Chapter 5. Binary Intervention. Government Expenditures.
When writers on public finance and political economy reach the topic of government expenditures,
they have traditionally abandoned analysis and turned to simple institutional description of various types of governmental expenditure.
In discussing taxation, they engage in serious analysis, faulty as some of it may be, but they have devoted little attention to a theoretical treatment of expenditure.
Clement L. Harris, in fact, goes so far as to say that a theory of government expenditure is impossible, or at least non-existent.
The bulk of discussion of expenditures is devoted to describing their great proliferation, absolute and relative, in the last decades, coupled with the assumption, implicit or explicit, that this growth has been necessary to cope with the growing complexities of the economy.
This slogan, or similar ones, have gained almost universal acceptance, but have never been rationally supported.
On its face, the statement is unproved, and will remain so until proved.
Broadly, we may consider two categories of government expenditures, transfer and resource-using.
Resource-using activities employ non-specific resources that could have been used for other production.
They withdraw factors of production from private uses to state-designated uses.
Transfer activities may be defined as those which use no resources, that is, which transfer money directly from Peter to Paul.
These are the pure subsidy-granting activities.
Now, of course, there is considerable similarity between the two branches of government action.
Both are transfer activities insofar as they pay the salaries of the bureaucracy engaged in these operations.
Both even involve shifts of resources, since transfer activities shift non-specific factors from free-market voluntary activity to demands stemming from state-privileged groups.
Both subsidize. The supply of governmental services, as well as the purchase of material by government enterprises, constitutes a subsidy.
The difference is important enough to preserve, for in one case goods are used for, and resources
are devoted to, state purposes as the state wills.
In the other, the state subsidizes private individuals, who employ resources as they
think best.
Transfer payments are pure subsidies, without prior diversion of resources.
We shall first analyze transfer payments as pure subsidies and then see how the analysis
applies to the subsidizing aspects of resource-using activities.
1.
Government Subsidies – Transfer Payments
There are two and only two ways of acquiring wealth, the economic means, voluntary production
and Exchange, and the Political Means, Confiscation by Coercion.
On the free market, only the economic means can be used, and consequently everyone earns
only what other individuals in society are willing to pay for his services.
As long as this continues, there is no separate process called distribution.
There are only production and exchange of goods.
Let government subsidies enter the scene, however, and the situation changes.
Now the political means to wealth becomes available.
On the free market, wealth is only a resultant of the voluntary choices of all individuals,
and the extent to which men serve each other.
But the possibility of government subsidy permits a change.
It opens the way to an allocation of wealth in accordance with the ability of a person
or group to gain control of the state apparatus.
Government subsidy creates a separate distribution process, not redistribution as some would
be tempted to say.
For the first time, earnings are severed from production and exchange and become separately
are determined. To the extent that this distribution occurs, therefore, the allocation of earnings is distorted away from efficient service to consumers.
Therefore, we may say that all cases of subsidy coercively penalize the efficient for the benefit of the inefficient.
Subsidies consequently prolong the life of inefficient firms at the expense of efficient ones, distort the productive system, and hamper the mobility of factors from less to more value-productive locations.
They injure the market greatly and prevent the full satisfaction of consumer wants.
Suppose, for example, an entrepreneur is sustaining losses in some industry, or the owner of a
factor is earning a very low sum there.
On the market, the factor owner would shift to a more value-productive industry, where
both the owner of the factor and the consumers would be better served.
If the government subsidizes him where he is, however, the life of inefficient firms
is prolonged and factors are encouraged not to enter their most value-productive uses.
The greater the extent of government subsidy in the economy, therefore, the more the market
is prevented from working, and the more inefficient will the market be in catering to consumer
wants.
Hence, the greater the government subsidy, the lower will be the standard of living of
everyone.
On the free market, as we have seen, there is a harmony of interests, for everyone demonstrably
gains in utility from market exchange.
Where government intervenes, on the other hand, caste conflict is thereby created, for
one man benefits at the expense of another.
This is most clearly seen in the case of government transfer subsidies paid from tax or inflation
funds, an obvious taking from Peter to give to Paul.
Let the subsidy method become general then and everyone will rush to gain control of
the government.
Production will be more and more neglected as people divert their energies to the political
struggles, to the scramble for loot.
It is obvious that production and general living standards are lowered in two ways.
One, by the diversion of energy from production to politics, and two, by the fact that the
government inevitably burdens the producers with the incubus of an inefficient privileged
group.
The inefficient achieve a legal claim to ride herd on the efficient.
This is all the more true since those who succeed in any occupation will inevitably
tend to be those who are best at it.
Those who succeed on the free market in economic life will therefore be those most adept at
production and at serving their fellow men.
Those who succeed in the political struggle will be those most adept at employing coercion
and Winning Favors from Wielders of Coercion.
Generally, different people will be adept at these different tasks, in accordance with
universal specialization and the division of labor, and hence the shackling of one set
of people will be done for the benefit of another set.
But perhaps it will be argued that the same people will be efficient at both activities,
and that therefore there will be no exploitation of one group at the expense of another.
As we have said, this is hardly likely.
If true, the subsidy system would die out, because it would be pointless for a group
to pay the government to subsidize itself.
But further, the subsidy system would promote the predatory skills of these individuals
and penalize their productive ones.
In sum, governmental subsidy systems promote inefficiency in production and efficiency in
coercion and subservience, while penalizing efficiency in production and inefficiency
in predation.
Those people who ethically favor voluntary production can gauge which system, the free
Every market or subsidies scores the higher economic marks, while those who favor conquest
and confiscation must at least reckon with the overall loss of production that their policy
brings about.
This analysis applies to all forms of government subsidies, including grants of monopolistic
privilege to favored producers.
A common example of direct transfer subsidies is governmental poor relief.
State poor relief is clearly a subsidization of poverty.
Men are now automatically entitled to money from the state because of their poverty.
Hence, the marginal disutility of income foregone from leisure diminishes, and idleness and
poverty tend to increase.
Thus, state subsidization of poverty tends to increase poverty, which in turn increases
the amount of subsidy paid and extracted from those who are not impoverished.
When, as is generally the case, the amount of subsidy depends directly on the number
of children possessed by the pauper, there is a further incentive for the pauper to have
more children than otherwise, since he is assured of a proportionate subsidy by the state.
Consequently, the number of paupers tends to multiply still further.
As Thomas McKay aptly stated, the cause of pauperism is relief.
We shall not get rid of pauperism by extending the sphere of state relief.
On the contrary, its adoption would increase our pauperism, for, as is often said, we can
have exactly as many paupers as the country chooses to pay for.
Private charity to the poor, on the other hand, does not have the same effect, for the
poor would not have a compulsory and unlimited claim on the rich.
Instead, charity is a voluntary and flexible act of grace on the part of the giver.
The sincerity of government's desire to promote charity may be gauged by two perennial governmental
drives, one to suppress charity rackets and the other to drive individual beggars off
the streets because the government makes plenty of provision for them.
From the following admiring anecdote of such a drive, the reader can gauge just who was
the true friend of the poor organ grinder, his customer or the government.
During a similar campaign to clean up the streets of organ grinders, most of whom were
simply licensed beggars, a woman came up to LaGuardia at a social function and begged
him not to deprive her of her favorite organ grinder.
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.
The effect of both measures is to suppress voluntary individual gifts of charity and
to force the public to root its giving into those channels approved by and tied in with
government officialdom.
Similarly, unemployment relief, instead of helping to cure unemployment as often is imagined,
actually subsidizes and intensifies it.
We have seen that unemployment arises when laborers or unions set a minimum wage above
what they can obtain on the free market.
The tax aid helps them to keep this unrealistic minimum and hence prolongs the period in which they can continue to withhold their labor from the market.
2. Resource Using Activities, Government Ownership versus Private Ownership
The bulk of government activities use resources, redirecting factors of production to government
chosen ends.
These activities generally involve the real or supposed supply of services by government
to some or all of the populace.
Government functions here as an owner and enterpriser.
Investments using expenditures by government are often considered investment, and this
classification forms an essential part of the Keynesian doctrine.
We have argued that on the contrary, all of this expenditure must be considered consumption.
Investment occurs where producers' goods are bought by entrepreneurs, not at all for
for their own use or satisfaction, but merely to reshape and resell them to others, ultimately
to the consumers.
But government redirects the resources of society to its ends, chosen by it and backed
by the use of force.
Hence, these purchases must be considered consumption expenditures, whatever their intention
or physical result.
They are a particularly wasteful form of consumption, however, since they are generally not regarded
as consumption expenditures by government officials.
Government enterprises may either provide free services or charge a price or fee to
users.
Free services are particularly characteristic of government.
Service and Military Protection, Firefighting, Education, Some Water Supply come to mind
as examples.
The first point to note, of course, is that these services are not and cannot be truly
free.
A free good would not be a good, and thus not an object of human action.
It would exist in abundance for all.
If a good does not exist plentifully for all, then the resource is scarce, and supplying
it costs society other goods foregone.
Hence, it cannot be free.
The resources needed to supply the free governmental service are extracted from the rest of production.
Payment is made, however, not by users on the basis of their voluntary purchases, but
by a coerced levy on the taxpayers. A basic split is affected between payment for and
receipt of service. Many grave consequences follow from this split and from the free service.
As in all cases where price is below the free market price, an enormous and excessive demand
is stimulated for the good, far beyond the supply of such service available.
Consequently, there will always be shortages of the free good, constant complaints of insufficiency,
overcrowding, etc.
To illustrate, we need only cite such common conditions as police shortages, particularly
in crime-ridden districts, teacher and school shortages in the public school system, traffic
jams on government-owned streets and highways, etc.
In no area of the free market are there chronic complaints about shortages and insufficiencies.
In all areas of private enterprise, firms try to coax and persuade consumers to buy
more of their product.
Where government owns, on the other hand, there are invariably calls on consumers for
for Patience and Sacrifice and there are continual problems of shortages and deficiencies.
It is doubtful if any private enterprise would ever do what the government of New York and
other cities have done, exhort the consumers to use less water.
It is also characteristic of government operation that when a water shortage develops, it is
is the consumers and not the government enterprises who are blamed for the shortage.
The pressure is on consumers to sacrifice and use less, while in private industry the
welcome pressure is on entrepreneurs to supply more.
The well-known inefficiencies of government operation are not empirical accidents, resulting
They are inherent in all government enterprise, and the excessive demand fomented by free and other underpriced services is just one of the many reasons for this condition.
Thus, free supply not only subsidizes the users at the expense of non-using taxpayers,
it also misallocates resources by failing to supply the service where it is most needed.
The same is true to a lesser extent wherever the price is under the free market price.
On the free market, consumers can dictate the pricing, and thereby assure the best allocation
of productive resources to supply their wants.
In a government enterprise, this cannot be done.
Let us take again the case of the free service.
Since there is no pricing, and therefore no exclusion of sub-marginal uses, there is no
No way that government, even if it wanted to, could allocate its services to the most
important uses and to the most eager buyers.
All buyers, all uses, are artificially kept on the same plane.
As a result, the most important uses will be slighted, and the government is faced with
with insuperable allocation problems which it cannot solve even to its own satisfaction.
Thus, the government will be confronted with the problem, should we build a road in place
A or place B?
There is no rational way by which it can make this decision.
It cannot aid the private consumers of the road in the best way.
Government can decide only according to the whim of the ruling government official.
That is, only if the government official, not the public, does the consuming.
If the government wishes to do what is best for the public, it is faced with an impossible
task.
Government can either deliberately subsidize by giving a service away free, or it may genuinely
try to find the true market price, that is, to operate on a business basis.
This is often the cry raised by conservatives, that government enterprise be placed on a
business footing, that deficits be ended, etc.
Almost always this means raising the price.
Is this a solution, however?
It is often stated that a single government enterprise operating within the sphere of
a private market, buying from it, etc., can price its services and allocate its resources
efficiently.
This however is incorrect.
There is a fatal flaw that permeates every conceivable scheme of government enterprise
and ineluctably prevents it from rational pricing and efficient allocation of resources.
Because of this flaw, government enterprise can never be operated on a business basis,
no matter what the government's intentions.
What is this fatal flaw?
It is the fact that government can obtain virtually unlimited resources by means of its
It's coercive tax power.
Private businesses must obtain their funds from investors.
It is this allocation of funds by investors on the basis of time preference and foresight
that rations funds and resources to the most profitable and therefore the most serviceable
uses.
Private firms can get funds only from consumers and investors.
They can get funds, in other words, only from people who value and buy their services, and
from investors who are willing to risk investment of their saved funds in anticipation of profit.
In short, payment and service are, once again, indissolubly linked on the market.
Government, on the other hand, can get as much money as it likes.
The free market provides a mechanism for allocating funds for future and present consumption,
for directing resources to their most value-productive uses for all the people.
It thereby provides a means for businessmen to allocate resources and to price services
to ensure such optimum use.
Government, however, has no check reign on itself, that is, no requirement for meeting
a profit and loss test of valued service to consumers to enable it to obtain funds.
Private enterprise can get funds only from satisfied valuing customers and from investors
guided by profits and losses.
Government can get funds literally at its own whim.
With the check rain gone, gone also is any opportunity for government to allocate resources
rationally.
How can it know whether to build road A or road B, whether to invest in a road or a school?
In fact, how much to spend for all its activities?
There is no rational way that it can allocate funds or even decide how much to have.
When there is a shortage of teachers or school rooms or police or streets, the government
and its supporters have only one answer, more money.
The people must relinquish more of their money to the government.
Why is this answer never offered on the free market?
The reason is that money must be withdrawn from some other use in consumption or investment,
and this withdrawal must be justified.
This justification is provided by the test of profit and loss, the indication that the
most urgent wants of the consumers are being satisfied.
If an enterprise or product is earning high profits for its owners, and these profits
are expected to continue, more money will be forthcoming. If not and losses are being incurred,
money will flow out of the industry. The profit and loss test serves as the critical guide for
directing the flow of productive resources. No such guide exists for the government,
Which has no rational way to decide how much money to spend, either in total or in each specific line.
The more money it spends, the more service it can supply. But where to stop?
Proponents of government enterprise may retort that the government could simply tell its bureau
to act as if it were a profit-making enterprise, and to establish itself in the same way as
a private business.
There are two flaws in this theory.
First, it is impossible to play enterprise.
Enterprise means risking one's own money in investment.
Bureaucratic managers and politicians have no real incentive to develop entrepreneurial
to really adjust to consumer demands.
They do not risk loss of their money in the enterprise.
Secondly, aside from the question of incentives, even the most eager managers could not function as a business.
Regardless of the treatment accorded the operation after it is established,
the initial launching of the firm is made with government money
and therefore by coercive levy.
An arbitrary element has been built into the very vitals of the enterprise.
Further, any future expenditures may be made out of tax funds
and therefore the decisions of the managers will be subject to the same flaw.
The ease of obtaining money will inherently distort the operations of the government enterprise.
Moreover, suppose the government invests in an enterprise.
E. Either the free market, left alone, would also have invested the same amount in the
self-same enterprise, or it would not.
If it would have, then the economy suffers at least from the take going to the intermediary
bureaucracy.
If not, and this is almost certain, then it follows immediately that the expenditure on
E is a distortion of private utility on the market, that some other expenditure would
have greater monetary returns.
It follows once again that a government enterprise cannot duplicate the conditions of private
business.
In addition, the establishment of government enterprise creates an inherent competitive
advantage over private firms, for at least part of its capital was gained by coercion
rather than service.
It is clear that government, with its subsidization, if it wishes, can drive private business out
of the field.
Private investment in the same industry will be greatly restricted, since future investors
Those will anticipate losses at the hands of the privileged governmental competitors.
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.
And when a government enterprise opens, it generates fears in other industries that they
They will be next, and that they will be either confiscated or forced to compete with government
subsidized enterprises.
This fear tends to repress productive investment further, and thus lower the general standard
of living still more.
The clinching argument, and one that is used quite correctly by opponents of government
Government Ownership is, if business operation is so desirable, why take such a tortuous
route?
Why not scrap government ownership and turn the operation over to private enterprise?
Why go to such lengths to try to imitate the apparent ideal, private ownership, when the
ideal may be pursued directly?
The plea for business principles in government, therefore, makes little sense, even if it
could be successful.
The inefficiencies of government operation are compounded by several other factors.
As we have seen, a government enterprise competing in an industry can usually drive out private
owners, since the government can subsidize itself in many ways and supply itself with
with unlimited funds when desired, thus it has little incentive to be efficient.
In cases where it cannot compete, even under these conditions, it can arrogate to itself
a compulsory monopoly, driving out competitors by force.
This was done in the United States, in the case of the post office.
When the government thus grants itself a monopoly, it may go to the other extreme from free service.
It may charge a monopoly price.
Charging a monopoly price, identifiably different from a free market price, distorts resources
again, and creates an artificial scarcity of the particular good.
It also permits an enormously lowered quality of service.
A governmental monopoly need not worry that customers may go elsewhere or that inefficiency
may mean its demise.
Only governments can make self-satisfied announcements of cuts in service to affect economies.
In private business, economies must be made as a corollary of improvements in service.
A recent example of governmental cuts is the decline in American postal deliveries, joined
of course with requests for higher rates.
When France nationalized the important Western railway system in 1908, freight was increasingly
damaged.
Trains slowed down, and accidents grew to such an extent that an economist caustically
observed that the French government had added railway accidents to its growing list of monopolies.
A further reason for governmental inefficiency has been touched on already that the personnel
have no incentive to be efficient.
In fact, the skills they will develop will not be the economic skills of production,
Hayek showed us that the worst get on top in a collectivist regime.
This is true for any government-run enterprise, however.
For our purposes, we may excise the moral evaluation and say that, for any task, those
who get on top will be those with the most skill in that particular task, a praxeological
law.
The difference is that the market promotes and rewards the skills of production and voluntary
Cooperation, Government Enterprise Promotes the Skills of Mass Coercion and Bureaucratic
Submission.
On the market, workers get paid in accordance with their discounted marginal value product.
But in a government enterprise, which can charge any price it pleases, there is no discernible
value product, and workers are hired and paid according to the personal charm or political
It is particularly absurd to call for business principles where a government enterprise functions
as a monopoly.
Periodically there are demands that the post office be put on a business basis and end
its deficit, which must be paid by the taxpayers.
But ending the deficit of an inherently and necessarily inefficient government operation
does not mean going on a business basis.
In order to do so, the price must be raised high enough to achieve a monopoly price, and
thus cover the costs of the government's inefficiencies.
A monopoly price will levy an excessive burden on the users of the postal service, especially
The Theory of Money and Credit
The New York subway system in recent years, which has been raising its fares in a vain attempt to end its deficit, only to see passenger volume fall so drastically that the deficit increased even further after a time.
Ironically enough, the higher fares have driven many customers to buying and driving their own cars, thus aggravating the perennial traffic problem,
Scarcity of Government Street Space, another example of government intervention creating
and multiplying its own difficulties.
Many criteria have been offered by writers as guides for the pricing of government services.
One criterion supports pricing according to marginal cost.
However, this is hardly a criterion at all, and rests on classical economic fallacies of price determination by costs.
For one thing, marginal varies according to the period of time surveyed.
Furthermore, costs are not static, but flexible.
They change according to selling prices, and hence cannot be used as a guide to those prices.
Moreover, prices equal average costs, or rather, average costs equal prices, only in final equilibrium, and equilibrium cannot be regarded as an ideal for the real world.
The market only tends toward this goal.
Finally, costs of government operation will be higher than for a similar operation on the free market.
Government enterprise will not only hamper and repress private investment and entrepreneurship in the same industry, and in industries throughout the economy, it will also disrupt the entire labor market.
For A. The government will decrease production and living standards in the society by siphoning off potentially productive labor to the bureaucracy.
B. In using confiscated funds, the government will be able to pay more than the market rate for labor, and hence set up a clamor by government job seekers for an expansion of the unproductive bureaucratic machine.
And, c, through high tax-supported wages, the government may well mislead workers and unions into believing that this reflects the market wage in private industry, thereby causing unwanted unemployment.
Moreover, government enterprise basing itself on coercion over the consumer can hardly fail to substitute its own values for those of its customers.
Hence, artificially standardized services of poorer quality, fashioned to governmental taste and convenience, will hold sway, in contrast to those of the free market, where diversified services of high quality are supplied to fit the varied tastes of a multitude of individuals.
Governments, despite bickering before a decision, generally end up speaking with a single voice.
This is true of the executive and judicial arms, which are organized like a military
force with command from the top down, and of the legislative arm, where the majority
may impose its will.
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.
This is the reason why state socialism could not plan or allocate rationally either.
In fact, even two or more stages could not be completely integrated vertically on the
market, for total integration would eliminate a whole segment of the market and establish
an island of calculational and allocational chaos, an island that would preclude optimal
Capital Planning for Profits and Maximum Satisfaction for the Consumers.
In the case of simple government ownership, still another extension of this thesis unfolds.
For each governmental firm introduces its own island of chaos into the economy, there
is no need to wait for socialism for chaos to begin its work.
No government enterprise can ever determine prices or costs, or allocate factors or funds
in a rational, welfare-maximizing manner.
No government enterprise can be established on a business basis, even if the desire were
present.
Thus, any government operation injects a point of chaos into the economy, and since all markets
are interconnected in the economy, every governmental activity disrupts and distorts pricing, the
allocation of factors, consumption investment ratios, etc.
Every government enterprise not only lowers the social utilities of the consumers by forcing
the allocation of funds to ends other than those desired by the public, it also lowers
Use the utility of everyone, including, perhaps, the utilities of government officials, by
distorting the market and spreading calculational chaos.
The greater the extent of government ownership, of course, the more pronounced will this impact
become.
Aside from its purely economic consequences, government ownership has another kind of impact
on society.
It necessarily substitutes conflict for the harmony of the free market.
Since government service means service by one set of decision-makers, it comes to mean
uniform service.
The desires of all those forced, directly or indirectly, to pay for the government service
cannot be satisfied.
Only some forms of the service can or will be produced by the government agency.
As a result, government enterprise creates enormous caste conflicts among the citizens,
each of whom has a different idea on the best form of service.
In recent years, government schools in America have furnished a striking example of such
conflicts.
Some parents prefer racially segregated schools, others prefer integrated education.
Some parents want their children taught socialism.
Others want anti-socialist teaching in the schools.
There is no way that government can resolve these conflicts.
It can only impose the will of the majority, or a bureaucratic interpretation of it, by
by coercion and leave an often large minority dissatisfied and unhappy.
Whichever type of school is chosen, some groups of parents will suffer.
On the other hand, there is no such conflict on the free market, which provides any type of service demanded.
On the market, those who want segregated or integrated, socialist or individualist schools
The degrees of government ownership in the economy vary from one country to another, but in all countries, the state has made sure that it owns the vital nerve centers, the command posts of the society.
It has acquired compulsory monopoly ownership over these command posts, and it has always tried to convince the populace that private ownership and enterprise in these fields is simply and a priori impossible.
We have seen on the contrary that every service can be supplied on the free market.
The vital command posts invariably owned monopolistically by the state are
1. Police and military protection
2. Judicial protection
3. Monopoly of the mint and monopoly of defining money
4. Rivers and coastal seas
5. Urban streets and highways and land generally
Unused land, in addition to the power of eminent domain, The Post Office
The defense function is the one reserved most jealously by the state.
It is vital to the state's existence, for on its monopoly of force depends its ability
to exact taxes from the citizens.
If citizens were permitted privately owned courts and armies, then they would possess
The Post Office has always been a very convenient tool for the inspection and prohibition of messages by heretics or enemies of the state.
In recent years, the state has constantly sought to expand these outposts. Monopoly of the mint
and of the definition of money, legal tender laws, has been used to achieve full control of
the nation's monetary system. This was one of the state's most difficult tasks since for centuries
paper money was thoroughly distrusted by the people. Monopoly over the mint and the definition
The creation of monetary standards has led to the debasement of the coinage, a shift
of monetary names from units of weight to meaningless terms, and the replacement of
gold and silver by bank or government paper.
At present, the state in nearly every country has achieved its major monetary goal, the
ability to expand its revenue by inflating the currency at will.
In the other areas, land and natural resources, transportation and communication, the state
is more and more in control.
Finally, another critical command post held, though not wholly monopolized by the state,
is education, for government schooling permits influencing the youthful mind to accept the
virtues of the government and of government intervention.
Those defenders of the free market who attack socialistic teaching in the government schools
are tilting at windmills.
The very fact that a government school exists and is therefore presumed to be good teaches
its little charges the virtues of government ownership, regardless of what is formally
taught in textbooks.
And if government ownership is preferable in schooling, why not in other educational
In many countries, the government does not have a compulsory monopoly of schooling, but
it approaches this ideal by compelling attendance of all children at either a government school
or a private school approved or accredited by government.
Governmentary attendance herds into the schools those who do not desire schooling, and thus
drives too many children into education.
Too few youngsters remain in such competing fields as leisure, home study and business
employment.
One very curious governmental activity has grown enormously in the present century.
Its great popularity is a notable indication of widespread popular ignorance of praxeological
law.
We are referring to what is called social security legislation.
This system confiscates the income of the poorer wage earners and then presumes to invest
the money more wisely than they could themselves, later paying out the money to them or their
and their beneficiaries in their old age.
Considered as social insurance, this is a typical example of government enterprise.
There is no relation between premiums and benefits,
both changing yearly under the impact of political pressures.
On the free market, anyone who wishes to invest in an insurance annuity
or in stocks or real estate may do so,
Compelling everyone to transfer his funds to the government forces him to lose utility.
Thus even on its face, it is difficult to understand the great popularity of the social
security system.
But the true nature of the operation differs greatly from its official image.
For the government does not invest the funds it takes in taxes.
It simply spends them, giving itself bonds, which must be later cashed when the benefits
fall due.
How will the cash then be obtained?
Only from further taxes or inflation.
Thus, the public must pay twice for Social Security.
The Social Security program taxes twice for one payment.
It is a device to permit palatable taxation of the lower income groups by the government,
and as is true of all taxes, the proceeds go into governmental consumption.
In weighing the question of private or governmental ownership of any enterprise, then, one should
keep in mind the following conclusions of our analysis.
1. Every service can be supplied privately on the market.
2. Private ownership will be more efficient in providing better quality of service at lower cost.
3. Allocation of resources in a private enterprise will better satisfy consumer demands,
while government enterprise will distort allocations and introduce islands of calculational chaos.
4. Government ownership will repress private activity in non-competing as well as competing
firms. 5. Private ownership ensures the harmonious and cooperative satisfaction of desires,
while government ownership creates caste conflict. Various other criteria advanced to decide between
Private and State Action are fallacious, thus a common rule states that government should weigh
marginal social costs against marginal social benefits in making a decision. But aside from
many other flaws, there is no such thing as society apart from constituent individuals,
Socialism or Collectivism occurs when the state owns all the means of production.
It is the compulsory abolition and prohibition of private enterprise and the monopolization
of the entire productive sphere by the state.
The system, therefore, extends the principle of compulsory governmental monopoly from a
few isolated enterprises to the whole economic system.
It is the violent abolition of the market.
If an economy is to exist at all, there must be production in order to satisfy the desires
of the consuming individuals.
How is this production to be organized?
Who is to decide on the allocation of factors to all the various uses, or on the income
each factor will receive in each use?
There are two and only two ways that an economy can be organized.
One is by freedom and voluntary choice, the way of the market.
The other is by force and dictation, the way of the state.
To those ignorant of economics, it may seem that only the latter constitutes real organization
and planning, whereas the way of the market is only confusion and chaos.
The organization of the free market, however, is actually an amazing and flexible means
of satisfying the wants of all individuals, and one far more efficient than state operation
or intervention.
Up to this point, however, we have discussed only isolated government enterprises and various
forms of government intervention in the market.
We must now examine socialism, the system of pure government dictation, the polar opposite
of the purely free market.
We have defined ownership as the exclusive control of a resource.
It is clear, therefore, that a planned economy, which leaves nominal ownership in the hands
of the previous private owners, but which places the actual control and direction of
resources in the hands of the state, is as much socialism as is the formal nationalization
of property.
The Nazi and fascist regimes were as socialist as the communist system that nationalizes
Many people refuse to identify nazism or fascism as socialism, because they confine the latter term to Marxist or neo-Marxist proletarianism, or to various social-democratic proposals.
But economics is not concerned with the color of the uniform or with the good or bad manners
of the rulers, nor does it care which groups or classes are running the state in various
political regimes.
Neither does it matter for economics whether the socialist regime chooses its rulers by
elections or by coup d'etat.
This is concerned only with the powers of ownership or control that the state exercises.
All forms of state planning of the whole economy are types of socialism, notwithstanding the
philosophical or aesthetic viewpoints of the various socialist camps and regardless whether
they are referred to as rightists or leftists.
Freedom may be monarchical, it may be proletarian, it may equalize fortunes, it may increase
inequality, its essence is always the same, total coercive state dictation over the economy.
The distance between the poles of the purely free market on the one hand and total collectivism
One on the other is a continuum involving different mixes of the freedom principle and
the coercive hegemonic principle.
Any increase of governmental ownership or control, therefore, is socialistic or collectivistic
because it is a coercive intervention bringing the economy one step closer to complete socialism.
The extent of collectivism in the 20th century is at once under and over estimated.
On the one hand, its development in such countries as the United States is greatly underestimated.
Most observers neglect, for example, the importance of the expansion of government lending.
The lender is also an entrepreneur and part owner, regardless of his legal status.
Government loans to private enterprise, therefore, or guarantees of private loans, create many
centers of government ownership.
Furthermore, the total quantity of savings in the economy is not increased by government
guarantees and loans, but its specific form is changed.
The free market tends to allocate social savings to their most profitable and productive channels.
Government loans and guarantees, by contrast, divert savings from more to less productive
channels.
They also prevent the success of the most efficient entrepreneurs and the weeding out
of the inefficient, who would then become simply labor factors rather than entrepreneurs.
In both these ways, therefore, government lending lowers the general standard of living.
To say nothing of the loss of utility inflicted on the taxpayers, who must make these pledges
good or who supply the money to be loaned.
On the other hand, the extent of socialism in such countries as Soviet Russia is overrated.
Those people who point to Russia as an example of successful planning by the government ignore
For the fact, aside from the planning difficulties constantly encountered, that Soviet Russia
and other socialist countries cannot have full socialism because only domestic trade
is socialized.
The rest of the world still has a market of sorts.
A socialist state, therefore, can still buy and sell on the world market and at least
Socialists vaguely approximate the rational pricing of producers' goods by referring
to the prices of factors set on the world market.
Although the errors of even this partial socialist planning are impoverishing, they are insignificant
compared to what would happen under the total calculational chaos of a world socialist state.
One big cartel could not calculate and therefore could not be established on the free market.
How much more does this apply to socialism, where the state imposes its overall monopoly
by force and where the inefficiencies of a single state's actions are multiplied a thousandfold?
One point should not be overlooked in the analysis of specific socialist regimes.
The possibility of a black market, with resources passing illicitly into private hands.
This differs completely from the artificial play at markets advocated by some writers
as a method of permitting calculation under socialism.
The black market is a real market, though very limited in scope.
Of course, the opportunity for black markets in large-sized goods is rather limited.
There is more scope for such trade, where commodities like candy, cigarettes, drugs
and stockings are easy to conceal.
On the other hand, falsification of records by managers and the pervasive opportunity
for bribery may be used to establish some form of limited market.
There is reason to believe, for example, that extensive graft, blot, and black markets,
that is, the subversion of socialist planning, have been essential to the level of production
which the Soviet system has been able to attain.
In recent years, the total failure of socialist planning to calculate for an industrial economy
has been implicitly acknowledged by the communist countries, which have been rapidly moving,
especially in Eastern Europe, away from socialism and toward an ever freer market economy.
This progress has been particularly remarkable in Yugoslavia, which is now marked by private
as well as producers' cooperative ownership, and by the absence of central planning, even
of Investments, Yugoslav economists are even thinking in terms of developing a stock market
and refer to this latent development as socialist people's capitalism.
4.
The Myth of Public Ownership
We all hear a great deal about public ownership.
Whenever the government owns property, in fact, or operates an enterprise, it is referred
When natural resources are sold or given to private enterprise, we learn that the public domain has been given away to narrow private interests.
The inference is that when the government owns anything, we, all members of the public, own equal shares of that property.
contrast to this broad sweep the narrow petty interests of mere private ownership.
We have seen that since a socialist economic system could not calculate economically, a
die-hard socialist must be prepared to witness the disappearance of a large part of the earth's
population, with only primitive subsistence remaining for the survivors.
Still, a man who identifies government with public ownership might be content to spread
the area of government ownership despite the loss of efficiency or social utility it entails.
The identity itself, however, is completely fallacious.
Ownership is the ultimate control and direction of a resource.
The owner of a property is its ultimate director, regardless of legal fictions to the contrary.
In the purely free society, resources so abundant as to serve as general conditions of human
welfare would remain unowned.
Scarce resources, on the other hand, would be owned on the following principles.
Ownership of each person by himself, Self-ownership of a person's created or transformed property,
First ownership of previously unowned land by its first user or transformer.
Government ownership means simply that the ruling officialdom owns the property.
The top officials are the ones who direct the use of the property and they therefore
or do the owning.
The public owns no part of the property.
Any citizen who doubts this may try to appropriate for his own individual use his aliquot part
of public property and then try to argue his case in court.
It may be objected that individual stockholders of corporations cannot do this either.
For example, by the rules of the company, a General Motors stockholder is not allowed
to seize a car in lieu of cash dividends or in exchange for his stock.
Yet stockholders do own their company, and this example precisely proves our point.
For the stockholder can contract out of his company.
He can sell his shares of General Motors stock to someone else.
The subject of a government cannot contract out of that government.
He cannot sell his shares in the post office because he has no such shares.
As F. A. Harper has succinctly stated, the corollary of the right of ownership is the
right of dis-ownership.
So if I cannot sell a thing, it is evident that I do not really own it.
Whatever the form of government, the rulers are the true owners of the property.
However, in a democracy, or in the long run under any form of government, the rulers are
transitory.
They can always lose an election, or be overthrown by a coup d'etat.
Hence, no government official regards himself as more than a transitory owner.
As a result, while a private owner, secure in his property and owning its capital value,
plans the use of his resource over a long period of time, the government official must
milk the property as quickly as he can, since he has no security of ownership.
Further, even the entrenched civil servant must do the same, for no government official
can sell the capitalized value of his property as private owners can.
In short, government officials own the use of resources but not their capital value except
in the case of the private property of a hereditary monarch, when only the current use can be
be owned, but not the resource itself, there will quickly ensue uneconomic exhaustion of
the resources, since it will be to no one's benefit to conserve it over a period of time,
and to every owner's advantage to use it up as quickly as possible.
In the same way, government officials will consume their property as rapidly as possible.
It is curious that almost all writers parrot the notion that private owners possessing
time preference must take the short view, while only government officials can take the
long view and allocate property to advance the general welfare.
The truth is exactly the reverse.
The private individual, secure in his property and in his capital resource, can take the
The Long View, for he wants to maintain the capital value of his resource.
It is the government official who must take and run, who must plunder the property while
he is still in command.
Those who object that private individuals are mortal but that governments are immortal
indulge in the fallacy of conceptual realism at its starkest.
Government is not a real acting entity, but is a real category of action adopted by actual
individuals.
It is a name for a type of action, the regularization of a type of interpersonal relation, and is
not itself an acting being.
5.
Democracy
Policy is a process of choosing government rulers or policies, and is therefore distinct
from what we have been considering, the nature and consequences of various policies that
a government may choose.
A democracy can choose relatively laissez-faire or relatively interventionist programs, and
the same is true for a dictator.
And yet, the problem of forming a government cannot be absolutely separated from the policy
that government pursues.
And so, we shall discuss some of these connections here.
Democracy is a system of majority rule in which each citizen has one vote, either in
deciding the policies of the government or in electing the rulers, who will, in turn,
decide policy.
It is a system replete with inner contradictions.
In the first place, suppose that the majority overwhelmingly wishes to establish a popular
dictator or the rule of a single party.
The people wish to surrender all decision-making into his or its hands.
Does the system of democracy permit itself to be voted democratically out of existence?
Whichever way the Democrat answers, he is caught in an inescapable contradiction.
If the majority can vote into power a dictator who will end further elections, then democracy
is really ending its own existence.
From then on, there is no longer democracy, although there is continuing majority consent
to the dictatorial party or ruler.
Democracy in that case becomes a transition to a non-democratic form of government.
On the other hand, if, as it is now fashionable to maintain, the majority of voters in a democracy
are prohibited from doing one thing, ending the democratic elective process itself, then
this is no longer democracy, because the majority of voters can no longer rule.
The election process may be preserved, but how can it express that majority rule essential
to democracy if the majority cannot end this process should it so desire?
In short, democracy requires two conditions for its existence, majority rule over governors
Progress or Policies, and Periodic Equal Voting.
So, if the majority wishes to end the voting process, democracy cannot be preserved, regardless
of which horn of the dilemma is chosen.
The idea that the majority must preserve the freedom of the minority to become the majority
is then seen not as a preservation of democracy, but as simply an arbitrary value judgment on the
part of the political scientist, or at least it remains arbitrary until justified by some
cogent ethical theory. This idea that democracy must force the majority to permit the minority
The freedom to become a majority is an attempt by social democratic theorists to permit those
results of democracy which they like, economic interventionism, socialism, while avoiding
the results which they do not like, interference with human rights, freedom of speech, etc.
They do this by trying to elevate their value judgments into an allegedly scientific definition
of Democracy.
Aside from the self-contradiction, this limitation is itself not as rigorous as they believe.
It would permit a democracy, for example, to slaughter negroes or redheads because there
is no chance that such minority groups could become majorities.
This dilemma occurs not only if the majority wishes to select a dictator, but also if it
Desires to Establish the Purely Free Society that we have outlined.
For that society has no overall monopoly government organization, and the only place where equal
voting would obtain would be in cooperatives, which have always been inefficient forms of
organization.
The only important form of voting in that society would be that of shareholders in joint
Stock Companies, whose votes would not be equal but proportionate to their shares of
ownership in the company assets.
Each individual's vote, in that case, would be meaningfully tied to his share in the ownership
of joint assets.
To Spencer Heath, this is the only genuine form of democracy.
When persons contractually pool their separate titles to property by taking undivided interests
in the whole, they elect servants, officers, and otherwise exercise their authority over
their property by a process of voting as partners, share owners, or other beneficiaries.
This is authentically democratic in that all the members exercise authority in proportion
and to their respective contributions. Coercion is not employed against any, and all persons
are as free to withdraw their membership and property as they were to contribute it.
In such a purely free society, there would be nothing for democratic electors to vote
about. Here, too, democracy can be only a possible route toward a free society, rather
than an attribute of it.
Neither is democracy conceivably workable under socialism.
The ruling party, owning all means of production, will have the complete decision, for example,
on how much funds to allocate to the opposition parties for propaganda, not to speak of its
economic power over all the individual leaders and members of the opposition.
With the ruling party deciding the income of every man and the allocation of all resources,
it is inconceivable that any functioning political opposition could long persist under socialism.
Even if, as is highly unlikely, especially in view of the fact that rulers under socialism
are those most adept at wielding force, the socialist leaders were saintly men, wishing
to give a political opposition every chance, and even if the opposition were unusually heroic
and risked liquidation by emerging into the open, how would the rulers decide their allocations?
Would they give funds and resources to all opposing parties or only to a pro-socialist
opposition? How much would they allocate to each opposition party? The only opposition that
could emerge would be not opposing parties in an election, but different administrative
cliques within the ruling party, as has been true in the communist countries.
Thus democracy is compatible neither with the purely free society nor with socialism.
And yet we have seen in this work that only those two societies are stable, that all intermediary
Military mixtures are in unstable equilibrium and always tending toward one or the other
pole.
This means that democracy, in essence, is itself an unstable and transitional form of
government.
Democracy suffers from many more inherent contradictions as well.
Thus, democratic voting may have either one of these two functions.
To Determine Governmental Policy or To Select Rulers
According to the former, what Schumpeter termed the classical theory of democracy, the majority
will is supposed to rule on issues.
According to the latter theory, majority rule is supposed to be confined to choosing rulers,
who in turn decide policy.
While most political scientists support the latter version, democracy means the former
version to most people, and we shall therefore discuss the classical theory first.
According to the will-of-the-people theory, direct democracy, voting on each issue by
all the citizens, as in New England town meetings, is the ideal political arrangement.
Modern civilization and the complexities of society, however, are supposed to have outmoded
direct democracy, so that we must settle for the less perfect representative democracy,
in olden days often called a republic, where the people select representatives to give
effect to their will on political issues.
Logical problems arise almost immediately.
One is that different forms of electoral arrangements, different delimitations of geographical districts,
all equally arbitrary, will often greatly alter the picture of the majority will.
If a country is divided into districts for choosing representatives, then gerrymandering
is inherent in such a division.
There is no satisfactory, rational way of demarking the divisions.
The party in power at the time of division or re-division will inevitably alter the
districts to produce a systematic bias in its favor.
But no other way is inherently more rational or more truly evocative of majority will.
Moreover, the very division of the Earth's surface into countries is itself arbitrary.
If a government covers a certain geographical area, does democracy mean that a majority
group in a certain district should be permitted to secede and form its own government, or
to join another country?
Does democracy mean majority rule over a larger or over a smaller area?
In short, which majority should prevail?
The very concept of a national democracy is, in fact, self-contradictory.
For if someone contends that the majority in country X should govern that country, then
Then it could be argued with equal validity that the majority of a certain district within
country X should be allowed to govern itself and secede from the larger country, and this
subdividing process can logically proceed down to the village block, the apartment house,
and finally each individual, thus marking the end of all democratic government through
through reduction to individual self-government.
But if such a right of secession is denied, then the National Democrat must concede that
the more numerous population of other countries should have a right to outvote his country,
and so he must proceed upwards to a world government run by a world majority rule.
In short, the Democrat who favors national government is self-contradictory.
He must favor a world government or none at all.
Aside from this problem of the geographical boundary of the government or electoral district,
the democracy that tries to elect representatives to effect the majority will runs into further
problems.
Finally, some form of proportional representation would be mandatory to arrive at a kind of
cross-section of public opinion.
Best would be a proportional representation scheme for the whole country or world, so
that the cross-section is not distorted by geographic considerations.
But here again, different forms of proportional representation will lead to very different
The Critics of Proportional Representation retort that a legislature elected on this principle would be unstable and that elections should result in a stable majority government.
The reply to this is that if we wish to represent the public, a cross-section is required, and the instability of representation is only a function of the instability or diversity of public opinion itself.
The Efficient Government Argument can be pursued, therefore, only if we abandon the classical majority will theory completely, and adopt the second theory, that the only function of the majority is to choose rulers.
But even proportional representation would not be as good, according to the classical view of democracy, as direct democracy.
And here we come to another important and neglected consideration.
Modern technology does make it possible to have direct democracy.
Certainly, each man could easily vote on issues several times per week
by recording his choice on a device attached to his television set.
This would not be difficult to achieve.
And yet, why has no one seriously suggested a return to direct democracy, now that it may be feasible?
The people could elect representatives through proportional representation solely as advisors to submit bills to the people,
but without having ultimate voting power themselves.
The final vote would be that of the people themselves, all voting directly.
In a sense, the entire voting public would be the legislature, and the representatives
could act as committees to bring bills before this vast legislature.
The person who favors the classical view of democracy must, therefore, either favor virtual
Eradication of the Legislature and, of course, of executive veto power, or abandon his theory.
The objection to direct democracy will undoubtedly be that the people are uninformed, and therefore
not capable of deciding on the complex issues that face the legislature.
But in that case, the democrat must completely abandon the classical theory that the majority
should decide on issues, and adopt the modern doctrine that the function of democracy is
majority choice of rulers, who in turn will decide the policies.
Let us then turn to this doctrine.
It faces, fully as much as the classical theory, the self-contradiction on national or electoral
and the modern Democrat, if we may call him such, as much as the classical Democrat, must advocate world government or none at all.
On the question of representation, it is true that the modern Democrat can successfully oppose direct television democracy or even proportional representation
and Resort to Our Current System of Single Constituencies.
But he is caught in a different dilemma.
If the only function of the voting people is to choose rulers, why have a legislature at all?
Why not simply vote periodically for a chief executive or president and then call it a day?
If the criterion is efficiency and stable rule by a single party for the term of office,
in the Office, then a single executive will be far more stable than a legislature, which
may always splinter into warring groups and deadlock the government.
The modern democrat, therefore, must also logically abandon the idea of a legislature,
and plump for granting all legislative powers to the elected executive.
The theories of democracy, it seems, must abandon the whole idea of a representative legislature.
Furthermore, the modern democrat who scoffs at direct democracy on the ground that the
people are not intelligent or informed enough to decide the complex issues of government
is caught in another fatal contradiction.
He assumes that the people are sufficiently intelligent and informed to vote on the people
who will make these decisions.
But if a voter is not competent to decide issues A, B, C, etc., how in the world could
he possibly be qualified to decide whether Mr. X or Mr. Y is better able to handle A,
B, or C?
In order to make this decision, the voter would have to know a great deal about the
issues, and know enough about the persons whom he is selecting.
In short, he would probably have to know more in a representative than in a direct democracy.
Furthermore, the average voter is necessarily less qualified to choose persons to decide
Issues, then he is to vote on the issues themselves, for the issues are at least intelligible
to him, and he can understand some of their relevance, but the candidates are people whom
he cannot possibly know personally, and whom he therefore knows essentially nothing about.
Hence he can vote for them only on the basis of their external personalities, glamorous
The modern democrat might object that the candidate's party affiliation enables the voter to learn, if not his personal competence, at least his political ideology,
Theology, but the modern democrat is precisely the theorist who hails the current two-party
system in which the platforms of both parties are almost indistinguishable as the most efficient,
stable form of democratic government.
These considerations also serve to refute the contention of the conservative that a
republic will avoid the inherent contradictions of a direct democracy, a position that it
itself stands in contradiction to its proponents' professed opposition to executive as against
legislative power.
We have seen the problems that democratic theory has with the legislature.
It also has difficulty with the judiciary.
In the first place, the very concept of an independent judiciary contradicts the theory
of Democratic Rule, whether classical or modern.
If the judiciary is really independent of the popular will, then it functions, at least
within its own sphere, as an oligarchic dictatorship, and we can no longer call the government a
democracy.
On the other hand, if the judiciary is elected directly by the voters, or appointed by the
If the voters' representatives, both systems, are used in the United States, then the judiciary is hardly independent.
If the election is periodic, or if the appointment is subject to renewal, then the judiciary is no more independent of political processes than any other branch of government.
If the appointment is for life, then the independence is greater.
Although, even here, if the legislature votes the funds for the judge's salaries, or if
it decides the jurisdiction of judicial powers, judicial independence may be sharply impaired.
We have not exhausted the problems and contradictions of democratic theory, and we may pursue the
rest by asking, why democracy anyway?
Until now we have been discussing various theories of how democracies should function,
or what areas, for example, issues or rulers, should be governed by the democratic process.
We may now inquire about the theories that support and justify democracy itself.
One theory, again of classical vintage, is that the majority will always, or almost always,
make the morally right decisions, whether about issues or men.
Since this is not an ethical treatise, we cannot deal further with this doctrine, except
to say that few people hold this view today.
It has been demonstrated that people can democratically choose a wide variety of policies and rulers,
and the experience of recent centuries has, for the most part, vitiated any faith that
that people may have had in the infallible wisdom and righteousness of the average voter.
Perhaps the most common and most cogent argument for democracy is not that democratic decisions
will always be wise, but that the democratic process provides for peaceful change of government.
The majority, so the argument runs, must support any government, regardless of form, if it
is to continue existing for long.
Far better, then, to let the majority exercise this right peacefully and periodically, than
to force the majority to keep overturning the government through violent revolution.
In short, ballots are hailed as substitutes for bullets.
One flaw in this argument is that it completely overlooks the possibility of the non-violent
overthrow of the government by the majority through civil disobedience, that is, peaceful
refusal to obey government orders.
Such a revolution would be consistent with this argument's ultimate end of preserving
peace, and yet would not require democratic voting.
Thus Etienne de la Boétie.
Obviously there is no need of fighting to overcome this single tyrant, for he is automatically
defeated if the country refuses consent to its own enslavement.
It is not necessary to deprive him of anything, but simply to give him nothing.
There is no need that the country make an effort to do anything for itself, provided
it does nothing against itself.
It is therefore the inhabitants themselves who permit, or rather, bring about their own
Subjection, since by ceasing to submit, they could put an end to their servitude.
There is, moreover, another flaw in the peaceful change argument for democracy, this one being
a grave self-contradiction that has been universally overlooked.
Those who have adopted this argument have simply used it to give a seal of approval
People to All Democracies and have then moved on quickly to other matters.
They have not realized that the peaceful change argument establishes a criterion for government
before which any democracy must pass muster.
For the argument that ballots are to substitute for bullets must be taken in a precise way,
That a democratic election will yield the same result as would have occurred if the
majority had had to battle the minority in violent combat.
In short, the argument implies that the election results are simply and precisely a substitute
for a test of physical combat.
Here we have a criterion for democracy.
Does it really yield the results that would have been obtained through civil combat?
If we find that democracy, or a certain form of democracy, leads systematically to results
that are very wide of this bullet-substitute mark, then we must either reject democracy
or give up the argument.
How then does democracy, either generally or in specific countries, fare when we test it
against its own criterion?
One of the essential attributes of democracy, as we have seen, is that each man have one
vote.
Even though in practice votes of rural or other areas are often more heavily weighted,
This democratic ideal is roughly approximated, or at least is the general aspiration in the
democratic countries.
But the peaceful change argument implies that each man would have counted equally in any
combat test.
But is this true?
In the first place, it is clear that physical power is not equally distributed.
In any test of combat, women, old people, sick people and 4Fs would fare very badly.
On the basis of the peaceful change argument, therefore, there is no justification whatever
for giving these physically feeble groups the vote.
So barred from voting would be all citizens who could not pass a test, not for literacy,
which is largely irrelevant to combat prowess, but for physical fitness.
Furthermore, it clearly would be necessary to give plural votes to all men who have been
militarily trained, such as soldiers and policemen, for it is obvious that a group of highly trained
fighters could easily defeat a far more numerous group of equally robust amateurs.
In addition to ignoring the inequalities of physical power and combat fitness, democracy
fails in another significant way to live up to the logical requirements of the Peaceful
Change Thesis.
This failure stems from another basic inequality, inequality of interest or intensity of belief.
Thus, 60 percent of the population may oppose a certain policy or political party, while
only 40 percent favor it.
In a democracy, this latter policy or party will be defeated.
But suppose that the bulk of the 40 percent are passionate enthusiasts for the measure
or candidate, while the bulk of the 60 percent majority have only slight interest in the
and the entire affair.
In the absence of democracy, far more of the passionate 40% would have been willing to
engage in a combat test than would the apathetic 60%.
And yet, in a democratic election, one vote by an apathetic, only faintly interested person
offsets the vote of a passionate partisan.
Hence, the democratic process grievously and systematically distorts the results of the
hypothetical combat test.
It is probable that no voting procedure could avoid this distortion satisfactorily and serve
as any sort of accurate substitute for bullets.
But certainly much could be done to alter current voting procedures to bring them closer
to the criterion, and it is surprising that no one has suggested such reforms.
The whole trend of existing democracies, for example, has been to make voting easier for
the people, but this violates the bullet-substitute test directly, because it has been made ever
easier for the apathetic to register their votes and thus distort the results.
Clearly, what would be needed is to make voting far more difficult and thus ensure that only
the most intensely interested people will vote.
A moderately high poll tax, not large enough to keep out those enthusiasts who could not
afford to pay, but large enough to discourage the indifferent, would be very helpful.
Voting booths should certainly be further apart.
The person who refuses to travel any appreciable distance to vote would surely not have fought
in his candidate's behalf.
Another useful step would be to remove all names from the ballot, thereby requiring the
voters themselves to write in the names of their favorites.
Not only would this procedure eliminate the decidedly undemocratic special privilege that
The State gives to those whose names it prints on the ballot, as against all other persons,
but it would bring elections closer to our criterion, for a voter who does not know the
name of his candidate would hardly be likely to fight in the streets on his behalf.
Another indicated reform would be to abolish the secrecy of the ballot.
The ballot has been made secret in order to protect the fearful from intimidation, yet
That civil combat is peculiarly the province of the courageous.
Surely those not courageous enough to proclaim their choice openly would not have been formidable
fighters in the combat test.
These and doubtless other reforms would be necessary to move the election results to
a point approximating the results of a combat foregone.
And yet, if we define democracy as including equal voting, this means that democracy simply
cannot meet its own criterion as deduced from the peaceful change argument.
Or, if we define democracy as majority voting but not necessarily equal, then the advocates
of democracy would have to favor abolishing the vote for women, sick people, old people,
etc., plural voting for the militarily trained, poll taxes, the open vote, etc.
In any case, democracy such as we have known it, marked by equal voting for each person,
is directly contradicted by the peaceful change argument.
One or the other, the argument or the system, must be abandoned.
If the arguments for democracy are thus shown to be a maze of fallacy and contradiction,
does this mean that democracy must be completely abandoned, except on the basis of a purely
arbitrary unsupported value judgment that democracy is good?
Not necessarily.
For democracy may be thought of, not so much as a value in itself, but as a possible method
for Achieving Other Desired Ends.
The end may be either to put a certain political leader into power, or to attain desired governmental
policies.
Democracy, after all, is simply a method of choosing governors and issues, and it is not
so surprising that it might have value largely to the extent that it serves as a means to
other political ends.
The socialist and the libertarian, for example, while recognizing the inherent instability
of the democratic form, may favor democracy as a means of arriving at a socialist or a
libertarian society.
The libertarian might thus consider democracy as a useful way of protecting people against
government or of advancing individual liberty.
Some libertarians consider a constitution a useful device for limiting or preventing
governmental encroachments on individual liberty.
A major difficulty with this idea was pointed out with great clarity by John C. Calhoun
that no matter how strict the limitations placed on government by a written constitution,
These limits must be constantly weakened and expanded if the final power to interpret them
is placed in the hands of an organ of the government itself, for example, the Supreme
Court.
One's views of democracy, then, depend upon one's estimates of the given circumstances.
Appendix.
The Role of Government Expenditures in National Product Statistics
National product statistics have been used widely in recent years as a reflection of
the total product of society and even to indicate the state of economic welfare.
These statistics cannot be used to frame or test economic theory, for one thing because
Because they are an inchoate mixture of grossness and netness, and because no objectively measurable
price level exists, that can be used as an accurate deflator to obtain statistics of
some form of aggregate physical output.
National product statistics, however, may be useful to the economic historian in describing
Originally national income statisticians were split on this issue.
Simon Kuznets evaluated government services as equal to the taxes paid, assuming that
government is akin to private business and that government receipts, like the receipts
of a firm, reflect the market appraised value of its product.
The error in treating government like a private business should be clear by this point in
In our discussion, now generally adopted is the Department of Commerce method of appraising
government services as equal to their cost, that is, to government expenditures on the
salaries of its officials and on commodities purchased from private enterprise.
The difference is that all governmental deficits are included by the Department in the government's
contribution to the national product.
The Department of Commerce method fallaciously assumes that the government's product is measurable by what the government spends.
On what possible basis can this assumption be made?
Actually, since governmental services are not tested on the free market, there is no possible way of measuring government's alleged productive contribution.
All government services, as we have seen, are monopolized and inefficiently supplied.
Clearly, if they are worth anything, they are worth far less than their cost in money.
Furthermore, the government's tax revenue and deficit revenue are both burdens imposed
on production, and the nature of this burden should be recognized.
Since government activities are more likely to be depredations upon rather than contributions
to production, it is more accurate to make the opposite assumption, namely that government
contributes nothing to the national product and its activities sap the national product
and channel it into unproductive uses.
When using national product statistics then, we must correct for the inclusion of government
activities in the national product.
From net national product, we first deduct income originating in government, that is,
the salaries of government officials.
We must also deduct income originating in government enterprises.
These are the current expenditures or salaries of officials in government enterprises that
sell their product for a price.
National income statistics unfortunately include these accounts in the private rather than
in the governmental sector.
This leaves us with net private product, or NPP.
From NPP we must deduct the depredations of government in order to arrive at private product
remaining in private hands, or PPR.
These depredations consist of A. purchases from business by government, B. purchases
from business by government enterprises, and C. transfer payments.
Depredations from business should be deducted gross of government sales to the public, rather
than net, for government sales are simply equivalent to tax revenue in absorbing money
from the private sector.
The total of these depredations divided by NPP yields the percentage of government depredations
on the private product.
A simpler guide to the fiscal impact of government on the economy would be to deduct the total
expenditures of government and government enterprises from the NNP.
These expenditures equaling income originating in government and government enterprises added
to the total depredations.
This figure would be an estimate of total government depredation on the economy.
Of course, taxes and revenues of government enterprises could be deducted instead from
the NNP and the result would be the same in accordance with double entry principles, provided
that a government deficit is also deducted.
On the other hand, if there is a surplus in the government budget, then this surplus should
should be deducted as well as expenditures, since it too absorbs funds from the private sector.
In short, either total government expenditures or total government receipts,
each figure inclusive of government enterprises, should be deducted from NNP, whichever is the higher.
The resulting figures will yield an approximation of the impact of the government's fiscal
affairs on the economy.
A more precise estimate, as we have seen, would compare total depredations proper with
gross private product.
In subtracting government expenditures from the gross national product, we note that government
transfer payments are included in this deduction.
Professor John Dew would dispute this procedure on the ground that transfer activities are
not included in the national product figures, but the important consideration is that taxes
and deficits to finance transfer payments do act as a drain on the national product
and therefore must be subtracted from NNP to yield PPR.
Engaging the relative size of governmental vis-à-vis private activity, Dew warns that
the sum of governmental expenditures should not include transfer payments, which merely
shift purchasing power without using up resources.
Yet this mere shift is as much a burden upon the producers, as much a shift from voluntary
Every production to state-created privilege as any other governmental expenditure.