Interventionism

The Alleged Superiority of the Income Tax

Orthodox neoclassical economics has long maintained that, from the point of view of the taxed themselves, an income tax is "better than" an excise tax on a particular form of consumption, since, in addition to the total revenue extracted, which is assumed to be the same in both cases, the excise tax weights the levy heavily against a particular consumer good. In addition to the total amount levied, therefore, an excise tax skews and distorts spending and resources away from the consumers' preferred consumption patterns. Indifference curves are trotted out with a flourish to lend the scientific patina of geometry to this demonstration.

As in many other cases when economists rush to judge various courses of action as "good," "superior," or "optimal," however, the ceteris paribus assumptions underlying such judgments—in this case, for example, that total revenue remains the same—do not always hold up in real life. Thus, it is certainly possible, for political or other reasons, that one particular form of tax is not likely to result in the same total revenue as another. The nature of a particular tax might lead to less or more revenue than another tax. Suppose, for example, that all present taxes are abolished and that the same total is to be raised from a new capitation, or head, tax, which requires that every inhabitant of the United States pay an equal amount to the support of federal, state, and local government. This would mean that the existing total government revenue of the United States, which we estimate at $1.38 trillion—and here exact figures are not important—would have to be divided between an approximate total of 243 million people. Which would mean that every man, woman, and child in America would be required to pay to government each and every year, $5,680. Somehow, I don't believe that anything like this large a sum could be collectible by the authorities, no matter how many enforcement powers are granted the IRS. A clear example where the ceteris paribus assumption flagrantly breaks down.

But a more important, if less dramatic, example is nearer at hand. Before World War II, Internal Revenue collected the full amount, in one lump sum, from every taxpayer, on March 15 of each year. (A month's extension was later granted to the long-suffering taxpayers.) During World War II, in order to permit an easier and far-smoother collection of the far-higher tax rates for financing the war effort, the federal government instituted a plan conceived by the ubiquitous Beardsley Ruml of R.H. Macy & Co., and technically implemented by a bright young economist at the Treasury Department, Milton Friedman. This plan, as all of us know only too well, coerced every employer into the unpaid labor of withholding the tax each month from the employee's paycheck and delivering it to the Treasury. As a result, there was no longer a need for the taxpayer to cough up the total amount in a lump sum each year. We were assured by one and all, at the time, that this new withholding tax was strictly limited to the wartime emergency, and would disappear at the arrival of peace. The rest, alas, is history. But the point is that no one can seriously maintain that an income tax deprived of withholding power could be collected at its present high levels.

One reason, therefore, that an economist cannot claim that the income tax, or any other tax, is better from the point of view of the taxed person, is that total revenue collected is often a function of the type of tax imposed. And it would seem that, from the point of view of the taxed person, the less extracted from him the better. Even indifference-curve analysis would have to confirm that conclusion. If someone wishes to claim that a taxed person is disappointed at how little tax he is asked to pay, that person is always free to make up the alleged deficiency by making a voluntary gift to the bewildered but happy taxing authorities.In 1619, Father Pedro Fernandez Navarrete, "Canonist Chaplain and Secretary of his High Majesty," published a book of advice to the Spanish monarch. Sternly advising a drastic cut in taxation and government spending, Father Navarrete recommended that, in the case of sudden emergencies, the king rely solely on soliciting voluntary donations. Alejandro Antonio Chafuen, Christians for Freedom: Late Scholastic Economics (San Francisco: Ignatius Press, 1986), p. 68.

A second insuperable problem with an economist's recommending any form of tax from the alleged point of view of the taxee, is that the taxpayer may well have particular subjective evaluations of the form of tax, apart from the total amount levied. Even if the total revenue extracted from him is the same for tax A and tax B, he may have very different subjective evaluations of the two taxing processes. Let us return, for example, to our case of the income as compared to an excise tax. Income taxes are collected in the course of a coercive and even brutal examination of virtually every aspect of every taxpayer's life by the all-seeing, all-powerful Internal Revenue Service. Each taxpayer, furthermore, is obliged by law to keep accurate records of his income and deductions, and then, painstakingly and truthfully, to fill out and submit the very forms that will tend to incriminate him into tax liability. An excise tax, say on whiskey or on movie admissions, will intrude directly on no one's life and income, but only into the sales of the movie theater or liquor store. I venture to judge that, in evaluating the "superiority" or "inferiority" of different modes of taxation, even the most determined imbiber or moviegoer would cheerfully pay far higher prices for whiskey or movies than neoclassical economists contemplate, in order to avoid the long arm of the IRS.It is particularly poignant, on or near any April 15, to contemplate the dictum of Father Navarrete, that "the only agreeable country is the one where no one is afraid of tax collectors," Chafuen, Christians for Freedom, p. 73. Also see Murray N. Rothbard, "Review of A. Chafuen, Christians for Freedom: Late Scholastic Economics," International Philosophical Quarterly 28 (March 1988): 112–14.

The Forms of Consumption Tax

In recent years, the old idea of a consumption tax in contrast to an income tax has been put forward by many economists, particularly by allegedly pro-free-market conservatives. Before turning to a critique of the consumption tax as a substitute for the income tax, it should be noted that current proposals for a consumption tax would deprive taxpayers of the psychic joy of eradicating the IRS. For while the discussion is often couched in either-or terms, the various proposals really amount to adding a new consumption tax on top of the current massive armamentarium of taxing power. In short, seeing that income tax levels may have reached their political limits for the time being, our tax consultants and theoreticians are suggesting a shining new tax weapon for the government to wield. Or, in the immortal words of that exemplary economic czar and servant of absolutism, Jean-Baptiste Colbert, the task of the taxing authorities is to "so pluck the goose as to obtain the largest amount of feathers with the least amount of hissing." We the taxpayers, of course, are the geese.

But let us put the best face on the consumption-tax proposal, and deal with it as a complete replacement of the income tax by a consumption tax, with total revenue remaining the same. Our first point is that one venerable form of consumption tax not only retains existing IRS despotism but makes it even worse. This is the consumption tax first prominently proposed by Irving Fisher.See, for example, Irving and Herbert N. Fisher, Constructive Income Taxation (New York: Harper, 1942). The Fisher tax would retain the IRS, as well as the requirement that everyone keep detailed and faithful records and truthfully estimate his own taxes. But it would add something else. In addition to reporting one's income and deductions, everyone would be required to report his additions to or subtractions from capital assets (including cash) over the year. Then, everyone would pay the designated tax rate on his income minus his addition to capital assets, or net consumption. Or, contrarily, if he spent more than he earned over the year, he would pay a tax on his income plus his reduction of capital assets, again equaling his net consumption. Whatever the other merits or demerits of the Fisherine tax, it would add to IRS power over every individual, since the state of his capital assets, including his stock of cash, would now be examined with the same care as his income.

A second proposed consumption tax, the VAT, or value-added tax, imposes a curious hierarchical tax on the "value added" by each firm and business. Here, instead of every individual, every business firm would be subjected to intense bureaucratic scrutiny, for each firm would be obliged to report its income and its expenditures, paying a designated tax on the net income. This would tend to distort the structure of business. For one thing, there would be an incentive for uneconomic vertical integration, since the fewer the number of times a sale takes place, the fewer the imposed taxes. Also, as has been happening in European countries with experience of the VAT, a flourishing industry may arise in issuing phony vouchers, so that businesses can overinflate their alleged expenditures, and reduce their reported value added. Surely a sales tax, other things being equal, is manifestly both simpler, less distorting of resources, and enormously less bureaucratic and despotic than the VAT. Indeed the VAT seems to have no clear advantage over the sales tax, except of course, if multiplying bureaucracy and bureaucratic power is considered a benefit.

The third type of consumption tax is the familiar percentage tax on retail sales. Of the various forms of consumption tax, the sales tax surely has the great advantage, for most of us, of eliminating the despotic power of the government over the life of every individual, as in the income tax, or over each business firm, as in the VAT. It would not distort the production structure as would the VAT, and it would not skew individual preferences as would specific excise taxes.

Let us now consider the merits or demerits of a consumption as against an income tax, setting aside the question of bureaucratic power. It should first be noted that the consumption tax and the income tax each carry distinct philosophical implications. The income tax rests necessarily on the ability-to-pay principle, namely the principle that if a goose has more feathers it is more ripe for the plucking. The ability-to-pay principle is precisely the creed of the highwayman, of taking where the taking is good, of extracting as much as the victims can bear. The ability-to-pay principle is the philosophical embodiment of the memorable answer of Willie Sutton when he was asked, perhaps by a psychological social worker, why he robbed banks. "Because," answered Willie, "that's where the money is."

The consumption tax, on the other hand, can only be regarded as a payment for permission-to-live. It implies that a man will not be allowed to advance or even sustain his own life unless he pays, off the top, a fee to the State for permission to do so. The consumption tax does not strike me, in its philosophical implications, as one whit more noble, or less presumptuous, than the income tax.

Proportionality and Progressivity: Who? Whom?

One of the suggested virtues of the consumption tax advanced by conservatives is that, while the income tax can be and generally is progressive, the consumption tax is virtually automatically proportional. It is also claimed that progressive taxation is tantamount to theft, with the poor robbing the rich, whereas proportionality is the fair and ideal tax. In the first place, however, the Fisher-type consumption tax could well be every bit as progressive as the income tax. Even the sales tax is scarcely free from progressivity. For most sales taxes in practice exempt such products as food, exemptions that distort individual market preferences and also introduce progressivity of taxation.

But is progressivity really the problem? Let us take two individuals, one who makes $10,000 a year and another who makes $100,000. Let us posit two alternative tax systems: one proportional, the other steeply progressive. In the progressive tax system, income-tax rates range from 1 percent for the $10,000-a-year man, to 15 percent for the man with the higher income. In the succeeding proportional system, let us assume, everyone, regardless of income, pays the same 30 percent of his income. In the progressive system, the low-income man pays $100 a year in taxes, and the wealthier pays $15,000, whereas in the allegedly fairer proportional system, the poorer man pays $3,000 instead of $100, while the wealthier pays $30,000 instead of $15,000. It is, however, small consolation to the higher-income person that the poorer man is paying the same percentage of income in tax as he, for the wealthier person is being mulcted far more than before. It is unconvincing, therefore, to the richer man to be told that he is now no longer being "robbed" by the poor, since he is losing far more than before. If it is objected that the total level of taxation is far higher under our posited proportional than progressive system, we reply that that is precisely the point. For what the higher-income person is really objecting to is not the mythical robbery inflicted upon him by "the poor"; his problem is the very real amount being extracted from him by the State. The wealthier man's real complaint, then, is not how badly he is being treated relative to someone else, but how much money is being extracted from his own hard-earned assets. We submit that progressivity of taxes is a red herring; that the real problem and proper focus should be on the amount that any given individual is obliged to surrender to the State.For a fuller treatment, and a discussion of who is being robbed by whom, see Murray N. Rothbard, Power and Market: Government and the Economy, 2nd ed. (Kansas City: Sheed Andrews & McMeel, 1977), pp. 120–21.

The State, of course, spends the money it receives on various groups, and those who claim that progressive taxation mulcts the rich on behalf of the poor argue by comparing the income status of the taxpayers with those on the receiving end of the State's largess. Similarly, the Chicago School claims that the tax system is a process by which the middle class exploits both the rich and the poor, while the New Left insists that taxes are a process by which the rich exploit the poor. All of these attempts misfire by unjustifiably bracketing as one class the payers to, and recipients from, the State. Those who pay taxes to the State, be they wealthy, middle class or poor, are certainly on net, a different set of people than those wealthy, middle-class, or poor, who receive money from State coffers, which notably includes politicians and bureaucrats as well as those who receive favors from these members of the State apparatus. It makes no sense to lump these groups together. It makes far more sense to realize that the process of tax and expenditures creates two and only two separate, distinct, antagonistic social classes, what Calhoun brilliantly identified as the (net) taxpayers and the (net) tax consumers, those who pay taxes and those who live off them. I submit that, looked at in this perspective, it also becomes particularly important to minimize the burdens which the State and its privileged tax consumers place on the productivity of the taxpayers.See Murray N. Rothbard, Man, Economy, and State: A Treatise on Economic Principles.

The Problem of Taxing Savings

The major argument for replacing an income by a consumption tax is that savings would no longer be taxed. A consumption tax, its advocates assert, would tax consumption and not savings. The fact that this argument is generally advanced by free-market economists, in our day mainly by the supply-siders, strikes one immediately as rather peculiar. For individuals on the free market, after all, each decide their own allocation of income to consumption or to savings. This proportion of consumption to savings, as Austrian economics teaches us, is determined by each individual's rate of time preference, the degree by which he prefers present to future goods. For each person is continually allocating his income between consumption now, as against saving to invest in goods that will bring an income in the future. And each person decides the allocation on the basis of his time preference. To say, therefore, that only consumption should be taxed and not savings is to challenge the voluntary preferences and choices of individuals on the free market, and to say that they are saving far too little and consuming too much, and therefore that taxes on savings should be removed and all the burdens placed on present as compared to future consumption. But to do that is to challenge free-market expressions of time preference, and to advocate government coercion to forcibly alter the expression of those preferences, so as to coerce a higher saving-to-consumption ratio than desired by free individuals.

We must, then, ask, By what standards do the supply-siders and other advocates of consumption taxes decide why and to what extent savings are too low and consumption too high? What are their criteria of "too low" or "too much," on which they base their proposed coercion over individual choice? And what is more, by what right do they call themselves advocates of the "free market" when they propose to dictate choices in such a vital realm as the proportion between present and future consumption?

Supply-siders consider themselves heirs of Adam Smith, and in one sense they are right. For Smith, too, driven in his case by a deep-seated Calvinist hostility to luxurious consumption, sought to use government to raise the social proportion of investment to consumption beyond the desires of the free market. One method he advocated was high taxes on luxurious consumption; another was usury laws, to drive interest rates below the free-market level, and thereby coercively channel or ration savings and credit into the hands of sober, industrious prime business borrowers, and out of the hands of "projectors" and "prodigal" consumers who would be willing to pay high interest charges. Indeed, through the device of the ghostly Impartial Spectator, who, in contrast to real human beings, is indifferent to the time at which he will receive goods, Smith virtually held a zero rate of time preference to be the ideal.See the illuminating article by Roger W. Garrision, "West's 'Cantillon and Adam Smith': A Comment*," Journal of Libertarian Studies 7 (Fall 1985): 291–92.

The only coherent argument offered by advocates of consumption against income taxation is that of Irving Fisher, based on suggestions in John Stuart Mill.See Rothbard, Power and Market, pp. 98–100. Fisher argued that, since the goal of all production is consumption, and since all capital goods are only way stations on the way to consumption, the only genuine income is consumption spending. The conclusion is quickly drawn that therefore only consumption income, not what is generally called "income," should be subject to tax.

More specifically, savings and consumption, it is alleged, are not really symmetrical. All saving is directed toward enjoying more consumption in the future. Potential present consumption is foregone in return for an expected increase in future consumption. The argument concludes that therefore any return on investment can only be considered a "double counting" of income, in the same way that a repeated counting of the gross sales of, say, a case of Wheaties from manufacturer to jobber to wholesaler to retailer as part of net income or product would be a multiple counting of the same good.

This reasoning is correct as far as it goes in explaining the consumption-savings process, and is quite helpful in leveling a critique of conventional national income or product statistics. For these statistics carefully leave out all double or multiple counting in order to arrive at total net product, yet they arbitrarily include in total net income, investment in all capital goods lasting longer than one year—a clear example itself of double counting. Thus, the current practice absurdly excludes from net income a merchant's investment in inventory lasting 11 months before sale, but includes in net income investment in inventory lasting for 13 months. The cogent conclusion is that an estimate of social or national income should include only consumer spending.We omit here the fascinating question of how government's activities should be treated in national income statistics. See Rothbard, Man, Economy, and State, 2, pp. 815–20; idem, Power and Market, pp. 199–201; idem, America's Great Depression, 4th ed. (New York: Richardson & Snyder, 1983), pp. 296–304; Robert Batemarco, "GNP, PPR, and the Standard of Living," Review of Austrian Economics 1 (1987): 181–86.

Despite the many virtues of the Fisher analysis, however, it is impermissible to leap to the conclusion that only consumption should be taxed rather than income. It is true that savings leads to a greater supply of consumer goods in the future. But this fact is known to all persons; that is precisely why people save. The market, in short, knows all about the productive power of savings for the future, and allocates its expenditures accordingly. Yet even though people know that savings will yield them more future consumption, why don't they save all their current income? Clearly, because of their time preferences for present as against future consumption. These time preferences govern people's allocation between present and future. Every individual, given his money "income"—defined in conventional terms—and his value scales, will allocate that income in the most desired proportion between consumption and investment. Any other allocation of such income, any different proportions, would therefore satisfy his wants and desires to a lesser extent and lower his position on his value scale. It is therefore incorrect to say that an income tax levies an extra burden on savings and investment; it penalizes an individual's entire standard of living, present and future. An income tax does not penalize saving per se any more than it penalizes consumption.

Hence, the Fisher analysis, for all its sophistication, simply shares the other consumption-tax advocates' prejudices against the voluntary free-market allocations between consumption and investment. The argument places greater weight on savings and investment than the market does. A consumption tax is just as disruptive of voluntary time preferences and market allocations as is a tax on savings. In most or all other areas of the market, free-market economists understand that allocations on the market tend always to be optimal with respect to satisfying consumers' desires. Why then do they all too often make an exception of consumption-savings allocations, refusing to respect time-preference rates on the market?

Perhaps the answer is that economists are subject to the same temptations as anyone else. One of these temptations is to call loudly for you, him, and the other guy to work harder, and save and invest more, thereby increasing one's own present and future standards of living. A follow-up temptation is to call for the gendarmes to enforce that desire. Whatever we may call this temptation, economic science has nothing to do with it.

The Impossibility of Taxing Only Consumption

Having challenged the merits of the goal of taxing only consumption and freeing savings from taxation, we now proceed to deny the very possibility of achieving that goal, i.e., we maintain that a consumption tax will devolve, willy-nilly, into a tax on income and therefore on savings as well. In short, that even if, for the sake of argument, we should want to tax only consumption and not income, we should not be able to do so.

Let us take, first, the Fisher plan, which, seemingly straightforward, would exempt saving and tax only consumption. Let us take Mr. Jones, who earns an annual income of $100,000. His time preferences lead him to spend 90 percent of his income on consumption, and save and invest the other 10 percent. On this assumption, he will spend $90,000 a year on consumption, and save-and-invest the other $10,000. Let us assume now that the government levies a 20 percent tax on Jones's income, and that his time-preference schedule remains the same. The ratio of his consumption to savings will still be 90:10, and so, after-tax income now being $80,000, his consumption spending will be $72,000 and his saving-investment $8,000 per year.We set aside the fact that, at the lower amount of money assets left to him, Jones's time-preference rate, given his time-preference schedule, will be higher, so that his consumption will be higher, and his savings lower, than we have assumed.

Suppose now that instead of an income tax, the government follows the Irving Fisher scheme, and levies a 20 percent annual tax on Jones's consumption. Fisher maintained that such a tax would fall only on consumption, and not on Jones's savings. But this claim is incorrect, since Jones's entire savings-investment is based solely on the possibility of his future consumption, which will be taxed equally. Since future consumption will be taxed, we assume, at the same rate as consumption at present, we cannot conclude that savings in the long run receives any tax exemption or special encouragement. There will therefore be no shift by Jones in favor of savings-and-investment due to a consumption tax.In fact, per note 9, supra, there will be a shift in favor of consumption because a diminished amount of money will shift the taxpayer's time preference rate in the direction of consumption. Hence, paradoxically, a pure tax on consumption will and up taxing savings more than consumption! See Rothbard, Power and Market, pp. 108–11. In sum, any payment of taxes to the government, whether they be consumption or income, necessarily reduces Jones's net income. Since his time-preference schedule remains the same, Jones will therefore reduce his consumption and his savings proportionately. The consumption tax will be shifted by Jones until it becomes equivalent to a lower rate of tax on his own income. If Jones still spends 90 percent of his net income on consumption, and 10 percent on savings-investment, his net income will be reduced by $15,000, instead of $20,000, and his consumption will now total $76,000, and his savings-investment $9,000. In other words, Jones's 20 percent consumption tax will become equivalent to a 15 percent tax on his income, and he will arrange his consumption-savings proportions accordingly.If net income is defined as gross income minus amount paid in taxes, and for Jones, consumption is 90 percent of net income, a 20 percent consumption tax on $100,000 income will be tantamount to a 15 percent tax on this income. Rothbard, Power and Market, pp. 108–11. The basic formula is that net income, where G=gross income, t=the tax rate on consumption, and c, consumption as percent of net income, are givens of the problem, and N = G – T by definition, where T is the amount paid in consumption tax.

We saw at the beginning of this paper that an excise tax skewing resources away from more desirable goods does not necessarily mean we can recommend an alternative, such as an income tax. But how about a general sales tax, assuming that one can be levied politically with no exemptions of goods or services? Wouldn't such a tax burden be only on consumption and not income?

In the first place, a sales tax would be subject to the same problems as the Fisher consumption tax. Since future and present consumption would be taxed equally, there would again be shifting by each individual so that future as well as present consumption would be reduced. But, furthermore, the sales tax is subject to an extra complication: the general assumption that a sales tax can be readily shifted forward to the consumer is totally fallacious. In fact, the sales tax cannot be shifted forward at all!

Consider: all prices are determined by the interaction of supply, the stock of goods available to be sold, and by the demand schedule for that good. If the government levies a general 20 percent tax on all retail sales, it is true that retailers will now incur an additional 20 percent cost on all sales. But how can they raise prices to cover these costs? Prices, at all times, tend to be set at the maximum net revenue point for each seller. If the sellers can simply pass the 20 percent increase in costs onto the consumers, why did they have to wait until a sales tax to raise prices? Prices are already at highest net income levels for each firm. Any increase in cost, therefore, will have to be absorbed by the firm; it cannot be passed forward to the consumers. Put another way, the levy of a sales tax has not changed the stock already available to the consumers; that stock has already been produced. Demand curves have not changed, and there is no reason for them to do so. Since supply and demand have not changed, neither will price. Or, looking at the situation from the point of the demand and supply of money, which help determine general price levels, the supply of money has remained as given, and there is also no reason to assume a change in the demand for cash balances either. Hence, prices will remain the same.

It might be objected that, even though shifting forward to higher prices cannot occur immediately, it can do so in the longer run, when factor and resources owners will have a chance to lower their supply at a later point in time. It is true that a partial excise can be shifted forward in this way, in the long run, by resources leaving, let us say, the liquor industry and shifting into other untaxed industries. After a while, then, the price of liquor can be raised by a liquor tax, but only by reducing the future supply, the stock of liquor available for sale at a future date. But such "shifting" is not a painless and prompt passing on of a higher price to consumers; it can only be accomplished in a longer run by a reduction in the supply of a good.

The burden of a sales tax cannot be shifted forward in the same way, however. For resources cannot escape a sales tax as they can an excise tax—by leaving the liquor industry and moving to another. We are assuming that the sales tax is general and uniform; it cannot therefore, be escaped by resources except by fleeing into idleness. Hence, we cannot maintain that the sales tax will be shifted forward in the long run by all supplies of goods falling by something like 20 percent (depending on elasticities). General supplies of goods will fall, and hence prices rise, only to the relatively modest extent that labor, seeing a rise in the opportunity cost of leisure because of a drop in wage incomes, will leave the labor force and become voluntarily idle (or more generally will lower the number of hours worked).Rothbard, Power and Market, pp. 88-93. Also see the notable article by Harry Gunnison Brown, "The Incidence of a General Sales Tax," in Readings in the Economics of Taxation, R. Musgrave and C. Shoup, eds. (Homewood, Ill: Irwin, 1959), pp. 330–39.

In the long run, of course, and that run is not very long, the retail firms will not be able to absorb a sales tax; they are not unlimited pools of wealth ready to be confiscated. As the retail firms suffer losses, their demand curves for all intermediate goods, and then for all factors of production, will shift sharply downward, and these declines in demand schedules will be rapidly transmitted to all the ultimate factors of production: labor, land, and interest income. And since all firms tend to earn a uniform interest return determined by social time preference, the incidence of the fall in demand curves will rest rather quickly on the two ultimate factors of production: land and labor.

Hence, the seemingly common-sense view that a retail sales tax will readily be shifted forward to the consumer is totally incorrect. In contrast, the initial impact of the tax will be on the net incomes of retail firms. Their severe losses will lead to a rapid downward shift in demand curves, backward to land and labor, i.e., to wage rates and ground rents. Hence, instead of the retail sales tax being quickly and painlessly shifted forward, it will, in a longer run, be painfully shifted backward to the incomes of labor and landowners. Once again, an alleged tax on consumption, has been transmuted by the processes of the market into a tax on incomes.

The general stress on forward shifting, and neglect of backward shifting, in economics is due to the disregard of the Austrian theory of value, and its insight that market price is determined only by the interaction of an already-produced stock, with the subjective utilities and demand schedules of consumers for that stock. The market supply curve, therefore, should be vertical in the usual supply-demand diagram. The standard Marshallian forward-sloping supply curve illegitimately incorporates a time dimension within it, and it therefore cannot interact with an instantaneous, or freeze-frame, market-demand curve. The Marshallian curve sustains the illusion that higher cost can directly raise prices, and not only indirectly by reducing supply. And while we may arrive at the same conclusion as Marshallian supply-curve analysis for a particular excise tax, where partial equilibrium can be used, this standard method breaks down for general sales taxation.

Conclusion: The Amount vs. the Form of Taxation

We conclude with the observation that there has been far too much concentration on the form, the type of taxation, and not enough on its total amount. The result has been endless tinkering with kinds of taxes, coupled with neglect of a far more critical question: how much of the social product should be siphoned away from the producers? Or, how much income should be retained by the producers and how much income and resources coercively diverted for the benefit of nonproducers?

It is particularly odd that economists who proudly refer to themselves as advocates of the free market have in recent years led the way in this mistaken path. It was allegedly free-market economists for example who pioneered in and propagandized for the alleged Tax Reform Act of 1986. This massive change was supposed to bring us "simplification" of our income taxes. The result, of course, was so simple that even the IRS, let alone the fleet of tax lawyers and tax accountants, has had great difficulty in understanding the new dispensation. Peculiarly, moreover, in all the maneuverings that led to the Tax Reform Act, the standard held up by these economists, a standard apparently so self-evident as to need no justification, was that the sum of tax changes be "revenue neutral." But they never told us what is so great about revenue neutrality. And of course, by cleaving to such a standard, the crucial question of total revenue was deliberately precluded from the discussion.

Even more egregious was an early doctrine of another group of supposed free-market advocates, the supply-siders. In their original Laffer-curve manifestation, now happily consigned to the dustbin of history, the supply-siders maintained that the tax rate that maximizes tax revenue is the "voluntary" rate, and a rate that should be diligently pursued. It was never pointed out in what sense such a tax rate is "voluntary," or what in the world the concept of "voluntary" has to do with taxation in the first place. Much less did the supply-siders in their Lafferite form ever instruct us why we must all uphold maximizing government revenue as our beau idéal. Surely, for free-market proponents, one might think that minimizing government depredation of the private product would be a bit more appealing.

It is with relief that one turns for a realistic as well as a genuine free-market approach to Jean-Baptiste Say, who contributed considerably more to economics than Say's law. Say was under no illusion that taxation is voluntary nor that government spending contributes productive services to the economy. Say pointed out that, in taxation,

The government exacts from a taxpayer the payment of a given tax in the shape of money. To meet this demand, the taxpayer exchanges part of the products at his disposal for coin, which he pays to the tax-gatherers.

Eventually, the government spends the money on its own needs, so that

in the end … this value is consumed; and then the portion of wealth, which passes from the hands of the taxpayer into those of the tax-gatherer, is destroyed and annihilated.

Note that, as in the case of the later Calhoun, Say sees that taxation creates two conflicting classes, the taxpayers and the tax gatherers. Were it not for taxes, the taxpayer would have spent his money on his own consumption. As it is, "The state … enjoys the satisfaction resulting from that consumption."

Say proceeds to denounce the

prevalent notion, that the values, paid by the community for the public service, return it again … that what government and its agents receive, is refunded again by their expenditures.

Say angrily comments that this "gross fallacy … has been productive of infinite mischief, inasmuch as it has been the pretext for a great deal of shameless waste and dilapidation."

On the contrary, Say declares, "the value paid to government by the taxpayer is given without equivalent or return; it is expended by the government in the purchase of personal service, of objects of consumption."

Say goes on to denounce the "false and dangerous conclusion" of economic writers that government consumption increases wealth. Say noted bitterly that "if such principles were to be found only in books, and had never crept into practice one might suffer them without care or regret to swell the monstrous heap of printed absurdity."

But unfortunately, he noted, these notions have been put into "practice by the agents of public authority, who can enforce error and absurdity at the point of a bayonet or mouth of the cannon."Jean-Baptiste Say, A Treatise on Political Economy, 6th ed. (Philadelphia: Claxton, Remsen & Heffelfinger, 1880), pp. 412–15. Also see Murray N. Rothbard, "The Myth of Neutral Taxation," Cato Journal 1 (Fall 1981): 551–54. Taxation, then, for Say is

the transfer of a portion of the national products from the hands of individuals to those of the government, for the purpose of meeting the public consumption of expenditure.… It is virtually a burthen imposed upon individuals, either in a separate or corporate character, by the ruling power … for the purpose of supplying the consumption it may think proper to make at their expense.Say, Treatise, p. 446.

But taxation, for Say, is not merely a zero-sum game. By levying a burden on the producers, he points out, taxes, over time, cripple production itself. Writes Say,

Taxation deprives the producer of a product, which he would otherwise have the option of deriving a personal gratification from, if consumed … or of turning to profit, if he preferred to devote it to an useful employment.… [T]herefore, the subtraction of a product must needs diminish, instead of augmenting, productive power.

J.B. Say's policy recommendation was crystal clear and consistent with his analysis and that of the present paper. "The best scheme of [public] finance is, to spend as little as possible; and the best tax is always the lightest."

This article serves as a complete response to Alan Greenspan's call for a consumption tax. It originally appeared in the Review of Austrian Economics 7, no. 2 (1994): 75–90. It appeared on mises.org on March 18, 2005.

With a few exceptions contemporary commentators on economic problems are advocating economic intervention. This unanimity does not necessarily mean that they approve of interventionistic measures by government or other coer­cive powers. Authors of economics books, essays, articles, and political platforms demand interventionistic measures before they are taken, but once they have been imposed no one likes them. Then everyone—usually even the authori­ties responsible for them—call them insufficient and unsat­isfactory. Generally the demand then arises for the replace­ment of unsatisfactory interventions by other, more suitable measures. And once the new demands have been met, the same scenario begins all over again. The universal desire for the interventionist system is matched by the rejection of all concrete measures of the interventionist policy.

Sometimes, during discussion of a partial or complete re­peal of a regulation, there are voices against changing it, but they rarely approve the given measure; they wish to prevent even worse measures. For instance, scarcely ever have live­stock farmers been pleased with the tariffs and veterinary regulations that were adopted in order to restrict the impor­tation of livestock, meats, and fats from abroad. But as soon as consumers demand the repeal or relaxation of these re­strictions, the farmers rise in their defense. The champions of legislative labor protection have labeled every regulation adopted so far as unsatisfactory—at best to be accepted as an installment on what needs to be done. But if one such regulation faces repeal—for instance, the legal limitation of the workday to eight hours—they rise in its defense.

This attitude toward specific interventions is readily un­derstood by anyone who recognizes that intervention neces­sarily is illogical and unsuitable, as it can never attain what its champions and authors hope to attain. It is remarkable, however, that it is obstinately defended in spite of its short­comings, and in spite of the failure of all attempts at demon­strating its theoretical logic. To most observers, the thought of returning to classical liberal policies appears so absurd that they rarely bother to give it thought.

The defenders of interventionism often appeal to the no­tion that classical liberalism belongs to a past era. Today, they tell us, we are living in the age of “constructive eco­nomic policy,” namely, interventionism. The wheel of his­tory cannot be turned back, and that which has vanished cannot be restored. He who calls for classical liberalism and thus proclaims the solution as “back to Adam Smith” is de­manding the impossible.

It is not at all true that contemporary liberalism is identi­cal with the British liberalism of the eighteenth and nine­teenth centuries. Certainly modern liberalism is built on the great ideas developed by Hume, Adam Smith, Ricardo, Bentham, and Wilhelm Humboldt. But liberalism is no closed doctrine and rigid dogma. It is an application of the principles of science to man’s social life, to politics. Eco­nomics and social science have made great strides since the beginning of liberal doctrine, and thus liberalism also had to change, although the basic thought remained unaltered. He who makes the effort to study modern liberalism will soon discover the differences between the two. He will learn that knowledge of liberalism cannot be derived from Adam Smith alone, and that the demand for repeal of intervention­istic measures is not identical with the call, Return to Adam Smith.

Modern liberalism differs from the liberalism of the eight­eenth and nineteenth centuries at least as much as modern interventionism differs from the mercantilism of the seven­teenth and eighteenth centuries. It is illogical to call the re­turn to free trade an anachronism if the return to the system of protection and prohibition is not also seen as an anachronism.

Writers who credit the change in economic policy simply to the spirit of the age surely expect very little from a scien­tific explanation of interventionism. The capitalist spirit is said to have been replaced by the spirit of the hampered economy. Capitalism has grown old and, therefore, must yield to the new. And this new is said to be the economy that is hampered by government and other intervention. Anyone who seriously believes that such statements can re­fute the conclusions of economics regarding the effects of import duties and price controls truly cannot be helped.

Another popular doctrine works with the mistaken con­cept of “free competition.” At first, some writers create an ideal of competition that is free and equal in conditions—like the postulates of natural science—and then they find that the private property order does not at all correspond to this ideal. But because realization of this postulate of “competition that is really free and equal in conditions” is believed to be the highest objective of economic policy, they suggest various reforms. In the name of the ideal, some are demanding a kind of socialism they call “liberal” because they apparently perceive the essence of liberalism in this ideal. And others are demanding various other interven­tionistic measures. But the economy is no prize contest in which the participants compete under the conditions of the rules of the game. If it is to be determined which horse can run a certain distance in the shortest period of time, the con­ditions should be equal for all horses. However, are we to treat the economy like an efficiency test to determine which applicant under equal conditions can produce at lowest costs?

Competition as a social phenomenon has nothing in common with competition in play. It is a terminological confusion to transfer the postulate of “equal conditions” from the rules of sport or from the arrangement of scientific and technological experiments to economic policy. In so­ciety, not only in the capitalist order, but in every conceiv­able social order, there is competition among individuals. The sociologists and economists of the eighteenth and nine­teenth centuries demonstrated how competition works in the social order that rests on private property in the means of production. This was an essential part of their critique of the interventionistic policies of the mercantilistic police and welfare state. Their investigations revealed how illogical and unsuitable interventionistic measures were. Pressing further they also learned that the economic order that corre­sponds best to man’s economic goals is that built on private property. Surely the mercantilists wondered how the people would be provided for if government left them alone. The classical liberals answered that the competition of business­men will supply the markets with the economic goods needed by consumers. In general they couched their de­mand for elimination of intervention in these words: the freedom of competition must not be limited. With the slo­gan of “free competition” they demanded that the social function of private property not be hampered by govern­ment intervention. Thus the misunderstanding could arise that the essence of liberal programs was not private prop­erty, but “free competition.” Social critics began to chase a nebulous phantom, “genuinely free competition,” which was nothing more than a creature of an insufficient study of the problem and occupation with catchwords.See the critique of such errors, Halm, Die Konkurrenz [Competition], Munich and Leipzig, 1929, especially p. 131 et seq.

The apology for interventionism and the refutation of the critique of interventions by economic theory are taken much too lightly with the assertion, e.g., by Lampe, that this cri­tique

is justified only when it is shown simultaneously that the existing economic order corresponds to the ideal of free competition. Only under this condition must every government intervention be tantamount to a reduction in economic productivity. But no seri­ous social scientist would venture today to speak of such a pre-established economic harmony, as the classical economists and their optimistic-liberal epi­gones envisage it. There are tendencies in the market mechanism that bring about an adjustment of dis­rupted economic relations. But these forces prevail only “in the long run,” while the readjustment pro­cess is interrupted by more or less sharp frictions. This gives rise to situations in which intervention by “social power” not only can be necessary politically, but also suitable economically … provided expert advice on the basis of strictly scientific analysis is available to the public power and that it is followed.Lampe, Notstandarbeiten oder Lohnabbau? [Public works or wage reductions?], Jena, 1927, p. 104 et seq.

It is most remarkable that this thesis was not written during the 1870s or 1880s when the Socialists of the Chair untiringly offered to the high authorities their infallible remedies for the social problem and their promises for the dawn of glori­ous times. But it was written in 1927. Lampe still does not see that the scientific critique of interventionism has nothing to do with an “ideal of free competition” and “pre­established harmony.”On “pre-established harmony” see, further my essay below, “Anti-Marxism.” He who scientifically analyzes in­terventionism does not maintain that the unhampered econ­omy is in any sense ideal, good, or free from frictions. He does not contend that every intervention is tantamount to a “reduction in economic productivity.” His critique merely demonstrates that interventions cannot achieve the objec­tives which their authors and promoters want to achieve, and that they must have consequences which even their au­thors and sponsors did not want and which run counter to their own intentions. This is what the apologists of inter­ventionism must answer. But they are without an answer.

Lampe presents a program of “productive intervention­ism” consisting of three points.Lampe, op. cit., p. 127 et seq. The first point is that the public authority “must possibly stand for a slow reduction of the wage level.” At least Lampe does not deny that any “public authority” attempt at holding wage rates above those an unhampered market would establish must create unemployment. But he overlooked the fact that his own pro­posal would bring about, to a lesser degree and for a limited time, the intervention which he himself knew to be unsuit­able. When compared with such vague and incomplete pro­posals, the advocates of all-round controls have the advan­tage of seeming logical. Lampe reproaches me for not caring how long the transitional frictional unemployment will last and how severe it may be.Ibid., p. 105. Now, without intervention it neither will last long nor affect many. But undoubtedly the enactment of Lampe’s proposal can only bring about its pro­longed duration and its aggravated severity. Even Lampe cannot deny this in the light of his other discussion.

Anyway, we must bear in mind that a critique of inter­ventionism does not ignore the fact that when some produc­tion interventions are eliminated special frictions are gener­ated. If, for instance, all import restrictions were lifted today, the greatest difficulties would be evident for a short time, but there would soon be an unprecedented rise in the productivity of human labor. These inevitable frictions can­not be mitigated through an orderly lengthening of the time taken for such a reduction of the protection, nor are they al­ways aggravated by such a lengthening. However, in the case of government interferences with prices, a slow and gradual reduction, when compared with their immediate abolition, only prolongs the time during which the undesir­able consequences of the intervention continue to be felt.

The two other points of Lampe’s “productive interven­tionism” require no special critique. In fact, one of them is not interventionistic, and the other actually aims at its aboli­tion. In the second point of his program, Lampe demands that public authority eliminate the numerous institutional obstacles that stifle the occupational and regional mobility of labor. But this means elimination of all those government and labor union measures that impede mobility. This is ba­sically the old demand of laissez passer, the very opposite of interventionism. And in his third point, Lampe demands that the central political authority gain “an early and de­pendable overview of the whole economic situation,” which surely is no intervention. An overview of the economic sit­uation can be useful to everybody, even to government, if the conclusion is reached that there should be no inter­ference at all.

When we compare Lampe’s interventionistic program with others of a few years ago, we recognize how much more modest the claims of this school have become. This is progress of which the critics of interventionism can be proud.

The Thesis of ​Schmalenbach

Considering the dismal intellectual poverty and sterility of nearly all books and papers defending interventionism, we must take notice of an attempt by Schmalenbach to prove the inevitability of the “hampered economy.”

Schmalenbach starts from the assumption that the capital intensity of industry is growing continuously. This leads to the inference that fixed costs become ever more significant while proportional costs lose in significance.

The fact that an ever larger share of production costs is fixed causes the old era of a free economy to draw to a close, and a new era of a hampered econ­omy to begin. It is a characteristic of proportional costs that they occur with every item produced, with every ton delivered…. When prices fall below pro­duction costs, production is curtailed with corre­sponding savings in proportional costs. But if the lion’s share of production costs consists of fixed costs, a production cutback does not reduce costs correspondingly. When prices then decline it is rather futile to offset their fall through production cutbacks. It is cheaper to continue production with average costs. Of course, the business now suffers a loss which, however, is smaller than it would be in the case of production cutbacks with nearly undi­minished costs. The modern economy with its high fixed costs thus has been deprived of the remedy that automatically coordinates production and consump­tion, and thereby restores the economic equilibrium. The economy lacks the ability to adjust production to consumption because to a large extent proportional costs have become rigid.Schmalenbach, “Die Betriebswirtschaftslehre an der Schwelle der neuen Wirt­schaftsverfassung” [The doctrines of business administration at the dawn of a new economic constitution] in Zeitschrift für Handelswissenschaftljche Forschung [Journal for trade research], 22nd year, 1928, p. 244 et seq.

This shifting of production costs within the enterprise “al­most alone” is “guiding us from the old economic order to the new one.” “The old great era of the nineteenth century, the epoch of free enterprise, was possible only when pro­duction costs generally were proportional in nature. It ceased to be possible when the proportion of fixed costs be­came ever more significant.” Since the growth of fixed costs has not yet stopped and will probably continue for a long time, it is obviously hopeless to count on a return of the free economy.Ibid., p. 242 et seq.

Schmalenbach at first offers proof for the relative rise in fixed costs with the remark that the continuous growth of enterprise size “is necessarily connected with an expansion, even a relative expansion, of the department that is heading the whole organization.”Ibid., p. 243. I doubt that. The superiority of a larger enterprise consists, among other things, in manage­rial costs lower than those of smaller enterprises. The same is true for the commercial departments, especially the sales organizations.

Of course, Schmalenbach is completely correct when he emphasizes that the costs of management and many other general costs cannot be reduced substantially when the en­terprise works only at one-half or one-fourth of its capacity. But as management costs decline with the growth of the en­terprise, calculated per unit of output, they are less signifi­cant in this age of big business and giant enterprises than formerly in the age of smaller operations.

But Schmalenbach’s emphasis is not here; it lies on the rise in capital intensity. He believes that he can simply con­clude from the continuous formation of new capital and progressive application of machines and equipment—which is undoubtedly true in a capitalist economy—that the ratio of fixed costs will rise. But he must prove first that this is actually the case for the whole economy, not just for indi­vidual enterprises. In fact, continuing capital formation leads to a decline in the marginal productivity of capital and an increase in that of labor. The share that goes to capital de­clines, and that of labor rises. Schmalenbach did not con­sider this, which negates the very premise of his thesis.See Adolf Weber, Das Ende des Kapitalismus [The end of capitalism], Munich, 1929, p. 19.

But let us also ignore this shortcoming and examine Schmalenbach’s doctrine itself. Let us raise the question of whether a relative rise in fixed costs can actually precipitate entrepreneurial behavior that deprives the economy of its ability to adjust production to demand.

Let us look at an enterprise that either from the start or be­cause of a changed situation does not come up to its earlier expectations. When it was built its founders hoped that the investment capital not only would be amortized and would yield the going rate of interest but, in addition, would pay a profit. Now it has turned out differently. The product price has fallen so much that it covers only a part of produc­tion costs—even without allowance for the costs of interest and amortization. A cutback in output cannot bring relief; it cannot make the enterprise profitable. The less it pro­duces, the higher will be the production costs per unit of output and the greater the losses from the sale of each unit (pursuant to our assumption that the fixed costs are very high relative to proportional costs, disregarding even the costs of interest and amortization). There is only one way out of the difficulty: to shut down entirely; only then can further losses be avoided. Of course the situation may not always be so simple. There is hope, perhaps, that the prod­uct price will rise again. In the meantime, production is con­tinued because the disadvantages of the shutdown are thought to be greater than the operating losses during the bad time. Until recently most unprofitable railroads were in this situation because automobiles and airplanes entered the competition. They counted upon an increase in traffic, hoping to earn profits some day. But if such special condi­tions do not exist, production is shut down. Enterprises la­boring under less favorable conditions disappear, which establishes the equilibrium between production and de­mand.

Schmalenbach’s error lies in his belief that the cutback in production, necessitated by the decline in prices, must take place through a proportionate cutback of all existing opera­tions. He forgets that there is yet another way, namely, the complete shutdown of all plants working under unfavorable conditions because they can no longer stand the competi­tion of plants producing at lower costs. This is true espe­cially in industries producing raw materials and staples. In finishing industries, where individual plants usually manu­facture various items for which production and market con­ditions may vary, a cutback may be ordered, limiting output to the more profitable items.

This is the situation in a free economy unhampered by government intervention. Therefore, it is utterly erroneous to maintain that a rise in fixed costs denies our economy the ability to adjust production to demand.

It is true that if government interferes with this adjust­ment process through the imposition of protective tariffs of appropriate size a new possibility arises for producers: they can form a cartel in order to reap monopolistic gains through reductions in output. Obviously, the formation of cartels does not result from some development in the free economy, but is rather the consequence of the government interven­tion, i.e., the tariff. In the case of coal and brick, the trans­portation costs, which are so high relative to product value, may, under certain conditions and without government in­tervention, lead to the formation of cartels with limited local effectiveness. A few metals are found in so few places that even in a free economy the producers may attempt to form a world cartel. But it cannot be said too often that all other cartels owe their existence not to a tendency in a free econ­omy, but to intervention. International cartels generally can be formed only because important production and con­sumption areas are sheltered from the world market by tariff barriers.

The formation of cartels has nothing to do with the ratio of fixed to proportional costs. The fact that the cartel forma­tion in the finishing industries is proceeding more slowly than in staple industries is not due to the slower rise in fixed costs, as Schmalenbach believes, but to the complex manu­facture of goods nearer to consumption, which is too intri­cate for cartel agreements. Furthermore, it is due to the dis­persal of production over numerous enterprises that are more vulnerable to competition by outsiders.

The fixed costs, according to Schmalenbach, prod an en­terprise to embark upon expansion in spite of lacking de­mand. There are facilities in each plant that are used very little; even at full plant operation they are working with de­gressive costs. To utilize these facilities better the plant is enlarged. “Thus whole industries are expanding their capac­ities without justification by a rise in demand.”Schmalenbach, op. cit., p. 245. We read­ily admit that this is the case in contemporary Europe with its interventionistic policies, and especially in highly inter­ventionistic Germany. Production is expanded without con­sideration of the market, but rather in view of the redistri­bution of cartel quotas and similar considerations. Again, this is a consequence of interventionism, not a factor giv­ing rise to it.

Even Schmalenbach, whose thinking is oriented eco­nomically in contrast to that of other observers, could not es­cape the error that generally characterizes German economic literature. It is erroneous to view developments in Europe, and particularly in Germany under the influence of highly protective tariffs, as the result of free market forces. It cannot be emphasized too often and too emphatically that the German iron, coal, and potash industries are operating under the impact of tariff protection, and, in the case of coal and potash, also under other government intervention, and these are forcing the formation of syndicates. Therefore, to draw conclusions for the free economy from what is happening in those industries is completely incorrect. The “permanent inefficiency” so sharply criticized by Schmal­enbach,Ibid., p. 247. is no inefficiency of the free economy, but in­efficiency of the hampered economy. The “new eco­nomic order” is the product of interventionism.

Schmalenbach is convinced that in the not-too-distant fu­ture we must reach a state of affairs in which the monopolis­tic organizations will receive their monopolistic power from the state, and the state will superintend “the performance of the duties incumbent on the monopoly.”Ibid., p. 249 et seq. Schmalenbach, op. cit., p. 245. Surely, if for any reason we reject the return to a free economy, this con­clusion completely agrees with that to which every economic analysis of the problems of interventionism must lead. Interventionism as an economic system is unsuitable and illogical. Once this is recognized it leaves us with the choice between lifting all restrictions, or expanding them to a system in which government directs all business decisions—in which the state determines what to produce and how, under what conditions, and to whom the products must be sold. This is a system of socialism in which private property at best survives in name only.

From Critique of Interventionism (1976), translated by Hans F. Sennholz, originally published as Kritik des Interventionismus (1929).

The claim of the Austrian School that has scandalized members of other schools for 150 years is the following. The propositions of economics are universal. The principles apply in all times and all places, because they derive from the structure of reality and human action.

What brought about economic growth, inflation, or the business cycle in China in 300 BC are the same institutions that drive phenomena in the United States in AD 2008. The circumstances of time and place change, but the underlying economic reality is identical.

That claim has made other economists—to say nothing of sociologists, historians, and politicians—scatter like pigeons. The Historical School poured scorn on this idea, and Carl Menger, the founder of the Austrian School, fought them tooth and nail. The Chicago School of positivists found the claim preposterous, and Mises and Hayek and Rothbard battled them. The Keynesians have long been outraged, and the postwar Austrian generation reasserted the truth. The socialists, who posit that rearranging property titles will transform all of reality, say that the claim is absurd, capitalistic nonsense.

But there it stands. No matter where or when, the essential prerequisite for economic growth is capital accumulation in a framework of freedom and sound money. The consequence of price control is shortage and surplus. The effect of money expansion is inflation and the business cycle. The effect of every form of intervention is to make society less prosperous than it would otherwise be.

The list of universals is endless, which is why every age needs good economists to explain and articulate the truth.

Well, I would like to add that there are universal fallacies too.

Frédéric Bastiat pointed to one: the belief that the destruction of wealth fuels its creation. He explains this by means of an allegory that has come to be known as the story of the broken window. Most famously it was retold as the opening of Henry Hazlitt's Economics in One Lesson, which is probably the bestselling economics book of all time.

A kid throws a rock at a window and breaks it, and everyone standing around regrets the unfortunate state of affairs. But then up walks a man who purports to be wise and all knowing. He points out that this is not a bad thing after all. The man fixing the window will get money for doing so. This will then be spent on a new suit, and the tailor too will get money. The tailor will spend money on other items, and the circle of rising prosperity will expand without end.

What's wrong with this scenario? As Bastiat put it, "It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way which this accident has prevented."

You can see the absurdity of the position of the wise commentator when you take it to absurd extremes. If the broken window really produces wealth, why not break all windows up and down the whole city block? Indeed, why not break doors and walls? Why not tear down all houses so that they can be rebuilt? Why not bomb whole cities so construction firms can get busy rebuilding?

It is not a good thing to destroy wealth. Bastiat puts it this way: "Society loses the value of things which are uselessly destroyed."

It sounds like an unexceptional claim. But herein rests the core case against everything the government does. Perhaps, then, we can see why the allegory is not better known. If we took it seriously, we would dismantle the whole apparatus of American economic intervention.

If you are with me to this point, perhaps you have a hard time believing that anyone really believes that wealth destruction is actually a good thing. Let me try to show that the fallacy is as pervasive as ever.

After every natural disaster, we at the Mises Institute start what we call the "Broken Window Watch."

After hurricane Katrina, the Labor Secretary said, "[W]hat will happen—and I have seen this in previous catastrophes and hurricanes—there is a bright spot in that new jobs do get created."

And The Economist said, "While big hurricanes like Katrina destroy wealth, they often have a net positive effect on GDP growth, as the temporary downturn immediately after the storm is more than made up for by the burst of economic activity that takes place when the rebuilding begins."

And the New York Times said, "Economists point out that although Katrina has destroyed a lot of accumulated wealth, it ultimately will probably have a positive effect on growth data over the next few months as resources are channeled into rebuilding."

After last year's California fires, we heard this from Alan Gin, a University of San Diego economist: "In the odd nature of economic accounting, this will probably be a stimulus. There will be a huge amount of rebuilding in the next couple of years, financed by insurance payments."

And CBS Marketwatch said, "Economists have noted the perverse reality that in the wake of disasters, reconstruction spending helps the economy, even as people are still struggling to recover from their personal losses."

Note that personal loss here is deemed rather irrelevant compared with the beneficial macroeconomic results. Here we have a theme we find often in economics, the attempt to drive a wedge between what makes sense for individuals and what is good for society. We see this on display in this recessionary environment, when people are told to spend spend spend, even though most people understand that recessions are times for saving.

Continuing on, we find the Broken Window fallacy popping up even after 9-11.

Timothy Noah of Slate wrote, "We live in a very wealthy nation that responds to horrible disasters by spending large sums of money…. It will also provide a meaningful Keynesian stimulus to a national economy that, let's face it, was tottering on the brink of recession well before Sept. 11. The recession may still come, but the countercyclical spending should help shorten it."

Another economist declared, "Initially, this could provide a significant boost to an economy that had been slumping. The construction industry could benefit from the rebuilding process. There may also be a boon for slumping tech sales, in replacing lost equipment."

Thus can we see the continuing relevance not only of Bastiat's allegory but also of the characters in the story. The posturing wiseguy who says that breaking windows is good for the economy keeps reappearing again and again. So entrenched is this mistake that we might call it official economic doctrine for the whole country.

I ask you to consider the absurd discussion of a stimulus package designed to rescue the economy from recession. The idea is that the government will inject funds into private markets to stimulate them to the point that they will run on their own. Not once in this debate have I heard anyone ask the core question: where is this money going to come from?

It seems that Washington wants us to believe that they have some magic machine that can turn up $150 billion in new assets without anyone having to do anything to make these assets appear. One wonders, then, why we need to wait until a recession to stimulate the economy. Why not magically create hundreds of billions every day, and not just for this country but for the entire world? Why are we holding back?

Now, the ideas of the stimulus package are not 100% awful. Some people are talking about tax cuts, which is a good thing but rather pointless without spending cuts. I'm particularly intrigued by the underlying assumption here that taxes work as a drag on an economy whereas tax cuts fuel expansion. If that is the case—and it is indeed true but for different reasons than Washington gives—why wait until the recession to cut taxes? If taking less from us is good for the economy, we should institute this as a universal policy.

One great lesson of political economy, emphasized for centuries, is that the government creates no wealth of its own. Everything it has it has to get from you and me, one way or another. It can tax. It can borrow. And, finally, it can inflate by means of credit-market manipulation. This third option is the most disguised. When people hear the words "monetary policy," they figure that this is something they will leave to experts. And central bankers have an astonishing talent for obfuscation to the point that no one knows with certainty precisely what they are doing.

The whole show is designed to make us go to sleep and not think about what is really going on. The unvarnished truth is that when the Fed artificially lowers rates, it is creating new money that waters down the value of the existing money stock, yielding a lower purchasing power for the dollar. That's another way of saying that it creates inflation—perhaps not right away, and perhaps not across all economic sectors, but eventually and certainly.

This, my friends, is a form of breaking windows. It is wealth destruction. It matters not that there will be more dollars to spend, because prices will be higher and wealth has been drained out of the private sector—and redistributed within it. It is Bastiat's fallacy reinvented in a new form.

New money also distorts production structures. At the very time when the market is pressuring long-term investment to pull back, the lower rates encourage expansion in ways that prolong the crisis. It only delays and worsens the inevitable. The Great Depression taught us that government is capable of doing this to the point that the crisis can last for 17 years. So this is no small matter. A government determined to prevent recession is a government that might end up sustaining one to the point of the collapse of civilization itself.

It is a perverse belief, but pervasive nonetheless. It is believed by both political parties. It is held by the president, the media, and the congress (except for Ron Paul). It is a reflexive belief, one that reflects a failure to think between stages and see the unseen effects of government intervention.

One reason that Bastiat's example has power is that it applies not just in one area of policy but all areas. If it isn't true that breaking windows creates wealth, it is not true that government spending and inflating is a boon to the economy. It only ends up draining wealth from the private sector, which is the only source of wealth creation.

It doesn't matter what the government spends money on. For example, building pyramids with tax dollars is not good for the economy, despite what Keynes claimed. But neither is waging war good for us or the victim country, despite constant claims to the contrary.

It is surely one of the most deadly myths that the Second World War ended the Depression. As Robert Higgs has shown, it further prolonged it, all phony data aside. And consider the spending on the war on terror: if government spending were capable of stimulating the economy, we would not have recession right now

Chris Westley assembled some data on the last seven years of economic conditions, and it is sobering indeed. Since 2000, tax revenues are up 25%. That's wealth destruction. Government spending is setting records for expansion, with $1 trillion added to the annual budget, with military spending up $250 billion each year over the egregious $400 billion spent annually in 2000. That's wealth destruction. The national debt is up 59%. That has to be paid. More destruction.

Social Security liabilities are up 60%. That too is the promise of future destruction. The money supply is up 72%. More destruction. Inflation itself has risen 20%, so the dollar of 2000 is now worth 80 cents. The gas price alone is up 118%, so that too is wealth destroyed. As an indication of economic trouble, the gold price is up 206%.

Here is the story so far of the government's great stimulus. It has led to hard economic times. More of the same will create more of the same and worse. The unemployment rate is rising. Savings are falling. Prices are rising. We are less secure, less prosperous, and we have fewer opportunities than ever to dig our way out of this mess.

Government expansion has actually created the absurd scenario mentioned above. The boy threw the rock; the crowds in Washington believed the sophist; and now they are plotting to raze all homes on the block, in the name of economic recovery.

Have we learned from the Great Depression? Ben Bernanke believes that he has learned something. He believes that the key problem of that period was a failure of the central bank to pump in enough money and credit. He has never absorbed the critical observation of Rothbard that the Fed did attempt to pump up the money supply from 1929–1934. They used every mechanism, but the credit markets found few takers, and without their cooperation, the money supply does not expand.

The real lesson of the Great Depression is that there is nothing that the central bank can do to forestall a recession whose time has come, and nothing government can do to improve the situation once the recession has arrived. Everything it attempts to do—except shrink—only ends up making matters worse.

So it is in our time. We must ask ourselves what Washington is capable of doing this time around. I believe that the answer is anything and everything. Bernanke will attempt to flood the economy with money. Washington is perfectly capable of imposing price and wage controls on the entire economy. It is capable of terrifying levels of protectionist legislation. New taxes are less likely but taxation through debt accumulation is probably inevitable. There might be rationing, spending mandates, antihoarding legislation, and more.

The assumption that driving up consumption is the key to prosperity is particularly dangerous, and also pregnant with irony. During good economic times, we are hounded constantly by the intellectual elites for our consumption habits. It is said that we are a greedy nation, buying ever more fripperies and not looking after the long term. The American public is decried by the intellectual elites as materialist, consumerist, and short sighted.

Then recession hits and the tune changes completely. Reliable leftists, fresh from having complained about the egregious spending habits of the American consumer, suddenly turn on a dime and tell us that more consumption is the key to economic growth. They favor policies that would get us to fork over ever more of our money, under the belief that the core problem is a lack of demand!

A recent example is Barack Obama, who said last year that the problem with popular culture is that it "saturates our airwaves with a steady stream of sex, violence and materialism." But only this week, he seemed to endorse one of the three. "If the economy continues to decline in the coming weeks, we should" send checks to people, he said. "This is the quickest way to help people pay their bills and get them to start spending."

In fact, less spending and more saving is what is called for during a recession, which is nothing but a market correction writ large. Attempting to coerce spending threatens the value of the dollar itself.

Here we face a very dangerous situation. If the dollar ever ceases to be the international currency of choice—and this could happen—we could face roaring inflation. And with dreadful legislation that prohibits any kind of choice in currency, Americans will be stuck. Here is a problem that could cause near panic in Washington.

The irony here is that after a century of failed interventionism and socialism, Washington is no less likely, and probably far more likely, to take the path of least resistance and accumulate ever more power unto itself, at our expense.

We are in an election season, so of course people ask who would be the least bad person to head the state in the years ahead. The answer here is not at all clear, if it is not Dr. Paul. As with the 1930s we face a choice between militaristic fascism and Keynesian-style socialism combined with environmentalism. These are two very grim choices.

I tell you this not to spread gloom but merely to be realistic about the prospects for the future of American politics. But there is also good news to be considered. The private sector has raced so far ahead of the state, and is so global, that it is far more resilient than before. There are safety valves available in the form of international capital markets.

The government is so much bigger now than in the 1930s, but, paradoxically, that also makes it less effective than it once was, which is very good news. It is a massive, lumbering giant, whereas the markets are a speed racer.

I might also point out that the government enjoys nowhere near the respect it once had. Once the governing elite consisted of the nation's elite, coming from the best families and the best schools. Today, the governing elite has never been more transparently ridiculous and even freakish. Gone are the aristocratic public servants of yesterday; today, the government is made up of a class of hucksters and gangsters that inspires no confidence.

This is all to the good, for as Mencken said, it is always great when we do not get all the government we pay for.

On the intellectual level, the teachings of economics in the Austrian School tradition have never been more available to the world, or more frequently cited and discussed. And a recessionary environment guarantees more attention to the Austrian theory of the business cycle simply because this is the only model that makes sense of our current problems.

We should never underestimate the power of ideas to make a difference in the world. During the Great Depression, the resistance to the state was present but weak. Today we have built up a mighty intellectual army that extends across the globe. We are prepared in ways that they were not. We have thousands of students and faculty, and men and women of affairs who know real economics. We have the Internet. We have new books that put the whole problem in perspective, such as Jesus Huera de Soto's work on business cycles. We have the biography of Mises now, and it illustrates the heroism of political dissidence. The works of Rothbard on the Great Depression and central banking have never been more widely circulated and available. This time our masters in Washington will not go unopposed.

At the Mises Institute, now in our 26th year, we have tried to maintain a careful balance between serious and fundamental scholarly work, and public advocacy. We must never lose sight of the need for research and detailed work. It is not enough to merely repeat slogans. At the same time, there are some foundational lessons of economics that must be taught again and again with each new generation. The fallacy of the Broken Window is one of them, and its implications are truly radical.

Both Bastiat and Hazlitt saw that the government is the great window breaker, that destroyer of wealth that drives the economy backwards. The engine of creativity, recovery, and expansion is the private sector, completely unencumbered by state intervention. Ron Paul's newest book is called Pillars of Prosperity: Free Markets, Sound Money, and Private Property. The title nicely sums up the message of the economics of freedom.

It bears repeating in every age, in all places, for we will never be completely free of the great threat of the window breaker. So long as there are governments with stones ready to throw, there will be a need for someone to point out that destruction is never productive, never beneficial, and never a path to the good life that we all seek.

This talk was delivered at the 2008 Mises Circle in Houston.

I first heard of Garet Garrett when Murray Rothbard mentioned him in What Has Government Done to Our Money? James Grant said he was one of his heroes (James Grant is one of my heroes). When I finally got the chance to read Garrett's People's Pottage, I too became a fan. Next I anxiously read his fascinating story of Henry Ford and laissez-faire, The Wild Wheel. I then embarked on his novel The Driver, the story of Henry M. Galt who courageously turned a railroad bankrupted during the panic of 1892 into a profit-making juggernaut by focusing on efficiently serving the customer.

The historical period of the book's beginning, the panic of 1892, is of great interest to lovers of classical liberty as it existed in the United States. The Democratic Party to that point had been the last political bastion of sound money, laissez-faire, and non-interventionist foreign policy.

Sound money would face one of its greatest crises and the inefficiency of government intervention in economic affairs would become evident to the observant in 1892. Unfortunately, President Grover Cleveland, the last knight of the old Democracy, would win the battle against the silverite inflationists but lose the war to them as their hero, William Jennings Bryan, was nominated to run for president in 1896. The Democracy, as the party was called at the time, would never be itself again. It would make a comeback as the antithesis of its old self under Woodrow Wilson and then FDR.

Garet Garrett fairly portrays the typical silverite money crank of the time as a well-meaning ignoramus. His explanation of the silver problem is one of the clearest available. Simply put, the government was forced by political pressure to declare that silver was worth about twice what it was really worth in terms of gold. Therefore people took advantage of the bargain thus created by continuing to buy gold for silver. The treasury's gold supply was continually in danger of dropping to a level which would mean national bankruptcy (see Allan Nevins's biography of Grover Cleveland or Cleveland's own book, Presidential Problems, for a complete account of the episode). Garrett portrays Wall Street at the time of this monetary crisis as a place filled with people who had lost faith in what they were doing with no plan of how to renew their faith.

Into the breach steps Henry M. Galt. Galt had been quietly buying devalued shares of the struggling Great Midwestern railroad and making himself a general nuisance to the complacent and hopeless board of directors. Privately Galt had been studying everything about the railroad business in general and in particular the potential of the Great Midwestern line. When, like every other major government-subsidized railroad at the time, the Great Midwestern went into bankruptcy, Galt was the only major shareholder with a plan to make the Great Midwestern profitable again.

One of Galt's first tasks was to invest money in straightening the route and reducing the grades so that freight could be carried profitably all along the line. Anyone familiar with the incredible inefficiency of the government subsidized transcontinental railroads—they were built over the longest routes with little concern for grading in order to collect government money on the basis of miles of track laid—will understand the task that Galt faced in turning around the Great Midwestern.

But Galt's vision for the Great Midwestern went beyond simply making it a profitable line. He also acquired feeder lines so that the Great Midwestern could originate its own traffic. Next Galt acquired various life insurance interests that would be sources of capital to continue expanding the services of the Great Midwestern.

Galt became an upstart titan of Wall Street. Share value of the Great Midwestern and of Galt's other holdings skyrocketed. However, while Galt was a visionary in the railroad business, he had made powerful enemies. First his family was socially ostracized and then his politically well-connected rivals used vaguely written antitrust laws to attempt to destroy him. Anyone familiar with the true nature of antitrust laws as means for less efficient competitors to attack more efficient rivals and for politicians to shake down corporations for money could have predicted the ease with which largely ignorant congressmen could be convinced to pursue Henry M. Galt.

Legal scholars may point to other laws and legal theories to explain the descent of the legal profession into its current sorry state, but antitrust law has to be considered one of the prime culprits. Garrett describes the lawyer Congress had to hire to cross-examine Galt (congressmen being incompetent to do it themselves) as a consummate opportunist. He would either collect huge fees for advising corporations on how to avoid prosecution, or if he found a corporation in violation of the law, blackmail the corporation into paying exorbitant fees for advice on how to fix the problem—or turn to "public service" and collect fees from the government for his help in investigating corporations.

When cross-examined by this lawyer, who had previously attempted to extort a million dollars from him, Galt was perfectly honest and totally disarmed the lawyer and derailed the case against him. I won't spoil it by giving too many details. Rest assured it is well worth reading.

Garet Garrett's The Driver is a masterpiece of a novel that rewards any one interested in how a great entrepreneur sees what others do not, at a time when few others are even looking. Galt ran his business as I think Gary North would advise. In Galt's own words:

"Somebody has to see it,—somebody who knows not only how to spend money when everyone is wild to buy, but how to spend it courageously when there is a surplus of things that nobody else wants. Every financial institution that I have anything to do with will be governed by that idea, and Great Midwestern properties, while I run them, will decrease their capital expenditures as prices rise and increase them as prices fall. When we show them the whole trick and how it pays everybody will do it…. We won't have any more unemployment. In a country like this unemployment is economic lunacy."

Economic lunacy indeed. And it is economic lunacy foisted upon society not by greedy capitalists but by ignorant politicians who can create no wealth; they can only impede great visionaries like Henry M. Galt with monetary chicanery, antitrust litigation, labor laws, and a host of other regulatory measures from creating wealth.

Originally published September 7, 2007.

During the 1930s, the Rockefellers pushed hard for war against Japan, which they saw as competing with them vigorously for oil and rubber resources in Southeast Asia and as endangering the Rockefellers' cherished dreams of a mass "China market" for petroleum products. On the other hand, the Rockefellers took a noninterventionist position in Europe, where they had close financial ties with German firms such as I.G. Farben and Co., and very few close relations with Britain and France.

The Morgans, in contrast, as usual deeply committed to their financial ties with Britain and France, once again plumped early for war with Germany, while their interest in the Far East had become minimal. Indeed, US ambassador to Japan Joseph C. Grew, former Morgan partner, was one of the few officials in the Roosevelt administration genuinely interested in peace with Japan.

World War II might therefore be considered, from one point of view, as a coalition war: the Morgans got their war in Europe, the Rockefellers theirs in Asia. Such disgruntled Morgan men as Lewis W. Douglas and Dean G. Acheson (a protégé of Henry Stimson), who had left the early Roosevelt administration in disgust at its soft-money policies and economic nationalism, came happily roaring back into government service with the advent of World War II. Nelson A. Rockefeller, for his part, became head of Latin American activities during World War II, and thereby acquired his taste for government service.

After World War II, the united Rockefeller–Morgan–Kuhn, Loeb eastern Establishment was not allowed to enjoy its financial and political supremacy unchallenged for long. "Cowboy" Sun Belt firms, maverick oil men and construction men from Texas, Florida, and southern California began to challenge the eastern Establishment "Yankees" for political power. While both groups favor the Cold War, the Cowboys are more nationalistic, more hawkish, and less inclined to worry about what our European allies are thinking. They are also much less inclined to bail out the now Rockefeller-controlled Chase Manhattan Bank and other Wall Street banks that loaned recklessly to Third World and Communist countries and expect the US taxpayer — through outright taxes or the printing of US dollars — to pick up the tab.

It should be clear that the name of the political party in power is far less important than the particular regime's financial and banking connections. The foreign-policy power for so long of Nelson Rockefeller's personal foreign affairs adviser, Henry A. Kissinger, a discovery of the extraordinarily powerful Rockefeller–Chase Manhattan Bank elder statesman John J. McCloy, is testimony to the importance of financial power — as is the successful lobbying by Kissinger and Chase Manhattan's head, David Rockefeller, to induce Jimmy Carter to allow the ailing shah of Iran into the US — thus precipitating the humiliating hostage crisis.

Despite differences in nuance, it is clear that Ronald Reagan's originally proclaimed challenge to Rockefeller-Morgan power in the Council of Foreign Relations (CFR) and to the Rockefeller-created Trilateral Commission has fizzled, and that the "permanent government" continues to rule regardless of the party nominally in power. As a result, the much-heralded "bipartisan-foreign-policy" consensus imposed by the Establishment since World War II seems to remain safely in place.

David Rockefeller, chairman of the board of his family's Chase Manhattan Bank from 1970 until recently, established the Trilateral Commission in 1973, with the financial backing of the CFR and the Rockefeller Foundation. Joseph Kraft, syndicated Washington columnist who himself has the distinction of being both a CFR member and a Trilateralist, has accurately described the CFR as a "school for statesmen" that "comes close to being an organ of what C. Wright Mills has called the Power Elite — a group of men, similar in interest and outlook, shaping events from invulnerable positions behind the scenes."

The idea of the Trilateral Commission was to internationalize policy formation, the commission consisting of a small group of multinational corporate leaders, politicians, and foreign-policy experts from the United States, Western Europe, and Japan, who meet to coordinate economic and foreign policy among their respective nations.

Perhaps the most powerful single figure in foreign policy since World War II, a beloved adviser to all presidents, is the octogenarian John J. McCloy. During World War II, McCloy virtually ran the War Department as assistant to aging Secretary Stimson; it was McCloy who presided over the decision to round up all Japanese Americans and place them in concentration camps in World War II, and he is virtually the only American left who still justifies that action.

Before and during the war, McCloy, a disciple of Morgan lawyer Stimson, moved in the Morgan orbit; his brother-in-law, John S. Zinsser, was on the board of directors of J.P. Morgan & Co. during the 1940s. But, reflecting the postwar power shift from Morgan to Rockefeller, McCloy moved quickly into the Rockefeller ambit. He became a partner of the Wall Street corporate law firm of Milbank, Tweed, Hope, Hadley & McCloy, which had long served the Rockefeller family and the Chase Bank as legal counsel.

From there he moved to become chairman of the board of the Chase Manhattan Bank, a director of the Rockefeller Foundation, and of Rockefeller Center, Inc., and finally, from 1953 until 1970, chairman of the board of the Council on Foreign Relations. During the Truman administration, McCloy served as president of the World Bank and then US high commissioner for Germany. He was also a special adviser to President John F. Kennedy on disarmament, and chairman of Kennedy's Coordinating Committee on the Cuban Crisis. It was McCloy who "discovered" Professor Henry A. Kissinger for the Rockefeller forces. It is no wonder that John K. Galbraith and Richard Rovere have dubbed McCloy "Mr. Establishment."

A glance at foreign-policy leaders since World War II will reveal the domination of the banker elite. Truman's first secretary of defense was James V. Forrestal, former president of the investment banking firm of Dillon, Read & Co., closely allied to the Rockefeller financial group. Forrestal had also been a board member of the Chase Securities Corporation, an affiliate of the Chase National Bank.

Another Truman defense secretary was Robert A. Lovett, a partner of the powerful New York investment banking house of Brown Brothers Harriman. At the same time that he was secretary of defense, Lovert continued to be a trustee of the Rockefeller Foundation. Secretary of the Air Force Thomas K. Finletter was a top Wall Street corporate lawyer and member of the board of the CFR while serving in the cabinet. Ambassador to Soviet Russia, ambassador to Great Britain, and secretary of commerce in the Truman administration was the powerful multimillionaire W. Averell Harriman, an often-underrated but dominant force with the Democratic Party since the days of FDR. Harriman was a partner of Brown Brothers Harriman.

Also ambassador to Great Britain under Truman was Lewis W. Douglas, brother-in-law of John J. McCloy, a trustee of the Rockefeller Foundation, and a board member of the Council on Foreign Relations. Following Douglas as ambassador to the Court of St. James was Walter S. Gifford, chairman of the board of AT&T, and member of the board of trustees of the Rockefeller Foundation for almost two decades. Ambassador to NATO under Truman was William H. Draper Jr., vice president of Dillon, Read & Co.

Also influential in helping the Truman administration organize the Cold War was director of the policy-planning staff of the State Department, Paul H. Nitze. Nitze, whose wife was a member of the Pratt family, associated with the Rockefeller family since the origins of Standard Oil, had been vice president of Dillon, Read & Co.

When Truman entered the Korean War, he created an Office of Defense Mobilization to run the domestic economy during the war. The first director was Charles E. ("Electric Charlie") Wilson, president of the Morgan-controlled General Electric Company, who also served as board member of the Morgans' Guaranty Trust Company. His two most influential assistants were Sidney J. Weinberg, ubiquitous senior partner in the Wall Street investment-banking firm of Goldman Sachs & Co., and former general Lucius D. Clay, chairman of the board of Continental Can Co., and a director of the Lehman Corporation.

Succeeding McCloy as president of the World Bank, and continuing in that post throughout the two terms of Dwight Eisenhower, was Eugene Black. Black had served for 14 years as vice president of the Chase National Bank, and was persuaded to take the World Bank post by the bank's chairman of the board, Winthrop W. Aldrich, brother-in-law of John D. Rockefeller, Jr.

The Eisenhower administration proved to be a field day for the Rockefeller interests. While president of Columbia University, Eisenhower was invited to high-level dinners where he met and was groomed for president by top leaders from the Rockefeller and Morgan ambits, including the chairman of the board of Rockefeller's Standard Oil of New Jersey, the presidents of six other big oil companies, including Standard of California and Socony-Vacuum, and the executive vice president of J.P. Morgan & Co.

One dinner was hosted by Clarence Dillon, the multimillionaire retired founder of Dillon, Read & Co., where the guests included Russell B. Leffingwell, chairman of the board of both J.P. Morgan & Co. and the CFR (before McCloy); John M. Schiff, a senior partner of the investment-banking house of Kuhn, Loeb & Co.; the financier Jeremiah Milbank, a director of the Chase Manhattan Bank; and John D. Rockefeller, Jr.

Even earlier, during 1949, Eisenhower had been introduced through a special study group to key figures in the CFR. The study group devised a plan to create a new organization called the American Assembly — in essence an expanded CFR study group — whose main function was reputedly to build up Eisenhower's prospects for the presidency. A leader of the "Citizens for Eisenhower" committee, who later became Ike's ambassador to Great Britain, was the multimillionaire John Hay Whitney, scion of several wealthy families, whose granduncle, Oliver H. Payne, had been one of the associates of John D. Rockefeller, Sr. in founding the Standard Oil Company. Whitney was head of his own investment concern, J.H. Whitney & Co., and later became publisher of the New York Herald Tribune.

Running foreign policy during the Eisenhower administration was the Dulles family, led by Secretary of State John Foster Dulles, who had also concluded the US peace treaty with Japan under Harry Truman. Dulles had for three decades been a senior partner of the top Wall Street corporate-law firm of Sullivan & Cromwell, whose most important client was Rockefeller's Standard Oil Company of New Jersey. Dulles had been for 15 years a member of the board of the Rockefeller Foundation, and before assuming the post of Secretary of State was chairman of the board of that institution.

Most important is the little-known fact that Dulles's wife was Janet Pomeroy Avery, a first cousin of John D. Rockefeller Jr. Heading the supersecret Central Intelligence Agency during the Eisenhower years was Dulles's brother, Allen Welsh Dulles, also a partner in Sullivan & Cromwell. Allen Dulles had long been a trustee of the CFR and had served as its president from 1947 to 1951. Their sister, Eleanor Lansing Dulles, was head of the Berlin desk of the State Department during that decade.

Undersecretary of State, and the man who succeeded John Foster Dulles in the spring 1959, was former Massachusetts governor Christian A. Herter. Herter's wife, like Nitze's, was a member of the Pratt family. Indeed, his wife's uncle, Herbert L. Pratt, had been for many years president or chairman of the board of Standard Oil Company of New York. One of Mrs. Herter's cousins, Richardson Pratt, had served as assistant treasurer of Standard Oil of New Jersey up to 1945. Furthermore, one of Herter's own uncles, a physician, had been for many years treasurer of the Rockefeller Institute for Medical Research.

Herter was succeeded as Undersecretary of State by Eisenhower's ambassador to France, C. Douglas Dillon, son of Clarence, and himself chairman of the Board of Dillon, Read & Co. Dillon was soon to become a trustee of the Rockefeller Foundation.

Perhaps to provide some balance for his banker-business coalition, Eisenhower appointed as secretary of defense three men in the Morgan rather than the Rockefeller ambit. Charles B. ("Engine Charlie") Wilson was president of General Motors, member of the board of J.P. Morgan & Co. Wilson's successor, Neil H. McElroy, was president of Proctor & Gamble Co. His board chairman, R.R. Deupree, was also a director of J.P. Morgan & Co.

The third secretary of defense, who had been undersecretary and secretary of the Navy under Eisenhower, was Thomas S. Gates Jr., who had been a partner of the Morgan-connected Philadelphia investment-banking firm of Drexel & Co. When Gates stepped down as defense secretary, he became president of the newly formed flagship commercial bank for the Morgan interests, the Morgan Guaranty Trust Co.

Serving as Secretary of the Navy and then Deputy Secretary of Defense (and later secretary of the Treasury) under Eisenhower was Texas businessman Robert B. Anderson. After leaving the Defense Department, Anderson became a board member of the Rockefeller-controlled American Overseas Investing Co., and, before becoming Secretary of the Treasury, he borrowed $84,000 from Nelson A. Rockefeller to buy stock in Nelson's International Basic Economy Corporation.

Head of the important Atomic Energy Commission during the Eisenhower years was Lewis L. Strauss. For two decades, Strauss had been a partner in the investment banking firm of Kuhn, Loeb & Co. In 1950, Strauss had become financial adviser to the Rockefeller family, soon also becoming a board member of Rockefeller Center, Inc.

A powerful force in deciding foreign policy was the National Security Council, which included on it the Dulles brothers, Strauss, and Wilson. Particularly important is the post of national-security adviser to the President. Eisenhower's first national security adviser was Robert Cutler, president of the Old Colony Trust Co., the largest trust operation outside New York City. The Old Colony was a trust affiliate of the First National Bank of Boston.

After two years in the top national-security post, Cutler returned to Boston to become chairman of the board of Old Colony Trust, returning after a while to the national-security slot for two more years. In between, Eisenhower had two successive national security advisers. The first was Dillon Anderson, a Houston corporate attorney, who did work for several oil companies. Particularly significant was Anderson's position as chairman of the board of a small but fascinating Connecticut firm called Electro-Mechanical Research, Inc. Electro-Mechanical was closely associated with certain Rockefeller financiers; thus, one of its directors was Godfrey Rockefeller, a limited partner in the investment banking firm of Clark, Dodge & Co.

After more than a year, Anderson resigned from his national security post and was replaced by William H. Jackson, a partner of the investment firm of J.H. Whitney & Co. Before assuming his powerful position, Dillon Anderson had been one of several men serving as special hush-hush consultants to the National Security Council. Another special adviser was Eugene Holman, president of Rockefeller's Standard Oil Company of New Jersey.

We may mention two important foreign-policy actions of the Eisenhower administration which seem to reflect the striking influence of personnel directly tied to bankers and financial interests. In 1951, the regime of Mohammed Mossadegh in Iran decided to nationalize the British-owned oil holdings of the Anglo-Iranian Oil company. It took no time for the newly established Eisenhower administration to intervene heavily in this situation. CIA director and former Standard Oil lawyer Allen W. Dulles flew to Switzerland to organize the covert overthrow of the Mossadegh regime, the throwing of Mossadegh into prison, and the restoration of the Shah to the throne of Iran.

After lengthy behind-the-scenes negotiations, the oil industry was put back into action as purchasers and refiners of Iranian oil. But this time the picture was significantly different. Instead of the British getting all of the oil pie, their share was reduced to 40 percent of the new oil consortium, with five top US oil companies (Standard Oil of New Jersey, Socony-Vacuum — formerly Standard Oil of NY, and now Mobil — Standard Oil of California, Gulf, and Texaco) getting another 40 percent.

It was later disclosed that Secretary of State Dulles placed a sharp upper limit on any participation in the consortium by smaller independent oil companies in the United States. In addition to the rewards to the Rockefeller interests, the CIA's man-on-the-spot directing the operation, Kermit Roosevelt, received his due by quickly becoming a vice president of Mellon's Gulf Oil Corp.

This article is excerpted from Wall Street, Banks, and American Foreign Policy, chapter 8, "Rockefeller, Morgan, and War" (1984; 2011).

From the beginning of history, sincere reformers as well as demagogues have sought to abolish or at least to alleviate poverty through state action. In most cases their proposed remedies have only served to make the problem worse.

The most frequent and popular of these proposed remedies has been the simple one of seizing from the rich to give to the poor. This remedy has taken a thousand different forms, but they all come down to this. The wealth is to be "shared," to be "redistributed," to be "equalized." In fact, in the minds of many reformers it is not poverty that is the chief evil but inequality.

All schemes for redistributing or equalizing incomes or wealth must undermine or destroy incentives at both ends of the economic scale. They must reduce or abolish the incentives of the unskilled or shiftless to improve their condition by their own efforts; and even the able and industrious will see little point in earning anything beyond what they are allowed to keep. These redistribution schemes must inevitably reduce the size of the pie to be redistributed. They can only level down. Their long-run effect must be to reduce production and lead toward national impoverishment.

The problem we face is that the false remedies for poverty are almost infinite in number. An attempt at a thorough refutation of any single one of them would run to disproportionate length. But some of these false remedies are so widely regarded as real cures or mitigations of poverty that if I do not refer to them I may be accused of having undertaken a book on the remedies for poverty while ignoring some of the most obvious.

The most widely practiced "remedy" for low incomes in the last two centuries has been the formation of monopolistic labor unions and the use of the strike threat. In nearly every country today this has been made possible to its present extent by government policies that permit and encourage coercive union tactics and inhibit or restrict counteractions by employers.

As a result of union exclusiveness, of deliberate inefficiency, of featherbedding, of disruptive strikes and strike threats, the long-run effect of customary union policies has been to discourage capital investment and to make the average real wage of the whole body of workers lower, and not higher, than it would otherwise have been.

Nearly all of these customary union policies have been dishearteningly shortsighted. When unions insist on the employment of men who are not necessary to do a job (requiring unneeded firemen on diesel locomotives; forbidding the gang size of dock workers to be reduced below, say, twenty men no matter what the size of the task; demanding that a newspaper's own printers must duplicate advertising copy that comes in already set in type, etc.), the result may be to preserve or create a few more jobs for specific men in the short run, but only at the cost of making impossible the creation of an equivalent or greater number of more productive jobs for others.

The same criticism applies to the age-old union policy of opposing the use of labor-saving machinery. Labor-saving machinery is installed only when it promises to reduce production costs. When it does that, it either reduces prices and leads to increased production and sales of the commodity being produced, or it makes more profits available for increased reinvestment in other production. In either case its long-run effect is to substitute more productive jobs for the less productive jobs it eliminates.

A similar judgment must be passed on all "spread-the-work" schemes. The existing Federal Wage-Hour Law has been on the books for many years. It provides that the employer must pay a 50% penalty overtime rate for all hours that an employee works in excess of 40 hours a week, no matter how high the employee's standard hourly rate of pay.

This provision was inserted at the insistence of the unions. Its purpose was to make it so costly for the employer to work men overtime that he would be obliged to take on additional workers.

Experience shows that the provision has in fact had the effect of narrowly restricting the length of the working week…. But it does not follow that the hour restriction either created more long-term jobs or yielded higher total payrolls than would have existed without the compulsory 50% overtime rate.

No doubt in isolated cases more men have been employed than would otherwise have been. But the chief effect of the overtime law has been to raise production costs. Firms already working full standard time often have to refuse new orders because they cannot afford to pay the penalty overtime necessary to fill those orders. They cannot afford to take on new employees to meet what may be only a temporarily higher demand because they may also have to install an equivalent number of additional machines.

Higher production costs mean higher prices. They must therefore mean narrowed markets and smaller sales. They mean that fewer goods and services are produced. In the long run, the interests of the whole body of workers must be adversely affected by compulsory overtime penalties.

All this is not to argue that there ought to be a longer work week, but rather that the length of the work week, and the scale of overtime rates, ought to be left to voluntary agreement between individual workers or unions and their employers. In any case, legal restrictions on the length of the working week cannot in the long run increase the number of jobs. To the extent that they can do that in the short run, it must necessarily be at the expense of production and of the real income of the whole body of workers.

A selection from The Conquest of Poverty.

The Encyclopaedia Britannica defines taxation as "that part of the revenues of a state which is obtained by the compulsory dues and charges upon its subjects." That is about as concise and accurate as a definition can be; it leaves no room for argument as to what taxation is.

In that statement of fact the word "compulsory" looms large, simply because of its ethical content. The quick reaction is to question the "right" of the state to this use of power. What sanction, in morals, does the state adduce for the taking of property? Is its exercise of sovereignty sufficient unto itself?

On this question of morality there are two positions, and never the twain will meet. Those who hold that political institutions stem from "the nature of man," thus enjoying vicarious divinity, or those who pronounce the state the keystone of social integrations, can find no quarrel with taxation per se; the state's taking of property is justified by its being or its beneficial office. On the other hand, those who hold to the primacy of the individual, whose very existence is his claim to inalienable rights, lean to the position that in the compulsory collection of dues and charges the state is merely exercising power, without regard to morals.

The present inquiry into taxation begins with the second of these positions. It is as biased as would be an inquiry starting with the similarly unprovable proposition that the state is either a natural or a socially necessary institution. Complete objectivity is precluded when an ethical postulate is the major premise of an argument and a discussion of the nature of taxation cannot exclude values.

If we assume that the individual has an indisputable right to life, we must concede that he has a similar right to the enjoyment of the products of his labor. This we call a property right. The absolute right to property follows from the original right to life because one without the other is meaningless; the means to life must be identified with life itself.

If the state has a prior right to the products of one's labor, his right to existence is qualified. Aside from the fact that no such prior right can be established, except by declaring the state the author of all rights, our inclination (as shown in the effort to avoid paying taxes) is to reject this concept of priority. Our instinct is against it. We object to the taking of our property by organized society just as we do when a single unit of society commits the act. In the latter case we unhesitatingly call the act robbery, a malum in se. It is not the law which in the first instance defines robbery, it is an ethical principle, and this the law may violate but not supersede.

If by the necessity of living we acquiesce to the force of law, if by long custom we lose sight of the immorality, has the principle been obliterated? Robbery is robbery, and no amount of words can make it anything else.

We look at the results of taxation, the symptoms, to see whether and how the principle of private property is violated. For further evidence, we examine its technique, and just as we suspect the intent of robbery in the possession of effective tools, so we find in the technique of taxation a telltale story. The burden of this intransigent critique of taxation, then, will be to prove the immorality of it by its consequences and its methods.

By way of preface, we might look to the origin of taxation, on the theory that beginnings shape ends, and there we find a mess of iniquity. A historical study of taxation leads inevitably to loot, tribute, ransom—the economic purposes of conquest. The barons who put up tollgates along the Rhine were tax-gatherers. So were the gangs who "protected," for a forced fee, the caravans going to market. The Danes who regularly invited themselves into England, and remained as unwanted guests until paid off, called it Dannegeld; for a long time that remained the basis of English property taxes.

The conquering Romans introduced the idea that what they collected from subject peoples was merely just payment for maintaining "law and order." For a long time the Norman conquerors collected catch-as-catch-can tribute from the English, but when by natural processes an amalgam of the two peoples resulted in a nation, the collections were regularized in custom and law and were called taxes. It took centuries to obliterate the idea that these exactions served but to keep a privileged class in comfort and to finance their internecine wars; in fact, that purpose was never denied or obscured until constitutionalism diffused political power.

All that is long passed, unless we have the temerity to compare such ancient skullduggery with reparations, extraterritoriality, charges for maintaining armies of occupation, absconding with property, grabbing of natural resources, control of arteries of trade and other modern techniques of conquest. It may be argued that even if taxation had an unsavory beginning it could have straightened itself out and become a decent and useful citizen. So, we must apply ourselves to the theory and practices of taxation to prove that it is in fact the kind of thing above described.

First, as to method of collection, taxation falls into two categories, direct and indirect. Indirect taxes are so called because they reach the state by way of private collectors, while direct taxes arrive without bypass. The former levies are attached to goods and services before they reach the consumer, while the latter are in the main demands upon accumulations of wealth.

It will be seen that indirect taxation is a permission-to-live price. You cannot find in the marketplace a single satisfaction to which a number of these taxes are not attached, hidden in the price, and you are under compulsion either to pay them or go without; since going without amounts to depriving yourself of the meaning of life, or even of life itself, you pay.

The inevitability of this charge on existence is expressed in the popular association of death and taxes. And it is this very characteristic that commends indirect taxation to the state, so that when you examine the prices of things you live by, you are astounded by the disproportion between the cost of production and the charge for permission to buy. Somebody has put the number of taxes carried by a loaf of bread at over one hundred; obviously, some are not ascertainable, for it would be impossible to allocate to each loaf its share of taxes on the broom used in the bakery, on the axle-grease used on the delivery wagon.

Whiskey is perhaps the most notorious example of the way products have been transmuted from satisfactions into tax gatherers. The manufacturing cost of a gallon of whiskey, for which the consumer pays around twenty dollars, is less than a half-dollar; the spread is partly accounted for in the costs of distribution, but most of the money which passes over the counter goes to maintain city, county, state and national officials.

The hue and cry over the cost of living would make more sense if it were directed at taxation, the largest single item in the cost. It should be noted too that though the cost-of-living problem affects mainly the poor, yet it is on this segment of society that the incidence of indirect taxation falls most heavily. This is necessarily so; since those in the lower earning brackets constitute the major portion of society they must account for the greatest share of consumption, and therefore for the greatest share of taxation. The state recognizes this fact in levying on goods of widest use. A tax on salt, no matter how small comparatively, yields much more than a tax on diamonds, and is of greater significance socially and economically.

It is not the size of the yield, nor the certainty of collection, which gives indirect taxation preeminence in the state's scheme of appropriation. Its most commendable quality is that of being surreptitious. It is taking, so to speak, while the victim is not looking. Those who strain themselves to give taxation a moral character are under obligation to explain the state's preoccupation with hiding taxes in the price of goods. Is there a confession of guilt in that? In recent years, in its search for additional revenue, the state has been tinkering with a sales tax, an outright and unequivocal permission-to-live price; wiser solons have opposed this measure on the ground of political expediency. Why? If the state serves a good purpose the producers will hardly object to paying its keep.

Follow an importation of raw silk, from importer to cleaner, to spinner, to weaver, to finisher, to manufacturer, to wholesaler, to retailer, each one adding his mark-up to the price paid his predecessor, and you will see that in the price milady pays for her gown there is much more than the tariff schedule demands. This fact alone helps to make merchants and manufacturers indifferent to the evils of protection.Merely as a matter of method, not with deliberate intent, indirect taxation yields a profit of proportions to private collectors, and for this reason opposition to the levies could hardly be expected from that corner. When the tax is paid in advance of the sale it becomes an element of cost which must be added to all other costs in computing price. As the expected profit is a percentage of the total outlay, it will be seen that the tax itself becomes a source of gain. Where the merchandise must pass through the hands of several processors and distributors, the profits pyramided on the tax can run up to as much as, if not more than, the amount collected by the state. The consumer pays the tax plus the compounded profits. Particularly notorious in this regard are customs duties.

Tacit support for indirect taxation arises from another byproduct. Where a considerable outlay in taxes is a prerequisite for engaging in a business, large accumulations of capital have a distinct competitive advantage, and these capitalists could hardly be expected to advocate a lowering of the taxes. Any farmer can make whiskey, and many of them do; but the necessary investment in revenue stamps and various license fees makes the opening of a distillery and the organizing of distributive agencies a business only for large capital.

Taxation has forced the individually owned and congenial grog shop to give way to the palatial bar under mortgage to the brewery or distillery. Likewise, the manufacture of cigarettes is concentrated in the hands of a few giant corporations by the help of our tax system; nearly three-quarters of the retail price of a package of cigarettes represents an outlay in taxes. It would be strange indeed if these interests were to voice opposition to such indirect taxes (which they never do) and the uninformed, inarticulate and unorganized consumer is forced to pay the higher price resulting from limited competition.

Direct taxes differ from indirect taxes not only in the manner of collection but also in the more important fact that they cannot be passed on; those who pay them cannot demand reimbursement from others. In the main, the incidence of direct taxation falls on incomes and accumulations rather than on goods in the course of exchange. You are taxed on what you have, not on something you buy; on the proceeds of enterprise or the returns from services already rendered, not on anticipated revenue. Hence there is no way of shifting the burden. The payer has no recourse.

The clear-cut direct taxes are those levied on incomes, inheritances, gifts, land values. It will be seen that such appropriations lend themselves to soak-the-rich propaganda, and find support in the envy of the incompetent, the bitterness of poverty, the sense of injustice which our monopoly economy engenders. Direct taxation has been advocated since colonial times (along with universal suffrage), as the necessary implementation of democracy, as the essential instrument of "leveling."

The opposition of the rich to direct taxation added virulence to the reformers who plugged for it. In normal times the state is unable to overcome this well-knit, articulate, and resourceful opposition. But, when war or the need of ameliorating mass poverty strains the purse of the state to the limit, and further indirect impositions are impossible or threaten social unrest, the opposition must give way. The state never relinquishes entirely the prerogatives it acquires during an "emergency," and so, after a series of wars and depressions, direct taxation became a fixture of our fiscal policy, and those upon whom it falls must content themselves to whittling down the levies or trying to transfer them from shoulder to shoulder.

Even as it was predicted, during the debates on the income tax in the early part of the century, the soak-the-rich label turns out to be a wicked misnomer. It was impossible for the state to contain itself once this instrument of getting additional revenue was put into its hands. Income is income, whether it stems from dividends, bootlegging operations, gambling profits or plain wages. As the expenses of the state mount, as they always do, legal inhibitions and considerations of justice or mercy are swept aside, and the state dips its hands into every pocket. So, in Philadelphia, the political power demands that the employer shall deduct an amount from the pay envelope and hand it over. The soak-the-rich principle has been applied on a large scale to the lowliest paid worker, not only by deductions from wages, but more so through the so-called social security taxes. These, by the way, show up the utter immorality of political power.

Social security taxation is nothing but a tax on wages, in its entirety, and was deliberately and maliciously misnamed. Even the part which is "contributed" by the employer is ultimately paid by the worker in the price of the goods he consumes, for it is obvious that this part is merely a cost of operation and is passed on, with a mark-up. The revenue from social security taxes is not set aside for the payment of social "benefits," but is thrown into the general tax fund, subject to any appropriation, and when an old-age pittance is ultimately allowed it is paid out of the then-current tax collections. It is in no way comparable to insurance, by which fiction it made its way into our fiscal policy, but it is a direct tax on wages.

There are more people in the low-income brackets than in the high brackets; there are more small bequests than large ones. Therefore, in the aggregate, those least able to meet the burden of soak-the-rich taxes bear the brunt of them. The attempt to offset this inequity by a system of graduations is unreal. Even a small tax on an income of $1,000 a year will cause the payer some hardship, while a 50% tax on $50,000 leaves something to live on comfortably. There is a vast difference between doing without a new automobile and making a patched-up pair of pants do more service.

It should be remembered, too, that the worker's income is almost always confined to wages, which are a matter of record, while large incomes are mainly derived from business or gambling operations, and are not so easily ascertainable; whether from intent to avoid paying the full tax, or from the necessary legal ambiguities which make the exact amount a matter of conjecture or bookkeeping, those with large incomes are favored. It is the poor who are soaked most heavily by soak-the-rich taxes.

Taxes of all kinds discourage production. Man works to satisfy his desires, not to support the state. When the results of his labors are taken from him, whether by brigands or organized society, his inclination is to limit his production to the amount he can keep and enjoy.

During the war, when the payroll deduction was introduced, workers got to figuring their "take home" pay, and to laying off when this net, after taxes, showed no increase comparable to the extra work it would cost; leisure is also a satisfaction. A prizefighter refuses another lucrative engagement because the additional revenue would bring his income for the year into a higher tax bracket. In like manner, every businessman must take into consideration, when weighing the risk and the possibility of gain in a new enterprise, the certainty of a tax offset in the event of success, and too often he is discouraged from going ahead. In all the data on national progress the items that can never be reported are: the volume of business choked off by income taxes; and the size of capital accumulations aborted by inheritance taxes.

While we are on the subject of discouragement of production by taxation, we should not overlook the greater weight of indirect taxes, even though it is not so obvious. The production level of a nation is determined by the purchasing power of its citizens, and to the extent that this power is sapped by levies, to that extent is the production level lowered. It is a silly sophism, and thoroughly indecent, to maintain that what the state collects it spends, and that therefore there is no lowering of total purchasing power.

Thieves also spend their loot, with much more abandon than the rightful owners would have spent it, and on the basis of spending one could make out a case for the social value of thievery. It is production, not spending, that begets production. It is only by the feeding of marketable contributions into the general fund of wealth that the wheels of industry are speeded up.

Contrariwise, every deduction from this general fund of wealth slows down industry, and every levy on savings discourages the accumulation of capital. Why work when there is nothing in it? Why go into business to support politicians?

In principle, as the framers of the Constitution realized, the direct tax is most vicious, for it directly denies the sanctity of private property. By its very surreptition the indirect tax is a backhanded recognition of the right of the individual to his earnings; the state sneaks up on the owner, so to speak, and takes what it needs on the grounds of necessity, but it does not have the temerity to question the right of the owner to his goods. The direct tax, however, boldly and unashamedly proclaims the prior right of the state to all property. Private ownership becomes a temporary and revocable stewardship.

The Jeffersonian ideal of inalienable rights is thus liquidated, and substituted for it is the Marxist concept of state supremacy. It is by this fiscal policy, rather than by violent revolution, or by an appeal to reason, or by popular education, or by way of any ineluctable historic forces, that the substance of socialism is realized. Notice how the centralization hoped for by Alexander Hamilton has been achieved since the advent of the federal income tax, how the contemplated union of independent commonwealths is effectively dissolved. The commonwealths are reduced to parish status, the individual no longer is a citizen of his community but is a subject of the federal government.

A basic immorality becomes the center of a vortex of immoralities. When the state invades the right of the individual to the products of his labors it appropriates an authority which is contrary to the nature of things and therefore establishes an unethical pattern of behavior, for itself and those upon whom its authority is exerted. Thus, the income tax has made the state a partner in the proceeds of crime; the law cannot distinguish between incomes derived from production and incomes derived from robbery; it has no concern with the source.

Likewise, this denial of ownership arouses a resentment which breaks out into perjury and dishonesty. Men who in their personal affairs would hardly think of such methods, or who would be socially ostracized for practicing them, are proud of, and are complimented for, evasion of the income tax laws; it is considered proper to engage the shrewdest minds for that purpose. More degrading even is the encouragement by bribes of mutual spying. No other single measure in the history of our country has caused a comparable disregard of principle in public affairs, or has had such a deteriorating effect on morals.

To make its way into the good will of its victims, taxation has surrounded itself with doctrines of justification. No law which lacks public approval or acquiescence is enforceable, and to gain such support it must address itself to our sense of correctness. This is particularly necessary for statutes authorizing the taking of private property.

Until recent times taxation rested its case on the need of maintaining the necessary functions of government, generally called "social services." But, such is the nature of political power that the area of its activity is not self-contained; its expansion is in proportion to the lack of resistance it meets. Resistance to the exercise of this power reflects a spirit of self-reliance, which in turn is dependent upon a sense of economic security. When the general economy falls, the inclination of a people, bewildered by lack of understanding as to basic causes, is to turn to any medicine man who promises relief. The politician serves willingly in this capacity; his fee is power, implemented with funds.

Obscured from public view are the enterprises of political power at the bottom of the economic malady, such as monopoly privileges, wars, and taxation itself. Therefore the promise of relief is sufficient unto itself, and the bargain is made. Thus it has come about that the area of political power has gradually encroached upon more and more social activities, and with every expansion another justification for taxation was advanced.

The current philosophy is tending toward the identification of politics with society, the eradication of the individual as the essential unit and the substitution of a metaphysical whole, and hence the elimination of the concept of private property. Taxation is now justified not by the need of revenue for the carrying on of specific social services, but as the necessary means for unspecified social betterment.

Both postulates of taxation are in fact identical, in that they stem from acceptance of a prior right of the state to the products of labor; but for purposes of analysis it is best to treat them separately.

Taxation for social services hints at an equitable trade. It suggests a quid pro quo, a relationship of justice. But, the essential condition of trade, that it be carried on willingly, is absent from taxation; its very use of compulsion removes taxation from the field of commerce and puts it squarely into the field of politics. Taxes cannot be compared to dues paid to a voluntary organization for such services as one expects from membership, because the choice of withdrawal does not exist. In refusing to trade one may deny oneself a profit, but the only alternative to paying taxes is jail. The suggestion of equity in taxation is spurious. If we get anything for the taxes we pay it is not because we want it; it is forced on us.

In respect to social services a community may be compared to a large office building in which the occupants, carrying on widely differing businesses, make use of common conveniences, such as elevator transportation, cleaning, heating, and so on. The more tenants in the building, the more dependent are they all on these overall specializations, and at a pro rata fee the operators of the building supply them; the fee is included in the room rent. Each of the tenants is enabled to carry on his business more efficiently because he is relieved of his share of the overall duties.

Just so are the citizens of a community better able to carry on their several occupations because the streets are maintained, the fire department is on guard, the police department provides protection to life and property. When a society is organizing, as in a frontier town, the need for these overall services is met by volunteer labor. The road is kept open by its users, there is a volunteer fire department, the respected elder performs the services of a judge.

As the town grows these extra-curricular jobs become too onerous and too complicated for volunteers, whose private affairs must suffer by the increasing demands, and the necessity of hiring specialists arises. To meet the expense, it is claimed, compulsory taxation must be resorted to, and the question is, why must the residents be compelled to pay for being relieved of work which they formerly performed willingly? Why is coercion a correlative of taxation?

It is not true that the services would be impossible without taxation; that assertion is denied by the fact that the services appear before taxes are introduced. The services come because there is need for them. Because there is need for them they are paid for, in the beginning, with labor and, in a few instances, with voluntary contributions of goods and money; the trade is without compulsion and therefore equitable. Only when political power takes over the management of these services does the compulsory tax appear. It is not the cost of the services which calls for taxation, it is the cost of maintaining political power.

In the case of the overall services in the building the cost is met by a rent payment, apportioned according to the size and location of the space occupied, and the amount is fixed by the only equitable arbiter of value, competition. In the growing community, likewise, the cost of social services could be equitably met by a charge against occupancy of sites within the community, and this charge would be automatically met because it is set by the higgling and haggling of the market.

When we trace the value of these locations to their source we find that they spring from the presence and activity of population; the more people competing for the use of these locations the higher their value. It is also true that with the growth of population comes an increasing need for social services, and it would seem that the values arising from integration should in justice be applied to the need which also arises from it. In a polity free from political coercion such an arrangement would apply, and in some historical instances of weak political power we find that land rent was used in this social manner.

All history points to the economic purpose of political power. It is the effective instrument of exploitative practices. Generally speaking, the evolution of political exploitation follows a fixed pattern: hit-and-run robbery, regular tribute, slavery, rent collections. In the final stage, and after long experience, rent collections become the prime proceeds of exploitation and the political power necessary thereto is supported by levies on production. Centuries of accommodation have inured us to the business, custom and law have given it an aura of rectitude; the public appropriation of private property by way of taxation and the private appropriation of public property by way of rent collections become unquestioned institutions. They are of our mores.

And so, as social integrations grow and the need for overall services grows apace, we turn to taxation by long habit. We know no other way. Why, then, do we object to paying taxes? Can it be that we are, in our hearts, conscious of an iniquity? There are the conveniences of streets, kept clean and lighted, of water supply, sanitation, and so on, all making our stay in the community convenient and comfortable, and the cost must be defrayed. The cost is defrayed, out of our wages. But then we find that for a given amount of effort we earn no more than we would in a community which does not have these advantages. Out at the margin, the rate per hour, for the same kind of work, is the same as in the metropolis.

Capital earns no less, per dollar of investment, on Main Street than on Broadway. It is true that in the metropolis we have more opportunities to work, and we can work harder. In the village the tempo is slower; we work less and earn less. But, when we put against our greater earnings the rent-and-tax cost of the big city, do we have any more in satisfactions? We need not be economists to sense the incongruity.

If we work more in the city we produce more. If, on the other hand, we have no more, net, where does the increase go? Well, where the bank building now stands there was in olden times a pigsty, and what was once the site of a barn now supports the department store. The value of these sites has risen tremendously, in fact in proportion to the multiplicity of social services which the burgeoning population calls for. Hence the final resting place of our increased productivity is in the sites, and the owners of these are in fact the beneficiaries of the social services for the maintenance of which we are forced to give up our wages.

It is the landowner then who profits from the taxation. He does indeed own the social services paid for by production. He knows it, makes no bones about it, tells us so every time he puts his lot up for sale. In his advertisements he talks about the transit facilities it enjoys, the neighborhood school, the efficient fire and police protection afforded by the community; all these advantages he capitalizes in his price. It's all open and above board. What is not advertised is that the social services he offers for sale have been paid for by compulsory dues and charges collected from the producing of the public. These people receive for their pains the vacuous pleasure of writing to their country cousins about the wonders of the big city, especially the wonder of being able to work more intensely so that they might pay for the wonders.

We come now to the modern doctrine of taxation—that its justification is the social purpose to which the revenue is put. Although this has been blatantly advertised as a discovery of principle in recent years, the practice of taxation for the amelioration of social unrest is quite ancient; Rome in its decadence had plenty of it, and taxes to maintain the poor house were levied long before the college-trained social worker gave them panacea proportions.

It is interesting to note that this doctrine grew into a philosophy of taxation during the 1930s, the decade of depression. It stamps itself, then, as the humanitarian's prescription for the malady of poverty-amidst-plenty, the charitarian's first-aid treatment of apparent injustice. Like all proposals which spring from the goodness of heart, taxation-for-social-purposes is an easy top-surface treatment of a deep-rooted illness, and as such it is bound to do more harm than good.

In the first place, this doctrine unequivocally rejects the right of the individual to his property. That is basic. Having fixed on this major premise, it jumps to the conclusion that "social need" is the purpose of all production, that man labors, or should labor, for the good of the "mass." Taxation is the proper means for diffusing the output of effort. It does not concern itself with the control of production, or the means of acquiring property, but only with its distribution. Strictly speaking, therefore, the doctrine is not socialistic, and its proponents are usually quick to deny that charge. Their purpose, they assert, is reform not revolution; even like boys whose innocent bonfire puts the forest ablaze.

The doctrine does not distinguish between property acquired through privilege and property acquired through production. It cannot, must not, do that, for in so doing it would question the validity of taxation as a whole. If taxation were abolished, for instance, the cost of maintaining the social services of a community would fall on rent—there is no third source—and the privilege of appropriating rent would disappear. If taxation were abolished, the sinecures of public office would vanish, and these constitute in the aggregate a privilege which bears most heavily on production. If taxation were abolished, the privilege of making profits on customs levies would go out. If taxation were abolished, public debt would be impossible, to the dismay of the bondholders. Taxation-for-social-purposes does not contemplate the abolition of existing privilege, but does contemplate the establishment of new bureaucratic privileges. Hence it dare not address itself to the basic problem.

Furthermore, the discouragement of production which must follow in the wake of this distributive scheme aggravates the condition which it hopes to correct. If Tom, Dick and Harry are engaged in making goods and rendering services, the taking from one of them, even if the part taken is given to the others, must lower the economy of all there.

Tom's opulence, as a producer, is due to the fact that he has served Dick and Harry in a way they found desirable. He may be more industrious, or gifted with superior capabilities, and for such reasons they favor him with their custom; although he has acquired an abundance he has not done so at their expense; he has because they have.

In every equitable trade there are two profits, one for the buyer and one for the seller. Each gives up what he wants less for what he desires more; both have acquired an increase in value. But, when the political power deprives Tom of his possessions, he ceases, to the extent of the peculation, to patronize Dick and Harry. They are without a customer in the amount of the tax and are consequently disemployed. The dole handed them thus actually impoverishes them, just as it has impoverished Tom. The economy of a community is not improved by the distribution of what has already been produced but by an increase of the abundance of things men live by; we live on current, not past, production. Any measure therefore which discourages, restricts, or interferes with production, must lower the general economy—and taxation-for-social-purposes is distinctly such a measure.

Putting aside the economics of it, the political implications of this eleemosynary fiscal policy comes to a revolution of first magnitude. Since taxation, even when it is clothed with social betterment, must be accompanied with compulsion, the limits of taxation must coincide with the limits of political power. If the end to be achieved is the "social good" the power to take can conceivably extend to total production, for who shall say where the "social good" terminates? At present the "social good" embraces free schooling up to and including postgraduate and professional courses; free hospitalization and medical services; unemployment insurance and old age pensions; farm subsidies and aid to "infant" industries; free employment services and low-rent housing; contributions to the merchant marine and projects for the advancement of the arts and sciences; and so on, approximating ad infinitum.

The "social good" has spilled over from one private matter to another, and the definition of this indeterminate term becomes more and more elastic. The democratic right to be wrong, misinformed, misguided, or even stupid is no restraint upon the imagination of those who undertake to interpret the phrase; and whither the interpretation goes there goes the power to enforce compliance.

The ultimate of taxation-for-social-purposes is absolutism, not only because the growing fiscal power carries an equal increase in political power, but because the investment of revenue in the individual by the state gives it a pecuniary interest in him. If the state supplies him with all his needs and keeps him in health and a degree of comfort, it must account him a valuable asset, a piece of capital. Any claim to individual rights is liquidated by society's cash investment.

The state undertakes to protect society's investment, as to reimbursement and profit, by way of taxation. The motor power lodged in the individual must be put to the best use so that the yield will further social ends, as foreseen by the management. Thus, the fiscal scheme which begins with distribution is forced by the logic of events into control of production. And the concept of natural rights is inconsistent with the social obligation of the individual. He lives for the state which nurtured him. He belongs to the state by right of purchase.

Taxation's final claim to rectitude is an ability-to-pay formula, and this turns out to be a case of too much protesting. In the levies on goods, from which the state derives the bulk of its revenue, the formula is not applicable. Whether your income is a thousand dollars a year or a thousand dollars a day, the tax on a loaf of bread is the same; ability-to-pay plays no part. Because of the taxes on necessaries, the poor man may be deprived of some marginal satisfaction, say a pipe of tobacco, while the rich man, who pays the same taxes on necessaries, will hardly feel impelled to give up his cigar. In the more important indirect taxes, then, the magic formula of social justice is non-existent.

It is applicable only in levying taxes on incomes before they are spent, and here again its claim to fairness is false. Every tax on wages, no matter how small, affects the worker's measure of living, while the tax on the rich man affects only his indulgences. The claim to equity implied in the formula is denied by this fact. Indeed, this claim would be valid only if the state confiscated all above a predetermined, equalitarian standard of living; but then, of course, the equity of confiscation would have to be established.

But no good can come of ability-to-pay because it is inherently an immorality. What is it but the highwayman's rule of taking where the taking is best? Neither the highwayman nor the tax collector give any thought to the source of the victim's wealth, only to its quantity. The state is not above taking what it can from known or suspected thieves, murderers, or prostitutes, and its vigilance in this regard is so well established that the breakers of other laws find it wise to observe the income tax law scrupulously.

Nevertheless, ability-to-pay finds popular support—and that must be recognized as the reason for its promulgation—because of its implied quality of justice. It is an appeal to the envy of the incompetent as well as to the disaffection of the mass consigned by our system of privileges to involuntary poverty. It satisfies the passions of avarice and revenge. It is the ideal leveler. It is Robin Hood.

Supporting the formula is the argument that incomes are relative to the opportunities afforded by the state, and that the amount of the tax is merely payment for these opportunities. Again the quid pro quo. This is only partially true, and in a sense not intended by the advocates of this fiscal formula. Where income is derived from privilege—and every privilege rests on the power of the state—it is eminently fair that the state confiscate the proceeds, although it would be fairer if the state did not establish the privilege in the first place.

The monopoly rent of natural resources, for instance, is income for which no service is rendered to society, and is collectible only because the state supports it; a hundred percent tax on rent would therefore be equitable. The profits on protective tariffs would be fair game for the tax collector. A levy on all subsidized businesses, to the full amount of the subsidies, would make sense, although the granting of subsidies would still require explanation. Bounties, doles, the "black market" profits made possible by political restrictions, the profits on government contracts—all income which would disappear if the state withdrew its support—might properly be taxed. In that event, the state would be taking what it is responsible for.

But that is not the argument of ability-to-pay energumens. They insist that the state is a contributing factor in production, and that its services ought properly to be paid for; the measure of the value of these services is the income of its citizens, and a graduated tax on these incomes is only due compensation. If earnings reflect the services of the state, it follows that larger earnings result from more services, and the logical conclusion is that the state is a better servant of the rich than of the poor. That may be so, but it is doubtful that the tax experts wish to convey that information; what they want us to believe is that the state helps us to better our circumstances.

That idea gives rise to some provocative questions. For the tax he pays does the farmer enjoy more favorable growing weather? Or the merchant a more active market? Is the skill of the mechanic improved by anything the state does with what it takes from him? How can the state quicken the imagination of the creative genius, or add to the wisdom of the philosopher? When the state takes a cut from the gambler is the latter's luck bettered? Are the earnings of the prostitute increased because her trade is legalized and taxed? Just what part does the state play in production to warrant its rake-off? The state does not give; it merely takes.

All this argument, however, is a concession to the obfuscation with which custom, law and sophistry have covered up the true character of taxation. There cannot be a good tax nor a just one; every tax rests its case on compulsion.

This article was originally published in 1947 as a pamphlet from Human Events Associates. It was reprinted in 1962 as chapter 22 of Out of Step: The Autobiography of an Individualist.

The seeming prosperity and glittering power of Spain in the 16th century proved a sham and an illusion in the long run. For it was fuelled almost completely by the influx of silver and gold from the Spanish colonies in the New World. In the short run, the influx of bullion provided a means by which the Spanish could purchase and enjoy the products of the rest of Europe and Asia; but in the long run, price inflation wiped out this temporary advantage.

The result was that when the influx of specie dried up, in the 17th century, little or nothing remained. Not only that—the bullion prosperity induced people and resources to move to southern Spain, particularly the port of Seville, where the new specie entered Europe. The result was malinvestment in Seville and the south of Spain, offset by the crippling of potential economic growth in the north.

But that was not all. At the end of the 17th century, the Spanish Crown cartelized the developing and promising Castilian textile industry by passing over 100 laws designed to freeze the industry at the current level of development. This freeze crippled the protected Castilian cloth industry and destroyed its efficiency in the long run, so that it could not become competitive in European markets.

Furthermore, royal action also managed to destroy the flourishing Spanish silk industry, which centered in southern Spain at Granada. Unfortunately, Granada was still a centre of Muslim or Moorish population, and so a series of vindictive acts by the Spanish Crown brought the silk industry to its virtual demise. First, several edicts drastically limited the domestic use and consumption of silk. Second, silks in the 1550s were prohibited from being exported, and a tremendous increase in taxes on the silk industry of Granada after 1561 finished the job.

Spanish agriculture in the 16th century was also crippled and laid waste by government intervention. The Castilian Crown had long made an alliance with the Mesta, the guild of sheep farmers, who received special privileges in return for heavy tax contributions to the monarchy. In the 1480s and 1490s, enclosures that had been made in previous years for grain farming were all disallowed, and sheepwalks (cañadas) were greatly expanded by government decree at the expense of the lands of grain farmers.

The grain farmers were also hobbled by special legislation passed on behalf of the carters' guild—roads being in all countries special favorites for military purposes. Carters were specially allowed free passage on all local roads, and heavy taxes were levied on grain farmers to build and maintain the roads benefiting the carters.

Grain prices rose throughout Europe beginning in the early 16th century. The Spanish Crown, worried that the rising prices might induce a shift of land from sheep to grain, levied maximum price control on grain, while landlords were allowed unilaterally to rescind leases and charge higher rates to grain farmers. The result of the consequent cost-price squeeze was massive farm bankruptcies, rural depopulation, and the shift of farmers to the towns or the military. The bizarre result was that, by the end of the 16th century, Castile suffered from periodic famines because imported Baltic grain could not easily be moved to the interior of Spain, while at the same time one-third of Castilian farm land had become uncultivated waste.

Meanwhile, shepherding, so heavily privileged by the Spanish Crown, flourished for the first half of the 16th century, but soon fell victim to financial and market dislocations. As a result, Spanish shepherding fell into a sharp decline.

Heavy royal expenditures and taxes on the middle classes also crippled the Spanish economy as a whole, and huge deficits misallocated capital. Three massive defaults by the Spanish king, Philip II—in 1557, 1575 and 1596—destroyed capital and led to large-scale bankruptcies and credit stringencies in France and in Antwerp. The resultant failure to pay Spanish imperial troops in the Netherlands in 1575 led to a thoroughgoing sack of Antwerp by mutinying troops the following year in an orgy of looting and rapine known as the "Spanish Fury." The name stuck even though these were largely German mercenaries.

The once free and enormously prosperous city of Antwerp was brought to its knees by a series of statist measures during the late 16th century. In addition to the defaults, the major problem was a massive attempt by the Spanish king, Philip II, to hold on to the Netherlands and to stamp out the Protestant and Anabaptist heresies.

In 1562, the Spanish king forcibly closed Antwerp to its chief import—English woolen broadcloths. And, when the notorious duke of Alva assumed the governorship of the Netherlands in 1567, he instituted repression in the form of a "Council of Blood," which had the power to torture, kill, and confiscate the property of heretics. Alva also levied a heavy value-added tax of 10 percent, the alcabala, which served to cripple the sophisticated and interrelated Netherlands economy. Many skilled woolen craftsmen fled to a hospitable home in England.

Finally, the breakaway of the Dutch from Spain in the 1580s, and another Spanish royal default in 1607, led to a treaty with the Dutch two years later, which finished Antwerp by cutting off its access to the sea and to the mouth of the River Scheldt, which was confirmed to be in Dutch hands. From then on, for the remainder of the 17th century, decentralized and free-market Holland, and in particular the city of Amsterdam, replaced Flanders and Antwerp as the main commercial and financial centre in Europe.

This article is excerpted from An Austrian Perspective on the History of Economic Thought, vol. 1, Economic Thought before Adam Smith. An audio version is available here.

I

One of the amazing phenomena of the present election campaign is the way in which speakers and writers refer to the state of business and to the economic condition of the nation. They praise the administration for the prosperity and for the high standard of living of the average citizen "You never had it so good," they say, and, "Don't let them take it away."

It is implied that the increase in the quantity and the improvement in the quality of products available for consumption are achievements of a paternal government. The incomes of the individual citizens are viewed as handouts graciously bestowed upon them by a benevolent bureaucracy. The American government is considered as better than that of Italy or of India because it passes into the hands of the citizens more and better products than they do.

It is hardly possible to misrepresent in a more thorough way the fundamental facts of economics. The average standard of living is in this country higher than in any other country of the world, not because the American statesmen and politicians are superior to the foreign statesmen and politicians, but because the per-head quota of capital invested is in America higher than in other countries. Average output per man-hour is in this country higher than in other countries, whether England or India, because the American plants are equipped with more efficient tools and machines. Capital is more plentiful in America than it is in other countries because up to now the institutions and laws of the United States put fewer obstacles in the way of big-scale capital accumulation than did those foreign countries.

It is not true that the economic backwardness of foreign countries is to be imputed to technological ignorance on the part of their peoples. Modern technology is by and large no esoteric doctrine. It is taught at many technological universities in this country as well as abroad. It is described in many excellent textbooks and articles of scientific magazines. Hundreds of aliens are every year graduated from American technological institutes. There are in every part of the earth many experts perfectly conversant with the most recent developments of industrial technique. It is not a lack of the "know how" that prevents foreign countries from fully adopting American methods of manufacturing but the insufficiency of capital available.

II

The climate of opinion in which capitalism could thrive was characterized by the moral approbation of the individual citizen's eagerness to provide for his own and his family's future. Thrift was appreciated as a virtue no less beneficial to the individual saver himself than to all other people. If people do not consume their whole incomes, the non-consumed surplus can be invested, it increases the amount of capital goods available and thereby makes it possible to embark upon projects which could not be executed before. Progressive capital accumulation results in perpetual economic betterment. All aspects of every citizen's life are favorably affected. The continuous tendency toward an expansion of business activities opens an ample field for the display of the energies of the rising generation. Looking backward upon his youth and the conditions in his parent's home, the average man cannot help realizing that there is progress toward a more satisfactory standard of living.

Such were the conditions in all countries on the eve of the First World War. Conditions were certainly not everywhere the same. There were the countries of western capitalism on the one hand, and on the other hand the backward nations which were slow and reluctant in adopting the ideas and the methods of modern progressive business. But these backward nations were amply benefited by the investment of capital provided by the capitalists of the advanced nations. Foreign capital built their railroads and factories and developed their natural resources.

The spectacle that the world offers today is very different. As it was forty years ago, the world is divided into two camps. There is, on the one hand, the capitalist orbit, considerably shrunk when compared with its size in 1914. It includes today the United States and Canada and some of the small nations of Western Europe. The much greater part of the earth's population lives in countries strictly rejecting the methods of private property, initiative and enterprise. These countries are either stagnating or faced with a progressive deterioration of their economic conditions.

III

Let us illustrate this difference by contrasting, as typical of each of the two groups, conditions in this country and those in India.

In the United States, capitalist big business almost every year supplies the masses with some novelties: either improved articles to replace similar articles used long since or things which had been altogether unknown before. The latter—as for instance, television sets or nylon hosiery—are commonly called luxuries, as people previously lived rather contented and happy without them. The average common man enjoys a standard of living which, only fifty years ago, his parents or grandparents would have considered as fabulous. His home is equipped with gadgets and facilities which the well-to-do of earlier ages would have envied. His wife and his daughters dress elegantly and apply cosmetics. His children, well fed and cared for, have the benefit of a high school education, many also of a college education. If one observes him and his family on their weekend outings, one must admit that he looks prosperous.

There are, of course, also Americans whose material conditions appear unsatisfactory when compared with those of the great majority of the nation. Some authors of novels and plays would have us believe that their gloomy descriptions of the lot of this unfortunate minority is representative of the fate of the common man under capitalism. They are mistaken. The plight of these wretched Americans is rather representative of conditions as they prevailed everywhere in the pre-capitalistic ages and still prevail in the countries which were either not at all or only superficially touched by capitalism. What is wrong with these people is that they have not yet been integrated into the frame of capitalist production. Their penury is a remnant of the past. The progressive accumulation of new capital and the expansion of big-scale production will eradicate it by the same methods by means of which it has already improved the standard of living of the immense majority, viz., by raising the per-head quota of capital invested and thereby the marginal productivity of labor.

Now let us look at India. Nature has endowed its territory with valuable resources, perhaps more richly than the soil of the United States. On the other hand, climatic conditions make it possible for man to subsist on a lighter diet and to do without many things which in the rough winter of the greater part of the United States are indispensable. Nonetheless, the masses of India are on the verge of starvation, shabbily dressed, crammed into primitive huts, dirty, illiterate. From year to year things are getting worse; for population figures are increasing while the total amount of capital invested does not increase or, even more likely, decreases. At any rate, there is a progressive drop in the per-head quota of capital invested.

In the middle of the eighteenth century conditions in England were hardly more propitious than they are today in India. The traditional system of production was not fit to provide for the needs of an increasing population. The number of people for whom there was no room left in the rigid system of paternalism and government tutelage of business grew rapidly. Although at that time England's population was not much more than fifteen percent of what it is today, there were several million destitute poor. Neither the ruling aristocracy nor these paupers themselves had any idea about what could be done to improve the material conditions of the masses.

The great change that within a few decades made England the world's wealthiest and most powerful nation was prepared for by a small group of philosophers and economists. They demolished entirely the pseudo-philosophy that hitherto had been instrumental in shaping the economic policies of the nations. They exploded the old fables:

that it is unfair and unjust to outdo a competitor by producing better and cheaper goods;

that it is iniquitous to deviate from traditional methods of production;

that labor-saving machines bring about unemployment and are therefore an evil;

that it is one of the tasks of civil government to prevent efficient businessmen from getting rich and to protect the less efficient against the competition of the more efficient; and

that to restrict the freedom and the initiative of entrepreneurs by government compulsion or by coercion on the pan of other powers is an appropriate means to promote a nation's well-being.

In short: these authors expounded the doctrine of free trade and laissez faire. They paved the way for a policy that no longer obstructed the businessman's effort to improve and to expand his operations.

What begot modern industrialization and the unprecedented improvement in material conditions that it brought about was neither capital previously accumulated nor previously assembled technological knowledge. In England, as well as in the other western countries that followed it on the path of capitalism, the early pioneers of capitalism started with scanty capital and scanty technological experience. At the outset of industrialization was the philosophy of private enterprise and initiative, and the practical application of this ideology made the capital swell and the technological know-how advance and ripen.

One must stress this point because its neglect misleads the statesmen of all backward nations in their plans for economic improvement. They think that industrialization means machines and textbooks of technology. In fact, it means economic freedom that creates both capital and technological knowledge.

Let us look again at India. India lacks capital because it never adopted the pro-capitalist philosophy of the West and therefore did not remove the traditional institutional obstacles to free enterprise and big-scale accumulation. Capitalism came to India as an alien imported ideology that never took root in the minds of the people. Foreign, mostly British, capital built railroads and factories. The natives looked askance not only upon the activities of the alien capitalists but no less upon those of their countrymen who cooperated in the capitalist ventures. Today the situation is this: thanks to new methods of therapeutics, developed by the capitalist nations and imported to India by the British, the average length of life has been prolonged and the population is rapidly increasing. As the foreign capitalists have either already been virtually expropriated or have to face expropriation in the near future, there can no longer be any question of new investment of foreign capital. On the other hand, the accumulation of domestic capital is prevented by the manifest hostility of the government apparatus and the ruling party.

The Indian government talks a lot about industrialization. But what it really has in mind is nationalization of already existing privately owned industries. For the sake of argument, we may neglect referring to the fact that this will probably result in a progressive decumulation of the capital invested in these industries as was the case in most of the countries that have experimented with nationalization. At any rate, nationalization as such does not add anything to the already prevailing extent of investment. Mr. Nehru admits that his government does not have the capital required for the establishment of new state-owned industries or for the expansion of such industries already existing. Thus, he solemnly declares that his government will give to private industries "encouragement in every way." And he explains in what this encouragement will consist: we will promise them, he says, "that we would not touch them for at least ten years, maybe more." He adds: "We do not know when we shall nationalize them."Cf. Jawaharlar Nehru, Independence and After, A Collection of Speeches, 1946–1949. New York 1950, page 192. But the businessmen know very well that new investments will be nationalized as soon as they begin to yield returns.

IV

I have dwelt so long upon the affairs of India because they are representative of what is going on today almost in all parts of Asia and Africa, in great parts of Latin America and even in many European countries. In all these countries the population is increasing. In all these countries foreign investments are expropriated, either openly or surreptitiously by means of foreign exchange control or discriminatory taxation. At the same time, their domestic policies do their best to discourage the formation of domestic capital. There is much poverty in the world today; and the governments, in this regard in full agreement with public opinion, perpetuate and aggravate this poverty by their policies.

As these people see it, their economic troubles were in some unspecified way caused by the capitalist countries of the West. This notion included, until a few years ago, also the advanced nations of Western Europe, especially also the United Kingdom. With recent economic changes, the number of nations to which it refers has been more and more restricted; today it means practically only the United States. The inhabitants of all those countries in which the average income is considerably lower than in this country look upon the United States with the same feelings of envy and hatred with which within the capitalist countries those voting the ticket of the various communist, socialist, and interventionist parties look upon the entrepreneurs of their own nation. The same slogans that are employed in our domestic antagonisms—such as Wall Street, big business, monopolies, merchants of death—are resorted to in speeches and articles by the anti-American politicians when they are attacking what is called in Latin America, Yankeeism, and in the other hemisphere, Americanism. In these effusions there is little difference between the most chauvinistic nationalists and the most enthusiastic adepts of Marxian internationalism, between the self-styled conservatives eager to preserve traditional religious faith and political institutions, and the revolutionaries aiming at the violent overthrow of all that exists.

The popularity of these ideas is by no means an effect of the inflammatory propaganda of the Soviets. It is just the other way round. The communist lies and calumnies get their persuasiveness, whatever it may be, from the fact that they agree with the sociopolitical doctrines taught at most of the universities and held by the most influential politicians and writers.

The same ideas dominate the minds in this country and determine the attitude of statesmen with regard to all the problems concerned. People are ashamed of the fact that American capital developed the natural resources in many countries which lacked both the capital and the trained specialists required. When various foreign governments expropriated American investments or repudiated loans granted by the American saver, the public either remained indifferent or even sympathized with the expropriators. With the ideas underlying the programs of the most influential political groups and taught at most of the educational institutions, no other reaction could be expected.

Four years ago there assembled in Amsterdam the World Council of Churches, an organization of one-hundred-and-fifty-odd denominations. We read in the report drafted by this ecumenical body the following statement: "Justice demands that the inhabitants of Asia and Africa should have the benefits of more machine production." This implies that the technological backwardness of these nations has been caused by an injustice committed by some individuals, groups of individuals or nations. The culprits are not specified. But it is understood that the indictment refers to the capitalists and businessmen of the shrinking number of capitalist countries, practically to the United States and Canada. Such is the opinion of very judicious conservative churchmen acting in full awareness of their responsibilities.

The same doctrine is at the bottom of the foreign aid and the Point Four policies of the United States. It is implied that the American taxpayers have the moral obligation to provide capital for nations that have expropriated foreign investments and are preventing the accumulation of domestic capital by various schemes.

There is no use indulging in wishful thinking. Under the present state of international law, foreign investments are unsafe and at the mercy of each sovereign nation's government. It is generally agreed that every sovereign government has the right to decree a fictitious parity of its inflated currency as against dollars or gold and to try to enforce this arbitrarily fixed spurious parity by foreign exchange control, that is, by virtually expropriating foreign investors. As far as some foreign governments still abstain from such confiscations, they do so because they hope to talk foreigners into more investments and thus to be later in a position to expropriate more.

In the ranks of those nations that do all that can be done to prevent their industries from getting badly needed capital, we find today also Great Britain, once the cradle of free enterprise and before 1914 the world's richest or second richest country. In exuberant and entirely undeserved praise of the late Lord Keynes, a Harvard professor found in his hero but one weakness. Keynes, he said, "always exalted what was at any moment truth and wisdom for England into truth and wisdom for all times and places."Cf. J. Schumpeter, Keynes, the Economist (in The New Economics, ed. by S. E. Harris, New York 1947, page 85.) I heartily disagree. Just at the moment in which it must have become manifest to every judicious observer that England's economic distress was caused by an insufficient supply of capital, Keynes enounced his notorious doctrine of the alleged dangers of saving and passionately recommended more spending. Keynes tried to provide a belated and spurious justification of a policy that Great Britain had adopted in defiance of the teachings of all its great economists. The essence of Keynesianism is its complete failure to conceive the role that saving and capital accumulation play in the improvement of economic conditions.

V

The main problem for this country is: will the United States follow the course of the economic policies adopted by almost all foreign nations, even by many of those which had been foremost in the evolution of capitalism? Up to now in this country the amount of savings and formation of new capital still exceeds the amount of dissaving and decumulation of capital. Will this last?

To answer such a question one must look upon the ideas about economic matters held by public opinion. The question is: do the American voters know that the unprecedented improvement in their standard of living that the last hundred years brought was the result of the steady rise in the per-head quota of capital invested? Do they realize that every measure leading to capital decumulation jeopardizes their prosperity? Are they aware of the conditions that make their wage rates tower above those of other countries?

If we pass in review the speeches of political leaders, the editorials of newspapers, and textbooks of economics and finance, we cannot help discovering that very little attention, if at all, is paid to the problems of capital equipment. Most people take it simply for granted that some mysterious factor is operative that makes the nation richer from year to year. Government economists have computed a rate of yearly increase in the national income for the past fifty years and blithely assume that in the future the same rate will prevail. They discuss problems of taxation without even mentioning the fact that our present tax system collects large funds, which would have been saved by the taxpayer, and employs them for current expenditure.

A typical instance of this mode of dealing (or rather, non-dealing) with the problem of America's capital supply may be cited. A few days ago the American Academy of Political and Social Science published a new volume of its Annals, entirely devoted to the investigation of vital issues of the nation. The title of the volume is: Meaning of the 1952 Presidential Election. To this symposium Professor Harold M. Groves of the University of Wisconsin contributed an article, "Are Taxes Too High?" The author comes out "with a largely negative answer." From our point of view, the most interesting feature of the article is the fact that it reaches this conclusion without even mentioning the effects which taxes on income, corporations, excess profits, and estates have upon the maintenance and formation of capital. What economists have said about these problems either remained unknown to the author or he does not consider it worthy of an answer.

One does not misrepresent the economic ideas determining the course of American policies if one blames them for not being conscious of the role the supply of new capital plays in improving and expanding production. An instructive example has been provided by the conflict between the government and business concerning the adequacy of depreciation quotas under inflationary conditions. In all the agitated debates concerning profits, taxes, and the height of wage rates, the capital supply is hardly mentioned, if at all. In comparing American wage rates and standards of living with those of foreign countries, most authors and politicians fail to stress the differences in the per-head quotas of capital invested.

In the latest forty years American taxation more and more adopted methods which considerably slowed down the pace of capital accumulation. If it continues along this line, it will one day reach the point at which no further increase in capital will be possible, or even decumulation will set in. There is only one way open to stop this evolution in time and to spare this country the fate of England and France. One must substitute sound economic ideas for fables and illusions.

VI

Up to this point I have employed the terms capital shortage and scarcity of capital without further explication and definition. This was quite sufficient as long as I dealt primarily with the conditions of countries whose capital supply appears as inadequate when compared with the supply in more advanced countries, especially in the economically most advanced country, the United States. But in examining American problems, a more searching interpretation of terms is required.

Strictly speaking, capital has always been scarce and will always be. The available supply of capital goods can never become so abundant that all projects, the execution of which could improve the material well-being of people, could be undertaken. If it were otherwise, mankind would live in the Garden of Eden and would not have to bother at all about production. Whatever the state of the capital supply may be, in this real world of ours there will always be business projects that cannot be launched because the capital they would require is employed for other enterprises, the products of which are more urgently asked for by the consumers. In every branch of industry there are limits beyond which the investment of additional capital does not pay. It does not pay because the capital goods concerned can find employment in the production of goods which are in the eyes of the buying public more valuable. If, other things being equal, the supply of capital increases, projects which hitherto could not be undertaken become profitable and are started. There is never a lack of investment opportunities. If there is lack of opportunities for profitable investment, the reason is that all the capital goods available have already been invested in profitable projects.

In speaking of the capital shortage of a country that is poorer than other countries, one does not refer to this phenomenon of the general and perpetual shortage of capital. One merely compares the state of affairs in this individual country with that of other countries in which capital is more abundant. Looking upon India one may say: here are a number of artisans producing with a total capital of ten thousand dollars products with the market value of, let us say, one million dollars. In an American factory with a capital equipment of one million dollars, the same number of workers turn out products with the market value of 500 times as many dollars. Indian businessmen unfortunately lack the capital to make such investments. The consequence is that productivity per man is lower in India than in America, that the total amount of goods available for consumption is smaller, and that the average Indian is poor when compared with the average American.

There is, especially under inflationary conditions, no reliable standard available that could be applied in measuring the degree of the scarcity of capital. Where it is impossible to compare a country's conditions with those of countries in which the supply of capital is more plentiful, as is the case with this country, only comparisons with the hypothetical size of the capital supply (as it would have been if certain things had not happened) are possible. There is in such a country no phenomenon that would present itself as capital scarcity so clearly and manifestly as the capital scarcity presents itself today to the people of India. All that can be said is: if in our nation people had saved more in the past, some improvements in technological methods (and lateral expansion of production by duplication of equipment of the kind already in existence for which the capital required is lacking) would have been feasible.

VII

It is not easy to explain this state of affairs to people misled by the passionate anti-capitalistic agitation. As the self-styled intellectuals see it, the capitalist system and the greed of the businessmen are to blame for the fact that the total sum of products turned out for consumption is not greater than it actually is. The only way to do away with poverty they know is to take away—by means of progressive taxation—as much as possible from the well-to-do. In their eyes the wealth of the rich is the cause of the poverty of the poor. In accordance with this idea the fiscal policies of all nations and especially also of the United States were in the last decades directed toward confiscating ever-increasing portions of the wealth and income of the higher brackets. The greater part of the funds thus collected would have been employed by the taxpayers for saving and additional capital accumulation. Their investment would have increased productivity per man-hour and would in this way have provided more goods for consumption. It would have raised the average standard of living of the common man. If the government spends them for current expenditure, they are dissipated and capital accumulation is concomitantly slowed down.

Whatever one may think about the reasonableness of this policy of soaking the rich, it is impossible to deny the fact that it has already reached its limits. In Great Britain the Socialist Chancellor of the Exchequer had to admit a few years ago that even total confiscation of all that has still been left to people with higher incomes would add only a quite negligible sum to internal revenue and that there can no longer be any question of improving the lot of the indigent by taking it away from the rich.

In this country a total confiscation of incomes above twenty-five thousand dollars would at best yield much less than one billion dollars, a very small sum indeed when compared with the size of our present budget and the probable deficit. The main principle of the financial policies of the self-styled progressives has been pursued to the point at which it defeats itself and its absurdity becomes manifest. The progressives are at their wit's end. Henceforth, if they want to expand public expenditure further, they will have to tax more heavily precisely those classes of voters for whose support they have hitherto canvassed by placing the main burden upon the shoulders of the minority of wealthier people. (A very embarrassing dilemma indeed for the next Congress.)

But it is exactly the perplexity of this situation that offers a favorable opportunity for the substitution of sound economic principles for the pernicious errors that prevailed in the last decades. Now is the time to explain to the voters the causes of American prosperity on the one hand, and of the plight of the backward nations on the other hand. They must learn that what makes American wage rates much higher than those in other countries is the size of capital invested and that any further improvement of their standard of living depends on a sufficient accumulation of additional capital. Today only the businessmen worry about the provision of new capital for the expansion and improvement of their plants. The rest of the people are indifferent with regard to this issue, not knowing that their well-being and that of their children is at stake. What is needed is to make the importance of these problems understood by everybody. No party platform is to be considered as satisfactory that does not contain the following point: as the prosperity of the nation and the height of wage rates depend on a continual increase in the capital invested in its plants, mines and farms, it is one of the foremost tasks of good government to remove all obstacles that hinder the accumulation and investment of new capital.

This address was delivered before the University Club of Milwaukee (Wisconsin) on October 13, 1952.

This was the original publisher's note:

This address was made in 1952. It was a prophetic address and still is; more will understand this now (in 1979) than twenty-eight years ago (in 1952). The implied prophecy is: If the United States continues to hamper capital accumulation by erosive and expropriational taxes, larger and larger shares of the incomes of people and corporations will be siphoned off into government waste and welfare programs, and our growth will be slowed, then stagnated, and eventually we shall sink into poverty. Socialists, communists, preachers, ecologists, union leaders, teachers, demagogues—seething with envy and covetousness will shunt us into "the decline and fall of the United States." It may turn out to be greater than what is described in Gibbon's The Decline and Fall of the Roman Empire.

Ludwig von Mises delivered this address before the University Club of Milwaukee on October 13, 1952.

A new economic fallacy came of age in the course of the last prewar decade and threatens to play havoc with the future peace of the world. This fallacy consists in saying that a country's national prosperity depends, essentially, upon a centralized planning of its economic life. Those who propound this point of view usually confuse full employment with prosperity and state the problem in terms of the former rather than of the latter objective.

They do not object, in principle, to international trade or to such measures as might improve international economic relations. They claim, however, that so long as the world economy is unstable, a country can best serve its own interests and those of the rest of the world by pursuing its own full employment program. They often go on to say that, if only each country adopted a full employment program suited to its particular circumstances, a great step forward would be taken on the path to world economic stability.

They argue that the greatest source of barriers to world trade is to be found in depressions and in the fear of depressions; should that fear be eliminated by appropriate measures of national planning, it would be much easier for a country to let down barriers to imports, since those imports would not interfere any longer with national economic stability. Most of these spokesmen are unwilling to accept any limitations on the freedom of national action in planning for full employment.

The doctrine briefly described in the preceding paragraphs can be attributed to many contemporary writers. Its chief intellectual sponsor has undoubtedly been John Maynard (later Lord) Keynes. In his Tract on Monetary Reform, published in 1923, Keynes emphasized the conflict which, in his opinion, existed between internal and international monetary stability and cast his influential ballot in favor of the former.

Turning from monetary to general economic issues, in 1933 he espoused the cause of national self-sufficiency. In his last major work, which was to become the vade mecum of the "Keynesians," he launched another vigorous attack against world trade. "If nations can learn," he wrote, "to provide themselves with full employment by their domestic policy … there need be no important economic force calculated to set the interest of one country against that of its neighbors."John Maynard Keynes, The General Theory of Employment, Interest, and Money (New York: Harcourt, Brace, 1936), p. 382.

One hundred and thirty-six years earlier another book had appeared which linked together self-sufficiency and peace. It was The Closed Commercial State by Johann Gottlieb Fichte, the German philosopher and first rector of the University of Berlin. Fichte, however, realized that individual countries would have to expand their territory and, therefore, go to war to achieve self-sufficiency, whereas Keynes did not even realize that the lovely fruit of national self-sufficiency, which he so glowingly described, concealed the ugly and poisonous worm of war.

On the contrary, he was obsessed by the fallacious idea that, in the past, international trade had been a source of wars. If nations would only provide themselves with full employment by their national policy, he argued,

there would no longer be a pressing motive why one country need force its wares on another…. International trade would cease to be what it is, namely, a desperate expedient to maintain employment at home by forcing sales on foreign markets and restricting purchases … but a willing and unimpeded exchange of goods and services in conditions of mutual advantage.Ibid., pp. 382–83.

These conceptions of international economic relations are based upon several misapprehensions; their net outcome is an intensification of economic nationalism. Indeed, it can be said that by placing in a faulty perspective the problem of national prosperity, these doctrines lead us inescapably to a conclusion which surely their authors would be the first to repudiate—namely, that prosperity and peace are contradictory objectives, that the quest for the former places the latter in jeopardy, and that mankind can be prosperous only in a world living in a shadow of war.

Yet Keynes's views have been taken up by followers throughout the world. In the United States, for example, Professor Alvin H. Hansen of Harvard propounds the view that if all countries would secure full employment at home, the stage would be set for a liberalization of foreign trade. America's principal contribution to world prosperity, he argues, is to maintain full employment at home.See Alvin Harvey Hansen, America's Role in the World Economy (New York: W.W. Norton & Co., 1945).

No one would disagree with the statement that the world cannot be prosperous unless the United States is prosperous and that an American economic depression would cast a shadow upon the prosperity of the world. But the question arises, what else is necessary on the part of the United States to promote world prosperity besides being prosperous herself?

We know from the experiences of the thirties that measures aimed at national prosperity can lead to an increase of trade barriers and other obstacles to international economic intercourse. In order for American prosperity (or that of any other important country) to promote effectively the prosperity of other countries, it is indispensable that the national market should be wide open to the produce of other countries and that national capital should be free to seek investments in foreign countries. Thus American prosperity is a condition of international prosperity, provided it is sought by measures which are favorable to international trade and capital movements. It is also a mistake to argue as if world prosperity were dependent upon American prosperity, but American prosperity depended only upon America's own domestic economic policies.

"In order for American prosperity (or that of any other important country) to promote effectively the prosperity of other countries, it is indispensable that the national market should be wide open to the produce of other countries and that national capital should be free to seek investments in foreign countries." 

Actually, as a careful study of the 1929 breakdown would clearly show, the causal factors underlying that breakdown were not all located within the United States but were widely spread throughout the world economy. The fact that America's prosperity in the years preceding the crash was accompanied by a growing precariousness of the international economic equilibrium rendered the depression, when it came, worse both for this country and for the rest of the world than it might have been, had the United States imported substantially more during the twenties and lent quite a bit less, especially on short term.

In brief, a proper conception of the relationships between American prosperity and that of the rest of the world would place them in a relation of mutual dependency rather than imply that American full employment planning is necessary for the welfare of the world, regardless of what forms that planning takes.

The Keynesian notion of prosperity attributes an excessive importance to the level of employment as against that of living standards. "Full employment" (whatever that ambiguous term may statistically mean) can be attained at various levels of well-being and within various types of social organizations. We can have full employment in a slave society in which the majority of people live on a subsistence level, and we can have full employment in a free society in which people enjoy high and rising standards of living.

Were it not for the seemingly indestructible specter of the mass unemployment of the thirties, we would realize that political freedom and economic well-being, rather than full employment, are the real objectives of our quest.

In a prosperous economy, to be sure, there are adequate opportunities for employment for all men and women willing and able to work. But an economy in which there is full employment need not necessarily be prosperous. If the international division of labor is a source of prosperity and well-being, then its curtailment reduces national prosperity below the level it might otherwise achieve. And since the days of Adam Smith economists and their readers have been made increasingly aware of the connection between this division of labor and the growth of standards of living.

The Wealth of Nations proved a time bomb which several decades after publication blasted out of existence the controls and restrictions on international trade which England inherited from the mercantilist period, and which had become a serious handicap to her economic growth. One hundred and seventy years after the publication of Adam Smith's immortal work, Keynes's magnum opus devoted many pages to a brilliant, if unconvincing, attempt at rehabilitating mercantilism, by showing that its spokesmen were in reality very farsighted men from whom much could be learned that was of great value in our own days.

This Keynesian "rehabilitation" of mercantilists was a sign of the times. For the mercantilists were economic nationalists par excellence, that is to say, they subordinated all considerations of economic policy to the fundamental desideratum of national power. The mercantilist period was a period of recurrent warfare, and the economic doctrines of that time were very much concerned with the problem of making a country strong for war.

Today we know that political sentiment dictates economic policies, that economic nationalism is merely an aspect of nationalism tout court, and that in a world dominated and obsessed by nationalism, policies aimed at better international economic relations are like tender plants at the mercy of strong northern winds.

Perhaps the mercantilists were not unaware of the importance of the international division of labor as a source of prosperity and well-being. But, since their concern was mostly with national power, they paid less attention than we do to the problem of national welfare. In the mercantilist revival of our own days, however, we are faced with a brand new fallacy, which consists in linking national prosperity with national full employment planning and in minimizing the importance of foreign trade.

Much more importance is attached to national planning than to the international division of labor as a basis for national well-being. To seek prosperity within an insulated national economy rather than within a closely integrated world economy is a fallacy which arises by attaching an exaggerated importance to short run aspects of the problem and by ignoring the long-run effects of these short-run processes.

As Henry Hazlitt has emphasized in his recent book, Economics in One Lesson, most economic fallacies are due to such failures to take the "long view" of economic processes. What our neomercantilists, taking the "short view," usually offer as a choice is full employment at home with limited foreign trade as against freer international trade tied up with domestic unemployment. In doing that they draw false conclusions from the historic evidence that is before us.

In particular, they tend to mistake the desperate attempts, in the thirties, to fight unemployment by promoting exports while keeping down imports, with the normal operations of international trade. But the "beggar-my-neighbor" policies of the depression years were in themselves a consequence of the economic nationalism of the twenties and of the failure to achieve in the thirties enough international collaboration to develop joint policies in fighting the depressions. The effect of the nationalistic ways of curing national depression was to increase the obstacles to international trade, to precipitate a further disintegration of the world economy, and to place each country's economic life upon a very uncertain basis.

The disintegration of the world economy, far from being attributed by them to economic nationalism, was then used by the neomercantilists to justify the adoption of still more nationalistic policies. In a disorganized world economy, it looked as if each country had its "own" business cycle, the elimination of which was the proper objective of national policy.

Policies of national planning had the effect of disturbing the relations between the country's economy and the currents of the world economy. In consequence, the erroneous notion gained increasing acceptance that the business cycle is a national phenomenon, and that a country may best preserve its prosperity by insulating itself against the evil disturbances originating in foreign lands. Prosperity thus came to be regarded as a national virtue and depression as an imported evil.

Considering that economic theory clearly shows the organic connections that exist between the upward and downward phases of a business cycle, this political dissociation of prosperity from depression strikes one as utterly nonsensical. Nonetheless, it has exercised a profound influence upon the course of economic policy and theoretical discussion.

What made the issue between economic nationalism and internationalism in our own time different from what it has been in the past is the emergence of collectivism. In its various forms, collectivism represents a growing control by the national government over the country's economic activity. Such collectivism promises prosperity through centralized planning. Since, however, the national government can only plan economic activity (and nationalize resources and industries) within the national boundaries of the state, international relations become inevitably subordinated to national plans. Hence the impatience with international relations evidenced by collectivists.

Thus collectivism promotes the segregation of countries from one another; it emphasizes the importance of national boundaries. Indeed, it makes territorial expansion once more worthwhile because, within the wider area, there are more resources and a greater scope for planning. Thus collectivism takes us further and further away from the kind of world envisaged by the liberal thinkers of the 19th and 20th centuries—a world in which political boundaries would gradually become mere administrative divisions; a world of free trade, free capital movements, and free migration; a world in which peace as well as prosperity would be indivisible and sought by common action of all mankind.

Such a world seems today much further removed from the realm of practical realizations than it had been in the days of Richard Cobden. But, whereas Cobden, his predecessors, and his followers, all inspired by the Wealth of Nations, realized that the same road leads to prosperity and to peace, the collectivistic and neomercantilistic writers of today seek prosperity along a road which necessarily takes us further and further away from peace. Only a reversal of policy, a return to the Smithian ideas, can save us from a further exacerbation of economic nationalism.

This article is excerpted from Studies in Economic Nationalism. It was first published in Conflicts of Power in Modern Culture: Seventh Symposium of the Conference of Science, Philosophy, and Religion (New York, 1947).

The term “hedonics” is derived from ancient Greek and basically means “pleasure doctrine”. It is also the doctrine which the Bureau of Labor Statistics (BLS) applies when calculating the price indices and for the computation of the real gross domestic product and of productivity.Bureau of Labor Statistics( www.bls.gov). For the Bureau’s research on hedonic price index see “Publications and other documentation” at its site. The idea behind hedonic price index calculation is to incorporate quality changes into prices. This way, a product may be on the market at a higher price, but when the product qualities have augmented more than the price in the eyes of the BLS, it will calculate that the price of this product has actually fallen.

Applying the hedonic technique to a host of goods and services means that even when prices were generally rising, but product improvement are deemed to be larger than the price increases, the calculated inflation rate will fall. With a lower inflation rate, the transformation of nominal gross domestic product (GDP) into real GDP will render a higher result. Likewise, given a constant labor input, productivity will increase. Hedonics opens the door to producing magical results: a lower inflation rate with generally rising prices, a higher growth rate although the economy may be weaker, and a higher productivity number, although productivity would have been declining without the hedonic imputations.

The BLS felt compelled to incorporate “quality changes” into its calculation of the price statistics in the second half of the 1990s when many new and modified goods and services appeared on the market and studies were launched that suggested that the conventional statistics overestimates the “true inflation rate." The Boskin report of 1996 (“Toward a more accurate measure of the cost of living” available online under http://www.ssa.gov/history/reports/boskinrpt.html) suggested that the statistical practices used at that time overestimated the inflation rate. The obvious problem here is that in order to determine whether the conventional price index over- or underestimates true inflation, one must have a correct measuring rod in the first place.

With hedonics, the BLS wants to introduce more “objectivity” into the calculation of price changes, but it needs a human being to determine quality in the first place. Not any new gadget can go through as an improvement of the product. Before determining its inflationary or deflationary price change, there must be a BLS official who has to ponder the problem of whether this new or modified good or service really provides more or less “pleasure” to the user than the chosen reference product.

A product, like a refrigerator, for example, is not just a refrigerator in the view of the BLS. Contrary to the act of use and consumption by the individual and contrary to the fact that one normally buys the whole product and not only a few parts, the BLS calculates price changes on the basis that the refrigerator or a certain TV set or a CD player consist of various different parts or product features.

While the BLS avoids claiming to know exactly how to calculate the pleasure that the whole product renders, the Bureau maintains that it is in a position to determine whether the electrical generator in the fridge has improved or not. This improvement then gets compared with a reference element of the product, as it was earlier on the market. Depending on what the expert decides, the overall product receives a new price from the BLS that is different from the market price of the product.

Quality, so the BLS determined, has many aspects. For this purpose they run a so-called hedonic regression through their computers. Whatever the type of regression that gets applied in order to calculate the “true price”, first of all an official from the BLS must determine whether a certain feature constitutes a quality change or not. Ludwig von Mises observed this problem long ago:

“All methods suggested for a measurement of the changes in the monetary unit’s purchasing power are more or less unwittingly founded on the illusory image of an eternal and immutable being who determines by the application of an immutable standard the quantity of satisfaction which a unit of money conveys to him. It is a poor justification of this ill-thought idea that what is wanted is merely to measure changes in the purchasing power of money.”Ludwig von Mises: Human Action . Auburn. The Ludwig von Mises Institute. 1998, p. 221.

The company, which offers the new or modified product, will be happy to say that there is an improvement, and the technicians, who developed the product, will be eager to provide exact calculations of this quality change. However, how many technical improvements are being offered every day and there is no market for them? How many inventors have patents that are registered but there are only a few or no buyers at all for the product? The crucial point here is that only pseudo-standards are available for evaluation, the assessment of the utility of a product is subjective and individual, and for the individual himself, the standards of evaluation change according to the specific situation.

It is quite obvious that hedonic imputations open the way to all kinds of manipulation. Given the implicit pressure that governments and central banks want to hear low inflation rates to be reported, due delivery would suggest to search mainly for quality improvements, and to calculate these even when they are of a dubious nature.

The impact of the techniques that get applied by the BLS reaches far beyond pure price statistics. The indices are not only used as indicators of price inflation, but with the price indices the statistician holds also the key in his hands to a series of other prominent economic figures. In order to calculate productivity, real output, real input, and real investment and their changes, one needs a deflator, and a deflator is derived from the price index.

Given a certain nominal GDP (in dollars or any other currency unit), the number for the deflator determines the size of real GDP and its real growth rate. If the measured inflation rate is low, the real GDP will be higher and vice versa, and along with that one also gets higher or lower numbers for productivity changes.

Determining price changes for a modern economy characterized by the modification of products, the emergence of new product, and a high share of services, the calculation of the price index and thus of real economic growth and a series of other indicators becomes a dubious statistical construct. Different assumptions and techniques bring about dramatic changes of results.

Most of what appears like an objective standard of measurement in economic statistics is a deeply flawed endeavor to measure the non-measurable. As the price statistician must admit, there is no meaningful way to measure the “price level”. At best, it is changes of the price level that can be constructed. But even with these changes, the measurement is flawed, because one cannot measure something, when both, the measurement rod and the object of measurement, are subject to change.

The price statistician constructs a basket of products in order to measure the changes of the value of money. He claims that this basket is representative. But he cannot ignore the fact that the composition of this basket changes over time. Some products become obsolete, other products get modified and new goods and services appear. So he will change the composition of the basket. By this procedure, however, he implicitly changes also the units of measurement.

It was this problem, after all, that caused the headaches at the BLS. Therefore it resorted to the hedonic technique as a way to make the basket “constant”. The current endeavors of the statistical bureau are directed at constructing a basket, which is not just representative, but also constant in terms of quality or rather in terms of the pleasure the product gives to the consumer. However, no sophistication can surmount the principle barrier that the claim of being “representative” or that of determining what is an improvement can be settled in an objective way.

Economists call the unnoticed effect of monetary changes on prices the “money illusion”. Likewise one may call the price index a “statistical illusion” based on the chimera of a fixed basket of products as the unit of measurement. Both illusions consist in taking something as stable that is not constant. In both cases, no correct measurement and no solid assessment occur. The published inflation rate along with the derived numbers for real economic growth and productivity get utmost attention, while the dubious nature of these figures is widely ignored.

In order to measure something one needs a constant measuring rod on. One cannot measure something in a meaningful sense when both are variables: the price changes as the object of measurement and the goods basket as the meter. The problem with the price index is that both do change: the composition of the individual basket of goods changes and the quantity of money.

The urge to measure the “price level” appeared after the demise of the gold standard. Under the gold standard, money was fairly stable, at least to a degree that allowed individuals and business to perform sound economic calculation. With the abandonment of the gold standard, the necessity emerged to “measure” the purchasing power of money. With money now as the variable, a “representative” basket of products was said to serve as the measuring rod. The BLS felt rightly so that the traditional way of calculating the price index was flawed. Now they use hedonics. However, the critique against measuring the un-measurable as put forth by Ludwig von Mises still holds that the “notion of stability and stabilization are empty if they do not refer to a state of rigidity and its preservation."Ludwig von Mises, op. cit., p. 223.

Who needs these statistics anyway other than governments and central banks that claim to be in charge of “the economy”, and the econometricians and prognosticators who build their models on these numbers? The consumer himself will judge to his best knowledge and preferences whether he likes the product or not. With respect to its price, he will decide to buy or to abstain. Companies may use “hedonics” and other techniques as long as they are based on technical criteria. But it is something quite different when the statistics are said to measure the overall economy and its performance, and to measure the so-called price level and the value of money.

Governments want the best available figures for the economy as a whole, for such indicators as real economic growth and productivity. If the government asks for it, the statisticians can deliver. Beyond government, the utility of aggregates and averages such as the “gross domestic production” of the “price-level”, are minimal or rather detrimental. If the variation of these figures is small, the significance of the number for business and the consumer is nil, and if these changes are large, any housewife, businessman and employee is aware of the new situation.

For economic and monetary policy formulation, the price index represents a central indicator. It affects directly social security payments and translates indirectly into the determination of the figures for real economic growth and productivity. The so-called “inflation rate” is central to the conduct of monetary policy, and for investors it serves to determine the real yields of bonds and stocks. However, what is published as the number for inflation is a highly crude number at best and a very deceiving one at worst. When taken naively at its face value, the inflation rate as it gets published not only distorts policy decisions, but also those of the private investor.

Originally published July 29, 2005.

Bloomberg suggests that individuals should not be permitted to make their own stock selections because they are not "qualified" to make such decisions. Instead, governments should help direct their investment choices.

Original Article: "Should Government Be Your Stockbroker? Maybe So, Says Bloomberg"

This Audio Mises Wire is generously sponsored by Christopher Condon.

1. The Futility of Price Control

Under socialism production is entirely directed by the orders of the central board of production management. The whole nation is an "industrial army" (a term used by Karl Marx in the Communist Manifesto) and each citizen is bound to obey his superior's orders. Everybody has to contribute his share to the execution of the overall plan adopted by the Government.

In the free economy no production czar tells a man what he should do. Everybody plans and acts for himself. The coordination of the various individuals' activities, and their integration into a harmonious system for supplying the consumers with the goods and services they demand, is brought about by the market process and the price structure it generates.

The market steers the capitalistic economy. It directs each individual's activities into those channels in which he best serves the wants of his fellow-men. The market alone puts the whole social system of private ownership of the means of production and free enterprise in order and provides it with sense and meaning.

There is nothing automatic or mysterious in the operation of the market. The only forces determining the continually fluctuating state of the market are the value judgments of the various individuals and their actions as directed by these value judgments. The ultimate factor in the market is the striving of each man to satisfy his needs and wants in the best possible way. Supremacy of the market is tantamount to the supremacy of the consumers. By their buying, and by their abstention from buying, the consumers determine not only the price structure, but no less what should be produced and in what quantity and quality and by whom. They determine each entrepreneur's profit or loss, and thereby who should own the capital and run the plants. They make poor men rich and rich men poor. The profit system is essentially production for use, as profits can be earned only by success in supplying consumers in the best and cheapest way with the commodities they want to use.

From this it becomes clear what government tampering with the price structure of the market means. It diverts production from those channels into which the consumers want to direct it into other lines. Under a market not manipulated by government interference there prevails a tendency to expand the production of each article to the point at which a further expansion would not pay because the price realized would not exceed costs. If the government fixes a maximum price for certain commodities below the level which the unhampered market would have determined for them and makes it illegal to sell at the potential market price, production involves a loss for the marginal producers. Those producing with the highest costs go out of the business and employ their production facilities for the production of other commodities, not affected by price ceilings. The government's interference with the price of a commodity restricts the supply available for consumption. This outcome is contrary to the intentions which motivated the price ceiling. The government wanted to make it easier for people to obtain the article concerned. But its intervention results in shrinking of the supply produced and offered for sale.

If this unpleasant experience does not teach the authorities that price control is futile and that the best policy would be to refrain from any endeavors to control prices, it becomes necessary to add to the first measure, restricting merely the price of one or of several consumers' goods, further measures. It becomes necessary to fix the prices of the factors of production required for the production of the consumers' goods concerned. Then the same story repeats itself on a remoter plane. The supply of those factors of production whose prices have been limited shrinks. Then again the government must expand the sphere of its price ceilings. It must fix the prices of the secondary factors of production required for the production of those primary factors. Thus the government must go farther and farther. It must fix the prices of all consumers' goods and of all factors of production, both material factors and labor, and it must force every entrepreneur and every worker to continue production at these prices and wage rates. No branch of production must be omitted from this all-around fixing of prices and wages and this general order to continue production. If some branches were to be left free, the result would be a shifting of capital and labor to them and a corresponding fall in the supply of the goods whose prices the government has fixed. However, it is precisely these goods which the government considers as especially important for the satisfaction of the needs of the masses.

But when such a state of all-around control of business is achieved, the market economy has been replaced by a system of centralized planning, by socialism. It is no longer the consumers, but the government who decides what should be produced and in what quantity and quality. The entrepreneurs are no longer entrepreneurs. They have been reduced to the status of shop managers—or Betriebsführer, as the Nazis said—and are bound to obey the orders issued by the government's central board of production management. The workers are bound to work in the plants to whom the authorities have assigned them; their wages are determined by authoritarian decrees. The government is supreme. It determines each citizen's income and standard of living. It is totalitarian.

Price control is contrary to purpose if it is limited to some commodities only. It cannot work satisfactorily within a market economy. The endeavors to make it work must enlarge the sphere of the commodities subject to price control until the prices of all commodities and services are regulated by authoritarian decree and the market ceases to work.

Either production can be directed by the prices fixed on the market by the buying or the abstention from buying on the part of the public; or it can be directed by the government's offices. There is no third solution available. Government control of a part of prices only results in a state of affairs which—without any exception—everybody considers as absurd and contrary to purpose. Its inevitable result is chaos and social unrest.

2. Price Control in Germany

It has been asserted again and again that German experience has proved that price control is feasible and can attain the ends sought by the government resorting to it. Nothing can be more erroneous.

When the first World War broke out, the German Reich immediately adopted a policy of inflation. To prevent the inevitable outcome of inflation, a general rise in prices, it resorted simultaneously to price control. The much-glorified efficiency of the German police succeeded rather well in enforcing these price ceilings. There were no black markets. But the supply of the commodities subject to price control quickly fell. Prices did not rise. But the public was no longer in a position to purchase food, clothes and shoes. Rationing was a failure. Although the government reduced more and more the rations allotted to each individual, only a few people were fortunate enough to get all that the ration card entitled them to. In their endeavors to make the price control system work, the authorities expanded step by step the sphere of the commodities subject to price control. One branch of business after the other was centralized and put under the management of a government commissary. The government obtained full control of all vital branches of production. But even this was not enough as long as other branches of industry were left free. Thus the government decided to go still farther. The Hindenburg Program aimed at all-around planning of all production. The idea was to entrust the direction of all business activities to the authorities. If the Hindenburg Program had been executed, it would have transformed Germany into a purely totalitarian commonwealth. It would have realized the ideal of Othmar Spann, the champion of "German" socialism, to make Germany a country in which private property exists only in a formal and legal sense, while in fact there is public ownership only.

However, the Hindenburg Program had not yet been completely put into effect when the Reich collapsed. The disintegration of the imperial bureaucracy brushed away the whole apparatus of price control and of war socialism. But the nationalist authors continued to extol the merits of the Zwangswirtschaft, the compulsory economy. It was, they said, the most perfect method for the realization of socialism in a predominantly industrial country like Germany. They triumphed when Chancellor Brüning in 1931 went back to the essential provisions of the Hindenburg Program and when later the Nazis enforced these decrees with the utmost brutality.

The Nazis did not, as their foreign admirers contend, enforce price control within a market economy. With them price control was only one device within the frame of an all-around system of central planning. In the Nazi economy there was no question of private initiative and free enterprise. All production activities were directed by the Reichswirtschaftsministerium. No enterprise was free to deviate in the conduct of its operations from the orders issued by the government. Price control was only a device in the complex of innumerable decrees and orders regulating the minutest details of every business activity and precisely fixing every individual's tasks on the one hand and his income and standard of living on the other.

What made it difficult for many people to grasp the very nature of the Nazi economic system was the fact that the Nazis did not expropriate the entrepreneurs and capitalists openly and that they did not adopt the principle of income equality which the Bolshevists espoused in the first years of Soviet rule and discarded only later. Yet the Nazis removed the bourgeois completely from control. Those entrepreneurs who were neither Jewish nor suspect of liberal and pacifist leanings retained their positions in the economic structure. But they were virtually merely salaried civil servants bound to comply unconditionally with the orders of their superiors, the bureaucrats of the Reich and the Nazi party. The capitalists got their (sharply reduced) dividends. But like other citizens they were not free to spend more of their incomes than the Party deemed as adequate to their status and rank in the hierarchy of graduated leadership. The surplus had to be invested in exact compliance with the orders of the Ministry of Economic Affairs.

The experience of Nazi Germany certainly did not disprove the statement that price control is doomed to failure within an economy not completely socialized. Those advocates of price control who pretend that they aim at preserving the system of private initiative and free enterprise are badly mistaken. What they really do is to paralyze the operation of the steering device of this system. One does not preserve a system by destroying its vital nerve; one kills it.

3. Popular Inflation Fallacies

Inflation is the process of a great increase in the quantity of money in circulation. Its foremost vehicle in continental Europe is the issue of non-redeemable legal tender banknotes. In this country inflation consists mainly in government borrowing from the commercial banks and also in an increase in the quantity of paper money of various types and of token coins. The government finances its deficit spending by inflation.

Inflation must result in a general tendency toward rising prices. Those into whose pockets the additional quantity of currency flows are in a position to expand their demand for vendable goods and services. An additional demand must, other things being equal, raise prices. No sophistry and no syllogisms can conjure away this inevitable consequence of inflation.

The semantic revolution which is one of the characteristic features of our day has obscured and confused this fact. The term inflation is used with a new connotation. What people today call inflation is not inflation, i.e., the increase in the quantity of money and money substitutes, but the general rise in commodity prices and wage rates which is the inevitable consequence of inflation. This semantic innovation is by no means harmless.

First of all, there is no longer any term available to signify what inflation used to signify. It is impossible to fight an evil which you cannot name. Statesmen and politicians no longer have the opportunity to resort to a terminology accepted and understood by the public when they want to describe the financial policy they are opposed to. They must enter into a detailed analysis and description of this policy with full particulars and minute accounts whenever they want to refer to it, and they must repeat this bothersome procedure in every sentence in which they deal with this subject. As you cannot name the policy increasing the quantity of the circulating medium, it goes on luxuriantly.

The second mischief is that those engaged in futile and hopeless attempts to fight the inevitable consequences of inflation—the rise in prices—are masquerading their endeavors as a fight against inflation. While fighting the symptoms, they pretend to fight the root causes of the evil. And because they do not comprehend the causal relation between the increase in money in circulation and credit expansion on the one hand and the rise in prices on the other, they practically make things worse.

The best example is provided by the subsidies. As has been pointed out, price ceilings reduce supply because production involves a loss for the marginal producers. To prevent this outcome governments often grant subsidies to the farmers operating with the highest costs. These subsidies are financed out of additional credit expansion. Thus they result in increasing the inflationary pressure. If the consumers were to pay higher prices for the products concerned, no further inflationary effect would emerge. The consumers would have to use for such surplus payments only money which had been already put into circulation. Thus the allegedly brilliant idea to fight inflation by subsidies in fact brings about more inflation.

4. Fallacies Must Not Be Imported

There is practically no need today to enter into a discussion of the comparatively slight and harmless inflation that under a gold standard can be brought about by a great increase in gold production. The problems the world must face today are those of runaway inflation. Such an inflation is always the outcome of a deliberate government policy. The government is on the one hand not prepared to restrict its expenditure. On the other hand it does not want to balance its budget by taxes levied or by loans from the public. It chooses inflation because it considers it as the minor evil. It goes on expanding credit and increasing the quantity of money in circulation because it does not see what the inevitable consequences of such a policy must be.

There is no cause to be too much alarmed about the extent to which inflation has gone already in this country. Although it has gone very far and has done much harm, it has certainly not created an irreparable disaster. There is no doubt that the United States is still free to change its methods of financing and to return to a sound money policy.

The real danger does not consist in what has happened already, but in the spurious doctrines from which these events have sprung. The superstition that it is possible for the government to eschew the inexorable consequences of inflation by price control is the main peril. For this doctrine diverts the public's attention from the core of the problem. While the authorities are engaged in a useless fight against the attendant phenomena, only few people are attacking the source of the evil, the Treasury's methods of providing for the enormous expenditures. While the bureaus make headlines with their activities, the statistical figures concerning the increase in the nation's currency are relegated to an inconspicuous place in the newspapers' financial pages.

Here again the example of Germany may stand as a warning. The tremendous German inflation which reduced in 1923 the purchasing power of the mark to one billionth of its prewar value was not an act of God. It would have been possible to balance Germany's postwar budget without resorting to the Reichsbank's printing press. The proof is that the Reich's budget was easily balanced as soon as the breakdown of the old Reichsbank forced the government to abandon its inflationary policy. But before this happened, all German would-be experts stubbornly denied that the rise in commodity prices, wage rates and foreign exchange rates had anything to do with the government's method of reckless spending. In their eyes only profiteering was to blame. They advocated thoroughgoing enforcement of price control as the panacea and called those recommending a change in financial methods "deflationists."

The German nationalists were defeated in the two most terrific wars of history. But the economic fallacies which pushed Germany into its nefarious aggressions unfortunately survive. The monetary errors developed by German professors such as Lexis and Knapp and put into effect by Havenstein, the Reichsbank's President in the critical years of its great inflation, are today the official doctrine of France and of many other European countries. There is no need for the United States to import these absurdities.

This article appeared in the Commercial and Financial Chronicle, December 20, 1945, and was later printed in Planning for Freedom.

I come to bury Reaganomics, not to praise it.

How well has Reaganomics achieved its own goals? Perhaps the best way of discovering those goals is to recall the heady days of Ronald Reagan's first campaign for the presidency, especially before his triumph at the Republican National Convention in 1980. In general terms, Reagan pledged to return, or advance, to a free market and to "get government off our backs."

Specifically, Reagan called for a massive cut in government spending, an even more drastic cut in taxation (particularly the income tax), a balanced budget by 1984 (that wild-spender, Jimmy Carter you see, had raised the budget deficit to $74 billion a year, and this had to be eliminated), and a return to the gold standard, where money is supplied by the market rather than by government. In addition to a call for free markets domestically, Reagan affirmed his deep commitment to freedom of international trade. Not only did the upper echelons of the administration sport Adam Smith ties, in honor of that moderate free-trader, but Reagan himself affirmed the depth of the influence upon him of the mid-19th century laissez-faire economist, Frederic Bastiat, whose devastating and satiric attacks on protectionism have been anthologized in economics readings ever since.

The gold standard was the easiest pledge to dispose of. President Reagan appointed an allegedly impartial gold commission to study the problem—a commission overwhelmingly packed with lifelong opponents of gold. The commission presented its predictable report, and gold was quickly interred.

Let's run down the other important areas:

Government Spending. How well did Reagan succeed in cutting government spending, surely a critical ingredient in any plan to reduce the role of government in everyone's life? In 1980, the last year of free-spending Jimmy Carter the federal government spent $591 billion. In 1986, the last recorded year of the Reagan administration, the federal government spent $990 billion, an increase of 68%. Whatever this is, it is emphatically not reducing government expenditures.

Sophisticated economists say that these absolute numbers are an unfair comparison, that we should compare federal spending in these two years as percentage of gross national product. But this strikes me as unfair in the opposite direction, because the greater the amount of inflation generated by the federal government, the higher will be the GNP. We might then be complimenting the government on a lower percentage of spending achieved by the government's generating inflation by creating more money. But even taking these percentages of GNP figures, we get federal spending as percent of GNP in 1980 as 21.6%, and after six years of Reagan, 24.3%. A better comparison would be percentage of federal spending to net private product, that is, production of the private sector. That percentage was 31.1% in 1980, and a shocking 34.3% in 1986. So even using percentages, the Reagan administration has brought us a substantial increase in government spending.

Also, the excuse cannot be used that Congress massively increased Reagan's budget proposals. On the contrary, there was never much difference between Reagan's and Congress's budgets, and despite propaganda to the contrary, Reagan never proposed a cut in the total budget.

Deficits. The next, and admittedly the most embarrassing, failure of Reaganomic goals is the deficit. Jimmy Carter habitually ran deficits of $40–50 billion and, by the end, up to $74 billion; but by 1984, when Reagan had promised to achieve a balanced budget, the deficit had settled down comfortably to about $200 billion, a level that seems to be permanent, despite desperate attempts to cook the figures in one-shot reductions.

This is by far the largest budget deficit in American history. It is true that the $50 billion deficits in World War II were a much higher percentage of the GNP; but the point is that that was a temporary, one-shot situation, the product of war finance. But the war was over in a few years; and the current federal deficits now seem to be a recent, but still permanent part of the American heritage.

One of the most curious, and least edifying, sights in the Reagan era was to see the Reaganites completely change their tune of a lifetime. At the very beginning of the Reagan administration, the conservative Republicans in the House of Representatives, convinced that deficits would disappear immediately, received a terrific shock when they were asked by the Reagan administration to vote for the usual annual increase in the statutory debt limit. These Republicans, some literally with tears in their eyes, protested that never in their lives had they voted for an increase in the national debt limit, but they were doing it just this one time because they "trusted Ronald Reagan" to balance the budget from then on. The rest, alas, is history, and the conservative Republicans never saw fit to cry again. Instead, they found themselves adjusting rather easily to the new era of huge permanent deficits. The Gramm-Rudman law, allegedly designed to eradicate deficits in a few years, has now unsurprisingly bogged down in enduring confusion.

Even less edifying is the spectre of Reaganomists who had inveighed against deficits—that legacy of Keynesianism—for decades. Soon Reaganite economists, especially those staffing economic posts in the executive and legislative branches, found that deficits really weren't so bad after all. Ingenious models were devised claiming to prove that there really isn't any deficit. Bill Niskanen, of the Reagan Council of Economic Advisors, came up with perhaps the most ingenious discovery: that there is no reason to worry about government deficits, since they are balanced by the growth in value of government assets. Well, hooray, but it is rather strange to see economists whose alleged goal is a drastic reduction in the role of government cheering for ever greater growth in government assets. Moreover, the size of government assets is really beside the point. It would only be of interest if the federal government were just another private business firm, about to go into liquidation, and whose debtors could then be satisfied by a parceling out of its hefty assets. The federal government is not about to be liquidated; there is no chance, for example, of an institution ever going into bankruptcy or liquidation that has the legal right to print whatever money it needs to get itself—and anyone else it favors—out of any financial hole.

There has also been a fervent revival of the old left-Keynesian idea that "deficits don't matter, anyway." Deficits are stimulating, we can "grow ourselves out of deficits," etc. The most interesting, though predictable, twist was that of the supply-siders, who, led by Professor Arthur Laffer and his famous "curve," had promised that if income tax rates were cut, investment and production would be so stimulated that a fall in tax rates would increase tax revenue and balance the budget. When the budget was most emphatically not balanced, and deficits instead got worse, the supply-siders threw Laffer overboard as the scapegoat, claiming that Laffer was an extremist, and the only propounder of his famous curve. The supply-siders then retreated to their current, fall-back position, which is quite frankly Keynesian; namely deficits don't matter anyway, so let's have cheap money and deficits; relax and enjoy them. About the only Keynesian phrase we have not heard yet from Reaganomists is that the national debt "doesn't matter because we owe it to ourselves," and I am waiting for some supply-sider to adopt this famous 1930s phrase of Abba Lerner without, of course, bothering about attribution.

One way in which Ronald Reagan has tried to seize the moral high road on the deficit question is to divorce his rhetoric from reality even more sharply than usual. Thus, the proposer of the biggest deficits in American history has been calling vehemently for a Constitutional amendment to require a balanced budget. In that way, Reagan can lead the way toward permanent $200 billion deficits, while basking in the virtue of proposing a balanced budget amendment, and trying to make Congress the fall guy for our deficit economy.

Even in the unlikely event that the balanced budget amendment should ever pass, it would be ludicrous in its lack of effect. In the first place, Congress can override the amendment at any time by three-fifths vote. Secondly, Congress is not required to actually balance any budget; that is, its actual expenditures in any given year are not limited to the revenues taken in. Instead, Congress is only required to prepare an estimate of a balanced budget for a future year; and of course, government estimates, even of its own income or spending, are notoriously unreliable. And third, there is no enforcement clause; suppose Congress did violate even the requirement for an estimated balanced budget: What is going to happen to the legislators? Is the Supreme Court going to summon marshals and put the entire U.S. Congress in jail? And yet, not only has Reagan been pushing for such an absurd amendment, but so too have many helpful Reaganomists.

Tax Cuts. One of the few areas where Reaganomists claim success without embarrassment is taxation. Didn't the Reagan administration, after all, slash income taxes in 1981, and provide both tax cuts and "fairness" in its highly touted tax reform law of 1986? Hasn't Ronald Reagan, in the teeth of opposition, heroically held the line against all tax increases?

The answer, unfortunately, is no. In the first place, the famous "tax cut" of 1981 did not cut taxes at all. It's true that tax rates for higher-income brackets were cut; but for the average person, taxes rose, rather than declined. The reason is that, on the whole, the cut in income tax rates was more than offset by two forms of tax increase. One was "bracket creep," a term for inflation quietly but effectively raising one into higher tax brackets, so that you pay more and proportionately higher taxes even though the tax rate schedule has officially remained the same. The second source of higher taxes was Social Security taxation, which kept increasing, and which helped taxes go up overall. Not only that, but soon thereafter; when the Social Security System was generally perceived as on the brink of bankruptcy, President Reagan brought in Alan Greenspan, a leading Reaganomist and now Chairman of the Federal Reserve, to save Social Security as head of a bipartisan commission. The "saving," of course, meant still higher Social Security taxes then and forevermore.

Since the tax cut of 1981 that was not really a cut, furthermore, taxes have gone up every single year since, with the approval of the Reagan administration. But to save the president's rhetorical sensibilities, they weren't called tax increases. Instead, ingenious labels were attached to them; raising of "fees," "plugging loopholes" (and surely everyone wants loopholes plugged), "tightening IRS enforcement," and even "revenue enhancements." I am sure that all good Reaganomists slept soundly at night knowing that even though government revenue was being "enhanced," the president had held the line against tax increases.

The highly ballyhooed Tax "Reform" Act of 1986 was supposed to be economically healthy as well as "fair"; supposedly "revenue neutral," it was to bring us (a) simplicity, helping the public while making the lives of tax accountants and lawyers miserable; and (b) income tax cuts, especially in the higher income brackets and in everyone's marginal tax rates (that is, income tax rates on additional money you may earn); and offset only by plugging those infamous loopholes. The reality, of course, was very different. In the first place, the administration has succeeded in making the tax laws so complicated that even the IRS admittedly doesn't understand it, and tax accountants and lawyers will be kept puzzled and happy for years to come.

Secondly, while indeed income tax rates were cut in the higher brackets, many of the loophole plugs meant huge tax increases for people in the upper as well as middle income brackets. The point of the income tax, and particularly the marginal rate, cuts, was the supply-sider objective of lowering taxes to stimulate savings and investment. But a National Bureau study by Hausman and Poterba on the Tax Reform Act shows that over 40% of the nation's taxpayers suffered a marginal tax increase (or at best, the same rate as before) and, of the majority that did enjoy marginal tax cuts, only 11% got reductions of 10% or more. In short, most of the tax reductions were negligible. Not only that; the Tax Reform Act, these authors reckoned, would lower savings and investment overall because of the huge increases in taxes on business and on capital gains. Moreover savings were also hurt by the tax law's removal of tax deductibility on contributions to IRAs.

Not only were taxes increased, but business costs were greatly raised by making business expense meals only 80% deductible, which means a great expenditure of business time and energy keeping and shuffling records. And not only were taxes raised by eliminating tax shelters in real estate, but the law's claims to "fairness" were made grotesque by the retroactive nature of many of the tax increases. Thus, the abolition of tax shelter deductibility was made retroactive, imposing huge penalties after the fact. This is ex post facto legislation outlawed by the Constitution, which prohibits making actions retroactively criminal for a time period when they were perfectly legal. A friend of mine, for example, sold his business about eight years ago; to avoid capital gains taxes, he incorporated his business in the American Virgin Islands, which the federal government had made exempt from capital gains taxes in order to stimulate Virgin Islands development. Now, eight years later, this tax exemption for the Virgin Islands has been removed (a "loophole" plugged!) but the IRS now expects my friend to pay full retroactive capital gains taxes plus interest on this eight-year-old sale. Let's hear it for the "fairness" of the tax reform law!

But the bottom line on the tax question: is what happened in the Reagan era to government tax revenues overall? Did the amount of taxes extracted from the American people by the federal government go up or down during the Reagan years? The facts are that federal tax receipts were $517 billion in the last Carter year of 1980. In 1986, revenues totaled $769 billion, an increase of 49%. Whatever that is, that doesn't look like a tax cut. But how about taxes as a percentage of the national product? There, we can concede that on a percentage criterion, overall taxes fell very slightly, remaining about even with the last year of Carter. Taxes fell from 18.9% of the GNP to 18.3%, or for a better gauge, taxes as percentage of net private product fell from 27.2% to 26.6%. A large absolute increase in taxes, coupled with keeping taxes as a percentage of national product about even, is scarcely cause for tossing one's hat in the air about a whopping reduction in taxes during the Reagan years.

In recent months, moreover; the Reagan administration has been more receptive to loophole plugging, fees, and revenues than ever before. To quote from the Tax Watch column in the New York Times (October 13, 1987): "President Reagan has repeatedly warned Congress of his opposition to any new taxes, but some White House aides have been trying to figure out a way of endorsing a tax bill that could be called something else."

In addition to closing loopholes, the White House is nudging Congress to expand the usual definition of a "user fee," not a tax because it is supposed to be a fee for those who use a government service, say national parks or waterways. But apparently the Reagan administration is now expanding the definition of "user fee" to include excise taxes, on the assumption, apparently, that every time we purchase a product or service we must pay government for its permission. Thus, the Reagan administration has proposed not, of course, as a tax increase, but as an alleged "user fee," a higher excise tax on every international airline or ship ticket, a tax on all coal producers, and a tax on gasoline and on highway charges for buses. The administration is also willing to support, as an alleged user fee rather than a tax, a requirement that employers, such as restaurants, start paying the Social Security tax on tips received by waiters and other service personnel.

In the wake of the stock market crash, President Reagan is now willing to give us a post-crash present of: higher taxes that will openly be called higher taxes. On Tuesday morning, the White House declared: "We're going to hold to our guns. The president has given us marching orders: no tax increase." By Tuesday afternoon, however, the marching orders had apparently evaporated, and the president said that he was "willing to look at" tax-increase proposals. To greet a looming recession with a tax increase is a wonderful way to bring that recession into reality. Once again, President Reagan is following the path blazed by Herbert Hoover in the Great Depression of raising taxes to try to combat a deficit.

Deregulation. Another crucial aspect of freeing the market and getting government off our backs is deregulation, and the administration and its Reaganomists have been very proud of its deregulation record. However, a look at the record reveals a very different picture. In the first place, the most conspicuous examples of deregulation; the ending of oil and gasoline price controls and rationing, the deregulation of trucks and airlines, were all launched by the Carter administration, and completed just in time for the Reagan administration to claim the credit. Meanwhile, there were other promised deregulations that never took place; for example, abolition of natural gas controls and of the Department of Energy.

Overall, in fact, there has probably been not deregulation, but an increase in regulation. Thus, Christopher De Muth, head of the American Enterprise Institute and a former top official of Reagan's Office of Management and the Budget, concludes that "the President has not mounted a broad offensive against regulation. There hasn't been much total change since 1981. There has been more balanced administration of regulatory agencies than we had become used to in the 1970s, but many regulatory rules have been strengthened."

In particular, there has been a fervent drive, especially in the past year; to intensify regulation of Wall Street. A savage and almost hysterical attack was launched late last year by the Securities and Exchange Commission and by the Department of Justice on the high crime of "insider trading." Distinguished investment bankers were literally hauled out of their offices in manacles, and the most conspicuous inside trader received as a punishment (1) a fine of $100 million; (2) a lifetime ban on any further security trading, and (3) a jail term of one year, suspended for community service. And this is the light sentence, in return for allowing himself to be wired and turn informer on his insider trading colleagues. [Editor's note: Ivan Boesky was sentenced to three years in prison.]

All this was part of a drive by the administration to protect inefficient corporate managers from the dread threat of takeover bids, by which means stockholders are able to dispose easily of ineffective management and turn to new managers. Can we really say that this frenzied assault on Wall Street by the Reagan administration had no impact on the stock market crash [October 1987]?

And yet the Reagan administration has reacted to the crash not by letting up, but by intensifying, regulation of the stock market. The head of the SEC strongly considered closing down the market on October 19, and some markets were temporarily shut down—a case, once again, of solving problems by shooting the market—the messenger of bad news. October 20, the Reagan administration collaborated in announcing early closing of the market for the next several days. The SEC has already moved, in conjunction with the New York Stock Exchange, to close down computer program trading on the market, a trade related to stock index futures. But blaming computer program trading for the crash is a Luddite reaction; trying to solve problems by taking a crowbar and wrecking machines. There were no computers, after all, in 1929. Once again, the instincts of the administration, particularly in relation to Wall Street, is to regulate. Regulate, and inflate, seem to be the Reaganite answers to our economic ills.

Agricultural policy, for its part, has been a total disaster. Instead of ending farm price supports and controls and returning to a free market in agriculture, the administration has greatly increased price supports, controls and subsidies. Furthermore, it has brought a calamitous innovation to the farm program; the PIK program ["Payments In Kind"] in which the government gets the farmers to agree to drastic cuts in acreage, in return for which the government pays back the wheat or cotton surpluses previously held off the market. The result of all this has been to push farm prices far higher than the world market, depress farm exports, and throw many farmers into bankruptcy. All the administration can offer, however, is more of the same disastrous policy.

Foreign Economic Policy. If the Reagan administration has botched the domestic economy, even in terms of its own goals, how has it done in foreign economic affairs? As we might expect, its foreign economic policy has been the exact opposite of its proclaimed devotion to free trade and free markets. In the first place, Adam Smith ties and Bastiat to the contrary notwithstanding, the Reagan administration has been the most belligerent and nationalistic since Herbert Hoover. Tariffs and import quotas have been repeatedly raised, and Japan has been treated as a leper and repeatedly denounced for the crime of selling high quality products at low prices to the delighted American consumer.

In all matters of complex and tangled international economics, the only way out of the thicket is to keep our eye on one overriding question: Is it good, or bad, for the American consumer? What the American consumer wants is good quality products at low prices, and so the Japanese should be welcomed and admired instead of condemned. As for the alleged crime of "dumping," if the Japanese are really foolish enough to waste money and resources by dumping—that is selling goods to us below costs—then we should welcome such a policy with open arms; anytime the Japanese are willing to sell me Sony TV sets for a dollar, I am more than happy to take the sets off their hands.

Not only foreign producers are hurt by protectionism, but even more so are American consumers. Every time the administration slaps a tariff or quota on motorcycles or on textiles or semiconductors or clothespins—as it did to bail out one inefficient clothespin plant in Maine—every time it does that, it injures the American consumer.

It is no wonder, then, that even the Reaganomist Bill Niskanen recently admitted that "international trade is more regulated than it was 10 years ago." Or, as Secretary of Treasury James Baker declared proudly last month: "President Reagan has granted more import relief to U.S. industry than any of his predecessors in more than half a century." Pretty good for a Bastiat follower.

Another original aim of the Reagan administration, under the influence of the monetarists, or Friedmanites, was to keep the government's hand completely off exchange rates, and to allow these rates to fluctuate freely on the market, without interference by the Federal Reserve or the Treasury. A leading monetarist, Dr. Beryl W. Sprinkel, was made Undersecretary of the Treasury for Monetary Policy in 1981 to carry out that policy. But this non-intervention is long gone, and Secretary Baker, aided by the Fed, has been busily engaged in trying to persuade other countries to intervene to help coordinate and fix exchange rates. After being removed from the Treasury after several years, Sprinkel was sent to Siberia and ordered to keep quiet, as head of the Council of Economic Advisors; and Sprinkel has recently announced that he will leave the government altogether. [Editor's note: Sprinkel was later rehabilitated, and given Cabinet status, in return for his agreement to take part in the disastrous Baker dollar policy.]

Moreover, the policy of foreign aid and foreign lending conducted or encouraged by the government has proceeded more intensely than even under previous administrations. Reagan has bailed out the despotic government of Poland with massive loans, so that Poland could repay its Western creditors. A similar policy has been conducted in relation to many shaky or bankrupt third world governments. The spectre of bank collapse from foreign loans has been averted by bailouts and promises of bailout from the Federal Reserve, the nation's only manufacturer of dollars, which it can produce at will.

Wherever we look, then, on the budget, in the domestic economy, or in foreign trade or international monetary relations, we see government even more on our backs than ever. The burden and the scope of government intervention under Reagan has increased, not decreased. Reagan's rhetoric has been calling for reductions of government; his actions have been precisely the reverse. Yet both sides of the political fence have bought the rhetoric and claim that it has been put into effect.

Reaganites and Reaganomists, for obvious reasons, are trying desperately to maintain that Reagan has indeed fulfilled his glorious promises; while his opponents, intent on attacking the bogey of Reaganomics, are also, and for opposite reasons, anxious to claim that Reagan has really put his free-market program into operation. So we have the curious, and surely not healthy, situation where a mass of politically interested people are totally misinterpreting and even misrepresenting the Reagan record; focusing, like Reagan himself, on his rhetoric instead of on the reality.

What of the Future? Is there life after Reaganomics? To assess coming events, we first have to realize that Reaganomics has never been a monolith. It has had several faces; Reaganomics has been an uneasy and shifting coalition of several clashing schools of economic thought. In particular, the leading schools have been the conservative Keynesians, the Milton Friedman monetarists, and the supply-siders. The monetarists, devoted to a money rule of a fixed percentage increase of money growth engineered by the Federal Reserve, have come a cropper. Fervently believing that science is nothing else but prediction, the monetarists have self-destructed by making a string of self-confident but disastrous predictions in the last several years. Their fate illustrates the fact that he who lives by prediction shall die by it. Apart from their views on money, the monetarists generally believe in free markets, and so their demise has left Reaganomics in the hands of the other two schools, neither of whom are particularly interested in free markets or cutting government.

The conservative Keynesians—the folks who brought us the economics of the Nixon and Ford administrations—saw Keynesianism lose its dominance among economists with the inflationary recession of 1973–74, an event which Keynesians stoutly believed could never possibly happen. But while Keynesians have lost their old eclat, they remain with two preoccupations: (1) a devotion to the New Deal-Fair Deal-Great Society-Nixon-Ford-Carter-status quo, and (2) a zeal for tax increases to moderate the current deficit. As for government spending, never has the thought of actually cutting expenditures crossed their minds. The supply-siders, who are weak in academia but strong in the press and in exerting enormous political leverage per capita, have also no interest in cutting government spending. To the contrary, both conservative Keynesians and supply-siders are prepared to call for an increasing stream of goodies from government.

Both groups have also long been keen on monetary inflation. The supply-siders have pretty much given up the idea of tax cuts; their stance is now to accept the deficit and oppose any tax increase. On foreign monetary matters, the conservative Keynesians and the supply-siders have formed a coalition; both groups embrace Secretary of Treasury Baker's Keynesian program of fixed exchange rates and an internationally coordinated policy of cheap money.

Politically, the Republican presidential candidates can be assessed on their various preferred visions of Reaganomics. Vice-President Bush is, of course, a conservative Keynesian and a veteran arch-enemy of supply-side doctrine, which he famously denounced in 1980 as "voodoo economics." Secretary of Treasury James Baker is a former Bush campaign aide. White House Chief of Staff Howard Baker is also in the conservative Keynesian camp, as was Paul Volcker, and is Alan Greenspan. Since former White House Chief of Staff Donald Regan was a fellow-traveller of the supply-siders, his replacement by Howard Baker as a result of Iranscam was a triumph of conservative Keynesians over the supply-siders. This year, in fact, our troika of Economic Rulers, Greenspan and the two Bakers, has all been squarely in the conservative Keynesian camp.

Senator Robert Dole, the other Republican front-runner for president, is also a conservative Keynesian. In fact, Bob Dole carried on the fight for higher taxes even when it was relatively unfashionable inside the administration. So devoted to higher taxes is Bob Dole, in fact, that he is reputed to be the favorite presidential candidate of the Internal Revenue Service. So if you like the IRS, you'll love Bob Dole.

Congressman Jack Kemp, on the other hand, has been the political champion of the supply-siders ever since supply-side was invented in the late 1970s. Kemp's call for higher government spending, and approval of deficits, monetary inflation, and fixed exchange rates, all attest to his supply-side devotion.

Jack Kemp, however, has for some reason not struck fire among the public, so Mrs. Jeanne Kirkpatrick stands ready in the wings to take up the cause if Kemp should fail to rally. I confess I have not been able to figure out the economic views of the Reverend Pat Robertson, although I have a hunch they do not loom very large in his world outlook.

Although there are a lot of Democratic candidates out there, it is hard at this point to distinguish one from another, on economic policy or indeed on anything else. As Joe Klein recently wrote in a perceptive article in New York magazine, the Republicans are engaged in an interesting clash of different ideas, while the Democrats are all muddily groping toward the center. To make the confusion still greater, Klein points out that Republicans are busily talking about "compassion," while the Democrats are all stressing "efficiency." One thing is fairly clear; Congressman Gephardt is an all-out protectionist, thoroughly jettisoning the old Democratic commitment to free trade, and is the most ardent statist in agricultural policy.

On monetary and fiscal policy, the Democrats are the classic party of liberal Keynesianism, in contrast to the Republican policy of conservative Keynesianism. The problem is that, in the last decade or two, it has become increasingly difficult to tell the difference. Apart from supply-sider Kemp, we can expect the president of either party to be a middle-of-the-road liberal/conservative Keynesian. And so we can expect the next administration's economic policies to be roughly the same as they are now. Except that the rhetoric will be different. So we can, therefore, expect diverse perceptions and responses to a similar reality by the public and by the market. Thus, if Jack Kemp becomes president, the public will wrongly consider him a champion of hard money, budget cutting, and the free market. The public will therefore underestimate the wildly inflationist reality of a Kemp administration. On the other hand, the public probably perceives the Democrats to be wilder spenders relative to the Republicans than they really are. So should the Democrats win in 1988, we can expect the market to overestimate the inflationary measure of a Democratic administration.

All of this, along with the universal misperception of Reaganomics, illustrates once more the wisdom of those incisive political philosophers, Gilbert and Sullivan: "Things are not always what they seem; skim milk masquerades as cream."

This memo to Mises Institute members was written in late 1987 and published in The Free Market Reader: Essays in the Economics of Liberty, edited by Lewellyn H. Rockwell, Jr., (Auburn, AL: Ludwig von Mises Institute, 1988), pp. 342–62.

[Should the state back science or even plan its progress? In this excerpt from a longer and previously unpublished study written in 1959—two years after Russia's launch of Sputnik and two years before the first manned space flight—Murray Rothbard (1926–95) argues that socially beneficial scientific innovation comes from independent thinkers working within the market economy, while the state distorts science and produces no really important innovations. This paper is not only remarkable for its theoretical rigor but also for its enduring quality: it was written at a time when the idea of state planning for science was at its height. See the full text here.]

Charges abound that scientific research, left to the mercies of the free market, would be insufficient for modern technological needs. The general principles of government policy in this field we have already set forth: (a) leaving the general allocation of resources purely to the free market—the profit and loss incentive and test of the free market being the only efficient way of allocating a country's resources in the way best calculated to satisfy consumer demand. This principle applies fully as well to scientific research as to any other sphere; and (b) for the military needs of research, acting only as a consumer rather than as a producer using funds to pay for private scientific contractors. In actual practice, the Federal government is already doing a great deal (although, as we shall see below, it can do much more) in this direction, by channeling most of its military research funds into private contractors, whom the military sees to be more efficient than government operation.In 1953–54, the Federal government spent $2.81 billion of its funds on scientific research and development; of this amount, only $970 million was spent on programs within the government itself (and most of this was development rather than research); the remainder was channeled into private hands to pay for privately-conducted research ($1.5 billion in industry, $280 million in colleges).

Let us first turn to the problem of general research, however. Is it really true that such research will be deficient on the free market?

We have, first, been hearing a great deal of how much resources the Soviet Union has been putting into scientific research, and how we must redouble our efforts in order to catch up. But the National Science Foundation has estimated that the Soviet Union has been putting a little over 1% of its national product into research and development. The Steelman Report of 1947 called for the United States to place 1% of its national product into research and development, in the years ahead. Yet, we now have 2% of our product going into "R and D," and out national income is far, far higher than that of the Soviets.See Basic Research, A National Resource (Washington, D.C.: National Science Foundation, 1957); and John Steelman, Science and Public Policy (Washington, D.C., 1947). In 1953–54, private sources contributed $2.6 billion to R and D; this contrast to a total of $530 million of private funds in 1941. In fact, with the exception of pure, or basic, research (which we will study further below) the National Science Foundation's study conceded the sufficiency of private scientific research in American industry.

The flourishing of private research in our modern age had been eloquently hailed by General David Sarnoff, board chairman of RCA:

Today, science and industry are linked by arteries of progress and their lifeblood is technical research…. The patter of our industrial progress … lies in a partnership between those who create good things and those who produce and distribute and service them. It lies in teamwork between research and industry.Brig. Gen. David Sarnoff, Research and Industry: Partners in Progress (Address, Nov. 14, 1951), pp. 6–7.

We have seen that government subsidization or operation of (non-military) research would distort the efficient allocation of resources of the free market economy. It would do more; as Sarnoff pointed out, government aid would inevitably mean "increased government control of the daily lives of all the people." Secondly, government control would tragically bureaucratize science and cripple that spirit of free inquiry on which all scientific advance must rest: "government control of research would destroy the very qualities that enable researchers to make such an important contribution to society. For government control means that rigid lines would be set for research; and these lines may not meet changing requirements. Certainly industry is best qualified to define its own research needs. And the partnership between research and industry loses its meaning when government can dictate the subject and objective of research in any competitive system of private enterprise.Sarnoff, op. cit., pp. 12 ff.

The myth has arisen that government research is made necessary by our technological age, because only planned, directed, large-scale "team" research can produce important inventions or develop them properly. The day of the individual or small-scale inventor is supposedly over and done with. And the strong inference is that government, as potentially the "largest-scale" operator, must play a leading role in even non-military scientific research. This common myth has been completely exploded by the researches of John Jewkes, David Sawers, and Richard Stillerman in their highly important recent work.John Jewkes, David Sawers, and Richard Stillerman, The Sources of Invention (New York: St. Martin's Press, 1958). Typical recent expressions of the myth may be found in John Kenneth Galbraith, American Capitalism; W. Rupert Maclaurin, "The Sequence from Invention to Innovation", Quarterly Journal of Economics, Feb. 1953; Waldemar B. Kaempffert, Invention and Society; A. Coblenz and H.L. Owens, Transistors: Theory and Application. Taking sixty-one of the most important inventions of the twentieth century (excluding atomic energy, which we will discuss below), Jewkes et. al. found that more than half of these were the work of individual inventors—with the individuals working at their own directions, and with very limited resources. In this category they place such inventions as: air-conditioning, automatic transmission, bakelite, the ball-point pen, catalytic cracking of petroleum, cellophane, the cotton picker, the cyclotron, gas refrigeration, the electron microscope, the gyro-compass, the helicopter, insulin, the jet engine, kodachrome, magnetic recording, penicillin, the Polaroid camera, radio, the safety razor, titanium, and the zipper. The jet engine was invented and carried through its early development, practically simultaneously, by Britons and Germans who were individual inventors, either completely unconnected with the aircraft industry or not specialists in engines. The gyrocompass was invented by a young German art historian. The bulk of the basic inventions for radio came from individual inventors unconnected with communications firms, some of whom created new small firms of their own to exploit the invention. The cyclotron was invented and partly developed by a university scientist, using simple equipment in the early stages. Penicillin was invented and partly developed in a university laboratory, and insulin was invented by a general practitioner who used a university laboratory.

"Government control of science, government planning of science, is bound to result in the politicization of science, the substitute of political goals and political criteria for scientific ones."

Of the inventions studied that were achieved in industrial research laboratories, some arose in small firms, others were more or less accidental by-products of other work rather than preplanned and predirected. Terylene, the synthetic fibre, was discovered by a small research group in a firm not directly interested in fibre production. The process of continuous hot strip rolling of steel sheets was thought up by an individual inventor and then perfected in a small steel company. The LP record was invented by an engineer working on it as an individual sideline, and then was developed by another corporation.

In other cases, inventions in the research laboratories of large companies were made by small research teams, often centered around one outstanding man. Such was the case with Nylon, at the DuPont laboratories.For other experts who believe that a highly important role still remains for the individual independent inventor, see Joseph Rossman, The Psychology of the Inventor; the late Charles F. Kettering, New York Times, March 12, 1950; W.J. Kroll (the inventor of ductile titanium), "How Commercial Titanium and Zirconium Were Born." Journal of the Franklin Institute, Sept. 1955; and H.S. Hatfield, The Inventor and His World.

The twentieth century has produced some great independent inventors, creators of many important new devices. One of them, the Englishman S.G. Brown (components for telegraphy, telephony, radio, and gyro-compass) declared: "if there were any control over me or my work every idea would stop." Brown never accepted financial aid for experimental work, or for producing a new device. How would such a man fare under the control of a government-directed research team, or one that was government-controlled? P.T. Farnsworth, great television pioneer, has always preferred to do his research on a small scale and with simple equipment. F.W. Lanchester, great British inventor in aerodynamics and engineering once wrote: "the salient feature of my career … (is that) … my work has been almost wholly individual. My scientific and technical work has been almost wholly individual. My scientific and technical work has never been backed by funds from external sources to any material extent." Lee de Forest, eminent inventor of the radio vacuum tube, always found it difficult to work under any conditions short of complete autonomy. Sir Frank Whittle invented the jet engine with very slim resources.

C.F. Kettering often positively preferred simple equipment. And R.M. Lodge recently warned:

The trend towards more and more complex apparatus should be carefully watched and controlled; otherwise the scientists themselves gradually become specialist machine-minders, and there is a tendency, for example, for analytical problem to be passed from the microanalytical laboratory to the intra-red laboratory and from there to the mass spectrographic laboratory, whereas all the time all that was needed was a microphone and a keen observer.R.M. Lodge, Economic Factors in Planning of Research, 1954. Quoted in Jewkes, et. al., p. 133. On other cases of great scientists preferring simple equipment, see: John Randal Baker, The Scientific Life, P. Freedman, The Principles of Scientific Research, J.B.S. Haldane, Science Advances.

The worthy individual inventor is far from helpless in the modern world. He may, in a free enterprise system, become a free-lance consultant to industry, may work on inventions on outside grants, may sell his ideas to corporations, may form or be backed by a research association (both profit and non-profit), or may obtain aid from special private organizations that invest risk capital in small speculative inventions (e.g. the American Research and Development Corporations).

One very important reason for the success of the independent inventor, and his preservation from the dominance of large-scale government-controlled projects, stems from the very nature of invention: "The essential feature of innovation is that the path to it is not known beforehand. The less, therefore, an inventor is pre-committed in his speculation by training or tradition, the better the chance of his escaping from the grooves of accepted thought.Jewkes, et. al., p. 116.There are many recorded instances of the inventor winning out despite the scoffing of the recognized experts in the field, perhaps even emboldened because he didn't know enough to be discouraged. One authority maintains that Farnsworth benefited from his lack of contact with the outside scientific world. Once, a professor gave him four good reasons why his idea—later successful—could not possibility work. Before the discovery of the transistor, many scientists claimed that nothing more could be learned in that field. Eminent mathematicians once claimed to prove logically that short-wave radio was impossible. Government-controlled research would undoubtedly rely on existing authorities, and thus would snuff out the searchings of the truly original minds. Many of the great inventors of recent times could not have gotten a research job in the field for lack of expertise: the inventors of Kodachrome were musicians; Eastman, the great inventor in photography, was a bookkeeper at the time; the inventor of the ball-point pen was an artist and journalists; the automatic dialing system was invented by an undertaker; a veterinarian invented the pneumatic tire. Furthermore, there are many inventors who are part-time, or one-shot, inventors, who are clearly more useful on their own than as part of a research team.

As the eminent British zoologist John Baker points out, the life of an independent researcher involves the willingness to bear great risks: "The life is too strenuous for most people, and the timid scientist hankers after the safety of directed team-work routine. The genuine research worker is [an] altogether different kind of person."John Randall Baker, Science and the Planned State (New York: Macmillan Co., 1945), p. 42. Darwin once wrote: "I am like a gambler and love a wild experiment." The importance of self-directed work to great scientists is stressed by the Nobel prize-winning chemical discoverer of vitamins, Szent-Gyorgyi, who wrote: "The real scientist … is ready to bear privation … rather than let anyone dictate to him which direction his work must take."A. Szent-Gyorgyi, "Science Needs Freedom." World Digest Vol. 55 (1943), p. 50.

Not only inventors, but many types of scientists benefit from the work of independent researchers in their fields. Einstein said that: "I am a horse for single harness, not cut out for team-work," and suggested that refugee scientists take jobs as lighthouse-keepers, so that they could enjoy needed isolation. The fundamental discoveries in valence theory, cytogenetics, embryology, and many other fields of twentieth-century biology, were made by individual scientists.See Baker, op. cit., pp. 49–52. Baker comments on the lack of originality of research teams, who tend to be better at following up the leads of others than at originating ideas themselves. Scientific discoveries, furthermore, cannot be planned in advance. They grow out of apparently unrelated efforts of previous scientists, often in diverse fields. The radium and X-ray treatments for cancer owe most, not to planned research, on cancer cures, but to the discoverers of radium and X-rays, who were working for quite different goals. Baker shows that the discovery of a treatment for cancer of the prostate emerged out of centuries of unrelated research on: the prostate, phosphatase, and on hormones, none of which was aimed toward a cancer cure."Our modern knowledge of how to control cancer of the prostate is due to the researches of these men—of Hunter, Gruber, Griffiths, Steinach, and Kun on the prostate; of Grosses, Rusler, Davis, Baaman, and Riedell on phosphatase; and of Kutcher and Wolbergs on phosphatase in the prostate. Not one of these men was studying cancer, yet without them, the discovery of the new treatment could not have been made . . . what central planner, interested in the cure of cancer, would have supported Griffiths in his studies on the seasonal cycle of the hedgehog, or Grosser and Husler in their biochemical work on the lining membrane of the intestine? How could anyone have connected phosphatase with cancer, when the existence of phosphatase was unknown? And while it was yet unknown, how could the man in charge of the cancer funds know to whom to give the money for research? No planner could make the right guesses." Baker, op.cit., pp. 59–60.

Apart from individual scientists and inventors, there is also great need for the existence of small research laboratories in small firms as well as in large ones. There is inevitably a clash between practical administrators of research and the scientists themselves, and the evils of bureaucratic administration and crippling of scientific endeavor will be infinitely greater if science is under the control or direction of the Ultimate Bureaucracy of government.On the inevitable clash between research administrators and scientists, see: Jewkes, et. al., pp. 132 ff.; K. Ziegler, The Indivisibility of Research, 1955, S.C. Harland, "Recent Progress in the Breeding of Cotton for Quality." Journal of the Textile Institute (Great Britain), Feb. 1955; R.N. Anthony, Management Controls in Industrial Research Organization.

O.E. Buckley, when President of the Bell Telephone Laboratories, stated: "one sure way to defeat the scientific spirit is to attempt to direct enquiry from above. All successful industrial research directors know this and have learnt by experience that one thing a director of research must never do is to direct research." Similar views have been expressed by C.E.K Mees, of Eastman Kodak, and Sir Alexander Fleming, discoverer of penicillin, who said: "certain industrial places … put up a certain amount of money for research and hire a team. They often direct them on the particular problems they are going to work out. This is a very good way of employing a certain number of people, paying salaries, and not getting very much in return."From L.J. Ludovivi, Fleming, Discoverer of Penicillin, cited in Jewkes, et.al. Jewkes and his colleagues, describing the best ways of crippling a research organization, might have had a typical government operation or control in mind:

The chances of success are further reduced where the research group is organized in hierarchical fashion, with ideas and instructions flowing downwards and not upwards … where the direction to research is … closely defined … where men are asked to report at regular intervals … where achievements are constantly being recorded and assessed; where spurious cooperation is enforced by time-wasting committees and paper work.Jewkes, et.al., pp. 141–42.

In gauging the effectiveness of large vs. small-scale research, we should remember that whether or not a firm engages in research at all (apart from government contract) depends on the type of industry it is in. The great bulk of manufacturing firms, for example, do not engage in research and development at all. The one-tenth that do, are mostly in technologically advanced and advancing industries, where expanding scientific knowledge is needed, and where many scientists must be hired anyway for test and control work. On the other hand, industries that rely more on empirical rather than scientific knowledge do less research. Some large-scale industries, like chemicals, do a great deal of research; while others, such as iron and steel, do much less. Some small-scale industries do little research, while others, like scientific instrument firms, do a relatively great amount. And while the bulk of industrial research is done by the very large firms, we have seen the vital role of the independent inventor (and later we shall see further the crucial role of the university laboratory in basic research). Furthermore, it has been found that in those firms that do conduct research, the number of research workers per 100 employees is higher for the small, and lowest for the large firms.This is borne out in separate studies by the U.S. Department of Labor, Scientific Research and Development in American Industry, Bulletin #1148, Wash. 1953; and the National Association of Manufacturers, Trends in Industrial Research and Patent Practices.

It should be noted that few of the Nobel Prize winners since 1900 came from the large industrial research laboratories. Furthermore, many of the current research labs of the big corporations originated as small firms, which were later bought by the big corporation. This happened with General Motors, and with General Electric. The large corporations also make a great deal of use of outside consultants and independent research organizations (both profit and non-profit making). This certainly must confound the partisan of organized, large-scale government-controlled and directed research: for if organized, large-scale research is invariably more efficient, why do these big corporations bother with small outside firms? Here are some of the reasons given by the big firms themselves:

They may be short of trained people. Or they may be confronted with a task of a non-continuing nature which they prefer to have out to others … or they may be confronted with a type of technical problem new to them which they feel they cannot handle at all. Or, having been continually defeated by some technical problem, they may hand out the task to others who will come to it with fresh minds and no preconceptions.Jewkes, et. al., pp. 188–89.

Resistance of an organization to new ideas has occurred significantly even in efficient, alert corporations—how much more would it occur in government, where there is neither the incentive nor the possibility of a profit-and-loss check on its efficiency! Thus: the telephone, cable, and electric manufacturing companies were originally apathetic about the possibilities of wireless telegraphy; RCA resisted Armstrong's FM ideas; the Edison Company, at the turn of the century, scoffed at the idea of a gas motor for transportation, insisting on the future of the electric motor for that purpose; the established aircraft-engine firms scoffed at the jet engine and at the retractable under-carriage; the British and American chemical firms were highly critical of penicillin, and almost refused to take part in its development; The Marconi Company expressed no interest in television when it was brought to their attention in 1925; the manufacturers of navigational equipment took no part in the invention of the gyro-compass. When the Ford Motor Company sought to introduce automation in their factories, they turned to the small specialized firms in the machine-tool industry, "The small uninhibited firms with no preconceived notions." And even Henry Ford resisted the thermostat, or hydraulic brakes.

Furthermore, in many of our biggest industries, the critical innovations of the twentieth century have come from outside the big firms. Of the three big inventions in the aluminum industry up to 1937, two came from men outside the industry—despite the fact that ALCOA had an aluminum monopoly during those years. The two significant new ideas in steel-making in this century cam from a newcomer and from one of the smaller steel firms (continuous hot strip rolling), and the other from an individual German inventor (continuous casting). The large-scale, progressive automotive industry has benefited a great deal from outside ideas—including automatic transmissions and power steering, and small firms and accessory manufacturers have contributed new systems of suspension. In the progressive, large-scale petroleum industry, which devotes heavy expenditures to research, many leading ideas have come from small firms or outside individuals including catalytic cracking: "Looking back dispassionately we find that (the major oil companies) mainly took up and developed ideas, which were brought to them by men who did not, in the first instance, belong to their own team."P.H. Frankel, Essentials of Petroleum, 1946, p. 148. Quoted in Jewkes, et. al.

Another important point is that most industrial research laboratories, even in the large companies, are themselves small; more than one-half of the laboratories in the U.S. employ less than 15 scientists, and most of these are for routine or development work, rather than research. The average operating cost of a laboratory per research scientists is about $25,000—not a prohibitive sum for an average sized firm. Moreover, 49% of all firms holding patents, in 1953, had fewer than 5000 employees all told.

Many laboratories, while remaining at the same size, have fluctuated greatly in their failure or success over time, depending on the qualities of their personnel and, above all, their leadership. The leading inventors in these laboratories themselves stress the virtues of small groups. Fermi has said: "Efficiency does not increase proportionately with numbers. A large group creates complicated administrative problems, and much effort is spent on organization." And, in a striking anticipation of Parkinson's Law of Bureaucracy, S.C. Harland wrote this about the large lab:

You see crowds of people milling around with an air of fictitious activity, behind a façade of massive mediocrity. There is a kind of Malthusianism acting on research institutes. Just as a population will breed up to the available food supply, research institutes will enlarge themselves as long as the money holds out.Harland, loc. cit. Also see Laura Fermi, Atoms in the Family, p. 185. Quoted in Jewkes, et. al., p. 162.

We may proceed now from research proper to the field of development. It has been argued that, while small scale basic research may continue to be important, the cost of developing already-created inventions is growing ever-greater, and is therefore peculiarly susceptible of large-scale organized and directed effort. Most of the technological work in the industrial laboratories, indeed, is the actual development of new methods and products, while university and other educational laboratories have relatively concentrated on pure research.

Development costs have grown more expensive especially in the chemical industries, where a new idea is taken and run through very large-scale empirical experimentation (e.g. the trial-and error searching for a better strain of penicillin among a large number of possible molds). Increased caution in developing products, greater testing for quality and safety, a heavy initial advertising campaign to introduce new products—all these factors have increased the costs of development in modern times (although, with technological advance cheapening everything else, we may expect it to lower costs of development as well).

But a crucial point about development has been often overlooked: how many resources to put into development as against other things, how fast to develop at any given time, is a risky decision on the part of a firm. The decision depends upon the firm's estimates of future costs, sales, profits, etc. Government, crippling or eliminating the free market signals of prices and costs, would be lost without a guide to efficiency or allocation of resources. Further, the main reason deciding a firm to devote its resources in an attempt at speedy development is the spur of competition. And competition means the free, unhampered market. Even in the case of Nylon, the most cited example on behalf of large-scale monopoly research and development, DuPont had the competitive spur of knowing that German scientists were also working on similar synthetic fibres.

Where the competitive spur is weak, or especially non-existent (as in government), development will be slowed down. Furthermore, the existence of many firms, many centers of development, make it far more likely that new ideas will obtain a hearing and a trial somewhere. General Electric, when dominant in lighting, was sluggish in developing fluorescent lighting, but once other firms entered the field, it sprang to life and regained a dominant position through its newfound efficiency. As Jewkes and his associates sum up:

Against the claim that the prerogative in development should always rest with the biggest and the most securely established industrial organizations, may be set, therefore, the advantages of the attack from many angles. The tasks of development are themselves of such diversity and of so varying a scale that it may be a … dangerous oversimplification to suppose that they can always be best handled by any single type of institution.Jewkes, et. al., p. 222.

The best condition, they add, is a variety of firms, in size and in outlook—some bold and others cautious, some leading and others following.

Even in the field of development proper, in fact, many important new products have come from small-sized firms, or even individuals. These include: air conditioning, automatic transmissions, bakelite, cellophane tape, magnetic recording, quick freezing, power steering, crease-resistant textiles, and ram-jet aircraft.

Professor Baker has preferred another important refutation of the statist claim that governmental monopoly direction of research would eliminate "wasteful overlapping" of effort. Baker points to the enormous importance for scientists, in having two or more mutually independent scientists or laboratories confirming each other's conclusions. Only then can the world of science consider the experiment truly confirmed.There is one occurrence . . . which helps the scientist form a valid judgment better than anything else. This is the . . . publication of the same result by two entirely independent workers. Central planners are inclined to consider that one of the two independent workers has been wasting his time. The actual research worker knows that this is not so. It is the very fact that the two workers are independent that inclines others to accept their findings. Scarcely a working scientist will deny that two independent papers containing the same result are very much more convincing than a single paper by two collaborators . . . (also) each paper has a different outlook, and the reading of the two papers is far more stimulating and suggestive." Baker, op. cit., p. 49.

Soviet Science

"Planned" science sounds impressive; actually it means prohibited science, where no scientist can follow the leads of his own creative ideas. We have heard a great deal recently about the alleged glories of Soviet science, and about the necessity of the United States catching up with such wonders as sputniks. What is the real record of Soviet science? Professor Baker, analyzing this record, shows that, at the beginnings of the Soviet Union, the old pre-revolutionary scientists continued to do well, largely because science was not yet under government planning. That came with the Second Five-Year Plan, in 1932. The Plan set forth very broad subjects for investigation, but, by the nature of such a plan, many important areas were excluded from the required agenda. "Take almost any branch of non-revolutionary biological science in which outstanding discoveries were made in the outside world during the years of the plan, and you are likely to find that the whole subject was excluded from study."Baker, op. cit., pp. 66ff. For example; the study of hormones, and genetics. The Lysenko controversy, the use of the State to eradicate the science of genetics in Soviet Russia, and the compulsory twisting of truth by the Soviet State to fit the ideological myths of its rulers, are well-known, but can hardly be overstressed. It is important to realize that it is not simply because the Soviet or Nazi leaders were particularly perverse men that they reached out to prevent or cripple science's drive for truth; but because such actions are inherent in the very nature of statism, and central planning. Power, and its promotion, advancement of the ideology of power, become the highest social goal, before which all truth, all integrity must give way.

Government control of science, government planning of science, is bound to result in the politicization of science, the substitution of political goals and political criteria for scientific ones. Even pro-Soviet scientists have admitted that Soviet research is inferior to American, that basic, as contrasted to applied, research, is neglected; that there is too much red tape; that little fundamentally creative work has been done; and that science is unduly governed by political considerations—such as the political views of the scientist propounding any given theory. Scientists are shot for taking the view that happens to be in political disfavor. And, as Baker concludes: "If the selection of scientific personnel is left to the State, the wrong ones are likely to be given important posts, because those who are not themselves scientists will be let astray by … false claims and pretences … (and) scientists may exhibit a servile obedience to their political bosses."Baker, op. cit., pp. 75–76. No wonder that in a list, drawn up by seven scientists, of the two dozen most important scientific discoveries made between World Wars I and II, not one came from the U.S.S.R.

There is one step now proposed, supported by government propaganda, which seems to me to strike at the very basis of freedom. It is the proposal that we establish compulsory military training in time of peace. The power to take a boy from his home and subject him to complete government discipline is the most serious limitation on freedom that can be imagined. Many who have accepted the idea favor a similar government-controlled training for all girls.

There is no doubt that the government, and particularly the War and Navy departments, are straining every nerve to secure the enactment of this legislation. Secret meetings are being held in the Pentagon Building and elsewhere. Recently the chief executive officers of some forty or more women's organizations were invited there, and it is said they were addressed by the Secretary of War, the Secretary of the Navy, the Under Secretary of State, General Marshall, Admiral King, and other high-ranking officers. The ladies were requested not to disclose the substance of the speeches made or identify the War Department or its officials with the sponsorship of the plan …

Government propaganda is bad enough when it is open, but it is inexcusable when secret. We may expect a flood of open propaganda after the ground has been prepared, and everyone who is opposed to the plan will be pictured as for war and for unpreparedness.

We have fought this war to preserve our institutions, not to change them. We have fought it to permit us to work out our problems here at home on a peaceful foundation, not on a foundation dominated by military preparations for another war. The question of the best form of military organization should not be an emotional problem. It should be dealt with by argument and not by propaganda. But the methods being used threaten the freedom of this country, for if they are successful they can be used to fasten upon us every kind of regulation, price control for business, wage control for labor, production control for farmers….

Military conscription is essentially totalitarian. It has been established for the most part in totalitarian countries and their dictators led by Napoleon and Bismarck. It has heretofore been established by aggressor countries. It is said it would ensure peace by emphasizing the tremendous military potential of this country. Surely we have emphasized that enough in this war. No one can doubt it.

On the contrary, if we establish conscription every other nation in the world will feel obliged to do the same. It would set up militarism on a high pedestal throughout the world as the goal of all the world. Militarism has always led to war and not peace.

Conscription was no insurance of victory in France, in Germany, or in Italy. The countries with military conscription found that it was only an incident and not the determining factor in defense or in victory.

Military training by conscription means the complete regimentation of the individual at his most formative period for a period of twelve months. If we admit that in peacetime we can deprive a man of all liberty and voice and freedom of action, if we can take him from his family and his home, then we can do the same with labor, we can order the farmer to produce and we can take over any business. If we can draft men, it is difficult to find an argument against drafting capital.

Those who enthusiastically orate of returning to free enterprise and at the same time advocate peacetime conscription are blind to the implications of this policy. They are utterly inconsistent in their position. Because of its psychological effect on every citizen, because it is the most extreme form of compulsion, military conscription will be more the test of our whole philosophy than any other policy.

Some say it is unconstitutional. It makes very little difference whether it actually violates the terms of the Constitution. It is against the fundamental policy of America and the American Nation. If adopted, it will color our whole future. We shall have fought to abolish totalitarianism in the world, only to set it up in the United States.

From a speech delivered by Senator Taft at the Gettysburg National Cemetery 1946.

Introduction: Two Rights, Old and New

In the spring of 1970, a new political term—"the hard hats"—burst upon the American consciousness. As the hard-hatted construction workers barreled their way around the Wall Street area, beating up college kids and peace demonstrators, earning the admiration of the right wing and a citation from President Nixon, one of the banners they raised summed up in a single phrase how remarkably the right wing has changed over the past two decades. For the banner said simply: "God Bless the Establishment."

In that single phrase, so typical of the current right wing, the hard-hats were expressing the age-old political philosophy of Conservatism, that philosophy which formed the central core of the originally labeled "Conservatism" of early 19th-century Europe. In fact, it is the philosophy that has marked genuinely conservative thought, regardless of label, since the ancient days of Oriental despotism: an all-encompassing reverence for "Throne-and-Altar," for whatever divinely sanctioned State apparatus happened to be in existence. In one form or another, "God Bless the Establishment" has always been the cry on behalf of State power.

But how many Americans realize that, not so long ago, the American right wing was almost the exact opposite of what we know today? In fact, how many know that the term "Establishment" itself, now used almost solely as a term of opprobrium by the Left, was first applied to America not by C. Wright Mills or other Left sociologists, but by National Review theoretician Frank S. Meyer, in the early days of that central organ of the American Right? In the mid-1950s, Meyer took a term which had previously been used only—and rather affectionately—to describe the ruling institutions of Great Britain, and applied the term with proper acidity to the American scene. Broader and more subtle than "ruling class," more permanent and institutionalized than a "power elite," "the Establishment" quickly became a household word. But the ironic and crucial point is that Meyer's and National Review's use of the term in those days was bitterly critical: the spirit of the right wing, then and particularly earlier, was far more "God Damn" than "God Bless" the establishment.By the 1964 campaign, the irreverent rightist Noel E. Parrnentel, Jr., was writing, in his "Folk Songs for Conservatives":Won't you come home, Bill Buckley,Won't you come homeFrom the Establishment? The difference between the two right wings, "Old" and "New," and how one was transformed into the other, is the central theme of this book.

The Old Right, which constituted the American right wing from approximately the mid-1930s to the mid-1950s, was, if nothing else, an Opposition movement. Hostility to the Establishment was its hallmark, its very lifeblood. In fact, when in the 1950s the monthly newsletter RIGHT attempted to convey to its readers news of the right wing, it was of course forced to define the movement it would be writing about—and it found that it could define the right wing only in negative terms: in its total opposition to what it conceived to be the ruling trends of American life. In brief, the Old Right was born and had its being as the opposition movement to the New Deal, and to everything, foreign and domestic, that the New Deal encompassed: at first, to burgeoning New Deal statism at home, and then, later in the '30s, to the drive for American global intervention abroad. Since the essence of the Old Right was a reaction against runaway Big Government at home and overseas, this meant that the Old Right was necessarily, even if not always consciously, libertarian rather than statist, "radical" rather than traditional conservative apologists for the existing order.

Origins of the Old Right, I: Early Individualism

Individualism, and its economic corollary, laissez-faire liberalism, has not always taken on a conservative hue, has not always functioned, as it often does today, as an apologist for the status quo. On the contrary, the Revolution of modern times was originally, and continued for a long time to be, laissez-faire individualist. Its purpose was to free the individual person from the restrictions and the shackles, the encrusted caste privileges and exploitative wars, of the feudal and mercantilist orders, of the Tory ancien régime. Tom Paine, Thomas Jefferson, the militants in the American Revolution, the Jacksonian movement, Emerson and Thoreau, William Lloyd Garrison and the radical abolitionists—all were basically laissez-faire individualists who carried on the age-old battle for liberty and against all forms of State privilege. And so were the French revolutionaries—not only the Girondins, but even the much-abused Jacobins, who were obliged to defend the Revolution against the massed crowned heads of Europe. All were roughly in the same camp. The individualist heritage, indeed, goes back to the first modern radicals of the 17th century—to the Levellers in England, and to Roger Williams and Anne Hutchinson in the American colonies.

The conventional historical wisdom asserts that while the radical movements in America were indeed laissez-faire individualist before the Civil War, that afterwards, the laissez-fairists became conservatives, and the radical mantle then fell to groups more familiar to the modern Left: the Socialists and Populists. But this is a distortion of the truth. For it was elderly New England Brahmins, laissez-faire merchants and industrialists like Edward Atkinson, who had financed John Brown's raid at Harper's Ferry, who were the ones to leap in and oppose the US imperialism of the Spanish-American War with all their might. No opposition to that war was more thoroughgoing than that of the laissez-faire economist and sociologist William Graham Sumner or than that of Atkinson who, as head of the Anti-Imperialist League, mailed antiwar pamphlets to American troops then engaged in conquering the Philippines. Atkinson's pamphlets urged our troops to mutiny, and were consequently seized by the US postal authorities.

In taking this stand, Atkinson, Sumner, and their colleagues were not being "sports"; they were following an antiwar, anti-imperialist tradition as old as classical liberalism itself. This was the tradition of Price, Priestley, and the late 18th-century British radicals that earned them repeated imprisonment by the British war machine; and of Richard Cobden, John Bright, and the laissez-faire Manchester School of the mid-19th century. Cobden, in particular, had fearlessly denounced every war and every imperial maneuver of the British regime. We are now so used to thinking of opposition to imperialism as Marxian that this kind of movement seems almost inconceivable to us today.Thus, see William H. Dawson, Richard Cobden and Foreign Policy (London: George Allen & Unwin, 1926).

By the advent of World War I, however, the death of the older laissez-faire generation threw the leadership of the opposition to America's imperial wars into the hands of the Socialist Party. But other, more individualist-minded men joined in the opposition, many of whom would later form the core of the isolationist Old Right of the late 1930s. Thus, the hardcore antiwar leaders included the individualist Senator Robert LaFollette of Wisconsin and such laissez-faire liberals as Senators William E. Borah (Republican) of Idaho and James A. Reed (Democrat) of Missouri. It also included Charles A. Lindbergh, Sr., father of the Lone Eagle, who was a congressman from Minnesota.

Almost all of America's intellectuals rushed to enlist in the war fervor of the First World War. A leading exception was the formidable laissez-faire individualist Oswald Garrison Villard, editor of the Nation, grandson of William Lloyd Garrison and former member of the Anti-Imperialist League. Two other prominent exceptions were friends and associates of Villard who were later to serve as leaders of libertarian thought in America: Francis Neilson and especially Albert Jay Nock. Neilson was the last of the laissez-faire English Liberals, who had emigrated to the United States; Nock served under Villard during the war, and it was his Nation editorial denouncing the progovernment activities of Samuel Gompers that got that issue of the magazine banned by the US Post Office. And it was Neilson who wrote the first revisionist book on the origins of World War I, How Diplomats Make War (1915). The first revisionist book by an American, in fact, was Nock's Myth of a Guilty Nation (1922), which had been serialized in LaFollette's Magazine.

The world war constituted a tremendous trauma for all the individuals and groups opposed to the conflict. The total mobilization, the savage repression of opponents, the carnage and the US global intervention on an unprecedented scale—all of these polarized a large number of diverse people. The shock and the sheer overriding fact of the war inevitably drew together the diverse antiwar groups into a loose, informal and oppositional united front—a front in a new kind of fundamental opposition to the American system and to much of American society. The rapid transformation of the brilliant young intellectual Randolph Bourne from an optimistic pragmatist into a radically pessimistic anarchist was typical, though in a more intense form, of this newly created opposition. Crying, "War is the health of the State," Bourne declared:

Country is a concept of peace, of balance, of living and letting live. But State is essentially a concept of power…. And we have the misfortune of being born not only into a country but into a State….

The State is the country acting as a political unit, it is the group acting as a repository of force…. International politics is a "power politics" because it is a relation of States and that is what States infallibly and calamitously are, huge aggregations of human and industrial force that may be hurled against each other in war. When a country acts as a whole in relation to another country, or in imposing laws on its own inhabitants, or in coercing or punishing individuals or minorities, it is acting as a State. The history of America as a country is quite different from that of America as a State. In one case it is the drama of the pioneering conquest of the land, of the growth of wealth and the ways in which it was used … and the carrying out of spiritual ideals…. But as a State, its history is that of playing part in the world, making war, obstructing international trade … punishing those citizens whom society agrees are offensive, and collecting money to pay for it all.Randolph Bourne, Untimely Papers (New York: B.W. Huebach, 1919), pp. 229–30.

If the opposition was polarized and forced together by the war, this polarization did not cease with the war's end. For one thing, the war and its corollary repression and militarism were shocks that started the opposition thinking deeply and critically about the American system per se; for another, the international system established by the war was frozen into the status quo of the postwar era. For it was obvious that the Versailles treaty meant that British and French imperialism had carved up and humiliated Germany, and then intended to use the League of Nations as a permanent world guarantor of the newly imposed status quo. Versailles and the League meant that America could not forget the war; and the ranks of the Opposition were now joined by a host of disillusioned Wilsonians who saw the reality of the world that President Wilson had made.

The wartime and postwar opposition joined together in a coalition including Socialists and all manner of progressives and individualists. Since they and the coalition were now clearly antimilitarist and anti-"patriotic," since they were increasingly radical in their antistatism, the individualists were universally labeled as "leftists"; in fact, as the Socialist Party split and faded badly in the postwar era, the Opposition was given an increasingly individualistic cast during the 1920s. Part of this opposition was also cultural: a revolt against hidebound Victorian mores and literature. Part of this cultural revolt was embodied in the well-known expatriates of the "Lost Generation" of young American writers, writers expressing their intense disillusion with the wartime "idealism" and the reality that militarism and the war had revealed about America. Another phase of this revolt was embodied in the new social freedom of the jazz and flapper eras, and the flowering of individual expression, among increasing numbers of young men and women.

Origins of the Old Right, II: The Tory Anarchism of Mencken and Nock

Leading the cultural struggle in America was H.L. Mencken, undoubtedly the single most influential intellectual of the 1920s; a notable individualist and libertarian, Mencken sailed into battle with characteristic verve and wit, denouncing the stodgy culture and the "Babbittry" of businessmen, and calling for unrestricted freedom of the individual. For Mencken, too, it was the trauma of World War I, and its domestic and foreign evils, that mobilized and intensified his concern for politics—a concern aggravated by the despotism of Prohibition, surely the greatest single act of tyranny ever imposed in America.

Nowadays, when Prohibition is considered a "right-wing" movement, it is forgotten that every reform movement of the 19th century—every moralistic group trying to bring the "uplift" to America by force of law—included Prohibition as one of its cherished programs. To Mencken, the battle against Prohibition was merely a fight against the most conspicuous of the tyrannical and statist "reforms" being proposed against the American public.

And so, Mencken's highly influential monthly The American Mercury, founded in 1924, opened its pages to writers of all parts of the Opposition—especially to attacks on American culture and mores, to assaults on censorship and the championing of civil liberties, and to revisionism on the war. Thus, the Mercury featured two prominent revisionists of World War I: Harry Elmer Barnes and Barnes's student, C. Hartley Grattan, whose delightful series in the magazine, "When Historians Cut Loose," acidly demolished the war propaganda of America's leading historians. Mencken's cultural scorn for the American "booboisie" was embodied in his famous "Americana" column, which simply reprinted news items on the idiocies of American life without editorial comment.

The enormous scope of Mencken's interests, coupled with his scintillating wit and style (Mencken was labeled by Joseph Wood Krutch as "the greatest prose stylist of the 20th century"), served to obscure for his generation of youthful followers and admirers the remarkable consistency of his thought. When, decades after his former prominence, Mencken collected the best of his old writings in The Mencken Chrestomathy (1948), the book was reviewed in the New Leader by the eminent literary critic Samuel Putnam. Putnam reacted in considerable surprise; remembering Mencken from his youth as merely a glib cynic, Putnam found to his admiring astonishment that H.L.M. had always been a "Tory anarchist"—an apt summation for the intellectual leader of the 1920s.

But H.L. Mencken was not the only editor leading the new upsurge of individualistic opposition during the 1920s. From a similar though more moderate stance, the Nation of Mencken's friend Oswald Garrison Villard continued to serve as an outstanding voice for peace, revisionism on World War I, and opposition to the imperialist status quo imposed at Versailles. Villard, at the end of the war, acknowledged that the war had pushed him far to the left, not in the sense of adopting socialism, but in being thoroughly "against the present political order." Denounced by conservatives as pacifist, pro-German, and "Bolshevist," Villard found himself forced into a political and journalistic alliance with socialists and progressives who shared his hostility to the existing American and world order.Villard to Hutchins Hapgood, May 19, 1919. Michael Wreszin, Oswald Garrison Villard (Bloomington, Ind.: Indiana University Press, 1965), p. 75, and ibid., pp. 125–30.

From a still more radical and individualist perspective, Mencken's friend and fellow "Tory anarchist" Albert Jay Nock, cofounded and coedited, along with Francis Neilson, the new weekly Freeman from 1920 to 1924. The Freeman, too, opened its pages to all left-oppositionists to the political order. With the laissez-faire individualist Nock as principal editor, the Freeman was a center of radical thought and expression among oppositionist intellectuals.

Rebuffing the Nation's welcome to the new Freeman as a fellow liberal weekly, Nock declared that he was not a liberal but a radical. "We can not help remembering," wrote Nock bitterly, "that this was a liberal's war, a liberal's peace, and that the present state of things is the consummation of a fairly long, fairly extensive, and extremely costly experiment with liberalism in political power."Albert Jay Nock, "Our Duty Towards Europe," The Freeman, 7 (August 8, 1923), p. 508; quoted in Robert M. Crunden, The Mind and Art of Albert Jay Nock (Chicago: Henry Regnery Co., 1964), p. 77.

To Nock, radicalism meant that the State was to be considered as an antisocial institution rather than as the typically liberal instrument of social reform. And Nock, like Mencken, gladly opened the pages of his journal to all manner of radical, anti-Establishment opinion, including Van Wyck Brooks, Bertrand Russell, Louis Untermeyer, Lewis Mumford, John Dos Passos, William C. Bullitt, and Charles A. Beard.

In particular, while an individualist and libertarian, Nock welcomed the Soviet revolution as a successful overthrow of a frozen and reactionary State apparatus. Above all, Nock, in opposing the postwar settlement, denounced the American and Allied intervention in the [Russian] Civil War. Nock and Neilson saw clearly that the American intervention was setting the stage for a continuing and permanent imposition of American might throughout the world. After the folding of the Freeman in 1924, Nock continued to be prominent as a distinguished essayist in the leading magazines, including his famous "Anarchist's Progress."Albert Jay Nock, On Doing the Right Thing, and Other Essays (New York: Harper & Row, 1928).

Most of this loose coalition of individualistic radicals was totally disillusioned with the political process, but to the extent that they distinguished between existing parties, the Republican Party was clearly the major enemy. Eternal Hamiltonian champions of Big Government and intimate government "partnership" with Big Business through tariffs, subsidies, and contracts, long-time brandishers of the Imperial big stick, the Republicans had capped their antilibertarian sins by being the party most dedicated to the tyranny of Prohibition, an evil that particularly enraged H.L. Mencken. Much of the opposition (e.g., Mencken, Villard) supported the short-lived LaFollette Progressive movement of 1924, and the Progressive Senator William E. Borah (R-Idaho) was an opposition hero in leading the fight against the war and the League of Nations, and in advocating recognition of Soviet Russia. But the nearest political home was the conservative Bourbon, non-Wilsonian or "Cleveland" wing of the Democratic Party, a wing that at least tended to be "wet," was opposed to war and foreign intervention, and favored free trade and strictly minimal government. Mencken, the most politically minded of the group, felt closest in politics to Governor Albert Ritchie, the states-rights Democrat from Maryland, and to Senator James Reed, Democrat of Missouri, a man staunchly "isolationist" and anti-intervention in foreign affairs and pro-laissez-faire at home.

It was this conservative wing of the Democratic Party, headed by Charles Michelson, Jouett Shouse, and John J. Raskob, which launched a determined attack on Herbert Hoover in the late 1920s for his adherence to Prohibition and to Big Government generally. It was this wing that would later give rise to the much-maligned Liberty League.

To Mencken and to Nock, in fact, Herbert Hoover—the prowar Wilsonian and interventionist, the Food Czar of the war, the champion of Big Government, of high tariffs and business cartels, the pious moralist and apologist for Prohibition—embodied everything they abhorred in American political life. They were clearly leaders of the individualist opposition to Hoover's conservative statism.

Since they were, in their very different styles, the leaders of libertarian thought in America during the 1920s, Mencken and Nock deserve a little closer scrutiny.

The essence of Mencken's remarkably consistent "Tory anarchism" was embodied in the discussion of government that he was later to select for his Chrestomathy:

All government, in its essence, is a conspiracy against the superior man: its one permanent object is to oppress him and cripple him. If it be aristocratic in organization, then it seeks to protect the man who is superior only in law against the man who is superior in fact; if it be democratic, then it seeks to protect the man who is inferior in every way against both. One of its primary functions is to regiment men by force, to make them as much alike as possible … to search out and combat originality among them. All it can see in an original idea is potential change, and hence an invasion of its prerogatives. The most dangerous man, to any government, is the man who is able to think things out for himself, without regard to the prevailing superstitions and taboos. Almost inevitably he comes to the conclusion that the government he lives under is dishonest, insane and intolerable, and so, if he is romantic, he tries to change it. And even if he is not romantic personally [as Mencken clearly was not] he is very apt to spread discontent among those who are….

The ideal government of all reflective men, from Aristotle onward, is one which lets the individual alone—one which barely escapes being no government at all. This ideal, I believe, will be realized in the world twenty or thirty centuries after I have … taken up my public duties in Hell.From the Smart Set, Dec. 1919. H.L. Mencken, A Mencken Chrestomathy (New York: Knopf, 1949), pp. 145–6. See also Murray N. Rothbard, "H.L. Mencken: the Joyous Libertarian," New Individualist Review, II, 2 (Summer 1962), pp. 15–27.

Again, Mencken on the State as inherent exploitation:

The average man, whatever his errors otherwise, at least sees clearly that government is something lying outside him and outside the generality of his fellow men—that it is a separate, independent and often hostile power, only partly under his control and capable of doing him great harm…. Is it a fact of no significance that robbing the government is everywhere regarded as a crime of less magnitude than robbing an individual, or even a corporation? …

What lies behind all this, I believe, is a deep sense of the fundamental antagonism between the government and the people it governs. It is apprehended, not as a committee of citizens chosen to carry on the communal business of the whole population, but as a separate and autonomous corporation, mainly devoted to exploiting the population for the benefit of its own members. Robbing it is thus an act almost devoid of infamy…. When a private citizen is robbed a worthy man is deprived of the fruits of his industry and thrift; when the government is robbed the worst that happens is that certain rogues and loafers have less money to play with than they had before. The notion that they have earned that money is never entertained; to most sensible men it would seem ludicrous. They are simply rascals who, by accidents of law, have a somewhat dubious right to a share in the earnings of their fellow men. When that share is diminished by private enterprise the business is, on the whole, far more laudable than not.

The intelligent man, when he pays taxes, certainly does not believe that he is making a prudent and productive investment of his money; on the contrary, he feels that he is being mulcted in an excessive amount for services that, in the main, are downright inimical to him…. He sees in even the most essential of them an agency for making it easier for the exploiters constituting the government to rob him. In these exploiters themselves he has no confidence whatever. He sees them as purely predatory and useless…. They constitute a power that stands over him constantly, ever alert for new chances to squeeze him. If they could do so safely, they would strip him to his hide. If they leave him anything at all, it is simply prudentially, as a farmer leaves a hen some of her eggs.

This gang is well-nigh immune to punishment…. Since the first days of the Republic, less than a dozen of its members have been impeached, and only a few obscure understrappers have been put into prison. The number of men sitting at Atlanta and Leavenworth for revolting against the extortions of government is always ten times as great as the number of government officials condemned for oppressing the taxpayers to their own gain. Government, today, has grown too strong to be safe. There are no longer any citizens in the world; there are only subjects. They work day in and day out for their masters; they are bound to die for their masters at call…. On some bright tomorrow, a geological epoch or two hence, they will come to the end of their endurance….From the American Mercury, Feb. 1925. Mencken Chrestomathy, pp. 146–48.

In letters to his friends, Mencken reiterated his emphasis on individual liberty. At one time he wrote that he believed in absolute human liberty "up to the limit of the unbearable, and even beyond." To his old friend Hamilton Owens he declared, "I believe in only one thing and that thing is human liberty. If ever a man is to achieve anything like dignity, it can happen only if superior men are given absolute freedom to think what they want to think and say what they want to say … [and] the superior man can be sure of freedom only if it is given to all men." And in a privately written "Addendum on Aims," Mencken declared that "I am an extreme libertarian, and believe in absolute free speech…. I am against jailing men for their opinions, or, for that matter, for anything else."Guy Forgue, ed., Letters of H.L. Mencken (New York: Knopf, 1961), pp. xiii, 189.

Part of Mencken's antipathy to reform stemmed from his oft-reiterated belief that "all government is evil, and that trying to improve it is largely a waste of time." Mencken stressed this theme in the noble and moving peroration to his Credo, written for a "What I Believe" series in a leading magazine:

I believe that all government is evil, in that all government must necessarily make war upon liberty, and that the democratic form is as bad as any of the other forms….

I believe in complete freedom of thought and speech—alike for the humblest man and the mightiest, and in the utmost freedom of conduct that is consistent with living in organized society.

I believe in the capacity of man to conquer his world, and to find out what it is made of, and how it is run.

I believe in the reality of progress. I —

But the whole thing, after all, may be put very simply. I believe that it is better to tell the truth than to lie. I believe that it is better to be free than to be a slave. And I believe that it is better to know than to be ignorant.H.L. Mencken, "What I Believe," The Forum, 84 (September 1930), p. 139.

Insofar as he was interested in economic matters, Mencken, as a corollary to his libertarian views, was a staunch believer in capitalism. He praised Sir Ernest Benn's paean to a free-market economy, and declared that to capitalism "we owe … almost everything that passes under the general name of civilization today." He agreed with Benn that "nothing government does is ever done as cheaply and efficiently as the same thing might be done by private enterprise."H.L. Mencken, "Babbitt as Philosopher" [Review of Henry Ford, Today and Tomorrow, and Ernest J.P. Benn, The Confessions of a Capitalist], The American Mercury, 9 (September 1926), pp. 126–27. Also see Mencken, "Capitalism," Baltimore Evening Sun, January 14, 1935, reprinted in Chrestomathy, p. 294.

But, in keeping with his individualism and libertarianism, Mencken's devotion to capitalism was to the free market, and not to the monopoly statism that he saw ruling America in the 1920s. Hence he was as willing as any socialist to point the finger at the responsibility of Big Business for the growth of statism. Thus, in analyzing the 1924 presidential election, Mencken wrote:

Big Business, it appears, is in favor of him [Coolidge]…. The fact should be sufficient to make the judicious regard him somewhat suspiciously. For Big Business, in America … is frankly on the make, day in and day out…. Big Business was in favor of Prohibition, believing that a sober workman would make a better slave than one with a few drinks in him. It was in favor of all the gross robberies and extortions that went on during the war, and profited by all of them. It was in favor of all the crude throttling of free speech that was then undertaken in the name of patriotism, and is still in favor of it.

As for John W. Davis, the Democratic candidate, Mencken noted that he was said to be a good lawyer—not, for Mencken, a favorable recommendation, since lawyers "are responsible for nine-tenths of the useless and vicious laws that now clutter the statute-books, and for all the evils that go with the vain attempt to enforce them. Every Federal judge is a lawyer. So are most Congressmen. Every invasion of the plain rights of the citizen has a lawyer behind it. If all lawyers were hanged tomorrow … we'd all be freer and safer, and our taxes would be reduced by almost a half." And what is more,

Dr. Davis is a lawyer whose life has been devoted to protecting the great enterprises of Big Business. He used to work for J. Pierpont Morgan, and he has himself said that he is proud of the fact. Mr. Morgan is an international banker, engaged in squeezing nations that are hard up and in trouble. His operations are safeguarded for him by the manpower of the United States. He was one of the principal beneficiaries of the late war, and made millions out of it. The Government hospitals are now full of one-legged soldiers who gallantly protected his investments then, and the public schools are full of boys who will protect his investments tomorrow.H.L. Mencken, "Breathing Space," Baltimore Evening Sun, August 4, 1924; reprinted in H.L. Mencken, A Carnival of Buncombe (Baltimore: Johns Hopkins Press, 1956), pp. 83–84.

In fact, the following brief analysis of the postwar settlement combines Mencken's assessment of the determining influence of Big Business with the bitterness of all the individualists at the war and its aftermath:

When he was in the Senate Dr. Harding was known as a Standard Oil Senator—and Standard Oil, as everyone knows, was strongly against our going into the League of Nations, chiefly because England would run the league and be in a position to keep Americans out of the new oil fields in the Near East. The Morgans and their pawnbroker allies, of course, were equally strong for going in, since getting Uncle Sam under the English hoof would materially protect their English and other foreign investments. Thus the issue joined, and on the Tuesday following the first Monday of November 1920, the Morgans, after six years of superb Geschaft under the Anglomaniacal Woodrow, got a bad beating.

But as a result, Mencken went on, the Morgans decided to come to terms with the foe, and therefore, at the Lausanne Conference of 1922–23, "the English agreed to let the Standard Oil crowd in on the oil fields of the Levant," and J.P. Morgan visited Harding at the White House, after which "Dr. Harding began to hear a voice from the burning bush counseling him to disregard the prejudice of the voters who elected him and to edge the United States into a Grand International Court of Justice…."H.L. Mencken, "Next Year's Struggle," Baltimore Evening Sun, June 11, 1923; reprinted in Mencken, A Carnival of Buncombe, pp. 56–57.

While scarcely as well known as Mencken, Albert Nock more than any other person supplied 20th-century libertarianism with a positive, systematic theory. In a series of essays in the 1923 Freeman on "The State," Nock built upon Herbert Spencer and the great German sociologist and follower of Henry George, Franz Oppenheimer, whose brilliant little classic, The State, had just been reprinted (New York: B.W. Huebsch, 1922).

Oppenheimer had pointed out that man tries to acquire wealth in the easiest possible way, and that there were two mutually exclusive paths to obtain wealth. One was the peaceful path of producing something and voluntarily exchanging that product for the product of someone else; this path of production and voluntary exchange Oppenheimer called the "economic means." The other road to wealth was coercive expropriation: the seizure of the product of another by the use of violence. This Oppenheimer termed the "political means." And from his historical inquiry into the genesis of States Oppenheimer defined the State as the "organization of the political means." Hence, Nock concluded, the State itself was evil, and was always the highroad by which varying groups could seize State power and use it to become an exploiting, or ruling, class, at the expense of the remainder of the ruled or subject population. Nock therefore defined the State as that institution which "claims and exercises the monopoly of crime" over a territorial area; "it forbids private murder, but itself organizes murder on a colossal scale. It punishes private theft, but itself lays unscrupulous hands on anything it wants…."

In his magnum opus, Our Enemy the State (New York: William Morrow, 1935), Nock expanded on his theory and applied it to American history, in particular the formation of the American Constitution. In contrast to the traditional conservative worshippers of the Constitution, Nock applied Charles A. Beard's thesis to the history of America, seeing it as a succession of class rule by various groups of privileged businessmen, and the Constitution as a strong national government brought into being in order to create and extend such privilege. The Constitution, wrote Nock, "enabled an ever-closer centralization of control over the political means. For instance … many an industrialist could see the great primary advantage of being able to extend his exploiting opportunities over a nationwide free-trade area walled in by a general tariff…. Any speculator in depreciated public securities would be strongly for a system that could offer him the use of the political means to bring back their face value. Any shipowner or foreign trader would be quick to see that his bread was buttered on the side of a national State which, if properly approached, might lend him the use of the political means by way of a subsidy, or would be able to back up some profitable but dubious freebooting enterprise with 'diplomatic representations' or with reprisals." Nock concluded that those economic interests, in opposition to the mass of the nation's farmers, "planned and executed a coup d'etat, simply tossing the Articles of Confederation into the wastebasket…."Albert Jay Nock, Our Enemy, the State (New York: William Morrow, 1935), pp. 162ff.

While the Nock-Oppenheimer class analysis superficially resembles that of Marx, and a Nockian would, like Lenin, look at all State action whatever in terms of "Who? Whom?" (Who is benefiting at the expense of Whom?), it is important to recognize the crucial differences. For while Nock and Marx would agree on the Oriental Despotic and feudal periods' ruling classes in privilege over the ruled, they would differ on the analysis of businessmen on the free market. For to Nock, antagonistic classes, the rulers and the ruled, can only be created by accession to State privilege; it is the use of the State instrument that brings these antagonistic classes into being. While Marx would agree on precapitalistic eras, he of course also concluded that businessmen and workers were in class antagonism to each other even in a free-market economy, with employers exploiting workers. To the Nockian, businessmen and workers are in harmony—as are everyone else—in the free market and free society, and it is only through State intervention that antagonistic classes are created.This idea of classes as being created by States was the pre-Marxian idea of classes; two of its earliest theorists were the French individualist and libertarian thinkers of the post-Napoleonic Restoration period, Charles Comte and Charles Dunoyer. For several years after the Restoration, Comte and Dunoyer were the mentors of Count Saint-Simon, who adopted their class analysis; the later Saint-Simonians then modified it to include businessmen as being class-exploiters of workers, and the latter was adopted by Marx. I am indebted to Professor Leonard Liggio's researches on Comte and Dunoyer. As far as I know, the only discussion of them in English, and that inadequate, is Elie Halevy, The Era of Tyrannies (Garden City, N.Y.: Doubleday and Co., 1965), pp. 21–60. Gabriel Kolko's critique of Marx's theory of the State is done from a quite similar perspective. Kolko, The Triumph of Conservatism (Glencoe, Ill.: The Free Press, 1963), pp. 287ff.

Thus, to Nock the two basic classes at any time are those running the State and those being run by it: as the Populist leader Sockless Jerry Simpson once put it, "the robbers and the robbed." Nock therefore coined the concepts "State power" and "social power."

"Social power" was the power over nature exerted by free men in voluntary economic and social relationships; social power was the progress of civilization, its learning, its technology, its structure of capital investment.

"State power" was the coercive and parasitic expropriation of social power for the benefit of the rulers: the use of the "political means" to wealth. The history of man, then, could be seen as an eternal race between social power and State power, with society creating and developing new wealth, later to be seized, controlled, and exploited by the State.

No more than Mencken was Nock happy about the role of Big Business in the 20th century's onrush toward statism. We have already seen his caustic Beardian view toward the adoption of the Constitution. When the New Deal arrived, Nock could only snort in disdain at the mock wails about collectivism raised in various business circles:

It is one of the few amusing things in our rather stodgy world that those who today are behaving most tremendously about collectivism and the Red menace are the very ones who have cajoled, bribed, flattered and bedeviled the State into taking each and every one of the successive steps that lead straight to collectivism…. Who hectored the State into the shipping business, and plumped for setting up the Shipping Board? Who pestered the State into setting up the Interstate Commerce Commission and the Federal Farm Board? Who got the State to go into the transportation business on our inland waterways? Who is always urging the State to "regulate" and "supervise" this, that, and the other routine process of financial, industrial, and commercial enterprise? Who took off his coat, rolled up his sleeves, and sweat blood hour after hour over helping the State construct the codes of the late-lamented National Recovery Act? None but the same Peter Schlemihl who is now half out of his wind about the approaching spectre of collectivism…Albert Jay Nock, "Imposter-Terms," Atlantic Monthly, February 1936, pp. 161–69.

Or, as Nock summed it up, "The simple truth is that our businessmen do not want a government that will let business alone. They want a government they can use. Offer them one made on Spencer's model, and they would see the country blow up before they would accept it."Nock to Ellen Winsor, August 22, 1938. F.W. Garrison, ed., Letters from Albert Jay Nock (Caldwell, Id.: Caxton Printers, 1949), p. 105.

This article is excerpted from The Betrayal of the American Right.

Most of us, and all of us most of the time, deal with the market economy as a definite type of economic order, a sort of "economic technique" as opposed to the socialist "technique." For this view, it is significant that we call its constructional principle the "price mechanism." Here we move in the world of prices, of markets, of supply and demand, of competition, of wage rates, of interest rates, of exchange rates, and whatnot.

That is, of course, right and proper—as far as it goes. But there is a great danger of overlooking an important fact: the market economy as an economic order must be correlated to a certain structure of society, and to a definite mental climate which is appropriate to it.

The success of the market economy wherever it has been restored in our time—most conspicuously in western Germany—has resulted, even in some socialist circles, in a tendency to appropriate the market economy as a technical device capable of being built into a society which, in all other respects, is socialist.

The market economy then appears as part of a comprehensive social and political system which, in its conception, is a highly centralized colossal machinery. In that sense, there has always been a sector of market economy also in the Soviet system, but we all realize that this sector is a mere gadget, a technical device, not a living thing. Why? Because the market economy as a field of liberty, spontaneity, and free coordination cannot thrive in a social system which is the very opposite.

That leads to my first main proposition: the market economy rests on two essential pillars, not on one alone. It assumes not only the freedom of prices and competition (whose virtues the new socialist adepts of the market economy now reluctantly acknowledge), but rests equally on the institution of private property. This property must be genuine. It must comprise all the rights of free disposal without which—as formerly in Nationalist Socialist Germany and today in Norway—it becomes an empty legal shell. To these rights must be added the right to bequeath property.

Property in a free society has a double function. It means not only that the individual sphere of decision and responsibility is, as we have learned as lawyers, demarcated against other individuals, but it also means that property protects the individual sphere against the government and its ever-present tendency toward omnipotence. It is both a horizontal and a vertical boundary. And it is in this double function that property must be understood as the indispensable condition of liberty.

It is curious and saddening to see how blind the average type of socialist is vis-à-vis the economic, moral, and sociological functions of property, and even more that particular social philosophy in which property must be rooted. In this tendency to ignore the meaning of property, socialism has made enormous progress in our time. Traces of this may be discovered even in modern discussion on the problems of enterprise and management, which sometimes give the impression that the property owner is the "forgotten man" of our age.

The Role of Private Property

The intellectual constructions of "market socialism" are a good example of how the most serious fallacies ensue if we overlook the functions of private property. These fallacies can already be demonstrated on the level of ordinary economic analysis. But I wish to suggest that it is the whole social climate, the form of life, and the habits of planning for life which matter.

There is a definite "leftist" ideology, inspired by excessive social rationalism, as opposed to a "rightist," conservative one, respecting certain things we cannot touch, weigh, or measure but which are of sovereign importance. The real role of property cannot be understood unless we see it as one of the most important examples of something of much wider significance.

It illustrates the fact that the market economy is a form of economic order that is correlated to a concept of life and a socio-moral pattern which, for want of an appropriate English or French term, we may call buergerliche in the wide sense of this German word, which is largely free of the disparaging associations of the adjective "bourgeois."

This buergerliche foundation of the market economy must be frankly acknowledged. All the more so because a century of Marxist propaganda and intellectualist romanticism has been astonishingly and alarmingly successful in spreading a parody of this concept. In fact, the market economy can thrive only as part of and surrounded by a buergerliche social order.

Its place is in a society where certain elementary things are respected and are coloring the whole life of the community: individual responsibility; respect of certain indisputable norms; the individual's honest and serious struggle to get ahead and develop his faculties; independence anchored in property; responsible planning of one's own life and that of one's family; thriftiness; enterprise; assuming well calculated risks; the sense of workmanship; the right relation to nature and the community; the sense of continuity and tradition; the courage to brave the uncertainties of life on one's own account; the sense of the natural order of things.

Those who find all this contemptible and reeking of narrow-mindedness and "reaction" must be seriously asked to reveal their own scale of values and to tell us what kind of values they want to defend against communism without borrowing ideas from it.

That is only another way of saying that the market economy supposes a society which is the opposite of a "proletarianized" one, the opposite of a mass society—with its lack of a solid and necessarily hierarchical structure, and its corresponding sense of being uprooted. Independence, property, individual reserves, natural anchors of life, saving, thrift, responsibility, reasonable planning of life, all these are alien to such a society. They are destroyed by it, at least to that extent that they cease to give the tone to society. But we must realize that these are precisely the conditions of a durable free society.

The moment has come to see clearly that this is the real watershed of social philosophies. Here the ultimate parting of ways takes place, and there is no getting around the fact that the concepts and patterns of life which clash against each other in this field are decisive for the fate of society, and that they are irreconcilable.

Once we admit this, we must be prepared to see its significance in every field and to draw the corresponding conclusions. It is indeed remarkable to see how far we all are already drawn into the habits of thinking of an essentially unbuergerliche world. That is a fact which the economists also ought to take to heart, for they are among the worst sinners.

Enchanted by the elegance of a certain type of analysis, how often we discuss the problems of aggregate savings and investments, the hydraulics of income flows, the attractions of vast schemes of economic stabilization and of social security, the beauties of advertising or installment credits, the advantages of "functional" public finance, the progress of giant enterprise and whatnot, without realizing that, in doing so, we take for granted a society which is already largely deprived of those buergerliche conditions and habits which I described.

It is shocking to think how far our minds are already moving in terms of a proletarianized, mechanized, centralized mass society. It has become almost impossible for us to reason other than, in terms of income and expenditure, of input and output, having forgotten to think in terms of property. That is, by the way, the deepest reason for my own fundamental and insurmountable distrust in Keynesian and post-Keynesian economics.

It is, indeed, highly significant that Keynes attained fame mostly for his trite and cynical remark that "in the long run, we are all dead." And it is even more significant that so many contemporary economists have found this dictum particularly spiritual and progressive. But let us remember that it only echoes the slogan of the Ancien Regime in the 18th century: Apres nous le deluge. And let us ask why this is so significant. Because it reveals the decidedly unbuergerliche, the Bohemian spirit of this modern trend in economics and in economic policy. It betrays the new hardboiled happy-go-luckiness, the tendency to live from hand to mouth, and to make the style of the Bohemian the new watchword for a more enlightened generation.

To incur debts becomes a positive virtue; to save, a capital sin. To live beyond one's means, as individuals and as nations, is the logical consequence. But what else is this than Entbuergerlichung, deracination, proletarianization, nomadization? And is not this the very opposite of our concept of civilization which is derived from civis, the Buerger?

Muddling through from day to day and from one expedient to another, to boast that "money does not matter"—that is, indeed, the opposite of an honest, disciplined, and orderly concept and plan of life. The income of people living on these lines may have become buergerliche, but their style of life is still proletarian.

A Growing Concept

It is clearly impossible in the space of a short article to study the impact of all this in all the important fields. I have discussed it in regards to private property. It is further very disquieting to see how this concept has permeated more and more the economic and social policies of our time. One major example is the Mitbestimmungsrecht (codetermination—the right of workers and trade-union representatives to participate in the administration of industrial enterprises and thus to take over some functions of proper ownership) in West Germany.

To give an illustration: the director of a large power plant in Germany tells me how silly he felt the other day when, in wage negotiations with trade-union officials, he had to deal with the same men who, at the same time, sit beside him at meetings of trustees of the power plants themselves. He adds that the structure of enterprises in West Germany approaches more and more that which Tito seems to have in mind. And that is happening in the very country which is considered today the model of a successful restoration of the free-market economy!

Another example of this gradual dissolution of the meaning of property, and of the corresponding norms, which can be observed in many countries, is the softening of the responsibility of the debtor. By lax legal procedure with regard to execution and bankruptcy, this, more often than not, amounts—in the name of social justice—to the expropriation of the creditor. It is hardly necessary to recall, in this connection, the expropriation of the hapless class of house owners by rent control, and the effects of progressive taxation.

Let us apply our reflections to another most important field: money. Let us recognize that respect for money as something intangible is, like property, an essential part of the social order and of the mentality which are the prerequisites of the market economy.

To illustrate my case, I want to tell two stories which I take from the financial history of France. At the end of 1870, Gambetta, the leader of the French Resistance after the defeat of the Second Empire, left the besieged capital in a balloon for Tours to create the new republican army. In his desperate need for money, he remembered that his admired predecessors of the Revolution had financed their wars by printing and assignats. He asked the representative of the Banque de France to print for him a few hundred million notes. But he met with a flat and indignant refusal. At that time, such a demand was considered so monstrous that Gambetta did not insist. The Jacobin firebrand and all-powerful dictator yielded to the determined no of the representative of the central bank who would not accept even a supreme national emergency as an excuse for the crime of inflation.

A few months later, the socialist revolt known as the Commune occurred in Paris. The gold reserves and the plates of the notes of the Banque de France were at the mercy of the revolutionaries. But, badly in need of money and politically unscrupulous as they were, they strongly resisted the temptation to lay their hands on them. In the very midst of the flames of civil war, the central bank and its money were sacrosanct to them.

The significance of these two stories will not escape anyone. It would, indeed, be harsh to ask what has become of this respect for money in our time, not least of all in France. To restore this respect and the corresponding discipline in money and credit policy is one of the most important conditions for the durable success of all our efforts to restore and maintain a free economy and, therewith, a free society.

This article was originally published in The Freeman, January 11, 1954.

"There isn't anyone around who is willing to stand up and say, 'I'm a fascist; I think fascism is a great social and economic system.'"

Everyone knows that the term fascist is a pejorative, often used to describe any political position a speaker doesn't like. There isn't anyone around who is willing to stand up and say, 'I'm a fascist; I think fascism is a great social and economic system."

But I submit that if they were honest, the vast majority of politicians, intellectuals, and political activists would have to say just that.

Fascism is the system of government that cartelizes the private sector, centrally plans the economy to subsidize producers, exalts the police state as the source of order, denies fundamental rights and liberties to individuals, and makes the executive state the unlimited master of society.

This describes mainstream politics in America today. And not just in America. It's true in Europe, too. It is so much part of the mainstream that it is hardly noticed any more.

It is true that fascism has no overarching theoretical apparatus. There is no grand theorist like Marx. That makes it no less real and distinct as a social, economic, and political system. Fascism also thrives as a distinct style of social and economic management. And it is as much or more of a threat to civilization than full-blown socialism.

This is because its traits are so much a part of life—and have been for so long—that they are nearly invisible to us.

If fascism is invisible to us, it is truly the silent killer. It fastens a huge, violent, lumbering state on the free market that drains its capital and productivity like a deadly parasite on a host. This is why the fascist state has been called the vampire economy. It sucks the economic life out of a nation and brings about a slow death of a once-thriving economy.

Let me just provide a recent example.

The Decline

The papers last week were filled with the first sets of data from the 2010 US Census. The headline story concerned the huge increase in the poverty rate. It is the largest increase in 20 years, and now up to 15 percent.

But most people hear this and dismiss it, probably for good reason. The poor in this country are not poor by any historical standard. They have cell phones, cable TV, cars, lots of food, and plenty of disposable income. What's more, there is no such thing as a fixed class called the poor. People come and go, depending on age and life circumstances. Plus, in American politics, when you hear kvetching about the poor, everyone knows what you're supposed to do: hand the government your wallet.

Buried in the report is another fact that has much more profound significance. It concerns median household income in real terms.

"The fascist economic model has killed what was once called the American dream."

What the data have revealed is devastating. Since 1999, median household income has fallen 7.1 percent. Since 1989, median family income is largely flat. And since 1973 and the end of the gold standard, it has hardly risen at all. The great wealth-generating machine that was once America is failing.

No longer can one generation expect to live a better life than the previous one. The fascist economic model has killed what was once called the American dream. And the truth is, of course, even worse than the statistic reveals. You have to consider how many incomes exist within a single household to make up the total income. After World War II, the single-income family became the norm. Then the money was destroyed and American savings were wiped out and the capital base of the economy was devastated.

It was at this point that households began to struggle to stay above water. The year 1985 was the turning point. This was the year that it became more common than not for a household to have two incomes rather than one. Mothers entered the workforce to keep family income floating.

The intellectuals cheered this trend, as if it represented liberation, shouting hosannas that all women everywhere are now added to the tax rolls as valuable contributors to the state's coffers. The real cause is the rise of fiat money that depreciated the currency, robbed savings, and shoved people into the workforce as taxpayers.

This story is not told in the data alone. You have to look at the demographics to discover it.

This huge demographic shift essentially bought the American household another 20 years of seeming prosperity, though it is hard to call it that since there was no longer any choice about the matter. If you wanted to keep living the dream, the household could no longer get by on a single income.

But this huge shift was merely an escape hatch. It bought 20 years of slight increases before the income trend flattened again. Over the last decade we are back to falling. Today median family income is only slightly above where it was when Nixon wrecked the dollar, put on price and wage controls, created the EPA, and the whole apparatus of the parasitic welfare-warfare state came to be entrenched and made universal.

Yes, this is fascism, and we are paying the price. The dream is being destroyed.

The talk in Washington about reform, whether from Democrats or Republicans, is like a bad joke. They talk of small changes, small cuts, commissions they will establish, curbs they will make in ten years. It is all white noise. None of this will fix the problem. Not even close.

The problem is more fundamental. It is the quality of the money. It is the very existence of 10,000 regulatory agencies. It is the whole assumption that you have to pay the state for the privilege to work. It is the presumption that the government must manage every aspect of the capitalist economic order. In short, it is the total state that is the problem, and the suffering and decline will continue so long as the total state exists.

The Origins of Fascism

To be sure, the last time people worried about fascism was during the Second World War. We were said to be fighting this evil system abroad. The United States defeated fascist governments, but the philosophy of governance that fascism represents was not defeated. Very quickly following that war, another one began. This was the Cold War that pitted capitalism against communism. Socialism in this case was considered to be a soft form of communism, tolerable and even praiseworthy insofar as it was linked with democracy, which is the system that legalizes and legitimizes an ongoing pillaging of the population.

In the meantime, almost everyone has forgotten that there are many other colors of socialism, not all of them obviously left wing. Fascism is one of these colors.

There can be no question of its origins. It is tied up with the history of post–World War I Italian politics. In 1922, Benito Mussolini won a democratic election and established fascism as his philosophy. Mussolini had been a member of the Italian Socialist Party.

All the biggest and most important players within the fascist movement came from the socialists. It was a threat to the socialists because it was the most appealing political vehicle for the real-world application of the socialist impulse. Socialists crossed over to join the fascists en masse.

This is also why Mussolini himself enjoyed such good press for more than ten years after his rule began. He was celebrated by the New York Times in article after article. He was heralded in scholarly collections as an exemplar of the type of leader we needed in the age of the planned society. Puff pieces on this blowhard were very common in US journalism all through the late 1920s and the mid-1930s.

"When you run out of everything else to spend money on, you can always depend on nationalist fervor to back more military spending."

Remember that in this same period, the American Left went through a huge shift. In the teens and 1920s, the American Left had a very praiseworthy anticorporatist impulse. The Left generally opposed war, the state-run penal system, alcohol prohibition, and all violations of civil liberties. It was no friend of capitalism, but neither was it a friend of the corporate state of the sort that FDR forged during the New Deal.

In 1933 and 1934, the American Left had to make a choice. Would they embrace the corporatism and regimentation of the New Deal or take a principled stand on their old liberal values? In other words, would they accept fascism as a halfway house to their socialist utopia? A gigantic battle ensued in this period, and there was a clear winner. The New Deal made an offer the Left could not refuse. And it was a small step to go from the embrace of the fascistic planned economy to the celebration of the warfare state that concluded the New Deal period.

This was merely a repeat of the same course of events in Italy a decade earlier. In Italy too, the Left realized that their anticapitalistic agenda could best be achieved within the framework of the authoritarian, planning state. Of course our friend John Maynard Keynes played a critical role in providing a pseudoscientific rationale for joining opposition to old-world laissez-faire to a new appreciation of the planned society. Recall that Keynes was not a socialist of the old school. As he himself said in his introduction to the Nazi edition of his General Theory, National Socialism was far more hospitable to his ideas than a market economy.

Flynn Tells the Truth

The most definitive study on fascism written in these years was As We Go Marching by John T. Flynn. Flynn was a journalist and scholar of a liberal spirit who had written a number of best-selling books in the 1920s. He could probably be put in the progressive camp in the 1920s. It was the New Deal that changed him. His colleagues all followed FDR into fascism, while Flynn himself kept the old faith. That meant that he fought FDR every step of the way, and not only his domestic plans. Flynn was a leader of the America First movement that saw FDR's drive to war as nothing but an extension of the New Deal, which it certainly was.

But because Flynn was part of what Murray Rothbard later dubbed the Old Right—Flynn came to oppose both the welfare state and the warfare state—his name went down the Orwellian memory hole after the war, during the heyday of CIA conservatism.

As We Go Marching came out in 1944, just at the tail end of the war, and right in the midst of wartime economic controls the world over. It is a wonder that it ever got past the censors. It is a full-scale study of fascist theory and practice, and Flynn saw precisely where fascism ends: in militarism and war as the fulfillment of the stimulus-spending agenda. When you run out of everything else to spend money on, you can always depend on nationalist fervor to back more military spending.

In reviewing the history of the rise of fascism, Flynn wrote,

One of the most baffling phenomena of fascism is the almost incredible collaboration between men of the extreme Right and the extreme Left in its creation. The explanation lies at this point. Both Right and Left joined in this urge for regulation. The motives, the arguments, and the forms of expression were different but all drove in the same direction. And this was that the economic system must be controlled in its essential functions and this control must be exercised by the producing groups.

Flynn writes that the Right and the Left disagreed on precisely who fits the bill as the producer group. The Left tends to celebrate laborers as producers. The Right tends to favor business owners as producers. The political compromise—and it still goes on today—was to cartelize both.

Government under fascism becomes the cartelization device for both the workers and the private owners of capital. Competition between workers and between businesses is regarded as wasteful and pointless; the political elites decide that the members of these groups need to get together and cooperate under government supervision to build a mighty nation.

The fascists have always been obsessed with the idea of national greatness. To them, this does not consist in a nation of people who are growing more prosperous, living ever better and longer lives. No, national greatness occurs when the state embarks on building huge monuments, undertaking nationwide transportation systems, carving Mount Rushmore or digging the Panama Canal.

In other words, national greatness is not the same thing as your greatness or your family's greatness or your company's or profession's greatness. On the contrary. You have to be taxed, your money's value has to be depreciated, your privacy invaded, and your well-being diminished in order to achieve it. In this view, the government has to make us great.

Tragically, such a program has a far greater chance of political success than old-fashioned socialism. Fascism doesn't nationalize private property as socialism does. That means that the economy doesn't collapse right away. Nor does fascism push to equalize incomes. There is no talk of the abolition of marriage or the nationalization of children.

"No matter how much you may believe that you are free, all of us today are but one step away from Guantanamo."

Religion is not abolished but used as a tool of political manipulation. The fascist state was far more politically astute in this respect than communism. It wove together religion and statism into one package, encouraging a worship of God provided that the state operates as the intermediary.

Under fascism, society as we know it is left intact, though everything is lorded over by a mighty state apparatus. Whereas traditional socialist teaching fostered a globalist perspective, fascism was explicitly nationalist. It embraced and exalted the idea of the nation-state.

As for the bourgeoisie, fascism doesn't seek their expropriation. Instead, the middle class gets what it wants in the form of social insurance, medical benefits, and heavy doses of national pride.

It is for all these reasons that fascism takes on a right-wing cast. It doesn't attack fundamental bourgeois values. It draws on them to garner support for a democratically backed all-around national regimentation of economic control, censorship, cartelization, political intolerance, geographic expansion, executive control, the police state, and militarism.

For my part, I have no problem referring to the fascist program as a right-wing theory, even if it does fulfill aspects of the left-wing dream. The crucial matter here concerns its appeal to the public and to the demographic groups that are normally drawn to right-wing politics.

If you think about it, right-wing statism is of a different color, cast, and tone from left-wing statism. Each is designed to appeal to a different set of voters with different interests and values.

These divisions, however, are not strict, and we've already seen how a left-wing socialist program can adapt itself and become a right-wing fascist program with very little substantive change other than its marketing.

The Eight Marks of Fascist Policy

John T. Flynn, like other members of the Old Right, was disgusted by the irony that what he saw, almost everyone else chose to ignore. In the fight against authoritarian regimes abroad, he noted, the United States had adopted those forms of government at home, complete with price controls, rationing, censorship, executive dictatorship, and even concentration camps for whole groups considered to be unreliable in their loyalties to the state.

After reviewing this long history, Flynn proceeds to sum up with a list of eight points he considers to be the main marks of the fascist state.

As I present them, I will also offer comments on the modern American central state.

Point 1. The government is totalitarian because it acknowledges no restraint on its powers.

This is a very telling mark. It suggests that the US political system can be described as totalitarian. This is a shocking remark that most people would reject. But they can reject this characterization only so long as they happen not to be directly ensnared in the state's web. If they become so, they will quickly discover that there are indeed no limits to what the state can do. This can happen boarding a flight, driving around in your hometown, or having your business run afoul of some government agency. In the end, you must obey or be caged like an animal or killed. In this way, no matter how much you may believe that you are free, all of us today are but one step away from Guantanamo.

"This nation, conceived in liberty, has been kidnapped by the fascist state."

As recently as the 1990s, I can recall that there were moments when Clinton seemed to suggest that there were some things that his administration could not do. Today I'm not so sure that I can recall any government official pleading the constraints of law or the constraints of reality to what can and cannot be done. No aspect of life is untouched by government intervention, and often it takes forms we do not readily see. All of healthcare is regulated, but so is every bit of our food, transportation, clothing, household products, and even private relationships.

Mussolini himself put his principle this way: "All within the State, nothing outside the State, nothing against the State." He also said: "The keystone of the Fascist doctrine is its conception of the State, of its essence, its functions, and its aims. For Fascism the State is absolute, individuals and groups relative."

I submit to you that this is the prevailing ideology in the United States today. This nation, conceived in liberty, has been kidnapped by the fascist state.

Point 2. Government is a de facto dictatorship based on the leadership principle.

I wouldn't say that we truly have a dictatorship of one man in this country, but we do have a form of dictatorship of one sector of government over the entire country. The executive branch has spread so dramatically over the last century that it has become a joke to speak of checks and balances. What the kids learn in civics class has nothing to do with reality.

The executive state is the state as we know it, all flowing from the White House down. The role of the courts is to enforce the will of the executive. The role of the legislature is to ratify the policy of the executive.

Further, this executive is not really about the person who seems to be in charge. The president is only the veneer, and the elections are only the tribal rituals we undergo to confer some legitimacy on the institution. In reality, the nation-state lives and thrives outside any "democratic mandate." Here we find the power to regulate all aspects of life and the wicked power to create the money necessary to fund this executive rule.

As for the leadership principle, there is no greater lie in American public life than the propaganda we hear every four years about how the new president/messiah is going to usher in the great dispensation of peace, equality, liberty, and global human happiness. The idea here is that the whole of society is really shaped and controlled by a single will—a point that requires a leap of faith so vast that you have to disregard everything you know about reality to believe it.

And yet people do. The hope for a messiah reached a fevered pitch with Obama's election. The civic religion was in full-scale worship mode—of the greatest human who ever lived or ever shall live. It was a despicable display.

Another lie that the American people believe is that presidential elections bring about regime change. This is sheer nonsense. The Obama state is the Bush state; the Bush state was the Clinton state; the Clinton state was the Bush state; the Bush state was the Reagan state. We can trace this back and back in time and see overlapping appointments, bureaucrats, technicians, diplomats, Fed officials, financial elites, and so on. Rotation in office occurs not because of elections but because of mortality.

Point 3. Government administers a capitalist system with an immense bureaucracy.

The reality of bureaucratic administration has been with us at least since the New Deal, which was modeled on the planning bureaucracy that lived in World War I. The planned economy—whether in Mussolini's time or ours—requires bureaucracy. Bureaucracy is the heart, lungs, and veins of the planning state. And yet to regulate an economy as thoroughly as this one is today is to kill prosperity with a billion tiny cuts.

"Have you ever noticed that the military budget is never seriously discussed in policy debates?"

This doesn't necessarily mean economic contraction, at least not right away. But it definitely means killing off growth that would have otherwise occurred in a free market.

So where is our growth? Where is the peace dividend that was supposed to come after the end of the Cold War? Where are the fruits of the amazing gains in efficiency that technology has afforded? It has been eaten by the bureaucracy that manages our every move on this earth. The voracious and insatiable monster here is called the Federal Code that calls on thousands of agencies to exercise the police power to prevent us from living free lives.

It is as Bastiat said: the real cost of the state is the prosperity we do not see, the jobs that don't exist, the technologies to which we do not have access, the businesses that do not come into existence, and the bright future that is stolen from us. The state has looted us just as surely as a robber who enters our home at night and steals all that we love.

Point 4. Producers are organized into cartels in the way of syndicalism.

Syndicalist is not usually how we think of our current economic structure. But remember that syndicalism means economic control by the producers. Capitalism is different. It places by virtue of market structures all control in the hands of the consumers. The only question for syndicalists, then, is which producers are going to enjoy political privilege. It might be the workers, but it can also be the largest corporations.

In the case of the United States, in the last three years, we've seen giant banks, pharmaceutical firms, insurers, car companies, Wall Street banks and brokerage houses, and quasi-private mortgage companies enjoying vast privileges at our expense. They have all joined with the state in living a parasitical existence at our expense.

This is also an expression of the syndicalist idea, and it has cost the US economy untold trillions and sustained an economic depression by preventing the postboom adjustment that markets would otherwise dictate. The government has tightened its syndicalist grip in the name of stimulus.

Point 5. Economic planning is based on the principle of autarky.

Autarky is the name given to the idea of economic self-sufficiency. Mostly this refers to the economic self-determination of the nation-state. The nation-state must be geographically huge in order to support rapid economic growth for a large and growing population.

This was and is the basis for fascist expansionism. Without expansion, the state dies. This is also the idea behind the strange combination of protectionist pressure today combined with militarism. It is driven in part by the need to control resources.

"I can think of no greater priority today than a serious and effective antifascist alliance."

Look at the wars in Iraq, Afghanistan, and Libya. We would be supremely naive to believe that these wars were not motivated in part by the producer interests of the oil industry. It is true of the American empire generally, which supports dollar hegemony.

It is the reason for the planned North American Union.

The goal is national self-sufficiency rather than a world of peaceful trade. Consider, too, the protectionist impulses of the Republican ticket. There is not one single Republican, apart from Ron Paul, who authentically supports free trade in the classical definition.

From ancient Rome to modern-day America, imperialism is a form of statism that the bourgeoisie love. It is for this reason that Bush's post-9/11 push for the global empire has been sold as patriotism and love of country rather than for what it is: a looting of liberty and property to benefit the political elites.

Point 6. Government sustains economic life through spending and borrowing.

This point requires no elaboration because it is no longer hidden. There was stimulus 1 and stimulus 2, both of which are so discredited that stimulus 3 will have to adopt a new name. Let's call it the American Jobs Act.

With a prime-time speech, Obama argued in favor of this program with some of the most asinine economic analysis I've ever heard. He mused about how is it that people are unemployed at a time when schools, bridges, and infrastructure need repairing. He ordered that supply and demand come together to match up needed work with jobs.

Hello? The schools, bridges, and infrastructure that Obama refers to are all built and maintained by the state. That's why they are falling apart. And the reason that people don't have jobs is because the state has made it too expensive to hire them. It's not complicated. To sit around and dream of other scenarios is no different from wishing that water flowed uphill or that rocks would float in the air. It amounts to a denial of reality.

Still, Obama went on, invoking the old fascistic longing for national greatness. "Building a world-class transportation system," he said, "is part of what made us an economic superpower." Then he asked, "We're going to sit back and watch China build newer airports and faster railroads?"

Well, the answer to that question is yes. And you know what? It doesn't hurt a single American for a person in China to travel on a faster railroad than we do. To claim otherwise is an incitement to nationalist hysteria.

As for the rest of this program, Obama promised yet another long list of spending projects. Let's just mention the reality: No government in the history of the world has spent as much, borrowed as much, and created as much fake money as the United States. If the United States doesn't qualify as a fascist state in this sense, no government ever has.

None of this would be possible but for the role of the Federal Reserve, the great lender to the world. This institution is absolutely critical to US fiscal policy. There is no way that the national debt could increase at a rate of $4 billion per day without this institution.

Under a gold standard, all of this maniacal spending would come to an end. And if US debt were priced on the market with a default premium, we would be looking at a rating far less than A+.

Point 7. Militarism is a mainstay of government spending.

Have you ever noticed that the military budget is never seriously discussed in policy debates? The United States spends more than most of the rest of the world combined.

And yet to hear our leaders talk, the United States is just a tiny commercial republic that wants peace but is constantly under threat from the world. They would have us believe that we all stand naked and vulnerable. The whole thing is a ghastly lie. The United States is a global military empire and the main threat to peace around the world today.

To visualize US military spending as compared with other countries is truly shocking. One bar chart you can easily look up shows the US trillion-dollar-plus military budget as a skyscraper surrounded by tiny huts. As for the next highest spender, China spends 1/10th as much as the United States.

Where is the debate about this policy? Where is the discussion? It is not going on. It is just assumed by both parties that it is essential for the US way of life that the United States be the most deadly country on the planet, threatening everyone with nuclear extinction unless they obey. This should be considered a fiscal and moral outrage by every civilized person.

This isn't only about the armed services, the military contractors, the CIA death squads. It is also about how police at all levels have taken on military-like postures. This goes for the local police, state police, and even the crossing guards in our communities. The commissar mentality, the trigger-happy thuggishness, has become the norm throughout the whole of society.

If you want to witness outrages, it is not hard. Try coming into this country from Canada or Mexico. See the bullet-proof-vest-wearing, heavily armed, jackbooted thugs running dogs up and down car lanes, searching people randomly, harassing innocents, asking rude and intrusive questions.

You get the strong impression that you are entering a police state. That impression would be correct.

Yet for the man on the street, the answer to all social problems seems to be more jails, longer terms, more enforcement, more arbitrary power, more crackdowns, more capital punishments, more authority. Where does all of this end? And will the end come before we realize what has happened to our once-free country?

Point 8. Military spending has imperialist aims.

Ronald Reagan used to claim that his military buildup was essential to keeping the peace. The history of US foreign policy just since the 1980s has shown that this is wrong. We've had one war after another, wars waged by the United States against noncompliant countries, and the creation of even more client states and colonies.

US military strength has led not to peace but the opposite. It has caused most people in the world to regard the United States as a threat, and it has led to unconscionable wars on many countries. Wars of aggression were defined at Nuremberg as crimes against humanity.

Obama was supposed to end this. He never promised to do so, but his supporters all believed that he would. Instead, he has done the opposite. He has increased troop levels, entrenched wars, and started new ones. In reality, he has presided over a warfare state just as vicious as any in history. The difference this time is that the Left is no longer criticizing the US role in the world. In that sense, Obama is the best thing ever to happen to the warmongers and the military-industrial complex.

As for the Right in this country, it once opposed this kind of military fascism. But all that changed after the beginning of the Cold War. The Right was led into a terrible ideological shift, well documented in Murray Rothbard's neglected masterpiece The Betrayal of the American Right. In the name of stopping communism, the right came to follow ex–CIA agent Bill Buckley's endorsement of a totalitarian bureaucracy at home to fight wars all over the world.

At the end of the Cold War, there was a brief reprise when the Right in this country remembered its roots in noninterventionism. But this did not last long. George Bush the First rekindled the militarist spirit with the first war on Iraq, and there has been no fundamental questioning of the American empire ever since. Even today, Republicans elicit their biggest applause by whipping up audiences about foreign threats, while never mentioning that the real threat to American well-being exists in the Beltway.

The Future

I can think of no greater priority today than a serious and effective antifascist alliance. In many ways, one is already forming. It is not a formal alliance. It is made up of those who protest the Fed, those who refuse to go along with mainstream fascist politics, those who seek decentralization, those who demand lower taxes and free trade, those who seek the right to associate with anyone they want and buy and sell on terms of their own choosing, those who insist they can educate their children on their own, the investors and savers who make economic growth possible, those who do not want to be felt up at airports, and those who have become expatriates.

It is also made of the millions of independent entrepreneurs who are discovering that the number one threat to their ability to serve others through the commercial marketplace is the institution that claims to be our biggest benefactor: the government.

How many people fall into this category? It is more than we know. The movement is intellectual. It is political. It is cultural. It is technological. They come from all classes, races, countries, and professions. This is no longer a national movement. It is truly global.

We can no longer predict whether members consider themselves to be left wing, right wing, independent, libertarian, anarchist, or something else. It includes those as diverse as homeschooling parents in the suburbs as well as parents in urban areas whose children are among the 2.3 million people who languish in jail for no good reason in a country with the largest prison population in the world.

And what does this movement want? Nothing more or less than sweet liberty. It does not ask that the liberty be granted or given. It only asks for the liberty that is promised by life itself and would otherwise exist were it not for the Leviathan state that robs us, badgers us, jails us, kills us.

This movement is not departing. We are daily surrounded by evidence that it is right and true. Every day, it is more and more obvious that the state contributes absolutely nothing to our well-being; it massively subtracts from it.

Back in the 1930s, and even up through the 1980s, the partisans of the state were overflowing with ideas. They had theories and agendas that had many intellectual backers. They were thrilled and excited about the world they would create. They would end business cycles, bring about social advance, build the middle class, cure disease, bring about universal security, and much more. Fascism believed in itself.

This is no longer true. Fascism has no new ideas, no big projects—and not even its partisans really believe it can accomplish what it sets out to do. The world created by the private sector is so much more useful and beautiful than anything the state has done that the fascists have themselves become demoralized and aware that their agenda has no real intellectual foundation.

It is ever more widely known that statism does not and cannot work. Statism is the great lie. Statism gives us the exact opposite of its promise. It promised security, prosperity, and peace; it has given us fear, poverty, war, and death. If we want a future, it is one that we have to build ourselves. The fascist state will not give it to us. On the contrary, it stands in the way.

It also seems to me that the old-time romance of the classical liberals with the idea of the limited state is gone. It is far more likely today that young people embrace an idea that 50 years ago was thought to be unthinkable: the idea that society is best off without any state at all.

"In the end, this is the choice we face: the total state or total freedom."

I would mark the rise of anarcho-capitalist theory as the most dramatic intellectual shift in my adult lifetime. Gone is that view of the state as the night watchman that would only guard essential rights, adjudicate disputes, and protect liberty.

This view is woefully naive. The night watchman is the guy with the guns, the legal right to use aggression, the guy who controls all comings and goings, the guy who is perched on top and sees all things. Who is watching him? Who is limiting his power? No one, and this is precisely why he is the very source of society's greatest ills. No constitution, no election, no social contract will check his power.

Indeed, the night watchman has acquired total power. It is he who would be the total state, which Flynn describes as a government that "possesses the power to enact any law or take any measure that seems proper to it." So long as a government, he says, "is clothed with the power to do anything without any limitation on its powers, it is totalitarian. It has total power."

It is no longer a point that we can ignore. The night watchman must be removed and his powers distributed within and among the whole population, and they should be governed by the same forces that bring us all the blessings the material world affords us.

In the end, this is the choice we face: the total state or total freedom. Which will we choose? If we choose the state, we will continue to sink further and further and eventually lose all that we treasure as a civilization. If we choose freedom, we can harness that remarkable power of human cooperation that will enable us to continue to make a better world.

In the fight against fascism, there is no reason to be despairing. We must continue to fight with every bit of confidence that the future belongs to us and not them.

Their world is falling apart. Ours is just being built.

Their world is based on bankrupt ideologies. Ours is rooted in the truth about freedom and reality.

Their world can only look back to the glory days. Ours looks forward to the future we are building for ourselves.

Their world is rooted in the corpse of the nation-state. Our world draws on the energies and creativity of all peoples in the world, united in the great and noble project of creating a prospering civilization through peaceful human cooperation.

It's true that they have the biggest guns. But big guns have not assured permanent victory in Iraq or Afghanistan—or any other place on the planet.

We possess the only weapon that is truly immortal: the right idea. It is this that will lead to victory.

As Mises said,

In the long run even the most despotic governments with all their brutality and cruelty are no match for ideas. Eventually the ideology that has won the support of the majority will prevail and cut the ground from under the tyrant's feet. Then the oppressed many will rise in rebellion and overthrow their masters.

This talk was delivered at the Doug Casey conference "When Money Dies" in Phoenix on October 1, 2011.

From time to time over the last 30 years, after I have talked or written about some new restriction on human liberty in the economic field, some new attack on private enterprise, I have been asked in person or received a letter asking, "What can I do" — to fight the inflationist or socialist trend? Other writers or lecturers, I find, are often asked the same question.

The answer is seldom an easy one. For it depends on the circumstances and ability of the questioner — who may be a businessman, a housewife, a student, informed or not, intelligent or not, articulate or not. And the answer must vary with these presumed circumstances.

The general answer is easier than the particular answer. So here I want to write about the task now confronting all libertarians considered collectively.

This task has become tremendous, and seems to grow greater every day. A few nations that have already gone completely communist, like Soviet Russia and its satellites, try, as a result of sad experience, to draw back a little from complete centralization, and experiment with one or two quasi-capitalist techniques; but the world's prevailing drift — in more than 100 out of the 111 or so nations and mini-nations that are now members of the International Monetary Fund — is in the direction of increasing socialism and controls.

The task of the tiny minority that is trying to combat this socialistic drift seems nearly hopeless. The war must be fought on a thousand fronts, and the true libertarians are grossly outnumbered on practically all these fronts.

In a thousand fields the welfarists, statists, socialists, and interventionists are daily driving for more restrictions on individual liberty; and the libertarians must combat them. But few of us individually have the time, energy, and special knowledge in more than a handful of subjects to be able to do this.

One of our gravest problems is that we find ourselves confronting the armies of bureaucrats who already control us, and who have a vested interest in keeping and expanding the controls they were hired to enforce.

A Growing Bureaucracy

The federal government now embraces some 2,500 different functioning agencies, bureaus, departments, and divisions. Federal full-time permanent civilian employees are estimated to reach 2,693,508 as of June 30, 1970.

And we know, to take a few specific examples, that of these bureaucrats 16,800 administer the programs of the Department of Housing and Urban Development, 106,700 the programs (including Social Security) of the Department of Health, Education, and Welfare, and 152,300 the programs of the Veterans Administration.

If we want to look at the rate at which parts of this bureaucracy have been growing, let us refer again to the Department of Agriculture. In 1929, before the United States Government started crop controls and price supports on an extensive scale, there were 24,000 employees in that Department. Today, counting part-time workers, there are 120,000, five times as many, all of them with a vital economic interest — to wit, their own jobs — in proving that the particular controls they were hired to formulate and enforce should be continued and expanded.

"The war must be fought on a thousand fronts, and the true libertarians are grossly outnumbered on practically all these fronts."

What chance does the individual businessman, the occasional disinterested professor of economics, or columnist, or editorial writer, have in arguing against the policies and actions of this 120,000-man army, even if he has had time to learn the detailed facts of a particular issue? His criticisms are either ignored or drowned out in the organized counterstatements.

This is only one example out of scores. A few of us may suspect that there is much unjustified or foolish expenditure in the United States Social Security program, or that the unfunded liabilities already undertaken by the program (one authoritative estimate of these exceeds a trillion dollars) may prove to be unpayable without a gross monetary inflation. A handful of us may suspect that the whole principle of compulsory government old age and survivor's insurance is open to question. But there are some 100,000 full-time permanent employees in the Department of Health, Education, and Welfare to dismiss all such fears as foolish, and to insist that we are still not doing nearly enough for our older citizens, our sick, and our widows and orphans.

And then there are the millions of those who are already on the receiving end of these payments, who have come to consider them as an earned right, who of course find them inadequate, and who are outraged at the slightest suggestion of a critical reexamination of the subject. The political pressure for constant extension and increase of these benefits is almost irresistible.

And even if there weren't whole armies of government economists, statisticians, and administrators to answer him, the lone disinterested critic, who hopes to have his criticism heard and respected by other disinterested and thoughtful people, finds himself compelled to keep up with appalling mountains of detail.

Too Many Cases to Follow

The National Labor Relations Board, for example, hands down hundreds of decisions every year in passing on "unfair" labor practices. In the fiscal year 1967 it passed on 803 cases "contested as to the law and the facts." Most of these decisions are strongly biased in favor of the labor unions; many of them pervert the intention of the Taft-Hartley Act that they ostensibly enforce; and in some of them the board arrogates to itself powers that go far beyond those granted by the Act. The texts of many of these decisions are very long in their statement of facts or alleged facts and of the board's conclusions. How is the individual economist or editor to keep abreast of the decisions and to comment informedly and intelligently on those that involve an important principle or public interest?

Or take again such major agencies as the Federal Trade Commission, the Securities and Exchange Commission, the Food and Drug Administration, the Federal Communications Commission. These agencies often combine the functions of legislators, prosecutors, judges, juries, and administrators.

Yet how can the individual economist, student of government, journalist, or anyone interested in defending or preserving liberty, hope to keep abreast of this Niagara of decisions, regulations, and administrative laws? He may sometimes consider himself lucky to be able to master in many months the facts concerning one of these decisions.

The armies of bureaucrats have a vested interest in keeping and expanding the controls they were hired to enforce.

Professor Sylvester Petro of New York University has written a full book on the Kohler strike and another full book on the Kingsport strike, and the public lessons to be learned from them. Professor Martin Anderson has specialized in the follies of urban renewal programs. But how many are there among those of us who call ourselves libertarians who are willing — or have the time — to do this specialized and microscopic but indispensable research?

In July, 1967, the Federal Communications Commission handed down an extremely harmful decision ordering the American Telephone and Telegraph Company to lower its interstate rates — which were already 20 percent lower than in 1940, though the general price level since that time had gone up 163 percent. In order to write a single editorial or column on this (and to feel confident he had his facts straight), a conscientious journalist had to study, among other material, the text of the decision. That decision consisted of 114 single-spaced typewritten pages.

… and Schemes for Reform

We libertarians have our work cut out for us.

In order to indicate further the dimensions of this work, it is not merely the organized bureaucracy that the libertarian has to answer; it is the individual private zealots. A day never passes without some ardent reformer or group of reformers suggesting some new government intervention, some new statist scheme to fill some alleged "need" or relieve some alleged distress. They accompany their scheme by elaborate statistics that supposedly prove the need or the distress that they want the taxpayers to relieve. So it comes about that the reputed "experts" on relief, unemployment insurance, Social Security, Medicare, subsidized housing, foreign aid, and the like are precisely the people who are advocating more relief, unemployment insurance, Social Security, Medicare, subsidized housing, foreign aid, and all the rest.

Let us come to some of the lessons we must draw from all this.

Specialists for the Defense

We libertarians cannot content ourselves merely with repeating pious generalities about liberty, free enterprise, and limited government. To assert and repeat these general principles is absolutely necessary, of course, either as prologue or conclusion. But if we hope to be individually or collectively effective, we must individually master a great deal of detailed knowledge, and make ourselves specialists in one or two lines, so that we can show how our libertarian principles apply in special fields, and so that we can convincingly dispute the proponents of statist schemes for public housing, farm subsidies, increased relief, bigger Social Security benefits, bigger Medicare, guaranteed incomes, bigger government spending, bigger taxation, especially more progressive income taxation, higher tariffs or import quotas, restrictions or penalties on foreign investment and foreign travel, price controls, wage controls, rent controls, interest rate controls, more laws for so-called consumer protection, and still tighter regulations and restrictions on business everywhere.

This means, among other things, that libertarians must form and maintain organizations not only to promote their broad principles — as do, for example, the Foundation for Economic Education at Irvington-on-Hudson, New York, the American Institute for Economic Research at Great Barrington, Massachusetts, and the American Economic Foundation in New York City — but to promote these principles in special fields. I am thinking, for example, of such excellent existing specialized organizations as the Citizens Foreign Aid Committee, the Economists' National Committee on Monetary Policy, the Tax Foundation, and so on.

"It is not merely the organized bureaucracy that the libertarian has to answer; it is the individual private zealots."

We need not fear that too many of these specialized organizations will be formed. The real danger is the opposite. The private libertarian organizations in the United States are probably outnumbered ten to one by communist, socialist, statist, and other left-wing organizations that have shown themselves to be only too effective.

And I am sorry to report that almost none of the old-line business associations that I am acquainted with are as effective as they could be. It is not merely that they have been timorous or silent where they should have spoken out, or even that they have unwisely compromised. Recently, for fear of being called ultraconservative or reactionary, they have been supporting measures harmful to the very interests they were formed to protect. Several of them, for example, came out in favor of the Johnson administration's tax increase on corporations in 1968, because they were afraid to say that that Administration ought rather to have slashed its profligate welfare spending.

The sad fact is that today most of the heads of big businesses in America have become so confused or intimidated that, so far from carrying the argument to the enemy, they fail to defend themselves adequately even when attacked. The pharmaceutical industry, subjected since 1962 to a discriminatory law that applies questionable and dangerous legal principles which the government has not yet dared to apply in other fields, has been too timid to present its own case effectively. And the automobile makers, attacked by a single zealot for turning out cars "unsafe at any speed," handled the matter with an incredible combination of neglect and ineptitude that brought down on their heads legislation harmful not only to the industry but to the driving public.

The Timidity of Businessmen

It is impossible to tell today where the anti-business sentiment in Washington, plus the itch for more government control, is going to strike next. In 1967 Congress allowed itself to be stampeded into a dubious extension of federal power over intrastate meat sales. In 1968 it passed a "truth-in-lending" law, forcing lenders to calculate and state interest rates the way federal bureaucrats want them calculated and stated. When, in January, 1968, President Johnson suddenly announced that he was prohibiting American business from making further direct investments in Europe, and that he was restricting them elsewhere, most newspapers and businessmen, instead of raising a storm of protest against these unprecedented invasions of our liberties, deplored their "necessity" and hoped they would be only "temporary."

The very existence of the business timidity that allows these things to happen is evidence that government controls and power are already excessive.

Why are the heads of big business in America so timid? That is a long story, but I will suggest a few reasons:

They may be entirely or largely dependent on government war contracts.

They never know when or on what grounds they will be held guilty of violating the antitrust laws.

They never know when or on what grounds the National Labor Relations Board will hold them guilty of unfair labor practices.

They never know when their personal income tax returns will be hostilely examined, and they are certainly not confident that such an examination, and its findings, will be entirely independent of whether they have been personally friendly or hostile to the Administration in power.

It will be noticed that the governmental actions or laws of which businessmen stand in fear are actions or laws that leave a great deal to administrative discretion. Discretionary administrative law should be reduced to a minimum; it breeds bribery and corruption, and is always potentially blackmail or blackjack law.

Schumpeter's Indictment "Discretionary administrative law should be reduced to a minimum; it breeds bribery and corruption."

Libertarians are learning to their sorrow that big businessmen cannot necessarily be relied upon to be their allies in the battle against extension of governmental encroachments. The reasons are many. Sometimes businessmen will advocate tariffs, import quotas, subsidies, and restrictions of competition, because they think, rightly or wrongly, that these government interventions will be in their personal interest, or in the interest of their companies, and are not concerned whether or not they may be at the expense of the general public. More often, I think, businessmen advocate these interventions because they are honestly confused, because they just don't realize what the actual consequences will be of the particular measures they propose, or fail to perceive the cumulative debilitating effects of growing restrictions on human liberty.

Perhaps most often of all, however, businessmen today acquiesce in new government controls out of sheer timidity.

A generation ago, in his pessimistic book, Capitalism, Socialism, and Democracy (1942), the late Joseph A. Schumpeter maintained the thesis that "in the capitalistic system there is a tendency toward self-destruction." And as one evidence of this he cited the "cowardice" of big businessmen when facing direct attack:

They talk and plead — or hire people to do it for them; they snatch at every chance of compromise; they are ever ready to give in; they never put up a fight under the flag of their own ideals and interests — in this country there was no real resistance anywhere against the imposition of crushing financial burdens during the last decade or against labor legislation incompatible with the effective management of industry.

So much for the formidable problems facing dedicated libertarians. They find it extremely difficult to defend particular firms and industries from harassment or persecution when those industries will not adequately or competently defend themselves. Yet division of labor is both possible and desirable in the defense of liberty, as it is in other fields. And many, who have neither the time nor the specialized knowledge to analyze particular industries or special complex problems, can be nonetheless effective in the libertarian cause by hammering incessantly on some single principle or point until it is driven home.

Some Basic Principles

Is there any single principle or point on which libertarians could most effectively concentrate? Let us look, and we may end by finding not one but several.

One simple truth that could be endlessly reiterated, and effectively applied to nine-tenths of the statist proposals now being put forward or enacted in such profusion, is that the government has nothing to give to anybody that it doesn't first take from somebody else. In other words, all its relief and subsidy schemes are merely ways of robbing Peter to support Paul.

Thus, it can be pointed out that the modern welfare state is merely a complicated arrangement by which nobody pays for the education of his own children, but everybody pays for the education of everybody else's children; by which nobody pays his own medical bills, but everybody pays everybody else's medical bills; by which nobody provides for his own old-age security, but everybody pays for everybody else's old-age security; and so on. As noted before, Bastiat exposed the illusive character of all these welfare schemes more than a century ago in his aphorism: "The State is the great fiction by which everybody tries to live at the expense of everybody else."

"The government has nothing to give to anybody that it doesn't first take from somebody else. In other words, all its relief and subsidy schemes are merely ways of robbing Peter to support Paul."

Another way of showing what is wrong with all the state handout schemes is to keep pointing out that you can't get a quart out of a pint jug. Or, as the state giveaway programs must all be paid for out of taxation, with each new scheme proposed the libertarian can ask, "Instead of what?" Thus, if it is proposed to spend another $1 billion on putting more men on the moon or developing a supersonic commercial plane, it may be pointed out that this $1 billion, taken in taxation, will not then be able to meet a million personal needs or wants of the millions of taxpayers from whom it is to be taken.

Of course, some champions of ever-greater governmental power and spending recognize this very well, and like Professor J.K. Galbraith, for instance, they invent the theory that the taxpayers, left to themselves, spend the money they have earned very foolishly, on all sorts of trivialities and rubbish, and that only the bureaucrats, by first seizing it from them, will know how to spend it wisely.

Knowing the Consequences

Another very important principle to which the libertarian can constantly appeal is to ask the statists to consider the secondary and long-run consequences of their proposals as well as merely their intended direct and immediate consequences. The statists will sometimes admit quite freely, for example, that they have nothing to give to anybody that they must not first take from somebody else. They will admit that they must rob Peter to pay Paul. But their argument is that they are seizing only from rich Peter to support poor Paul. As President Johnson once put it quite frankly in a speech on January 15, 1964: "We are going to try to take all of the money that we think is unnecessarily being spent and take it from the 'haves' and give it to the 'have nots' that need it so much."

Those who have the habit of considering long-run consequences will recognize that all these programs for sharing the wealth and guaranteeing incomes must reduce incentives at both ends of the economic scale. They must reduce the incentives both of those who are capable of earning a higher income, but find it taken away from them, and those who are capable of earning at least a moderate income, but find themselves supplied with the necessities of life without working.

"They will admit that they must rob Peter to pay Paul. But their argument is that they are seizing only from rich Peter to support poor Paul."

This vital consideration of incentives is almost systematically overlooked in the proposals of agitators for more and bigger government welfare schemes. We should all be concerned about the plight of the poor and unfortunate. But the hard two-part question that any plan for relieving poverty must answer is: How can we mitigate the penalties of failure and misfortune without undermining the incentives to effort and success? Most of our would-be reformers and humanitarians simply ignore the second half of this problem. And when those of us who advocate freedom of enterprise are compelled to reject one of these specious "antipoverty" schemes after another on the ground that it will undermine these incentives and in the long run produce more evil than good, we are accused by the demagogues and the thoughtless of being "negative" and stony-hearted obstructionists. But the libertarian must have the strength not to be intimidated by this.

Finally, the libertarian who wishes to hammer in a few general principles can repeatedly appeal to the enormous advantages of liberty as compared with coercion. But he, too, will have influence and perform his duty properly only if he has arrived at his principles through careful study and thought. "The common people of England," once wrote Adam Smith, "are very jealous of their liberty, but like the common people of most other countries have never rightly understood in what it consists." To arrive at the proper concept and definition of liberty is difficult, not easy.I strongly recommend The Constitution of Liberty, by F.A. Hayek (University of Chicago Press, 1960).

Legal and Political Aspects

So far, I have written as if the libertarian's study, thought, and argument need be confined solely to the field of economics. But, of course, liberty cannot be enlarged or preserved unless its necessity is understood in many other fields — and most notably in law and in politics.

We have to ask, for example, whether liberty, economic progress, and political stability can be preserved if we continue to allow the people on relief — the people who are mainly or solely supported by the government and who live at the expense of the taxpayers — to exercise the franchise. The great liberals of the 19th and early 20th centuries, including John Stuart Mill and A.V. Dicey, expressed the most serious misgivings on this point.

An Honest Currency and an End to Inflation

This brings me, finally, to one more single issue on which all those libertarians who lack the time or background for specialized study can effectively concentrate. This is in demanding that the government provide an honest currency, and that it stop inflating.

This issue has the inherent advantage that it can be made clear and simple because fundamentally it is clear and simple. All inflation is government made. All inflation is the result of increasing the quantity of money and credit; and the cure is simply to halt the increase.

If libertarians lose on the inflation issue, they are threatened with the loss of every other issue. If libertarians could win the inflation issue, they could come close to winning everything else. If they could succeed in halting the increase in the quantity of money, it would be because they could halt the chronic deficits that force this increase. If they could halt these chronic deficits, it would be because they had halted the rapid increase in welfare spending and all the socialistic schemes that are dependent on welfare spending. If they could halt the constant increase in spending, they could halt the constant increase in government power.

The devaluation of the British pound, first in 1949 and again in 1967, may as an offset have the longer effect of helping the libertarian cause. It exposes the bankruptcy of the welfare state. It exposes the fragility and complete undependability of the paper-gold international monetary system under which the world has been operating since 1944. There is hardly one of the hundred or more currencies in the International Monetary Fund, with the exception of the dollar, that has not been devalued at least once since the IMF opened its doors for business. There is not a single currency unit — and there is no exception to this statement — that does not buy less today than when the Fund started.

At the moment of writing this, the dollar, to which practically every other currency is tied in the present system, is in the gravest peril. If liberty is to be preserved, the world must eventually get back to a full gold standard system in which each major country's currency unit must be convertible into gold on demand, by anybody who holds it, without discrimination. I am aware that some technical defects can be pointed out in the gold standard, but it has one virtue that more than outweighs them all. It is not, like paper money, subject to the day-to-day whims of the politicians; it cannot be printed or otherwise manipulated by the politicians; it frees the individual holder from that form of swindling or expropriation by the politicians; it is an essential safeguard for the preservation, not only of the value of the currency unit itself, but of human liberty. Every libertarian should support it.

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I have one last word. In whatever field he specializes, or on whatever principle or issue he elects to take his stand, the libertarian must take a stand. He cannot afford to do or say nothing. I have only to remind him of the eloquent call to battle on the final page of Ludwig von Mises's great book Socialism, written 35 years ago:

Everyone carries a part of society on his shoulders; no one is relieved of his share of responsibility by others. And no one can find a safe way out for himself if society is sweeping toward destruction. Therefore everyone, in his own interests, must thrust himself vigorously into the intellectual battle. None can stand aside with unconcern; the interests of everyone hang on the result. Whether he chooses or not, every man is drawn into the great historical struggle, the decisive battle into which our epoch has plunged us.

This essay is excerpted from chapter 24 of Man vs. the Welfare State (1969).