One of the aspects of capitalism and the free market that the typical lay person finds difficult to comprehend is the fact that the complex structure of work, production, distribution, and trade could possibly take place without some kind of centralised, directing authority in order to co-ordinate everybody’s efforts. Wouldn’t there just be chaos and mal-coordination with everyone trying to make their own, independent plans if there is nobody at the tiller to steer the giant ship?
This fallacy stems from the belief – accentuated by holistic concepts such as aggregate, pseudo-statistics like “GDP” or “the national income” – that what we refer to as “the economy” is some kind of enormous machine that has “input”, with a single operator “processing” these “inputs” into “outputs”.
In fact, rather than being one giant, amorphous blob “the economy” is made up of millions and millions of independent, unilateral acts of production and two-way trades, many of which will never have anything to do with each other. I may sell an apple to my neighbour for 10p in London; another person may sell an orange for 20p to his neighbour in Manchester. Neither of the two pairs of people has ever met, nor need any of them have any involvement with the exchange of the other pair; and yet both exchanges would be regarded as part of “the British economy” in mainstream discourse.
Rather than being a top-down operated machine, “the economy” is a bottom up network of independent transactions – motivated by the ends desired by each and every one of us rather than by some bureaucrat – joined together only through the communication of the price system. All of the trades together, stimulated by varying and changing desires and ends that people seek, will have a constant and unceasing influence on the prices that regulate the supply of goods relative to their demand. Ironically, it is precisely because of such complexity – the so-called “knowledge problem” – that the attempts of any central authority to control and direct it are nothing short of futile. Even worse, however, is the fact that without market prices generating profit and loss such an authority would have no rational guide to apportion resources to where they are most needed. This is what Ludwig von Mises established in his Economic Calculation in the Socialist Commonwealth, a work that was published at the birth of the world’s greatest collectivist experiment – the Soviet Union – and foresaw its ultimate failure.
An oft-heard complaint, particularly from the left, is that “globalisation” – by which we mean economic globalisation, characterised by increased trade across borders, as opposed to political globalisation, which is increased co-operation between states and/or the consolidation and centralisation of state entities – has led to a decimation of local communities and economies. All that this means, however, is that the market for goods has simply expanded so that one can source one’s needs from pretty much anywhere on the globe. It is still the case that the driving force of demand is not global or holistic – it resides very locally in every individual person’s tastes and desires. Such complaints therefore fail to recognise the irony in calling for a very distant and hardly local entity – the state – to halt globalisation and expanding markets by replacing what individual, local people desire with its own ends.
This myth, of course, goes further than economics and has more than seeped into philosophy as well, stemming from a basic misunderstanding about what is required for the human race to live in peace and harmony. Such peaceful co-existence does not demand that we all pursue the same ends or ultimate goals, follow the same plan or sing from the same hymn sheet; nor do we need some centralising authority to prevent “discordance” between the actions of one person and another. Rather, what is required is that we can each follow our own plans while not conflicting with the plans of others.
This is precisely the great achievement of the institution of private property. Recognising that all conflicts have their origin in the contest over physical goods, an exclusive right is granted to the first user-producer (or to the recipient of the good in a voluntary exchange) so that he may fulfil his ends without molestation from other people; and that other people can use the goods for which they are the first producer-user without interference from him. Any person arguing in favour of “one direction” and “harmony” at the behest of centralised control really means that everyoneelse’s plans should be overridden, with force, by his own. Indeed, in contrast to voluntary exchange, every transaction that is compelled by the state requires there to be at least one loser, one person who does not want his funds directed to the ends desired by the state. Rather than producing harmony what results is bitterness and frustration from at least one part of the population whose needs are denied in order to serve the needs of another part. Furthermore, aside from the economic chaos that such a system brings, rather than inspiring such qualities as productivity, self-reliance, hard work, prudence, patience and responsibility, the resulting social disorder instils, in their stead, laziness, apathy, conflict, corruption, impatience and cynicism – hardly the human qualities that one would wish to exemplify as the hallmarks of a “peaceful” and “harmonious” society.
True harmony can be brought about only by allowing each and every individual to pursue his own ends with the scarce resources over which he has lawful ownership, while allowing everyone else to do the same – permitting the human race to flourish peacefully and devoid of conflict. Not only does the state fail to aid this process, it is the active cause of its destruction – and the sooner we recognise this then the closer we will be to building a lasting peace and prosperity.
Author’s Note: This is the first in a series of short posts which will seek to rebut popular, but wrong, economic beliefs.
One of the positive indicators of our so-called economic recovery bandied about not only in the media but also by our monetary lords and masters at the head of central banks is the idea that rising prices are a sign of economic recovery. This mistaken belief is part of a wider myth that views the economy as little more than a giant number – a number which, if going up, means things are good and getting better, and if going down means the situation is bad and getting worse.
Theoretically the market price for any good is never “good” or “bad”; it is simply a function of the supply and demand for that good. The only way in which we can say that the market price is “good” is that both parties to a transaction are satisfied with that price and, thus, both have received an increase in welfare as a result.
That aside, however, surely economic progress is marked by an increasing abundance of goods and services – that more and more stuff is being produced for each hour of work? Therefore, if goods and services are increasing in supply then shouldn’t this lead to decreasing prices rather than increasing prices? If so, then increasing prices must indicate the opposite – a decreasing supply of goods relative to the money used to buy them and, consequently, greater impoverishment.
Contrary to the “wisdom” of so-called experts, such facts are intuitive – stop any number of strangers in the supermarket and they will almost certainly tell you that they want everything on the shelves to be cheaper, not more expensive. They will tell you also that they would be better off if they could buy more with the money they have in their pockets rather than less. Thus it is a travesty for economists and talking heads to call for even a “modest” degree of price inflation unless they are keen to promote destitution. Such inflation means that those of us with fixed incomes are forced to sit by and watch the purchasing power of our wages drop, unable to continue to afford to buy things because the “recovering” prices put them out of our reach.
The “recovery” of rising prices is just as ridiculous when it refers to rising asset prices rather than consumer prices. This kind of “recovery” has nothing to do with whether life is getting better for Joe and Jane Average. Rather, it means that there has been a localised recovery and improvement for a select group of people – those who borrowed cheap money heavily during the boom (mostly the politically connected big banks and investment houses) and ploughed it into stocks, bonds, property, etc. They can now breathe a sigh of relief as the prices of those assets once again begin to rise with the new round of monetary inflation.
In the UK this can be seen most clearly in the specific arena of house prices. Rising house prices are great for those who already own houses, boosting their wealth and allowing them to take out second mortgages or other equity release schemes to finance increased spending on their lifestyles. At some point, however, the prices rise so much that purchasing a property becomes an almost impossible expense for those who are not yet on the so-called “property ladder”. Government schemes to help “first time buyers” simply exacerbate the situation as they permit more money to chase the existing stock of housing.
A general economic recovery is not based upon rising consumer or asset prices buoyed up by paper money. It is created by a sound monetary order that allows entrepreneurs to allocate resources to where they are most urgently desired by consumers and to, slowly but surely, increase the economy’s accumulation of capital goods. The result should be a gradual secular price deflation as more and more goods are produced, meaning that the money in the hands of the lowest earners gradually increases in value. Consequently, everyone grows wealthier and more prosperous instead of just the super rich.
Together with other free marketeers, Austro-libertarians are adept at explaining the inefficient and destructive nature of the state. This compulsory aegis of taxation and redistribution destroys economic progress and the standard of living, siphoning off an increasing quantity of the fruits of our labour into vast bureaucracies. For our efforts, control and regulation of every aspect of our lives with a fine tooth-comb is all we can expect in return.
Such an enormous concentration of wealth and power could never be attained by a private individual (or even an institution) in a genuine free market. What’s more, the state seldom shies away from any opportunity to extend its destructive influence not only within its own territory, but also overseas with armies, navies, air forces and all of the destructive fire power they can carry.
To any one individual the state can seem like an awesome, overwhelming entity – if only because it professes to do so much for us.
In the UK, for instance, the government provides your with your banking infrastructure, your healthcare, your transportation networks, educates your children, and supposedly is the guardian of your health, safety and well-being from greedy, unscrupulous companies which might seek to defraud you. Moreover, should you get on the wrong side of the state, its uniformed police force can arrest you, its black robed judges can imprison you, and, of course, it promises to do the same to all of the people who attempt to commit a crime against you. And who could fail to be overwhelmed by the state’s vast, impressive edifices such as the Houses of Parliament or the US Capitol, together with their patriotic pageantries (such as Presidential inaugurations) which inspire a turnout of millions?
This article will in no way dispute the fact that the state is something to be feared. Indeed, one need only contemplate the fact that a handful of states are sitting on a nuclear arsenal sufficient to destroy the worlds tens of times over.
What we will explore here, however, is the fact that the monopolistic, overreaching nature of the state is both its source of power yet also its Achilles’ heel. That, far from being a lean, mean, fighting machine, the state more often acts in a bumbling, bloated and altogether rather stupid manner.
First, the state is severely handicapped by its very nature as a monopolistic force. Shorn of much need to compete in any areas in which it decides to wade, it is burdened by a natural tendency to languish in laziness and inefficiency to a degree which renders it extremely vulnerable. Britain’s NHS, for instance, suffers from repeated crises of chronic shortages and supposed underfunding year after year. This is in spite (or perhaps because) of the fact that it is the world’s fifth largest employer, with its pre-COVID spending consuming as much as 7 to 8% of Britain’s GDP.
Or take the highly cartelised commercial banking sector. In the UK, most salary and routine business payments are made through the BACS network, the infrastructure for which dates from the 1960s. In our age of instant communication, this system can still take three days to transfer funds between bank accounts. According to entrepreneur Simon Black (whose frustration with the service offered by established banks led him to establish his own), the Society for Worldwide Interbank Telecommunication (“SWIFT”) was using Windows Vista as its platform as late as 2017. By that time, Microsoft was no longer supporting the operating system. How is it possible for the world’s premier financial network to be using software more outdated than that available to any private individual on a recently purchased laptop or smartphone?
The answer, of course, is that these organisations are simply removed from any genuine competitive pressure to innovate or to stay ahead of the game. With a continued supply of tax dollars and/or the blessing of state privilege, they see no impetus to maintain the highest standards that would ensure their efficiency.
Such lack of standards spreads also to the quality of the personnel in these organisations. Bureaucrats – who are more or less promised a job for life so long as the avoid making a major mistake – have little incentive to develop their knowledge and skills. As such, they are unlikely to possess the drive of private entrepreneurs, who keep a sharper eye on the game. This is one reason why (in spite of all of the hullabaloo from politicians seeking election) tax and regulatory loopholes will always exist: the people finding and exploiting them have a keener motivation than those who are supposed to close them.
This is not to imply, of course, that politics is not a competitive arena. However, the nature of competition in politics is very different from the nature of competition in the free market.
In the latter, people are certainly competing, but the objective of that competition is to create more goods and services for the benefit of consumers. As such, market competition is positive sum – the more that is created, the more opportunities there are for everyone. What is gained by one person doesn’t come at the expense of anybody else.
It is true, of course, that some companies may prosper while others go bankrupt – and obviously there can only be one CEO of any particular company at a time. But even if one company should collapse, the process of wealth creation furnishes us with the wherewithal for new enterprises to be started - businesses which will exploit opportunities which are yet to be explored. In the free market, one door closed is two more opened.
Politics, however, is a zero-sum game. The power possessed by one individual is necessarily taken from another; money handed over to one set of beneficiaries has necessarily been taxed (i.e. confiscated) from another set. There can only be one President of the United States or one Prime Minister of Great Britain, and there is only so much landmass on the Earth from which to fashion powerful states. The process of politics will never create an unlimited number of opportunities to lead a great country.
The budding politician, therefore, must necessarily gain from what anyone else loses; in this eliminative game, he must ensure that no one else is able to beat him to the top job. Thus, politics is a poison for any genuine co-operation or betterment; ultimately, everyone is the enemy of everyone else. The only co-operation that does exist is in the transient form of favours, bribes or other “tit-for-tat” arrangements, with relationships susceptible to a sudden backstabbing by the more ruthlessly ambitious partner. With such a widespread lack of trust serving as the foundation for the state, it becomes impossible for it to operate as a fast, efficient and unified whole. In fact, private citizens can often be thankful for the feuds and foibles of the fiefdoms and factions craving state power; if they are so busy stamping on each other, they have little time left over for plundering everyone else.
Given that state power is inherently eliminative and unproductive, creating the wherewithal to exercise that power is - ironically - highly dependent upon a vibrant and efficient capitalist economy. The only reason we are now threatened with digital regimentation and surveillance is because our level of capital accumulation and technological advance has produced the complex goods that make these things possible. The warped commitment of our leaders leaders today is not only to the exertion of a greater degree of socialisation and control, but also to deindustrialisation and impoverishment in the name of greenery and “saving the planet”. But to press for these aims is to sign the death warrant of the infrastructure that enables systematised power and control. Without maintaining the extent and structure of the capital stock that feeds an efficient economy, there will be no internet, no smartphones, no CCTV, no facial recognition, no microchips, no nothing. The result of this is that people will have a greater ability to wrest themselves free of state power long before the only things left to enforce it are bows and arrows.
This leads us neatly onto to the state’s second major stumbling block: that statist intervention can never produce any positive achievements (or, at the very least, it can do so only with significantly inflated cost). All of the state’s declared aspirations – the conquest of poverty, affordable healthcare, employment for all, safety and security in retirement, the vanquishing of crime, and so on – are beyond the state’s reach for one, very simple reason: these things cannot be achieved through the means of wealth redistribution.
In fact, because there is no way in which the state can genuinely make a positive difference for the whole of society, the state can survive and thrive only by making problems worse rather than better. If society continues to experience degradation and destitution, the state can swoop in so as to declare itself the saviour. It is better for the state, for instance, for people to be kept poor so that they remain dependent upon government handouts. It is better for the state to disarm its citizenry so that the latter present no threat to the state’s own armed guards (but at the cost of increasing crime, resulting in bigger budgets for the state’s monopolised provision of law enforcement). It is better for the state if more people are sick so that increasing sacks of cash can be siphoned off into its wasteful, inefficient healthcare bureaucracies.
Unfortunately this perverse incentive is fed by the fact that many people see the state’s failings as a reason not for cutting the state down to size, but for lending it even more power.
One reason for this peculiarity is that – in our “mixed” economy dominated by publicly connected, but nominally private actors – the symptoms of state failure tend to be far removed from the state itself. As such, one has to follow a chain of cause and effect in order to identify the true culprit.
For instance, when the government inflates the money supply, prices are likely to rise. However, because it is businesses who actually implement any increase, all of the blame is heaped upon their alleged “greed” and “profiteering”. Similarly, if state mandated minimum wages result in unemployment, the only thing that the public can see is those same, evil businessmen refusing to lower their profits so as to hire more workers.
Much of this is also due to the fact that the advent of democracy has weakened the distinction between the state and the people – i.e. between “us” and “them”. Rather, through our voting rights, we believe that the government either belongs to us as our servant, or is an integral part of us as a nation. As such, any notion of the state harming its people amounts, effectively, to an accusation of self-destruction. Avoiding the cognitive dissonance of this conclusion simply causes most people to default to incorrect, but psychologically comfortable explanations for their woes.
Here, again, however lies another of the state’s weaknesses. As the growing backlash against globalisation and political gigantism has revealed, that crucial feeling of unity with (and control of) the state begins to dissolve if the state becomes too big and bloated. If decision making authority is delegated upwards to supranational institutions, people begin to withdraw their consent to be governed by foreign technocrats who seemingly have little interest in people’s priorities. In short, a clear perception of “us” and “them” re-emerges. A major motivation for the Brexit vote, for instance, was to repatriate decision making authority from Brussels, suggesting that the degree to which power can be removed from its proximity to the people is finite. Such a limit is serving to frustrate the unifying, globalising and bureaucratising ambitions of political elites.
Indeed, it is now unlikely that these ambitions will ever be fulfilled in their totality, in spite of the continued attempt to weaponise crises (such as COVID) in favour of greater centralised decision making. Given that smaller states and state entities are, all else being equal, weaker than larger ones, the impossibility of excessive centralisation suggests that there will always be an upper limit to the state’s power vis-à-vis its citizens.
Majority vs. Minority
This leads us onto our third and final major point which is that the state – or rather the people who can be said to form it – are a minority of the citizenry. As a parasitic entity, it is simply impossible for the state to be comprised of the majority. The vampires will always be outnumbered by those pumping the blood they crave.
Contrary to popular belief no state has ever retained power as a result of force alone; rather, the sustenance of state rule is dependent upon – at minimum – the tacit acceptance of the majority of the citizenry. Although the fear of force may certainly help the state to attain that tacit acceptance, the state only has enough resources to dispense actual force against a bare minority of rebels and upstarts. In order to ensure sustained, widespread compliance, the state has to ensure that its subjects are kept within the confines of a general degree of contentment – either materially, or, preferably, through the conviction that state rule is legitimate. In other words, even though people may mumble and groan about the state’s inadequacy in this, that or the other, they can find no reason for upsetting the apple cart.
The Brexit vote and, we might suggest, the election of Donald Trump are instances of when contentment with the status quo was exhausted in the minds of at least a significant proportion of the population. Although – as is now clear – the beneficiaries of that status quo are refusing to go down without a war, each of these instances shows that they cannot win every battle. Once the people decide to exert their preference for a particular direction with ferocity, then the state has no choice but to yield. Whichever plundering/pillaging/controlling/regimenting/surveillance plans that the state has in store for us ultimately cannot succeed without our compliance. Indeed, it was the elites’ frenzied reaction to both Brexit and Trump which demonstrated how truly scared they are of popular resistance.
The bumbling, bloated nature of the state is indicated by a joking phrase apparently made by the industrialist Charles F Kettering - “Thank God we don’t get as much government as we pay for”. Indeed, if all of the wealth and resources that the state commands were actually put to use effectively and efficiently, then it truly would be a terrifying, formidable obstacle.
Unfortunately, however, the state’s capacity for buffoonery leads also to what we might call, informally, the “cock up theory of history”. When certain key individuals are able to dispense a degree of power disproportionate to their abilities, it is not only the effects of their conscious decisions that become magnified – so too do their mistakes. So whereas statists would have us believe that great leaders and statesmen shape the world’s events for the benefit of humanity, we cannot overlook the fact that anything significant that has happened in history is, at least, equally attributable to accidents and mishaps. And it is with cock ups that the true danger of the state may lie.
One of the most infamous of these mistakes occurred in 1983 at the height of the Cold War when the Soviet nuclear early-warning system reported the launch of intercontinental ballistic missiles from the United States. The Soviet officer monitoring the system at the time, Stanislav Petrov, interpreted the warnings to be the result of a computer error – a belief which was verified by a subsequent inspection. Petrov’s refusal to act on the false warnings prevented a Soviet retaliatory attack which would have almost certainly elevated the Cold War into a full scale nuclear holocaust. In other words, the annihilation of human existence was averted by the prudential actions of a single individual who refused to trust his government issued equipment.
When the state today still handles so much (and handles it so very very badly) the possibility of such a mistake going the other way remains very high indeed – all the more so when East and West, once again, are running headlong towards nuclear tripwires. Given the exceedingly poor quality of our statesmen today, can we expect them to show the same kind of caution displayed by Colonel Petrov?
It is for this reason more than any other that the state should be regarded as dangerous. So much power in the hands of so few people is at risk of one them making a simple error. As awesome as the state may be, our fate may be in the hands of its stupidity as much as its evil ingenuity.