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Advancing Austrian Economics, Liberty, and Peace

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Chapter 5—Binary Intervention: Government Expenditures (continued)

3. Resource-Using Activities: Socialism

     Socialism—or collectivism—occurs when the State owns all the means of production. It is the compulsory abolition and prohibition of private enterprise, and the monopolization of the entire productive sphere by the State. Socialism, therefore, extends the principle of compulsory governmental monopoly from a few isolated enterprises to the whole economic system. It is the violent abolition of the market.

     If an economy is to exist at all, there must be production in order to satisfy the desires of the consuming individuals. How is this production to be organized? Who is to decide on the allocation of factors to all the various uses, or on the income each factor will receive in each use? There are two and only two ways that an economy can be organized. One is by freedom and voluntary choice—the way of the market. The other is by force and dictation—the way of the State. To those ignorant of economics, it may seem that only the latter constitutes real organization and planning, whereas the way of the market is only confusion and chaos. The organization of the free market, however, is actually an amazing and flexible means of satisfying the wants of all individuals, and one far more efficient than State operation or intervention.

     Up to this point, however, we have discussed only isolated government enterprises and various forms of government intervention in the market. We must now examine socialism—the system of pure government dictation—the polar opposite of the purely free market.

     We have defined ownership as the exclusive control of a resource. It is clear, therefore, that a “planned economy” which leaves nominal ownership in the hands of the previous private owners, but which places the actual control and direction of resources in the hands of the State, is as much socialism as is the formal nationalization of property. The Nazi and Fascist regimes were as socialist as the Communist system that nationalizes all productive property.

     Many people refuse to identify Nazism or Fascism as “socialism” because they confine the latter term to Marxist or neo-Marxist proletarianism or to various “social-democratic” proposals. But economics is not concerned with the color of the uniform or with the good or bad manners of the rulers. Nor does it care which groups or classes are running the State in various political regimes. Neither does it matter, for economics, whether the socialist regime chooses its rulers by elections or by coups d’etat. Economics is concerned only with the powers of ownership or control that the State exercises. All forms of State planning of the whole economy are types of socialism, notwithstanding the philosophical or esthetic viewpoints of the various socialist camps and regardless whether they are referred to as “rightists” or “leftists.” Socialism may be monarchical; it may be proletarian; it may equalize fortunes; it may increase inequality. Its essence is always the same: total coercive State dictation over the economy.

     The distance between the poles of the purely free market, on the one hand, and total collectivism on the other, is a continuum involving different “mixes” of the freedom principle and the coercive, hegemonic principle. Any increase of governmental ownership or control, therefore, is “socialistic,” or “collectivistic,” because it is a coercive intervention bringing the economy one step closer to complete socialism.

     The extent of collectivism in the twentieth century is at once under- and overestimated. On the one hand, its development in such countries as the United States is greatly underestimated. Most observers neglect, for example, the importance of the expansion of government lending. The lender is also an entrepreneur and part owner, regardless of his legal status. Government loans to private enterprise, therefore, or guarantees of private loans, create many centers of government ownership. Furthermore, the total quantity of savings in the economy is not increased by government guarantees and loans, but its specific form is changed. The free market tends to allocate social savings to their most profitable and productive channels. Government loans and guarantees, by contrast, divert savings from more to less productive channels. They also prevent the success of the most efficient entrepreneurs and the weeding out of the inefficient (who would then become simply labor factors rather than entrepreneurs). In both these ways, therefore, government lending lowers the general standard of living—to say nothing of the loss of utility inflicted on the taxpayers, who must make these pledges good, or who supply the money to be loaned.

     On the other hand, the extent of socialism in such countries as Soviet Russia is overrated. Those people who point to Russia as an example of “successful” planning by the government ignore the fact (aside from the planning difficulties constantly encountered) that Soviet Russia and other socialist countries cannot have full socialism because only domestic trade is socialized. The rest of the world still has a market of sorts. A socialist State, therefore, can still buy and sell on the world market and at least vaguely approximate the rational pricing of producers’ goods by referring to the prices of factors set on the world market. Although the errors of even this partial socialist planning are impoverishing, they are insignificant compared to what would happen under the total calculational chaos of a world socialist State. One Big Cartel could not calculate and therefore could not be established on the free market. How much more does this apply to socialism, where the State imposes its overall monopoly by force, and where the inefficiencies of a single State’s actions are multiplied a thousandfold.

     One point should not be overlooked in the analysis of specific socialist regimes: the possibility of a “black” market, with resources passing illicitly into private hands.[16] Of course, the opportunity for black markets in large-sized goods is rather limited; there is more scope for such trade where commodities (like candy, cigarettes, drugs, and stockings) are easy to conceal. On the other hand, falsification of records by managers and the pervasive opportunity for bribery may be used to establish some form of limited market. There is reason to believe, for example, that extensive graft (blat) and black markets, i.e., the subversion of socialist planning, have been essential to the level of production which the Soviet system has been able to attain.

     In recent years, the total failure of socialist planning to calculate for an industrial economy has been implicitly acknowledged by the Communist countries, which have been rapidly moving, especially in Eastern Europe, away from socialism and toward an ever freer market economy. This progress has been particularly remarkable in Yugoslavia, which is now marked by private as well as producers’ co-operative ownership and by the absence of central planning, even of investments.[17]

4. The Myth of “Public” Ownership

     We all hear a great deal about “public” ownership. Whenever the government owns property, in fact, or operates an enterprise, it is referred to as “publicly owned.” When natural resources are sold or given to private enterprise, we learn that the “public domain” has been “given away” to narrow private interests. The inference is that when the government owns anything, “we”—all members of the public—own equal shares of that property. Contrast to this broad sweep the narrow, petty interests of mere “private” ownership.

     We have seen that, since a socialist economic system could not calculate economically, a die-hard socialist must be prepared to witness the disappearance of a large part of the earth’s population, with only primitive subsistence remaining for the survivors. Still, a man who identifies government with public ownership might be content to spread the area of government ownership despite the loss of efficiency or social utility it entails.

     The identity itself, however, is completely fallacious. Ownership is the ultimate control and direction of a resource. The owner of a property is its ultimate director, regardless of legal fictions to the contrary. In the purely free society, resources so abundant as to serve as general conditions of human welfare would remain unowned. Scarce resources, on the other hand, would be owned on the following principles: self-ownership of each person by himself; self-ownership of a person’s created or transformed property; first ownership of previously unowned land by its first user or transformer. Government ownership means simply that the ruling officialdom owns the property. The top officials are the ones who direct the use of the property, and they therefore do the owning. The “public” owns no part of the property. Any citizen who doubts this may try to appropriate for his own individual use his aliquot part of “public” property and then try to argue his case in court. It may be objected that individual stockholders of corporations cannot do this either, e.g., by the rules of the company, a General Motors stockholder is not allowed to seize a car in lieu of cash dividends or in exchange for his stock. Yet stockholders do own their company, and this example precisely proves our point. For the stockholder can contract out of his company; he can sell his shares of General Motors’ stock to someone else. The subject of a government cannot contract out of that government; he cannot sell his “shares” in the post office because he has no such shares. As F.A. Harper has succinctly stated: “The corollary of the right of ownership is the right of disownership. So if I cannot sell a thing, it is evident that I do not really own it.”[18]

     Whatever the form of government, the rulers are the true owners of the property. However, in a democracy or, in the long run under any form of government, the rulers are transitory. They can always lose an election or be overthrown by a coup d’etat. Hence, no government official regards himself as more than a transitory owner. As a result, while a private owner, secure in his property and owning its capital value, plans the use of his resource over a long period of time, the government official must milk the property as quickly as he can, since he has no security of ownership. Further, even the entrenched civil servant must do the same, for no government official can sell the capitalized value of his property, as private owners can. In short, government officials own the use of resources, but not their capital value (except in the case of the “private property” of a hereditary monarch). When only the current use can be owned, but not the resource itself, there will quickly ensue uneconomic exhaustion of the resources, since it will be to no one’s benefit to conserve it over a period of time and to every owner’s advantage to use it up as quickly as possible. In the same way, government officials will consume their property as rapidly as possible.

     It is curious that almost all writers parrot the notion that private owners, possessing time preference, must take the “short view,” while only government officials can take the “long view” and allocate property to advance the “general welfare.” The truth is exactly the reverse. The private individual, secure in his property and in his capital resource, can take the long view, for he wants to maintain the capital value of his resource. It is the government official who must take and run, who must plunder the property while he is still in command.[19]

5. Democracy

     Democracy is a process of choosing government rulers or policies and is therefore distinct from what we have been considering: the nature and consequences of various policies that a government may choose. A democracy can choose relatively laissez-faire or relatively interventionist programs, and the same is true for a dictator. And yet the problem of forming a government cannot be absolutely separated from the policy that government pursues, and so we shall discuss some of these connections here.

     Democracy is a system of majority rule in which each citizen has one vote either in deciding the policies of the government or in electing the rulers, who will in turn decide policy. It is a system replete with inner contradictions.

     In the first place, suppose that the majority overwhelmingly wishes to establish a popular dictator or the rule of a single party. The people wish to surrender all decision-making into his or its hands. Does the system of democracy permit itself to be voted democratically out of existence? Whichever way the democrat answers, he is caught in an inescapable contradiction. If the majority can vote into power a dictator who will end further elections, then democracy is really ending its own existence. From then on, there is no longer democracy, although there is continuing majority consent to the dictatorial party or ruler. Democracy, in that case, becomes a transition to a nondemocratic form of government. On the other hand, if, as it is now fashionable to maintain, the majority of voters in a democracy are prohibited from doing one thing—ending the democratic elective process itself—then this is no longer democracy, because the majority of voters can no longer rule. The election process may be preserved, but how can it express that majority rule essential to democracy if the majority cannot end this process should it so desire? In short, democracy requires two conditions for its existence: majority rule over governors or policies, and periodic, equal voting. So if the majority wishes to end the voting process, democracy cannot be preserved regardless of which horn of the dilemma is chosen. The idea that the “majority must preserve the freedom of the minority to become the majority” is then seen, not as a preservation of democracy, but as simply an arbitrary value judgment on the part of the political scientist (or at least it remains arbitrary until justified by some cogent ethical theory).[20]

     This dilemma occurs not only if the majority wishes to select a dictator, but also if it desires to establish the purely free society that we have outlined above. For that society has no overall monopoly-government organization, and the only place where equal voting would obtain would be in co-operatives, which have always been inefficient forms of organization. The only important form of voting, in that society, would be that of shareholders in joint stock companies, whose votes would not be equal, but proportionate to their shares of ownership in the company assets. Each individual’s vote, in that case, would be meaningfully tied to his share in the ownership of joint assets.[21] In such a purely free society there would be nothing for democratic electors to vote about. Here, too, democracy can be only a possible route toward a free society, rather than an attribute of it.

     Neither is democracy conceivably workable under socialism. The ruling party, owning all means of production, will have the complete decision, for example, on how much funds to allocate to the opposition parties for propaganda, not to speak of its economic power over all the individual leaders and members of the opposition. With the ruling party deciding the income of every man and the allocation of all resources, it is inconceivable that any functioning political opposition could long persist under socialism.[22] The only opposition that could emerge would be not opposing parties in an election, but different administrative cliques within the ruling party, as has been true in the Communist countries.

     Thus, democracy is compatible neither with the purely free society nor with socialism. And yet we have seen in this work (and shall see further below) that only those two societies are stable, that all intermediary mixtures are in “unstable equilibrium” and always tending toward one or the other pole. This means that democracy, in essence, is itself an unstable and transitional form of government.

     Democracy suffers from many more inherent contradictions as well. Thus, democratic voting may have either one of these two functions: to determine governmental policy or to select rulers. According to the former, what Schumpeter termed the “classical” theory of democracy, the majority will is supposed to rule on issues.[23] According to the latter theory, majority rule is supposed to be confined to choosing rulers, who in turn decide policy. While most political scientists support the latter version, democracy means the former version to most people, and we shall therefore discuss the classical theory first.

     According to the “will of the people” theory, direct democracy—voting on each issue by all the citizens, as in New England town meetings—is the ideal political arrangement. Modern civilization and the complexities of society, however, are supposed to have outmoded direct democracy, so that we must settle for the less perfect “representative democracy” (in olden days often called a “republic”), where the people select representatives to give effect to their will on political issues. Logical problems arise almost immediately. One is that different forms of electoral arrangements, different delimitations of geographical districts, all equally arbitrary, will often greatly alter the picture of the “majority will.” If a country is divided into districts for choosing representatives, then “gerrymandering” is inherent in such a division: there is no satisfactory, rational way of demarking the divisions. The party in power at the time of division, or redivision, will inevitably alter the districts to produce a systematic bias in its favor; but no other way is inherently more rational or more truly evocative of majority will. Moreover, the very division of the earth’s surface into countries is itself arbitrary. If a government covers a certain geographical area, does “democracy” mean that a majority group in a certain district should be permitted to secede and form its own government, or to join another country? Does democracy mean majority rule over a larger, or over a smaller, area? In short, which majority should prevail? The very concept of a national democracy is, in fact, self-contradictory. For if someone contends that the majority in Country X should govern that country, then it could be argued with equal validity that the majority of a certain district within Country X should be allowed to govern itself and secede from the larger country, and this subdividing process can logically proceed down to the village block, the apartment house, and, finally, each individual, thus marking the end of all democratic government through reduction to individual self-government. But if such a right of secession is denied, then the national democrat must concede that the more numerous population of other countries should have a right to outvote his country; and so he must proceed upwards to a world government run by a world majority rule. In short, the democrat who favors national government is self-contradictory; he must favor a world government or none at all.

     Aside from this problem of the geographical boundary of the government or electoral district, the democracy that tries to elect representatives to effect the majority will runs into further problems. Certainly some form of proportional representation would be mandatory, to arrive at a kind of cross section of public opinion. Best would be a proportional representation scheme for the whole country—or world—so that the cross section is not distorted by geographic considerations. But here again, different forms of proportional representation will lead to very different results. The critics of proportional representation retort that a legislature elected on this principle would be unstable and that elections should result in a stable majority government. The reply to this is that, if we wish to represent the public, a cross section is required, and the instability of representation is only a function of the instability or diversity of public opinion itself. The “efficient government” argument can be pursued, therefore, only if we abandon the classical “majority-will” theory completely and adopt the second theory—that the only function of the majority is to choose rulers.

     But even proportional representation would not be as good—according to the classical view of democracy—as direct democracy, and here we come to another important and neglected consideration: modern technology does make it possible to have direct democracy. Certainly, each man could easily vote on issues several times per week by recording his choice on a device attached to his television set. This would not be difficult to achieve. And yet, why has no one seriously suggested a return to direct democracy, now that it may be feasible? The people could elect representatives through proportional representation, solely as advisers, to submit bills to the people, but without having ultimate voting power themselves. The final vote would be that of the people themselves, all voting directly. In a sense, the entire voting public would be the legislature, and the representatives could act as committees to bring bills before this vast legislature. The person who favors the classical view of democracy must, therefore, either favor virtual eradication of the legislature (and, of course, of executive veto power) or abandon his theory.

     The objection to direct democracy will undoubtedly be that the people are uninformed and therefore not capable of deciding on the complex issues that face the legislature. But, in that case, the democrat must completely abandon the classical theory that the majority should decide on issues, and adopt the modern doctrine that the function of democracy is majority choice of rulers, who, in turn, will decide the policies. Let us, then, turn to this doctrine. It faces, fully as much as the classical theory, the self-contradiction on national or electoral boundaries; and the “modern democrat” (if we may call him such), as much as the “classical democrat” must advocate world government or none at all. On the question of representation, it is true that the modern democrat can successfully oppose direct television-democracy, or even proportional representation, and resort to our current system of single constituencies. But he is caught in a different dilemma: if the only function of the voting people is to choose rulers, why have a legislature at all? Why not simply vote periodically for a chief executive, or President, and then call it a day? If the criterion is efficiency, and stable rule by a single party for the term of office, then a single executive will be far more stable than a legislature, which may always splinter into warring groups and deadlock the government. The modern democrat, therefore, must also logically abandon the idea of a legislature and plump for granting all legislative powers to the elected executive. Both theories of democracy, it seems, must abandon the whole idea of a representative legislature.

     Furthermore, the “modern democrat” who scoffs at direct democracy on the ground that the people are not intelligent or informed enough to decide the complex issues of government, is caught in another fatal contradiction: he assumes that the people are sufficiently intelligent and informed to vote on the people who will make these decisions. But if a voter is not competent to decide issues A, B, C, etc., how in the world could he possibly be qualified to decide whether Mr. X or Mr. Y is better able to handle A, B, or C? In order to make this decision, the voter would have to know a great deal about the issues and know enough about the persons whom he is selecting. In short, he would probably have to know more in a representative than in a direct democracy. Furthermore, the average voter is necessarily less qualified to choose persons to decide issues than he is to vote on the issues themselves. For the issues are at least intelligible to him, and he can understand some of their relevance; but the candidates are people whom he cannot possibly know personally and whom he therefore knows essentially nothing about. Hence, he can vote for them only on the basis of their external “personalities,” glamorous smiles, etc., rather than on their actual competence; as a result, however ill-informed the voter, his choice is almost bound to be less intelligent under a representative republic than in a direct democracy.[24][25]

     We have seen the problems that democratic theory has with the legislature. It also has difficulty with the judiciary. In the first place, the very concept of an “independent judiciary” contradicts the theory of democratic rule (whether classical or modern). If the judiciary is really independent of the popular will, then it functions, at least within its own sphere, as an oligarchic dictatorship, and we can no longer call the government a “democracy.” On the other hand, if the judiciary is elected directly by the voters, or appointed by the voters’ representatives (both systems are used in the United States), then the judiciary is hardly independent. If the election is periodic, or if the appointment is subject to renewal, then the judiciary is no more independent of political processes than any other branch of government. If the appointment is for life, then the independence is greater, although even here, if the legislature votes the funds for the judges’ salaries, or if it decides the jurisdiction of judicial powers, judicial independence may be sharply impaired.

     We have not exhausted the problems and contradictions of democratic theory; and we may pursue the rest by asking: Why democracy anyway? Until now, we have been discussing various theories of how democracies should function, or what areas (e.g., issues or rulers) should be governed by the democratic process. We may now inquire about the theories that support and justify democracy itself.

     One theory, again of classical vintage, is that the majority will always, or almost always, make the morally right decisions (whether about issues or men). Since this is not an ethical treatise, we cannot deal further with this doctrine, except to say that few people hold this view today. It has been demonstrated that people can democratically choose a wide variety of policies and rulers, and the experience of recent centuries has, for the most part, vitiated any faith that people may have had in the infallible wisdom and righteousness of the average voter.

     Perhaps the most common and most cogent argument for democracy is not that democratic decisions will always be wise, but that the democratic process provides for peaceful change of government. The majority, so the argument runs, must support any government, regardless of form, if it is to continue existing for long; far better, then, to let the majority exercise this right peacefully and periodically than to force the majority to keep overturning the government through violent revolution. In short, ballots are hailed as substitutes for bullets. One flaw in this argument is that it completely overlooks the possibility of the nonviolent overthrow of the government by the majority through civil disobedience, i.e., peaceful refusal to obey government orders. Such a revolution would be consistent with this argument’s ultimate end of preserving peace and yet would not require democratic voting.[26]

     There is, moreover, another flaw in the “peaceful-change” argument for democracy, this one being a grave self-contradiction that has been universally overlooked. Those who have adopted this argument have simply used it to give a seal of approval to all democracies and have then moved on quickly to other matters. They have not realized that the “peaceful-change” argument establishes a criterion for government before which any given democracy must pass muster. For the argument that ballots are to substitute for bullets must be taken in a precise way: that a democratic election will yield the same result as would have occurred if the majority had had to battle the minority in violent combat. In short, the argument implies that the election results are simply and precisely a substitute for a test of physical combat. Here we have a criterion for democracy: Does it really yield the results that would have been obtained through civil combat? If we find that democracy, or a certain form of democracy, leads systematically to results that are very wide of this “bullet-substitute” mark, then we must either reject democracy or give up the argument.

     How, then, does democracy, either generally or in specific countries, fare when we test it against its own criterion? One of the essential attributes of democracy, as we have seen, is that each man have one vote.[27] But the “peaceful-change” argument implies that each man would have counted equally in any combat test. But is this true? In the first place, it is clear that physical power is not equally distributed. In any test of combat, women, old people, sick people, and 4F’s would fare very badly. On the basis of the “peaceful-change” argument, therefore, there is no justification whatever for giving these physically feeble groups the vote. So, barred from voting would be all citizens who could not pass a test, not for literacy (which is largely irrelevant to combat prowess), but for physical fitness. Furthermore, it clearly would be necessary to give plural votes to all men who have been militarily trained (such as soldiers and policemen), for it is obvious that a group of highly trained fighters could easily defeat a far more numerous group of equally robust amateurs.

     In addition to ignoring the inequalities of physical power and combat fitness, democracy fails, in another significant way, to live up to the logical requirements of the “peaceful-change” thesis. This failure stems from another basic inequality: inequality of interest or intensity of belief. Thus, 60 percent of the population may oppose a certain policy, or political party, while only 40 percent favor it. In a democracy, this latter policy or party will be defeated. But suppose that the bulk of the 40 percent are passionate enthusiasts for the measure or candidate, while the bulk of the 60 percent majority have only slight interest in the entire affair. In the absence of democracy, far more of the passionate 40 percent would have been willing to engage in a combat test than would the apathetic 60 percent. And yet, in a democratic election, one vote by an apathetic, only faintly interested person offsets the vote of a passionate partisan. Hence, the democratic process grievously and systematically distorts the results of the hypothetical combat test.

     It is probable that no voting procedure could avoid this distortion satisfactorily and serve as any sort of accurate substitute for bullets. But certainly much could be done to alter current voting procedures to bring them closer to the criterion, and it is surprising that no one has suggested such reforms. The whole trend of existing democracies, for example, has been to make voting easier for the people; but this violates the bullet-substitute test directly, because it has been made ever easier for the apathetic to register their votes and thus distort the results. Clearly, what would be needed is to make voting far more difficult and thus insure that only the most intensely interested people will vote. A moderately high poll tax, not large enough to keep out those enthusiasts who could not afford to pay, but large enough to discourage the indifferent, would be very helpful. Voting booths should certainly be further apart; the person who refuses to travel any appreciable distance to vote would surely not have fought in his candidate’s behalf. Another useful step would be to remove all names from the ballot, thereby requiring the voters themselves to write in the names of their favorites. Not only would this procedure eliminate the decidedly undemocratic special privilege that the State gives to those whose names it prints on the ballot (as against all other persons), but it would bring elections closer to our criterion, for a voter who does not know the name of his candidate would hardly be likely to fight in the streets on his behalf. Another indicated reform would be to abolish the secrecy of the ballot. The ballot has been made secret in order to protect the fearful from intimidation; yet civil combat is peculiarly the province of the courageous. Surely, those not courageous enough to proclaim their choice openly would not have been formidable fighters in the combat test.

     These and doubtless other reforms would be necessary to move the election results to a point approximating the results of a combat foregone. And yet, if we define democracy as including equal voting, this means that democracy simply cannot meet its own criterion as deduced from the “peaceful-change” argument. Or, if we define democracy as majority voting, but not necessarily equal, then the advocates of democracy would have to favor: abolishing the vote for women, sick people, old people, etc.; plural voting for the militarily trained; poll taxes; the open vote; etc. In any case, democracy such as we have known it, marked by equal voting for each person, is directly contradicted by the “peaceful-change” argument. One or the other, the argument or the system, must be abandoned.

     If the arguments for democracy are thus shown to be a maze of fallacy and contradiction, does this mean that democracy must be completely abandoned, except on the basis of a purely arbitrary, unsupported value judgment that “democracy is good”? Not necessarily, for democracy may be thought of, not so much as a value in itself, but as a possible method for achieving other desired ends. The end may be either to put a certain political leader into power or to attain desired governmental policies. Democracy, after all, is simply a method of choosing governors and issues, and it is not so surprising that it might have value largely to the extent that it serves as a means to other political ends. The socialist and the libertarian, for example, while recognizing the inherent instability of the democratic form, may favor democracy as a means of arriving at a socialist or a libertarian society. The libertarian might thus consider democracy as a useful way of protecting people against government or of advancing individual liberty.[28] One’s views of democracy, then, depend upon one’s estimates of the given circumstances.


     National product statistics have been used widely in recent years as a reflection of the total product of society and even to indicate the state of “economic welfare.” These statistics cannot be used to frame or test economic theory, for one thing because they are an inchoate mixture of grossness and netness and because no objectively measurable “price level” exists that can be used as an accurate “deflator” to obtain statistics of some form of aggregate physical output. National product statistics, however, may be useful to the economic historian in describing or analyzing an historical period. Even so, they are highly misleading as currently used.

     Private product is appraised at exchange values set by the market, and difficulty occurs even here. The major trouble, however, enters with the appraisal of the role of the government in contributing to the national product. What is the government’s contribution to the product of society? Originally, national income statisticians were split on this issue. Simon Kuznets evaluated government services as equal to the taxes paid, assuming that government is akin to private business and that government receipts, like the receipts of a firm, reflect the market-appraised value of its product. The error in treating government like a private business should be clear by this point in our discussion. Now generally adopted is the Department of Commerce method of appraising government services as equal to their “cost,” i.e., to government expenditures on the salaries of its officials and on commodities purchased from private enterprise. The difference is that all governmental deficits are included by the Department in the government’s “contribution” to the national product. The Department of Commerce method fallaciously assumes that the government’s “product” is measurable by what the government spends. On what possible basis can this assumption be made?

     Actually, since governmental services are not tested on the free market, there is no possible way of measuring government’s alleged “productive contribution.” All government services, as we have seen, are monopolized and inefficiently supplied. Clearly, if they are worth anything, they are worth far less than their cost in money. Furthermore, the government’s tax revenue and deficit revenue are both burdens imposed on production, and the nature of this burden should be recognized. Since government activities are more likely to be depredations upon, rather than contributions to, production, it is more accurate to make the opposite assumption: namely, that government contributes nothing to the national product and its activities sap the national product and channel it into unproductive uses.

     In using “national product” statistics, then, we must correct for the inclusion of government activities in the national product. From net national product, we first deduct “income originating in government,” i.e., the salaries of government officials. We must also deduct “income originating in government enterprises.” These are the current expenditures or salaries of officials in government enterprises that sell their product for a price. (National income statistics unfortunately include these accounts in the private rather than in the governmental sector.) This leaves us with net private product, or NPP. From NPP we must deduct the depredations of government in order to arrive at private product remaining in private hands, or PPR. These depredations consist of: (a) purchases from business by government; (b) purchases from business by government enterprises; and (c) transfer payments.[30] The total of these depredations, divided by NPP, yields the percentage of government depredation on the private product. A simpler guide to the fiscal impact of government on the economy would be to deduct the total expenditures of government and government enterprises from the NNP (these expenditures equalling income originating in government and government enterprises, added to the total depredations). This figure would be an estimate of total government depredation on the economy.

     Of course, taxes and revenues of government enterprises could be deducted instead from the NNP, and the result would be the same in accordance with double-entry principles, provided that a government deficit is also deducted. On the other hand, if there is a surplus in the government budget, then this surplus should be deducted as well as expenditures, since it too absorbs funds from the private sector. In short, either total government expenditures or total government receipts (each figure inclusive of government enterprises) should be deducted from NNP, whichever is the higher. The resulting figures will yield an approximation of the impact of the government’s fiscal affairs on the economy. A more precise estimate, as we have seen, would compare total depredations proper with gross private product.

     In subtracting government expenditures from the gross national product, we note that government transfer payments are included in this deduction. Professor Due would dispute this procedure on the ground that transfer activities are not included in the national product figures. But the important consideration is that taxes (and deficits) to finance transfer payments do act as a drain on the national product and therefore must be subtracted from NNP to yield PPR. In gauging the relative size of governmental vis-à-vis private activity, Due warns that the sum of governmental expenditures should not include transfer payments, which “merely shift purchasing power” without using up resources. Yet this “mere shift” is as much a burden upon the producers—as much a shift from voluntary production to State-created privilege—as any other governmental expenditure.[31]

[16]This differs completely from the artificial play-at-markets advocated by some writers as a method of permitting calculation under socialism. The “black market” is a real market, though very limited in scope.

[17]On the Yugoslav experience, see Rudolf Bicanic, “Economics of Socialism in a Developed Country,” Foreign Affairs, July, 1966, pp. 632–50. See also Deborah D. Milenkovitch, “Which Direction for Yugoslavia’s Economy?” East Europe, July, 1969, pp. 13–19. Yugoslav economists are even thinking in terms of developing a stock market and refer to this latent development as “socialist people’s capitalism”! See the November 25, 1966, Research Report of Radio Free Europe. On the impossibility of economic calculation under socialism, see Mises, Human Action; F.A. Hayek, ed., Collectivist Economic Planning (New York: Augustus M. Kelley, 1967); and Trygve Hoff, Economic Calculation in the Socialist Society (London: William Hodge & Co., 1949).

[18]F.A. Harper, Liberty, a Path to Its Recovery (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1949), pp. 106, 132. See also Paterson, God of the Machine, pp. 179ff. Paterson has a stimulating discussion of the “two-dimensionality”—neglect of real conditions—in the theory of collective ownership.

[19]Those who object that private individuals are mortal, but that “governments are immortal,” indulge in the fallacy of “conceptual realism” at its starkest. “Government” is not a real acting entity but is a real category of action adopted by actual individuals. It is a name for a type of action, the regularization of a type of interpersonal relation, and is not itself an acting being.

[20]This idea that democracy must force the majority to permit the minority the freedom to become a majority, is an attempt by social democratic theorists to permit those results of democracy which they like (economic interventionism, socialism), while avoiding the results which they do not like (interference with “human rights,” freedom of speech, etc.). They do this by trying to elevate their value judgments into an allegedly “scientific” definition of democracy. Aside from the self-contradiction, this limitation is itself not as rigorous as they believe. It would permit a democracy, for example, to slaughter Negroes or redheads, because there is no chance that such minority groups could become majorities. For more on “human” rights and property rights, see below.

[21]To Spencer Heath, this is the only genuine form of democracy:

When persons contractually pool their separate titles to property by taking undivided interests in the whole, they elect servants—officers—and otherwise exercise their authority over their property by a process of voting, as partners, share owners or other beneficiaries. This is authentically democratic in that all the members exercise authority in proportion to their respective contributions. Coercion is not employed against any, and all persons are as free to withdraw their membership and property as they were to contribute it. (Heath, Citadel, Market, and Altar, p. 234)

[22]Even if, as is highly unlikely—especially in view of the fact that rulers under socialism are those most adept at wielding force—the socialist leaders were saintly men, wishing to give a political opposition every chance, and even if the opposition were unusually heroic and risked liquidation by emerging into the open, how would the rulers decide their allocations? Would they give funds and resources to all opposing parties? Or only to a pro-socialist opposition? How much would they allocate to each opposition party?

[23]See Schumpeter, Capitalism, Socialism and Democracy, passim.

[24]The “modern democrat” might object that the candidate’s party affiliation enables the voter to learn, if not his personal competence, at least his political ideology. But the “modern democrat” is precisely the theorist who hails the current “two-party” system, in which the platforms of both parties are almost indistinguishable, as the most efficient, stable form of democratic government.

[25]These considerations also serve to refute the contention of the “conservative” that a republic will avoid the inherent contradictions of a direct democracy—a position that itself stands in contradiction to its proponents’ professed opposition to executive as against legislative power.

[26]Thus Etienne de La Boétie:

Obviously there is no need of fighting to overcome this single tyrant, for he is automatically defeated if the country refuses consent to its own enslavement: it is not necessary to deprive him of anything, but simply to give him nothing; there is no need that the country make an effort to do anything for itself provided it does nothing against itself. It is therefore the inhabitants themselves who permit, or rather, bring about, their own subjection, since by ceasing to submit they could put an end to their servitude. (La Boétie, Anti-Dictator, pp. 8–9)

[27]Even though, in practice, votes of rural or other areas are often more heavily weighted, this democratic ideal is roughly approximated, or at least is the general aspiration, in the democratic countries.

[28]Some libertarians consider a constitution a useful device for limiting or preventing governmental encroachments on individual liberty. A major difficulty with this idea was pointed out with great clarity by John C. Calhoun: that no matter how strict the limitations placed on government by a written constitution, these limits must be constantly weakened and expanded if the final power to interpret them is placed in the hands of an organ of the government itself (e.g., the Supreme Court). See Calhoun, Disquisition on Government, pp. 25–27.

[29]For a critique of the arguments for government activity—“collective goods” and “neighborhood effects” or “external benefits”—see Man, Economy, and State, pp. 1029–41.

[30]Purchases from business should be deducted gross of government sales to the public, rather than net, for government sales are simply equivalent to tax revenue in absorbing money from the private sector.

[31]Due, Government Finance, pp. 76–77. For application of the above method of correcting national product statistics, see Murray N. Rothbard, America’s Great Depression (Princeton, N.J.: D. Van Nostrand, 1963), pp. 296–304.

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