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Economics, Philosophy, and Politics

Mises Daily: Wednesday, February 25, 2004 by


Interviewed by Emrah Akkurt, Turkey-Association for Liberal Thinking. To be published in a forthcoming special issue of the economic journal Piyasa on socialism.

Akkurt: How did you come to be a libertarian and which thinkers were most important in shaping your ideas?

Hoppe: As a young man, a 'Gymnasiast' in Germany, I was a Marxist. Then, as a student at the University of Frankfurt, I encountered Boehm-Bawerk's Marx critique, and that finished Marxist economics for me.

Consequently, for a while I became somewhat of a skeptic, attracted to the positivist and especially the falsificationist Popperian methodology and to Popper's program of piecemeal social engineering. Like Popper himself, at this time I was a right-wing Social democrat.

Then things changed fast. First I encountered Milton Friedman (pretty good), then Hayek (better), then Mises (far better still, because of Mises's explicit anti-positivist—aprioristic—methodology), and finally, Mises's most important theoretical successor, Murray N. Rothbard.

Akkurt: To what extent did your formal education overlap with your being a libertarian?

Hoppe: I did not learn libertarianism or free market economics at the university. My professors were either socialists or interventionists. To be sure, occasionally (rarely) the names of some free marketeers were mentioned: Boehm-Bawerk, Mises, Hayek, also Herbert Spencer as a sociologist. However, they were dismissed as outdated apologists of capitalism, unworthy of anyone's serious attention. So I had to discover everything pretty much on my own through lots of reading (much of which in retrospect appears like a waste of time).

Today, you can click on mises.org and everything is right at your fingertips. Matters have definitely improved in this regard.

Akkurt: In the early years of the century, 'capitalist' economists were in an apologist position. This was true particularly before Mises's criticisms began. Mises's writings were decisive in bringing socialists to today's 'apologist' position. Mises's writings also gave way to a distinct Austrian economics, apart from the neo-classical paradigm. During your formal education, did you think that Austrian economics was, or should be distinct from neo-classical thinking. How was the process of passing from criticism to an alternative approach?

Hoppe: Until the 1950s, the majority of economists shared the view concerning the nature of economics which had been expressed by Lionel Robbins, in his famous Nature and Significance of Economic Science (1932). Robbins, who had been heavily influenced by Mises at the time, there presented economics as some sort of applied logic (Mises would call it 'praxeology'). It started with a few simple and obviously true premises (axioms) and then proceeded by means of logical deduction to various conclusions (economic theorems). These conclusions or theorems were, provided no mistake had been made in the process of deduction, logically true, and it would be a category mistake if one wanted to 'empirically test' such theorems. (We also do not 'empirically test' logical truths and arguments, or mathematical propositions. For instance, we do not empirically test the law of Pythagoras, we can prove it deductively, and he who wanted to 'prove' it empirically, by measuring angles and lengths, would not be considered 'more scientific' but rather as totally confused.) Today, only the "Austrians" still defend this (in my view correct) view of economics as applied logic.

Since the 1950s, largely due to the influence of Milton Friedman, the majority among economists has adopted instead the 'positivist' view that economics should try to imitate the methods used in physics. As a result, modern economics has become either low-level mathematics with no empirical meaning or application whatsoever. Or else it builds and tests so-called models, thus 'proving' (at best) what is already obvious to everyone, such that water is running downward, or showing by empirical means what can be established logically (like confirming Pythagoras' law empirically). However, in many cases, and by the same method, they also empirically 'prove' that water sometimes runs upward and, absurdly, that the law of Pythagoras sometimes doesn't hold. In short, modern mainstream economics is in a state of total confusion.

When I began to study economics I was taught the positivist methodology along with it. However, from the outset I was unconvinced. The law of marginal utility, or the quantity theory of money, or the statement that if one increases the minimum wage in the US to $500 per hour mass unemployment would result, did not appear to me as questionable hypotheses which required any empirical testing, but as straightforward logical truths. It took me a while to find out that this was actually the classic view, espoused most explicitly by Robbins and Mises. Discovering Mises and Robbins thus came as a great intellectual relief to me, and it first made me take (and study) economics seriously.

Mainstream economics is irrelevant, but open to the idea of social experimentation and engineering (how else can one test one's hypotheses?). That's why the modern interventionist state is willing to fund the entire exercise. In contrast, Austrian economics is of great practical importance, but it is generally opposed to economic interventionism as counter-productive. Not surprisingly, then, AE receives little or no state support. Nonetheless, I am optimistic that mainstream economics will eventually die due to its own irrelevancy (articles in famous mainstream journals have practically no reader) and be displaced by AE. Already, the Mises Institute website has more readers than any comparable mainstream-economics site.

Akkurt: In its modern version, Austrian economics, with its emphasis on property rights, entrepreneurship and freedom have natural allies among different schools of economics. For example, the property rights approach of Alchian and Coase come mostly to similar policy positions with Austrians. Do you think, Mises's writings were somehow influential on the emphasis on property rights and market based approach besides Austrians. Was there a visible link between Mises and some of these people?

Hoppe: I am not aware of any intellectual link between Mises and the modern Chicago law and economics school, in particular Coase, and in his footsteps, Richard Posner. On the other hand, Hayek was one of Coase's professors at the London School of Economics.

In any case: I believe the similarity between the Austrian and the Chicago view of law and economics to be merely superficial. In reality, both intellectual traditions are fundamentally opposed to each other. It is a common but serious error to think of the Chicago school as a defender of property rights. In fact, Coase and his followers are the most dangerous enemies of property rights. I know, this may sound unbelievable to some people. Thus let me explain, using one of Coase's examples from his famous article on "Social Cost."

A railroad runs beside a farm. The engine emits sparks, damaging the farmer's crop. What is to be done? From the Austrian (and the classic as well as the commonsensical) viewpoint, what needs to be answered is who established property first, the farmer or the railroad? If the farmer was there first, he could force the railroad to stop emitting sparks or demand compensation. On the other hand, if the railroad was there first, then it may continue emitting sparks and the farmer would have to pay the railroad to be spark-free.

Coase's and Posner's answer is entirely different. According to them, it is a mistake to think of the farmer and the railroad as either 'right' or 'wrong' (liable), as 'aggressor' or 'victim.' Let me quote Coase from the very beginning of his famous article. There he says "the question is commonly thought of as one in which A inflicts harm on B and what has to be decided is, How should we restrain A? But this is wrong. We are dealing with a problem of a reciprocal nature. To avoid the harm to B would be to inflict harm on A. The real question that has to be decided is, Should A be allowed to harm B or should B be allowed to harm A? The problem is to avoid the more serious harm." Or put differently, the problem is to maximize the value of production or 'wealth.' According to Posner, whatever increases social wealth is just and whatever doesn't is unjust. The task of the law-courts, then, is to assign property rights (and liability) to contesting parties in such a way that 'wealth' is maximized.

Applied to our case this means: if the cost of preventing sparks is less than the crop loss, then the court should side with the farmer and hold the railroad liable. Otherwise, if the cost of preventing sparks is higher than the loss in crops, then the court should side with the railroad and hold the farmer liable. But more importantly, this means also that property rights (and liability) are no longer something stable, constant and fixed but instead become 'variables.' Courts assign property rights depending on market data. And if these data change, courts may re-assign such rights. That is, different circumstances may lead to a re-distribution of property titles. No one can ever be sure of his property. Legal uncertainty is made permanent.

This seems neither just nor economical. In particular, this 'variable' way of assigning property rights will certainly not lead to long-run wealth maximization.

Akkurt: In some of your work, you emphasize that Hayek stresses the role of knowledge and ignores or neglects private property. Do you think Hayek deliberately ignored, and underemphasized the crucial place of private property? Would you describe your view of property and knowledge in an entrepreneurial economy briefly to our readers.

Hoppe: Hayek was indeed always, from his student years on, interested in psychology. He wrote an interesting book on it (Sensory Order). This may explain his special emphasis on knowledge and his relative neglect of property. For instance, Hayek wrote a famous article on the "Use of Knowledge in Society." Mises never would have written an article with that title. His title would have been the "Use of Property in Society."

In the famous socialist-calculation debate, Hayek often conveyed the impression that socialism's central problem was the 'impossibility' of centralizing in a single mind (the central planner's) all of the knowledge that existed dispersed in the heads of a multitude of separate individuals. What I pointed out instead, in agreement with Mises, is that socialism's central problem is that of centralizing (concentrating) a multitude of physically dispersed and individually owned properties into the property of one single agency (of the socialist state). It is this concentration of all property in one hand that makes economic calculation impossible. Because where there is only one owner of all capital goods, there is no buying and selling of such goods; hence, no capital goods prices exist and monetary calculation is impossible.

And as for the special, individual knowledge of time and place, emphasized by Hayek, it is important to keep in mind that this knowledge is essentially the result—or the epiphenomenon—of an underlying diversity of private property. It is our property and the requirement of having to continuously act within the constraints of our property, that first influences what knowledge (out of an abundance of overall knowledge) is important for us to know and that further directs, shapes, and individualizes our interests and quest for knowledge.

An entrepreneur risks his own property in the attempt to satisfy some future, expected buyers' demand better than others do. If he succeeds, he will earn a profit, indicating that he has served consumers well. If he fails, he will make a loss, indicating that he has served consumers badly. Because they risk their own property, entrepreneurs are generally careful and circumspect in their investment and try to avoid any waste. 'Bad' (loss-making) entrepreneurs will sooner or later go bankrupt and become employees (instead of being an employer), and their mal-invested capital goods will be bought up (at appropriately lowered prices) by other or new entrepreneurs.

By the way: In contrast, government officials do not produce anything consumers demand (otherwise they would not need taxes to finance themselves; they would simply sell whatever 'goods' they had to offer and live of[f] the sales-revenue). Government officials spend their tax-revenue on what they think is good, not on what consumers think good. Moreover, government officials, who do not spend their own money, but the money coercively taken from others in the form of taxes, are typically careless and wasteful in the management of such funds.

Akkurt: What are your views on the public choice school. If I am not wrong you criticize James Buchanan for defending the state. Would you briefly describe your view on this issue. Why is there a tension between your thinking and public choice?

Hoppe: The Public Choice school—most notably Buchanan and Tullock—is typically credited for the insight that people within government are just as much self-interested as people outside of government, i.e., in private business. People do not change their nature and become less self-interested upon becoming a government official.

Now this is of course a fundamentally correct insight. But this insight is not new. You can find it all over in the literature. Certainly 'realist' political sociologists such as Gaetano Mosca and Robert Michels knew this much, and 'Austrians' knew it too, of course.

What is new about the Buchanan-Tullock school is its theory of the State and political (as contrasted to economic) action. However, this innovation is patently false.

Buchanan and Tullock think the State is essentially a voluntary institution, on a par with private business firms. They claim that 'the market and the State are both devices through which cooperation is organized and made possible.' (Calculus of Consent, p. 19) And since the State is like a firm, Buchanan then concludes in his Limits of Liberty, whatever happens in politics, every status quo, 'must be evaluated as if it were legitimate contractually.'

Now, I regard all of this as dangerous nonsense. Until Buchanan & Tullock, there existed almost universal agreement, regardless of whether one was a State-apologist or an anarchist critic of the State, as to the nature of the State, i.e., what a State actually was. States were recognized as categorically different forms of organization than firms: unlike firms, every State fundamentally rested on coercion. Buchanan's claim to the contrary would have been regarded as a childish intellectual error.

The great Austrian economist Joseph Schumpeter (himself a member of the Lausanne rather than the Vienna or Austrian School) once remarked on views such as Buchanan's: a "theory which construes taxes on the analogy of club dues or the purchase of the service of, say, a doctor only proves how far removed this part of the social sciences is from scientific habits of minds." I wholeheartedly agree with this verdict.

Akkurt: Professor Hoppe, we now want to turn to more political issues. What is your opinion as a libertarian about the American intervention in Iraq. Do you think that the events that began with September 11 have become an unfortunate turn for libertarian thinking?

Hoppe: Libertarians have always known that crises, in particular wars, are good for the State and bad for liberty. Under the cover of an emergency the power of the State is increased and individual liberty restricted. This is exactly what has happened in the USA after September 11, with the passing of the so-called Patriot Act, the establishment of an office of Homeland Security, the quasi-nationalization of airports and airport security, etc.

Moreover, because crises are good for the State, States often if not always fabricate these crises. For instance, the evidence now appears rather convincing that US-President Roosevelt knew about the impending attack of Japan on Pearl Harbor. However, he didn't do anything about it, because he wanted the event to happen, so that he could present a 'reason' to the American public which would allow him to enter World War II—which is what he had wanted to do for quite some time.

As for Iraq, not everything is known yet. Certain is only that President Bush and his cronies are a bunch of shameless liars. But that came hardly as a surprise. For quite some time, I have been in the habit of expecting government pronouncements (in the U.S. as everywhere else) to be lies—until proven otherwise. It has become increasingly apparent, that the Bush-men had decided to go to war against Iraq long before September 11. But without September 11, it would have been impossible to do so, because of a lack of war-support in US-public opinion. September 11 provided the 'reason' to carry out the planned attack. Naturally, this makes you wonder if the Bush-men—like Roosevelt—knew about the event in advance and decided to use it to their advantage. I do not claim to know the answer to this question. In German publications, for instance, it has been reported that German 'intelligence' provided the U.S. with detailed advance warnings. It may take a long time before we find out what really happened.

In any case, the attack against Iraq has been the result of a strange mixture of evangelical missionary zeal, Zionism, and hard-nosed economic imperialism (oil) coming together in the Bush-men government. Iraq was simply the perfect target. Initially, there was considerable support for the Iraq war in the US, even though obviously no link existed between Saddam Hussein and Osama bin Laden. Of course, it is sad for libertarians to see one's neighbors lose their minds and clamor for the killing of people, and the destruction of their homes, they do not know and who have done them no harm. Slowly but surely, however, the Americans are recovering from this temporary loss of sanity and beginning to recognize that they have been betrayed.

There also have been so-called libertarians, affiliated with various organizations named after the novelist Ayn Rand, who have enthusiastically endorsed the Iraq war and even demanded that the U.S. go on and 'liberate' the entire Muslim world. The genuine libertarian position is a different one. Libertarians are not pacifists. But in their view, violence is only justified in defense, not to attack, and surely the U.S. did not act in self-defense against an attacking Iraq. True, Saddam Hussein was a 'bad guy.' But this does not make the U.S. invasion and occupation of Iraq an act of liberation. If A frees B, who is held hostage by C, this is an act of liberation. However, it is not an act of liberation if A frees B from the hands of C in order to take B hostage himself. It is not an act of liberation if A frees B from the hands of C by killing D. Nor is it an act of liberation if A forcibly takes D's money to free B from C. Accordingly, unlike genuine liberation, which is greeted by the liberated with unanimous assent, the U.S. occupation has been met with much less than universal enthusiasm by the 'liberated' Iraqis.

Akkurt: What do you think about the role of the state in society? Is it a practical necessity, or a necessary evil? How would you describe the transition from a statist model, like Turkey, to a classical liberal society?

Hoppe: We must first quickly define what we mean by state. I adopt what one might call the standard definition: a state is an agency that exercises a territorial monopoly of ultimate jurisdiction (for all cases of conflicts, including conflicts involving the state itself) and, by implication, of taxation.

Now: we have learnt in Microeconomics that "monopolies" are "bad" from the viewpoint of consumers. Monopoly is thereby understood in its classic sense as an exclusive privilege granted to a single producer of a commodity or service, i.e. as absence of 'free entry.' Only A is allowed to produce x. Any such monopolist is bad for consumers because, shielded from potential new entrants into his area of production, the price of x will be higher and the quality lower than otherwise.

Why should this reasoning be different when it comes to the State's monopoly as ultimate judge and law enforcer?! Given that the State is a classic monopolist, we must expect that the price of justice is higher and the quality lower than otherwise. Worse, because the State is the judge even in conflicts involving itself, it must be expected that the state actually causes conflict in order to then 'solve' it in his own interest. Yet this is not justice—a good—but injustice—an evil. So, to answer your question: No, I consider the State an un-necessary evil. In a natural order, with a multitude of competing insurance and arbitration agencies, the price of justice would fall and its quality rise. My two most recent books, in particular Democracy: The God That Failed and also The Myth of National Defense explain in considerable detail, how state-less societies—societies which run themselves - would operate and generate unrivaled prosperity.

What about transitional goals toward liberty for countries like Turkey? The answer I have is essentially the same for Turkey as for Germany, France, Italy or any other large country. Democracy or democratization is not the answer—as it was also not the answer in the countries of the former Soviet Empire. Nor is centralization—as it is happening in the EU—the answer. Maybe my book should be translated into Turkish!

To the contrary, the greatest hope for liberty comes from the small countries: from Monaco, Andorra, Liechtenstein, even Switzerland, Hong Kong, Singapore, Bermuda, etc.; and as a liberal one should hope for a world of tens of thousands of such small independent entities. Why not a free independent city of Istanbul and Izmir, which maintain friendly relations with the central Turkish government, but which no longer make tax payments to the latter nor receive any payments from it, and which no longer recognize central government law but have their own Istanbul law or Izmir law.

The apologists of the central state (and of superstates such as the EU) claim that such a proliferation of independent political units would lead to economic disintegration and impoverishment. However, not only does empirical evidence speak sharply against this claim: the above-mentioned small countries are all wealthier than their surroundings. Moreover, theoretical reflection also shows that this claim is just another statist myth.

Small governments have many close competitors. If they tax and regulate their own subjects visibly more than their competitors, they are bound to suffer from the emigration of labor and capital. Moreover, the smaller the country, the greater will be the pressure to opt for free trade rather than protectionism. Every government interference with foreign trade leads to relative impoverishment, at home as well as abroad. But the smaller a territory and its internal markets, the more dramatic this effect will be. If the U.S. engaged in protectionism, U.S. average living standards would fall, but no one would starve. If a single city, say Monaco, did the same, there would be almost immediate starvation. Consider a single household as the conceivably smallest secessionist unit. By engaging in unrestricted free trade, even the smallest territory can be fully integrated in the world market and partake of every advantage of the division of labor. Indeed, its owners may become the wealthiest people on earth. On the other hand, if the same household owners decided to forego all inter-territorial trade, abject poverty or death would result. Accordingly, the smaller the territory and its internal market, the more likely it is that it will opt for free trade.

Moreover, as I can only indicate but not explain here, secession also promotes monetary integration and would lead to the replacement of the present monetary system of fluctuating national paper currencies with a commodity money standard entirely outside of government control. In sum, the world would be one of small liberal governments economically integrated through free trade and an international commodity money such as gold. It would be a world of unheard of prosperity, economic growth, and cultural advancement.

Akkurt: What do you think about libertarian thinking in developing countries? Under the influence of [the] IMF and World Bank, do you think they may find their way to a more free market economy? Are you optimistic about the future for these countries, including Turkey, with respect to classical liberal values?

Hoppe: Mankind has been endowed with reason. Hence, we may always be hopeful that the truth will ultimately win. Whether or not one can be optimistic regarding any particular country, such as Turkey, depends on the answer to this question: How many, what proportion, of the members of one's country's intellectual elite have a firm grasp of economic fundamentals? And it is one of the central tasks of a liberal think-tank to produce and multiply such people and thus create reasons for optimism.

What must be understood in the 'developing' world is this. There exist reasons why some countries are rich and others poor—and these reasons have little to do with 'exploitation' of the poor by the rich (although such a thing undoubtedly exists, too). There exists only one way to general prosperity: through saving and investment. Rich countries are rich, because they have accumulated a large supply of capital goods per capita. Poor countries are poor, because they have accumulated little capital. Why is there a lot of saving-investment and capital accumulation in some places and little in others? Because in some places a relatively high degree of security of private property exists or has existed in the past, and in others private property is or has been under constant attack from confiscation, taxation, and regulation. Where private property is not secure, there will be little saving and investment.

Why is it that there is low or little private foreign investment in the so-called developing world, despite the fact that labor costs are much lower than in the U.S. or Western Europe? In the U.S., you hear constant complaints about 'jobs being exported' to low wage third-world countries. However, the amazing thing is how small this sort of export actually is. Again: a central reason why foreigners do not invest more in the developing world is the high insecurity of private property rights.

Moreover, it must be understood in the 'developing' world that a sound currency and monetary system is a highly important aspect of property security. Above all, a fundamental law must be understood: that an increase in the supply of government paper money cannot—never, ever—increase social wealth. After all, it is just an increase in the number of colorful pieces of paper. It does not create one single additional consumer or producer good. Otherwise, if more paper money could produce greater wealth, why is it that there are still poor people around? The only thing that inflation can and does achieve is a systematic re-distribution of existing social wealth in favor of government as the producer of the additional money and its immediate clients (and at the expense of those who must consequently pay higher prices while their own money income has remained unchanged). Paper money inflation is stealing and confiscating, and the governments of 'developing' countries have been the worst offenders against monetary security.

My advice to the undeveloped world: Acquire the reputation of a place where private property, including money, is safe (think of Switzerland, for instance). Then you will prosper. Otherwise you won't.

As for help from the IMF or the World Bank, don't count on it. Instead, these institutions are a major source of economic mischief and misinformation. They have been established by Western governments, foremost the U.S., in order to promote their interests. They are manned by thousands of 'expert' bureaucrats on well-paid jobs requiring little work and offering exotic perks. If they are economists, the 'experts' are most likely Keynesians; that is, for them, there exists no problem that paper money cannot cure. This bureaucracy is endowed with paper money which the US and its allied governments have 'created out of thin air' (printed up). It negotiates loans to governments of countries in financial trouble, presumably in order to get them out of trouble.

From this constellation the following prediction can be derived: Because it is not their own money or that of private investors that the international bureaucrats loan out, they have little or no interest that their policy proposals actually work and the loans be repaid. Worse, because it is 'governments in trouble' that are bailed out with loans, economic troubles and policies leading to such troubles are actually encouraged (think of Zimbabwe and Mugabe!). Perversely, then, the failure of their own policy-prescriptions provides a reason for the institutions' own continued existence and growth. What would the IMF do, if governments would not cause economic troubles?

Thus, cooperation with the IMF and the World Bank should be feared and avoided.


Hans-Hermann Hoppe is Professor of Economics at the University of Nevada, Las Vegas, Senior Fellow of the Ludwig von Mises Institute, and editor of the Journal of Libertarian Studies. His most recent book is Democracy: The God That Failed, and he is editor of The Myth of National Defense. His personal website is www.HansHoppe.com.