Table of Contents
All the economizing human actions this book has discussed so far have been voluntary. Part II discussed voluntary economizing actions individuals undertake on their own to improve the quality and quantity of their time. Part III explained the market system that emerges from social interactions individuals voluntarily undertake to improve the quality and quantity of their time. In each section, the individuals involved acted of their will and volition, whether individually or in concert with others. But that is not the only way for humans to interact. They can also improve the quality and quantity of their time on Earth by employing violence and the threat of violence against others. They may aggress against the body and property of others, with the aim of acquiring their property and possibly even their body. Violence and the threat of violence result in coercion: the imposition of one’s will on another.
Economics does not assume violence and coercion away, nor does it wish they were irrelevant. They are studied as a form of human action whose consequences are examined and contrasted alongside the consequences of voluntary exchanges. The fundamental difference between voluntary and involuntary interaction is that all participants in a voluntary interaction expect to benefit from it, whereas someone must expect to suffer negative consequences in an involuntary interaction (otherwise, they would not have needed to be coerced into it). A voluntary exchange may not always succeed in achieving the intended results of the actors. Coercion, on the other hand, guarantees that one party will suffer undesirable consequences. People who do not benefit from consensual interactions can readjust their erroneous expectations and refrain from partaking in them or can adjust their methods and hope for better results. But victims of violent coercions have no such ability, as their will is overruled by violence or the threat of violence. Coercive interactions can continue when the perpetrator does not suffer the negative consequences of their aggression.
In terms of undesirability, the negative impacts of coercive aggression can be likened to natural disasters or attacks by animals. And like natural disasters and animal attacks, humans have long sought ways of protecting themselves from such calamities. In the same way humans work, accumulate capital, trade, and innovate, they also learn to defend themselves and develop increasingly elaborate and effective mechanisms for protecting their body and property from the aggression of others. Chapter 17 details various defense strategies against aggression. The rest of this chapter examines one specific kind of aggression: government aggression.
In ethical and economic terms, there is a very important distinction between violence and the initiation of violence. Initiating violence violates the victim’s ownership of his body or property, leading to hostility and likely retribution on the part of the victim or the shunning of the perpetrator by others. This makes peaceful cooperation more difficult and prevents the growth of the extent of the market and the division of labor. The extent to which groups of individuals, small or large, agree to reject the initiation of violence is the extent to which they can live in a peaceful extended market order and benefit from the division of labor. The extent to which the initiation of violence is accepted by some members of a group is the extent to which conflict emerges and undermines the cooperation necessary for the market order. Aggression being legitimate for one individual or group but not others is not a moral standard that can be consistently applied across society.
Violence, on the other hand, can be considered ethically acceptable when deployed in self-defense to repel or punish initiators of aggression. Legitimate self-defense can also be considered compatible with an extended market order. Members of a market order can all cooperate in an extended market order if they all agree to one universal rule applicable to them all: the illegitimacy of initiating aggression and the legitimacy of self-defense. This asymmetry between violence and initiation of violence, and the implications for a market order, are the basis for the Non-Aggression Principle, which Rothbard defines as:
No one may threaten or commit violence (“aggress”) against another man’s person or property. Violence may be employed only against the man who commits such violence; that is, only defensively against the aggressive violence of another. In short, no violence may be employed against a nonaggressor.
The non-aggression principle is formulated and popularized by Rothbard and Austrian economists, but it has historical origins throughout history and across civilizations, as documented in a paper by Edward Fuller:
[A] large and diverse group of history’s most eminent thinkers have expressed ideas very similar to the non-aggression principle. The rudiments of the principle were known to the ancient Egyptians around 2000 BC, the ancient Hindus around 1500 BC, and the ancient Hebrews around 1000 BC. Around 500 BC, the ancient Chinese and Greek philosophers expressed the underlying logic of the principle. Cicero came close to articulating the principle in its modern form. Thomas Aquinas reasserted something strikingly similar to non-aggression after the Dark Ages, and the scholastic philosophers carried the idea into the early modern period. During the seventeenth century, the non-aggression principle rose to the pinnacle of Western philosophy.
Many economics textbooks, including this one, use the story of Robinson Crusoe on a deserted island to illustrate the realities of economic production and the benefit of peaceful cooperation. The origin of the story comes from a fictional novel, Hayy Ibn Yaqdhan, which is the work of Arab philosopher Ibn Tufayl, who used the premise of the story to explain how a human being can develop an understanding of morality, even if born alone in isolation from humanity.
Most mainstream schools of economics and politics present government as society’s solution to the problem of aggression. Since violence and aggression are ever-present, the only way to establish a civilized and peaceful social order in any territory is for an entity to establish a monopoly on violence. When all inhabitants of the territory accept the legitimacy of the monopolist (willingly or otherwise), acts of violence committed by any other entity are considered illegal and punishable by the monopolist.
The political and intellectual debates of the nineteenth and twentieth centuries mainly revolved around the proper role of the state in society and not its legitimacy or necessity. Mises and the classical liberals viewed the proper role of government as consisting of securing its people and their property and ensuring their safety from aggression and theft.
Government ought to do all the things for which it is needed and for which it was established. Government ought to protect the individuals within the country against the violent and fraudulent attacks of gangsters, and it should defend the country against foreign enemies. These are the functions of government within a free system, within the system of the market economy.
Under socialism, of course, the government is totalitarian, and there is nothing outside its sphere and its jurisdiction. But in the market economy, the main task of the government is to protect the smooth functioning of the market economy against fraud or violence from within and from outside the country.
By ensuring the security of property, the government would allow individuals to plan for the future, lower their time preference, accumulate capital, increase productivity, and improve their lives. But classical liberals argued that if a government failed to restrict its mandate to the preservation of property and enforcement of law and order, it would do more harm than good. Its interventions in the market economy would fail to bring about the intended ends, primarily because of the problem of economic calculation without clearly defined property rights (discussed in Chapter 12). If the government is the owner of the capital resources, then there is no market for these resources and no possibility of performing economic calculation on the alternative uses of these resources or determining how they can be allocated. When government bureaucrats make coercive decisions about resources owned by others, they do so blindly without knowledge of the most important factor that determines the allocation of resources: the subjective preferences of the individuals involved. Economic calculation without property rights results in the misallocation of resources, waste, and destruction of capital.
A staggering number of works have been written on the failures of government intervention in economic affairs, both by economists in the Austrian tradition and mainstream statist economists. The rest of this chapter will refer to several of the failure modes of some of the most common and popular forms of government intervention in individual decision-making in the capitalist economy. By using the lens of human action and understanding the properties of the emergent market order, we can identify the economic impacts of particular forms of government coercion.
Imposing price controls is arguably the most popular form of government intervention in the economy. It is a tempting solution to real problems that can have enormous implications, to the benefit of some and at the expense of many others. The rationale seems simple and compelling: If the price of a good is too high, the government can mandate a price ceiling, making it illegal to sell at a high price while forcing sellers to sell at a lower price. This way, people who are unable to pay the higher price can get the lower-priced goods. In Forty Centuries of Wage and Price Control: How Not to Fight Inflation, Robert Schuettinger and Eamonn Butler provide a highly informative historical account of the failures of price controls across four millennia and countless locales. A startling number of governments throughout history have taken this very course of action to deal with the prices of an endless array of goods, from foodstuffs to rent. There is no record of price controls succeeding in bringing prices down; instead, they only ever lead to shortages, black markets, and the emergence of highly wasteful methods of rationing the limited supply.
If price controls have any effect whatsoever, it is that they stop people from trading at a particular price they would have willingly traded at. When trade is prohibited at the market price, the producer will invariably become less able to produce the good. And without the revenue from the higher price, the producer will be unable to secure enough of the resources necessary to produce the good. Government coercion can force the producer to not sell under the minimum price, but it cannot force him to sell at the minimum price, as he can simply choose to stop producing. The effect of this intervention will invariably be reducing the supply of the good on the market.
Another likely effect is the emergence of a black market, where goods are sold illegally at higher prices. The black market helps secure the good for those who need it and it navigates around the damage caused by government intervention. But it also imposes waste on transacting parties. Rather than dedicate scarce resources to producing the desired good, producers must incur costs to arrange for the illicit sale and distribution of their good, and they must risk prosecution, confiscation, and imprisonment. Alternatively, dedicated organizations will emerge to arrange for the sale of the good, and a large part of the profits will be captured by these organizations, instead of being dedicated to investment in capital goods to produce more of the limited good. Price control does not magically alter the economic valuation of goods and their cost of production. It only makes it criminal to exchange the goods at the prices the producers are asking for. That constitutes a subsidy to the criminal sector in the economy. For people who are used to operating beyond the law, this is a lucrative business. Resources that could have gone to the producers to allow them more investment, will instead go to crime.
As shortages inevitably appear after price controls, the demand for the good will exceed the supply, necessitating new mechanisms for rationing supply among consumers. Queuing is one common mechanism wherein consumers spend time waiting in line until the good becomes available. Because time is scarce, queuing simply transfers the cost of the good from money to time. So, consumers will now pay for the good with the time they wasted, which cannot be captured by the producer to make more of the good.
For some other economic goods, violent government intervention will seek to impose a higher price on the market than the price emerging from voluntary exchange. This is most commonly exercised in the case of wages, where governments have long sought to mandate higher wages for workers. The failure of the minimum wage is explained in detail in Chapters 1 and 4.
The problem of prices almost always has its roots in inflation, which is a result of coercive government meddling in market money. As discussed in Chapter 10, money emerges on the market as the good with the best salability across time—the good most likely to hold on to its value over time. Since its supply can be reliably expected to increase at the lowest rate among all other market commodities, the value of money tends to appreciate over time, as relatively more of all other goods are produced than money. In such a world, prices of all goods would tend to fall in terms of money, while wages would increase in real terms even if they stay constant or decline in nominal terms. But with coercive intervention in the market for money, the value of money declines over time, forcing sellers to raise prices and depreciating the wages of workers. The story of inflation has long been the same, even when its mechanisms differ: From Roman emperors reducing the gold or silver content of their coins and replacing it with copper and other base metals, through modern governments printing large quantities of paper money to manipulating interest rates down to allow for the creation of credit beyond the savings of society. Inflation takes real wealth from savers, devaluing their money and raising the prices of the goods they purchase while allowing the government to spend with little constraint.
Mainstream schools of economics may admit to the problems of monetary inflation to money holders and the economy at large, but they view government spending as a good thing that can ameliorate these problems and help achieve better societal goals. They fail to properly consider the cost. Understanding opportunity cost, the subjective nature of economics, and the problems of economic calculation lead to the opposite conclusion. Any spending performed by the government must be financed by money taken from productive members of the market economy at the cost of their own spending. Individuals direct their spending to meet their needs best. Coercively taxing their income to spend the money on other uses cannot increase their well-being, as they would have chosen to spend that money elsewhere themselves. No government spending can be seen as voluntary as long as inflation and taxation are not voluntary. Thus, government spending is best understood as consumption spending for the people in government institutions; it is not an investment.
Another common government intervention is the dispensation of subsidies to people or the purchase of specific goods for them. The simplistic view here is to assume that government spending is costless and that governments can direct subsidies to improve the well-being of citizens. But economic analysis quickly dispels this. Government subsidies distort the market, influencing people’s decisions away from where their incentives and economic calculations would lead them. Subsidies lead to the overproduction and overconsumption of goods away from what people would freely choose when able to freely calculate. When subsidies are given to individuals based on their economic situation, they create a stronger incentive for people to choose the condition that makes them eligible for those subsidies. Welfare encourages those with low income to stay on a low income. Subsidies for the unemployed create an incentive for unemployment. Worse, by being financed at the expense of the employed, they also lead to the erosion of the incentive to work.
Government provision of goods and services is often presented as a solution to the problem of their lack of availability or affordability. Whereas private sector providers are concerned with profitability, government could do a better job, it is argued, by focusing on inclusion instead. This rationale is presented in favor of government provision of many goods and services, such as education, water, and healthcare, but it also misunderstands the basics of capitalist economic production. Profits are not just a mechanism for greedy people to get rich—they are what coordinates the entire structure of market production, allowing producers to calculate the costs and benefits of their various options while searching for a way to serve others the most and produce optimal gains for themselves. Eliminating the profit motive from economic production does not lead to selfless, abundant, and affordable production; it leads to a failure of economic calculation, causing large amounts of waste. Products might be undesirable, thus constituting a waste of resources. Or, if they are desirable, the absence of a free-market price will lead to overuse of the resources and problems with allowing users access to said resources. For instance, government-provided free roads end up packed with traffic, causing large delays for travelers that likely are more expensive than what they would pay to build private roads. And government-provided healthcare in places like Canada is notorious for making patients wait for very long periods before they can be seen by a doctor. Tellingly, as Canada has a free-market healthcare system for animals, it is astonishing that a sick Canadian pet will get seen by a doctor faster than its owner.
Government spending, beyond just being damaging to the economy by disrupting individuals’ private calculations of profit and loss, is destructive because it must be financed by taxation either directly or through inflation. Taxing producers to finance government spending penalizes economic production, thus, reducing the incentive to engage in it. The depreciation of savings reduces the incentive to save, and the taxation of capital gains reduces the incentive to invest. By making a person less able to provide for his or her future, governments counteract the process of lowering time preference, which is the driving force of human civilization.
Whether it be in price controls or crop subsidies or taxation, all government interventions involve the coercive perversion of some humans’ actions away from how they would be taken freely. Left to their own devices, victims of government coercion would spend their time and wealth on the ends they find most valuable, whether that be producing for themselves or others. Since economic value is itself subjective, perverting a human’s action away from his chosen course must be less subjectively preferred by him.
To their credit, most mainstream economists, particularly since the end of the Soviet Union, have demonstrated some understanding of the problems of government intervention in the economic system and its distorted impacts. Even the Samuelsonian textbook now incorporates a discussion of the problems of government intervention in markets. But the rationalization for interventionism continues unabated—only now it is presented in terms of governments solving for “market failures,” a term mainstream economists use to denote an outcome of free human interaction they do not favor.
Rationales for Government Violence
The modern rationales for government intervention are usually presented in the language of market failure: Left to their own devices, free individuals will produce outcomes that are inferior and suboptimal. The initial flaw of this approach is that the market is presented as an agent who failed to deliver on some desired outcome. But in reality, the market is an umbrella term humans use to refer to the actions of individuals enacting their own will to maximize their own satisfaction in life. The term “market failure” posits an omniscient central planner capable of deciding what would be the optimum outcome of individuals’ free interactions, then denouncing the actions of free individuals as inferior and in need of change. While couched in terms of the public good, methodologically, this approach simply consists of a central planner declaring their will to supersede the will of all freely acting individuals.
The conveyor belt of mainstream economists and their highly rewarded, unreadable papers published over the past few decades contains an inordinate amount of government propaganda masquerading as economic analysis. Their thinking all follows the same predictable script: An economist performs a large amount of theoretical or mathematical or experimental make-work, then concludes that freely acting individuals are producing something suboptimal to society as a whole, which they, in turn, call a “market failure.” They conveniently skip over the question of what allows an academic—who has to write government research grants to eat—to pass judgment on the ultimate ends of every other person’s actions and what goal they should meet. The collectivist methodology of this approach to economics presumes that valuations are objective and knowable to an impartial central planner. It also disenfranchises individuals by depriving them of the right to make their own decisions with regard to their property, capital, and consumption. By presenting economics as an objective mathematical function, when economic value itself has no unit with which it can be measured, government-funded economists can conjure any numbers needed to justify any form of aggression against the individual property.
The root of market failure analysis comes from the standard model of neoclassical economics, which tried to model the market process mathematically. Rather than follow the Austrian school method of individual action as the basis of understanding economics, modern economists, in a bold display of cargo cult science, attempted to copy physics. Most economics, since the 1930s government takeover of academia, has largely focused on trying to apply concepts borrowed from physics to John Maynard Keynes’ ideas to arrive at rationalizations of government and central bank policies. Mathematical economists attempted to impose a mathematical model from physics on economic reality, and whenever they were confronted with any of the countless insurmountable obstacles to mathematizing human action, they made a simplified assumption of a flattened economic reality in order to make it more pliable for math. Some of the most notable of these assumptions are 1) that all agents in a market system must possess complete knowledge; 2) that they are rationally selfinterested; and 3) that there is a state of perfect competition, with an infinite number of buyers and sellers for each market. These assumptions obviously do not hold in the real world, but mainstream economists have treated the assumptions’ inaccuracy as proof that markets fail rather than simply realizing that such mathematical models are useless!
With the “market failure” established, the economists then posit, without any evidence or analysis, that government intervention can correct this perceived market inefficiency. They then publish this nonsense in highly regarded journals, get jobs teaching it at a university, and collect accolades and prizes for providing the pretexts for government coercive intervention and aggression against private property. There is no cost to being wrong in fiat academia, and there is plenty of reward for being wrong in support of government power. The entirety of fiat economics can be likened to an elaborate scam of building up straw men, tearing them down, and using their demise to claim the land on which they stood as ownerless before taking it over.
Among the more fashionable rationales for economic intervention in recent decades has been the fallacy of “information asymmetry.” According to this enormous school of unreadable research, individuals who take part in a transaction do not possess complete knowledge of everything pertaining to the transaction, which often results in bad outcomes. This is a completely trivial statement of the obvious: It is impossible for a person to know everything the other knows. But this thought is presented as proof in support of coercive government intervention to allow trades to take place. Yet billions of market transactions take place each day worldwide, and the vast majority of them are to the satisfaction of both parties. One does not need to know everything to know what constitutes a beneficial trade—one simply needs to know their own preference for the traded goods. And, of course, this rationale ignores the problem of how the coercive regulatory authority happens to secure knowledge that is not available to both parties, and how an authority can use that knowledge to enforce, with the threat of violence, a superior solution to both parties. How, if the parties themselves do not have sufficient information, would a regulatory body in charge of all transactions in a society have the information for each transaction? And whose interest will this central plannerbe optimizing?
To the extent that information asymmetry is a problem in markets, it is a problem that is best resolved through voluntary means. Fiat economists’ favorite example of information asymmetry is the market for used cars—and yet a large industry of used car information has developed around the car industry to solve this problem. Car buyers prefer to buy cars with a car history report. Car owners, in turn, voluntarily choose to sign up for these services to increase the value of their car to potential purchasers. Thus, the market solves the supposed market failure in a completely voluntary manner. A multitude of product information services has emerged in all such industries to allow consumers access to the information about products: movie reviews, restaurant reviews, electronics reviews, and so on. Were these industries stymied from growing because of government intervention and regulation under the pretext of imperfect information, then how would that have benefited consumers and producers?
Among the newly emergent pseudoscience of behavioral economics, “irrationality” is another highly popular cluster of fallacies used to justify government coercion. Behavioral economists posit arbitrary and irrelevant criteria for what constitutes rational behavior and then test their university’s undergraduate students—as human lab rats and stand-ins for all of humanity—to see whether these criteria are fulfilled by humans. After the undergrads fail to give the researcher a result that meets his criteria of rationality, he smugly denounces the human race as irrational. Finally, he concludes that the only way to correct this behavior is through the coercive intervention of the government.
Economic rationality, though, cannot be studied in the context of a lab experiment, as it is inherently subjective and marginal. It pertains to individuals’ decisions at the time and place where these decisions need to be made, and in a lab setting, all decisions pertain to the lab, not to the real world. After all, the world is full of enormous complexity and countless factors that cannot be transferred to a lab. There is no reason to accept behavioral economists’ completely contrived experiments as an accurate reflection of the real world and the incentives of an experimental subject as being equivalent to real-world incentives. But even if one were to accept them, the bigger question remains: How can humans be irrational, but behavioral economists rational? If human biases distort rationality, why would behavioral economists be exempt? More significantly, why would the regulators who intervene in these markets be immune from this irrationality? And how much more destructive would it be if the irrationality is imposed at a coercive macroscale rather than restricted to them and the people who willingly and voluntarily choose to deal with them?
As the neoclassical economic model assumes perfect competition, another way in which markets fail is imperfect competition: The failure of markets to have an infinite number of suppliers and demanders for each market. Obviously, that is an impossible bar to clear. As long as the number of buyers and sellers is not infinite in any market—which, of course, it never is—then the market can be denounced as suffering from imperfect competition or monopolization.
This situation can only be remedied, according to statist economists, by having a monopoly on violence that forces all market participants to obey its edicts on how to operate in a market free of monopolies.
But markets do not tend toward monopolies, except through the use of coercive violence. Quite simply, individual producers who charge exorbitant prices cannot stop competitors from undercutting them—unless they resort to force. In decades of examining this question, I have never come across a single example of a monopoly provider whose monopoly status was secured on the market peacefully rather than through coercive intervention. It is always government rules and regulations that create monopolies, as they are the only barrier that can stop peaceful private enterprise. The irony here is that government mandates turn specific industries into monopolies, which then normalizes the idea that this industry inevitably can only function as a monopoly, making it a “natural monopoly.” But there is nothing natural about monopolies, and government regulation of monopolies is a problem masquerading as its solution, as Thomas DiLorenzo explains in an article that thoroughly refutes the basis of monopoly as a justification for government coercion:
It is a myth that natural-monopoly theory was developed first by economists, and then used by legislators to “justify” franchise monopolies. The truth is that the monopolies were created decades before the theory was formalized by intervention-minded economists, who then used the theory as an ex-post rationale for government intervention. At the time when the first government franchise monopolies were being granted, the large majority of economists understood that large-scale, capital-intensive production did not lead to monopoly, but was an absolutely desirable aspect of the competitive process.
Certain examples of monopolies often presented by economists refer to producers who managed to grow their share of the market by offering a vastly improved product to their competitors at a lower price. In this case, monopoly laws do not protect the consumer from a monopolist producer; they simply protect inefficient producers from more efficient ones. And they allow the inefficient to remain profitable without having to upgrade to the most efficient production mechanisms adopted by the market leader.
Externalities and Public Goods
Some of the most common rationales for government coercion are the fallacies of “externalities” and “public goods,” which are presented as unique goods that, by their very nature, can only be provided satisfactorily through government coercion. Most mainstream economic textbooks will concede that free-market capitalism is the best societal organization principle for the production and allocation of private goods. But these textbooks present “public goods” as a special kind of good for which markets are inadequate.
Externalities are positive or negative economic implications accruing to a person as a result of another person’s consumption or production decisions. Negative externalities can take the form of pollution or economic losses. Positive externalities can take the form of benefiting economically from activities others undertake, such as a hotel or restaurant enjoying outsized revenues thanks to a sports event taking place near their location. Or a real estate development agency witnessing a rise in the prices of its properties because a public park was opened on nearby land, making the properties more attractive to buyers. The use of externalities as a justification for government coercion is inadequate. Externalities are either violations of property rights, in which case they can be resolved by arbitration or an inevitable consequence of living in a society that offers no rationale for initiating violence. An example of the former is pollution. If a factory starts to release waste into neighboring properties, it is simply violating the property of its neighbors. The polluting act is the initiation of aggression, and the landowner who is its victim can resort to taking a legal action against the factory. In the same vein, virtually every economic activity in the market economy impacts others. Your buying the last piece of cake at your local bakery means others are unable to buy it. Your looking presentable and acting civil—as opposed to you looking and smelling awful—has a positive impact on people who deal with you. Any person can take an interest in any other person’s decisions and thus develop positive or negative utility from them, but never does that justify the initiation of aggression. Chapter 5 explained the rationale for private property and how it is the only consistent moral standard by which a society can function peacefully and productively. Participating in the market economy means economically interacting with a very large number of people and incurring countless externalities every day from their private decisions. The only way this economic and social system can operate peacefully is if all members exercise their sovereignty over their own property and accept the sovereignty of others over their own property. If the property owner does not violate the property of others, then the emotional state of people who do not own a good cannot possibly constitute legitimate grounds for the initiation of violence against the owner. This is a moral standard that can be enforced universally. A moral standard where people can control the property of non-aggressors will inevitably lead to interminable conflict and the unraveling of the foundation upon which civilized society rests: private property.
Public goods are defined as goods that are non-excludable and non-rival—terms closely intertwined with the concept of externality. Non-excludable is a term used to refer to the fact that it is not possible to prevent someone from benefiting from the good if someone else pays for it. In other words, the benefits of the good would accrue to the person who paid for it as well as to the person who did not pay for it, which would encourage everyone to not pay for the good, resulting in suboptimal production, i.e., underproduction. With government coercion forcing everyone to pay for the good, it can be provided to everyone in the necessary quantity. The fatal, unmentionable assumption here is that the economist and central planners can determine the optimal production of a good for society overall. They make the decision on behalf of everyone, fully cognizant of the trade-offs involved and the opportunity cost incurred for every single other person. But economic calculation can only be performed when capital resources are privately traded, so their prices can act as reliable signals for the market. Public goods are provided at the margin, and they require the dedication of labor and capital resources based on economic calculation. Abstract considerations about their value are immaterial if they cannot be translated into price through the free action of individuals as workers and capitalists.
A mainstream economics textbook presents the military and police, public parks, roads, lighthouses, fire brigades, and police as examples of non-excludable goods. If you were to move to a city in which you did not pay a single cent to produce these goods, you would still benefit from them. The army would still keep you and everyone in the town safe, and you could enjoy the parks and roads without paying a cent. Your goods would arrive on boats benefiting from lighthouses that you did not contribute to building. The fire brigade would extinguish a fire in your house, while the police would arrest criminals in your neighborhood, making it safer for you. Since society cannot exclude you from benefiting from these goods, the free rider problem emerges—everyone would like to benefit from these goods without contributing to their provision. Hence, mainstream economists conclude without government coercion to force people to pay for these goods, they would be underprovided.
And yet history is full of examples of these goods being successfully provided voluntarily as well as examples of these goods being provided wastefully and inadequately through violent government intervention. A voluntary provision does not always have to be provided through profit-seeking organizations. Countless forms of charity or voluntary associations can provide crucial goods without resorting to violent coercion. Countless public parks have been donated by landowners to their hometowns. Private parks also abound in many areas, where private organizations manage biodiversity and beautiful areas and protect them from the revenues generated from entrance fees and various experiences and products. These privately owned natural areas cover approximately 200,000 km2 in South Africa—roughly a sixth of the entire country’s area. There, fees are paid to enjoy natural areas. The historical record is full of lighthouses built by private entities that operate ports and financed through the fees charged to docking boats. The fact that some boats passing by the port can benefit from seeing the light without contributing to its construction is no impediment to its building, as it can still be economically useful enough for port users to pay for. In a pinch, operators of lighthouses can also turn the light off when free riders are benefiting from them to force them to arrange payments.
The fundamental problem with the externality argument is that it ignores the reality of how marginal economic decisions are taken. When deciding whether to purchase a good, a man decides by economically calculating the costs and benefits of this marginal purchase. If the benefits outweigh the cost, he purchases the good. It is immaterial to him whether others will manage to benefit from it or not. As long as the product does not involve violating the property of others, then the decision-maker has no reason to calculate other people’s benefits or losses from it. He will not choose to inconvenience himself just to ensure that others will not benefit. If the lighthouse is beneficial to the port owner, then docking boats will pay more for using it than it costs to build it, so he will likely build it.
Public roads worldwide suffer from congestion and degradation. The governments that build them can confiscate land and pay the price they deem necessary to owners, so central planners do not face an accurate cost accounting for the main resource they plan, meaning they do not have to pay the full market price for it. The result is an overproduction of roads that leads to the consumption of large amounts of land for roads, reduces the usable space of a city, and forces people to have to drive increasingly more as the city spreads out. Contrary to well-worn statist tropes, a world where governments do not provide roads would not be a world with no roads. It would simply mean that the providers of roads would have to pay the full cost for them, and the return from using the road to consumers and from repurposing the land for alternative uses would have to be high enough to justify paying that cost. No such calculation is possible when governments can confiscate land to build roads or impose a selling price on landowners. At the margin, such a policy will allow governments to acquire land at a cost lower than its market price. Further, the economic calculation is performed by people with a vested interest in more projects taking place, as that entails more funding in their hands. When no entity can buy land at a price it decrees, then the land will be allocated to economic uses and will not be overused in one particular avenue. Many roads are built privately, and by charging their users directly, the roads end up being far more functional, as they eliminate the costs of congestion on users by charging a price that keeps the road flowing with traffic. Walter Block’s work on the economics of roads is very useful here. The next chapter examines security and defense and why they are regular economic goods that do not require special provisions.
Non-rivalry refers to goods whose consumption by one person does not reduce the benefit accruing to other consumers. These are goods that can be provided to society as a whole or to nobody. A lighthouse, streetlights, and national defense are classic examples. A lighthouse benefits all boats passing by a seaport, even if the boat is not docking in the port and paying a docking fee to its owners. Boats passing by the lighthouse can all see its light and benefit from it, and they do not reduce the light for each other. Similarly, all pedestrians on a road benefit from streetlights, and their benefiting does not take the light from others. An army that protects the country from foreign invaders protects all members of society, and adding an extra member to society does not reduce the safety and security of other members. The military either stops foreign armies from invading for the good of all citizens or it does not.
On closer inspection, however, this also proves a faulty rationale for the initiation of aggression. If a good is truly non-rival, it would be a non-economic good. Rivalry is always present in economic goods, and the solution to that problem is property rights and the principle of non-aggression. Streetlights are simply part of the street, belonging to its owner, who charges for them as part of charging for access to the street. Even in the case of common streets—in urban areas that are owned by nobody—individuals who live on the street benefit from its light most, as do customers and visitors. For them, if the benefit of street lighting is worth investing in, they can invest, individually or collectively, through voluntary forms of association. The fact that they might not be able to stop passersby from benefiting is no justification for aggressing against all members of society in order to finance the streetlights. If one street’s residents can expect the rest of society to finance their streets, then all streets’ residents will expect the same. Rather than voluntarily deciding whether the costs outweigh the benefits individually, the collectivist solution places a central planner in charge of making that decision for all of society. Giving some people lights for which they pay very little and forcing others to pay for lights they do not use if their street is deemed unworthy of lighting. Ultimately, with property rights, nothing is non-rival. There is a limit to the number of people who can use a road and benefit from its lighting, and this rivalry is what motivates the road owner to optimize the infrastructure of the road. Doing so benefits him and the users he wants to have on the road.
It is also fallacious to assume national defense is non-rival. Defense from aggression and security are private goods, and each individual’s security adds to the burden of the security provider. The more territory that must be secured, the higher the cost of security. The more people live in the territory, the more possible targets of attack for enemies, and the more security risks come from the behavior of each added individual, whose actions can endanger the security of others.
In all of these examples, sloppy economic reasoning has its root in ignoring marginal analysis. It is tempting to speak of national defense, justice, roads, light, and the like in absolute and aggregate terms, but in economic reality, there are only marginal items, and individuals making the decision about the employment of capital resources to produce these goods at the margin. Whether it is a soldier, policeman, judge, road, or lamppost, there are only individual units being deployed, with an economic cost and benefit. Only through economic calculation with property rights can these resources be deployed productively and rationally.
Rationality in Economics
The root of market failure analysis comes from the standard model of neoclassical economics, which, as I have noted, tried to model the market process mathematically. To do so, economists made some ridiculous assumptions: That all agents in a market system must possess complete knowledge and be rationally self-interested; and that there is a state of perfect competition, with an infinite number of buyers and sellers for each market. The past seventy years of economics have primarily consisted of supposed geniuses receiving government paychecks to poke holes through this ridiculous mathematical model and then concluding that they have disproved the possibility of markets working.
A good metaphor here is to imagine that an economist is creating a mathematical model for the flight of a bird. To make the model computable, he makes simplifying assumptions, such as the weight of the bird is uniformly distributed across its body. With this assumption, some sort of simplified model of bird flight can be constructed and made conducive for exam questions. Market failure economists would then elaborately dispute the assumption and proudly proclaim that they have proven that … birds do not fly! They do not simply reject this model of bird flight as inaccurate—they reject the real-world phenomenon that the model is inaccurately conveying, even though they can see flying birds every day. Just as it does not matter that birds can actually fly, it also does not matter that billions of people worldwide partake in satisfying, mutually beneficial market exchanges daily. For the fiat academic, truth is decreed by the interests that conjure their fiat paycheck from thin air, not by reflecting reality. As long as an economist can point out a flaw in the ridiculous mathematical models of other economists, all the mainstream textbooks will faithfully regurgitate the holy mantras: “Markets fail!” and “The government fixes this!”
This becomes clear after reading Vernon Smith’s fascinating book, Rationality in Economics. An experimental economist who tested economic models in classrooms, Smith was definitely not an Austrian economist—at least not for most of his long career. But as he experimented with economic decision-makers, Smith arrived at the same conclusions that the Austrian economists had arrived at decades earlier. Even in artificial laboratory settings, Smith’s subjects could conduct beneficial trades and discover prices. And they did so without needing to meet the assumptions of the neoclassical model and without needing a benevolent central planner to dictate terms to them. Thus, markets do not need to meet the assumptions of the neoclassical model of economics to work; rather, it is the neoclassical model that needs these assumptions to compute. Real-world markets need these models as much as the sun needs astronomy to rise.
This realization led Vernon Smith to build on the work of Friedrich Hayek to distinguish between the results of human design and human action and how each can be understood to be rational in its own way. “Constructive rationality” is the term Smith uses to designate things that are designed consciously by human reason—an example being the design of a car or airplane. Engineers drew out every single detail of their design and manufactured it accordingly. By contrast, Smith uses the term “ecological rationality” to refer to phenomena that emerge out of human action and interaction—through an evolutionary process of variation and selection—without a specific designer decreeing the contours of the design. An example would be airplane routes, which are not designed by a planner from above, but instead, emerge out of an extensive process of variation and selection. In this case, countless airlines try many different routes and plans for connecting flights, but consumer choice ultimately decides which routes are profitable and which are not. Airlines then utilize market feedback—building new airports, launching new lines, optimizing for particular connections—to produce the highly sophisticated global web of airplane routes that blanket our planet. Hayek introduced the concept of spontaneous order to refer to these phenomena, which appear as the complex outputs of a designer’s work, but in reality, are the product of human action and interaction under a set of agreed-upon, abstract rules.
Hayek’s powerful insight is that so much of the order in our life, and the institutions on which we rely for our survival, is a spontaneously emergent product of human interaction—not the product of conscious human design. Language is perhaps the best example of this. While some modern languages, such as Esperanto, are constructed rationally, the vast majority of the world’s languages have no designer or founder. These languages emerged and developed over thousands of years, with generations of people learning them and making small additions and alterations, some of which survived while others were discarded. Hayek, the Austrians, and Smith contend that the capitalist market economy is also not the product of any one person’s design but the complex emergent phenomenon evolving from the actions of humans functioning under a set of abstract rules. Nobody designs markets or brings them into existence by fiat; they emerge in a world in which individuals are free to engage in the economizing acts discussed in the second part of this book. In a social order in which humans have justly acquired property and maintain ownership of their bodies, they are able to work, accumulate capital, increase their utilization of energy sources to meet their needs, and improve the state of the technology they use. In a society where humans respect each other’s property and reject the initiation of aggression, we can trade with one another, and from that emerges money, the division of labor, and the modern capitalist system. There is no conscious designer directing the development of a market economy; it is the spontaneous order emerging from the observance of the abstract rules that govern modern civilization.
Mainstream economists of the twentieth century completely miss this point. Instead, they imagine that markets are the products of rational design, like a car, table, or at least, something that can be improved with conscious top-down design. The fatal conceit here, to borrow Hayek’s term, is that by seeking to improve and mend the market economy with top-down planning, coercive action will undo and disrupt the basic abstract rules that are the foundation of the market economy. To that end, Hayek offers the Austrian perspective on the job of the economist:
The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design. To the naive mind that can conceive of order only as the product of deliberate arrangement, it may seem absurd that in complex conditions order, and adaptation to the unknown, can be achieved more effectively by decentralizing decisions and that a division of authority will actually extend the possibility of overall order. Yet that decentralization actually leads to more information being taken into account.
Mainstream fiat economists are quick to provide voluminous rationalizations for why markets fail, why humans are irrational, and why only coercive intervention can succeed in improving things. Yet closer inspection shows that markets function regardless of economists’ objections and that the real failure of markets occurs when coercive intervention, under alluringly altruistic pretexts, is used to try to fix these markets. Perhaps it is not market participants but economists who are irrational and who refuse to see the natural order of the market even as they rely upon it for their daily survival. But that is not a fair charge, for the reality is that the modern economist’s livelihood relies on attacking the market economy and rationalizing government interventions. Producing nonsensical research to justify government initiation of aggression is arguably, and unfortunately, the rational course of action for a professional economist in a world in which academia has been hijacked by the state.