WEBVTT

NOTE The State as an Organization (video)

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The Theory of Money and Credit

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Well, we're delighted to have as a special guest lecturer Michael Rozaf. Dr. Rozaf holds

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a B.A. and an M.A.T. from Harvard University, two master's degrees from the University

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of Illinois and a Ph.D. in finance from the University of Rochester. He's published widely

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on Stock Market Pricing, Earnings Forecast, Insider Trading, and Asian Stock Markets.

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Among other venues, his articles have appeared in the Journal of Finance, the Journal of

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Financial and Quantitative Analysis, the Review of Quantitative Finance and Accounting, and

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the Journal of Portfolio Management.

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Dr. Roseff has held the Louis M. Jacobs Chair in Finance at the State University of New

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York at Buffalo since 1989.

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He will speak on the topic, Reflections on the Organization of Society Without a State, Michael.

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Thank you for the brief introduction.

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That title actually was, there have been about four titles.

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The first title was, Confessions of an Anarchist.

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and that somehow got changed to this second title and now I have a third title which is in your brochure, The State as an Organization.

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I'm really grateful and honored to be here. I'm not Austrian. I may be an Austrian but I'm not Austrian.

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And I'm not an economist. I'm in finance. So some of what I have to say will probably be, undoubtedly will be old wine to many of you.

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but it may come in new bottles with a finance slant to it and I find it helps me understand things

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and I hope it will help you understand things, put the concepts into a different framework.

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Franz Oppenheimer called the state the organization of the political means.

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Murray Rothbard defined the state as that organization in society which attempts to maintain a monopoly of the use of force and violence in a given territorial area.

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What they have in common is they both call the state an organization and that's where I begin.

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I think since it's an organization we should analyze it as an organization.

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There is theory of organizations, so why not apply theory of organizations to the state?

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It might help clarify how we think about it.

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First off, it's somewhat difficult to define an organization.

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By the way, what I'm going to say is work in progress.

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Some of it is off the top of my head.

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All the errors in here, all the omissions are solely mine.

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The only person who read this doesn't want to have any culpability at all.

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Anyway, so I define an organization as simply a group of individuals who order their acts together.

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They do that through understandings, agreements, sometimes contracts.

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They are either explicit or implicit.

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They may come into the organization with personal aims, but somehow in the organization they constrain their aims and they act jointly.

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They agree to act jointly.

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So therefore, all organizations have a few things in common.

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First of all, every organization has aims.

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Even though sometimes we say, well, society doesn't exist,

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or this organization doesn't literally exist,

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yet the organization has aims.

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The Ludwig von Mises Institute has aims.

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And the people working for it have somehow gotten together

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and agreed to work in certain ways such

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There will be goals. They may not be stated. They may be unstated. They may not be understood. They may be dimly known, but nevertheless they're coordinated.

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Secondly, all organizations will have boundaries. Some people are in it, some people are not in it. So some people are in the state and some people are not in the state.

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Third, often times there will be capital in the organization, and then there will be ownership of the capital, there will be people who own the capital.

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I will call those people the principles, they bear the risks of owning the capital.

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They often contract with other people who work with the capital, those we will call agents.

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I'm going to be using, I'm going to bring in principal agent theory here and try to apply it to the state.

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Now fourth, in organizations there is always some kind of contracting going on.

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These will be the agreements or understandings, explicit or implicit, such that people willivid their behavior.

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So the contracts will have principals and agents involved in them.

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And then there will be incentives.

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Every organization will have an incentive structure.

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It arises from the contracting.

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Now, most of that you've probably all heard of.

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The new element that came in 1976 was due to Michael C. Jensen and William Meckley.

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They pioneered the theory of agency costs.

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The way they describe agency costs are a composition of three elements.

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In order to contract, to reach understandings, there are costs of getting people together

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to reach agreements and contracts.

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So that's one agency cost.

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Secondly, inside an organization, people agree to do different things.

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That means that you have to monitor what they're doing, and make sure they live up to their contract.

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So there are costs of monitoring them.

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Third, and most important of all, in organizations, human beings acting as agents,

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they do not fully live up to what they agree to do.

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Therefore, the failure to live up to their obligations leads to some more costs,

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and those are very important costs.

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I'll give some examples of these as we go along to make it clear.

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Now, it's impossible if there's a principal and the principal says to an agent,

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I want you to do something for me and the agent agrees and they have some sort of understanding or agreement.

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It's impossible to get the agent to work fully to do what the principal wants them to do.

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There's always some slippage in there, some shirking or some inability of the agent to fully carry out what the principal wants.

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For example, in a firm owned by stockholders and managed by managers, we could say the managers are agents and the stockholders are the principals.

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We will see that the same person can be both a principal and an agent.

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So, for example, in a corporation, the stockholders are the principals. They supply the capital.

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The managers are supposed to do what for the stockholders. They're supposed to maximize

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the value of the firm, invest in good things and so on and so on. The managers also allocate

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capital to employees, and in that role, the managers are the principals and the employees

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These are the agents.

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So there are always levels of this principal agent problem where the agents do not live

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up to the expectations of the principles.

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So I'm right now saying the stockholders will experience perhaps some agency cost because

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they can't monitor the managers perfectly.

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The managers will waste resources inside a corporation.

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The reasons for this are that if they waste a dollar of assets, which is a one dollar

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loss to the shareholders, the managers personally lose less than a dollar.

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So to them it's not as important.

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The managers may get some gratification or utility basically from wasting that dollar,

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from having a fancy office, from having nice carpets, for having nice automobiles, jets

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and so on.

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So this is where your agency cost partly comes in, but the worst part of the agency cost

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there is that the managers will fail to make good investments.

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They may, why should they always risk their jobs?

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There may be some really good thing that comes along, but they decide not to do it.

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And that will also lower shareholder wealth, so there will be costs there.

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So you have all these losses.

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The shareholders try to monitor the managers, try to get them to behave, but the managers

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don't act perfectly in the shareholder interest, and you have agency costs.

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Now who bears those costs?

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This is the interesting thing.

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The shareholders actually do not bear these agency costs if they have any brains in their

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head, because there's economics that people are rational.

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So, if you're going to supply capital to somebody, and if you think they're going to waste a certain amount of it, you exact a price at the outset.

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You want a higher return on your money before you give them the capital to compensate you for your prospective losses.

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So, maybe the easiest way to see this is just think of bondholders, bondholders who lend money to corporations that are at risk.

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Say there's a higher risk of bankruptcy.

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You'll find that the bonds of that firm

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will pay a higher yield.

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That's to compensate the bondholders

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for the chance of bankruptcy.

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They price it in to begin with,

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knowing that there is a higher risk.

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So bondholders, the reason people can sell bonds

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for firms that are very risky and micro-bankrupt

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is because they pay a higher rate of interest.

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So the bondholders do not bear the cost of bankruptcy.

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The borrower bears the cost of bankruptcy.

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And in the same way, the shareholders

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do not bear the agency cost.

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It's the entrepreneurs who want the money

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and who might waste it once they get it,

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or the managers who might want it.

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They bear the agency cost.

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The company basically bears the agency cost, not

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the capital, suppliers.

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Now, coming to the state, there are

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There are people who think about the state in the same terms as a corporation.

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I'll talk about a spectrum of possible states here.

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And at one end will be anarchy, and at the other end will be totalitarianism.

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And for those who are interested in these things, anarchy will be on the left, okay?

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Totalitarianism will be on the right.

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And somewhere as we go in, from the left, we have the contractual state, and then we

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go further we have the predatory state, and then more and more predatory we get to totalitarianism.

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So the contractual state, it's a model, conceptually it's like a publicly owned corporation.

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The taxpayers are supposed to own the state, they are in the state so to speak, they are

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The State specializes in law, justice, and the taxpayers supply the capital.

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So the taxpayers are the principals, you see.

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The government employees and the officials, they're the agents.

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There will be agency costs now, the minute you set up anything like this, because the

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agents will not necessarily act on behalf of the principals.

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The principles are going to have to monitor them to make sure they behave.

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So there will be agency costs.

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Now remember, the corporation, what happens is, the people who supply the capital, they

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don't bear the agency costs, the stockholders.

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It falls upon the entrepreneur who gets hands on the capital.

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But I say, when you have a state, what happens is, the state should be bearing the agency

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costs, but it doesn't.

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The taxpayers who bear the agency costs, and the reason is the state is able to impose taxes, so whatever costs happen within the state, whatever the state does that's bad, whatever bad investments it makes, the costs all fall back on the taxpayer.

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See, if a company makes bad investments, eventually the company is going to go broke, its cost

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of capital will go up, the managers will get thrown out of their jobs, various things will

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happen.

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They can't simply push the cost back onto the shareholders.

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But in this case, the state will impose taxes which makes up for all its misuse of capital.

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So it's perverse.

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Now I mentioned you have also internal agency costs.

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This happens inside a company.

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The managers delegate decisions, the workers will shirk perhaps, you have to monitor them

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and so on and so forth.

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And for the same reason that the top managers don't behave perfectly, their employees don't

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behave perfectly either.

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The reasons are they don't receive fully the benefit of doing a good job.

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You get a salary, let's say.

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No matter whether you have a good idea or a bad idea, you get a salary.

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So therefore, you don't necessarily come up with a lot of good ideas.

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The bosses can't cautiously monitor their employees.

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So they will tend to goof off, do various things.

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You try to align their incentives, you see, with the shareholders, but it's not always

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as possible.

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Now there are methods to reduce these agency costs.

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Human beings are not dumb.

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We know what's going on.

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So we try to reduce these costs.

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Inside companies what happens is you have budgeting, auditing, procedures, work procedures,

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orders, incentive plans and so on and so on that reduce the cost.

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In that way, actually the employees can get paid a higher wage, because if it were known

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that they were going to steal stuff, walk off with stuff, shirk and so on, the managers

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would end up paying them a lower wage.

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In other words, the managers, knowing, we're going to have some agency costs from these

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employees, what they would then do would be pay a lower wage, and the cost of stealing

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Banking and theft and shirking and inactivity and laziness and so on would fall upon the employees, just as in the case where the managers were the agents, the cost fell on them too if they did badly.

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But in the state, what I'm saying here is that the same things go on.

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You've got hierarchies of various kinds, legislators, they delegate funds to the executive branch.

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The top officials there, they delegate to the FEMA's and the HUD's.

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They delegate to lower level employees.

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So you've got layers and layers and layers of agency costs, all inside government.

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They have bureaus there. They're not profit-seeking. They don't have the proper incentives. They have entrenched employees and bureaucrats.

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So the entire structure of monitoring and incentives is very weak. The taxpayers don't control their agents.

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I often tell it in my classes. Just think about the situation here. I'm providing, I'm supposed to give you a good lecture.

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Supposing I don't, what are you going to do about it?

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Look at the layers that are involved.

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They have my chairman or the chairman of the department.

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Then there's the dean.

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Then it goes to the provost and the president.

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Then it goes back to the legislatures, the legislator,

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SUNY system, and eventually the taxpayer.

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See, the taxpayer is footing the bill.

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Well. But they have no control over what I do, basically. It's because I'm an agent.

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There are very high possible agency costs. Only if I, you know, because of Mother Roselle,

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so I'm conscientious, right? But how about all the other people who are not so, but this

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temptation, you know, after a while maybe you're not so conscientious as you'd like to be.

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So you get lax and slack.

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In government I'm saying it's even worse because I'm saying the taxpayers don't control their

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agents but what's worse is the state is able to shovel all the cost back on the taxpayer.

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So the fact that the taxpayers bear the agency cost of actually supplying the capital to

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for the government, as far as I can see, is absolutely a fatal flaw in the taxpayer-state arrangement.

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In other words, no taxpayer would rationally agree to fork over money in this situation

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unless they thought these costs would be either low or controllable, or they thought the state would produce benefits for them

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that would offset the massive costs that they actually experience.

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I don't know what taxpayers are thinking, but I do know this, we can go through and

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compare the state's institutions with the corporation and see that these agency costs

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are not well controlled. So I'm going to do this one by one. For corporations, we know

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there are sometimes bad situations that arise even there. This morning there was a seminar

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on General Motors and very high agency costs inside a company like that. A lot of waste

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and bad decision making was made. Or we have Enron as another example of what can happen.

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But there are institutions that have been devised to lower these costs and control the behavior

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of the managers so that they do act in the interest of the capital suppliers.

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The first one is there's a product market, okay, product market.

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If the firm's prices are too high, if the quality of the product is too low, consumers

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simply quit.

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They exit their interaction with the firm.

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They lower their purchases.

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There is no comparable sanction against the state.

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If the state's product is lousy, I say voters cannot routinely or at low cost simply exit

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the state.

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You can do a lot of things, which may help some of these other things that will go on,

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but you can't exit at low cost.

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It's impossible for you and me to exit the social security program or Medicare program.

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What are we going to do?

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We're going to leave the country?

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That's not a low-cost method of controlling the product market.

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So if you don't like the product, there's nothing you can do about it.

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You take it or leave it, basically.

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So there's a doctrine called tacit consent, right?

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I think it's a totally false doctrine.

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It just tries to cover up this fault in the contractual state.

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It says basically, you all know what it says, it says basically if you don't like the product

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and you still stay in the country, that you are tacitly consenting to the product.

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Well you're not.

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The costs of exiting are very, very high.

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So it really isn't consent.

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The second thing in firms is there's a takeover market.

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If the company does badly, the stock goes down.

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Then entrepreneurs can come in and take over that company and put it right.

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This doesn't happen with states.

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When states are badly run, what happens?

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The only takeovers I can think of are invasions by other states, rebellions within the country,

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revolutions within the country.

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In other words, very high cost and difficult maneuvers comparable to a takeover.

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The third thing is if companies do badly, have high agency costs, the financial markets

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provide sanctions.

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Investors raise the capital cost for firms that have high agency costs.

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Now states, they have that sanction too.

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They borrow money and they could find their cost of borrowing going up.

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But they circumvent it, they have taxation and they have inflation, so they have ways

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of getting around this financial market constraint.

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The next thing is decision control.

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What stockholders and bondholders do is directly try to control the manager's menu of decisions.

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Managers cannot simply say, we're going to take over some big firm, we're going to have

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They have to meet certain covenants that are in the bonds.

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Bond covenants run hundreds of pages.

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So they are controlled.

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Bank lending agreements have many, many controls in them

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about what the managers can invest in, how much they can invest in.

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So things are very much controlled.

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Even the corporate charter, which calls for votes on certain important matters

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Mergers and Require Proxy Statements and Voting, and so on and so on.

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There are ways of controlling the behavior of the management.

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Now, what do we have in the case of the state?

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Enumerated powers in the Constitution,

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at least in the United States, this is a superb idea.

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You see, it's exactly analogous to controlling the behavior of the corporate managers.

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The problem is, the Supreme Court is part of the state, it interprets the Constitution,

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the Constitution has loopholes big enough to drive a truck through, such as the welfare clause.

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So the state is able to circumvent the enumerated powers by interpreting the powers itself.

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So therefore, I'm saying that method of control over the years,

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I can go on with more of these. Another one is companies actually bond themselves, bonding. What I mean by bonding is they pay dividends and they pay out interest on debt. And by doing that, they shove interest on debt.

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So they actually are generating the cash flows and they're showing, we're not just saying

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we have earnings, but we actually have money in the bank, we can afford to pay you dividends,

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we can pay off interest on our debt.

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This is a bonding mechanism which shows that we're doing something for real.

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States, well, states don't pay dividends, right, unless, well, they pay negative dividends.

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They pay interest, but I say they avoid the discipline because they can float debt and

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the Federal Reserve will buy the debt and they can just raise money by taxation.

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So the discipline is much lower.

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It's not that they're completely free to do anything, but it's lower than in a company.

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Monitoring.

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You have noticed that there are auditors who audit financial statements of corporations.

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There are security analysts who write about the corporations.

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There are credit rating agencies who talk about the debts of the corporations.

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They're all monitoring them and finding out what the characteristics are and how risky

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they are and so on.

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What do we have with regard to the state?

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We have citizen watchdog groups.

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We have the press, heaven help us, that's our equivalent of security analysts.

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But most of the time, the states actually, the federal government audits itself.

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The GAO sometimes does some good stuff, but really they audit themselves.

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They hide as much information as they can, they understate costs, they overstate benefits.

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They don't have an incentive to monitor themselves, why should they?

301
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If they do something bad, they just shift the cost to the taxpayer, it gives them an incentive

302
00:27:05.780 --> 00:27:12.020
to have a new program, we'll make it better now and cover up whatever mess occurred.

303
00:27:12.020 --> 00:27:17.500
So the monitoring process, that doesn't work well.

304
00:27:17.500 --> 00:27:23.860
Stock prices, well stock prices are a way to monitor companies because information gets

305
00:27:23.860 --> 00:27:25.720
reflected in the price.

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So a shareholder can look at the stock price and know something about how well the company

307
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is doing.

308
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They can compare it to other stock prices and see if they're doing better or worse.

309
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Taxpayers, what do they have?

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00:27:42.480 --> 00:27:47.160
Well they can sort of, some idea of how well am I doing.

311
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My standard living going up or is it going down and so on.

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It's not quite as sharp.

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00:27:55.160 --> 00:28:00.500
And furthermore, when that happens, they don't know whether the state is responsible or not.

314
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They can't discern whether the state is doing something that's affecting their welfare or

315
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not.

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Where the stockholder knows, if the stock goes down, chances are, sure, there's noise

317
00:28:12.560 --> 00:28:14.260
in the stock price.

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But you can compare it to some other stock prices and see, is my stock doing better or

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worse than somebody else?

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But when you're looking at the federal government, you have a tremendous amount of noise and

321
00:28:24.960 --> 00:28:54.960
And knowing what's going on. So that's a monitoring mechanism that's absent. Now notice when there is the ability to compare, when you can compare Texas to New York State and you see, well, prices are cheaper in Texas and work conditions are better or whatever the case may be, that taxpayers will move from one area to another when they are capable of monitoring. Or they'll move from one country to another.

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Last, I might mention the labor market. In a company, if the managers perform badly, the board of directors can fire the top managers. So there's a labor market sanction. And there's research showing that if you lose your job as a top manager, you lose your job as a top manager.

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The Labor Market.

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In a company, if the managers perform badly,

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the board of directors can fire the top managers.

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So there's a labor market sanction.

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And there's research showing that if you

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lose your job as a top manager, you

329
00:29:25.760 --> 00:29:28.840
have a hard time getting another comparable job.

330
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It's not so easy.

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What do we have with respect to the state?

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The voters can remove the politicians from office.

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That's basically what we have.

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And so that's supposed to be the ultimate controller of their bad behavior, or the agency costs.

335
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However, the effectiveness of voting is really quite limited, that's my opinion.

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And it's been brought out of a number of presentations here, so I'm going to skip one large section where

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we can go through all the arguments why voting really doesn't work.

338
00:30:09.040 --> 00:30:11.040
It's not what it's cracked up to be.

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If you want to see a complete treatment, eventually I'll publish this.

340
00:30:16.040 --> 00:30:22.040
Maybe I'll break it up into sections and put it on LRC, if Lew will accept it.

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00:30:22.040 --> 00:30:32.040
Anyway, to sum up so far, the contractual state, the voters are supposed to control their agents and control these agency costs,

342
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but they don't for four reasons, and I have discussed two so far.

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The state can extract capital by force from the taxpayer, and secondly, there are institutional deficiencies in the methods to control the agency costs.

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We the taxpayer really have a lot of problems controlling our agents in government.

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Now there are more than this, there are more problems here that I'll discuss further on.

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One is that there's an incentive for the state to destroy whatever institutions exist to control its behavior and agency costs.

347
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And fourth, there are weaknesses in the people and their incentives to prevent the state from gaining strength.

348
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Okay, now to get a broad perspective we should talk about society also and distinguish society from the state.

349
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I'll do that extremely briefly.

350
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Just mention that basically society is not the state.

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Society, in my view, precedes the state.

352
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It's the society that creates the governance, not vice versa, and then, so society is really the principle, the governance organization is its agent, that's the idea in this contractual state.

353
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For those of you who might think maybe it would be nice to have a contractual state where we firmly control our agents, it might be possible.

354
00:32:19.540 --> 00:32:27.540
For example, although I don't really think so, but a couple of things occurred to me.

355
00:32:27.540 --> 00:32:31.540
You might have a state that has a monopoly on legal coercion

356
00:32:31.540 --> 00:32:39.540
and then have a two-year sunset provision on all laws.

357
00:32:39.540 --> 00:32:42.540
Okay, so you might build that into the Constitution.

358
00:32:42.540 --> 00:32:44.540
We'll have a sunset provision on every law you pass,

359
00:32:44.540 --> 00:32:47.540
it stops after a year or two.

360
00:32:47.540 --> 00:32:52.540
Or you might have it stop unless a super majority of the people approve of it,

361
00:32:52.540 --> 00:32:54.540
like three-quarters, something like that.

362
00:32:54.540 --> 00:33:02.040
Something large so that only if it really were in the public interest could it ever get passed again.

363
00:33:02.040 --> 00:33:04.880
Anyway, that's at one end of the spectrum.

364
00:33:04.880 --> 00:33:09.000
That's the watchman state, let us say.

365
00:33:09.000 --> 00:33:15.740
But if the controls over your agents get weak enough, you then get the predatory state.

366
00:33:15.740 --> 00:33:17.980
The predatory state is a little different.

367
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Here, the citizens are no longer in the state.

368
00:33:21.200 --> 00:33:24.760
The predatory state, that's an autonomous organization.

369
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You think of it just as an autonomous group of people.

370
00:33:28.600 --> 00:33:30.800
It's like an owner-managed firm.

371
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There are no stockholders, okay?

372
00:33:32.760 --> 00:33:35.960
The owners own it and manage it,

373
00:33:35.960 --> 00:33:38.880
and the citizens don't own it.

374
00:33:38.880 --> 00:33:41.040
The citizens are the prey.

375
00:33:41.040 --> 00:33:42.880
So the state is a gang,

376
00:33:42.880 --> 00:33:45.520
and it just preys on those under its control.

377
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That's the predatory state.

378
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And the totalitarian state is simply an extreme predatory state.

379
00:33:52.880 --> 00:33:58.480
The other end of the spectrum, anarchy or an anarchic society,

380
00:33:58.480 --> 00:34:01.780
there's no single governance organization.

381
00:34:01.780 --> 00:34:08.780
There's decentralized governance organizations, private justice, private enforcement of judgments.

382
00:34:08.780 --> 00:34:11.680
In other words, the defense agencies.

383
00:34:11.680 --> 00:34:15.380
Once you have that, companies that are supplying defense

384
00:34:15.380 --> 00:34:17.840
and they're competing with one another,

385
00:34:17.840 --> 00:34:22.840
then what happens is the agency costs shifts back

386
00:34:24.260 --> 00:34:28.360
onto those companies because if they misbehave,

387
00:34:28.360 --> 00:34:31.040
you can immediately move your business

388
00:34:31.040 --> 00:34:34.400
to some other company, some other defense agency.

389
00:34:34.400 --> 00:34:36.920
If somebody develops a bad reputation,

390
00:34:36.920 --> 00:34:40.280
some defense agency does something really horrendous

391
00:34:40.280 --> 00:34:45.280
or starts passing bad judgments or acting or itself

392
00:34:45.280 --> 00:34:49.600
becoming predatory, people will move their business elsewhere.

393
00:34:49.600 --> 00:34:55.760
So that's the product market sanction that's acting on those companies.

394
00:34:55.760 --> 00:35:03.040
I'm saying all the sanctions that act to lower agency costs for corporations, they will all

395
00:35:03.040 --> 00:35:10.200
work when you have multiple suppliers of law and order.

396
00:35:10.200 --> 00:35:16.640
That's why that will work, why you can't have an anarchic society.

397
00:35:16.640 --> 00:35:22.240
But once you move off that extreme, you start to get more and more agency costs and more

398
00:35:22.240 --> 00:35:28.760
and more inability of the agents to control their, the principles to control the agents.

399
00:35:28.760 --> 00:35:33.640
All right, I'll do some examples now.

400
00:35:33.640 --> 00:35:38.800
The third thing I said that goes wrong with the state is this.

401
00:35:38.800 --> 00:35:45.040
It has the incentive to destroy any institutions that are controlling the agency costs.

402
00:35:45.040 --> 00:35:48.040
It would like to shift them elsewhere.

403
00:35:48.040 --> 00:35:49.560
That's a destructive process.

404
00:35:49.560 --> 00:35:52.680
It's happened in America and it's still happening in America.

405
00:35:52.680 --> 00:35:54.900
It's happening right now in America.

406
00:35:54.900 --> 00:35:58.200
If a company tries to do that, it will fail.

407
00:35:58.200 --> 00:36:00.920
It can't do it.

408
00:36:00.920 --> 00:36:05.760
The competition will prevent it from doing it and all these other checks and balances.

409
00:36:05.760 --> 00:36:07.760
But states can do this.

410
00:36:07.760 --> 00:36:12.900
They can destroy the institutions that are put in place to control them.

411
00:36:12.900 --> 00:36:17.940
They can do it because they have the monopoly on making laws.

412
00:36:17.940 --> 00:36:20.140
So it gives them a one-sided advantage.

413
00:36:20.140 --> 00:36:22.120
They're the apex of society.

414
00:36:22.120 --> 00:36:23.760
They make the laws.

415
00:36:23.760 --> 00:36:26.580
Therefore, you'll see.

416
00:36:26.580 --> 00:36:29.460
So here's how I'm going to go through this.

417
00:36:29.460 --> 00:36:36.760
I'll just say that our founding fathers were well aware of agency costs.

418
00:36:36.760 --> 00:36:43.180
You can read the Federalist papers and reinterpret everything in terms of principal agent problems.

419
00:36:43.180 --> 00:36:45.600
They knew that there were these problems there.

420
00:36:45.600 --> 00:36:47.880
They tried to prevent these problems.

421
00:36:47.880 --> 00:36:56.080
That's why we have the checks and balances, or have them, excuse me.

422
00:36:56.080 --> 00:37:01.840
We could review U.S. history, and at each instance we'll see there was some institution

423
00:37:01.840 --> 00:37:11.840
The first one, I would say for the first 85 years of its existence, the U.S. was more a contractual state and less of a predatory state.

424
00:37:11.840 --> 00:37:21.840
I would say it could not avoid being predatory, even at the outset it was predatory, by the structure and nature of the country.

425
00:37:21.840 --> 00:37:28.400
of a Predatory State. I would say it could not avoid being predatory, even at the outset

426
00:37:28.400 --> 00:37:34.960
it was predatory, by the structure and nature of the Constitution. Shea's Rebellion showed

427
00:37:34.960 --> 00:37:42.920
you the predatory nature immediately, or the Alien and Sedition Acts. However, that predation

428
00:37:42.920 --> 00:37:48.060
was rather low compared to later on.

429
00:37:48.060 --> 00:37:56.440
And the reason it was low, maybe it was partly ideology, Professor Higgs, but also it was

430
00:37:56.440 --> 00:38:00.120
because of institution.

431
00:38:00.120 --> 00:38:06.920
It was partly ideology because the people understood what was going on and they agreed

432
00:38:06.920 --> 00:38:13.320
with the Constitution and the people in government at first interpreted it according to a certain

433
00:38:13.320 --> 00:38:14.320
philosophy.

434
00:38:14.320 --> 00:38:20.000
Anyway, now the war between the states, what did that do?

435
00:38:20.000 --> 00:38:25.240
There was one important agency control device that the principals thought was available

436
00:38:25.240 --> 00:38:28.000
to them and that was secession.

437
00:38:28.000 --> 00:38:33.760
The U.S. was set up as, in theory, the sovereignty was in the people, then you have the states,

438
00:38:33.760 --> 00:38:36.880
the individual states set up the United States.

439
00:38:36.880 --> 00:38:43.880
Now, just like a stockholder can exit a publicly held corporation by selling his stock, the

440
00:38:44.040 --> 00:38:50.260
state could conceivably have exited the union by secession. That could have been a device

441
00:38:50.260 --> 00:38:57.020
to control agency costs. If the central state made decisions that imposed excessive costs

442
00:38:57.020 --> 00:39:01.620
on its member states or on the public, they might have exited the union. You know, if

443
00:39:01.620 --> 00:39:06.540
the tariffs were too high, exit the union. Therefore, you control the misbehavior of

444
00:39:06.540 --> 00:39:08.780
of Your Agents.

445
00:39:08.780 --> 00:39:12.540
So that threat restrained the actions of the central state.

446
00:39:12.540 --> 00:39:18.980
However, the Civil War, I don't want to insult anybody, but whatever you want to call it,

447
00:39:18.980 --> 00:39:30.460
the War of Northern Aggression, it wasn't actually a civil war, I understand.

448
00:39:30.460 --> 00:39:32.780
That became null and void.

449
00:39:32.780 --> 00:39:38.580
So within a generation, it only took a generation, the U.S. accreted a lot more power and became

450
00:39:38.580 --> 00:39:41.460
more and more predatory.

451
00:39:41.460 --> 00:39:47.600
Lincoln did not save the union, he destroyed the contract and the contractual state.

452
00:39:47.600 --> 00:39:51.420
What he did was save and augment the predatory state.

453
00:39:51.420 --> 00:39:57.060
Another control device was the election of senators by the state legislatures.

454
00:39:57.060 --> 00:40:01.740
That ended in 1913, replaced by direct election by the people.

455
00:40:01.740 --> 00:40:08.860
Now just imagine that the stockholders of a company, suppose the managers of a company

456
00:40:08.860 --> 00:40:14.700
had various proposals they put in front of the stockholders and then the stockholders

457
00:40:14.700 --> 00:40:21.340
directly elected those managers, okay, that's what direct election corresponds to.

458
00:40:21.340 --> 00:40:27.140
I say the companies would actually be worse off than the system we have now.

459
00:40:27.140 --> 00:40:31.340
What they do now is we elect a board of directors.

460
00:40:31.340 --> 00:40:38.380
The board of directors hires and fires the managers and says yes or no to the important

461
00:40:38.380 --> 00:40:40.420
managerial decisions.

462
00:40:40.420 --> 00:40:41.820
Why does that work?

463
00:40:41.820 --> 00:40:47.900
It's because the board of directors has special knowledge, a lot more knowledge than the stockholders

464
00:40:47.900 --> 00:40:51.540
do about the affairs of that company.

465
00:40:51.540 --> 00:40:57.140
Furthermore, the board of directors often own large blocks of stock themselves, so they

466
00:40:57.140 --> 00:41:02.580
have an incentive to monitor these managers.

467
00:41:02.580 --> 00:41:03.580
That works.

468
00:41:03.580 --> 00:41:07.100
That's how the corporations actually work.

469
00:41:07.100 --> 00:41:13.300
So in an analogous way, citizens elected the state legislatures.

470
00:41:13.300 --> 00:41:15.280
That's like electing the board of directors.

471
00:41:15.280 --> 00:41:19.380
They elected the senators or selected the senators.

472
00:41:19.380 --> 00:41:23.060
The Senators were beholden to the state legislatures.

473
00:41:23.060 --> 00:41:29.520
So there was a degree of control over their voting from the state legislatures who were

474
00:41:29.520 --> 00:41:31.740
somewhat specialized.

475
00:41:31.740 --> 00:41:37.660
They understand the politics, what's going on, better than the people do.

476
00:41:37.660 --> 00:41:43.500
Let's face it, the voters are rationally ignorant and they don't know half of what's going on.

477
00:41:43.500 --> 00:41:49.340
So the minute you get rid of this procedure and make a direct election, you now have

478
00:41:49.340 --> 00:41:55.860
have a diffuse electorate, very diffuse, all kinds of people, the control and the monitoring

479
00:41:55.860 --> 00:41:59.180
actually go down.

480
00:41:59.180 --> 00:42:06.860
What now happens is an interest group can get to the senator, the interest group can

481
00:42:06.860 --> 00:42:11.460
also try to sway the public, propagandize the public.

482
00:42:11.460 --> 00:42:16.980
So the system does not work as well as when you have state legislatures electing the senators.

483
00:42:16.980 --> 00:42:20.660
The agency costs actually go up.

484
00:42:20.660 --> 00:42:24.020
What happens then is the senators become part of the central state.

485
00:42:24.020 --> 00:42:30.180
Instead of the senators being beholden to the state legislatures, they become more identified

486
00:42:30.180 --> 00:42:33.700
with the federal state.

487
00:42:33.700 --> 00:42:36.380
So that has been perverted.

488
00:42:36.380 --> 00:42:43.540
That mechanism has been lost.

489
00:42:43.540 --> 00:42:46.540
What else?

490
00:42:46.540 --> 00:42:54.540
The civil service system, we used to have the spoil system, and that's gone.

491
00:42:54.540 --> 00:43:02.540
What now happens is, you have the important arms of the state, the bureaucracies have tenure, basically.

492
00:43:02.540 --> 00:43:06.540
So, you used to be able to turn the employees over at an election.

493
00:43:06.540 --> 00:43:12.540
That's a device to control costs, too, the misbehavior of the agents.

494
00:43:12.540 --> 00:43:18.540
People could elect somebody, they would then get rid of all these underlings and put in a new crop.

495
00:43:18.540 --> 00:43:23.540
This no longer happens, so you lost another device to control your agents.

496
00:43:23.540 --> 00:43:27.540
They're ensconced right there, the bureaucracy.

497
00:43:27.540 --> 00:43:30.540
And whether it's Republican or Democrat, they're still there.

498
00:43:30.540 --> 00:43:37.540
And after a while, they begin to run things.

499
00:43:37.540 --> 00:43:46.540
Limited taxation is actually a significant method of controlling agent's behavior.

500
00:43:46.540 --> 00:43:52.020
If you only give them so much money, there's only so much they can waste.

501
00:43:52.020 --> 00:43:55.080
So hey, that's good.

502
00:43:55.080 --> 00:44:02.500
The income tax undermined that because now the revenues exploded.

503
00:44:02.500 --> 00:44:12.400
So the agency costs rose dramatically, and again, they're paid for by the public.

504
00:44:12.400 --> 00:44:14.720
So we can continue on.

505
00:44:14.720 --> 00:44:21.660
The notion I'm putting forward here is that basically the mechanisms to control the agency

506
00:44:21.660 --> 00:44:25.460
costs have been systematically ravaged.

507
00:44:25.460 --> 00:44:29.480
Another one I would say would be the war-making power.

508
00:44:29.480 --> 00:44:33.160
It was lodged in Congress.

509
00:44:33.160 --> 00:44:38.080
That's like having the board of directors decide on an important investment.

510
00:44:38.080 --> 00:44:41.560
Shall we go ahead with it or should we not go ahead with it?

511
00:44:41.560 --> 00:44:47.560
The managers say, well, we'd like to build a new plan in Pakistan and put it right on

512
00:44:47.560 --> 00:44:49.160
the Afghanistan border.

513
00:44:49.160 --> 00:44:50.160
Okay?

514
00:44:50.160 --> 00:44:54.600
And the board of directors said, no, I don't think this is really a good idea right now.

515
00:44:54.600 --> 00:44:55.600
Okay?

516
00:44:55.600 --> 00:44:58.560
Now, Congress was given this job to do.

517
00:44:58.560 --> 00:45:10.560
war should be undertaken or not. War is like an important investment project, whether you have a war, but it apparently has abandoned that in the last 40-50 years.

518
00:45:10.560 --> 00:45:21.560
Basically, why? Congress seems to actually want to consolidate power with the executive branch. That removes a check and a balance.

519
00:45:21.560 --> 00:45:27.840
you see that consolidation now we have we're facing one team against us the

520
00:45:27.840 --> 00:45:32.960
Congress is no longer acting on behalf of we the people or us the people but

521
00:45:32.960 --> 00:45:38.320
now it's more consolidated with the president now this is not good we lose

522
00:45:38.320 --> 00:45:45.400
that or if the president says that he wants plenary power he wants to be

523
00:45:45.400 --> 00:45:48.240
beyond the judicial reach.

524
00:45:48.240 --> 00:45:50.080
What is he saying?

525
00:45:50.080 --> 00:45:53.160
Basically, he wants to overcome the check and balance

526
00:45:53.160 --> 00:45:55.760
and consolidate the separate branches.

527
00:45:55.760 --> 00:45:57.400
The more you see the consolidation

528
00:45:57.400 --> 00:46:01.000
of the separate branches, the worse things, obviously, get.

529
00:46:01.000 --> 00:46:05.080
Because the agents are, you have less and less control

530
00:46:05.080 --> 00:46:06.800
over your agents in government.

531
00:46:11.420 --> 00:46:13.360
So the outcome of all this is predictable.

532
00:46:13.360 --> 00:46:20.800
If you destroy the institutions that control agency costs, which is what we have done in America,

533
00:46:20.800 --> 00:46:23.040
then you move toward totalitarianism.

534
00:46:23.040 --> 00:46:27.300
You move more toward predatory behavior on the part of the state.

535
00:46:27.300 --> 00:46:34.760
So we the people, we were supposed to control the behavior of our agents, we didn't do it

536
00:46:34.760 --> 00:46:37.680
for various reasons, for a lot of different reasons for this.

537
00:46:37.680 --> 00:46:41.720
But one reason is we had to blame, the American people had to blame.

538
00:46:41.720 --> 00:46:50.720
Each generation has come along, more ignorant, more weak, more suggestible, more adrift from

539
00:46:50.720 --> 00:46:56.680
philosophic foundations, sound philosophic foundations, and they've blessed these changes

540
00:46:56.680 --> 00:46:57.680
actually.

541
00:46:57.680 --> 00:47:06.060
On the other hand, the state has outflanked and outmaneuvered the population because it

542
00:47:06.060 --> 00:47:10.580
has that lawmaking power at the apex of society.

543
00:47:10.580 --> 00:47:18.420
So that process actually is institutionalized now, and it's so deep, and it's affected

544
00:47:18.420 --> 00:47:25.020
the ideology of so many Americans that I don't think it can be reversed by anything less.

545
00:47:25.020 --> 00:47:30.740
We would have to have revolutions in thought and deed in order to overcome that.

546
00:47:30.740 --> 00:47:36.440
There's no simple way to overcome this at the moment.

547
00:47:36.440 --> 00:47:43.160
So the predominance of the state, it seems to me, follows logically from its relationship

548
00:47:43.160 --> 00:47:44.160
with society.

549
00:47:44.160 --> 00:47:47.040
This is why I'm an anarchist, for many, many reasons.

550
00:47:47.040 --> 00:47:55.280
But the logic of it shows me that the state will win in most of these battles.

551
00:47:55.280 --> 00:48:00.060
So why is it that the state will overcome society?

552
00:48:00.060 --> 00:48:05.400
First of all, it has a monopoly over law and justice, okay, fine.

553
00:48:05.400 --> 00:48:12.300
What does that do? That immediately, critically weakens society, because what happens when

554
00:48:12.300 --> 00:48:19.460
injustice is done? What do you do? You don't have recourse to each other through private

555
00:48:19.460 --> 00:48:26.160
institutions, so the horizontal communication or ability to organize yourself and rectify

556
00:48:26.160 --> 00:48:32.480
some injustice is lessened. You have to go along with the rule of law, because that's

557
00:48:32.480 --> 00:48:37.480
That's the law making organ and that's what you've made it.

558
00:48:37.480 --> 00:48:43.440
So therefore society no longer can overcome these issues easily.

559
00:48:43.440 --> 00:48:48.440
The state is strong, united and focused.

560
00:48:48.440 --> 00:48:52.720
Individuals, we're rather weak as individuals and isolated.

561
00:48:52.720 --> 00:49:00.120
In order to fight the state, hey, Hans spent a year just trying to fight University of

562
00:49:00.120 --> 00:49:01.120
Nevada Las Vegas.

563
00:49:01.120 --> 00:49:07.640
It's very, very difficult to do this, and most of us, most people give in.

564
00:49:07.640 --> 00:49:15.720
Secondly, obviously, law is a very, very fundamental thing, and if it is so fundamental that if

565
00:49:15.720 --> 00:49:21.040
you're able to make law, you can twist society in a direction, move it in a direction you

566
00:49:21.040 --> 00:49:27.840
want to, and then if you control one part of society, then it gives you a wedge to control

567
00:49:27.840 --> 00:49:31.280
all another part of society.

568
00:49:31.280 --> 00:49:39.920
So third, I would say once there is any state at all, then there are opportunities for gain.

569
00:49:39.920 --> 00:49:47.120
The members of the state will see that they can gain in various ways by making law or

570
00:49:47.120 --> 00:49:49.280
not making law.

571
00:49:49.280 --> 00:49:55.380
So they have an incentive to increase their domination over society because they can personally

572
00:49:55.380 --> 00:49:56.960
gain from it.

573
00:49:56.960 --> 00:50:04.760
So therefore, over time, economics will tell you they will exploit these gains, and therefore

574
00:50:04.760 --> 00:50:07.900
the state's power will grow.

575
00:50:07.900 --> 00:50:16.820
Fourth, in order to increase their domination, the states have an incentive to encourage

576
00:50:16.820 --> 00:50:25.100
society to deviate from the paths of righteousness, and society deviates on its own to begin with.

577
00:50:25.100 --> 00:50:32.220
So it's not that difficult to incentivize society to deviate.

578
00:50:32.220 --> 00:50:37.100
What do I mean by that?

579
00:50:37.100 --> 00:50:43.020
Failing to take responsibility for one's own life, shifting burdens to other people,

580
00:50:43.020 --> 00:50:49.860
extracting benefits you don't deserve, if people in society are excessively fearful

581
00:50:49.860 --> 00:50:54.540
or if they're greedy, if they're ignorant, if they have any incapacity, if they want

582
00:50:54.540 --> 00:51:00.560
for Revenge, if they want to dominate other peoples, if they have prejudices, all the

583
00:51:00.560 --> 00:51:05.580
human weaknesses are just lying there on the table, and you give them the state all this

584
00:51:05.580 --> 00:51:09.880
power, what are they going to do? They're going to try to exploit these weaknesses that

585
00:51:09.880 --> 00:51:14.780
are inherent in all of us, because they gain from it, the members of the state will gain

586
00:51:14.780 --> 00:51:19.100
from it, they will gain power.

587
00:51:19.100 --> 00:51:24.940
I see this as a two-way street, a simultaneous process.

588
00:51:24.940 --> 00:51:30.020
The weakness of the people is always there, but if it stays powerful, it will try to exploit

589
00:51:30.020 --> 00:51:31.160
it.

590
00:51:31.160 --> 00:51:37.100
But then also, once you get tyranny, it fosters societal weakness.

591
00:51:37.100 --> 00:51:42.020
Once you have a social security program or a Medicare program or all kinds of programs

592
00:51:42.020 --> 00:51:48.420
where people become dependent, then the people become weak and they lose their ability, you

593
00:51:48.420 --> 00:51:53.900
The whole philosophy changes, so the tyranny fosters societal weakness.

594
00:51:53.900 --> 00:52:00.140
On the other hand, freedom fosters societal strength, because you have to take responsibility

595
00:52:00.140 --> 00:52:05.100
for your acts.

596
00:52:05.100 --> 00:52:11.240
So the aims of the state are subject unto themselves.

597
00:52:11.240 --> 00:52:16.040
When you do have a state, what is it like?

598
00:52:16.040 --> 00:52:19.000
And it's a predatory organization, for example.

599
00:52:19.000 --> 00:52:24.480
What happens within that organization?

600
00:52:24.480 --> 00:52:28.820
And running short of time, so let me skip.

601
00:52:28.820 --> 00:52:33.560
Another interesting topic is how the state maintains its power.

602
00:52:33.560 --> 00:52:39.080
And as I said, one way is to remove a lot of checks and balances.

603
00:52:39.080 --> 00:52:44.880
In doing that, what you have, the state is very clever, the members of the state are

604
00:52:44.880 --> 00:52:55.880
They are very clever. They are always enacting laws or undertaking projects that must harm society economically.

605
00:52:55.880 --> 00:53:02.880
They are not things that we would choose if we were free to choose them. They are not products. They are imposed on us.

606
00:53:02.880 --> 00:53:09.880
So we only get to vote on them and that is not an efficient or effective way to say we like them or not.

607
00:53:09.880 --> 00:53:13.720
So laws generally harm society.

608
00:53:13.720 --> 00:53:17.520
In other words, the state is always aggressing on us.

609
00:53:17.520 --> 00:53:24.120
And that means that it's lowering our standard of living, basically.

610
00:53:24.120 --> 00:53:29.320
So people more or less realize this in one way or another.

611
00:53:29.320 --> 00:53:35.720
So the state has to therefore control or tries to control the population's resistance to

612
00:53:35.720 --> 00:53:38.560
these laws.

613
00:53:38.560 --> 00:53:44.480
In order to do that, they basically have to fool the people, that would be one method,

614
00:53:44.480 --> 00:53:48.540
or use fear, another method.

615
00:53:48.540 --> 00:53:56.080
But the state will use many, many, many means in order to reduce the rebelliousness or the

616
00:53:56.080 --> 00:54:00.720
resistance of society to what it's doing.

617
00:54:00.720 --> 00:54:07.280
Violence, it'll stress them, be law-abiding, make examples out of law-breakers with long

618
00:54:07.280 --> 00:54:12.260
Concealing Sentences, Imprisoned People, Imprison Innocent People, so that people will know

619
00:54:12.260 --> 00:54:20.000
you're powerful, don't rehabilitate people, spread propaganda, lies, sentience, conceal

620
00:54:20.000 --> 00:54:25.720
your true aims, conceal even what you're doing, what your actions are, conceal the

621
00:54:25.720 --> 00:54:35.720
effects of your actions, blame others, blame businessmen, blame the rich, control education,

622
00:54:35.720 --> 00:54:45.620
break up families, spy on dissidents, inculcate values like obedience, raise fears, appeal

623
00:54:45.620 --> 00:54:54.840
to popular values like equality, I think that in my opinion one of the major things that

624
00:54:54.840 --> 00:55:02.720
has happened in America is that the doctrine of equality has firmly taken hold and that

625
00:55:02.720 --> 00:55:19.720
So people identify equality as being a just thing, and obviously if they believe that's just then they want the state to enforce equality, and therefore the state will do this which is really unjust.

626
00:55:19.720 --> 00:55:23.720
So this is right in line with what the state wants, I believe.

627
00:55:23.720 --> 00:55:28.720
So I could go on and on. The state has many, many, many tools.

628
00:55:28.720 --> 00:55:36.720
Disarming the population, portraying itself as crucial to law and order, society and order.

629
00:55:36.720 --> 00:55:47.720
They'll say things like this, majority rule, voting, look, you've got to go along with what happens.

630
00:55:47.720 --> 00:56:00.720
Sometimes you get your way, sometimes the other gets his way, but we're all Americans, we're all in this together, so we still stay with this system of majority, but they have ways of soft-soaping in doing this.

631
00:56:00.720 --> 00:56:10.720
And, of course, as things get worse, they'll try to suppress speech and communication as well.

632
00:56:10.720 --> 00:56:17.480
Everything is worthwhile to look at the totalitarian state because it's an extreme predatory state

633
00:56:17.480 --> 00:56:21.920
and everything is very clear in a totalitarian state.

634
00:56:21.920 --> 00:56:28.160
The owners of the state, the clique who run it, they value control over the personal lives

635
00:56:28.160 --> 00:56:34.380
of their prey, not just their wealth, but control, power, per se.

636
00:56:34.380 --> 00:56:38.920
If they can educate them, feed them, give them welfare, they can turn them into compliant

637
00:56:38.920 --> 00:56:49.160
Subjects. As time goes on, if you can control health, education and welfare, that's a big

638
00:56:49.160 --> 00:56:55.680
foot in the door. After that, the totalitarian state likes to control employment, entertainment,

639
00:56:55.680 --> 00:57:05.800
art, expression and speech. But the state does have some kind of natural limitations.

640
00:57:05.800 --> 00:57:09.700
I don't want to leave the impression that states are all powerful.

641
00:57:09.700 --> 00:57:16.400
Because the more they control society, there are two things that happens.

642
00:57:16.400 --> 00:57:21.620
One is there are more and more inefficiencies introduced into the system.

643
00:57:21.620 --> 00:57:29.500
So the population then will tend to go more and more resistance to what's happening.

644
00:57:29.500 --> 00:57:34.520
At the same time, the state has to control the population.

645
00:57:34.520 --> 00:57:40.780
And the more things it tries to control, the higher its costs of control go.

646
00:57:40.780 --> 00:57:50.640
So what I'm saying is there's basically a demand curve for control and a cost curve for control.

647
00:57:50.640 --> 00:57:55.880
If the cost of control was zero, we would see totalitarian states everywhere, but we

648
00:57:55.880 --> 00:57:57.080
don't see them.

649
00:57:57.080 --> 00:58:04.080
So the costs are, at some point, is substantial enough that the states cannot go any further.

650
00:58:04.080 --> 00:58:13.080
States make mistakes. Hitler went too far, and that was the end of the Third Reich.

651
00:58:13.080 --> 00:58:17.080
Mao went too far, his successors couldn't continue what he did.

652
00:58:17.080 --> 00:58:20.080
Mussolini went too far. Stalin went too far.

653
00:58:20.080 --> 00:58:25.080
His successors couldn't continue controlling what he did.

654
00:58:25.080 --> 00:58:27.080
They do make mistakes.

655
00:58:27.080 --> 00:58:32.080
The more you try to control, the more you're raising your own costs of control,

656
00:58:32.080 --> 00:58:37.760
Control, and then you're also providing incentives to your subjects to find ways around your

657
00:58:37.760 --> 00:58:45.920
regulations and rebel. You'll get black markets and attempts to leave the country or organize

658
00:58:45.920 --> 00:58:54.840
rebellions or coups or shoot the dictators or whatever the case may be. Anyway, the totalitarian

659
00:58:54.840 --> 00:59:01.640
The State, in my view, it helps us understand all States because it's extreme.

660
00:59:01.640 --> 00:59:07.160
The State, it's an organization, the State, it always competes with society.

661
00:59:07.160 --> 00:59:12.360
It's always either the choices of the subjects versus the choices of the rulers.

662
00:59:12.360 --> 00:59:15.560
The State always seeks to suppress freedom.

663
00:59:15.560 --> 00:59:17.940
It always seeks control and domination.

664
00:59:17.940 --> 00:59:23.640
The rulers always try to impose their values, fulfill their values.

665
00:59:23.640 --> 00:59:37.640
The state is always opposed to society. Meanwhile, the characterization of the states, it depends on the institutions that society has in place to control their agents.

666
00:59:37.640 --> 00:59:50.640
There are large agency costs here. The power to tax is the exact opposite of an institution that will help control agency costs. It just plays right into the hands of the controllers.

667
00:59:50.640 --> 00:59:58.640
In other words, that's why I cannot see you can have a state and at the same time allow taxation.

668
00:59:58.640 --> 01:00:07.640
People end up not being able to control the level of taxation effectively and the state ends up being the master.

669
01:00:07.640 --> 01:00:20.280
So, in finance, what we would say is that totalitarian states are obviously negative

670
01:00:20.280 --> 01:00:24.680
net present value projects.

671
01:00:24.680 --> 01:00:30.600
A negative net present value project is an investment that destroys wealth or destroys

672
01:00:30.600 --> 01:00:31.600
utility.

673
01:00:31.600 --> 01:00:36.600
But I would say all states are negative net present value projects.

674
01:00:36.600 --> 01:00:47.600
What that implies is that the difference between the current level of where we are and where we could be,

675
01:00:47.600 --> 01:00:50.600
there is unexploited gain to be made.

676
01:00:50.600 --> 01:00:54.600
If we could simply stop the state's policies,

677
01:00:54.600 --> 01:00:59.600
we would suddenly see a big gain in welfare and utility of the population.

678
01:00:59.600 --> 01:01:10.600
So that provides a pervasive, long-run incentive for states to be shrunk and eliminated.

679
01:01:10.600 --> 01:01:15.600
I'm actually a long-run optimist because I see, look, this is an arbitrage opportunity here.

680
01:01:15.600 --> 01:01:23.600
If we get rid of the states, if states were business firms, supposing they were corporations,

681
01:01:23.600 --> 01:01:33.600
They long ago have been taken over, sold off, spun off, restructured, cut back, merged, liquidated or dismantled.

682
01:01:33.600 --> 01:01:40.600
But we haven't done that. We the people haven't done that to our states for a variety of reasons mentioned earlier.

683
01:01:40.600 --> 01:01:44.600
I'll mention another one. There are cost barriers.

684
01:01:44.600 --> 01:01:56.600
One of the costs of getting rid of a state is the renegotiation of the contracts that have been made already.

685
01:01:56.600 --> 01:02:01.600
And that arises also when you have bankrupt companies.

686
01:02:01.600 --> 01:02:10.600
To redo the company, somebody has to decide how to renegotiate, change the contracts and pay off the debt holders and stockholders.

687
01:02:10.600 --> 01:02:20.600
Here's what I mean. Right now we have one-third of all seniors receive all their income from Social Security, one-third.

688
01:02:20.600 --> 01:02:25.600
Two-thirds of all seniors receive 50 to 100 percent of their income from Social Security.

689
01:02:25.600 --> 01:02:30.600
They are going to resist shrinking the state until their income is secured.

690
01:02:30.600 --> 01:02:32.600
In other words, that's a big barrier.

691
01:02:32.600 --> 01:02:36.600
Now there are many other programs like that.

692
01:02:36.600 --> 01:02:44.600
So you see that the state's programs have inherently erected obstacles that discourage the restructuring.

693
01:02:44.600 --> 01:02:52.600
We'd like to restructure this situation, cut it back, get rid of it altogether if we could,

694
01:02:52.600 --> 01:02:56.600
but that's not going to happen very quickly.

695
01:02:56.600 --> 01:03:02.600
But there are some clear obstacles here in that the population is going to resist this,

696
01:03:02.600 --> 01:03:11.400
Even if they like the idea, even if they think all the anarcho-capitalists are the New Kansians,

697
01:03:11.400 --> 01:03:15.200
so these guys really know what they're doing, let's do what they say, you're still going

698
01:03:15.200 --> 01:03:24.200
to have to figure out a way to compensate people or get them to go along, basically.

699
01:03:24.200 --> 01:03:38.200
Alright, I'll conclude by briefly a section called The Fault, Dear Brutus, by saying that

700
01:03:38.200 --> 01:03:44.080
the contest, in my opinion, state is always in a contest with society, against society,

701
01:03:44.080 --> 01:03:51.000
but the outcome depends on society. If we show weakness, it presents an opportunity

702
01:03:51.000 --> 01:03:56.600
for the state to exploit, and they will try to exploit weaknesses. What is preferred to

703
01:03:56.600 --> 01:04:03.600
that is that we cooperate to insure each other against violations of rights. That is our

704
01:04:06.920 --> 01:04:11.080
best chance of holding on to freedom, not to rely on the state to do this, but to do

705
01:04:11.080 --> 01:04:16.400
it for ourselves. In order to do that, we have to know what rights and justice actually

706
01:04:16.400 --> 01:04:25.240
are. So we need ethical codes as a ballwork against tyranny. Going beyond having multiple

707
01:04:25.240 --> 01:04:30.960
defense agencies, beyond vigilance or beyond an armed public, we need more than that. We

708
01:04:30.960 --> 01:04:37.580
need the right philosophy. The philosophy of relativism has spread too far. The American

709
01:04:37.580 --> 01:04:46.300
people no longer have the ability or the will to support natural right against natural wrong.

710
01:04:46.300 --> 01:04:50.460
I don't think they even know the difference between right and wrong, never mind natural

711
01:04:50.460 --> 01:04:52.820
right and natural wrong.

712
01:04:52.820 --> 01:04:59.500
Relativism, that gives a rationale for unethical and immoral behavior.

713
01:04:59.500 --> 01:05:04.940
And the doctrine of equality covers it up.

714
01:05:04.940 --> 01:05:10.940
If justice is defined as equality, and if the state dispenses justice, then the state's

715
01:05:10.940 --> 01:05:13.420
aggressions become valid.

716
01:05:13.420 --> 01:05:19.420
So, unlawfulness and furtherance of equality, that becomes right and praise-worthy.

717
01:05:19.420 --> 01:05:22.420
In other words, wrong becomes right.

718
01:05:22.420 --> 01:05:28.420
And people get very confused then, about they don't know the difference between right and wrong anymore.

719
01:05:28.420 --> 01:05:34.420
So in order to rescue society from tyranny, we need a lot of things.

720
01:05:34.420 --> 01:05:42.420
One revolution we need, we need to recover the ability simply to understand and distinguish right from wrong.

721
01:05:42.420 --> 01:05:52.420
Then we also need an understanding that it's the right behavior that brings peace and happiness.

722
01:05:52.420 --> 01:05:59.420
So sooner or later the American state will fail, just as the Soviet Empire failed.

723
01:05:59.420 --> 01:06:04.420
And I don't think we're prepared for it. We need a lot of preparation.

724
01:06:04.420 --> 01:06:10.420
When it happens, we will need to know the right remedies so we don't repeat the mistakes of the past.

725
01:06:10.420 --> 01:06:16.420
I think we will need a very strong understanding of why the state is defective.

726
01:06:16.420 --> 01:06:21.420
We will need to know exactly what went wrong so we don't make the same mistakes again.

727
01:06:21.420 --> 01:06:27.420
Society as the principle cannot control the state as the agent.

728
01:06:27.420 --> 01:06:33.420
If it grants the state irrevocable law-making power, including taxing power,

729
01:06:33.420 --> 01:06:37.420
we will bear the cost rather than the state.

730
01:06:37.420 --> 01:06:47.420
and no matter what institutions we devise to control the costs, the state will have the incentive to tear them down and tear society down.

731
01:06:47.420 --> 01:06:52.420
The state very simply is the enemy of society.

732
01:07:07.420 --> 01:07:35.420
I could add one more institutional change to the list that you gave that included the income tax and the Postal Security Administration that was an extremely important empowerment of the state, and that was the Federal Reserve Act of 1930, which made it possible to tax without actually people knowing it.

733
01:07:37.420 --> 01:07:55.420
I would like for you to consider an alternative to your sunsetting idea of legislation dying after two years of judicial action, because I can see that becoming standard practice if we re-institute what's gone before.

734
01:07:55.420 --> 01:08:07.420
I think we'd be better off to say that new legislation requires a supermajority of two-thirds or 75%, but could be repealed with a simple majority.

735
01:08:07.420 --> 01:08:14.420
That would prevent a small majority from enacting a great hardship on a sizable majority.

736
01:08:14.420 --> 01:08:16.420
A good idea.

737
01:08:16.420 --> 01:08:20.420
It's further back behind.

738
01:08:20.420 --> 01:08:43.420
Michael, I think the first half of your speech was great. I love the theme of examining government as an organization, but you seem to veer into what I'm, I mean, maybe it's the optimism of youth, but little sentimentality, I think, saying that each generation is successively ignorant. I think, if you, if you're, I saw some older people nodding.

739
01:08:43.420 --> 01:09:01.420
If you're at a starting point and each generation takes one successive step, you can get to a pretty terrible spot and each generation is equally fault, but I tend to think that what we're really seeing is both the state and the people are actually getting more sophisticated over time.

740
01:09:01.420 --> 01:09:05.420
I think, you know, there's some things the state was able to get away with.

741
01:09:05.420 --> 01:09:09.420
The state is doing some things now that it hadn't thought of a hundred years ago,

742
01:09:09.420 --> 01:09:13.420
but there's some things the state used to try to get away with a hundred years ago when it did,

743
01:09:13.420 --> 01:09:17.420
and now it doesn't get away with them. Like, I think some of the foreign aggression might

744
01:09:17.420 --> 01:09:21.420
take a look at the Philippines, then take a look at Vietnam, then take a look at Iraq,

745
01:09:21.420 --> 01:09:25.420
and I think the public response to those has been a lot sharper and a lot sooner,

746
01:09:25.420 --> 01:09:29.420
I mean, in the more recent past.

747
01:09:29.420 --> 01:09:31.420
I didn't mean you.

748
01:09:59.420 --> 01:10:08.420
Well, a more localized situation would be better. It would be much, much better.

749
01:10:08.420 --> 01:10:23.420
I just like the extreme left viewpoint because it's clear and it gives a good benchmark for thinking about all the problems and analyzing what's going on.

750
01:10:23.420 --> 01:10:34.420
Look, if we got, if we started even moving in that direction, I'd be happy, and if we got down to what you're saying, I'd be quite happy.

751
01:10:34.420 --> 01:10:36.420
Harry?

752
01:10:36.420 --> 01:10:41.420
The President, I think one other thing you could add is the establishment of the Federal Reserve.

753
01:10:41.420 --> 01:10:43.420
You're going to print money without gold.

754
01:10:43.420 --> 01:10:44.420
Yes.

755
01:10:44.420 --> 01:10:50.420
Just one extra, breaking the curable of a state of state policy.

756
01:10:50.420 --> 01:10:52.420
I totally agree with that, sure.

757
01:10:52.420 --> 01:10:57.420
It seems like you presented with two different models of the state.

758
01:10:57.420 --> 01:11:07.420
Toward the end of your talk, you had a monolithic state that you personified, sometimes with actual names like Stalin and Hitler and so forth,

759
01:11:07.420 --> 01:11:09.420
that's trying to do all this stuff to us.

760
01:11:09.420 --> 01:11:18.420
But in the beginning, when you talk about agency costs, you suggest that these agency problems are worse in the state than they are in the private sector,

761
01:11:18.420 --> 01:11:24.860
Which would sort of lead you to believe that the state really couldn't accomplish these ends anyway because of the agency problem.

762
01:11:24.860 --> 01:11:29.460
How do you reconcile those two different models of the state?

763
01:11:29.460 --> 01:11:34.180
I'll clarify.

764
01:11:34.180 --> 01:11:43.220
I have one model of the state in my mind, which is, you can think of it as being, we're the principals, they're the agents.

765
01:11:43.220 --> 01:11:50.820
But the mechanisms to control their behavior vary significantly from state to state.

766
01:11:50.820 --> 01:11:55.420
So if you have very good mechanisms to control what they are doing,

767
01:11:55.420 --> 01:11:58.620
then you'll have what I call a contractual state.

768
01:11:58.620 --> 01:12:07.720
But at some point, the members of the state begin to act on their own behalf,

769
01:12:07.720 --> 01:12:11.020
impose strictures and measures upon the public,

770
01:12:11.020 --> 01:12:14.020
And then I call that a predatory state.

771
01:12:14.020 --> 01:12:19.020
Any given state will have a kind of a mixture of these things in practice.

772
01:12:19.020 --> 01:12:26.020
So it's going to be, what you term predatory will depend on how badly they are behaving.

773
01:12:26.020 --> 01:12:31.020
And as you continue on, you eventually come to a totalitarian state,

774
01:12:31.020 --> 01:12:35.020
which has extreme control over the population.

775
01:12:35.020 --> 01:12:39.020
They are no longer, the population is no longer the principles at all.

776
01:12:39.020 --> 01:12:55.020
But let me rephrase that. Because of these agency problems, if Stalin is the state, how can he accomplish anything, how can he get the people under him to accomplish his ends, given the agency problems you cited at the beginning?

777
01:13:09.020 --> 01:13:11.020
There's no agency problem in getting Stalin to control the gulag. I mean, he's got to have people...

778
01:13:39.020 --> 01:13:50.020
There are many documentation where he didn't know what was going on during World War II and so on, or even in the gulag sometimes, he didn't know.

779
01:13:50.020 --> 01:13:55.020
One last question.

780
01:13:55.020 --> 01:14:11.020
You mentioned that when the American state collapses, we have to be prepared in our next step, assuming, towards, well, Kalei and our vocabularies, or something that doesn't repeat 1776.

781
01:14:11.020 --> 01:14:25.020
Would you mind elaborating on that, because I feel that people who have this traditional mindset of going back to what we were have learned from a failure of the past.

782
01:14:41.020 --> 01:14:49.020
We're the cutting edge. We are the scholars. We're focusing on these problems full-time or with a lot of brain power.

783
01:14:49.020 --> 01:15:01.020
We shouldn't be engaged in peripheral matters too much or get diverted, but we should try to focus on really building up a body of knowledge

784
01:15:01.020 --> 01:15:10.020
about what has happened, why it's happened, and then what to do about it. And that alone is extremely challenging.

785
01:15:10.020 --> 01:15:15.020
My prescription, I can't give you one really. How can I give you one?

786
01:15:15.020 --> 01:15:27.020
But I think the more widespread the understanding is of what has happened, why it has happened, what went wrong, the better off we are.

787
01:15:27.020 --> 01:15:36.020
I'm just trying to contribute my little part to it, simply to understand, for example, the destruction of checks and balances,

788
01:15:36.020 --> 01:15:44.540
balances, or the inherent problems in controlling layers and layers and layers of agents in

789
01:15:44.540 --> 01:15:53.260
government or the fact that they measure up poorly compared to controlling corporations.

790
01:15:53.260 --> 01:16:01.580
So maybe it will make an easier pathway for people to say, let's try, my own favorite

791
01:16:01.580 --> 01:16:07.260
is what we should do but my own prescription basically is privatize as

792
01:16:07.260 --> 01:16:14.180
many things as possible we already have a big private police contingent try to

793
01:16:14.180 --> 01:16:19.660
private and we have some private courts just keep pushing that more and more and

794
01:16:19.660 --> 01:16:26.940
more so that it goes into the fabric of society basically but you know it's very

795
01:16:26.940 --> 01:16:31.940
It's very difficult because we're fighting against the expansion.

796
01:16:31.940 --> 01:16:35.940
The groups constantly try to expand the powers of government,

797
01:16:35.940 --> 01:16:42.940
and so it's really an uphill battle, as far as I can see.