensive in number as they are ambiguous in their nature.

The Administration of Justice: Böhm-Bawerk’s Position Revisited The Orthodox Positions According to the Economic Analysis of Justice

Instead of reviewing seriatim all the different orthodox positions advocating the status quo, i.e., for the public monopoly of justice, the previous discussion suggests that Böhm-Bawerk’s definition can be used as a powerful lever that allows for a radical refutation of these approaches, from a conceptual standpoint. As a matter of fact, most of these positions are encompassed in general theories of the state, which seldom address the administration of justice per se. These arguments range from, on the one hand, a mere repetition of principle18 and arguments from intimidation19 to, on the other hand, highly sophisticated mathematical models arguing the instability or the non-viability of anarchy (Hirschleifer 1995).

However, all other authors resort systematically to either the transaction-costs argument, the external-benefits argument, or the collective-good argument in order to sustain their claim for the public administration of justice.20 Consequently, these theories can be and actually are refuted, on the mere basis of conceptual inconsistency: they are unsound because they resort to irrelevant economic categories.

But curiously enough, for the purpose of his study, Böhm-Bawerk did not draw such definitive conclusions from the illuminating standard he established. After exposing in the most apodictic way the severely restricted conditions under which a thing can deserve the name good, he decreed the government an economic good. He did this using arguments that were in contradiction to results he had obtained from logical inquiry. Despite this aberration, after a brief presentation of Böhm-Bawerk’s insights on the institutions of justice, a reappraisal of the subjectivist framework he set down will be offered, from a libertarian perspective.

The Self-contradiction of Böhm-Bawerk

After he had made a thorough examination into the nature of candidates for the status of a good, acknowledging the central role of power of disposal, Böhm-Bawerk addressed the question that is also at the heart of our present discussion:

Only in the rarest instances would the physical strength of any one individual suffice to preserve the physical control that is indispensable for the preservation of his economic requirements against the attacks of other individuals and especially against the wishes of the community. In this connection, therefore, the power of disposal and control which relies on individual physical strength, must seek outside assistance. . . . And that assistance is effected through the administration of justice. That administration proceeds along the following lines: The first step consists in a ruling by the court as to whether or not the necessary presuppositions are in force, by virtue of which the instrumentalities of the community may be invoked: then the enforcement agencies of the state lend their physical support to the community-member entitled thereto, in order to place him or maintain him in the position of factual physical control of the thing in question.

Hence a legal right or the legalized power of disposal over a thing is nothing more nor less than a necessary re-enforcement supplied by a politically organized state of the physical power which is needed by the owner of a good as a condition of its economic utilization. (Böhm-Bawerk 1962, pp. 58–59)

Thus, the economic function of legal rights and of their enforcement closely parallels that of physical possession of a good. Both identify a species of the power of disposal and, in combination with each other, they constitute the complementary constituents of complete economic control.

Note that Böhm-Bawerk gives a functional definition of the “agencies of state” which leaves space for various institutional arrangements. But then, he anticipates the modern professional opinion:

Under the economic conditions prevailing in our society, the desired complete and assured power of disposal over goods is, so to speak, divided between two agencies. The first is the strength of the individual, the second is the power of the state as represented by its agencies for the administration of justice. The natural power of disposal possessed by any individual economizing subject would be inadequate. For it would probably be at a disadvantage against the unlawful attacks of other individuals. (Ibid.: emphasis added)

In fact, he further describes the government as a public-good phenomenon, anticipating the free-rider argument, considering that “only a very tiny fraction of the total advantage derived from the state’s institutions impresses itself upon any individual as a direct and positive rendition of service” (ibid., p. 132).

What of the criteria of being known as a good, being under actual control, and mostly, being perceived mostly as a subjective good? These traits are not to be found in the government provision of justice; can his own theory of what constitutes a good be used to establish that these traits subsist in such government provided “goods?” The compelling evidence is that of a typical ad hoc argument. Although it is a realistic, non-holistic theory of the state, inner contradiction is obvious and inescapable.

Böhm-Bawerk as an Inadvertent Contributor to Libertarian Theory?

Apart from Böhm-Bawerk’s surprising backward leap, it seems unfair to classify him among those who make the usual claims for the provision of public justice by the state. First, while he suggests that the government should play a role in social organization, his description of the state is still highly minimalist. As a matter of fact, he describes the state as a functional complex of resources aiming exclusively at achieving the protection of property rights, i.e., the administration of justice.

Second, Böhm-Bawerk’s (1962, p. 132) theory and definition of economic goods sets up, incidentally, an entire subjectivist framework of methodological individualism. In the same way that, in the theory of rights, “voluntariness and purposiveness,” are the generic features that characterize all action (Philon 1979, pp. 1171–96), Böhm-Bawerk’s five conditions identify the generic features that characterize all subjects of economic analysis. Further, they do so in a visionary way, expounding in the context of legal-rights analysis and proposing a unified system of thought that integrates the economic, legal, and institutional aspects of economic analysis. In retrospect, this system is astonishingly similar, from the analytic point of view, to the one which gives libertarianism its outstanding analytical power.

From the perspective of history of thought, this singularity should qualify him as an early contributor (although an inadvertent one) to the political economy of libertarianism.

In conclusion, Böhm-Bawerk unerringly centered his analysis on some of the most basic problems in the theory of economic goods. The prerequisites he formulated and drew together constitute a dazzling achievement and a cornerstone for Austrian economic analysis, mostly because they provided a case of universal principle and not of degree. Building upon Menger’s foundation, he established an epistemological guideline, that may be called, retaining the analogy with the theory of rights (Philon 1979), a “principle of generic consistency.” From a methodological standpoint, the essential implication is that the knowledge that something is a good must be demonstrated: not only must preferences be demonstrated, but the very character of something being a good must itself be demonstrated.

Although this sounds moderate and reasonable, it appears that most mainstream policy prescriptions (like public provision of collective services), when subjected to the Böhm-Bawerkian criteria, do not withstand analysis. Hence, the alternative that Gustave de Molinari stressed in 1849 is still relevant today, and the challenge is the same: either economists must approach their discipline as a coherent, integrated whole, so that such basic concepts as what constitutes a good may be readily understood, or it will grow increasingly fragmented, broken into pieces of unintegrated analysis.

  • 1. Böhm-Bawerk set down, in a fully systematic manner, what is today known as the subjectivist approach of economic analysis.
  • 2. It is sometimes said that any theory grounded on a logical separation between means and ends is unrealistic because in practice the two are often amalgamated or fused into one. As demonstrated by Rothbard (1993, p. 66), the only sense to the charge concerns those cases where certain objects or certain courses of action are an end in themselves, as well as means to other ends. Nevertheless, this does not preclude the fact that the separation of ends and means into different categories is a logical prerequisite in the analysis of human action in general and of economizing man in particular.
  • 3. See Böhm-Bawerk: “[It] becomes possible to differentiate corporeal goods from nonuseful material things on the ground that goods are such advantageous manifestations of matter that they permit man to guide the natural forces inherent in them into channels advantageous to him. (1962, p. 67: emphasis in original)
  • 4. The term unit is not used in a metric sense here.
  • 5. This is what Lancaster will rediscover a few years later.
  • 6. From this point, Böhm-Bawerk draws the illuminating explanation of the concept of “wearing-out” or exhaustion of goods.
  • 7. If this statement needs further proof, see, for example, the literature endorsing the perfect knowledge assumption.
  • 8. Böhm-Bawerk writes: “Once [it] is established, it becomes impossible to maintain, with economic seriousness, that the quality of coldness can be termed a good which exists in addition to or more especially instead of the cold water, except by indulgence in a pleonasm or a totally impermissible metaphor.” (1962, p. 118; emphasis in original)
  • 9. For an exhaustive discussion of this topic, see Böhm-Bawerk (1962, pp. 43–45).
  • 10. Furthermore, agents are given recognition for positive causality, and the relationship between the thing and the individual leaves no place for a determinist interpretation, as is illustrated in the book’s example: “Whatever intellectual element is added we supply out of our ‘souls’ when we react to the physical stimulus. But if we are not prepared for the fruitful reaction—if, that is to say, we cannot read or, even if we can read but are incapable of the necessary understanding or emotions, then nothing takes place beyond the physical stimulus.” (Ibid., p. 69) Beyond the outstanding modernity of this element of cognitive psychology, this assertion is so radical in its formulation and so subversive in its consequences that even Böhm-Bawerk failed to draw all of them. A patent example of this failure is his analysis of the nature of the State.
  • 11. It is worth noticing, that although many logical restrictions were introduced here in order to mark out the realm of goods relevant for economic analysis, goods are not limited in number. Moreover, even if the logical category is immovable, its concrete elements are always changing. New goods are perpetually created, and as many ends are satisfied, new ends appear to each individual.
  • 12. For clarification see Böhm-Bawerk: “‘Ability or knowledge of how to use’ is lacking in Menger’s enumeration of the conditions requisite for goods-quality. I felt that it was necessary to list it as a requirement independent of and different from the factor that Menger lists next under the name of ‘power of disposal.’ My reason for this is that the latter is a purely external factor while ‘ability to use’ (or knowledge of how to use) is a purely subjective factor.” (Ibid., p. 42, n. 2: emphasis in original)
  • 13. And is there any point in producing, even publicly, a superabundant good?
  • 14. For the refutation of the “technically collective” argument, see Rothbard (1993, p. 885).
  • 15. Cheung (1973) demonstrated with an empirical study that real farmers through contract relationships had precisely overcome the impending disaster predicted by welfare economists.
  • 16. Just as in the famous statement of Proudhon, “Property is theft,” the concept of gift, just like the concept of theft, must refer to some definition of property.
  • 17. That is what the French etymology of the word reveals: “entrepreneur” literally means in-between-taker.
  • 18. Douglass North (1981, p. 23; emphasis added): “the state trades a group of services, which we shall call protection and justice, for revenue. Since there are economies of scale in providing the services, total income of the society is higher as a result of an organization specializing in these services than it would be if each individual in the society protected his own property.”
  • 19. James Buchanan (1975, p. 4): “when we examine it carefully, anarchy does not seem to be able to set down the ground principle allowing the organization of social order, even if we stay within the boundaries of strictly interpersonal relationships.”
  • 20. For an exhaustive presentation of these arguments see Landes and Posner (1975, pp. 1–46; 1979, pp. 235–84).
Forex stock trading

Ready for Some Good News?

We are constantly bombarded with bad news. There are disasters, dangers, challenges, and woes. On the political scene, we find perpetual discord peppered with lurid denunciations and shrill condemnations. Media reports are alternately dismaying, disappointing, distressing, disgusting, or depressing. But despair not, friends: All is not lost!

Here let me serve you a heaping helping of good news: The world is more prosperous and more peaceful than it has ever been before.

To those of us who came of age in the ‘60s, the two most pressing problems in the world were poverty and war. Fifty years later — Voila! — there is a lot less of those two blights on human life.

Let’s start with poverty: In the mid-1970s, there were approximately 3.5 billion people on Earth and 2 billion of them were poor and hungry. Forty years later, there are 7.3 billion people and 767 million in severe poverty. In less than two full generations, the proportion of severely poor humans has plummeted from five-in-nine to one-in-nine. Nothing remotely similar to this massive economic progress has ever happened before.

Look at poverty in a longer-term context: In 1820, near the dawn of the Age of Capitalism, 94% of people were poor. Indeed, throughout all of human history before then, only a tiny elite prospered while over 90% of humanity barely subsisted. At the end of World War II, there had been significant progress, but over 70% of the people alive were severely poor. Then look: in 1981, 44% of humans were severely poor; in 1990, 37%; 2010, 16%; 2013, 10.7%. This is an astonishing achievement. To see it graphically, click here.

Here let me interject a cautionary note: While we are on a trend to potentially eliminate severe poverty entirely by 2030, don’t count on that happening. Flawed humans have an amazing capacity to mess things up. Just look at Venezuela today. In 1950, Venezuela had the fourth-highest per capita GDP in the world. Today, crippled by socialist policies, Venezuela has been reduced to an economic basket case with people starving to death. (Americans enthralled by Bernie Sanders, take note.)

Now, back to the good news: More people are enjoying peace and prosperity than ever before. Poverty has receded to the degree that governments around the world abandoned socialistic policies and unleashed market forces. Billions of people gained greater freedom and opportunity to work, invest, produce, profit, and trade with each other, both domestically and internationally.

Indeed, an under-appreciated aspect of market liberalization (i.e., the freeing of economic activity from government controls) has been the increased freedom to trade across national borders. After two world wars with a trade war/depression sandwiched in between, enlightened statesmen in the 1940s (with Americans taking the lead) worked diligently to craft a more peaceful, prosperous world by lowering trade barriers and strengthening commercial ties.

The underlying economics is simple: Every time the social division of labor is expanded through the inclusion of more people in the marketplace, the greater the range of talents and products available to consumers and the more competition, specialization, efficiency, comparative advantages, and economies of scale impel producers to improve quality and lower prices. In short, more trade leads to more prosperity. And as greater international commerce demonstrates that trade increases prosperity, people realize that it is self-defeating to wage war against the very people who are supplying things we want.

The theory that trade conduces peace has been borne out in practice. As international trade has expanded greatly since WWII, the incidence of war has plummeted. By one calculation, the number of wars was ten times greater in the century before 1950 than in the 50 years after. Harvard scholar Steven Pinker avers, “the world is less violent now than at any time in history.” Let us be grateful.

The post-WWII order — more trade, more prosperity, and more peace — is worth preserving. We should celebrate the amazing progress against the twin scourges of poverty and war, even as we continue to aim for their eventual elimination. Let us urge our leaders to remove the remaining barriers to trade. True, current trade rules are not always fair. They need to be improved, as President Trump is trying, but let’s not allow the perfect to be the enemy of the good and collapse the post-WWII order of trade and peace. Our unprecedentedly peaceful and prosperous world is a whole lot better than a world of national isolation, lower standards of living, and war.

Forex stock trading

Frank Fetter and the Austrians

Although students of Austrian economics are familiar with Mises, Hayek, and the other major figures of the school, there are many economists who worked in and around the Austrian tradition—and made crucial contributions to it—whose writings are today neglected. One of the most significant of these is the American Frank A. Fetter, the “forgotten giant” of the Austrian school.

When I began studying the Austrians, I noticed that Fetter’s name often appeared on standard lists of economists who worked in the tradition. (For example, he receives a chapter in the excellent collection 15 Great Austrian Economists, now available in an abridged audio version here). But as I explored his work, I also noticed that almost every discussion of it focused mainly on drawing parallels between his theories and those of the Austrians, without mentioning any personal or professional relationships he had with them, or what they might have thought of each other.

Unlike Mises, for instance, whose personal manner and life story are preserved through audio recordings and first- and second-hand accounts, there are virtually no published records that describe what Fetter was like, or how he interacted with his fellow economists. And besides some positive remarks scattered throughout his works, there is almost no evidence that he ever met or seriously engaged with the Austrians, especially after the First World War. At first glance then, it seems as if his connection to the Austrians was more “spiritual” than practical.

However, a wealth of unpublished records in the archives of Fetter’s papers and correspondence tell a very different story, and I’m happy to say that after a great deal of research in the collection, I have been able to uncover this history for the first time. You can read the full details in a new paper that will appear shortly in the Journal of Institutional Economics (ungated version here). Below I will mention a few highlights of Fetter’s fifty-year relationship with the Austrian school.

Fetter’s Influence on the Austrians

Fetter’s most Austrian work is in the field of value, price, and distribution theory. Both his criticism and positive theory quickly attracted the attention of the Austrians, whom he met during trips to Vienna in 1910 and 1914, and also during their own visits in the US.

He became particularly close with Böhm-Bawerk, with whom he went climbing in the mountains of Austria. In economics, Böhm-Bawerk bestowed high praise on Fetter’s price theory, writing to him that,

The method that you follow… is Daedalian and original, and has led to a good number of insightful and unexpected results. Moreover, I rejoiced in many a fine use of terms that you incorporated into the analysis of your historical-statistical material. They definitely made a good and important step toward the improvement and standardization of that instrument of our scientific inquiries that we refer to as terminology.

Even though they diverged on interest theory (Fetter sharply criticized Böhm-Bawerk’s partial-productivity theory of interest), Böhm-Bawerk was still able to write that “Your work is so penetrated by a truly scientific spirit that I always enjoy reading it even if I cannot fully agree.”

Fetter’s pure time preference theory of interest was more in accord with Mises’s views. But beyond a few scattered references, Mises never publicly indicated that Fetter was a major inspiration for his writings on the subject. Once again though, the unpublished record puts things in a different light. In 1938, while drafting Nationalökonomie, the German-language predecessor to Human Action, Mises wrote to Fetter to express his appreciation, stating that, “In these last months I have reread your contributions on the theory of interest. It is my firm opinion that they are more important than any other contribution on the subject since Böhm-Bawerk. I am indebted to them.” Given Mises’s regard for Böhm-Bawerk and his parsimony with compliments, this is a great tribute.

Fetter remained in contact with the Austrians throughout the inter-war period, during which he befriended many young students of the Mises Circle who looked to him for both professional advice and guidance as an expert theorist. Oskar Morgenstern, for example, worked as Fetter’s editorial assistant on a multi-volume festschrift for Wieser, co-edited with Hans Mayer and Richard Reisch.

In fact, there were scarcely any Austrian economists in the period 1900-1950 who didn’t have some kind of interaction with Fetter. The list of those he influenced is a who’s who of Austrian economics: Eugen von Böhm-Bawerk, Gottfried Haberler, W.H. Hutt, Fritz Machlup, Hans Mayer, Ludwig von Mises, Oskar Morgenstern, Joseph Schumpeter, and Friedrich von Wieser. He was also friends with other US economists of interest to the Austrian school, such as Benjamin Anderson, John Bates Clark, Arthur Marget, and Frank Taussig. And although Fetter was not a liberal in Mises’s sense (Fetter was also influenced by early progressivism), he nevertheless was friends with liberals and libertarians like Henry Hazlitt, Garet Garrett, and John T. Flynn, and shared some of their views.

Fetter’s Place in the History of Economic Thought

Importantly, like Joseph Schumpeter (who quipped that “only fish go in schools”), Fetter was highly suspicious of attempts to conveniently label economists as members of one group or another. Not only do school labels make it easy to misrepresent opponents’ views without actually understanding them, they can also lead to blind devotion and intellectual stagnation. In Fetter’s own case:

[A]ltho my years of economic study were spent entirely under teachers of the historical school, yet I was early tagged as an adherent of “the Austrian school”, because of my recognition of their substantial contributions… [Yet] I have never been consciously an adherent of any “school” or sect of economic theory and have earnestly striven to prevent either pride of personal opinion or a mistaken sense of loyalty to the ideas of any writer or school from dimming my eyes to newly discovered truth. I have continued to believe that sharp differences of opinions among economists on intellectual issues is consistent with mutual respect and halting friendship, and that in such matters the one loyalty, is loyalty to the search for truth, not to some theoretical hero, living or dead, or to some cult, past or present.

These sobering words should challenge contemporary economists of all types. As Joseph Salerno explains in his essay “Economics: Vocation or Profession,” economics is a search for meaningful truths about the world. Yet whether labels are based on an individual or a school, they often take on lives of their own, in some cases even replacing sound arguments as standards of truth. Taking Fetter’s warning seriously is one good way to ensure that we do not fall into this trap.

Forex stock trading

In Socialist Venezuela the Poor Starve to Death While the Politically Powerful Feast

The socialist policies of the Venezuela government continue to impose a living hell on its people. Hyperinflation has turned its currency to literal garbage. Mortality rates have skyrocketed for groups such as infants, pregnant mothers, and the elderly as clinics have shut down and medicine grown scarce. Food has disappeared from store shelves forcing the population to consume pets and zoo animals. A recent poll found that 78% of Venezuelans “reported trouble keeping themselves fed.”

Of course, this is not true for all Venezuelans.

Earlier this week President Nicolas Maduro was seen in a plush Istanbul restaurant lavishly dining on expensive steaks while smoking fine cigars, the check paid for by the wealth his regime has drained from his people. Once again we see that under socialism “all animals are equal, but some animals are more equal than others.”

While the outrage over Maduro’s obtuse opulence is well deserved, it serves as only a gaudy reminder of how socialism actually operates in the real world. The more controlled an economy becomes, the more it benefits those with power.

While less obvious than Maduro’s dinner prepared by celebrity chefs, we’ve seen this play out throughout the country. The regime understands that its survival depends upon keeping the guns of government pointed at the people, and not at themselves. As such, the country has fallen into rule by corruption, with the police and military being offered access to food and supplies in exchange for their loyalty.

Maduro’s government is able to benefit from the trade in a variety of ways. As a South American businessman told an AP reporter last year, a bribe to the right official allows him to sell his goods to the Venezuelan government. He can afford to pay it because the government pays him a higher price than international markets do. The government then takes the food and gives it to the military, who is then able to feed their families and sell the rest — and for dollars as opposed to increasingly worthless bolivars.

It’s been noted that in Venezuela today, black markets in food are “a better business than drugs.” As is the case with any other black market, the business is even better if it comes with the protection of a government badge. Not only is Maduro’s regime active in supplying the black markets of government officers, but they also unleash the police on the bachaqueros — illegal vendors — that compete with them.

This is not the only way that those with state privilege are able to profit from the horrors of socialism.

As the Miami Herald reported recently, those close to Maduro — including his stepsons — have been able to exploit the government’s currency exchanges at rates that don’t take into consideration the hyperinflation going on within the country. It has resulted in $1.2 billion money-laundering case filed in Miami:

In the Miami federal case, prosecutors charge that a network of Venezuelan businessmen and executives with the national oil company PDVSA managed to quickly turn $42 million worth of bolivars into $600 million in U.S. dollars by simply making a “loan” to the state-owned firm. PDVSA tapped into the government exchange to pay off the loan in a few months and, according to federal court records, funneled the windfall back to the ring. Its members then hid the money in Europe and the U.S. and bought up mansions from Cocoplum to Wellington in South Florida.

Russell Dallen, a Miami businessman who manages a capital investment company and formerly owned a newspaper in Venezuela, dubbed the government currency scheme a “perpetual money machine.”

“That’s one of the reasons why Venezuela has not changed this [government exchange] system,” said Dallen, a financial investor who has closely followed the money-laundering case.

This corruption, of course, is not unique to Maduro’s regime — but simply a byproduct of the socialist system he inherited. Hugo Chavez may still remain popular among many within the country, but his own corruption has enabled his daughter to enjoy a life of luxury. Her wealth has been estimated in the billions, so she can even afford more houses than Bernie Sanders and nicer outfits than Alexandria Ocasio-Cortez. 

Socialism is sold to the idealistic and naïve as a way to end the inequality that exists in a free market. In reality, it only changes the way in which power and privilege is consolidated. On the market, wealth is acquired through voluntary exchange and serving the desires of consumers — one of the many ways it makes us more humane. In socialism it’s acquired through force and brutality. As F.A. Hayek explained in The Road to Serfdom, the result is the worst rising to the top.

For the people in Venezuela, their future will not be improved by simply replacing Maduro for a more modest socialist leader. It can only come by rejecting the very ideology that has eroded away the country’s wealth for decades. Until then, those with political power will continue to live at the expense of their neighbors.

Forex stock trading

Socialism and ‘Social’ Justice

Volume 11, Number 2 (1995)

I may, as a result of long endeavors to trace the destructive effect which the invocation of ‘social justice’ has had on our moral sensitivity, and of again and again finding even eminent thinkers thoughtlessly using the phrase, have become unduly allergic to it, but I have come to feel strongly that the greatest service I can still render to my fellow men would be that I can make … speakers and writers … thoroughly ashamed…to employ the term ‘social justice’.

—F.A. Hayek1

In his Preface to The Mirage of Social Justice, Hayek explained how he came to conclude “that the Emperor had no clothes on, that is, that the term ‘social justice’ was entirely empty and meaningless” and “that the people who habitually employ the phrase simply do not know themselves what they mean by it and just use it as an assertion that a claim is justified without giving a reason for it”.

I

In his Preface to The Mirage of Social Justice, Hayek explained how he came to conclude “that the Emperor had no clothes on, that is, that the term ‘social justice’ was entirely empty and meaningless”2 and “that the people who habitually employ the phrase simply do not know themselves what they mean by it and just use it as an assertion that a claim is justified without giving a reason for it”.3

Certainly, as Hayek proceeded so painstakingly to show, this cant expression is usually employed quite thoughtlessly. Few if any of those who habitually employ it have even attempted to produce a systematic and consistent rationale for its application. But this is still not sufficient to show that it is “entirely empty and meaningless”. For there is in fact sufficient regularity in the actual usage of the expression ‘social justice’ to provide it with a meaning, albeit a meaning which is somewhat vague and variable.

In that meaning it can be defined most illuminatingly as referring to the achievement by extensive statist means of whatever would for socialists be an ideal distribution of goods of all kinds. Following the suggestion made by Hayek in his Preface to the Second Edition of The Road to Serfdom — a work dedicated to “The Socialists of All Parties” — the word ‘socialism’ is here to be understood to mean: “not the nationalization of the means of production and the central economic planning which this made possible and necessary…” but “…the extensive redistribution of incomes through taxation and the institutions of the welfare state”.4

Consider, for example, quotations from a Fabian Society review of the 1974-9 Labour Party administrations in the United Kingdom (Bosanquet and Townsend 1980). The Editors proclaim “that the Labour Party can and should light a flame in a world of injustice and inequality.”5 Contributor after contributor speaks of “socialist canons of equality and social justice”6 and of “a more socially just and equal society”.7 One even goes so far as to lay it down — without attempting to explain what this might mean or why we should accept it as true — that, in particular, “Racial equality requires a society which is equal in all respects”.8

Such identification of inequality with injustice and of equality with social justice have become characteristic of “the socialists of all parties”.9 According to Bosanquet and Townsend, these identifications were manifested in two ways. In the first place, none of the contributors made any attempt to respond to the request of the editors that they should examine and elucidate “the meaning of equality”. In the second place, and perhaps still more significant, the editors failed to demand, and the contributors neglected to offer, any reasons at all either for adopting equality as a value or for concluding themselves entitled or required to impose that value upon others by force. No doubt it appeared to one and all altogether obvious that a just society must be an equal one; if not perhaps, if this is conceivable, “a society which is equal in all respects”. For, given the equation between equality and justice, then there would certainly be no need for further justification on either count.

This suggests the reason why Hayek was wrong to maintain “that the people who habitually employ the phrase [social justice] just use it as an assertion that a claim is justified without giving a reason for it.” For anyone asserting that some policy is required by a kind of justice is in fact giving what — if but only if their assertion were true — would constitute the best of reasons. The truth, however, is that social justice as customarily conceived is precisely not a kind of justice.10

On the contrary, such ‘social’ justice essentially involves what, by the standards of the old-fashioned, without prefix or suffix, sort of justice must constitute a paradigm case of flagrant injustice; namely, the abstraction under the threat of force (the taxing away) of (some of) the justly acquired property of the better off in order to give it (less, of course, some often substantial service charge) to those whose previous just acquisitions or lack of just acquisitions have left worse off.

It is of the greatest importance to socialists as here conceived thus to maintain that their cherished policies are mandated by a kind of justice. For this enables them to see themselves — and, hopefully, to be seen — as in incontestable occupation of the moral high ground. It thus becomes possible for a spokeswoman for a Labour Opposition to say in all sincerity during a House of Commons debate upon a Queen’s speech: “Our complaint against the Government, and in particular the Prime Minister, is that brick by brick they have set out to create an unjust society.”11

Again, it is only on the assumption that Procrustean policies12 are mandated by a kind of justice that their supporters become equipped with an answer to the objection of those who would ask by what right they are proposing to employ the enforcement machinery of the state in order to realize their own personal vision of the ideal society? If but only if the prescriptions of social justice were indeed mandates of a kind of justice, then the socialists certainly would have a decisive answer to this libertarian objection. For, as Adam Smith so soundly observed in his other masterpiece:

The man who barely abstains from violating either the person, or the estate, or the reputation of his neighbours, has, surely, little positive merit. He fulfills, however, all the rules of what is peculiarly called justice, and does everything which his equals can with propriety force him to do, or which they can punish him for not doing.13

II

In the Preface to The Mirage of Social Justice, Hayek proceeds to explain why he decided not to try “to justify my position vis-a-vis a major recent work”, namely “John Rawls A Theory of Justice”. It was “because the differences between us seemed more verbal than substantial”.14

This decision was both somewhat surprising and extremely unfortunate. It was surprising since it was explicitly grounded upon a passage from an article Rawls published much earlier, and to which Hayek himself confessed that he could find no satisfactory parallel in the later book.15 It was unfortunate, since it ensured that The Mirage of Social Justice received far less attention than it should have done, and otherwise would. For although the book of Rawls is misleadingly entitled A Theory of Justice, it in fact deals only — or, some might say, alternatively — with “the principles of social justice”, principles which, we are told, “provide a way of assigning rights and duties in the basic institutions of society and…define the appropriate distribution of the benefits and burdens of social cooperation”.16

From the beginning Rawls assumes that social justice thus conceived constitutes the greater part if not the whole of justice, insisting that (unqualified) “Justice is the first virtue of social institutions, as truth is of systems of thought”.17 Later, however, albeit only once and as it were parenthetically, he does at least warn readers not to confuse “The principles of justice for institutions with the principles which apply to individuals and their actions in particular circumstances”.18

Because this book attempted to satisfy the need for some clear formulation and persuasive rationalization of the putative principles of social justice, it received on its first appearance such a wide and overwhelmingly enthusiastic welcome that it at once became, and has ever since remained, the standard starting point for all subsequent discussion. For instance, in a notably uncritical “Critical Notice”, the lifelong socialist Stuart Hampshire wrote:

I think that this book is the most substantial and interesting contribution to moral philosophy since the war, at least if one thinks only of works written in English. It is a very persuasive book, being very well argued and carefully composed.19

It presents, Hampshire continued,

a noble, coherent, highly abstract picture of the fair society, as social democrats see it…This is certainly the model of social justice that has governed the advocacy of R. H. Tawney and Richard Titmuss and that holds the Labour Party together.20

III

What actually holds the Labour Party together as an organization is, surely, the strength of the labour unions, which created it in the beginning and which continue to provide by far the greatest part of its funding. But Hampshire was certainly right to suggest that intellectuals who are social democrats, in the present understanding of the expression,21 are inspired by some such ideal of social justice. Indeed at the time of writing the Labour Party itself is debating the replacement of its original statement of aim, which demanded “the nationalization of the means of production,” with a new statement, which will most likely revolve around the ideal or ideals of equality and social justice conceived as requiring “the extensive redistribution of incomes through taxation and the institutions of the welfare state.” For us here the crucial question is whether social justice so conceived is indeed a kind of justice. If we are to answer that question truly we must recall the warning issued by Plato’s Socrates: “If I do not know what justice is I am scarcely likely to find out whether it is an excellence, and whether its possessor is happy or not happy.”22

That was a warning to which Rawls not so much fails as refuses to attend. He never finds room to quote, much less to examine, either some variant of the traditional definition of the word ‘justice’ or any preferred alternative. Indeed it is only on his five hundred and seventy ninth page that he thinks to explain, without any suggestion of apology, that he was eager “to leave questions of meaning and definition aside and get on with the task of developing a substantive theory of justice.”23

So what is justice? Among those who have asked themselves this question there seems, at least until comparatively recently, to have been little disagreement.24 The central, crucial element in their definitions has always been what Plato scripted Polemachus to offer as his first suggestion: “to render to each their due,”25 a phrase later translated into Latin as suum cuique tribuere. Ulpian prefaced this with two further clauses, making his own definition run: Honeste vivere, neminem laedere, suum cuique tribuere [To live honestly, to injure no one, to render to each their own]. The Institutes of Justinian proclaim that the mark of a just person is a constant and perpetual resolve to render to each suum jus [his right, his own]. That last Latin expression is in such contexts naturally construed as referring to the several and presumably often very different deserts and entitlement of different individuals, the deserts primarily under the criminal and the entitlements under the civil law. These traditional definitions tend to confirm the contention that “To apply the term ‘just’ to circumstances other than human actions or the rules governing them” — such as the operation of social institutions or the behaviour of some hypostatized Society — “is a category mistake”.26

Rawls distances his conception of social justice still further from the justice which can and can only characterize the actions of individuals and the general rules governing those actions by his refusal to recognize entitlements which are neither (creditably) deserved nor (discreditably) undeserved. Thus from the premise “that no one deserves his place in the distribution of native endowments, any more than one deserves one’s initial starting place in society” he apparently infers that no one can be morally entitled to anything gained in consequence of enjoying such not-deserved because neither deserved nor undeserved entitlements.27 But this conclusion is unconscionable. For neither universal human rights, nor individual property rights, nor claims to the legitimate possession and retention of one’s own bodily parts are grounded in pretended desert.28 Rawls, nevertheless, is not prepared to accept the implication that, in as much as social justice is not a variety of traditional, without prefix or suffix justice, the cherishers of this ideal of ‘social’ justice (a.k.a. the Procrusteans) are as such neither occupants of the moral high ground, nor entitled to draw on the forces of the state to realize their ideal.

IV

At one point in A Theory of Justice Rawls claims that “Throughout the choice between a private-property economy and socialism is left open…”29 But the hypothetical contracting parties who “in the original position” are to make the hypothetical social contract from which he proposes to derive the fundamental principles of social justice have to take for granted the ultimately collective ownership of all wealth and income. “For simplicity” we are required to “assume that the chief primary goods at the disposition of society are rights and liberties, powers and opportunities, income and wealth”.30

The contracting parties are also conceived as operating behind a veil of ignorance: “…no one knows his place in society, his class position or social status; nor does he know his fortune in the distribution of natural assets and abilities, his intelligence and the like”.31 It should be noticed that this prescription is introduced not so much to ensure impartiality but because it supposedly expresses “the result of leaving aside those aspects of the social world that seem arbitrary from a moral point of view”.32

After the captivating frankness of the confession that “We want to define the original position so that we get the desired solution”,33 and given that the hypothetical contracting parties have therefore been made to assume both that all relevant property is collectively owned and that all individual differences in social situation and personal achievement are morally irrelevant, it should come as no surprise that they cannot but “acknowledge as the first principle of justice one requiring an equal distribution. Indeed, this principle is so obvious that we would expect it anyone immediately.”34

Nor is it surprising to find that Rawls is no more eager than most other advocates of equality and social justice to settle for an absolute equality of wealth and income. Thus he continues: “If there are inequalities in the basic structure that work to make everyone better off in comparison with the benchmark of initial equality, why not permit them?”35 Why not indeed, if only we were considering two alternative arrangements both of which were allowed to be morally indifferent? But Rawls has from the beginning himself insisted that “laws and institutions no matter how efficient and well arranged must be reformed or abolished if they are unjust”.36 He might perhaps, had he recognized this difficulty, have tried to wriggle out of it by assuming, somewhat implausibly, that all those who are to be assigned37 below average incomes would agree to abandon their rights not to be exceeded in return for some suitably substantial additions to the lower income which they would otherwise have enjoyed. For it is a well established legal principle that volenti non fit injuria.

Having failed to appreciate this first difficulty, Rawls proceeds by way of salutary remarks about envy to another, which he also fails to recognize. Earlier the pellucidly unequivocal prescription that “social and economic inequalities are to be arranged so that they are…reasonably expected to be to everyone’s advantage” was characterized as “ambiguous”.38 Now it is laboriously construed as a formulation of what Rawls calls the Difference Principle: “Inequalities are permissible when they maximize, or a least all contribute to, the long-term expectations of the least fortunate group in society”.39 This unlovely dog-in-the-manger principle simply cannot be derived from what Rawls himself has just proclaimed to be, on his own assumption, the first principle of justice. If that is indeed to be accepted as fundamental and inviolable, and if the desired above average inequalities are to be shown to be at least not unjust, then not only members “of the least fortunate group in society” but also all the others who are to be less than average advantaged will have somehow to be bought off.

V

Section I, above, drew attention to some of the benefits which socialists derive from pretending that the prescriptions of ‘social’ justice are the mandates of (unqualified) justice. These benefits are implications carried by that claim. There are, of course, also costs. One of these is rarely noticed. Yet it deserves special emphasis and attention. For if only this implication were to become widely appreciated then there would surely be a much greater reluctance to make claims which carry it.

We have here an occasion for introducing the distinction between justicizing — showing to be just — and justifying. It is certainly possible to justify things which are neither just nor unjust and perhaps possible to justify the unjust.

That said we can, without prejudice to any questions about alternative justifications go on to assert that if compulsory transfers of any of the present wealth or income of the better off to the presently worse off are indeed demanded by justice, then this surely implies that the amounts to be thus compulsorily transferred are not justly possessed by the former but are properly the property of the latter. From that it certainly follows that all those enjoying amounts of wealth and income larger than whatever are allowed to constitute their socially just allocations are necessarily in possession of some — and presumably in many cases much — stolen property and, most shameful of all, property stolen from people worse off than themselves. No doubt there are cases in which people may quite rightly and properly refuse to make any individual voluntary contributions to further some purpose which they are urging ought to be financed by new taxes to be paid by everyone. But the retention by thieves of stolen property until those thieves are forced to surrender their illicit gains is, most emphatically, not one of those cases.

VI

Rawls regularly describes his conception of social justice as “justice as fairness”. Fairness as justice would be a more apt description. For the only necessary connection between justice and equality is that the rules of justice, like all rules, apply equally to all the cases which satisfy their terms.40 A system of ‘criminal justice’ insisting that convicted criminals should be treated exactly as if they had been found not guilty would, as Kant might have said, contradict itself. But suppose that we were charged with making a fair distribution among a particular set of people of some collection of goods which we were entitled and perhaps also required to distribute. The presumption, albeit a defeasible presumption, surely is that a fair distribution would be the one which gave equal shares to all concerned?41

Where Rawls goes so radically wrong is in so constructing “the original position” that his hypothetical contracting parties assume that all presently available wealth and income as well as all the wealth and income to be produced in future in their to them presently unknown national territory is their collective property, which they are entitled to distribute at their absolute discretion to different subsets among themselves (and, presumably, their descendants).

All this is simply irrelevant to questions about the justice or injustice of the actual distributions of income and wealth in non- socialist countries. For in such countries most property is presently private, and the always in-principle defeasible presumption must be that this property has been or is being justly acquired. So, if any compulsory transfers are to be not merely justified but justicized, then it will need to be shown not only that the property claims of those from whom some amount is to be taken are to the extent unjust, but also that those to whom these transfers are to be made have just claims to possession of the amounts to be transferred.42 That would be no easy task. It is one not even attempted by Rawls. He, as we have seen, apparently does not even notice that he is making this radically socialist assumption of total collective ownership.

VII

The direct compulsory transferring of wealth or income from the better off to the worse off constitutes the most clear-cut and dramatic feature of the conflict between the ideal of ‘equality and social justice’ and the ethics of a Great Society. But there is also an even more important tendency for the traditional virtues of such a society to be undermined by the institutions of an extensive and comprehensive welfare state.

Suppose, for instance, that educational services for children are provided by a near total state monopoly. Then parents are necessarily deprived both of a choice between schools competing to provide either better service and/or the same service at less cost, and of the responsibility for making such choices in the senses which best suit the needs of their own children. Notoriously such systems tend to serve the interests of their employees rather than of the consumers and, by excluding competition, reduce the chances of reducing the costs and/or of improving the quality of the services provided.43

Again, when first a system of compulsory National Insurance and then much later a comprehensive National Health service were introduced in the UK these centralized and comprehensive state systems replaced large numbers of voluntary and private Friendly Societies and Medical Institutes. Of course not everyone who would at some time need the services provided by these institutions had previously been enrolled as a member, although, according to D. G. Green, “By the time the British Government came to introduce compulsory social insurance of 12 million persons under the 1911 National Insurance Act, at least 9 million were covered by registered and unregistered voluntary insurance associations…”44 Green further states, “The rate of growth of the friendly societies over the preceding thirty years had been accelerating.”45

On the other hand, these predecessor institutions had enabled their members to take the responsibility for providing themselves with the relevant benefits and had offered many welcome opportunities in their organization and management for voluntary public service. These responsibilities and these opportunities were removed once the replacement state organization was in place.

The previous voluntary organizations, because they were smaller and because more of their members knew one another, were also better able to discourage and detect fraud: “The Prudential Assurance Company, the largest of the industrial assurance companies, had to abandon sick pay because, as its secretary told the Royal Commission on Friendly Societies in 1873, ‘after five years’ experience we found we were unable to cope with the fraud that was practised”.46

VIII

These near-total state monopolies in the provision of all health services and of all educational services for children have both played parts in depriving our people of choices and consequently of responsibilities which our ancestors used to have. But what has probably done most to discourage the virtues appropriate to a Great Society and to promote progressive demoralization is the introduction of systems of tax-financed handouts designed to rectify various perceived deficiencies (a.k.a. inequalities). For consider Charles Murray’s Law of Unintended Rewards. This, in the original formulation, reads: “Any social transfer increases the net value of being in the condition that prompted the transfer”.47 This law like the other established laws of economic analysis constitutes a logically necessary truth. For, as Murray goes on to observe, if “A deficiency is observed — too little money, too little food, too little academic achievement — and a social transfer program tries to fill the gap with a welfare payment then the program, however unintentionally, must be constructed in such a way that it increases the net value of being in the condition that it seeks to change — either by increasing the rewards or by reducing the penalties”.48

Where the condition prompting some particular programme is one to which the patients of that condition could not by their own efforts avoid becoming and/or remaining subject there is of course no call to take account of Murray’s Law. Indeed the whole point of providing welfare services for, for instance, the blind precisely is to reduce as much as can be the monstrous disvalue of being in a condition into which no one would willingly fall and which all its victims would strive to escape, if only that were possible.

But many, perhaps most, of the conditions unintentionally ‘rewarded’ by existing state welfare provisions are conditions into which at least some of their victims could and indeed ought to have avoided falling and/or which they could and indeed ought to escape partly or wholly by their own efforts. Insofar as this is the case, such rewards must necessarily tend to weaken both any existing inhibitions against falling into these conditions and any existing incentives to escape them. In the case of many of these conditions this alone should be recognized as a more than sufficient reason as far as possible both to maintain and to strengthen such inhibitions and such incentives.

But the implications and the actual effects of the ideology of equality and social justice are directly contrary. For, necessarily, every handout mandated by social justice is a welfare right.49 Among those working within the machinery of the welfare state the supreme commandment appears to have become: “Thou shalt not be judgmental.”50 For those people — to borrow the expression employed by General Lee to describe the Union armies — it is in the highest degree politically incorrect to wish to distinguish the deserving from the undeserving poor. All welfare payments and services are considered to be owed as of right, and to generate no reciprocal duties for their beneficiaries. It is, therefore, reckoned to be scandalous that there should be less than a 100% uptake by those thus entitled to benefit. It is a scandal which activists both inside and outside that machinery constantly labour to diminish.51

The effects of the operation of Murray’s Law are bound to increase the larger the amounts paid out in welfare payments to each beneficiary. In any expanding economy in which the decision makers are misguided by ideals of equality and social justice those amounts themselves are bound to increase. For those ideals require relativistic standards of poverty according to which the size of the various welfare payments to be provided is determined: not by reference to some comparatively fixed and stable standard of hardship, but by reference to, and relative to, the rising average level of incomes over the population as a whole.52

There is by now a great and ever growing accumulation of evidence to show the strength of the effects brought about by the operation of Murray’s Law of Unintended Rewards. But one recent study is peculiarly impressive for anyone who can remember how miserably low the living standards of the households of unemployed working men were in the UK during the nineteen thirties. The conclusions of this study were unequivocal and decisive:

In summary, the cross-sectional evidence…reveals a pattern that is inescapable: the inter-war unemployment insurance system importantly shaped the unemployment histories of every nook and cranny of Britain. Whether one examines the pattern by age, sex, industry, duration, location or skill, one simple fact emerges: lowering the cost of an activity [an inactivity-AF] induces more of that activity [or inactivity-AF]. In the present instance, lowering the cost of unemployment induced more unemployment in inter-war Britain.53

It may nevertheless be allowed that “There is no reason why in a free society government should not assure to all protection against severe deprivation in the form of an assured minimum income, or a floor below which nobody needs to descend”.54 A prudent government, however, even when that assured minimum income was very low would still, at least in the case of conditions which could have been avoided, try to find ways of channeling the necessary relief funds through private organizations less inhibited from discriminating between deserving and undeserving recipients than our present welfare state bureaucracies.

It is remarkable that Milton Friedman in developing his proposals for a Negative Income Tax appears never to have considered the relevance to its introduction of the economists’ general Law of Supply and Demand, of which what Murray was later to formulate as his Law of Unintended Rewards can be seen as a special case. For, as we may learn from Murray, it was in an attempt to meet the objection that the introduction of such a guaranteed income would cause people to reduce their work effort or to drop out of the labour force altogether that the Office of Economic Opportunity set up “the most ambitious social-science experiment in history”.55 The result was totally decisive, demonstrating beyond all possibility of dispute that the objections had been and were right.

We can perhaps avoid attributing any such oversight to Hayek. For, later in the book in which he conceded that government might take steps “to assure to all protection against severe deprivation…a floor below which no one needs to descend,” he went on to insist that “The mischievous idea that all public needs should be satisfied by compulsory organization…is wholly alien to the basic principles of a free society. The true liberal must on the contrary desire as many as possible of those ‘particular societies within the state’, voluntary organizations between the individual and government, which…Rousseau and the French Revolution wanted to suppress”.56

  • 1. F. A. Hayek, The Mirage of Social Justice, Vol II, Law, Legislation and Liberty (London: Routledge and Kegan Paul, 1976), p. 97.
  • 2. Hayek, The Mirage of Social Justice, p. xi.
  • 3. Hayek, The Mirage of Social Justice, p. xi.
  • 4. F. A. Hayek, The Road to Serfdom, 2nd ed. (London: Routledge and Kegan Paul, 1976), p. viii.
  • 5. N. Bosanquet & P. Townsend, Labour and Equality (London: Heinemann, 1980), preface.
  • 6. Bosanquet & Townsend, p. 131.
  • 7. Bosanquet & Townsend, p. 228, also compare p. 67 and p. 227.
  • 8. Bosanquet & Townsend, p. 151.
  • 9. Since nowadays this category apparently embraces most spokespersons for the mainstream Christian churches, it becomes noteworthy that Cruden’s Concordance to the (King James) Bible contains no entry at all for either ‘inequality’ or ‘social justice’ and only two for ‘equality’. These are both to II Corinthians 14, which provides no Biblical warrant for these identifications. It is also worth noting that the first employment of the expression ‘social justice’ recorded in the big Oxford English Dictionary is that by John Stuart Mill in Utilitarianism (1861).
  • 10. See, for instance, Antony Flew, “Is “Social Justice” a Kind of Justice?” Journal des Economistes et des Etudes Humaines, Vol IV, no 2/3, (June/September, 1993), pp. 281-94.
  • 11. See Hansard for 6/XI/72, 845, 55. The Prime Minister was Edward Heath, whose administration had in fact taken few if any steps to reverse any of the policies of its Labour predecessors.
  • 12. Compare Flew 1981, Ch. I-IV, and Flew 1987, Part II.
  • 13. Adam Smith, The Theory of Moral Sentiments (Indianapolis: Liberty Press, 1969). This frequently quoted passage comes from the penultimate paragraph of Chapter I of Section II of Part II of this classic that Smith originally published in 1759.
  • 14. Hayek, The Mirage of Social Justice, pp. xii – xiii.
  • 15. Hayek, The Mirage of Social Justice, pp. 100 and 183.
  • 16. John Rawls, A Theory of Justice (Cambridge Mass and Oxford: Harvard University Press and Clarendon, 1972), p. 4.
  • 17. Rawls, p. 3.
  • 18. Rawls, p. 54. Compare this with one successor’s surprised statement that “there appears to be a category of ‘private justice’ which concerns the dealing of a man with his fellows where he is not acting as a participant in one of the major social institutions” (D. Miller, Social Justice (Oxford: Clarendon, 1976) p. 17).
  • 19. Stuart Hampshire, “Critical Notice,” New York Review of Books (1972, Issue 3).
  • 20. Hampshire, ibid.
  • 21. It is too rarely remembered that all the European Social-Democratic Parties were originally Marxist, and that even the Bolsheviks began as the allegedly majority faction in the Russian Social-Democratic Labour Party.
  • 22. Plato, The Republic, 354C.
  • 23. Rawls, p. 579.
  • 24.  Perhaps we need here to distinguish between the concept and conceptions of justice. For, although there seems to have been little disagreement about the concept, there have of course been rival conceptions both of what people’s moral and legal deserts and entitlement are and of how these are properly to be determined.
  • 25. Plato, 331E.
  • 26. Hayek, The Mirage of Social Justice, p. 31.
  • 27. Rawls, pp. 103-104.
  • 28. Robert Nozick, Anarchy, State and Utopia (New York and Oxford: Basic Press and Blackwell, 1975), pp. 206-207.
  • 29. Rawls, p. 258.
  • 30. Rawls, p. 62, emphasis added.
  • 31. Rawls, p. 137.
  • 32. Rawls, p. 15.
  • 33. Rawls, p. 141.
  • 34. Rawls, pp. 150-151.
  • 35. Rawls, p. 151.
  • 36. Rawls, p. 3.
  • 37. It is significant that ‘assigned’ and ‘distributed’, in an equally active understanding, are both favorite words in A Theory of Justice. Any administration proposing to establish a Commission to advise on the control of incomes could confidently seek a suitable Chairman from Harvard.
  • 38. Rawls, p. 60.
  • 39. Rawls, p. 151.
  • 40. Compare, for instance, Antony Flew, The Politics of Procrustes: Contradictions of Enforced Equality (London and Buffalo: Temple Smith and Prometheus, 1981), pp. 64 and 67-70.
  • 41. Compare, for instance, Flew, Chapter III, Section 4.
  • 42. In the UK the Archbishops’ Commission for Urban Priority Areas endorsed a claim by the Bishop of Liverpool that “It is not charity when the powerful help the poor…it is justice”, appealing to the Parable of the Good Samaritan for support. But, that parable, as they ought to have known, shows how love (Greek, agapee, hence Latin caritas, hence old English charity) goes beyond the demands of the law (of justice). The true model for the enforced transfers supported by the Commission is the legendary robber Robin Hood, who stole from the rich and gave (some of) his takings to the poor (Anderson 1992, pp 221-4).
  • 43. See, for example, Antony Flew, Shephard’s Warning: Setting Schools Back on Course (London: Adam Smith Institute, 1994).
  • 44. D. G. Green, Reinventing Civil Society (Longon: Institute of Economic Affairs, 1993), pp. 31-32.
  • 45. Green, Reinventing Civil Society, pp 31-32.
  • 46. Green, Reinventing Civil Society, p. 58.
  • 47. Charles Murray, Losing Ground: American Social Policy 1950 – 1980 (New York: Basic, 1984), p. 212.
  • 48. Murray, pp. 212-213, emphasis in the original.
  • 49. On the present century, the century of the rise of that ideology, the Universal, European and other Declarations of Human Rights have all included welfare as well as option rights. Option rights, like those of the American Declaration of Independence, are the rights of individuals to be left to their own devices, provided only that they respect the equal rights of others. Welfare rights are rights to be provided with some good, necessarily at the expanse of others and presumably by the appropriate welfare state. See, for example, Antony Flew, Equality in Liberty and Justice (London and New York: Routledge, 1989), Chapter 2.
  • 50. Compare, for instance, N. Dennis and G. Erdos, “Thou Shalt Not Commit a Value Judgement”, Chapter 3 of Families Without Fatherhood (London: Institute of Economic Affairs, 1992).
  • 51. D. Anderson, ed., The Loss of Virtue: Moral Confusion and Social Disorder in Britain and America (New York: Social Affairs Unit and National Review, 1992)., p. 209. Enormous funds are spent by the British welfare services in promoting public knowledge of individual’s rights to welfare benefits. In theory this is supposed to help the needy who may be ignorant of the assistance available to them, but in practice it creates a climate of opinion in which the individual is encouraged to seek out what he can get and to behave in a way which will justify receiving benefits.
  • 52. Or even by reference to, and relative to, the levels achieved by the best off. See D. Green, Equalizing People (London: Institute of Economic Affairs, 1990), Chapter II, for several examples of the ways in which persons paid as social scientists contrive to work themselves and to invite others into frenzies of indignation by misrepresenting lesser improvements in the condition of the worst off than in the condition of the best off as a “grotesque increase” in the burden of poverty under administrations — those, of course, of Margaret Thatcher — which in this way allegedly continued to “reduce the incomes of the poorest” (emphasis original).
  • 53. K. Matthews and D. Benjamin, US and UK Unemployment between the Wars: A Doleful Story (London: Institute of Economic Affairs, 1992), p. 110.
  • 54. Hayek, The Mirage of Social Justice, p. 87.
  • 55. Murray, p. 149.
  • 56. Hayek, The Mirage of Social Justice, pp. 150-151.
Forex stock trading