WEBVTT NOTE 12.09. Binary Intervention: Government Expenditures 1 00:00:00.000 --> 00:00:06.000 9. Binary Intervention, Government Expenditures 2 00:00:06.000 --> 00:00:10.000 Government expenditures are made from government revenue. 3 00:00:10.000 --> 00:00:17.000 In the preceding section we have dealt with the major source of governmental revenue, taxation. 4 00:00:17.000 --> 00:00:21.000 Later we shall deal with inflation or money creation. 5 00:00:21.000 --> 00:00:27.000 And in the present section a discussion of government enterprise is included. 6 00:00:27.000 --> 00:00:36.000 For a brief treatment of the final major source of government revenue, borrowing from the public, see Appendix A. 7 00:00:36.000 --> 00:00:42.000 A. The Productive Contribution of Government Spending 8 00:00:42.000 --> 00:00:53.000 Government expenditures are a coerced transfer of resources from private producers to the uses preferred by government officials. 9 00:00:53.000 --> 00:01:02.120 It is customary to classify government spending into two categories, resource using and transfer. 10 00:01:02.120 --> 00:01:08.560 Resource using expenditures frankly shift resources from private persons in society to 11 00:01:08.560 --> 00:01:10.680 the use of government. 12 00:01:10.680 --> 00:01:16.200 This may take the form of hiring bureaucrats to work for government, which shifts labor 13 00:01:16.200 --> 00:01:22.000 resources directly or of buying products from business firms. 14 00:01:22.000 --> 00:01:29.300 Payments are pure subsidy spending, when the government takes from Peter to pay Paul. 15 00:01:29.300 --> 00:01:35.880 It is true that in the latter case the government gives Paul money to decide the allocation 16 00:01:35.880 --> 00:01:42.780 as he wishes, and in a sense we may analyze the two types of spending separately. 17 00:01:42.780 --> 00:01:48.720 But the similarities here are greater than the differences, for in both cases resources 18 00:01:48.720 --> 00:01:54.620 Resources are seized from private producers and shifted to the uses which government officials 19 00:01:54.620 --> 00:01:56.260 think best. 20 00:01:56.260 --> 00:02:01.640 After all, when a bureaucrat receives his government salary, this payment is in the 21 00:02:01.640 --> 00:02:09.320 same sense a transfer payment from the taxpayers, and the bureaucrat is also free to decide 22 00:02:09.320 --> 00:02:13.420 how further to allocate the income at his command. 23 00:02:13.420 --> 00:02:21.100 In both cases, money and resources are shifted from producers to non-producers, who consume 24 00:02:21.100 --> 00:02:23.500 or otherwise use them. 25 00:02:23.500 --> 00:02:29.980 It may be objected that while bureaucrats may not be producers, other Pauls who receive 26 00:02:29.980 --> 00:02:34.960 subsidies on occasion are basically producers on the market. 27 00:02:34.960 --> 00:02:40.180 To the extent that they receive subsidies from the government, however, they are being 28 00:02:40.180 --> 00:02:52.860 In short, what is relevant is the extent to which they are in a relation of state to their 29 00:02:52.860 --> 00:02:54.540 fellow men. 30 00:02:54.540 --> 00:03:01.900 We might add that in this work, the term state is never meant in an anthropomorphic manner. 31 00:03:01.900 --> 00:03:09.460 State really means people acting toward one another in a systematically statish relationship. 32 00:03:09.460 --> 00:03:17.680 I am indebted to Mr. Ralph Reiko of the University of Chicago for the Relation of State concept. 33 00:03:17.680 --> 00:03:23.840 This type of analysis of government has been neglected, because economists and statisticians 34 00:03:23.840 --> 00:03:30.680 tend to assume, rather blithely, that government expenditures are a measure of its productive 35 00:03:30.680 --> 00:03:33.320 contribution to society. 36 00:03:33.320 --> 00:03:39.880 In the private sector of the economy, the value of productive output is sensibly gauged 37 00:03:39.880 --> 00:03:46.120 by the amount of money that consumers spend voluntarily on that output. 38 00:03:46.120 --> 00:03:52.880 Curiously, on the other hand, the government's productive output is gauged not by what is 39 00:03:52.880 --> 00:03:58.800 spent on government, but by what government itself spends. 40 00:03:58.800 --> 00:04:05.400 No wonder that grandiose claims are often made for the unique productive power of government 41 00:04:05.400 --> 00:04:12.080 spending when a mere increase in that spending serves to raise the government's productive 42 00:04:12.080 --> 00:04:14.840 contribution to the economy. 43 00:04:14.840 --> 00:04:21.760 Originally, Professor Simon Kuznets contended that only taxes should gauge the government's 44 00:04:21.760 --> 00:04:29.040 It's Productive Output, thus measuring product by revenue, as in the case of private firms. 45 00:04:29.040 --> 00:04:35.080 But taxes, being compulsory, cannot be used as a productive gauge. 46 00:04:35.080 --> 00:04:41.320 In contrast to the present method of national income accounting, Kuznets would have eliminated 47 00:04:41.320 --> 00:04:47.320 all government deficits from its productive contribution. 48 00:04:47.320 --> 00:04:51.900 What then is the productive contribution of government? 49 00:04:51.900 --> 00:04:57.300 Since the value of government is not gauged on the market, and the payments to the government 50 00:04:57.300 --> 00:05:01.080 are not voluntary, it is impossible to estimate. 51 00:05:01.080 --> 00:05:08.140 It is impossible to know how much would be paid in to the government were it purely voluntary, 52 00:05:08.140 --> 00:05:15.260 or indeed, whether one central government in each geographical area would exist at all. 53 00:05:15.260 --> 00:05:22.540 Since then, the only thing we do know is that the tax and spend process diverts income and 54 00:05:22.540 --> 00:05:27.460 resources from what they would have been doing in the private sector. 55 00:05:27.460 --> 00:05:34.540 We must conclude that the government's productive contribution to the economy is precisely zero. 56 00:05:34.540 --> 00:05:40.780 Furthermore, even if it be objected that governmental services are worth something, it would have 57 00:05:40.780 --> 00:05:47.300 have to be noted that we are again suffering from the error pointed out by Bastiat, a sole 58 00:05:47.300 --> 00:05:53.580 emphasis on what is seen to the neglect of what is not seen. 59 00:05:53.580 --> 00:05:58.280 We may see the government's hydroelectric dam in operation. 60 00:05:58.280 --> 00:06:04.220 We do not see the things that private individuals would have done with the money, whether buying 61 00:06:04.220 --> 00:06:18.660 In fact, since private consumers would have done something else, something more desired, 62 00:06:18.660 --> 00:06:24.380 and therefore from their point of view more productive with the money, we can be sure 63 00:06:24.380 --> 00:06:30.740 that the loss in productivity incurred by the government's tax and spending is greater 64 00:06:30.740 --> 00:06:43.020 In short, strictly, the government's productivity is not simply zero, but negative, for it has 65 00:06:43.020 --> 00:06:48.340 imposed a loss in productivity upon society. 66 00:06:48.340 --> 00:06:54.780 Even for those who do not accept this analysis, any who believe empirically that waste in 67 00:06:54.780 --> 00:07:01.300 and Government Exceeds 50% of Its Expenditures would have to agree that our assumption is 68 00:07:01.300 --> 00:07:09.680 more accurate than the current estimate of 100% productivity by the government. 69 00:07:09.680 --> 00:07:16.340 Government expenditure is often referred to as investment, resulting in capital, and we 70 00:07:16.340 --> 00:07:23.520 have heard much in recent years about Soviet and other multi-year plans busily engaged 71 00:07:23.520 --> 00:07:31.240 in Building up Capital by Government Action, yet it is illegitimate to use the term capital 72 00:07:31.240 --> 00:07:33.920 for government expenditures. 73 00:07:33.920 --> 00:07:40.320 Capital is the status of productive goods along the path to eventual consumption. 74 00:07:40.320 --> 00:07:46.600 In any sort of division of labor economy, capital goods are built not for their own 75 00:07:46.600 --> 00:08:01.960 In short, a characteristic of an investment expenditure is that the good in question is 76 00:08:01.960 --> 00:08:09.200 not being used to fulfill the needs of the investor, but of someone else, the consumer. 77 00:08:09.200 --> 00:08:16.240 Yet, when government confiscates resources from the private market economy, it is precisely 78 00:08:16.240 --> 00:08:19.240 Defying the Wishes of the Consumers 79 00:08:19.240 --> 00:08:29.240 When government invests in any good, it does so to serve the whims of government officials, not the desires of consumers. 80 00:08:29.240 --> 00:08:40.240 Therefore, no government expenditures can be considered genuine investment, and no government-owned assets can be considered capital. 81 00:08:40.240 --> 00:09:03.240 Government expenditures are divisible into two parts, consumption expenditures by government officials, beneficiaries of government subsidies and other non-productive recipients, and waste expenditures, where government officials really believe that they are investing in capital. 82 00:09:03.240 --> 00:09:08.240 These waste expenditures result in waste assets. 83 00:09:08.240 --> 00:09:18.240 If a waste asset owned by the government is sold to private enterprise, then all or part of it might become a capital good. 84 00:09:18.240 --> 00:09:24.240 But this potential does not make the good capital while used by the government. 85 00:09:24.240 --> 00:09:34.240 It might be objected that government purchases are genuine investments when used by a government enterprise that charges prices on the market. 86 00:09:34.240 --> 00:09:41.240 We shall see, however, that this is not really enterprise, but playing at enterprise. 87 00:09:41.240 --> 00:09:49.240 The consumption of the governmentally privileged is, of course, in a different category from private consumption, 88 00:09:49.240 --> 00:09:55.240 since it is necessarily at the expense of the private consumption of producers. 89 00:09:55.240 --> 00:10:01.240 We may therefore call the former anti-productive consumption. 90 00:10:01.240 --> 00:10:15.240 This is to be distinguished from the classical concept of non-productive consumption, as all consumption above that needed to maintain the productive capacity of the laborer. 91 00:10:15.240 --> 00:10:20.240 b. Subsidies and transfer payments 92 00:10:20.240 --> 00:10:26.240 Let us delve a little further into the typology of government spending. 93 00:10:26.240 --> 00:10:36.240 Transfer spending or subsidies distort the market by coercively penalizing the efficient for the benefit of the inefficient. 94 00:10:36.240 --> 00:10:42.240 And it does so even if the firm or individual is efficient without a subsidy, 95 00:10:42.240 --> 00:10:48.240 for its activities are then being encouraged beyond their most economic point. 96 00:10:48.240 --> 00:10:52.240 Subsidies prolong the life of inefficient firms 97 00:10:52.240 --> 00:10:58.240 and prevent the flexibility of the market from fully satisfying consumer wants. 98 00:10:58.240 --> 00:11:04.240 The greater the extent of government subsidy, the more the market is prevented from working, 99 00:11:04.240 --> 00:11:12.240 the more resources are frozen in inefficient ways, and the lower will be the standard of living of everyone. 100 00:11:12.240 --> 00:11:21.240 Furthermore, the more government intervenes and subsidizes, the more caste conflict will be created in society 101 00:11:21.240 --> 00:11:27.560 for individuals and groups will benefit only at one another's expense. 102 00:11:27.560 --> 00:11:35.560 The more widespread the tax and subsidy process, the more people will be induced to abandon production 103 00:11:35.560 --> 00:11:40.840 and join the army of those who live coercively off production. 104 00:11:40.840 --> 00:11:49.240 Production and living standards will be progressively lowered as energy is diverted from production to politics 105 00:11:49.240 --> 00:11:58.240 and as government saddles a dwindling base of production with a growing and more top-heavy burden of the state privileged. 106 00:11:58.240 --> 00:12:10.240 This process will be all the more accelerated because those who succeed in any activity will invariably tend to be those who are best at performing it. 107 00:12:10.240 --> 00:12:15.920 Those who particularly flourish on the free market, therefore, will be those most adept 108 00:12:15.920 --> 00:12:19.880 at production and at serving their fellow men. 109 00:12:19.880 --> 00:12:24.720 Those who succeed in the political struggle for subsidies, on the other hand, will be 110 00:12:24.720 --> 00:12:31.800 those most adept at wielding coercion or at winning favors from wielders of coercion. 111 00:12:31.800 --> 00:12:37.320 Generally, different people will be in the different categories of the successful, in 112 00:12:37.320 --> 00:12:41.320 in accordance with the universal specialization of skills. 113 00:12:41.320 --> 00:12:44.660 Furthermore, for those who are skillful at both, 114 00:12:44.660 --> 00:12:47.740 the tax and subsidy system will encourage 115 00:12:47.740 --> 00:12:50.500 and promote their predatory skills 116 00:12:50.500 --> 00:12:53.060 and penalize their productive ones. 117 00:12:53.920 --> 00:12:57.440 A common example of direct transfer subsidy 118 00:12:57.440 --> 00:13:00.000 is governmental poor relief. 119 00:13:00.000 --> 00:13:04.900 State poor relief is clearly a subsidization of poverty, 120 00:13:04.900 --> 00:13:11.540 For men are now automatically entitled to money from the state because of their poverty. 121 00:13:11.540 --> 00:13:19.540 Hence, the marginal disutility of income foregone from leisure diminishes, and idleness and 122 00:13:19.540 --> 00:13:25.700 poverty tend to increase further, which in turn increases the amount of subsidy that 123 00:13:25.700 --> 00:13:29.060 must be extracted from the taxpayers. 124 00:13:29.060 --> 00:13:36.620 Thus, a system of legally subsidized poverty tends to call forth more of the very poverty 125 00:13:36.620 --> 00:13:39.140 that is supposedly being alleviated. 126 00:13:39.140 --> 00:13:45.220 When, as is generally the case, the amount of subsidy depends directly on the number 127 00:13:45.220 --> 00:13:51.220 of children possessed by the pauper, there is a further incentive for the pauper to breed 128 00:13:51.220 --> 00:13:57.660 more children than otherwise, and thereby multiply the number of paupers and even more 129 00:13:57.660 --> 00:14:01.140 Poor Dependent Paupers Still Further 130 00:14:01.140 --> 00:14:07.660 As Thomas McKay aptly stated, we can have exactly as many paupers as the country chooses 131 00:14:07.660 --> 00:14:09.300 to pay for. 132 00:14:09.300 --> 00:14:14.420 Private charity to the poor, on the other hand, would not have the same vicious circle 133 00:14:14.420 --> 00:14:21.500 effect, since the poor would not have a continuing compulsory claim on the rich. 134 00:14:21.500 --> 00:14:28.580 This is particularly true where private charity is given only to the deserving poor. 135 00:14:28.580 --> 00:14:35.100 The sincerity of the state's desire to promote charity towards the poor may be gauged by 136 00:14:35.100 --> 00:14:43.540 two perennial drives of government, to suppress charity rackets and to drive individual beggars 137 00:14:43.540 --> 00:14:49.320 off the streets because the government makes plenty of provision for them. 138 00:14:49.320 --> 00:14:56.080 The reader may gauge from the following anecdote by an admirer of such a drive just who was 139 00:14:56.080 --> 00:15:02.120 the true friend of the poor organ grinder, his customer or the government. 140 00:15:02.120 --> 00:15:07.340 During a similar campaign to clean up the streets of organ grinders, most of whom were 141 00:15:07.340 --> 00:15:13.680 simply licensed beggars, a woman came up to LaGuardia at a social function and begged 142 00:15:13.680 --> 00:15:17.120 him not to deprive her of her favorite organ grinder. 143 00:15:17.120 --> 00:15:31.120 Where do you live? he asked her. On Park Avenue. LaGuardia successfully pushed through his plan to eliminate the organ grinders and the peddlers, despite the pleas of the penthouse slummers. 144 00:15:31.120 --> 00:15:48.120 The effect of both measures is to cripple voluntary individual gifts of charity and to force the public to root its giving into the channels approved by and tied in with government officialdom. 145 00:15:48.120 --> 00:15:58.120 Similarly, governmental unemployment relief, often supposed to help in curing unemployment, has the precisely reverse effect. 146 00:15:58.120 --> 00:16:03.120 It subsidizes and intensifies unemployment. 147 00:16:03.120 --> 00:16:13.120 We have seen that unemployment arises when laborers or unions set a minimum wage above what they could obtain on the unhampered market. 148 00:16:13.120 --> 00:16:24.120 Tax aid helps them to keep this unrealistic minimum and hence prolongs the period of unemployment and aggravates the problem. 149 00:16:24.120 --> 00:16:29.120 C. Resource-using activities 150 00:16:29.120 --> 00:16:40.120 Let us now return to the resource-using activities of government, where the state professes to be providing a service of some sort to the public. 151 00:16:40.120 --> 00:16:46.120 Government service may be either furnished free or sold at a price to users. 152 00:16:46.120 --> 00:16:51.120 Free services are particularly characteristic of government. 153 00:16:51.120 --> 00:16:58.320 Police and military protection, firefighting, education, parks, some water supply come to 154 00:16:58.320 --> 00:17:00.220 mind as examples. 155 00:17:00.220 --> 00:17:06.520 The first point to note, of course, is that these services are not and cannot be truly 156 00:17:06.520 --> 00:17:07.520 free. 157 00:17:07.520 --> 00:17:14.620 A free good, as we saw early in this book, would not be a good, and hence not an object 158 00:17:14.620 --> 00:17:16.260 of Human Action. 159 00:17:16.260 --> 00:17:20.300 It would simply exist in superabundance for all. 160 00:17:20.300 --> 00:17:27.060 If a good does not exist aplenty for all, then the resource is scarce, and supplying 161 00:17:27.060 --> 00:17:30.860 it costs society other goods foregone. 162 00:17:30.860 --> 00:17:34.020 Hence, it cannot be free. 163 00:17:34.020 --> 00:17:41.780 The resources needed to supply the free governmental service are extracted from the rest of production. 164 00:17:41.780 --> 00:17:49.260 is made, however, not by users on the basis of their voluntary purchases, but by a coerced 165 00:17:49.260 --> 00:17:58.380 levy on the taxpayers. A basic split is thus effected between payment and receipt of service. 166 00:17:58.380 --> 00:18:06.740 This split is inherent in all government operations. Many grave consequences follow from the split 167 00:18:06.740 --> 00:18:14.340 and from the free service as well, as in all cases where price is below the free market price, 168 00:18:14.340 --> 00:18:22.580 an enormous and excessive demand is stimulated for the good, far beyond the supply of service available. 169 00:18:22.580 --> 00:18:30.260 Consequently, there will always be shortages of the free good, constant complaints of insufficiency, 170 00:18:30.260 --> 00:18:32.580 Overcrowding, etc. 171 00:18:32.580 --> 00:18:38.660 An illustration is the perpetual complaints about police insufficiency, particularly in 172 00:18:38.660 --> 00:18:44.620 crime-ridden districts, about teacher and school shortages in the public school system, 173 00:18:44.620 --> 00:18:49.940 about traffic jams on government-owned streets and highways, etc. 174 00:18:49.940 --> 00:18:57.460 In no area of the free market are there such chronic complaints about shortages, insufficiencies, 175 00:18:57.460 --> 00:18:59.580 and low-quality service. 176 00:18:59.580 --> 00:19:07.100 In all areas of private enterprise, firms try to coax and persuade consumers to buy more 177 00:19:07.100 --> 00:19:08.860 of their product. 178 00:19:08.860 --> 00:19:14.460 Where government owns and operates, on the other hand, there are invariably calls on 179 00:19:14.460 --> 00:19:21.960 consumers for patience and sacrifice, and problems of shortages and deficiencies continually 180 00:19:21.960 --> 00:19:23.100 abound. 181 00:19:23.100 --> 00:19:29.380 It is doubtful if any private enterprise would ever do what the New York City and other governments 182 00:19:29.380 --> 00:19:34.340 Experiments have done, exhort consumers to use less water. 183 00:19:34.340 --> 00:19:40.820 It is also characteristic of government operation that when a water shortage develops, it is 184 00:19:40.820 --> 00:19:47.260 the consumers and not the government enterprises who are blamed for the shortage. 185 00:19:47.260 --> 00:19:54.340 The pressure is on consumers to sacrifice and to use less, while in private industry 186 00:19:54.340 --> 00:20:00.380 The welcome pressure is on entrepreneurs to supply more. 187 00:20:00.380 --> 00:20:07.060 The well-known inefficiencies of government operation are not empirical accidents, resulting 188 00:20:07.060 --> 00:20:10.780 perhaps from the lack of a civil service tradition. 189 00:20:10.780 --> 00:20:17.900 They are inherent in all government enterprise, and the excessive demand fomented by free 190 00:20:17.900 --> 00:20:25.400 Free and other under-priced services is just one of the many reasons for this condition. 191 00:20:25.400 --> 00:20:32.100 Free supply not only subsidizes the users at the expense of non-using taxpayers, it 192 00:20:32.100 --> 00:20:39.660 also misallocates resources by failing to supply the service where it is most needed. 193 00:20:39.660 --> 00:20:46.440 The same is true to a lesser extent wherever the price is under the free market price. 194 00:20:46.440 --> 00:20:53.320 On the free market, consumers can dictate the pricing, and thereby assure the best allocation 195 00:20:53.320 --> 00:20:57.280 of productive resources to supply their wants. 196 00:20:57.280 --> 00:21:00.960 In a government enterprise, this cannot be done. 197 00:21:00.960 --> 00:21:04.380 Let us take again the case of the free service. 198 00:21:04.380 --> 00:21:11.080 Since there is no pricing, and therefore no exclusion of sub-marginal uses, there is no 199 00:21:11.080 --> 00:21:18.080 No way that the government, even if it wanted to, could allocate its services to their most 200 00:21:18.080 --> 00:21:22.360 important uses and to the most eager buyers. 201 00:21:22.360 --> 00:21:28.320 All buyers, all uses, are artificially kept on the same plane. 202 00:21:28.320 --> 00:21:32.600 As a result, the most important uses will be slighted. 203 00:21:32.600 --> 00:21:40.040 The government is faced with insuperable allocation problems, which it cannot solve even to its 204 00:21:40.040 --> 00:21:42.280 own satisfaction. 205 00:21:42.280 --> 00:21:47.560 Thus the government will be confronted with the problem, should we build a road in place 206 00:21:47.560 --> 00:21:54.360 A or place B. There is no rational way whatever by which it can make this decision. 207 00:21:54.360 --> 00:21:59.440 It cannot aid the private consumers of the road in the best way. 208 00:21:59.440 --> 00:22:06.280 It can decide only according to the whim of the ruling government official, that is, only 209 00:22:06.280 --> 00:22:13.560 If the government officials do the consuming and not the public, thus the government official 210 00:22:13.560 --> 00:22:20.360 may select a road that will yield him or his allies more votes. If the government wishes 211 00:22:20.360 --> 00:22:25.960 to do what is best for the public, it is faced with an impossible task. 212 00:22:27.400 --> 00:22:31.960 D. The Fallacy of Government on a Business Basis 213 00:22:31.960 --> 00:22:40.780 Government may either subsidize deliberately by giving a service away free, or it may genuinely 214 00:22:40.780 --> 00:22:47.640 try to find the true market price, that is, to operate on a business basis. 215 00:22:47.640 --> 00:22:53.820 The latter is often the cry raised by conservatives that government enterprise be placed on a 216 00:22:53.820 --> 00:22:58.480 business footing, that deficits be ended, etc. 217 00:22:58.480 --> 00:23:01.920 Almost always this means raising the price. 218 00:23:01.920 --> 00:23:04.840 Is this a rational solution, however? 219 00:23:04.840 --> 00:23:10.160 It is often stated that a single government enterprise operating within the sphere of 220 00:23:10.160 --> 00:23:16.760 a private market and buying resources from it can price its services and allocate its 221 00:23:16.760 --> 00:23:19.000 resources efficiently. 222 00:23:19.000 --> 00:23:21.200 This however is incorrect. 223 00:23:21.200 --> 00:23:28.000 There is a fatal flaw that permeates every conceivable scheme of government enterprise 224 00:23:28.000 --> 00:23:35.360 and ineluctably prevents it from rational pricing and efficient allocation of resources. 225 00:23:35.360 --> 00:23:42.280 Because of this flaw, government enterprise can never be operated on a business basis, 226 00:23:42.280 --> 00:23:46.440 no matter how ardent a government's intentions. 227 00:23:46.440 --> 00:23:48.440 What is this fatal flaw? 228 00:23:48.440 --> 00:23:54.760 It is the fact that government can obtain virtually unlimited resources by means of 229 00:23:54.760 --> 00:24:01.760 of the Coercive Tax Power, that is, limited only by the total resources of society. 230 00:24:01.760 --> 00:24:06.760 Private businesses must obtain their funds from private investors. 231 00:24:06.760 --> 00:24:12.760 This allocation of funds by investors, based on time preference and foresight, 232 00:24:12.760 --> 00:24:19.760 rations funds and resources to the most profitable and therefore the most serviceable uses. 233 00:24:19.760 --> 00:24:25.760 Private firms can get funds only from consumers and investors. 234 00:24:25.760 --> 00:24:31.760 They can get funds, in other words, only from people who value and buy their services, 235 00:24:31.760 --> 00:24:39.760 and from savers who are willing to risk investment of their saved funds in anticipation of profit. 236 00:24:39.760 --> 00:24:47.760 In short, payment and service are, we repeat, indissolubly linked on the market. 237 00:24:47.760 --> 00:24:51.960 But government, on the other hand, can get as much money as it likes. 238 00:24:51.960 --> 00:24:58.260 The free market, therefore, provides a mechanism, which we have analyzed in detail, 239 00:24:58.260 --> 00:25:02.860 for allocating funds for future and present consumption, 240 00:25:02.860 --> 00:25:08.660 for directing resources to their most value-productive uses for all the people. 241 00:25:08.660 --> 00:25:17.660 It thereby provides a means for businessmen to allocate resources and to price services to ensure optimum use. 242 00:25:17.660 --> 00:25:32.660 Government, however, has no check reign on itself, that is, no requirement of meeting a test of profit and loss or valued service to consumers, to permit it to obtain funds. 243 00:25:32.660 --> 00:25:45.660 Private enterprise can get funds only from satisfied valuing customers and from investors guided by present and expected future profits and losses. 244 00:25:45.660 --> 00:25:49.660 Government gets more funds at its own whim. 245 00:25:49.660 --> 00:25:58.660 With the check rain gone, gone also is any opportunity for government to allocate resources rationally. 246 00:25:58.660 --> 00:26:06.660 How can it know whether to build road A or road B, whether to invest in a road or a school, 247 00:26:06.660 --> 00:26:10.660 in fact, how much to spend for all of its activities? 248 00:26:10.660 --> 00:26:18.540 There is no rational way that it can allocate funds or even decide how much to have. 249 00:26:18.540 --> 00:26:24.740 When there is a shortage of teachers or school rooms or police or streets, the government 250 00:26:24.740 --> 00:26:28.220 and its supporters have only one answer. 251 00:26:28.220 --> 00:26:29.220 More money. 252 00:26:29.220 --> 00:26:34.180 The people must relinquish more of their money to the government. 253 00:26:34.180 --> 00:26:38.020 Why is this type of answer never offered on the free market? 254 00:26:38.020 --> 00:26:46.540 The reason is that money must always be withdrawn from some other use in consumption or investment, 255 00:26:46.540 --> 00:26:49.660 and this withdrawal must be justified. 256 00:26:49.660 --> 00:26:55.880 On the market, justification is provided by the test of profit and loss, the indication 257 00:26:55.880 --> 00:27:00.820 that the most urgent wants of the consumers are being satisfied. 258 00:27:00.820 --> 00:27:06.480 If an enterprise or product is earning high profits for its owners, and these profits 259 00:27:06.480 --> 00:27:14.300 are expected to continue, more money will be forthcoming. If not, and losses are being 260 00:27:14.300 --> 00:27:21.860 incurred, money will flow out of the industry. The profit and loss test serves as the critical 261 00:27:21.860 --> 00:27:29.220 guide for directing the flow of productive resources. No such guide exists for government, 262 00:27:29.220 --> 00:27:36.700 which therefore has no rational way to decide how much money to spend in total or in each 263 00:27:36.700 --> 00:27:38.660 specific line. 264 00:27:38.660 --> 00:27:46.020 The more money it spends, the more service, of course, it can supply, but where to stop? 265 00:27:46.020 --> 00:27:51.140 Proponents of government enterprise may retort that the government should simply tell its 266 00:27:51.140 --> 00:27:58.260 bureau to act as if it were a profit-making enterprise and to establish itself in the 267 00:27:58.260 --> 00:28:03.260 There are two basic flaws in this theory. 268 00:28:03.260 --> 00:28:08.260 One, it is impossible to play enterprise. 269 00:28:08.260 --> 00:28:13.260 Enterprise means risking one's own money in investment. 270 00:28:13.260 --> 00:28:18.260 Bureaucratic managers and politicians have no real incentive to develop entrepreneurial skills, 271 00:28:18.260 --> 00:28:23.260 to really adjust to consumer demands. 272 00:28:23.260 --> 00:28:28.260 are the most important aspects of a company's business. 273 00:28:28.260 --> 00:28:37.260 2. Aside from the question of incentives, even the most eager managers could not function as a business. 274 00:28:37.260 --> 00:28:43.260 For regardless of the treatment accorded the operation after it is established, 275 00:28:43.260 --> 00:28:51.260 the initial launching of the firm is made with government money and therefore by coercive levy. 276 00:28:51.260 --> 00:28:59.420 A fatally arbitrary element has been built into the very vitals of the enterprise. Furthermore, 277 00:28:59.420 --> 00:29:05.740 future decisions on expenditures will be made out of tax funds and will therefore be subject 278 00:29:05.740 --> 00:29:12.600 to the same flaw. The ease of obtaining money will inherently distort the operations of 279 00:29:12.600 --> 00:29:20.000 government enterprise. Moreover, suppose that the government invests in an enterprise e. 280 00:29:20.000 --> 00:29:26.800 Either the free market, left alone, would also have invested in this self-same enterprise, 281 00:29:26.800 --> 00:29:28.340 or it would not. 282 00:29:28.340 --> 00:29:34.440 If it would have, then the economy suffers, at the very least, from the take going to 283 00:29:34.440 --> 00:29:37.440 the intermediary bureaucracy. 284 00:29:37.440 --> 00:29:43.400 If not, and this is almost certain, then it follows immediately that the expenditure on 285 00:29:43.400 --> 00:29:50.280 E is a distortion of private utility on the market that some other expenditure would have 286 00:29:50.280 --> 00:29:53.560 brought greater monetary returns. 287 00:29:53.560 --> 00:29:59.800 It follows once again that a government enterprise cannot duplicate the conditions of private 288 00:29:59.800 --> 00:30:01.760 business. 289 00:30:01.760 --> 00:30:08.520 In addition, the establishment of government enterprise creates an unfair competitive advantage 290 00:30:08.520 --> 00:30:15.720 over private firms, for at least part of its capital was gained by coercion, rather than 291 00:30:15.720 --> 00:30:16.720 service. 292 00:30:16.720 --> 00:30:23.800 It is clear that government, with its subsidization, can drive a private business out of the field. 293 00:30:23.800 --> 00:30:29.280 Private investment in the same industry will be greatly restricted, since future investors 294 00:30:29.280 --> 00:30:34.920 will anticipate losses at the hands of privileged governmental competitors. 295 00:30:34.920 --> 00:30:47.420 Moreover, since all services compete for the consumer's dollar, all private firms and all private investment will to some degree be affected and hampered. 296 00:30:47.420 --> 00:31:01.720 And when a new government enterprise begins, it generates fears in other industries that they will be next, that they will either be confiscated or forced to compete with government-subsidized enterprises. 297 00:31:01.720 --> 00:31:10.720 This sphere tends to repress productive investment further, and thus lower the general standard of living still more. 298 00:31:10.720 --> 00:31:18.720 Another argument used quite correctly by leftist proponents of government ownership is this. 299 00:31:18.720 --> 00:31:23.720 If business operation is so desirable, why take such a tortuous route? 300 00:31:23.720 --> 00:31:30.720 Why not scrap government ownership and turn the whole operation over to private business enterprise? 301 00:31:30.720 --> 00:31:41.220 Why go to such elaborate lengths to try to imitate the apparent ideal, private ownership, when the ideal may be pursued directly? 302 00:31:41.220 --> 00:31:49.220 The call for business principles in government, therefore, makes little sense, even if that call could be successful. 303 00:31:49.220 --> 00:31:57.220 Many criteria have been offered by writers as guides for the pricing of government services. 304 00:31:57.220 --> 00:32:02.220 One criterion supports pricing according to marginal cost. 305 00:32:02.220 --> 00:32:07.220 As we have indicated, however, this is hardly a criterion at all, 306 00:32:07.220 --> 00:32:13.220 and rests on classical fallacies of price determination by costs. 307 00:32:13.220 --> 00:32:17.220 Marginal varies according to the period of time surveyed, 308 00:32:17.220 --> 00:32:21.220 and costs are not, in fact, static, but flexible. 309 00:32:21.220 --> 00:32:41.220 are flexible. They change according to prices, and hence cannot be used as a guide to the setting of prices. Moreover, prices equal average costs only in final equilibrium, and equilibrium cannot be regarded as an ideal for the real world. 310 00:32:41.220 --> 00:32:45.220 The market only tends toward this goal. 311 00:32:45.220 --> 00:32:52.220 Finally, costs of government operation will be higher than for similar operations on the free market. 312 00:32:52.220 --> 00:33:00.220 Various fallacious criteria have been advanced for deciding between private and state action. 313 00:33:00.220 --> 00:33:09.220 One common rule is to weigh marginal social costs and benefits against marginal private costs and benefits. 314 00:33:09.220 --> 00:33:23.220 Apart from other flaws, there is no such entity as society separate from constituent individuals, so that this preferred criterion is simply meaningless. 315 00:33:23.220 --> 00:33:32.220 Government enterprise will not only hamper and repress private investment and entrepreneurship in the same industry, 316 00:33:32.220 --> 00:33:39.000 Industry, and in industries throughout the economy, it will also disrupt the entire labor 317 00:33:39.000 --> 00:33:40.300 market. 318 00:33:40.300 --> 00:33:47.440 For the government, A, will decrease production and living standards in the society by siphoning 319 00:33:47.440 --> 00:33:51.740 off potentially productive labor to the bureaucracy. 320 00:33:51.740 --> 00:33:59.040 B, using confiscated funds, it will be able to pay more than the market rate for labor, 321 00:33:59.040 --> 00:34:05.440 and hence set up a clamor by government job seekers for an expansion of the unproductive 322 00:34:05.440 --> 00:34:13.200 bureaucratic machine, and c, the government's high tax-supported wages may well mislead 323 00:34:13.200 --> 00:34:19.360 workers into believing that this reflects the market wage in private industry, thus 324 00:34:19.360 --> 00:34:22.900 causing unwanted unemployment. 325 00:34:22.900 --> 00:34:29.020 The inefficiencies of government operation are compounded by several other factors. 326 00:34:29.020 --> 00:34:35.740 As we have seen, a government enterprise competing in an industry can usually drive out private 327 00:34:35.740 --> 00:34:42.300 owners, since the government can subsidize itself in many ways and supply itself with 328 00:34:42.300 --> 00:34:45.340 unlimited funds when desired. 329 00:34:45.340 --> 00:34:52.100 In cases where it cannot compete even under these conditions, it can arrogate to itself 330 00:34:52.100 --> 00:34:57.160 a Compulsory Monopoly, Driving Out Competitors by Force. 331 00:34:57.160 --> 00:35:01.540 This was done in the United States in the case of the post office. 332 00:35:01.540 --> 00:35:08.660 When the government thus grants itself a monopoly, it may go to the other extreme from free service. 333 00:35:08.660 --> 00:35:11.540 It may charge a monopoly price. 334 00:35:11.540 --> 00:35:18.220 Charging a monopoly price, now identifiably different from a free market price, distorts 335 00:35:18.220 --> 00:35:24.700 It's resources again and creates an artificial scarcity of the particular good. 336 00:35:24.700 --> 00:35:29.260 It also permits an enormously lowered quality of service. 337 00:35:29.260 --> 00:35:35.600 A governmental monopoly need not worry that customers may go elsewhere or that inefficiency 338 00:35:35.600 --> 00:35:38.320 may mean its demise. 339 00:35:38.320 --> 00:35:46.560 Only governments can make self-satisfied announcements of cuts in service in order to affect economies. 340 00:35:46.560 --> 00:35:53.460 In private business, economies must be made as corollaries to improvements in service. 341 00:35:53.460 --> 00:35:59.820 A recent example of a cut in government service, in the midst of improving private services 342 00:35:59.820 --> 00:36:07.620 in most other fields, was the decline in American postal deliveries from two to one a day, coupled 343 00:36:07.620 --> 00:36:12.060 of course with perennial requests for higher rates. 344 00:36:12.060 --> 00:36:19.840 When France nationalized the important Western railway system in 1908, freight was increasingly 345 00:36:19.840 --> 00:36:27.080 damaged, trains slowed down, and accidents grew at such a pace that an economist caustically 346 00:36:27.080 --> 00:36:34.560 observed that the French government had added railway accidents to its growing list of monopolies. 347 00:36:34.560 --> 00:36:41.720 It is particularly absurd to call for business principles where a government enterprise functions 348 00:36:41.720 --> 00:36:48.360 as a monopoly. Periodically, for example, there are demands that the post office be put on a 349 00:36:48.360 --> 00:36:55.800 business basis and end its deficit, which must be paid by the taxpayers. But ending the deficit 350 00:36:55.800 --> 00:37:03.000 of an inherently and necessarily inefficient government operation does not mean going on a 351 00:37:03.000 --> 00:37:10.680 business basis. To cover costs, the price must be raised high enough to achieve a monopoly price, 352 00:37:10.680 --> 00:37:16.040 and so camouflage and compensate for the government's inefficiencies. 353 00:37:16.040 --> 00:37:22.280 A monopoly price will levy an excessive burden on the users of the postal service, 354 00:37:22.280 --> 00:37:25.640 especially since the monopoly is compulsory. 355 00:37:25.640 --> 00:37:33.080 On the other hand, we have seen that even monopolists must abide by the consumer's demand schedule. 356 00:37:33.080 --> 00:37:36.360 If this demand schedule is elastic enough, 357 00:37:36.360 --> 00:37:50.660 It may well happen that a monopoly price will reduce revenue so much, or cut down so much on its increase, that a higher price will increase deficits rather than reduce them. 358 00:37:50.660 --> 00:37:56.360 An outstanding example has been the New York City subway system in recent years. 359 00:37:56.360 --> 00:38:11.360 Ironically enough, the higher fares have driven many customers to buying and driving their own cars, thus aggravating the perennial traffic problem, shortage of government street space, even further. 360 00:38:11.360 --> 00:38:18.360 Another example of government intervention creating and multiplying its own difficulties. 361 00:38:18.360 --> 00:38:23.360 E. Centers of Calculational Chaos 362 00:38:23.360 --> 00:38:39.360 We have seen in Chapter 10 that one cartel or one firm could not own all the means of production in the economy, because it could not calculate prices and allocate factors in a rational manner. 363 00:38:39.360 --> 00:38:47.360 And we have seen that this is the reason why state socialism could also not plan or allocate rationally. 364 00:38:47.360 --> 00:38:54.860 We further noted that two or more stages could not be totally integrated vertically on the market, 365 00:38:54.860 --> 00:38:59.860 for total integration would eliminate a whole segment of the market, 366 00:38:59.860 --> 00:39:05.360 and establish an island of calculational and allocational chaos, 367 00:39:05.360 --> 00:39:13.860 an island that would preclude optimal planning for profits and maximum satisfaction for the consumers. 368 00:39:13.860 --> 00:39:20.860 In the case of simple government ownership, still another extension of this thesis becomes evident. 369 00:39:20.860 --> 00:39:28.860 For each governmental firm introduces its own island of chaos into the economy. 370 00:39:28.860 --> 00:39:34.860 There is no need to wait for full socialism for chaos to begin its work. 371 00:39:34.860 --> 00:39:46.860 No government enterprise can ever determine prices or costs or allocate factors or funds in a rational, welfare-maximizing manner. 372 00:39:46.860 --> 00:39:54.860 No government enterprise could be established on a business basis, even if the desire were present. 373 00:39:54.860 --> 00:40:02.540 Thus, any governmental operation injects a point of chaos into the economy, and since 374 00:40:02.540 --> 00:40:10.220 all markets are interconnected in the economy, every governmental activity disrupts and distorts 375 00:40:10.220 --> 00:40:17.540 pricing, the allocation of factors, consumption-investment ratios, etc. 376 00:40:17.540 --> 00:40:24.460 Every government enterprise not only lowers the social utilities of the consumers by forcing 377 00:40:24.460 --> 00:40:30.900 Lowering the allocation of funds to other ends than those desired by the public, it lowers 378 00:40:30.900 --> 00:40:38.220 the utility of everyone, including the utilities of some government officials, by distorting 379 00:40:38.220 --> 00:40:42.420 the market and spreading calculational chaos. 380 00:40:42.420 --> 00:40:48.620 The greater the extent of government ownership, of course, the more powerful will this impact 381 00:40:48.620 --> 00:40:50.420 become. 382 00:40:50.420 --> 00:40:55.420 F. Conflict and the Command Posts 383 00:40:55.420 --> 00:41:03.420 Aside from its purely economic consequences, government ownership has another kind of impact on society. 384 00:41:03.420 --> 00:41:09.420 It necessarily substitutes conflict for the harmony of the free market. 385 00:41:09.420 --> 00:41:18.420 Since government service means service by one set of decision-makers, it comes to mean uniform service. 386 00:41:18.420 --> 00:41:28.420 The desires of all those forced directly or indirectly to pay for the government service cannot be satisfied. 387 00:41:28.420 --> 00:41:35.420 Only some forms of the service can or will be produced by the government agency. 388 00:41:35.420 --> 00:41:41.420 As a result, government enterprise creates enormous caste conflicts among the citizens, 389 00:41:41.420 --> 00:41:46.420 each of whom has different ideas on the best form of service. 390 00:41:46.420 --> 00:41:58.920 In the final result, government enterprise can hardly fail to substitute its own values, or the values of one set of customers, for the values of all others. 391 00:41:58.920 --> 00:42:12.420 Artificially standardized services of poorer quality, fit to governmental taste or convenience, will hold sway, in contrast to the diversified services of higher quality, 392 00:42:12.420 --> 00:42:18.420 which the free market supplies to fit the tastes of a multitude of individuals. 393 00:42:18.420 --> 00:42:27.420 In recent years, government schools in America have furnished a striking example of such problems and conflicts. 394 00:42:27.420 --> 00:42:34.420 Some parents prefer racially segregated schools. Others prefer integrated education. 395 00:42:34.420 --> 00:42:41.420 Some parents want their children taught socialism. Others want anti-socialist teaching in the schools. 396 00:42:41.420 --> 00:42:46.420 There is no way that the government can resolve these conflicts. 397 00:42:46.420 --> 00:42:55.420 It can only impose the will of one group by coercion and leave the others dissatisfied and unhappy. 398 00:42:55.420 --> 00:43:00.420 Whichever type of school is chosen, some groups of parents will suffer. 399 00:43:00.420 --> 00:43:08.420 On the other hand, there is no such conflict on the free market which provides any type of service demanded. 400 00:43:08.420 --> 00:43:18.420 On the market, those who want segregated or integrated, pro-socialist or individualist schools can have their wants satisfied. 401 00:43:18.420 --> 00:43:29.420 It is obvious, therefore, that governmental, as opposed to private, provision of services, lowers the standard of living of much of the population. 402 00:43:29.420 --> 00:43:36.420 The degrees of government ownership in the economy vary from one country to another. 403 00:43:36.420 --> 00:43:47.420 But in all countries, the state has made sure that it owns and monopolizes the vital nerve centers, the command posts of the society. 404 00:43:47.420 --> 00:44:03.420 It has acquired compulsory monopoly ownership over these command posts, and it has always asserted, without proof, that private ownership and enterprise in these fields is simply and a priori impossible. 405 00:44:03.420 --> 00:44:25.420 Such vital command posts are defense, money, the mint and nowadays note issue, rivers and coastal seas, streets and highways, land generally, the public domain and the power of eminent domain, and the post office. 406 00:44:25.420 --> 00:44:37.720 The defense function is particularly vital to the state's existence, for on its virtual monopoly of force, depends its ability to extract taxes from its citizens. 407 00:44:37.720 --> 00:44:50.420 Another critical command post held, though not always monopolized by the state, is education, for government schooling permits the influencing of the youthful mind 408 00:44:50.420 --> 00:44:57.560 to accept the virtues of the government under which it lives, and of the principle of government intervention. 409 00:44:57.560 --> 00:45:05.260 Conservatives who often attack socialistic teaching in government schools are particularly wide of the mark. 410 00:45:05.260 --> 00:45:11.660 For the very fact that a government school exists, and is therefore presumed to be good, 411 00:45:11.660 --> 00:45:17.620 teaches its little charges the virtues of government ownership by example. 412 00:45:17.620 --> 00:45:31.120 And if government ownership is good and even preferable in schooling, why not for other educational media, for example, newspapers, or for other important social services? 413 00:45:31.120 --> 00:45:42.120 Even where the government does not have a compulsory monopoly of schooling, it approaches this ideal by compelling attendance of all children 414 00:45:42.120 --> 00:46:07.120 G. The Fallacies of Public Ownership 415 00:46:07.120 --> 00:46:16.400 Finally, government ownership is often referred to as public ownership, the public domain, 416 00:46:16.400 --> 00:46:19.400 public schools, the public sector. 417 00:46:19.400 --> 00:46:25.800 The implication is that when government owns anything, every member of the public owns 418 00:46:25.800 --> 00:46:28.600 equal shares of that property. 419 00:46:28.600 --> 00:46:35.280 But we have seen that the important feature of ownership is not legal formality, but actual 420 00:46:35.280 --> 00:46:41.480 Rule and Under Government Ownership It is the government officialdom that controls 421 00:46:41.480 --> 00:46:46.040 and directs and therefore owns the property. 422 00:46:46.040 --> 00:46:51.640 Any member of the public who thinks he owns the property may test this theory by trying 423 00:46:51.640 --> 00:46:59.280 to appropriate for his own individual use his aliquot part of government property. 424 00:46:59.280 --> 00:47:05.180 It might be objected that individual stockholders of corporations cannot do this either. 425 00:47:05.180 --> 00:47:11.340 For example, a General Motors stockholder is not allowed to seize a car in lieu of cash 426 00:47:11.340 --> 00:47:15.300 dividends or in exchange for his stock. 427 00:47:15.300 --> 00:47:22.320 Yet stockholders do own their company, and this example precisely proves our point. 428 00:47:22.320 --> 00:47:27.420 For the individual stockholder can contract out of his company. 429 00:47:27.420 --> 00:47:33.980 He can sell his aliquot shares of General Motors stock to someone else. 430 00:47:33.980 --> 00:47:39.380 The subject of government cannot contract out of that government. 431 00:47:39.380 --> 00:47:47.100 He cannot sell his shares in the post office, for example, because he has no such shares. 432 00:47:47.100 --> 00:47:53.220 As F. A. Harper has succinctly stated, the corollary of the right of ownership is the 433 00:47:53.220 --> 00:47:55.560 right of disownership. 434 00:47:55.560 --> 00:48:01.080 So if I cannot sell a thing, it is evident that I do not really own it. 435 00:48:01.080 --> 00:48:07.180 It might be noted that even if all the fallacious planks of the Henry George structure were 436 00:48:07.180 --> 00:48:13.100 conceded, the single tax program would still not follow from the premises. 437 00:48:13.100 --> 00:48:18.700 As Benjamin Tucker brilliantly demonstrated years ago, the most that could possibly be 438 00:48:18.700 --> 00:48:26.220 established would be each man's right to his tiny aliquot part of the site value of 439 00:48:26.220 --> 00:48:39.300 While rulers of government own public property, their ownership is not secure in the long 440 00:48:39.300 --> 00:48:44.860 run since they may always be defeated in an election or deposed. 441 00:48:44.860 --> 00:48:51.620 Hence government officials will tend to regard themselves as only transitory owners of public 442 00:48:51.620 --> 00:48:56.420 Like Resources While a private owner, secure in his property 443 00:48:56.420 --> 00:49:03.140 and its capital value, may plan the use of his resource over a long period of time in 444 00:49:03.140 --> 00:49:10.140 the future, the government official must exploit his property as quickly as he can, since he 445 00:49:10.140 --> 00:49:12.940 has no security of tenure. 446 00:49:12.940 --> 00:49:20.060 And even the most securely entrenched civil servant must concentrate on present use, because 447 00:49:20.060 --> 00:49:27.020 Government officials cannot usually sell the capitalized value of their property, as private 448 00:49:27.020 --> 00:49:34.140 owners can. In short, except in the case of the private property of a hereditary monarch, 449 00:49:34.140 --> 00:49:40.700 government officials own the current use of resources, but not their capital value. 450 00:49:41.260 --> 00:49:48.700 But if a resource itself cannot be owned, but only its current use, there will rapidly ensue 451 00:49:48.700 --> 00:49:55.580 to an uneconomic exhaustion of the resource, since it will be to no one's benefit to conserve 452 00:49:55.580 --> 00:50:02.300 it over a period of time, and yet to each owner's advantage to use it up quickly. 453 00:50:02.300 --> 00:50:08.500 It is particularly curious, then, that almost all writers parrot the notion that private 454 00:50:08.500 --> 00:50:16.060 owners, possessing time preference, must take the short view in using their resources, while 455 00:50:16.060 --> 00:50:23.080 While only government officials are properly equipped to exercise the long view, the truth 456 00:50:23.080 --> 00:50:25.320 is precisely the reverse. 457 00:50:25.320 --> 00:50:31.960 The private individual, secure in his capital ownership, can afford to take the long view 458 00:50:31.960 --> 00:50:37.800 because of his interest in maintaining the capital value of his resource. 459 00:50:37.800 --> 00:50:44.160 It is the government official who must take and run, who must exploit the property quickly 460 00:50:44.160 --> 00:50:47.200 while he is still in command. 461 00:50:47.200 --> 00:50:53.240 Those who object that private individuals are mortal, while governments are immortal, 462 00:50:53.240 --> 00:50:58.360 indulge in the fallacy of conceptual realism at its starkest. 463 00:50:58.360 --> 00:51:05.320 Government is not a real acting entity, but rather a type of interpersonal action adopted 464 00:51:05.320 --> 00:51:08.440 by actual individuals. 465 00:51:08.440 --> 00:51:12.640 H. Social Security 466 00:51:12.640 --> 00:51:19.800 Before ending our discussion of specific governmental activities, we may note in passing a curiously 467 00:51:19.800 --> 00:51:25.160 popular form of government expenditure, social security. 468 00:51:25.160 --> 00:51:31.920 Social security confiscates the income of wage earners and then, most people presume, 469 00:51:31.920 --> 00:51:37.880 it invests the money more wisely than they could themselves, later paying out the money 470 00:51:37.880 --> 00:51:42.160 to the former wage earners in their old age. 471 00:51:42.160 --> 00:51:48.120 Considered as social insurance, this is a typical example of government enterprise. 472 00:51:48.120 --> 00:51:54.400 There is no relation between premiums and benefits, the latter changing yearly under 473 00:51:54.400 --> 00:51:57.440 the impact of political pressures. 474 00:51:57.440 --> 00:52:03.920 On the free market, anyone who wishes may invest in an insurance annuity, or in stocks 475 00:52:03.920 --> 00:52:05.800 or real estate. 476 00:52:05.800 --> 00:52:12.640 Compelling everyone to transfer his funds to the government forces him to lose utility. 477 00:52:12.640 --> 00:52:19.120 Thus, even on its face, it is difficult to understand the great popularity of the Social 478 00:52:19.120 --> 00:52:21.200 Security program. 479 00:52:21.200 --> 00:52:26.360 But the true nature of the program differs greatly from the popular image. 480 00:52:26.360 --> 00:52:31.080 For the government does not invest the funds it takes in taxes. 481 00:52:31.080 --> 00:52:37.040 It simply spends them, giving itself its own bonds, which must later be cashed when the 482 00:52:37.040 --> 00:52:39.000 benefits fall due. 483 00:52:39.000 --> 00:52:43.960 The cash, of course, can be obtained only by further taxation. 484 00:52:43.960 --> 00:52:50.160 Thus, the public must pay twice for one payment of Social Security. 485 00:52:50.160 --> 00:52:57.660 The program is essentially one of making more palatable a general taxation of lower-income 486 00:52:57.660 --> 00:53:00.560 wage-earning groups. 487 00:53:00.560 --> 00:53:05.600 I Socialism and Central Planning 488 00:53:05.600 --> 00:53:11.700 When government ownership or control extends to the entire productive system, then the 489 00:53:11.700 --> 00:53:15.960 economic system is called socialism. 490 00:53:15.960 --> 00:53:22.040 Socialism in short is the violent abolition of the market, the compulsory monopolization 491 00:53:22.040 --> 00:53:26.320 of the entire productive sphere by the state. 492 00:53:26.320 --> 00:53:31.880 There are two and only two ways that any economy can be organized. 493 00:53:31.880 --> 00:53:36.680 One is by freedom and voluntary choice, the way of the market. 494 00:53:36.680 --> 00:53:41.480 The other is by force and dictation, the way of the state. 495 00:53:41.480 --> 00:53:46.960 To those ignorant of economics, it may seem that the way of the market is only anarchic 496 00:53:46.960 --> 00:53:54.000 confusion and chaos, while the way of the state constitutes genuine organization and 497 00:53:54.000 --> 00:53:55.840 central planning. 498 00:53:55.840 --> 00:54:01.300 On the contrary, we have seen in this book what an amazing and flexible mechanism the 499 00:54:01.300 --> 00:54:06.280 market is for satisfying the wants of all individuals. 500 00:54:06.280 --> 00:54:12.440 State operation or intervention is, on the other hand, far less efficient, and creates 501 00:54:12.440 --> 00:54:16.600 many disruptive and cumulative problems of its own. 502 00:54:16.600 --> 00:54:23.220 Moreover, a socialist state, deprived of the real market and its determination of prices 503 00:54:23.220 --> 00:54:29.740 Mises for producers' goods cannot calculate, and can therefore run a productive system 504 00:54:29.740 --> 00:54:32.580 only in chaotic fashion. 505 00:54:32.580 --> 00:54:38.560 The economics of socialism, a whole branch of economics of its own, can only be touched 506 00:54:38.560 --> 00:54:39.860 upon here. 507 00:54:39.860 --> 00:54:45.820 Suffice it to say that Mises' demonstration of the impossibility of economic calculation 508 00:54:45.820 --> 00:54:51.540 under socialism has never been successfully refuted. 509 00:54:51.540 --> 00:54:56.380 Here we might mention just a few points on the economics of socialism. 510 00:54:56.380 --> 00:55:05.000 One, since ownership is, de facto, the control of a resource, a Nazi, fascist, or other centrally 511 00:55:05.000 --> 00:55:12.920 planned system is as much socialism as a communist regime that officially nationalizes property. 512 00:55:12.920 --> 00:55:19.700 A chief difference is that a formal communist-style expropriation makes it far more difficult 513 00:55:19.700 --> 00:55:22.740 to Desocialize Later. 514 00:55:22.740 --> 00:55:26.980 Secondly, the extent of socialism in the present day world 515 00:55:26.980 --> 00:55:30.580 is at the same time underestimated in countries 516 00:55:30.580 --> 00:55:35.580 such as the United States and overestimated in Soviet Russia. 517 00:55:35.980 --> 00:55:38.980 It is underestimated because the expansion 518 00:55:38.980 --> 00:55:42.040 of government lending to private enterprise 519 00:55:42.040 --> 00:55:45.700 in the United States has been generally neglected. 520 00:55:45.700 --> 00:55:47.740 And we have seen that the lender, 521 00:55:47.740 --> 00:55:54.100 regardless of his legal status, is also an entrepreneur and part owner. 522 00:55:54.100 --> 00:56:01.380 The extent of socialism is overestimated because most writers ignore the fact that Russia, 523 00:56:01.380 --> 00:56:08.760 socialist as she is, cannot have full socialism, as long as she can still refer to the relatively 524 00:56:08.760 --> 00:56:12.940 free markets existing in other parts of the world. 525 00:56:12.940 --> 00:56:19.900 In short, a single socialist country or block of countries, while inevitably experiencing 526 00:56:19.900 --> 00:56:27.140 enormous difficulties and wastes in planning, can still buy and sell and refer to the world 527 00:56:27.140 --> 00:56:34.000 market, and can therefore at least vaguely approximate some sort of rational pricing 528 00:56:34.000 --> 00:56:39.180 of producers' goods by extrapolating from that market. 529 00:56:39.180 --> 00:56:44.960 The first one to point this out was Ludwig von Mises in his Human Action. 530 00:56:44.960 --> 00:56:52.260 It is particularly interesting to find an empirical confirmation by PJD Wiles dealing 531 00:56:52.260 --> 00:56:54.620 with communist planning. 532 00:56:54.620 --> 00:57:02.080 What actually happens is that world prices, that is, capitalist world prices, are used 533 00:57:02.080 --> 00:57:05.340 in all intra-Soviet block trade. 534 00:57:05.340 --> 00:57:11.000 They are translated into rubles and entered into bilateral clearing accounts. 535 00:57:11.000 --> 00:57:17.100 To the question, what would you do if there were no capitalist world, came only the answer, 536 00:57:17.100 --> 00:57:20.120 we'll cross that bridge when we come to it. 537 00:57:20.120 --> 00:57:24.160 In the case of electricity, the bridge is already under their feet. 538 00:57:24.160 --> 00:57:29.920 There has been great difficulty in pricing it since there is no world market. 539 00:57:29.920 --> 00:57:36.320 The well-known wastes and errors of this partial socialist planning are negligible compared 540 00:57:36.320 --> 00:57:44.580 to what would be experienced under the total calculational chaos of a world socialist state. 541 00:57:44.580 --> 00:57:50.760 Another neglected factor diminishing the extent of planning in socialist countries is black 542 00:57:50.760 --> 00:57:59.340 market activities, particularly in commodities, candy, cigarettes, drugs, stockings, etc., 543 00:57:59.340 --> 00:58:06.780 are easy to conceal. Even in bulkier commodities, falsification of records and extensive graft 544 00:58:06.780 --> 00:58:14.300 may bring some sort of limited market, a market violating all the socialist plans into existence. 545 00:58:15.820 --> 00:58:22.940 Moreover, it should be noted that a centrally planned economy is a centrally prohibited 546 00:58:22.940 --> 00:58:31.060 The concept of social engineering is a deceptive metaphor, since in the social realm it is 547 00:58:31.060 --> 00:58:37.620 largely people who are being planned, rather than the inanimate machinery of engineering 548 00:58:37.620 --> 00:58:38.940 blueprints. 549 00:58:38.940 --> 00:58:47.060 And since every individual is by nature, if not always by law, a self-owner and self-starter, 550 00:58:47.060 --> 00:58:49.420 That is, a self-energizer. 551 00:58:49.420 --> 00:58:55.500 This means that central orders, backed up as they must be under socialism, by force 552 00:58:55.500 --> 00:59:02.580 and violence, effectively prohibit all the individuals from doing what they want most, 553 00:59:02.580 --> 00:59:07.200 or what they believe themselves to be best fitted to do. 554 00:59:07.200 --> 00:59:14.700 If the Central Planning Board, in short, orders X and Y to PINSK to work as truck drivers, 555 00:59:14.700 --> 00:59:21.660 This means that X and Y are effectively and coercively prohibited from doing what they 556 00:59:21.660 --> 00:59:24.980 would have done voluntarily. 557 00:59:24.980 --> 00:59:30.380 Perhaps X would have gone to Leningrad to be a longshoreman, and perhaps Y would have 558 00:59:30.380 --> 00:59:37.560 stayed around to tinker in his workshop and invent a new and highly useful device. 559 00:59:37.560 --> 00:59:42.780 The latter point brings us to another grave defect of central planning. 560 00:59:42.780 --> 00:59:50.380 Inventions, innovations, technological developments, by their very nature, by definition, cannot 561 00:59:50.380 --> 00:59:57.780 be predicted in advance, and therefore cannot be centrally and bureaucratically planned. 562 00:59:57.780 --> 01:00:05.680 Not only does no one know what will be invented when, no one knows who will do the inventing. 563 01:00:05.680 --> 01:00:13.240 Clearly, a centrally prohibited economy, irrational and inefficient enough for given ends and 564 01:00:13.240 --> 01:00:20.200 given means and techniques at any point of time, is all the more incompetent if a flow 565 01:00:20.200 --> 01:00:25.360 of inventions and new development are desired in society. 566 01:00:25.360 --> 01:00:32.600 Bureaucracy, incompetent enough to plan a stationary system, is vastly more incompetent 567 01:00:32.600 --> 01:00:34.600 at Planning, a Progressive One.