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INSTITUTO LUDWIG VON MISES

CURSO DE ESTUDO EM CASA EM


ECONOMIA AUSTRÍACA
Leituras Suplementares

Compilado por Robert P. Murphy


Copyright © 2005 Instituto Ludwig von Mises
Todos direitos reservedo. A autorização escrita deve ser garantida da editora para
usar ou reproduzir qualquer parte deste livro, exceto para citações breves em
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6 Curso de Estudo em Casa do Instituto Mises em Economia Austríaca


LEITURAS SUPLEMENTARES

(na ordem do plano de aula):

Rothbard, Murray N. Para uma Nova Liberdade: O Manifesto Libertário, capítulo 2: “Pro
priedade e Troca,” rev. ed. (New York: Collier Books, 2002).
Klein, Peter, “Empreendedorismo e Governança Corporativa,” Jornal Trimestral da Escola
Economia Austríaca 2, no. 2 (Verão, 1999): 19-42.
Hoppe, Hans-Hermann, “Sobre certeza e incerteza, Ou: Como Racional Pode Ser Nossas
Expectativas ?” Revisão da Economia Austríaca 10, no. 1 (1997): 49–78.
Block, Walter, “Transporte de Mercado Livre : Denacionalização das estradas,” Jornal
de Estudos Libertários 3, no. 2 (1979): 209–38.
Callahan, Gene, “Repensando a Lei de Patentes,” Mises.org Artigo Diário, Julho 18, 2000.
Callahan, Gene, “Em louvor de Erros,” Mises.org Artigo Diário, Março 27, 2000.
Mises, Ludwig von, Dinheiro, Método e Processo de Mercado, Capítulo 21: “A Ideia da
Liberdade é ocidental,” Richard Ebeling, ed. (Norwell, Mass.: Kluwer Academic
Publishers, 1990).
Mises, Ludwig von Mises, Dinheiro, Método e Processo de Mercado, Capítulo 12, “A
Situação das Nações Subdesenvolvidas,” Richard Ebeling, ed. (Norwell, Mass.: Kluwer
Academic Publishers, 1990).
Rothbard, Murray N. “Primeira Guerra Mundial como Cumprimento: Poder e os intelec-
tuais,” Jornal de Estudos Libertários IX, no. 1 (Winter, 1989): 81–125.
Block, Walter, “Coase e Demsetz sobre Direitos de Propriedade Privada,” Jornal de
Estudos Libertários 1, no. 2 (1977): 111–15.

8 Curso de Estudo em Casa do Instituto Mises em Economia Austríaca


37

Capítulo 2

Propriedade e Troca

O Axioma da Não-Agressão

O credo libertário está baseado num axioma central: o de que nenhum


homem ou grupo de homens pode cometer uma agressão contra a pessoa
ou a propriedade de qualquer outro. Ele pode ser chamado de “axioma da
não-agressão”. “Agressão” é definida como o uso ou ameaça de violência
física contra a pessoa ou propriedade de qualquer outro indivíduo.
Agressão, portanto, é um sinônimo de invasão.

Se nenhum homem pode cometer uma agressão contra outro; se, em


suma, todos têm o direito absoluto de estarem “livres” da agressão, então
isto implica diretamente que o libertário se encontra firmemente ao lado
daquelas que geralmente costumam se chamar “liberdades civis”: a liberdade
de falar, publicar, se reunir, e se envolver em qualquer um dos chamados
“crimes sem vítima”, como pornografia, desvios sexuais, e prostituição (que o
libertário não vê como “crimes” em absoluto, uma vez que ele define “crime”
como uma invasão violenta da pessoa ou propriedade de outro indivíduo).
Além do mais, ele vê o alistamento militar compulsório como uma forma
de escravidão em escala colossal. E uma vez que a guerra, especialmente as
guerras modernas, provoca a matança em massa de civis, o libertário vê tais
conflitos como assassinatos em massa e, portanto, totalmente ilegítimos.

Hoje em dia todas estas posições são consideradas “esquerdistas”,


na balança ideológica contemporânea. Por outro lado, como o libertário
também se opõe à invasão dos direitos da propriedade privada, isto também
significa que ele se opõe com a mesma ênfase à interferência do governo
nos direitos de propriedade ou na economia de livre mercado através de
controles, regulamentações, subsídios ou proibições; pois se todo indivíduo
tem o direito de possuir sua própria propriedade sem sofrer depredações
agressivas, ele, portanto, também tem o direito de dar sua propriedade
(legado ou herança) e de trocá-la pela propriedade de outros indivíduos
(livre contrato e a economia de livre mercado) sem interferência. O libertário
favorece o direito da propriedade privada sem restrições e da livre troca; um
sistema, portanto, de “capitalismo de laissez-faire”.

Novamente, na terminologia corrente, a posição libertária a respeito de


propriedade e economia seria chamada de “extrema direita”. O libertário,
no entanto, não vê inconsistência alguma em ser “esquerdista” em algumas
38 Murray N. Rothbard

questões e “direitista” em outras. Pelo contrário, ele vê a sua própria posição


como sendo virtualmente a única consistente, consistente com os interesses
da liberdade de cada indivíduo. Pois como pode o esquerdista se opor à
violência da guerra e do alistamento militar compulsório ao mesmo tempo
em que apoia a violência da taxação e do controle governamental? E como
pode o direitista alardear sua devoção à propriedade privada e à livre iniciativa
ao mesmo tempo em que favorece a guerra, o alistamento compulsório e o
banimento de atividades não-invasivas e práticas que ele julga imorais? E
como pode o direitista ser a favor de um livre mercado ao mesmo tempo em
que não vê nada de errado nos enormes subsídios, distorções e ineficiências
improdutivas que envolvem o complexo militar-industrial?

Ao mesmo tempo em que se opõe a toda e qualquer agressão, privada


e coletiva, contra os direitos da pessoa, o libertário vê que ao longo da
história e até os dias de hoje existiu um agressor central, dominante e
preponderante sobre todos esses direitos: o estado. Diferentemente de
todos os outros pensadores, sejam eles de esquerda, de direita ou entre
ambos, o libertário se recusa a conceder ao estado a sanção moral para
cometer atos que quase todos concordam que seriam imorais, ilegais
e criminosos, se fossem cometidos por qualquer pessoa ou grupo na
sociedade. O libertário, em suma, insiste em aplicar a lei moral geral a
todos, e não permite isenções especiais a nenhuma pessoa ou grupo.
Porém se examinarmos o estado nu, por assim dizer, veremos que ele
recebe permissão universal, e é até mesmo encorajado, a cometer todos os
atos que até mesmo os não-libertários admitem ser crimes repreensíveis.
O estado habitualmente comete assassinatos em massa, que ele chama de
“guerra”, ou, por vezes, de “supressão da subversão”; o estado emprega a
escravidão em suas forças militares, que ele chama de “alistamento militar
obrigatório”; e ele vive e subsiste através da prática do roubo à força, que
ele chama de “imposto”. O libertário insiste que o fato da maioria da
população apoiar ou não estas práticas não tem qualquer relação com sua
natureza; que, a despeito da sanção popular, guerra é assassinato em massa,
alistamento é escravidão, e imposto é roubo. O libertário, em suma, é quase
que perfeitamente aquela criança da fábula, avisando insistentemente que
o imperador está sem roupas.

Ao longo dos tempos, o imperador teve uma série de pseudo-roupas


que lhe foram fornecidas pela casta intelectual da nação. Em séculos
passados, os intelectuais informavam o público que o estado ou seus
governantes eram divinos, ou pelo menos estavam investidos da
autoridade divina e, portanto, o que poderia parecer ao olho ingênuo e
inculto como despotismo, assassinato em massa e roubo em grande escala
era apenas o divino agindo de sua maneira misteriosa e benigna sobre
o corpo político. Nas últimas décadas, à medida que a sanção divina
Propriedade e Troca 39

começou a ficar um pouco puída, os “intelectuais da corte” do imperador


começaram a tecer apologias cada vez mais sofisticadas, informando o
público que o que o governo faz é para o “bem comum” e para o “bem-
estar público”, que o processo de taxação-e-gastos funciona através
do misterioso processo do “multiplicador” para manter a economia
equilibrada, e que, de qualquer maneira, uma vasta gama de “serviços”
governamentais não poderia ser executada apenas por cidadãos agindo
voluntariamente, no mercado ou na sociedade. Tudo isto é negado pelo
libertário; ele vê estas diversas apologias como meios fraudulentos de
obter o apoio do público ao governo do estado, e insiste que quaisquer
serviços que o governo possa de fato realizar poderiam ser fornecidos de
maneira muito mais eficiente e muito mais moral pela iniciativa privada
e cooperativa.

O libertário considera, portanto, uma de suas tarefas educacionais


primordiais espalhar a desmistificação e dessantificação do estado entre
seus súditos desafortunados. Sua tarefa é demonstrar repetidamente,
e a fundo, que não apenas o imperador, mas até mesmo o estado
“democrático” está sem roupas; que todos os governos subsistem através
do domínio explorador sobre o público; e que este domínio é o inverso
da necessidade objetiva. Ele luta para mostrar que a própria existência
dos impostos e do estado instaura, obrigatoriamente, uma divisão de
classes entre os governantes exploradores e os governados explorados. Ele
procura mostrar que a tarefa dos intelectuais da corte que constantemente
apoiaram o estado sempre foi a de tecer mistificações para induzir o
público a aceitar o governo do estado, e que estes intelectuais obtêm, em
troca, uma parcela do poder e da pilhagem extraída pelos governantes de
seus súditos iludidos.

Pegue-se, por exemplo, a instituição do imposto, que os estatistas


alegam ser, de certa forma, realmente “voluntária”. Qualquer um
que realmente acredita na natureza “voluntária” dos impostos está
convidado a se recusar a pagar seus impostos e ver o que acontecerá a
ele. Se analisarmos a taxação, descobriremos que, entre todas as pessoas
e instituições da sociedade, apenas o governo obtém seus rendimentos
através da violência coercitiva. Todo o resto da sociedade obtém sua
renda ou através de doações voluntárias (associações, instituições de
caridade, clubes de xadrez) ou através da venda de mercadorias ou
serviços adquiridos voluntariamente por consumidores. Se qualquer
um além do governo começasse a “taxar”, seria evidentemente acusado
de coerção e de um banditismo levemente disfarçado. No entanto, os
adornos místicos da “soberania” encobriram de tal maneira o processo
que apenas os libertários estão preparados para chamar o imposto do que
ele é: roubo, legalizado e organizado, em grande escala.
40 Murray N. Rothbard

Direitos de Propriedade

Se o axioma central do credo libertário é a não-agressão contra a pessoa e


a propriedade de qualquer indivíduo, como é que se chegou a este axioma?
Qual é seu fundamento ou sua base? Neste ponto os libertários, tanto do
passado quanto do presente, diferem consideravelmente. Resumidamente,
existem três tipos amplos de fundação para o axioma libertário, que
correspondem a três tipos de filosofia ética: o ponto de vista emotivista, o
utilitário, e o dos direitos naturais. Os emotivistas afirmam que tomam a
liberdade ou a não-agressão como sua premissa unicamente por motivos
subjetivos, emocionais. Embora sua própria emoção intensa possa parecer
uma base válida para sua própria filosofia política, ela dificilmente serve
para convencer qualquer outra pessoa. Na medida em que se colocam,
basicamente, fora do terreno do discurso racional, os emotivistas acabam
por garantir o insucesso da doutrina que tanto estimam.

Os utilitários declaram, a partir de seu estudo das consequências da


liberdade quando justaposta a sistemas alternativos, que a liberdade levará
com mais segurança às metas aprovadas: harmonia, paz, prosperidade etc.
Evidentemente ninguém discute que as consequências relativas devam ser
estudadas ao se avaliar os méritos ou deméritos de seus respectivos credos.
Porém existem diversos problemas em nos confinarmos a uma ética
utilitária. Um dos motivos é o de que o utilitarismo presume que podemos
pesar as alternativas, e decidir a respeito de políticas, com base em suas
consequências boas ou más. Mas se é legítimo aplicar julgamentos de valor
às consequências de X, por que não seria igualmente legítimo aplicar estes
julgamentos ao próprio X? Não haverá algo inerente ao próprio ato que
possa ser considerado bom ou mau?

Outro problema com o utilitário é que ele dificilmente adotará


algum princípio como um padrão de medida absoluto ou consistente a
ser utilizado nas diversas situações concretas do mundo real. Ele apenas
utilizará um princípio, na melhor das hipóteses, como uma aspiração ou
diretriz vaga, uma tendência que ele pode optar por ignorar a qualquer
momento. Este foi o principal defeito dos Radicais ingleses do século XIX,
que haviam adotado o ponto de vista laissez-faire dos liberais do século
XVIII, mas que optaram por um utilitarismo supostamente “científico”
no lugar do conceito supostamente “místico” dos direitos naturais como
fundamento para a sua filosofia. Desta maneira, os liberais do laissez-faire
do século XIX passaram a usar o laissez-faire como uma tendência vaga, e
não como um padrão de medida imaculado, comprometendo desta forma
de maneira crescente e fatal o credo libertário. Dizer que não se pode
“confiar” num utilitarista para manter o princípio libertário em cada uma
Propriedade e Troca 41

de suas aplicações específicas pode soar duro, mas é uma maneira justa
de apresentar o caso. Um célebre exemplo contemporâneo é o professor
Milton Friedman, um economista adepto do mercado livre que, como
os economistas clássicos que o antecederam, se apega à liberdade contra
a intervenção do estado como uma tendência geral, porém na prática
permite uma miríade de exceções danosas, exceções que servem para
corromper quase que totalmente o princípio, especialmente nos campos
dos assuntos policiais e militares, educação, impostos, bem-estar social,
“efeitos de vizinhança”, leis antitruste, e o dinheiro e sistema bancário.

Consideremos um exemplo cabal: suponhamos uma sociedade que


considera fervorosamente que todos os ruivos são agentes do demônio
e, portanto, devem ser executados sempre que forem encontrados.
Presumamos então que existe apenas um número pequeno de ruivos
em qualquer geração – poucos demais para serem significantes,
estatisticamente. O libertário-utilitarista poderia muito bem argumentar:
“embora o assassinato de ruivos seja, quando examinado isoladamente,
deplorável, as execuções são pouco numerosas; a imensa maioria do
público, enquanto não-ruivos, obtém uma enorme satisfação psíquica da
execução pública dos ruivos. O custo social é desprezível, e o benefício
social e psíquico para o resto da sociedade é grande; logo, a execução dos
ruivos é correta e apropriada para a sociedade.” O libertário dos direitos
naturais, como está esmagadoramente preocupado com a justiça do ato,
reagirá com horror, e se oporá de maneira firme e inequívoca contra as
execuções, sendo elas assassinatos totalmente injustificados e uma agressão
cometida contra pessoas que a princípio não são agressivas. A consequência
da interrupção destes assassinatos – privar a maior parte da sociedade de
um grande prazer psíquico – não influenciaria em absoluto este libertário,
o libertário “absolutista”. Dedicado à justiça e à consistência lógica, o
libertário dos direitos naturais admite tranquilamente que é “doutrinário”,
que é, em suma, um seguidor impassível de suas próprias doutrinas.

Voltemo-nos então à base de direitos naturais para o credo libertário,


uma base que, de uma forma ou outra, foi adotada pela maioria dos
libertários, no passado ou no presente. Os “direitos naturais” são a pedra
fundamental de uma filosofia política que, por sua vez, está incrustada
numa estrutura política superior, a da “lei natural”. A teoria da lei natural
se apoia na constatação de que vivemos num mundo composto por mais
de uma – na realidade, um número imenso – de entidades, e que cada
entidade tem propriedades distintas e específicas, uma “natureza” distinta,
que pode ser investigada pela razão do homem, por suas percepções
sensoriais e por suas faculdades mentais. O cobre tem uma natureza
distinta e se comporta de uma maneira distinta, e o mesmo ocorre com o
ferro, o sal etc. A espécie humana, da mesma maneira, tem uma natureza
42 Murray N. Rothbard

específica, da mesma maneira que o mundo que a cerca e as maneiras


como eles interagem. Resumindo de maneira excessiva, a atividade de cada
entidade inorgânica e orgânica é determinada por sua própria natureza e
pela natureza de outras entidades com a qual ela entra em contato. Mais
especificamente, enquanto o comportamento das plantas e de pelo menos
os animais mais inferiores é determinado por sua natureza biológica,
ou talvez pelos seus “instintos”, a natureza do homem é tal que cada
indivíduo deve, ao agir, escolher seus próprios fins e utilizar-se de seus
próprios meios para atingi-los. Como não possui instintos automáticos,
cada homem deve aprender sobre si mesmo e sobre o mundo, utilizar sua
mente para escolher valores, aprender sobre causa e consequência, e agir
de uma maneira intencional para se manter e levar sua vida adiante. Como
os homens podem pensar, sentir, avaliar e agir apenas como indivíduos,
torna-se vitalmente necessário para a sobrevivência e a prosperidade de
cada homem que ele tenha a liberdade de aprender, escolher e desenvolver
suas faculdades, e aja a partir de seu conhecimento e seus valores. Este é
o caminho necessário da natureza humana; interferir com este processo e
danificá-lo através do uso da violência vai profundamente contra o que é
necessário, na própria natureza humana, para a sua vida e prosperidade.
A interferência violenta no aprendizado e nas escolhas de um homem
é, portanto, profundamente “anti-humana”; ela viola a lei natural das
necessidades do homem.

Os individualistas sempre foram acusados por seus inimigos de serem


“atomísticos” – de postularem que cada indivíduo vive numa espécie
de vácuo, pensando e escolhendo sem relações com qualquer outra
pessoa na sociedade. Esta, no entanto, é uma falácia autoritária; poucos
individualistas foram “atomistas”, se é que algum já o foi. Pelo contrário, é
evidente que os indivíduos sempre aprendem uns com os outros, cooperam
e interagem uns com os outros, e que isto, também, é necessário para a
sobrevivência do homem. O ponto, no entanto, é que cada indivíduo é
responsável pela escolha final de quais influências ele adotará e rejeitará,
ou de qual ele adotará inicialmente e rejeitará posteriormente. O libertário
vê com bons olhos o processo de cooperação e intercâmbio voluntário entre
indivíduos que agem livremente; o que ele abomina é o uso de violência
para danificar esta cooperação voluntária e forçar alguém a escolher e agir
de uma maneira diferente do que dita a sua própria mente.

O método mais viável de se elaborar uma declaração de direitos naturais


da posição libertária é dividi-la em partes, começando com o axioma básico
do “direito à autopropriedade”. O direito à autopropriedade assegura o
direito absoluto de cada homem, devido a ele (ou ela) ser um ser humano,
de ter a “propriedade” de seu próprio corpo; isto é, controlar este corpo
livre de qualquer interferência coercitiva. Uma vez que cada indivíduo
Propriedade e Troca 43

deve pensar, aprender, dar valor e escolher os seus fins e meios de um


modo que lhe permita sobreviver e florescer, o direito à autopropriedade
dá ao homem o direito de executar estas atividades vitais sem ser impedido
ou restringido pelo assédio coercitivo.

Consideremos, também, as consequências de se negar a todos os


homens o direito de ter a propriedade de sua própria pessoa. Existem
então apenas duas alternativas; ou (1) uma certa categoria de pessoas,
A, tem o direito de ter a propriedade sobre outra classe, B; ou (2) todos
têm o direito de possuir sua própria fração de propriedade sobre todos os
outros indivíduos. A primeira alternativa implica que enquanto a Classe
A merece o direito de ser humana, a Classe B é, na realidade, sub-humana
e, como tal, não merece estes direitos. Porém como eles de fato são seres
humanos, a primeira alternativa se contradiz ao negar direitos humanos
a um conjunto de humanos. Além do mais, como veremos, permitir que
a Classe A tenha posse sobre a Classe B significa que a primeira tem a
permissão de explorá-la, e, portanto, viver de maneira parasítica, à custa
da segunda. Este próprio parasitismo, no entanto, viola as necessidades
econômicas básicas da vida: produção e trocas.

A segunda alternativa, o que poderíamos chamar de “comunalismo


participativo” ou “comunismo”, sustenta que todos os homens deveriam
ter o direito de possuir a propriedade de uma parcela igual de todos os
outros. Se existem dois bilhões de pessoas no mundo, então todos têm
o direito de ter um bilionésimo de cada uma dessas outras pessoas. Em
primeiro lugar, podemos afirmar que este ideal se sustenta sobre um
disparate; afirma que cada homem tem o direito de ter propriedade sobre
parte de todos os outros, e, no entanto, ele não tem o direito de ter propriedade
sobre si mesmo. Em segundo lugar, podemos visualizar a viabilidade de um
mundo como este: um mundo em que nenhum homem está livre para
tomar qualquer atitude sem conseguir antes a aprovação ou, na realidade,
ser assim ordenado por todos os outros membros da sociedade. Deveria ser
claro que neste tipo de mundo “comunista”, ninguém seria capaz de fazer
nada, e a raça humana pereceria rapidamente. Porém se um mundo de
zero autopropriedade e um mundo de cem por cento da propriedade dos
outros significaria a morte da raça humana, então quaisquer passos rumo
a estas direções também contradizem a lei natural sobre o que é melhor
para o homem e sua vida na Terra.

Finalmente, no entanto, o mundo comunista participativo não pode


ser colocado em prática; pois é fisicamente impossível para todos manter
o controle contínuo sobre todos os outros, e exercitar, assim, sua fração
igualitária de propriedade parcial sobre todos os outros homens. Na prática,
portanto, o conceito de propriedade universal e igualitária sobre os outros
44 Murray N. Rothbard

é utópica e impossível, e a supervisão e o decorrente controle e propriedade


sobre os outros recairia necessariamente sobre um grupo especializado
de pessoas, que acabaria por se tornar uma classe dominante. Assim, na
prática, qualquer tentativa de governo comunista automaticamente se
torna um governo de classes, e nos remeteria à primeira alternativa.

O libertário rejeita, portanto, estas alternativas, e conclui ao adotar


como seu axioma primário o direito universal à autopropriedade, um
direito possuído por todos pelo simples motivo de ser um ser humano.
Uma tarefa mais difícil é a de se chegar a um acordo a respeito da
propriedade sobre objetos não-humanos, sobre as coisas desta Terra.
É comparativamente fácil reconhecer, na prática, quando alguém está
cometendo uma agressão contra o direito de propriedade de outra
pessoa: se A agride B, ele está violando o direito de propriedade B sobre
seu próprio corpo. Porém com objetos não-humanos o problema se torna
mais complexo. Se, por exemplo, vemos X pegando um relógio que é de
propriedade de Y, não podemos presumir automaticamente que X está
cometendo uma agressão contra o direito de propriedade de Y sobre o
relógio; pois não poderia X ser o proprietário “verdadeiro”, original,
do relógio, e que estaria apenas retomando a posse de sua propriedade
legítima? Para se chegar a uma decisão, precisamos de uma teoria de
justiça sobre a propriedade, uma teoria que nos diga se X, Y ou qualquer
outra pessoa é o proprietário legítimo.

Alguns libertários tentaram resolver o problema presumindo que quem


quer que o governo existente determine ter o título de propriedade deverá
ser considerado o proprietário legítimo da propriedade. Até agora, não
investigamos profundamente a respeito da natureza do governo, porém
a anomalia aqui deveria ser suficientemente clara; seria seguramente
estranho encontrar um grupo de pessoas eternamente desconfiadas de
virtualmente todas e quaisquer funções do governo repentinamente deixar
a cabo do governo definir e aplicar o precioso conceito de propriedade, base
e fundamento de toda a ordem social. São especificamente os utilitaristas
do laissez-faire que acreditam ser mais plausível dar início ao novo mundo
libertário confirmando todos os títulos de propriedade já existentes; isto
é, direitos e títulos de propriedade tais como decretados pelo próprio
governo que é condenado como um agressor crônico.

Ilustremos com um exemplo hipotético. Suponhamos que a agitação


e a pressão libertária tenham chegado a tal ponto que o governo e seus
diversos ramos estejam prontos para abdicar. Porém eles engendram um
astucioso ardil: pouco antes do governo do estado de Nova York abdicar, ele
aprova uma lei que torna toda a área territorial de Nova York propriedade
privada da família Rockefeller. Os legisladores de Massachusetts fazem o
Propriedade e Troca 45

mesmo com a família Kennedy. E assim por diante, em todos os estados.


O governo poderia então abdicar e decretar a abolição dos impostos e das
legislações coercitivas, porém os libertários vitoriosos agora se deparariam
com um dilema: deveriam reconhecer os novos títulos de propriedade
como propriedades privadas legítimas? Os utilitaristas, que não possuem
nenhuma teoria de justiça a respeito de direitos de propriedade o
fariam, se se mantivessem consistentes com sua aceitação do direito do
governo de conceder os títulos de propriedade, e teriam de aceitar uma
nova ordem social na qual, 50 novos sátrapas coletariam impostos na
forma de um “aluguel” imposto de maneira unilateral. O ponto é que
apenas os libertários de direitos naturais, apenas aqueles libertários que
realmente têm uma teoria de justiça a respeito de títulos de propriedade
que não depende de decretos governamentais, estariam numa posição
que lhes permitiria desdenhar das pretensões destes novos governantes
de considerar o território do país como sua propriedade privada, e de
rejeitar como inválidas tais pretensões. Como o grande liberal do século
XIX, lorde Acton, via claramente, a lei natural fornece a única base segura
para uma crítica contínua das leis e decretos governamentais.1 Qual,
especificamente, é a posição dos direitos naturais a respeitos dos títulos de
propriedade é a questão para a qual agora nos voltamos.

Estabelecemos o direito de cada indivíduo à autopropriedade, a


um direito de propriedade sobre seu próprio corpo e pessoa. Porém as
pessoas não são espectros flutuantes; não são entidades autosubsistentes;
podem apenas sobreviver e florescer ao confrontar o mundo que as cerca.
Precisam, por exemplo, estar em locais físicos; do mesmo modo, precisam,
para poder sobreviver e se sustentar, transformar os recursos que lhes são
dados pela natureza em “bens de consumo”, em objetos que lhes sejam
mais apropriados para o uso e consumo. A comida deve ser cultivada e
consumida; minerais devem ser extraídos do solo e então transformados
em capital e outros bens de consumo mais úteis, e assim por diante. O
homem, em outras palavras, não deve apenas ser proprietário de sua
própria pessoa, mas também de objetos materiais que possa controlar e
utilizar. Como, então, devem ser alocados os títulos de propriedade destes
objetos?

Tomemos, como nosso primeiro exemplo, um escultor que fez uma


obra de arte a partir da argila e de outros materiais; e abdiquemos,
por ora, da questão dos direitos de propriedade originais a respeito da
argila e das ferramentas do escultor. A questão então se torna: quem é o

1
Ver Gertrude Himmelfarb, Lord Acton: A Study in Conscience and Politics (Chicago: Phoenix Books,
1962), p. 294–305. Comparar também com John Wild, Plato’s Modern Enemies and the Theory of Natural
Law (Chicago: University of Chicago Press, 1953), p. 176.
46 Murray N. Rothbard

proprietário da obra de arte à medida que ela surge a partir da confecção


do escultor? Ela é, na realidade, a “criação” do escultor, não no sentido
de que ele criou a matéria, mas no sentido de que ele transformou a
matéria fornecida pela natureza – a argila – em outra forma, ditada
por suas próprias ideias e moldadas por suas próprias mãos e energia.
Seguramente seria difícil encontrar uma pessoa que, depois de ver o
caso ser apresentado desta maneira, afirmaria que o escultor não tem o
direito de propriedade sobre seu próprio produto. Seguramente, se todo
homem tem o direito de ter a propriedade sobre seu próprio corpo, e
se ele deve lidar com os objetos materiais do mundo para sobreviver,
então o escultor tem o direito de possuir o produto que ele fez, através
de sua própria energia e esforço, uma genuína extensão de sua própria
personalidade. Ele colocou o selo de sua própria pessoa sobre o material
cru, ao “misturar seu trabalho” com a argila, nas palavras do grande
teórico da propriedade, John Locke. E o produto transformado por sua
própria energia se tornou a manifestação material das ideias e da visão
do escultor. John Locke apresentou assim o caso:

. . . cada um guarda a propriedade de sua própria pessoa; sobre


esta ninguém tem qualquer direito exceto ela. Podemos dizer
que o trabalho de seu corpo e a obra produzida por suas mãos
são propriedade sua. Sempre que ele tira um objeto do estado
em que a natureza o colocou e deixou, mistura nisso o seu
trabalho e a isso acrescenta algo que lhe pertence, por isso o
tornando sua propriedade. Ao remover este objeto do estado
comum em que a natureza o colocou, através do seu trabalho
adiciona-lhe algo que excluiu o direito comum dos outros ho-
mens. Sendo este trabalho uma propriedade inquestionável
do trabalhador, nenhum homem, exceto ele, pode ter o direito
ao que o trabalho lhe acrescentou.2

Como no caso da propriedade dos corpos das pessoas, temos aqui três
alternativas lógicas: (1) ou o transformador, ou “criador”, tem o direito de
propriedade sobre sua criação; ou (2) outro homem ou grupo de homens
têm o direito sobre esta criação, ou seja, têm o direito de se apropriar dela
à força sem o consentimento do escultor; ou (3) todos os indivíduos do
mundo têm uma parcela igual de propriedade sobre aquela escultura —
a solução “comunal”. Novamente, colocando de uma maneira grosseira,
existem poucos que não reconheceriam a injustiça monstruosa de se
confiscar a propriedade do escultor, seja por uma ou mais pessoas, ou
em nome do mundo como um todo. Com que direito o fazem? Com que

2
John Locke, Segundo Tratado Sobre o Governo Civil e Outros Escritos; tradução de Magda Lopes e
Marisa Lobo da Costa (Petrópolis, RJ: Vozes, 1994), p. 98.
Propriedade e Troca 47

direito se apropriam para si próprios do produto da mente e energia do


criador? Neste caso claro, o direito do criador de possuir aquilo ao qual ele
misturou sua pessoa e seu trabalho seria geralmente reconhecido. (Mais
uma vez, como no caso da propriedade comunal de pessoas, a solução
comunal do mundo acabaria sendo, na prática, reduzida a uma oligarquia
de alguns poucos se apropriando da obra do criador em nome da propriedade
“pública mundial”.)

O ponto principal, no entanto, é que o caso do escultor não é diferente,


qualitativamente, de todos os casos de “produção”. O homem ou os homens
que extraíram a argila do solo e a venderam ao escultor podem não ser
tão “criativos” quanto o escultor, mas também são “produtores”, eles
também misturaram suas ideias e seu know-how tecnológico com o solo
dado pela natureza para aparecer com um produto útil. Eles também são
“produtores”, e também misturaram seu trabalho com materiais naturais
para transformar estes materiais em bens e serviços mais úteis. Estas
pessoas também têm o direito à propriedade de seus produtos. Quando,
então, se inicia o processo? Novamente, voltemos a Locke:

Aquele que se alimentou com bolotas que colheu sob um


carvalho, ou das maçãs que retirou das árvores na floresta,
certamente se apropriou deles para si. Ninguém pode negar
que a alimentação é sua. Pergunto então: Quando começa-
ram a lhe pertencer? Quando os digeriu? Quando os comeu?
Quando os cozinhou? Quando os levou para casa? Ou quando
os apanhou? E é evidente que se o primeiro ato de apanhar
não os tornasse sua propriedade, nada mais poderia fazê-lo.
Aquele trabalho estabeleceu uma distinção entre eles e o bem
comum; ele lhes acrescentou assim algo além do que a natu-
reza, a mãe de tudo, havia feito, e assim eles se tornaram seu
direito privado. Será que alguém pode dizer que ele não tem
direito àquelas bolotas do carvalho ou àquelas maçãs de que
se apropriou porque não tinha o consentimento de toda a hu-
manidade para agir dessa forma? Poderia ser chamado de rou-
bo a apropriação de algo que pertencia a todos em comum? Se
tal consentimento fosse necessário, o homem teria morrido
de fome, apesar da abundância que Deus lhe proporcionou.
Sobre as terras comuns que assim permanecem por conven-
ção, vemos que o fato gerador do direito de propriedade, sem
o qual essas terras não servem para nada, é o ato de tomar uma
parte qualquer dos bens e retirá-la do estado em que a natu-
reza a deixou. E este ato de tomar esta ou aquela parte não
depende do consentimento expresso de todos. Assim, a grama
que meu cavalo pastou, a relva que meu criado cortou, e o
48 Murray N. Rothbard

ouro que eu extraí em qualquer lugar onde eu tinha direito a


eles em comum com os outros, tornaram-se minha proprieda-
de sem a cessão ou o consentimento de ninguém. O trabalho
de removê-los daquele estado comum em que estavam fixou
meu direito de propriedade sobre eles.

Se fosse exigido o consentimento expresso de todos para que


alguém se apropriasse individualmente de qualquer parte do
que é considerado bem comum, os filhos ou os criados não
poderiam cortar a carne que seu pai ou senhor lhes forneceu
em comum, sem determinar a cada um sua porção particular.
Ainda que a água que corre na fonte pertença a todo mundo,
quem duvida que no cântaro ela pertença apenas a quem a
tirou? Seu trabalho a tirou das mãos da natureza, onde ela era
um bem comum e pertencia igualmente a todos os seus filhos,
e a transformou em sua propriedade.

Assim, esta lei da razão dá ao índio o veado que ele matou;


admite-se que a coisa pertence àquele que lhe consagrou seu
trabalho, mesmo que antes ela fosse direito comum de todos.
E entre aqueles que contam como a parte civilizada da hu-
manidade, que fizeram e multiplicaram leis positivas para a
determinação da propriedade, a lei original da natureza, que
autoriza o início da apropriação dos bens antes comuns, per-
manece sempre em vigor; graças a ela, os peixes que alguém
pesca no oceano, esta grandeza comum a toda a humanidade,
ou aquele âmbar cinzento que se recolheu, tornam-se proprie-
dade daqueles que lhes consagraram tantos cuidados através
do trabalho que os removeu do estado comum em que a natu-
reza os deixou.3

Se todo homem tem a propriedade sobre sua própria pessoa, e,


portanto, sobre seu próprio trabalho, e se, por consequência, ele possui
toda propriedade que ele tenha “criado” ou coletado de um “estado
natural” até então desprovido de uso ou propriedade, então como
responder a última grande questão: o direito de possuir ou controlar a
própria terra? Em suma, se o coletor tem o direito de possuir as bolotas
ou bagas que coletou, ou o fazendeiro tem o direito de possuir sua safra
de trigo ou pêssegos, quem tem o direito de possuir a terra na qual estas
coisas cresceram? É neste ponto que Henry George e seus seguidores,

3
Locke, Segundo Tratado Sobre o Governo Civil e Outros Escrito., p. 98–100. Embora Locke tenha sido
um brilhante teórico da propriedade, não estamos afirmando, de maneira alguma, que ele desenvolveu
e aplicou sua teoria com uma consistência completa.
Propriedade e Troca 49

que até então estavam junto com os libertários, abandonaram a pista


e passaram a negar o direito do indivíduo de possuir o próprio pedaço
de terra, o solo no qual estas atividades foram realizadas. Os georgistas
afirmavam que, embora todo homem possa possuir os bens que ele
produz ou cria, uma vez que a Natureza ou Deus criaram a própria
terra, nenhum indivíduo tem o direito de assumir para si a propriedade
daquela própria terra. Ainda assim, se a terra tem de ser utilizada de uma
maneira minimamente eficiente, ela deve ser possuída ou controlada por
alguém ou algum grupo, e novamente nos deparamos com nossas três
alternativas: ou a terra pertence a quem primeiro a utilizou, o homem
que primeiro lhe tornou produtiva; ou ela pertence a um grupo de outros
indivíduos; ou ela pertence ao mundo como um todo, e cada indivíduo
possui uma parte fracionária de todo acre de terra. A opção de George
pela última solução dificilmente soluciona seu problema moral: se a
própria terra pertence a Deus ou à Natureza, então por que seria mais
moral que cada acre de terra no mundo pertencesse ao mundo como
um todo do que conceder a propriedade individual? Novamente, na
prática é obviamente impossível que cada pessoa no mundo exerça de
maneira efetiva a propriedade de sua parcela de quatro bilionésimos (se
a população do mundo for de, digamos, quatro bilhões) de cada pedaço
da superfície da terra. Na prática, obviamente, uma pequena oligarquia
acabaria por controlar e deter essa propriedade, e não o mundo como
um todo.

Além, no entanto, destas dificuldades encontradas na posição georgista,


a justificativa dos direitos naturais para a propriedade da terra é a mesma
justificativa que a propriedade original de qualquer outra propriedade.
Pois, como vimos, nenhum produtor realmente “cria” a matéria; ele pega a
matéria que foi fornecida pela natureza e a transforma, através da energia
de seu trabalho, de acordo com suas ideias e sua visão. Porém é exatamente
isto que o pioneiro — o “apropriador original”4 — faz quando ele passa
uma terra que até então não era utilizada para sua própria propriedade
privada. Assim como o homem que forja o aço a partir do minério de
ferro o faz através de seu know-how e com sua energia, e assim como o
homem que extrai o ferro do solo, o proprietário faz o mesmo quando roça,
cerca, cultiva ou constrói sobre a terra. O apropriador original da terra,
da mesma forma, transformou o caráter do solo fornecido pela natureza
através de seu trabalho e de sua personalidade. O apropriador original da
terra é dono de sua propriedade de maneira tão legítima quanto o escultor
ou o fabricante; ele é tão “produtor” quanto os outros.

4
No original, “homesteader”, proprietário que, no período da expansão americana para o Oeste, recebia
concessões de terra do governo (geralmente de 160 acres) para nela viver e cultivar. (N.T.)
50 Murray N. Rothbard

Além disso, se a terra original é dada pela natureza – ou por Deus


– então igualmente o são os talentos, a saúde e a beleza das pessoas. E
assim como estes atributos são dados a determinados indivíduos e não à
“sociedade”, então o mesmo se dá com os recursos naturais e com a terra.
Todos estes recursos são dados a indivíduos, e não à “sociedade”, uma
abstração que não existe de fato. Não há uma entidade existente chamada
“sociedade”; existem apenas indivíduos que interagem entre si. Afirmar
que a “sociedade” deveria ter a propriedade de terra ou de qualquer outra
propriedade em comum, portanto, significaria que um grupo de oligarcas
— na prática, burocratas do governo — deveria deter a posse dessa
propriedade, e à custa da expropriação do criador ou do proprietário de
terras que trouxe, originalmente, este produto à existência.

Além do mais, ninguém pode produzir qualquer coisa sem a cooperação


da terra original, nem que apenas como espaço físico para fazê-lo. Homem
algum pode produzir ou criar algo unicamente através de seu trabalho; ele
precisa da cooperação da terra e de outras matérias-primas naturais.

O homem vem ao mundo com apenas ele próprio e o mundo ao seu


redor — a terra e os recursos naturais que lhe são dados pela natureza. Ele
pega estes recursos e os transforma, através de seu trabalho, sua mente e
sua energia, em bens que são mais úteis para o homem. Se um indivíduo,
portanto, não pode possuir a terra original, ele tampouco poderá, no sentido
pleno, possuir qualquer um dos frutos de seu trabalho. O fazendeiro não
poderá ter a propriedade do trigo que colher se ele não puder ter a posse
da terra na qual aquele trigo cresceu. Agora que seu trabalho foi misturado
de maneira inextricável com a terra, ele não pode ser privado de um sem
ser privado do outro.

Além do mais, se um produtor não tiver direito aos frutos de seu


trabalho, quem deverá ter? É difícil perceber por que um bebê recém-
nascido paquistanês deveria ter uma reivindicação moral por uma parcela
fracionária de direito sobre uma terra no Iowa que alguém transformou
num trigal — e vice-versa, evidentemente, no caso de um bebê do Iowa e
uma fazenda no Paquistão. A terra, em seu estado original, não tem uso
nem proprietário. Os georgistas e outros comunalistas da terra podem
alegar que na verdade toda a população mundial a “possui”, porém se
ninguém ainda a usou, ninguém a possui e controla de fato. O pioneiro, o
apropriador original da terra, aquele que primeiro a usou e transformou,
é quem primeiro deu àquela coisa simples e sem valor um uso social e
produtivo. É difícil de ver a moralidade em privá-lo da propriedade em
nome de pessoas que nunca chegaram a uma milha de distância daquela
terra, e podem nem mesmo saber da existência da propriedade sobre a
qual elas supostamente têm direito.
Propriedade e Troca 51

A questão moral, de direitos naturais, abordada aqui fica ainda


mais clara se considerarmos o caso dos animais. Os animais são “terra
econômica”, uma vez que são recursos originais dados pela natureza.
Alguém, no entanto, negaria o direito de posse de um cavalo ao homem
que primeiro o encontrou e domesticou — como isto é diferente das
bolotas e bagas geralmente reconhecidas como sendo de quem as colheu?
Na terra, da mesma maneira, algum apropriador foi responsável por pegar
aquela terra “não-domesticada”, “selvagem”, e a “domou”, dando-lhe um
uso produtivo. Misturar o seu trabalho com a extensão de terra lhe deveria
dar um direito de posse tão claro quanto no caso dos animais. Como
Locke declarou: “A superfície da terra que um homem trabalha, planta,
melhora, cultiva e da qual pode utilizar os produtos, pode ser considerada
sua propriedade. Por meio de seu trabalho, ele a limita e a separa do bem
comum.”5

A teoria libertária da propriedade foi resumida de maneira eloquente


por dois economistas franceses do laissez-faire:

Se o homem adquire direitos sobre as coisas, é porque ele é,


ao mesmo tempo, ativo, inteligente e livre; através de sua ati-
vidade ele abrange a natureza externa; através de sua inteli-
gência ele a governa, e a molda para seu uso; através de sua
liberdade, ele estabelece entre ele próprio e ela uma relação de
causa e efeito e faz com que ela se torne sua. (...)

Onde existe, num país civilizado, um torrão de terra, uma fo-


lha, que não carregue consigo esta marca da personalidade
humana? Na cidade, estamos cercados por obras do homem;
caminhamos sobre uma calçada nivelada ou uma estrada ba-
tida; foi o homem que deixou saudável o solo que até então
era lamacento, que removeu das escarpas de um monte dis-
tante as pedras ou rochas que o cobriram. Vivemos em casas;
foi o homem que escavou a pedra da pedreira, que a lavrou,
que aplainou as madeiras; foi o pensamento do homem que
dispôs os materiais de uma maneira apropriada e construiu
um edifício do que antes era apenas rocha e madeira. E, no
campo, a ação do homem ainda está presente em toda a parte;
os homens cultivaram o solo e gerações de trabalhadores o
amadureceram e enriqueceram; as obras dos homens repre-
saram os rios e criaram fertilidade onde as águas haviam até
então trazido apenas a desolação. (...) Em todo lugar uma mão
poderosa recebeu o dom de moldar a matéria, e uma vontade

5
Locke, Segundo Tratado Sobre o Governo Civil e Outros Escritos, p. 100-101.
52 Murray N. Rothbard

inteligente a adaptou (...) visando satisfazer as vontades de


um mesmo ser. A natureza reconheceu seu mestre, e o homem
se sente em casa na natureza. A natureza foi apropriada por
ele para seu uso; ela se tornou sua; ela é sua propriedade. Esta
propriedade é legítima; ela constitui um direito tão sagrado
para o homem quanto o exercício livre de suas faculdades.
Ela é sua porque veio inteiramente dele, e não é nada mais do
que uma emanação de seu próprio ser. Antes dele, não havia
praticamente nada além da matéria; depois dele, e por seu
intermédio, há agora uma riqueza intercambiável, isto é, ar-
tigos que passaram a adquirir um valor através da indústria,
da manufatura, do manuseio, da extração, ou simplesmente
através do transporte. Da pintura feita por um grande mestre,
que talvez seja, em toda a produção material, aquela na qual a
matéria desempenha o menor papel, até o balde de água que o
carregador leva do rio até o consumidor, a riqueza, qualquer
que seja, adquire seu valor apenas através dessas qualidades
transferidas, e essas qualidades fazem parte da atividade, da
inteligência, da força humana. O produtor deixou um frag-
mento de sua própria pessoa na coisa que passou assim a se
tornar valiosa, e pode, portanto, ser vista como uma extensão
das faculdades do homem agindo sobre a natureza externa.
Como um ser livre, ele pertence a si próprio; a causa, agora,
a força produtiva, por assim dizer, é ele próprio; o efeito, por
assim dizer, a riqueza produzida, ainda é ele próprio. Quem
ousaria contestar seu direito de propriedade marcado de ma-
neira tão clara pelo selo de sua personalidade? (...)

É então ao ser humano, criador de todas as riquezas, que deve-


mos retornar (…) é através do trabalho que o homem impri-
me sua personalidade sobre a matéria. É o trabalho que culti-
va a terra, e faz de um baldio inabitado um campo apropriado;
é o trabalho que transforma uma floresta inexplorada num
bosque bem ordenado; é o trabalho, ou melhor, uma série de
trabalhos, muitas vezes executados por uma sucessão muito
numerosa de trabalhadores, que obtêm o cânhamo da semen-
te, o fio do cânhamo, o tecido do fio, a roupa do tecido; que
transformam a pirita disforme, extraída de uma mina, num
bronze elegante que adorna algum local público, e repente a
todo um povo o pensamento de um artista. (...)

A propriedade, tornada manifesta através do trabalho, faz


parte dos direitos da pessoa da qual ela emana; assim como
essa pessoa, ela é inviolável, enquanto não se expanda até en-
Propriedade e Troca 53

trar em colisão com qualquer outro direito; como essa pes-


soa, é individual, porque tem sua origem na independência
do indivíduo, e porque, quando diversas pessoas cooperaram
para a sua formação, o último a possuí-la a adquiriu com um
valor, o fruto de seu trabalho pessoal, o trabalho de todos os
co-trabalhadores que o precederam: isto é geralmente o que
ocorre com artigos manufaturados. Quando a propriedade
passou, seja através da venda ou da herança, da mão de uma
pessoa para a de outra, suas condições não foram alteradas;
ela continua a ser fruto da liberdade humana manifestada
através do trabalho, e aquele que passa a possuí-la tem os
seus direitos na qualidade de produtor que tomou posse dela
por direito.6

A Sociedade e o Indivíduo

Falamos extensivamente sobre os direitos dos indivíduos; mas e, pode-


se perguntar, os “direitos da sociedade”? Não estariam eles acima dos
direitos do mero indivíduo? O libertário, no entanto, é um individualista;
ele acredita que um dos erros primários da teoria social é tratar a “sociedade”
como se ela fosse uma entidade realmente existente. A “sociedade” é por
vezes tratada como uma figura superior ou semidivina, com “direitos”
primordiais próprios; em outras instâncias, como um mal existente que
pode ser culpado por todos os males do mundo. O individualista sustenta
que apenas indivíduos existem, pensam, sentem, escolhem e agem; e que
a “sociedade” não é uma entidade viva, mas apenas um rótulo para um
conjunto de indivíduos que interagem. Tratar a sociedade como algo que
escolhe e age, portanto, serve para obscurecer as forças que de fato estão
agindo. Se, numa pequena comunidade, dez pessoas formam um bando
para roubar e expropriar três outras pessoas, isto é clara e evidentemente
um caso de um grupo de indivíduos agindo em conjunto contra outro
grupo. Nesta situação, se estas dez pessoas ousassem referir a si próprias
como uma “sociedade” agindo em “seu” interesse, seu raciocínio seria
recebido com risadas num tribunal; até mesmo os dez ladrões teriam
vergonha de usar este tipo de argumento. Porém aumente este número
de indivíduos, e este tipo de ofuscamento se torna comum, e consegue
enganar o público.

6
Leon Wolowski and Emile Levasseur, “Property,” in Lalor’s Cyclopedia of Political Science (Chicago:
M.B. Cary, 1884), vol. III, p. 392–93.
54 Murray N. Rothbard

A utilização falaciosa de um substantivo coletivo como “nação”, de


modo semelhante, neste aspecto, a “sociedade”, foi apontado de maneira
incisiva pelo historiador Parker T. Moon:

Quando se usa simplesmente o nome “França”, pensa-se na


França como uma unidade, uma entidade. Quando (...) dize-
mos que “a França enviou suas tropas para conquistar Túnis”
— imputamos não apenas unidade, mas também personalida-
de, ao país.

As próprias palavras escondem os fatos e fazem das relações


internacionais um drama glamoroso, no qual as nações perso-
nalizadas são os atores, e nos esquecemos com frequência ex-
cessiva de que são homens e mulheres de carne e osso que são
os verdadeiros atores (...) se não tivéssemos a palavra “Fran-
ça” (...) descreveríamos então de maneira mais precisa esta ex-
pedição a Túnis de uma maneira semelhante a esta: “Algumas
poucas destas trinta e oito milhões de pessoas enviaram trinta
mil outras delas para conquistar Túnis.” Esta maneira de ex-
pressar o fato sugere imediatamente uma questão, ou melhor,
uma série de questões. Quem eram estas “poucas” pessoas?
Por que eles enviaram as outras trinta mil a Túnis? E por que
estes lhes obedeceram? A construção de impérios não é feita
por “nações”, mas por homens. O problema que se apresenta
diante de nós é descobrir quais são os homens, as minorias
ativas e interessadas, em cada nação, que estão diretamente
interessadas no imperialismo, e então analisar os motivos pe-
los quais as maiorias pagam os custos e lutam as guerras exi-
gidas pela expansão imperialista.7

A visão individualista da “sociedade” foi resumida na frase: “Sociedade”


é todo mundo exceto você. Colocada desta maneira crua, esta análise pode
ser usada para considerar todos aqueles casos em que a “sociedade” é
tratada não só como um super-herói com super-direitos, mas também
como um super-vilão, sobre cujos ombros se deposita uma culpa colossal.
Consideremos a visão típica de que o indivíduo que comete um crime não
é responsável pelo seu crime, e sim a “sociedade”. Peguemos, por exemplo,
o caso no qual Smith assalta ou assassina Jones. A visão “antiquada” é a
de que Smith é responsável por seu ato. O progressista moderno contesta,
afirmando que a “sociedade” é responsável. Isto soa tanto sofisticado
quanto humanitário, até que apliquemos a perspectiva individualista.
Então percebemos que o que os progressistas estão realmente dizendo é que

7
Parker Thomas Moon, Imperialism and World Politics (Nova York: Macmillan, 1930), p. 58.
Propriedade e Troca 55

todos, exceto Smith, incluindo, é claro, a vítima, Jones, são responsáveis


pelo crime. Quando isto é descrito desta maneira, sem rodeios, quase
todos reconheceriam o absurdo deste ponto de vista. Porém evocar a
“sociedade”, essa entidade fictícia, ofusca o processo. Como afirmou o
sociólogo Arnold W. Green: “Deduzir-se-ia, então, que se a sociedade é
responsável pelo crime, e os criminosos não são responsáveis pelo crime,
apenas aqueles membros da sociedade que não cometem crimes podem
ser responsabilizados pelos crimes. Uma falta de sentido tão óbvia pode
ser contornada simplesmente através da evocação da sociedade como um
demônio, um mal que está à parte das pessoas e daquilo que elas fazem.”8

O grande escritor libertário Americano Frank Chodorov enfatizou este


ponto de vista a respeito da sociedade quando escreveu que “Sociedade
São Pessoas”.

Sociedade é um conceito coletivo e nada mais que isso; é


uma conveniência que serve para designar um número de
pessoas. O mesmo ocorre com família, multidão, gangue, ou
qualquer outro nome que dermos a um aglomerado de pesso-
as. Sociedade (...) não é uma “pessoa” a mais; se o censo con-
tabiliza cem milhões de indivíduos, este é o total existente,
e nem um a mais, pois não pode haver qualquer acréscimo à
sociedade além da procriação. O conceito de sociedade como
uma pessoa metafísica desmorona quando observamos que
a sociedade desaparece quando as partes que a compõem se
dispersam, como no caso de uma “cidade fantasma” ou de
uma civilização que conhecemos pelos artefatos que deixou.
Quando os indivíduos desaparecem, o todo também desa-
parece. O todo não tem uma existência separada. Utilizar o
substantivo coletivo com um verbo singular nos leva a uma
armadilha da imaginação; ficamos inclinados a personalizar
a coletividade, e imaginá-la como possuidora de um corpo e
uma psique própria.9

8
Arnold W. Green, “The Reified Villain,” Social Research (inverno, 1968), p. 656.
9
Frank Chodorov, The Rise and Fall of Society (Nova York: Devin Adair, 1959), p. 29-30
56 Murray N. Rothbard

Livre Troca e Livre Contrato

O núcleo central do credo libertário, portanto, é estabelecer o direito


absoluto de todo homem à propriedade privada; primeiro, de seu próprio
corpo, e, segundo, dos recursos naturais que até então não foram usados e
que ele transformou através de seu trabalho. Estes dois axiomas, o direito à
auto-propriedade e o direito à “apropriação original”, formam o conjunto
completo de princípios do sistema libertário. A doutrina libertária inteira
se torna, portanto, a extensão e a aplicação de todas as implicações desta
doutrina central. Por exemplo, um homem, X, tem a propriedade de sua
própria pessoa, de seu trabalho e da fazenda cujo terreno ele limpou e onde
ele planta trigo. Outro homem, Y, é proprietário dos peixes que pesca; um
terceiro, Z, é proprietário das couves que cultivou e da terra sobre a qual
elas cresceram. Porém, se um homem tem a propriedade de algo, ele tem
por consequência o direito de dar ou trocar estes títulos de propriedade
para outra pessoa, e a partir de então esta outra pessoa passa a ter este
título de propriedade absoluto. E é deste direito corolário à propriedade
privada que se origina a justificativa básica para o livre contrato e para
a economia de livre mercado. Deste modo, se X cultiva trigo, ele pode
e provavelmente concordará em trocar parte deste trigo por alguns dos
peixes pescados por Y ou algumas das couves cultivadas por Z. Como tanto
X e Y fizeram acordos voluntários para trocar títulos de propriedade (ou
Y e Z, ou X e Z), a propriedade então passa a ser, de maneira igualmente
legítima, propriedade de outra pessoa. Se X trocar seu trigo pelo peixe de
Y, então aquele peixe passa a ser propriedade de X, para que ele possa fazer
com ele o que desejar, e o trigo se torna igualmente propriedade de Y.

Além disso, um homem pode trocar não apenas os objetos tangíveis que
ele possui, mas também seu próprio trabalho, que obviamente também
é uma propriedade sua. Desta forma, Z pode vender seus serviços de
trabalho ensinando os filhos do fazendeiro X em troca de algum produto
do fazendeiro.

O fato é que a economia de livre mercado, e a especialização e divisão


de trabalho que ela implica, é de longe a forma mais produtiva de
economia conhecida pelo homem, e foi responsável pela industrialização
e pela economia moderna sobre a qual a civilização foi construída. Esta
é uma feliz consequência utilitária do livre mercado, porém não é, para
o libertário, a razão primordial para o seu apoio a este sistema. Esta razão
primordial é moral, e tem suas raízes na defesa dos direitos naturais da
propriedade privada que foi demonstrada acima. Mesmo se uma sociedade
baseada numa invasão despótica e sistemática dos direitos fosse provada
como mais produtiva do que o que Adam Smith chamou de “o sistema
Propriedade e Troca 57

da liberdade natural”, o libertário ainda assim apoiaria este sistema.


Felizmente, como em tantas outras áreas, o utilitário e o moral, assim
como os direitos naturais e a prosperidade geral, andam de mãos dadas.

A economia de mercado desenvolvida, por mais complexa que seu


sistema possa parecer na superfície, nada mais é que uma vasta rede de
trocas voluntárias e de comum acordo estabelecidas entre duas pessoas,
tais como as que mostramos ocorrendo entre os fazendeiros produtores de
trigo e couve, ou entre o fazendeiro e o professor. Assim, quando compro
um jornal por uma moeda, ocorre uma troca que beneficia mutuamente
duas pessoas: eu transfiro minha propriedade da moeda ao dono da banca
de jornal, e ele transfere a propriedade do jornal para mim. Fazemos isto
porque, sob a divisão do trabalho, eu calculo que o jornal vale mais para
mim que a moeda, enquanto o dono da banca prefere a moeda a ficar com
o jornal. Ou, quando leciono numa universidade, eu calculo preferir meu
salário a não gastar meu trabalho de ensinar, enquanto os responsáveis
pela universidade calculam que preferem ganhar meus serviços como
professor a não me pagar aquele dinheiro. Se o dono da banca de jornal
insistir em cobrar 50 centavos pelo jornal, eu posso muito bem decidir que
ele não vale aquele preço; da mesma maneira, se eu insistir em receber o
triplo do meu salário atual, a universidade poderá muito bem decidir abrir
mão dos meus serviços.

Muitas pessoas estão dispostas a reconhecer a justiça e a adequação


dos direitos de propriedade e da economia de livre mercado, a reconhecer
que o fazendeiro deve poder cobrar por seu trigo o que quer que seus
consumidores estejam dispostos a pagar, ou ao trabalhador de colher o
que quer que os outros estejam dispostos a pagar por seus serviços. Porém
eles empacam diante de um ponto: a herança. Se Willie Stargell é um
jogador de beisebol dez vezes melhor e mais “produtivo” que Joe Jack,
estão dispostos a admitir a justiça de que Stargell ganhe dez vezes mais;
porém, perguntam, qual é a justificativa para alguém cujo único mérito
é ter nascido um Rockefeller herdar muito mais riqueza que alguém que
nasceu um Rothbard? A resposta libertária é não se concentrar naquele
que recebe, na criança Rockefeller ou na criança Rothbard, mas sim
concentrar-se naquele que a dá, o homem que confere a herança. Pois se
Smith, Jones e Stargell têm o direito ao seu trabalho e à sua propriedade,
e a trocar os títulos desta propriedade pela propriedade semelhante de
outros, eles também têm o direito de dar esta sua propriedade a quem bem
entenderem. E, obviamente, a maior parte destes presentes consistem de
presentes dados por quem possui estas propriedades a seus filhos — em
suma, herança. Se Willie Stargell detém a propriedade de seu trabalho
e do dinheiro que ele obtém a partir dele, então ele tem o direito de dar
aquele dinheiro ao bebê Stargell.
58 Murray N. Rothbard

Na economia de livre mercado desenvolvida, portanto, o fazendeiro


troca o trigo por dinheiro; o trigo é comprado pelo moleiro, que processa
e transforma este trigo em farinha; o moleiro vende a farinha ao padeiro,
que produz pão; o padeiro vende o pão ao atacadista, que por sua vez o
vende ao varejista, que finalmente o vende ao consumidor. E, em cada
passo do processo, o produtor pode contratar os serviços dos trabalhadores
em troca de dinheiro. Como o “dinheiro” entra na equação é um processo
complexo; porém deve estar claro que, conceitualmente, o uso do dinheiro
equivale a qualquer mercadoria ou grupo de mercadorias úteis que são
trocadas pelo trigo, farinha etc. No lugar do dinheiro, a mercadoria
trocada poderia ser tecido, ferro, ou qualquer outra coisa. A cada passo
do processo, trocas mutuamente benéficas de títulos de propriedade são
negociadas e efetuadas.

Estamos agora numa posição que nos permite ver como o libertário
define o conceito de “liberdade”. Liberdade é uma condição na qual os
direitos de propriedade de uma pessoa sobre seu próprio corpo e sua
propriedade material legítima não são invadidos, e não sofrem qualquer
agressão. Um homem que rouba a propriedade de outro homem está
invadindo e restringindo a liberdade da vítima, da mesma maneira que o
homem que golpeia a cabeça de outro. Liberdade e propriedade irrestrita
andam lado a lado. Por outro lado, para o libertário, “crime” é um ato
de agressão contra o direito de propriedade de um homem, seja contra
sua própria pessoa ou os objetos materiais de sua propriedade. O crime é
uma invasão, através do uso da violência, da propriedade de um homem
e, portanto, de sua liberdade. “Escravidão” — o oposto de liberdade — é
uma condição na qual o escravo tem pouco ou nenhum direito de auto-
propriedade; sua pessoa e aquilo que ele produz são expropriados de
maneira sistemática pelo seu senhor através do uso da violência.

O libertário, logo, é claramente um individualista, porém não é um


igualitário. A única “igualdade” que ele defenderia é o direito igual de todo
homem à propriedade de sua própria pessoa, da propriedade dos recursos
ainda não usados de que ele “primeiro se apropriou”, e da propriedade de
outros que ele tenha adquirido através de doação ou troca voluntária.
Propriedade e Troca 59

Direitos de Propriedade e “Direitos Humanos”

Os progressistas geralmente reconhecem o direito de todo indivíduo


à sua “liberdade pessoal”, sua liberdade de pensar, falar, escrever e
se envolver em “trocas” pessoais tais como atividades sexuais entre
“adultos consensuais”. Em suma, o progressista tenta defender o direito
do indivíduo à propriedade de seu próprio corpo, porém logo em
seguida nega o seu direito à “propriedade”, isto é, à posse de objetos
materiais. Daí a típica dicotomia progressista entre “direitos humanos”,
que ele defende, e “direitos de propriedade”, que ele rejeita. Os dois, no
entanto, segundo o libertário, estão inextricavelmente interligados; ou
se sustentam, ou caem juntos.

Tomemos como exemplo o progressista socialista que defende a


propriedade governamental de todos os “meios de produção” ao mesmo
tempo em que defende o direito “humano” da liberdade de imprensa e de
expressão. Como este direito “humano” deverá ser exercido se os indivíduos
que constituem o público lhes têm negado o direito de propriedade? Se,
por exemplo, o governo for proprietário de todo o papel para impressão e
de todas as gráficas, como poderá ser exercido o direito a uma imprensa
livre? Se o governo for proprietário de todo o papel para impressão, ele
tem então, necessariamente, o direito e o poder de alocar aquele papel, e
o “direito a uma imprensa livre” de alguém se torna uma zombaria se o
governo decidir não alocá-lo para esta pessoa. E, uma vez que o governo
tem de alocar o escasso papel de impressão de alguma maneira, o direito
à imprensa livre de, digamos, minorias ou antissocialistas “subversivos”
seguramente não receberá muita atenção. O mesmo vale para o “direito à
liberdade de expressão” se o governo for o proprietário de todas as salas de
reunião, e, portanto, alocá-las apenas da maneira que julgar adequado. Ou
se, por exemplo, o governo da Rússia soviética, por ser ateu, decidir não
alocar muitos recursos escassos para a produção de matzás10 para judeus
ortodoxos, a “liberdade de religião” se tornaria uma zombaria; porém,
novamente, o governo soviético sempre pode responder que os judeus
ortodoxos são uma pequena minoria e que o equipamento capital não deve
ser desviado para a produção de matzás.

A falha básica na separação progressista entre “direitos humanos”


e “direitos de propriedade” é a de que as pessoas são tratadas como
abstrações etéreas. Se um homem tem o direito à auto-propriedade,
ao controle de sua vida, então no mundo real ele também tem de ter o

10
Espécie de pão ázimo consumido pelos judeus, especialmente durante o período da Páscoa. (N.T.)
60 Murray N. Rothbard

direito de sustentar sua vida lidando com seus recursos e transformando-


os; ele também deve ter o direito de ter a posse do solo e dos recursos
sobre o qual eles se encontram e que ele tem de utilizar. Em suma, para
sustentar seu “direito humano” — ou seus direitos de propriedade sobre
sua própria pessoa — ele também precisa ter o direito de propriedade
sobre o mundo material, sobre os objetos que ele produz. Direitos de
propriedade são direitos humanos, e são essenciais para os direitos
humanos que os progressistas tentam manter. O direito humano de uma
imprensa livre depende do direito humano da propriedade privada sobre
o papel para a impressão.

Na realidade, não existem direitos humanos que possam ser separados


dos direitos de propriedade. O direito humano da liberdade de expressão
é simplesmente o direito de propriedade de se alugar uma sala de reuniões
de seu proprietário, ou de se possuir uma; o direito humano da liberdade
de imprensa é o direito de propriedade de se comprar materiais e então
imprimir panfletos ou livros e de vendê-los àqueles que estiverem dispostos
a comprá-los. Não existe qualquer “direito de liberdade de expressão”
ou de liberdade de imprensa adicional além daqueles que podem ser
enumerados em qualquer caso. E, além do mais, descobrir e identificar os
direitos de propriedade envolvidos resolverá qualquer conflito aparente
de direitos que possa surgir.

Consideremos, por exemplo, o clássico exemplo em que os progressistas


geralmente admitem que o “direito à liberdade de expressão” de uma pessoa
deve ser restringido em nome do “interesse público”: o célebre dito do
juiz Holmes11 de que ninguém tem o direito de gritar “fogo” sem motivo
num teatro lotado. Holmes e seus seguidores utilizaram repetidamente
esta ilustração para provar a suposta necessidade de que todos os direitos
sejam relativos e experimentais, e não precisos e absolutos.

O problema aqui, no entanto, não é que os direitos possam vir a ser


levados a tamanhos extremos, mas que todo o caso é discutido sob o
ponto de vista de uma vaga e confusa “liberdade de expressão”, e não
sob o ponto de vista dos direitos da propriedade privada. Passemos a
analisar o problema sob o aspecto dos direitos de propriedade. O sujeito
que deu início a um tumulto por gritar “fogo”, sem necessidade, num
teatro lotado, é, necessariamente, ou o proprietário do teatro (ou um
representante do proprietário) ou um cliente pagante. Se ele for o
proprietário, então ele fraudou seus clientes. Ele recebeu seu dinheiro
em troca da promessa de exibir um filme ou peça, e agora, em vez disso,
causa um distúrbio no espetáculo ao gritar “fogo” e interromper a

11
Oliver Wendell Holmes, Jr., juiz da Suprema Corte dos Estados Unidos entre 1902 e 1932. (N.T.)
Propriedade e Troca 61

performance. Ele não cumpriu, portanto, suas obrigações contratuais,


e desta forma roubou a propriedade — o dinheiro — de seus clientes e
violou seus direitos de propriedade.

Suponhamos, por outro lado, que quem gritou tenha sido um cliente, e
não o proprietário. Neste caso, ele está violando o direito de propriedade
do proprietário do estabelecimento — bem como o dos outros clientes
que pagaram para a performance. Como cliente, ele ganhou acesso à
propriedade sob determinados termos, entre eles a obrigação de não
violar a propriedade do proprietário ou interromper a performance sendo
exibida pelo proprietário. Seu ato malicioso, portanto, viola os direitos de
propriedade do proprietário do teatro e de todos os outros clientes.

Não há necessidade, portanto, de que os direitos individuais sejam


restritos no caso do indivíduo que grita “fogo” injustamente. Os direitos
do indivíduo ainda são absolutos; porém eles são direitos de propriedade. O
sujeito que gritou “fogo” de forma mal-intencionada dentro de um teatro
lotado é, de fato, um criminoso, mas não porque seu suposto “direito de
liberdade de expressão” deve ser restringido, pragmaticamente, em nome
do “bem público”; ele é um criminoso porque ele clara e obviamente
violou os direitos de propriedade de outra pessoa.
ENTREPRENEURSHIP AND CORPORATE
GOVERNANCE

PETER G. K LEIN

I n his “closing salvo” in the socialist calculation debate, Mises (1949, pp.
705–10) argued that the market socialists failed to understand the role of
financial markets in an industrial economy. Even with markets for consumer
goods, he explained, socialism would fail because it substituted collective owner-
ship of the means of production for private capital markets. Through these
markets, owners of financial capital decide which firms, and which industries,
receive resources to make consumer goods. In a modern economy, most produc-
tion takes place in publicly held corporations. Of prime importance, then, is the
problem of corporate governance: How do owners of financial capital structure
their agreements with those who receive that capital, to prevent its misuse?
Unfortunately, there exists little research in this area from an Austrian perspective.
In this article, I focus on the financial-market entrepreneur—what Rothbard
(1962, 1985) calls the capitalist–entrepreneur—to outline some features of an
Austrian theory of corporate governance. I begin by reviewing the traditional,
production-function theory of the firm and suggesting two alternative perspec-
tives: that of the entrepreneur and that of the capitalist. I next discuss the Coasian,
or “contractual” approach to the firm and argue that it provides a useful organizing
framework for Austrian research on the firm. The subsequent section proposes
entrepreneurship and economic calculation as building blocks for an Austrian
theory of the firm. Finally, after a brief review of capital-market behavior and the
disciplinary role of takeovers, I outline four areas for Austrian research in corporate
governance: firms as investments, internal capital markets, comparative corporate
governance, and financiers as entrepreneurs.
T HE T RADITIONAL THEORY OF THE F IRM
In economics textbooks, the “firm” is a production function or production possi-
bilities set, a “black box” that transforms inputs into outputs. Given the existing
state of technology, the prices of inputs, and a demand schedule, the firm
maximizes money profits subject to the constraint that its production plans must

PETER G. KLEIN is assistant professor of economics at the University of Georgia. Earlier versions of this
article were presented at George Mason University’s “Seminars in Austrian Economics IV: Inside the Black
Box,” October 1997; the Austrian Scholars Conference 4, Auburn University, April 1998; and Copenha-
gen Business School’s RESPECT workshop, November 1998. The author thanks participants at those
meetings, and Jerry Ellig, Richard Langlois, Ivo Sarjanovic, and Narin Smith, for helpful suggestions.
The Quarterly Journal of Austrian Economics vol. 2, no. 2 (Summer 1999): 19–42
19
20 THE QUARTERLY JOURNAL OF AUSTRIAN ECONOMICS VOL. 2, NO. 2 (SUMMER 1999)

be technologically feasible. The firm is modeled as a single actor, facing a series of


uncomplicated decisions: what level of output to produce, how much of each
factor to hire, and the like. These “decisions,” of course, are not really decisions at
all; they are trivial mathematical calculations, implicit in the underlying data. In the
long run, the firm may choose an optimal size and output mix, but even these are
determined by the characteristics of the production function (economies of scale,
scope, and sequence). In short: the firm is a set of cost curves, and the “theory of
the firm” is a calculus problem.
While descriptively vacuous, the production–function approach has the ap-
peal of analytical tractability along with its elegant parallel to neoclassical con-
sumer theory (profit maximization is like utility maximization, isoquants are indiffer-
ence curves, and so on). Nonetheless, many economists now see it as increasingly
unsatisfactory, as unable to account for a variety of real-world business practices:
vertical and lateral integration, mergers, geographic and product-line diversification,
franchising, long-term commercial contracting, transfer pricing, research joint
ventures, and many others. The inadequacy of the traditional theory of the firm
explains much of the recent interest in agency theory, transaction cost economics,
the capabilities approach, and other facets of the “new institutional economics.”1
A more serious problem with the traditional theory, however, has received less
attention. The theory of profit maximization is nearly always told from the perspec-
tive of the manager, the agent who operates the plant, not that of the owner, who
supplies the capital to fund the plant. Yet owners control how much authority to
delegate to operational managers, so capitalists are the ultimate decisionmakers.
To understand the firm, then, we must focus on the actions and plans of the
suppliers of financial capital.
Focusing on capital markets and the corporate governance problem highlights
a fundamental analytical problem with the traditional approach to the theory of
the firm. In the production-function approach, money capital is treated as a factor
of production. The manager’s objective is to maximize the difference between
total revenues and total costs, with the cost of capital treated simply as another
cost (and typically assumed to be exogenous). The residual, “profit,” is retained by
the manager. Hence financial capital receives scant attention. As discussed below,
this can be a serious flaw.
TWO A LTERNATIVE PERSPECTIVES
What, then, is the proper way to understand the business firm? Two alternative
perspectives deserve consideration. The first perspective, which has received
substantial attention in the Austrian literature, is that of the entrepreneur, or what
Mises (1949, pp. 254–55) calls the “entrepreneur–promoter.” Entrepreneurship,
in the Misesian sense, is the act of bearing uncertainty. Production unfolds through
time, and thus the entrepreneur must purchase factors of production in the present
(paying today’s prices, which are known), in anticipation of revenues from the
future sale of the product (at tomorrow’s prices, which are uncertain). En-
trepreneurial profit or loss is the difference between these revenues and the initial
outlays, less the general rate of interest. As such, profit is the reward for successfully
bearing uncertainty. Successful promoters make accurate forecasts of future

1
For recent surveys of this literature see Furubotn and Richter (1997), and Klein (1998a).
ENTREPRENEURSHIP AND CORPORATE GOVERNANCE 21

prices and receive returns greater than their outlays. Those whose forecasts are
less accurate earn losses. Promoters who systematically make poor forecasts
quickly find themselves unable to secure any further resources for investment and
eventually exit the market.
The second perspective is that of the capitalist, the owner of the firm. Ownership
can also be thought of as a factor of production—what Rothbard (1962, pp. 538–41)
calls the “decisionmaking factor”—but it is different from the other factors. In an
ownership approach, money capital is treated as a unique factor of production, the
“controlling factor”; the investor is both ultimate decisionmaker and residual
claimant. The firm’s objective is to maximize the return on the owner’s investment.
Because the owner delegates certain functions to managers, a central focus of the
theory of the firm becomes the problem of corporate governance: How do
suppliers of capital structure their arrangements with managers in a way that
maximizes their returns?
This article argues that the most interesting problems in the theory of the firm
relate to the intersection between the entrepreneurial function and the capitalist
function. Indeed, as Mises argued, the driving force behind the market economy is
a particular type of entrepreneur, the capitalist–entrepreneur, who risks his money
capital in anticipation of future, uncertain, returns. Moreover, as discussed below,
the entrepreneur is nearly always also a capitalist, and the capitalist is also an
entrepreneur.
Economists now increasingly recognize the importance of the capitalist in the
direction of the firm’s affairs. In the introduction to his influential book Strong
Managers, Weak Owners, Mark Roe (1994, p. vii) makes the point succinctly:
Economic theory once treated the firm as a collection of machinery, technology,
inventory, workers, and capital. Dump these inputs into a black box, stir them up, and
one got outputs of products and profits. Today, theory sees the firm as more, as a
management structure. The firm succeeds if managers can successfully coordinate the
firm’s activities; it fails if managers cannot effectively coordinate and match people
and inputs to current technologies and markets. At the very top of the firm are the
relationships among the firm’s shareholders, its directors, and its senior managers. If
those relationships are dysfunctional, the firm is more likely to stumble.

As Roe suggests, the relationships between the firm’s owners (shareholders) and
its top managers are centrally important in determining firm performance.2
T HE C ONTRACTUAL APPROACH
Both the entrepreneurial perspective and the ownership perspective can be
understood from within the “contractual” framework associated with Coase
(1937). Coase was the first to explain that the boundaries of the organization depend
not only on the productive technology, but on the costs of transacting business. In the
Coasian framework, as developed and expanded by Williamson (1975, 1985, 1996),
Klein, Crawford, and Alchian (1978), Grossman and Hart (1986), Hart and Moore
(1990), and others, the decision to organize transactions within the firm as
opposed to on the open market—the “make or buy decision”—depends on the

2
For recent surveys of the literature on corporate governance see Gilson (1995), Shleifer and
Vishny (1997), and Zingales (1998).
22 THE QUARTERLY JOURNAL OF AUSTRIAN ECONOMICS VOL. 2, NO. 2 (SUMMER 1999)

relative costs of internal versus external exchange. The market mechanism entails
certain costs: discovering the relevant prices, negotiating and enforcing contracts,
and so on. Within the firm, the entrepreneur may be able to reduce these
“transaction costs” by coordinating these activities himself. However, internal
organization brings other kinds of transaction costs, namely problems of informa-
tion flow, incentives, monitoring, and performance evaluation. The boundary of
the firm, then, is determined by the tradeoff, at the margin, between the relative
transaction costs of external and internal exchange. In this sense, firm boundaries
depend not only on technology, but on organizational considerations; that is, on
the costs and benefits of various contracting alternatives.
Economic organization, both internal and external, imposes costs because
complex contracts are usually incomplete. The transaction-cost literature makes
much of the distinction between complete and incomplete contracts. A complete
contract specifies a course of action, a decision, or terms of trade contingent on
every possible future state of affairs. In textbook models of competitive general
equilibrium, all contracts are assumed to be complete. The future is not known
with certainty, but the probability distributions of all possible future events are
known.3 In an important sense, the model is “timeless”: all relevant future contin-
gencies are considered in the ex ante contracting stage, so there are no decisions
to be made as the future unfolds.
The Coasian approach relaxes this assumption and holds that complete,
contingent contracts are not always feasible. In a world of “true” (structural, rather
than parametric) uncertainty, the future holds genuine surprises (Foss 1993a), and
this limits the available contracting options. In simple transactions—for instance,
procurement of an off-the-shelf component—uncertainty may be relatively unim-
portant, and spot-market contracting works well. For more complex transactions,
such as the purchase and installation of specialized equipment, the underlying
agreements will typically be incomplete—the contract will provide remedies for
only some possible future contingencies.4 One example is a relational contract, an
agreement that describes shared goals and a set of general principles that govern
the relationship (Goldberg 1980). Another is an implicit contract—an agreement
that while unstated, is presumably understood by all sides.5 Regardless, contrac-
tual incompleteness exposes the contracting parties to certain risks. In particular,
investment in relationship-specific assets exposes agents to a potential “holdup”
problem: If circumstances change, their trading partners may try to expropriate the
rents accruing to the specific assets. Suppose an upstream supplier tailors its
equipment to service a particular customer. After the equipment is in place, the
customer may demand a lower price, knowing that the salvage value of the
specialized equipment is lower than the net payment it offers. Anticipating this
possibility, the supplier will be unwilling to install the custom machinery without

3
What Knight (1921) would describe as “risk,” rather than “uncertainty.”
4
Williamson (1975, 1985) attributes contractual incompleteness to cognitive limits or “bounded
rationality,” following Simon’s (1961, p. xxiv) interpretation of human action as “intendedly rational,
but only limitedly so.” Other economists are more agnostic, assuming only that some quantities or
outcomes are unobservable (or not verifiable to third parties, such as the courts), in which case
contracts cannot be made contingent on these variables or outcomes.
5
This is the sense in which Kreps (1990) understands “corporate culture.”
ENTREPRENEURSHIP AND CORPORATE GOVERNANCE 23

protection for such a contingency, even if the specialized technology would make
the relationship more profitable for both sides.
One way to safeguard rents accruing to specific assets is vertical (or lateral)
integration, where a merger eliminates any adversarial interests. Less extreme
options include long-term contracts (Joskow 1985, 1987, 1988, 1990), partial
ownership agreements (Pisano, Russo, and Teece 1988; Pisano 1990), or agree-
ments for both parties to invest in offsetting relationship-specific investments
(Heide and John 1988). Overall, parties may employ several governance struc-
tures. The Coasian literature tries to match the appropriate governance structure
with the particular characteristics of the transaction.
There is some debate within the Austrian literature about whether the basic
Coasian approach is compatible with Austrian economics. O’Driscoll and Rizzo
(1985, p. 124), while acknowledging Coase’s approach as an “excellent static
conceptualization of the problem,” argue that a more evolutionary framework is
needed to understand how firms respond to change. Some Austrian econo-
mists have suggested that the Coasian framework may be too narrow, too
squarely in the general-equilibrium tradition to deal adequately with Austrian
concerns (Boudreaux and Holcombe 1989; Langlois 1994). However, as Foss
(1993b) has pointed out, there are “two Coasian traditions.” One tradition, the
moral-hazard or agency-theoretic branch associated with Alchian and Demsetz
(1972), studies the design of ex-ante mechanisms to limit shirking when supervi-
sion is costly. Here the emphasis is on monitoring and incentives in an (exo-
genously determined) agency relationship. The above criticisms may apply to
this branch of the modern literature, but they do not apply to the other tradition,
the governance or asset-specificity branch, especially in Williamson’s more
heterodox formulation. Williamson’s transaction cost framework incorporates
non-maximizing behavior (bounded rationality); true, “structural” uncertainty or
genuine surprise (complete contracts are held not to be feasible, meaning that not
all ex-post contingencies can be contracted upon ex ante); and process or adapta-
tion over time (trading relationships develop over time, typically undergoing a
“fundamental transformation” that changes the terms of trade). In short, “at least
some modern theories of the firm do not at all presuppose the ‘closed’ economic
universe—with all relevant inputs and outputs being given, human action concep-
tualized as maximization, etc.—that [some critics] claim are underneath the con-
temporary theory of the firm” (Foss 1993a, p. 274). Stated differently, one can
adopt an essentially Coasian perspective without abandoning the Knightian or
Austrian view of the entrepreneur as an uncertainty-bearing, innovating decision-
maker.6
BUILDING BLOCKS OF AN AUSTRIAN T HEORY OF THE FIRM
Beginning with the basic Coasian or contractual framework, we can add two
elements as building blocks to an Austrian theory of the firm: entrepreneurship
and economic calculation. Entrepreneurship represents the bearing of uncer-
tainty. Economic calculation is the tool entrepreneurs use to assess costs and
expected future benefits. Consider each in turn.

6
Foss and Foss (1998) argue, more generally, that contractual and “knowledge-based” theories
of the firm are fundamentally complements, not rivals.
24 THE QUARTERLY JOURNAL OF AUSTRIAN ECONOMICS VOL. 2, NO. 2 (SUMMER 1999)

Entrepreneurship
Entrepreneurship, in the Misesian sense, is the act of bearing uncertainty. In an
ever-changing world, decisions must be made based on expectations of future
events. Because production takes time, resources must be invested before the
returns on those investments are realized. If the forecast of future returns is
inaccurate, the expected profits will turn out to be losses. This is, of course, true not
only of financial investors, but of all human actors. If the future were known with
certainty, man would not act, since his action would not change the future. Thus,
all purposeful human action carries some risk that the means chosen will not bring
about the desired end. In this sense, all human actors are entrepreneurs.
Austrians tend to focus on this kind of pure entrepreneurship, the entrepreneurial
aspect of all human behavior. In doing so, however, they often overlook a particular
case of entrepreneurship, the driving force behind the structure of production: the
capitalist–entrepreneur, who risks his money capital in anticipation of future events.
Kirzner’s (1973, 1979) influential interpretation of Mises identifies “alertness” or “discov-
ery,” rather than uncertainty bearing, as the defining property of entrepreneurship. In
Kirzner’s framework, entrepreneurial profit is the reward to superior alertness to
profit opportunities. The simplest case is that of the arbitrageur, who discovers a
discrepancy in present prices that can be exploited for financial gain. In a more
typical case, the entrepreneur is alert to a new product or a superior production
process and steps in to fill this market gap before others.
Kirzner’s formulation has been criticized, however, for a lack of attention to
uncertainty. According to this criticism, mere alertness to a profit opportunity is
not sufficient for earning profits. To reap financial gain, the entrepreneur must
invest resources to realize the discovered profit opportunity. “Entrepreneurial
ideas without money are mere parlor games until the money is obtained and
committed to the projects” (Rothbard, 1985, p. 283). Moreover, excepting the few
cases where buying low and selling high are nearly instantaneous (say, electronic
trading of currencies or commodity futures), even arbitrage transactions require
some time to complete. The selling price may fall before the arbitrageur has made
his sale, and thus even the pure arbitrageur faces some probability of loss. In
Kirzner’s formulation, the worst that can happen to an entrepreneur is the failure to
discover an existing profit opportunity. Entrepreneurs either earn profits or break
even, but it is unclear how they suffer losses.
Kirzner (1997, p. 72) argues, more recently, that entrepreneurs can earn losses
when they misread market conditions. “[E]ntrepreneurial boldness and imagina-
tion can lead to pure entrepreneurial losses as well as to pure profit. Mistaken
actions by entrepreneurs mean that they have misread the market, possibly
pushing price and output constellations in directions not equilibrative.” But even
this formulation makes it clear that it is mistaken actions—not mistaken discover-
ies—that lead to loss. Misreading market conditions leads to losses only if the
entrepreneur has invested resources in a project based on this misreading. It is the
failure to anticipate future market conditions correctly that causes the loss. It
seems obscure to describe this as erroneous discovery, rather than unsuccessful
uncertainty bearing.7
7
In his defense, it should be noted that Kirzner’s (1997) remarks appear in the context of defend-
ing the equilibrating tendency of markets, against the Walrasian picture of instantaneous market
ENTREPRENEURSHIP AND CORPORATE GOVERNANCE 25

Mises, by contrast, consistently identifies entrepreneurship with both profit


and loss. “There is a simple rule of thumb to tell entrepreneurs from non-entrepre-
neurs. The entrepreneurs are those on whom the incidence of losses on the capital
employed falls” (Mises 1951, p. 112). Moreover, while Mises indeed acknow-
ledges the element of entrepreneurship in all human action, it is clear that the
potential losses of the capitalist–entrepreneurs are particularly important:
Mises applies the concept of the entrepreneur to all cases of uncertainty-bearing, and
since laborers face uncertainty in deciding where to move or what occupation to go
into, laborers are also entrepreneurs. But the most important case of entrepreneurship,
the driving force in shaping the actual structure and patterns of production in the
market economy, are the capitalist–entrepreneurs, the ones who commit and risk their
capital in deciding when, what, and how much to produce. The capitalists, too, are far
more subject to actual monetary losses than are the laborers. (Rothbard 1985, p. 282)8

Mises is careful to distinguish entrepreneurship from management, the carrying


out of those tasks specified by the capitalist–entrepreneur. “[T]hose who confuse
entrepreneurship and management close their eyes to the economic problem”
Mises 1949, p. 708). It is the capitalist–entrepreneurs who control the allocation of
capital to the various branches of industry.
It is clear from this formulation that the capitalist–entrepreneur must own prop-
erty. He cannot invest without prior ownership of financial capital. Menger’s (1871,
pp. 159–61) treatment of production includes as entrepreneurial functions eco-
nomic calculation, the “act of will,” and “supervision of the execution of the production
plan.” These functions “entail property ownership and, therefore, mark the Mengerian
entrepreneur as a capitalist–entrepreneur” (Salerno 1999, p. 30). Menger describes
“command of the services of capital” as a “necessary prerequisite” for economic
activity. Even in large firms, although he may employ “several helpers,” the entrepre-
neur himself continues to bear uncertainty, perform economic calculation, and
supervise production, even if these functions “are ultimately confined . . . to determining
the allocation of portions of wealth to particular productive purposes only by general
categories, and to selection and control of persons” (Menger 1871, pp. 160–61;
quoted in Salerno 1999, p. 30).9 An Austrian theory of the firm, then, is essentially a
theory about the ownership and use of capital. As Yu (1998, p. 7) puts it, “the
Austrian firm is a collection of capital resources.”
Unfortunately, the Austrian literature on the firm often confuses entrepreneur-
ship with innovation, strategic planning, leadership, and other functions more
properly associated with management than ownership. Witt (1998a,b), for exam-
ple, describes entrepreneurship as a form of “cognitive leadership.” Witt (1998b)
outlines a potential Austrian theory of the firm by combining recent literature on
cognitive psychology with Kirzner’s concept of entrepreneurship. Entrepreneurs
require complementary factors of production, he argues, which are coordinated
within the firm. For the firm to be successful, the entrepreneur must establish a
adjustment. Still, the defense could perhaps be made equally well without reference to the discovery
metaphor.
8
It should be noted that bondholders, as well as equity holders, are partly entrepreneurs, since
even bondholders bear some default risk.
9
For more on Misesian entrepreneurship and its various interpretations, see also Salerno (1993,
pp. 116–33) and Kirzner (1996).
26 THE QUARTERLY JOURNAL OF AUSTRIAN ECONOMICS VOL. 2, NO. 2 (SUMMER 1999)

tacit, shared framework of goals—what the management literature terms “leader-


ship.” A proper Austrian theory of the firm, then, must take account of the ways in
which entrepreneurs communicate their business conceptions within the organi-
zation.
The problem with this argument is that while organizational leadership is
undoubtedly important, it is not particularly “entrepreneurial.” Entrepreneurship
has little necessarily to do with having a business plan, communicating a “corpo-
rate culture,” or other dimensions of business leadership; these are attributes of
the successful manager, who may or may not be an entrepreneur.10 Moreover,
even if top-level managerial skill were the same as entrepreneurship, it is unclear
why “cognitive leadership”—tacit communication of shared modes of thought,
core capabilities, and the like—should be more entrepreneurial than other, com-
paratively mundane managerial tasks such as structuring incentives, limiting op-
portunism, administering rewards, and so on.
Economic Calculation
All entrepreneurs, particularly capitalist–entrepreneurs, use economic calcula-
tion as their primary decisionmaking tool. By economic calculation we simply
mean the use of present prices and anticipated future prices to compare present costs
with expected future benefits. In this way, the entrepreneur decides what goods and
services should be produced, and what methods of production should be used to
produce them. “The business of the entrepreneur is not merely to experiment with
new technological methods, but to select from the multitude of technologically
feasible methods those which are best fit to supply the public in the cheapest way
with the things they are asking for most urgently” (Mises 1951, p. 110). To make
this selection, the entrepreneur must be able to weigh the costs and expected
benefits of various courses of action.
The need for economic calculation places ultimate limits on the size of the
organization (Klein 1996). Indeed, many writers have recognized the connections
between the socialist calculation debate and the problems of internal organization
(Montias 1976; Williamson 1991). Kirzner, for example, interprets the costs of
internal organization in terms of Hayek’s knowledge problem:
In a free market, any advantages that may be derived from “central planning” . . . are
purchased at the price of an enhanced knowledge problem. We may expect firms to
spontaneously expand to the point where additional advantages of “central” planning
are just offset by the incremental knowledge difficulties that stem from dispersed
information. (Kirzner 1992, p. 162)

What, precisely, drives this knowledge problem? The mainstream literature on


the firm focuses mostly on the costs of market exchange, and much less on the
costs of governing internal exchange. The new research has yet to produce a fully
satisfactory explanation of the limits to firm size (Williamson 1985, chap. 6). In
Coase’s words, “Why does the entrepreneur not organize one less transaction or one
more?” Or, more generally, “Why is not all production carried on in one big firm?”

10
One distinction between entrepreneurship (as uncertainty bearing) and management is that
managerial functions can be purchased on the market: innovation can be outsourced to R&D labs;
strategic planning can be contracted out to consultants; corporate identities, both internal and exter-
nal, can be developed and communicated by outside specialists; and so on.
ENTREPRENEURSHIP AND CORPORATE GOVERNANCE 27

(Coase 1937, pp. 42–43). Existing contractual explanations rely on problems of


authority and responsibility (Arrow 1974); incentive distortions caused by residual
ownership rights (Grossman and Hart 1986; Holmström and Tirole 1989; Hart and
Moore 1990); and the costs of attempting to reproduce market governance features
within the firm (Williamson 1985, chap. 6). Rothbard (1962, pp. 544–50) offered an
explanation for the firm’s vertical boundaries based on Mises’s claim that eco-
nomic calculation under socialism is impossible. Rothbard argued that the need
for monetary calculation in terms of actual prices not only explains the failures of
central planning under socialism, but places an upper bound on firm size.
Rothbard’s account begins with the recognition that Mises’s position on
socialist economic calculation is not exclusively, or even primarily, about socialism.
It is about the role of prices for capital goods. Entrepreneurs allocate resources
based on their expectations about future prices, and the information contained in
present prices. To make profits, they need information about all prices, not only the
prices of consumer goods but the prices of factors of production. Without markets
for capital goods, these goods can have no prices, and hence entrepreneurs
cannot make judgments about the relative scarcities of these factors. In any
environment, then—socialist or not—where a factor of production has no market
price, a potential user of that factor will be unable to make rational decisions about
its use. Stated this way, Mises’s claim is simply that efficient resource allocation in a
market economy requires well-functioning asset markets. To have such markets,
factors of production must be privately owned.
Rothbard’s contribution was to generalize Mises’s analysis of this problem under
socialism to the context of vertical integration and the size of the organization. Rothbard
writes in Man, Economy, and State that up to a point, the size of the firm is determined by
costs, as in the textbook model. However, “the ultimate limits are set on the relative size of
the firm by the necessity for markets to exist in every factor, in order to make it possible
for the firm to calculate its profits and losses” (Rothbard 1962, p. 536). This argument
hinges on the notion of “implicit costs.” The market value of opportunity costs for factor
services—what Rothbard calls “estimates of implicit incomes”—can be determined
only if there are external markets for those factors (pp. 542–44). For example, if an
entrepreneur hires himself to manage the business, the opportunity cost of his labor
must be included in the firm’s costs. Yet, without an actual market for the entrepre-
neur’s managerial services, he will be unable to figure out his opportunity cost; his
balance sheets will therefore be less accurate than they would if he could measure
his opportunity cost.
The same problem affects a firm owning multiple stages of production. A large,
integrated firm is typically organized into semi-autonomous profit centers, each
specializing in a particular final or intermediate product. The central management of
the firm uses the implicit incomes of the business units, as reflected in statements of
divisional profit and loss, to allocate physical and financial capital across the divisions.
To compute divisional profits and losses, the firm needs an economically meaningful
transfer price for all internally transferred goods and services. If there is an external
market for the component, the firm can use that market price as the transfer price.
Without a market price, however, the transfer price must be estimated, either on a
cost-plus basis or by bargaining between the buying and selling divisions (Gabor
1984; Eccles and White 1988; King 1994). Such estimated transfer prices contain
less information than actual market prices.
28 THE QUARTERLY JOURNAL OF AUSTRIAN ECONOMICS VOL. 2, NO. 2 (SUMMER 1999)

The use of internally traded intermediate goods for which no external market
reference is available thus introduces distortions that reduce organizational effi-
ciency. This gives us the element missing from contemporary theories of eco-
nomic organization, an upper bound: the firm is constrained by the need for
external markets for all internally traded goods. In other words, no firm can
become so large that it is both the unique producer and user of an intermediate
product; for then no market-based transfer prices will be available, and the firm will
be unable to calculate divisional profit and loss and therefore unable to allocate
resources correctly between divisions.11 Of course, internal organization does
avoid the holdup problem, which the firm would face if there were a unique
outside supplier; conceivably, this benefit could outweigh the increase in “incalcu-
lability” (Rothbard 1962, p. 548). Usually, however, the costs from the loss of
calculation will likely exceed the costs of external governance.12
Like Kirzner (1992), Rothbard viewed his contribution as consistent with the
basic Coasian framework. In a later elaboration of this argument, he states that his
own treatment of the limits of the firm
serves to extend the notable analysis of Professor Coase on the market determinants
of the size of the firm, or the relative extent of corporate planning within the firm as
against the use of exchange and the price mechanism. Coase pointed out that there
are diminishing benefits and increasing costs to each of these two alternatives,
resulting, as he put it, in an “‘optimum’ amount of planning” in the free-market system.
Our thesis adds that the costs of internal corporate planning become prohibitive as
soon as markets for capital goods begin to disappear, so that the free-market optimum
will always stop well short not only of One Big Firm throughout the world market but
also of any disappearance of specific markets and hence of economic calculation in
that product or resource. (Rothbard 1976, p. 76)

“Central planning” within the firm, then, is possible only when the firm exists within
a larger market setting.13

11
Note that in general, Rothbard is making a claim only about the upper bound of the firm, not
the incremental cost of expanding the firm’s activities (as long as external market references are
available). As soon as the firm expands to the point where at least one external market has disap-
peared, however, the calculation problem exists. The difficulties become worse as more and more
external markets disappear, as “islands of noncalculable chaos swell to the proportions of masses and
continents. As the area of incalculability increases, the degrees of irrationality, misallocation, loss,
impoverishment, etc., become greater” (Rothbard 1962, p. 548).
12
Similarly, Rothbard’s claim is not that because external prices are necessary for large firms to
function efficiently, firms will tend to become large where external markets are “thick” or better
developed. On the contrary, large firms typically arise precisely where external markets are poorly
developed or hampered by government intervention; these are the kinds of circumstances that give
entrepreneurs an advantage in coordinating activities internally (Chandler 1977). However, such
firms are still constrained by the need for some external market reference.
13
Ironically, the only reason the Soviet Union and the communist nations of Eastern Europe
could exist at all is that they never fully succeeded in establishing socialism worldwide, so they could
use world market prices to establish implicit prices for the goods they bought and sold internally
(Rothbard, 1991, pp. 73–74). As Mises (1949, pp. 702–03) observes, “[w]ithout the aid of [world]
prices their actions would have been aimless and planless. Only because they were able to refer to
these foreign prices were they able to calculate, to keep books, and to prepare their much talked
about plans.” Indeed, traditional command-style economies, such as that of the former U.S.S.R.,
appear to be able only to mimic those tasks that market economies have performed before; they are
unable to set up and execute original tasks (Ericson 1991, p. 21).
ENTREPRENEURSHIP AND CORPORATE GOVERNANCE 29

Rothbard’s argument about the limits to firm size has several implications for
research in industrial organization and business strategy. First, all else equal, firms
able to use market-based transfer prices should eventually outperform firms using
administered or negotiated transfer prices. Second, innovation should be particu-
larly difficult in industries where few of the relevant manufacturing capabilities
exist in the market (Langlois and Robertson 1995). Because innovating firms are
more likely to be using unique intermediate goods and production processes,
innovation carries with its benefits the cost of more severe internal distortions.
Economic calculation is then another obstacle the innovator must overcome.
Third, the allocation of overhead or fixed cost across divisions will be particularly
problematic. If an input is essentially indivisible (or nonexcludable), then there is
no way to compute the opportunity cost of just the portion of the input used by a
particular division (see Rogerson 1992, for a discussion of these problems).14 Firms
with high overhead costs should thus be at a disadvantage relative to firms able to
allocate costs more precisely between business units. In the literature on cost
accounting there has been some recent interest in “market simulation accounting”
(Staubus 1986), by which firms try to assess the price at which an asset would trade
in an active market, based on observed market prices and related information.
Rothbard’s position on the limits to firm size suggests that the market simulation
approach may prove a useful accounting technique.
C APITAL MARKETS
If the capitalist–entrepreneur is the driving force behind the industrialized, market
economy, then economists should focus their attention on the financial markets,
the capitalist–entrepreneur’s main venue. It is here that this most important form of
entrepreneurship takes place. Of course, in the traditional, production–function
theory of the firm, capital markets do little but supply financial capital to managers,
who can get as much capital as they wish at the going market price. In a more
sophisticated understanding, managers do not decide how much capital they
want; capitalists decide where capital should be allocated. In doing so, they
provide essential discipline to the plant-level manager, whom Mises (1949, p. 304)
calls the entrepreneur’s “junior partner.”
When capitalists supply resources to firms, they usually delegate to managers
the day-to-day responsibility for use of those resources. Managers may thus be
able to use those resources to benefit themselves, rather than the capitalist. The
problem of managerial discretion—what we now call the principal–agent prob-
lem—occupies much current research in the theory of the firm. Under what conditions
can managers exercise discretionary behavior? What kinds of rules, or mechanisms,
can be designed to align the manager’s interest with the owner’s? Without effective
rules, what actions will managers choose? An early application was the proposed
“separation of ownership and control” in the modern corporation. Berle and
Means (1932) argued that the modern firm is run not by its owners, the share-hold-
ers, but by salaried managers, whose interests are different from those of share-
holders and include executive perks, prestige, and similar rewards. If the corpora-
tion is diffusely held, no individual shareholder has sufficient motivation to engage
in (costly) monitoring managerial decisions, and therefore discretion will flourish at
14
Mises (1944, p. 32) recognized the problem of allocating overhead costs, mentioning this as a
possible exception to the notion that divisional accounting costs can reflect “true” costs.
30 THE QUARTERLY JOURNAL OF AUSTRIAN ECONOMICS VOL. 2, NO. 2 (SUMMER 1999)

the expense of the market value of the firm. However, Berle and Means did not
consider how owners might limit this discretion ex ante, without the need for
detailed ex post monitoring.
Agency theory—now the standard language of corporate finance—addresses
these problems. As developed by Jensen and Meckling (1976), Fama (1980), Fama
and Jensen (1983), and Jensen (1986), agency theory studies the design of ex-ante
incentive-compatible mechanisms to reduce agency costs in the face of potential
moral hazard (malfeasance) by agents. Agency costs are defined by Jensen and
Meckling (1976, p. 308) as the sum of “(1) the monitoring expenditures of the
principal, (2) the bonding expenditures by the agent, and (3) the residual loss.” The
residual loss represents the potential gains from trade that fail to be realized
because perfect incentives for agents cannot be provided when the agent’s
actions are unobservable. In a typical agency model, a principal assigns an agent
to do some task (producing output, for instance), but has only an imperfect signal
of the agent’s performance (for example, effort). The agency problem is analogous
to the signal-extraction problem popularized in macroeconomics by Lucas (1972):
how much of the observable outcome is due to the agent’s effort, and how much is
due to factors beyond the agent’s control? The optimal incentive contract balances
the principal’s desire to provide incentives to increase the agent’s effort (for
example, by basing compensation on the outcome) with the agent’s desire to be
insured from the fluctuations in compensation that come from these random
factors.
Owners of corporations (shareholders) use a variety of control or governance
mechanisms to limit the managerial discretion described by Berle and Means.
Both “internal” and “external” governance may be employed. Internally, owners
may establish a board of directors to oversee the actions of managers. They can
use performance-based compensation to motivate managers to act in the owners’
interest (for instance, giving managers stock options instead of cash bonuses).
They can adopt a particular organizational form, such as the “M-form” structure, in
which managerial discretion is more easily kept in check (Williamson 1975).
Finally, they can rely on competition within the firm for top-level management
positions—what Fama (1980) calls the internal market for managers—to limit the
discretionary behavior of top-level management.
Even more important are external forces that help align managers’ interests
with those of shareholders. Competition in the product market, for example,
assures that firms whose managers engage in too much discretionary behavior will
fail, costing the managers their jobs. In countries where universal banking is
permitted, large equity holders such as banks can exercise considerable influence
over managerial behavior. The external governance mechanism that has received
the most attention, however, is the market for ownership itself, the “market for
corporate control.”
Henry Manne’s essay, “Mergers and the Market for Corporate Control”
(1965), responded to Berle and Means by noting that managerial discretion will be
limited if there is an active market for control of corporations. When managers
engage in discretionary behavior, the share price of the firm falls, and this invites
takeover and subsequent replacement of incumbent management. Therefore,
while managers may hold considerable autonomy over the day-to-day operations
of the firm, the stock market places strict limits on their behavior.
ENTREPRENEURSHIP AND CORPORATE GOVERNANCE 31

Mises makes the same general point in the passage in Human Action (1949)
distinguishing what he calls “profit management” from “bureaucratic manage-
ment” (pp. 308–11). It is true, Mises acknowledges, that the salaried managers of a
corporation hold considerable autonomy over the day-to-day operations of the
firm. Nonetheless, the shareholders make the ultimate decisions about allocating
resources to the firm, in their decisions to buy and sell stock:
[The Berle–Means] doctrine disregards entirely the role that the capital and money
market, the stock and bond exchange, which a pertinent idiom simply calls the
“market,” plays in the direction of corporate business. . . . [T]he changes in the prices of
common and preferred stock and of corporate bonds are the means applied by the
capitalists for the supreme control of the flow of capital. The price structure as
determined by the speculations on the capital and money markets and on the big
commodity exchanges not only decides how much capital is available for the conduct
of each corporation’s business; it creates a state of affairs to which the managers must
adjust their operations in detail. Mises 1949, p. 303)

Mises does not identify the takeover mechanism per se as a means for capitalists to
exercise control—takeovers were much less popular before the late 1950s, when
the tender offer began to replace the proxy contest as the acquisition method of
choice—but the main point is clear: The true basis of the market system is not the
product market, the labor market, or the managerial market, but the capital market,
where entrepreneurial judgments are exercised and decisions carried out.15
Mises’s treatment of the importance of financial markets is also the key to his
final rebuttal in Human Action to Lange, Lerner, and the other market-socialist
critics of his calculation argument (Mises 1949, pp. 698–715). The market social-
ists, he argued, fail to understand that the main task performed by a market system
is not the pricing of consumer goods, but the allocation of financial capital among
the various branches of industry. By focusing on production and pricing decisions
within a given structure of capital, the socialists ignore the vital role of capital
markets.
TOWARD AN A USTRIAN T HEORY OF C ORPORATE GOVERNANCE
Given that financial-market entrepreneurship is the defining feature of a market
economy, that economic calculation is the capitalist–entrepreneur’s primary tool,
and that economic calculation requires well-functioning capital markets, what can
capitalist–entrepreneurs do to govern their relationships with operational manag-
ers? What should be the basis of an Austrian theory of corporate governance? This
section suggests four areas that Austrians should address: (1) the concept of the
firm as an investment; (2) the relationship between internal and external capital
markets; (3) comparative corporate governance; and (4) financiers as entrepre-
neurs. Consider each in turn.
15
Compare Rothbard (1962, p. 538):
Hired managers may successfully direct production or choose production proc-
esses. But the ultimate responsibility and control of production rests inevitably with the
owner, with the businessman whose property the product is until it is sold. It is the
owners who make the decision concerning how much capital to invest and in what
particular processes. And particularly, it is the owners who must choose the managers.
The ultimate decisions concerning the use of their property and the choice of the men to
manage it must therefore be made by the owners and by no one else.
32 THE QUARTERLY JOURNAL OF AUSTRIAN ECONOMICS VOL. 2, NO. 2 (SUMMER 1999)

Firms as Investments
Because the owner, and not the manager, is the ultimate decisionmaker, the
Austrian theory of the firm should comprise two elements: a theory of investment
(corporate finance), and a theory of how investors provide incentives for managers to
use these resources efficiently (corporate governance). In microeconomics text-
books, by contrast, what the capital investors give to the firm is treated as just another
factor of production. Its price, the “rental price of capital” or interest, is simply another
cost to the producer. Any excess of revenues over costs, including the cost of capital,
goes to the manager (sometimes confusingly called the “entrepreneur”). This residual
is called “profit,” though it is not profit in the Misesian sense.
In the ownership perspective, as developed by Gabor and Pearce (1952,
1958), Vickers (1970, 1987), Moroney (1972), and others, the firm is viewed as an
investment. The firm’s goal is to maximize the return on invested capital. This money
capital may be regarded as a factor of production, but it is a unique factor, the
“controlling” factor that receives the net proceeds of the operation. Other factors,
such as labor (including management) and physical capital, are regarded as “contract-
ing” factors that receive a fixed payment. The services of the top-level manager are
thus treated as a cost, while the investor is considered the residual claimant. Also note
that because the capitalist bears the risk that the investment will fail, upon investing the
capitalist has become an entrepreneur. Furthermore, to the extent that the entre-
preneur (as Kirznerian discoverer) hires himself out to the capitalist as a salaried
manager, his compensation is not entrepreneurial profit; it is a cost to the owner of
the firm (Rothbard 1985, p. 283).This has significant implications for firm behavior.
First, the firm will not always expand output to the point where marginal revenue
equals marginal cost. For if the firm is earning positive net returns at its current level
of output, instead of increasing output until marginal net returns fall to zero, the
firm could simply take those returns and employ them elsewhere, either to set up a
new firm in the same industry or to diversify into a new industry (Gabor and Pearce
1952, p. 253). The efficient scale of production is determined by outside invest-
ment opportunities, not simply the marginal returns from producing a single
output.
Indeed, it is easy to show that under fairly weak assumptions, the output level
that maximizes the profit rate is less than the output level that maximizes the level
of profit. Consider a standard, concave profit function; add a “money capital
requirement,” the amount of capital required to finance a given level of output. As
long as the money capital requirement is increasing in output, the output level that
maximizes the profit rate—profit divided by the money capital required to finance
that output level—is less than the output level that maximizes profit. From the
capitalist’s perspective, output should be expanded to the point where the return
on the last dollar of money capital is just equal to the opportunity cost of that last
dollar of money capital. But as long as the plant manager is not free to invest his
financial capital elsewhere, the manager’s cost curves do not reflect this opportu-
nity cost. Hence, the manager chooses a higher output level than that which
maximizes the capitalist’s return.
Significantly, for internal accounting purposes, firms are typically structured
such that the goal of any operating unit is to maximize the return on its invested
capital. In fact, not only do firms set up divisions as profit centers, as discussed
above, but groups of profit centers are frequently grouped together as “investment
ENTREPRENEURSHIP AND CORPORATE GOVERNANCE 33

centers” within the firm itself. Reece and Cool (1978) studied 620 of the largest
U.S. firms in 1978 and found that seventy-four percent had investment centers.
These subunits are commonly evaluated according to a return-on-investment
(ROI) criterion, such as the ratio of accounting net income generated by the
investment center divided by total assets invested in the investment center. More
recently, measures such as residual income and “economic value added” (EVA)
have become popular as an alternative to ROI (Stern, Stewart, and Chew 1995).
The point is that individual divisions are being evaluated on the same basis as the
corporation itself—namely, what kind of return is being generated on the financial
resources invested.
Second, the firm-as-investment concept relates closely to an emerging litera-
ture on merger as a form of firm-level investment (Bittlingmayer 1996; Andrade
and Stafford 1997). Once managers have acquired financial resources from
capitalists, these managers have some discretion over how to invest those re-
sources. To supplement the “normal” forms of firm-level investment—capital ex-
penditures and R&D—managers may choose to purchase assets of existing firms
through merger. Merger may be a different form of investment; Andrade and
Stafford (1997) find, for example, that mergers in particular industries tend to be
clustered over time, while rankings of non-merger forms of investment by industry
tend to remain constant. This suggests that merger activity is encouraged by
specific industry or policy shocks, like deregulation, the emergence of junk-bond
financing, and increased foreign competition (Mitchell and Mulherin 1996). None-
theless, mergers will be evaluated by the returns they generate, just like any other
investment.
Internal Capital Markets
In his extension of the Coasian framework, Williamson (1975, 1981) describes
the modern multidivisional or “M-form” corporation as a means of intra-firm
capital allocation. Capital markets allocate resources between stand alone, single-
product firms. In the diversified, multidivisional firm, by contrast, resources are
allocated internally, as the entrepreneur distributes funds among profit-center
divisions. This “internal capital market” replicates the allocative and disciplinary
roles of the financial markets, shifting resources toward more profitable lines of
production.16 Coase claimed that firms “supplant” markets when the transaction
costs of market exchange exceed those of internal production. Williamson adds

16
Such a process is described explicitly in the 1977 Annual Report of Fuqua Industries, a diversi-
fied firm with interests in lawn and garden equipment, sports and recreation, entertainment, photofin-
ishing, transportation, housing, and food and beverages:
Fuqua’s strategy is to allocate resources into business segments having prospects of
the highest return on investment and to extract resources from areas where the
future return on investment does not meet our ongoing requirements. . . . The same
principle of expanding areas of high return and shrinking areas of low return is
constantly extended to product lines and markets within individual Fuqua opera-
tions. Only with a diversified business structure is the application of this modern
fundamental business investment policy practical.
Another highly diversified firm, Bangor Punta Corporation, explains that the role of its corporate
headquarters is “to act as a central bank supplying operating units with working capital and capital
funds” (1966 Annual Report).
34 THE QUARTERLY JOURNAL OF AUSTRIAN ECONOMICS VOL. 2, NO. 2 (SUMMER 1999)

that diversified, multidivisional firms “supplant” capital markets when the costs of
external finance exceed those of internal resource allocation.
According to the internal capital markets theory, diversified firms arise when
limits in the capital market permit internal management to allocate and manage
funds more efficiently than the external capital market. These efficiencies may
come from several sources. First, the central headquarters of the firm (HQ)
typically has access to information unavailable to external parties, which it extracts
through its own internal auditing and reporting procedures (Williamson 1975, pp.
145–47).17 Second, managers inside the firm may also be more willing to reveal
information to HQ than to outsiders, since revealing the same information to the
capital market would also reveal it to rival firms, potentially hurting the firm’s
competitive position. Third, HQ can also intervene selectively, making marginal
changes to divisional operating procedures, whereas the external market can
discipline a division only by raising or lowering the share price of the entire firm.
Fourth, HQ has residual rights of control that providers of outside finance do not
have, making it easier to redeploy the assets of poorly performing divisions
(Gertner, Scharfstein, and Stein 1994). More generally, these control rights allow
HQ to add value by engaging in “winner picking” among competing projects
when credit to the firm as a whole is constrained (Stein 1997). Fifth, the internal
capital market may react more “rationally” to new information: those who dis-
pense the funds need only take into account their own expectations about the
returns to a particular investment, and not their expectations about other inves-
tors’ expectations. Hence there would be no speculative bubbles or waves.
Bhide (1990) uses the internal capital markets framework to explain both the
conglomerate merger wave of the 1960s and the divestitures of the 1980s,
regarding these developments as responses to changes in the relative efficiencies
of internal and external finance. For instance, corporate refocusing can be ex-
plained as a consequence of the rise of takeover by tender offer rather than proxy
contest, the emergence of new financial techniques and instruments like leveraged
buyouts and high-yield bonds, and the appearance of takeover and breakup
specialists, like Kohlberg Kravis Roberts, which themselves performed many func-
tions of the conglomerate HQ (Williamson 1992). Furthermore, the emergence of
the conglomerate in the 1960s can itself be traced to the emergence of the M-form
corporation. Because the multidivisional structure treats business units as semi-in-
dependent profit or investment centers, it is much easier for an M-form corpora-
tion to expand via acquisition than it is for the older unitary structure. New
acquisitions can be integrated smoothly when they can preserve much of their
internal structure and retain control over day-to-day operations. In this sense, the
conglomerate could emerge only after the multidivisional structure had been
diffused widely throughout the corporate sector.
Internal capital market advantages, then, explain why diversification can increase
the value of the firm. During the 1960s, entrepreneurs took advantage of financial-
market imperfections (many due to regulatory interference) to form large, highly
diversified firms (Hubbard and Palia 1999; Klein 1998b). They also benefited from

17
Myers and Majluf (1984) show that if the information asymmetry between a stand-alone firm
and potential outside investors is large enough, the firm may forego investments with positive net
present value rather than issue risky securities to finance them.
ENTREPRENEURSHIP AND CORPORATE GOVERNANCE 35

government spending in high-technology and other defense-related businesses,


which were particularly suited for acquisition. In the two subsequent decades,
financial-market performance improved, reducing the internal capital market ad-
vantages of conglomerate firms.
If entrepreneurs have a special ability to manage information and allocate
financial resources within the firm—if diversified firms “supplant” external capital
markets—then why are capital markets necessary at all? Why not, to paraphrase
Coase’s (1937, pp. 42–43) second question, organize the entire economy as one
giant conglomerate? The answer is that the argument for internal capital market
advantages does not “scale up”; it applies only to firms that are themselves
engaged in rivalrous competition. This situation, in turn, implies strict limits to firm
size, even for large conglomerates.
The argument for the efficiency of internal capital markets is that compared
with outside investors, the entrepreneur can extract additional information about
divisional requirements and performance. It is not that the entrepreneur’s knowl-
edge substitutes for the knowledge embodied in market prices. To evaluate the
merit of a proposed investment, the central management of a diversified con-
glomerate still relies on market prices to calculate expected (money) benefits
and cost. Internal accounting does not substitute for money prices; it merely
uses the information contained in prices in a particular way. When capital-
goods prices are distorted—for example, because of financial market regula-
tion—then the entrepreneur’s additional knowledge is that much more valuable.
So under those conditions we would expect an increase in M-form corporations,
allocating resources via internal capital markets. During the 1960s, that is exactly
what we observed.
Correctly understood, the internal capital markets hypothesis does not state
that internal capital markets supplant financial markets. It states that internal capital
markets supplement financial markets. Even ITT’s Harold Geneen, LTV’s James
Ling, Litton’s “Tex” Thornton, and the other conglomerators of the 1960s were
constrained by the need for economic calculation in terms of money prices.
Thornton’s “Whiz Kids” have been criticized for their advocacy of “scientific
management” or “management by the numbers.” Yet Thornton’s techniques were
quite successful at Litton. It was only when his disciple Robert McNamara tried to
apply the same techniques to a nonmarket setting—the Vietnam War—that the
limitations of “scientific management” were revealed.18
Comparative Corporate Governance
How well do various systems of corporate governance function? The last few
years have seen the growth of a new literature on “comparative corporate govern-
ance,” the study of alternative means of governing relations between firm owners
and managers. The typical comparison is between stock-market systems like those
in the U.S. and U.K., and bank-centered systems like those in Germany and Japan
(Roe 1994, 1998; Gilson and Black 1997; Milhaupt 1997). According to Roe, the
phenomenon he calls “strong managers, weak owners” is an outgrowth not of the
market process, but of legal restrictions on firm ownership and control. In the U.S., for
example, banks and other institutions are forbidden from owning firms; antitrust laws
18
For more on the relationship between Thornton and McNamara, see Shapley (1993), and
Byrne (1993).
36 THE QUARTERLY JOURNAL OF AUSTRIAN ECONOMICS VOL. 2, NO. 2 (SUMMER 1999)

prohibit industrial combinations like the Japanese keiretsu; and anti-takeover


restrictions dilute the effects of the takeover mechanism. Laws that require diffuse
ownership create what Roe terms the “Berle–Means corporation,” in which
“fragmented ownership shifts power in the firm to managers” (p. 93).
Mises makes a very similar argument in Human Action. There he notes that “the
emergence of an omnipotent managerial class is not a phenomenon of the unham-
pered market economy,” but a result of government policy (Mises 1949, p. 307). Here
he expands upon his earlier analysis in Bureaucracy (1944, p. 12), where he attacks
the claim that bureaucracy follows naturally from firm size. Mises conceives of
bureaucracy as rule-following, as opposed to profit-seeking, behavior. He reserves
the term “bureaucratic management” for the governing of activities that have no
cash value on the market. As long as a firm’s inputs and outputs are bought and
sold, the central management of the firm will have the information provided by
market prices to evaluate the efficiency of the various branches and divisions
within the firm. Then subordinate managers can be given wide discretion to make
daily operational decisions without the pursuit of profit.19 If an organization
produces a good or service that has no market price—the output of a government
agency, for example—then subordinate managers must be given specific instruc-
tions for how to perform their tasks.
The fact that managers in a private firm have latitude to make day-to-day
decisions, Mises argues, does not make the firm “bureaucratic.” “[N]o profit-seek-
ing enterprise, no matter how large, is liable to become bureaucratic provided the
hands of its management are not tied by government interference. The trend
toward bureaucratic rigidity is not inherent in the evolution of business. It is an
outcome of government meddling with business” (Mises 1944, p. 12). By this
Mises means that government interference impedes the entrepreneur’s use of
economic calculation and the attempt to use prices to impose managerial disci-
pline. Mises gives three examples (pp. 64–73): taxes and price regulations that
interfere with corporate profits (distorting an important signal of managerial
performance); laws that interfere with hiring and promotion (including the
need to hire public relations staffs and legal and accounting personnel to
comply with government reporting requirements); and the omnipresent threat
of arbitrary antitrust or regulatory activity, in response to which entrepreneurs
must become adept at “diplomacy and bribery” (p. 72). The effect of legal
restrictions on corporate governance and organizational form is an important
and growing area, and further research from an Austrian perspective is sorely
needed.
Financiers as Entrepreneurs
As discussed above, the market for corporate control places strict limits on the
ability of managers to pursue their own goals rather than those of the capitalist–en-
trepreneurs. However, in the mainstream literature at least, there is much debate
19
Chapter 1 of Bureaucracy, on profit management and the sources of entrepreneurial profit,
contains a remarkably lucid account of economic calculation under capitalism and its impossibility
under socialism. “To the entrepreneur of capitalist society a factor of production through its price
sends out a warning: Don’t touch me, I am earmarked for another, more urgent need. But under
socialism these factors of production are mute” (Mises 1944, p. 29).
Mises also provides a very Coase-like discussion of the make-or-buy decision, though without
citation (p. 33).
ENTREPRENEURSHIP AND CORPORATE GOVERNANCE 37

about the effectiveness of the takeover mechanism in providing managerial disci-


pline.20 If managers desire acquisitions to increase their own prestige or span of
control—to engage in “empire building”—then an unregulated market will generate
too many takeovers. Indeed, several studies have found a sharp divergence
between market participants’ pre-merger expectations about the post-merger
performance of merging firms, and the firms’ actual performance rates. Raven-
scraft and Scherer’s (1987) large-scale study of manufacturing firms, for example,
found that while the share prices of merging firms did on average rise with the
announcement of the proposed restructuring, post-merger profit rates were unim-
pressive. They find that nearly one-third of all acquisitions during the 1960s and
1970s were eventually divested. Ravenscraft and Scherer conclude that mergers
typically promote empire building rather than efficiency, and they support in-
creased restrictions on takeover activity. Jensen (1986, 1993) suggests changes in
the tax code to favor dividends and share repurchases over direct reinvestment,
thus limiting managers’ ability to channel free cash flow into unproductive acquisi-
tions.
However, the fact that some mergers—indeed, many mergers, takeovers, and
reorganizations—turn out to be unprofitable does not imply market failure or
necessarily prescribe any policy response. Errors will always be made in a world of
uncertainty. Even the financial markets, which aggregate the collective wisdom of
the capitalist–entrepreneurs, will sometimes make the wrong judgment on a
particular business transaction. Sometimes the market will reward, ex ante, a
proposed restructuring that has no efficiency rationale. But this is due not to
capital market failure, but to imperfect knowledge. Final judgments about success
and failure can be made only ex post, as the market process plays itself out.
Moreover, there is no reason to believe that courts or regulatory authorities can
make better judgments than the financial markets. The decisions of courts and
government agencies will, in fact, tend to be far worse: unlike market participants,
judges and bureaucrats pursue a variety of private agendas, unrelated to eco-
nomic efficiency. Furthermore, the market is quick to penalize error as it is
discovered; no hearings, committees, or fact-finding commissions are required. In
short, that firms often fail is surprising only to those committed to textbook models
of competition in which the very notion of “failure” is defined away.
Another criticism of the market for corporate control is that unregulated
financial markets engage in too few takeovers, due to a free-rider problem associ-
ated with tender offers (see, for example, Scharfstein 1988). Critics point out that if
the difference between the current (undervalued) price of the firm and its after-
takeover market value is common knowledge, then the target firm’s shareholders
will refuse to tender their shares until the current price is bid up, appropriating a
share of the returns to the acquiring firm. These critics conclude that regulation,
not the takeover market, should be used to discipline managers.
The flaw in this argument is that it assumes perfect knowledge on the part of
investors. The typical shareholder will not usually have the same information as
incumbent managers, outside “raiders,” and other specialists. It is not in the small
shareholder’s interest to learn these details; that is why he delegates such responsibilities

20
For overviews of this literature see Romano (1992), Shleifer and Vishny (1997), and Zingales
(1998).
38 THE QUARTERLY JOURNAL OF AUSTRIAN ECONOMICS VOL. 2, NO. 2 (SUMMER 1999)

to the managers in the first place. As Hayek (1945) described it, there is a “division
of knowledge” in society. The raider who discovers a difference between a firm’s
current market value and its potential value under new management has an
opportunity for an entrepreneurial profit (less the transaction costs of takeover).
Because shareholders have delegated these responsibilities, they will not usually
earn a share of this profit. Nonetheless, as Rothbard (1962, p. 372) observes,
because shareholders (owners) choose to delegate operational responsibility to
managers—contracting out for the managerial function—they themselves retain the
ultimate rights of control.
Moreover, the post-takeover market value of the firm is uncertain; the raider’s
profit, if he is successful, is the reward for bearing this uncertainty. In this sense, the
takeover artist is a Misesian capitalist–entrepreneur. This account, however, could
use further elaboration. For example, how is the bearing of uncertainty distributed
among participants in various forms of restructuring? How do regulatory barriers
hamper the capitalist–entrepreneur’s ability to exercise the entrepreneurial func-
tion in this context?
CONCLUSIONS
The main message of this article is that Austrians can continue to work within the
contractual, or Coasian, approach to the firm in elaborating the insights discussed
above. In particular, the problem of corporate governance, and the corollary view
that firms are investments, belongs at the forefront of Austrian research on the
theory of the firm. Emphasis should thus be placed on the plans and actions of the
capitalist–entrepreneur.
A particularly undeveloped area concerns the provision of capital to small,
“entrepreneurial” ventures. Most of the literature on governance focuses on the
large corporation, and the use of stock and bond markets to govern these
organizations. Equally important, however, are smaller, privately held firms, fi-
nanced with venture capital or other forms of investment. So far, the firm-as-invest-
ment literature has said little about these organizations, despite their growing
importance, particularly in high-growth, technologically-advanced industries like
software and biotechnology. Further research in this area is sorely needed.
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On Certainty and Uncertainty, Or:
How Rational Can Our Expectations Be?
Hans-Hermann Hoppe

The honest historicist would have to say: Nothing can be asserted


about the future.
Ludwig von ~ i s e s '

The future is to all of us unknowable.


Ludwig LachmannZ

I
t is possible to imagine a world characterized by complete certainty. All
future events and changes would be known in advance and could be
predicted precisely. There would be no errors and no surprises. We would
know all of our future actions and their exact outcomes. In such a world,
nothing could be learned, and accordingly, nothing would be worth knowing.
Indeed, the possession of consciousness and knowledge would be useless. For
why would anyone want to know anything if all future actions and events were
completely predetermined and it would not make any difference for the future
course of events whether or not one possessed this or any knowledge? Our
actions would be like those of an automaton-and an automaton has no need of
any knowledge. Thus, rather than representing a state of perfect knowledge,
complete certainty actually eliminates the value of all knowledge.
Obviously, we d o not inhabit a world of complete certainty. We cannot
predict all of our future actions and their outcome. There are in our world
surprises. Our knowledge of future events and outcomes is less than perfect. We
make errors, can distinguish between failure and success, and are capable of learn-
ing. Unlike for an automaton, for us knowledge is valuable. To know something

Hans-Hermann Hoppe is professor of economics at the University of Nevada, Las Vegas and
is co-editor of The Renew ofAustrian Eronomicr.
' ~ u d w i ~ v oMn
ises,7Iwy and Hiswty (Auburn, Ala.: Ludwig von M i s Institute, 1985). p. 203.
2
LudwigLachmann, "From Mises to Shackle: An Essay on Austrian Economics and the Kaleidic
Society,"Journal ofEconomic Literature 14 (1976): 55-59.
Review ojAustrian Economics 10, no. 1 (1997): 49-78
ISSN:0889-3047
50 Review of Austrian Economics 10, No. 1 ( 1 997)

o r not makes a difference. Knowledge is not of predetermined events and states


of affairs, but knowledge of how to intefere with and divert the natural course of
events so as to improve our subjective well-being. Knowledge does not help us predict
an unalterable course of events but is a tool of purposefully changing and hope-
fully bettering future outcomes and events. Our actions, unlike the operations of
an automaton, are not a series of predetermined events which the knower cannot
influence and with respect to whose outcome he is indifferent. Rather, our
actions are sequences of decisions (choices) of altering the predetermined
course of events to our advantage. We are never neutral o r indifferent toward the
course of future events. Instead, we always prefer one course of events over
another, and we use our knowledge to bring about our preferences. For us,
knowledge is practical and effective, and while it is imperfect and subject to
error, it is the only means of achieving human betterment.

From the recognition of the fact that ~ e r f e cforesight


t eliminates the very need
of knowing and knowers, and that such a need only arises if, as in our world,
foresight is less than perfect, and insofar as knowledge is a means of bringing
about preferences, it does not follow that everything is uncertain. Quite to the
contrary In a world where everything is certain, the idea of certainty would not
even come into existence. The idea of certain knowledge requires, as its logical
counterpart, the idea of uncertainty. Certainty is defined in contrast to uncer-
tainty, and not everything can be certain. Likewise, uncertainty cannot be defined
without reference to certainty, and not all knowledge can be uncertain. It is this
latter part of one and the same conclusion which critics of the model of perfect
foresight, such as Ludwig Lachmann, have failed to recognize. From the correct
insight that we d o not inhabit a world of perfect knowledge it does not follow
that we live in a world of perfect uncertainty; i.e., in a world with no certainty at
all, and from the fact that I cannot predict all of my and others' future actions it
does not follow that I can say nothing at all about them. In fact, even if I d o not
know everything about my future actions, for instance, I do know something to
be true about each and every one of them: that I will, as long as I act, employ my
knowledge t o interfere in the natural course of events so as to-hope-
fully-bring about a more preferable state of affairs.
Later on, more will be said about the importance of this insight. But it is
worth emphasizing from the outset that the idea of perfect or radical uncertainty
(or ignorance) is either openly contradictory insofar as it is meant to say "every-
thing about the future is uncertain except that there will be uncertainty-about
this we are certain," o r i t entails an implicit contradiction if it is meant to say
Hoppe: On Certainty and Uncertainty 51

"everything is uncertain and that there is nothing but uncertainty, is uncertain,


too." (I do know such and such to be the case, and I do not know whether such
and such is the case o r not.) Only a middle-of-the-road position between the two
3
extremes of perfect knowledge and perfect ignorance is consistently defensible :
There exists uncertainty but this we know for certain. Hence, also certainty
exists, and the boundary between certain and uncertain knowledge is certain
(based on certain knowledge).

IPI
Nothing about the external, physical world is o r can be known with cer-
tainty-except for those rather abstract but universal and real things that are
already implied in the certain knowledge of acting and action: that this must be
a world of objects and object-qualities (predicates), of countable units, physical
magnitudes, and quantitative determinateness (causality). Without objects and
object-qualities there can be no such thing as propositions; without countable units
there can be no arithmetic; and without quantitative determinatenessthe fact that
definite quantities of causes only bring about definite (limited) effects--there can
be no ends and means (goods); i.e., no active interference in the course of external
events with the purpose of bringing about a more highly-valued end (preferred
effect). Apart from the laws of propositional logic, arithmetic, and causality, however,
all other knowledge about the external world is uncertain (a posteriori). We do not
and cannot know with certainty (a priori) what kinds of objects and object-qualities
exist, how many units of what physical dimensions there are, and what quantitative
cause-and-effect relationships exist (or do not exist) between various magnitudes of
various objects. All of this must be learned from experience. Moreover, experience
is invariably past experience, that of past events. It cannot reveal whether or not the
facts and relationships of the past will also hold in the future. We cannot but assume
that this will be the case, by and large. But it cannot be ruled out categorically that
we might be mistaken, and that the future will be so different from the past that all
of our past knowledge will be entirely useless. It is possible that none of our
instruments or machines will work anymore tomorrow, that our houses will
collapse on top of us, that the earth will open up, and that all of us will perish. It

j ~ e Oskar
e Morgenstern, "Perfect Foresight and Economic Equilibrium," in Selected Economic
Writings ofOskarMorgenstem, A. Schotter, ed. (New York: New York University Press, 1976), esp. p.
175; Roger W Garrison, "Austrian Economics as Middle Ground," in Method, Praess, and Austrian
Economics, Israel Kirmer, ed. (Lexington, Mass.: Lexington Books, 1982); idem, "From Lachmann
to Lucas: On Institutions, Expectations, and EquilibratingTendencies," in Subjectivism, Intelligibility
and Economic Understanding: Essay in Honor ofLudmg M. Lachmann (New York: New York University
Press, 1986).
52 Review ofAustrian Economics 10, No. 1 ( 1 99 7)

is in this sense that our knowledge of the external physical world must be
ultimately regarded as uncertain.
Notwithstanding this ultimate uncertainty of our knowledge concerning the
external world, however, as a result of contingent circumstances, the relative
stability and regularity in the concatenation of external objects and events, it has
been ~ossiblefor mankind to accumulate a vast and expanding body of practically
certain knowledge. This knowledge does not render the future predictable, but
it helps us predict the effects to be produced by definite actions. Even though we
do not know why things work the way they do, and whether or not they must
always work in this way, we do know with complete practical certitude that and
how certain things will operate now and tomorrow. One would never know it
from the writings of the apostles of radical uncertainty but an innumerable and
growing number of events (outcomes) can be produced literally at will and predicted
with almost perfect exactitude. My toaster will toast, my key will open the door, my
computer, telephone, and fax will work as they are supposed to, my house will
protect me from the weather, cars will drive, airplanes will fly, cups will still hold
water, hammers will still hammer, and nails will still nail. Much of our future is,
practically speaking, perfectly certain. Every product, tool, instrument or machine
represents a piece of practical certainty To claim, instead, that we are faced with
radical uncertainty and that the future is to all of us unknowable is not only
self-contradictory but also appears to be a position devoid of common sense.

Our practical certainty concerning future outcomes and events extends even
further. There are many future events about whose outcome we are practically
certain because we literally know how to produce them (the outcome is under our
complete practical control). We can also predict with practical certainty a great
and growing number of outcomes outside and beyond anyone's control. Some-
times my tools, machines, and products are defective. My toaster does not toast,
my telephone is silent, a hurricane or an earthquake has destroyed my house, my
airplane crashes, or my cup is broken. I had no knowledge that this would happen
to me here and now, and hence I could not have acted differently from the way I
did. I am thus taken by surprise. But my surprise and my uncertainty must not
be complete. For while I may know absolutely nothing about the single
event-this cup will now break, this airplane will now crash, my house will be
destroyed in an earthquake two years from now-and thus cannot possibly
predict and alter any such event, I may know practically everything with respect
to the whole class of events (broken cups, crashing airplanes, earthquakes) of
which this single event is a member. I may know, based on the observation of
Hoppe: On Certainy and Uncerrainy 53

long-run frequency distributions, that airplanes of a certain type crash every so


often, that one in ten thousand cups produced is defective, that machines of such
and such a type function on the average for ten years, and that an earthquake
strikes a certain region on the average twice a year and destroys, in the long run,
one percent of the existing housing stock per year. Then, although the single
event still comes as a surprise, 1 do know with practical certainty that surprises
such as these exist and how frequent they are. I am surprised neither by the type
of surprise nor its long-run frequency. My surprise is only relative. I am surprised
that such and such happens here and now rather than elsewhere o r later. But I
am not surprised that it happens at all, here, there, now, or later. In thus
delineating the range and frequency of possible surprises, my uncertainty con-
cerning the future, while not eliminated, is systematically reduced.
Cases of limited surprises o r reduced uncertainty are, of course, what Frank
Knight first classified as "risk" (as opposed to "uncertainty"), and what Ludwig
von Mises, building on Knight and the work on the foundations of probability
theory of his mathematician brother, Richard von Mises, would later define as
"class probability" (as opposed to ILcaseprobability")4: "Class probability means:
We know or assume to know, with regard to the problem concerned, everything
about the behavior of a whole class of events o r phenomena; but about the actual
singular events o r phenomena we know nothing but that they are elements of this
c l a s ~ . "I ~know nothing about whether this or that cup will be broken, and I know
nothing about whether my house o r your house will be destroyed by a tornado
within the next year, but I do know from the observation of long-run frequency
distributions regarding cups and tornadoes, for instance, that no more than one
in ten thousand cups is defective and that of a thousand houses in a given
territory, no more than one per year on the average will be destroyed. If, based
on this knowledge, I adopted a strategy of always predicting that the next cup will
not be broken, and that my house will not be destroyed next year, I would commit
errors. But in the long run, the strategy would assure more successes than errors:
my errors would be 'correct' errors. On the other hand, if I adopted the strategy
of predicting always that the next cup will be broken and my house destroyed, I
might well be correct. But in the long run this strategy would assuredly fail: I
would be erroneously correct. Whenever the conditions of class probability are
met and we do not know enough to avoid mistakes altogether but enough to make

4
See Frank Knight, k k , h ~ e ~ and n ~ (Chicago: University of Chicago Press, 197 l),
i ?+.fit
esp. chap. 7; Richard von Mises, Robobiliy, Statistics, and Tmth (London: George Allen and Unmn,
1957), esp. chaps. 1 and 3; Ludwigvon Mises, Human Action: A Treatise on Economics (Chicago: Henry
Regnery, 1966), esp. chap. 6.
bid., p. 109.
54 Review ofAustrian Economics 10, No. 1 ( 1 997)

only correct mistakes, it is possible to take out insurance. As a producer of cups,


for instance, I know that on the average I will have to produce 10,001 cups in
order to have 10,000. I cannot avoid broken cups, but I can insure myself against
the risk of broken cups by including it, as a regularly-occuring loss, in my
cost-accounting, and by thus associating a correspondingly-higher cost with my
production of cups. Similarly, I cannot avoid tornadoes, but I can insure myself
against them. Because tornado losses are large and infrequent in relation to the
size and operations of my household, it would be difficult (although not impos-
sible) to provide insurance internally (within my household). But it is possible
to pool my tornado risk with yours and that of other households or firms in a
given region. Not one of us knows who will be affected by the risk in question,
but based on the knowledge of the objective long-run frequency of tornadoes
and tornado damage for the entire region, it is possible to calculate a premium
against payment of which each one of us can be insured for this hazard.
It is not only the knowledge incorporated in our tools, instruments, and
machines, then, which provides practical certain information about our future:
in this case, knowledge of how we will generate various singular events. Also, the
knowledge incorporated in any form of insurance, whether internally practiced
o r by method of pooling, represents practical certain knowledge: in this case,
knowledge of how to be prepared for various classes of events whose individual
occurrence is beyond anyone's control. To be sure, while the conditions of class
probability and insurability can be stated exactly, with certainty, the question of
whether o r not there exist insurable events, which ones, and the various expenses
of insuring against them, cannot be answered with certainty. O n the one hand,
the knowledge of objective probability distributions must be acquired through
observational experience, and as is the case for all knowledge based on such
experience, we can never know whether o r not past regularities will also hold in
the future. We may have to make revisions. On the other hand, even in order to
collect such information, it is necessary that various singular events be classified
from the outset as falling into one and the same class (of events). This cup or
tornado and that cup o r tornado are both members of the same class of cup or
tornado. Yet any such classification is tainted with uncertainty. The joint classi-
fication of a series of singular events is only correct (for the purpose of insurance)
if it holds that I do not know more about any of the single class members than
that each one of them is a member of the same class. If I learned, however, that
one cup was made of clay A and another from clay B, for instance, and that this
fact makes a difference for the long-run frequency of defects, my initial classifi-
cation would become faulty. Similarly, I might learn from experience that tor-
nado damage on the eastside of a given valley is systematically higher than on its
Hoppe: On Certainty and Uncertainty 55

western side. In this case, too, my original classification would have to be


changed, new and revised classes and subclasses of insurable events would have
to be formed, and new and different insurance premiums would have to be
calculated. These uncertainties notwithstanding, however, it deserves to be
pointed out that as a contingent fact of human life, the actual range of insurance,
and hence of relatively certain information about future events and outcomes, is
vast and growing: We know how many ships will likely sink, how many airplanes
crash, how often it will rain or shine, how many people of a given age will die,
how many hot water-boilers will explode, how many people will be struck by
cancer, that more women than men will be affected by breast cancer, that
smokers will die earlier than non-smokers, that Jews suffer more frequently from
Tay-Sachs disease than Gentiles, and Blacks more from sickle cell anemia than
Whites, that tornadoes, earthquakes, and floods occur here but not there, etc.
Our future is most definitely not unknowable.

Little of this ever attracts the attention of theoreticians of radical uncertainty.


The existence of a practical working technology and of a vast and flourishing
insurance industry constitutes an embarrassment for any theory of radical un-
certainty. If pressed sufficiently hard, of course, Lachmann and his followers
would probably admit the undeniable and, as if all of this did not matter, quickly
move onto another problem. So far, it might be pointed out with some justifica-
tion, attention has been directed almost exclusively either to the technological
rather than the economic aspect of action-to accidents rather than to actions.
The phenomenon of radical uncertainty, however, arises in a different arena.
While it may be possible to predict the physical outcomes fsuch and such an
action is taken, and while it may be possible also to predict the pattern of various
physical events entirely outside of human control, matters are completely differ-
ent when it comes to predicting our own future actions. I can predict that my
toaster will toast if I employ it in a certain way, and I can predict that toasters
generally do not work longer than ten years, but presumedly 1 cannot predict
whether o r not 1 will actually employ my toaster in the future, nor could I have
predicted before it actually happened that I ever wanted-and constructed
o r bought-a toaster in the first place. It is here, in the arena of human choices
and preferences, where supposedly radical uncertainty reigns.
Lachmann and his followers are correct in emphasizing that the problem of
predicting my and others' future actions is categorically different from that of
predicting the physical outcomes ofgiven actions o r of natural events. In fact, the
destructive part of Lachmann's argument is largely correct even though it is
56 Review ofAustrian Economics 1 0 , No. I (I 997)

hardly new (and entirely insufficient to establish his constructive thesis of radical
uncertainty). This is the roof that not only the idea of ~ e r f e c foresight,
6
t
underlying general equilibrium theory, is mistaken, but likewise the idea, ad-
vanced by rational expectations theorists, that all human uncertainty can be
subsumed under the heading of insurable risks: that the uncertainty concerning
our future actions in particular is no different from that regarding the future of
natural events, such that we can, based on our observation of long-run frequency
distributions, predict their general pattern in the same way as we can predict the
pattern of earthquakes, tornadoes, cancer, o r car accidents, for example.
As Lachmann points out, and as Frank Knight and Ludwig von Mises ex-
plained long before, the new theory of rational expectations suffers from essentially
the same deficiency as the old general equilibrium model of perfect foresight: it
cannot account for the phenomenon of learning and hence, of knowledge and
consciousness. Rational expectation theorists only replace the model of man as a
never-failing automaton with that of a machine subject to random errors and
breakdowns of known types and characteristics. Rather than possessing perfect
knowledge of all singular (individual) actions, man is assumed to possess merely
perfect knowledge of the probability distribution of all future classes of actions. He
is assumed to commit forecasting errors, but his errors are always correct errors.
False predictions never require a revision of a person's given stock of knowledge.
There is no learning from success or failure and, hence, there is no change, or only
predictable change, in the future pattern of human actions. Such a model of man,
Knight, Mises, and Lachmann agree, is no less faulty than the one it is supposed to
replace. It not only stands in manifest contradiction to the facts, but any proponent
of this model is also inevitably caught up in logical contradictions.
First off, if our expectations (predictions) concerning our future actions
were indeed as rational as rational expectation theorists believe them to be, this
would imply that it would be possible to give an exhaustive classification of all
possible actions (just as one could list all possible outcomes of a game of roulette
o r all possible locations of a physical body in space). For without a complete
enumeration of all possible types of actions there can be no knowledge of their
relative frequencies. Obviously, no such list of all possible human actions exists,
however. We know of a great number of types of action performed then o r now,
but this list is always open and incomplete. Indeed, actions are designed to alter
the natural course of events in order to bring about something as yet non-exis-
tent. They are the result of creative imagination. New and different actions are
6
See Ludwig Lachmann, n e Marker as an Ikonomic Profess (Oxford: Basil Blackwell, 1986),
chap. 2, esp. pp. 27-29; also Gerald E O'DriscoU, Jr., and Mario J. Rizzo, The Economics $Erne and
Ignorance (Oxford: Basil Blackwell, 1985), chap. 2, esp. pp. 24-26.
Hoppe: On Certainty and Uncenainy 57

constantly added to the list, and old ones dropped. For instance, new or different
products and services are constantly added to the pre-existing list of products
and services, while others disappear from the list. However, something as yet
non-existent-a new product--cannot appear o n any list until after it has been
imagined and produced by someone. Even the producer of a new product X does
not know-and could not have predicted-anything regarding the relative fre-
quency of actions such as the supply of o r the demand for X before he had actually
had the new idea of X-yet any new product idea and any new product must
necessarily upset (alter) the entire pre-existing pattern of the relative frequency
of various forms of action (and of relative prices).
Moreover, if we could indeed predict our future actions, either perfectly o r
subject only to random errors, then it would have to be implicitly assumed as
well that every actor must possess the same (identical) knowledge as everyone
else. I must know what you know, and you must know what I know. Otherwise,
if our knowledge were somehow different, it would be impossible that both our
predictions could be equally correct or else equally correctly wrong. Instead,
either my predictions would have to be correct and yours would have to be
wrong, o r vice versa, and either my predictions o r yours then would have to be
wrongly wrong. The error (mine o r yours) would not be random but systematic,
for it could have been avoided had I (or you) known what you (or I) knew. This
precisely is the case, however: our knowledge is not identical. You and 1 may
know some things in common, but I also know things (about myself, for instance)
that you do not know, and vice versa. Our knowledge, and hence our predictions
and expectations concerning future actions, are in fact different. Yet if different
actors possess different knowledge, the likelihood (frequency) of their predicting
correctly or incorrectly will be different as well. Hence, neither the success nor
the failure of our predictions can be considered purely random but will have to
be ascribed instead, at least partially, to a person's more-and-better o r less-and-
worse individual knowledge.
Most importantly, however, the rational expectations' model of man as a ma-
chine which is endowed with perfect knowledge of the relative frequency distribu-
tion of all of its possible future classes of actions (but that knows nothing about any
particular action falling into any one of these classes except that it is a member of
such and such a class and that this class of action has such and such a relative
frequency) is fraught with inescapable internal contradictions. On the one hand, .as
far as the assumption that all actors possess identical knowledge is concerned, any
proponent of this view is caught in a performative contradiction: his words are belied
by the very fact of uttering them. For there would be no need to say what he is saying
if everyone else already knew what he knows. Indeed, if everyone's knowledge were
58 Review $Austrian Economics 10. No. 1 ( 1 997)

identical to everyone else's, no one would have to communicate at all. That men
d o communicate demonstrates that they must assume instead, contrary to the
stated assumption, that their knowledge is not identical. Rational expectations
theorists, too, by virtue of presenting their ideas to the reading public, must
obviously assume that the public dois not yet know what they already know, and
hence, that the public's predictions concerning the future course of actions-in
contrast to their own predictions-will be systematically flawed until it has
successfully absorbed the lesson of rational expectations.
Similarly, anyone proposing the assumption of a given list of all possible
forms of human actions, with its implied denial of all learning, is caught up in
contradictions. For one, if his knowledge was indeed given, this would imply
assuming that he already knows everything that he will ever know (otherwise, if
he could learn something tomorrow that is not already known today, his list of
possible classes of actions could no longer be assumed to be complete). Yet if this
were the case, then inevitably the question arises how he ever came to know this. If
he cannot learn, it would appear that he also could not possibly have learned to know
that there is no human learning. Rather, this knowledge must have always been there,
as part of his initial natural endowment, like his hands and fingers. But this
idea-that our knowledge is given as our hands and fingers are given-is absurd.
Knowledge is always the knowledge of something: the knowledge of hands and
fingers, for instance, and it cannot possibly be conceived of as anything but sequen-
tially (in time) aquired knowledge (as something based upon and learned about some
logically and temporarily prior facts). Moreover, the denial of the possibility of
learning is again belied by the proponent's action. In proposing his thesis, he cannot
but assume that others can understand and possibly learn from him something that
they do not yet know. And in waiting for and listening to the response of others to
his proposition-by engaging in any form of argumentation-he cannot but also
assume that he himself can possibly learn from what others have to say. Other-
wise, if he already knew what they would respond and how he would respond to
their responses, and so on, there would simply be no purpose to the whole
enterprise of communication and argumentation. Indeed, if he knew in advance
all of his arguments (propositions) and all possible replies and counterreplies (or
at least their relative frequency distribution), it would also be senseless to even
engage in any form of internal, intra-personal argumentation, because his knowl-
edge would already be complete, and he would already possess the answers to all
questions. Of course, the rational expectation theorists do engage in argumen-
tation-and no one could argue that he cannot argue without thereby falling into
a contradiction-and they do conduct research (which no one would do if he
already knew everything there is to know). Hence, they demonstrate through
Hoppe: On G r t a i n y and Uncenaing 59

their own actions that their model of man must be considered systematically
flawed, and that man must think of himself as capable of learning something as
yet unknown (unpredictable).

What are the consequences as regards the nature of the social sciences that follow
from the recognition of man as a learning actor? It is in the answer to this question
that Knight and Mises on the one hand, and Lachmann on the other, ultimately part
company. They would agree only on one consequence: that there exists a categorical
difference between the logic of the natural sciences and that of the social sciences.
Indeed, it follows from the recognition of man as a learning actor that the (still)
dominating positivist (or falsificationist) philosophy, which assumes that all
(empirical) sciences follow the same method-a uniform logic of science-is
7
self-contradictory.
It is one thing to predict the physical outcomes resulting from a given action
(technology) o r to predict the future pattern of a given class of natural events
outside an actor's physical control (insurance). It is an entirely different matter
to predict what action an actor will actually perform o r against which classes of
natural events he will actually want to insure himself. As far as the former
problem is concerned, there is no need to dispute what positivism has to say: An
actor wants to produce a certain physical result and he has an idea about what
type of interference of his is capable of bringing about such a change. His idea is
a hypothetical one. The actor never can be ultimately certain that his action will
lead to the desired result. He can only try and see what happens. If his action is
successful and the anticipated outcome is achieved, his idea is confirmed. How-
ever, even then the actor cannot be sure that the same interference will always
bring about the same result. All that a confirmation adds to his previous knowl-
edge is the certitude that his hypothesis so far has not yet been shown to be faulty.
O n the other hand, if his action fails, his idea is falsified and a new, revised or
amended hypothesis will have to be formed. Thus, even if certainty is out of
human reach, it is still possible, through a process of trial and error, that an actor
may continuously improve his technological know-how. Likewise, as regards
natural events outside one's control, insofar as an actor is not indifferent (un-
concerned) about such events but prefers the presence of any such event over its
absence, o r vice versa, he may form an idea concerning the relative frequency
distribution of the entire class of the particular event in question. This idea, based

7 ~ e Hans-Hermann
e Hoppe, Kritik der kaucalwissensch~dichenSozia$rschung (Opladcn: Wcst-
deutscher Verlag, 1983); idem, 7he Economics and Erhicc $Private Propeny (Boston: Kluwcr, 1993),
chap. 7.
60 Review ofAustrian Economics 10, No. 1 ( 1 997)

as it is on the joint classification of singular events and the observation of long-run


frequencies, is hypothetical, too. In this case, however, the occurrence of a single
favorable or unfavorable event does not constitute a confirmation or a falsification
of one's hypothesis. Rather, because the hypothesis refers to an entire class of
favorable or unfavorable events and does not state anything regarding any singular
event except that it is a member of this class, the question whether or not the
course of future events confirms or falsifies one's idea can only be decided based
on the observation of a large number of cases. This fact, although seemingly less
than completely satisfying, does not imply that the experiences of confirmation and
falsification, of success and failure, and of scientific progress proceeding through
trial and error are any less real, however. In this case, whether or not one's hypothesis
is confirmed or falsified can be decided based on the 'hard' and objective fact that
an insurer-whether a single individual who insures himself over time through
personal savings or an agency that insures a class of individuals across time against
payment of a premium--either has, or has not, saved or collected premiums
sufficient to cover the cost resulting from the occurrence of each and all unfavorable
singular events. If he has, his hypothesis is temporarily confirmed, and if he has not,
his hypothesis is falsified, and he will either have to change his frequency estimate
and increase his savings or premiums, or he will have to revise his classification of
singular events and introduce a new, further differentiated-system of classes and
subclasses. Thus, even if certainty is again unattainable, continuous scientific pro-
gress is possible also with respect to man's ability to forecast accidents (natural
events outside of his control).
Granted that this is so, however, the question arises if it is also true, as
positivists maintain, that man can be thought of as following the same logic--of
hypothetical conjecture, confirmation or falsification, and of scientific progress
proceeding through a process of trial and error-when it comes to the problem
of predicting his own future actions. But this must be categorically denied. For
in proceeding in the way he does regarding the world of physical events inside or
outside his control, an actor must necessarily conceive of himself as capable of
learning (otherwise, why conduct any research at all?). Yet if man can learn and
possibly improve his predictive mastery over nature, it must be assumed that he
can not only alter his knowledge, and hence his actions, in the course of time, but
also that these possible changes must be regarded by him as in principle unpre-
dictable (such that any progress in his ability to predict these changes must be
considered systematically impossible). Or putting things somewhat differently, if
man proceeds, as positivists say he does, to interpret a predictive success as a
confirmation of his hypothesis such that he would, given the same circumstance,
employ the same knowledge in the future, and if he interprets a predictive failure
Hoppe: On Certainty and Uncerrainty 61

as a falsification such that he would not employ the same but a different hypothe-
sis in the future, he can only do so if he assumes-even if only implicitly-that
the behavior of the objects under consideration does not change over the course
of time. Otherwise, if their behavior were not assumed to be time-invariant-if
the same objects were to behave sometimes this way and at other times in a
different way-no conclusion as to what to make ofa predictive success or failure
would follow. A success would not imply that one's hypothesis had been temporarily
confirmed, and hence, that the same knowledge should be employed again in the
future. Nor would any predictive failure imply that one should not employ the same
hypothesis again under the same circumstances. But this assumption-that the
objects of one's research do not alter their behavior in the course of time--cannot
be made with respect to the very subject engaging in research without thereby
falling into a self-contradiction. For in interpreting his successful predictions as
confirmations and his failed predictions as falsifications, the researcher must
necessarily assume himecfto be a learning subject-someone who can learn about
the behavior of objects conceived by him as non-learning objects. Thus, even if
everything else may be assumed to have a constant nature, the researcher cannot
make the same assumption with respect to himself. H e must be a different person
after each confirmation or falsification than he was before, and it is then his nature
to be able to change his personality over the course of time.'
But if the positivist-falsificationist view of a uniform logic of science is
rejected and the logic of the social sciences considered categorically different
from that applying to the natural sciences, as Knight, Mises, and Lachmann
would agree, then what is the method appropriate for the study of human action?
It is here that Knight and Mises would fundamentally disagree with Lachmann.
Knight and Mises argue-correctly, as will be seen-that it does not follow from
the recognition of man as a learning actor that everything concerning the future
of human actions must be considered unknowable-indeed, they would con-
sider such a view self-contradictory-but rather only that one must admit the
existence of two categorically-different branches within the social sciences: of
apodictic (aprioristic) theory (economics) on the one hand and of history and

'~ikewise, it would be self-contradictory for me to state about my actions performed over


the course of time what would have to be assumed if I wanted to consider them instances of
insurable events (class probability): that I know nothing about any one of my actions except that
they are my actions (in the same way as one may legitimately say, for instance, that I know nothing
about any singular outcome of a game of roulette except that each one is the outcome of the same
roulette). In fact, I do know more about each of them. I know that each action is influenced by my
knowledge, and that my knowledge will be changed dependent on the outcome of each action, such
that each action will be performed by a dgerent me and must be considered a unique event (forming
an entire class by itself).
62 Review ofAustrian Economics 10, No. I (1 997)

entrepreneurship on the other.9Lachmann and his followers conclude precisely this:


(1) that there can be no such thing as economic theory capable of prediction at all,
that all of the social sciences are nothing but history and "economists must confine
10
their generalizations to the knowable past" ; and (2), that all of our predictions
concerning human actions, which we must venture day in and day out, are nothing
but haphazard guesses, that "man in his true humanity," as Lachmann approvingly
cites Shackle, %an neither predict nor be predicted."11

Regarding the first of Lachrnann's two contentionsthe impossibility of economic


theory-it should be noted from the outset that this thesi-ontrary to Lach-
mann's own claim, and in particular the self-congratulatory attitude found among
some of his younger disciplesis anydung but new and original, but represents
instead a return to Lachrnann's intellectual beginnings as a student of Werner
Sombart and the "historicist" teachings of the German Kothedersozialisten (and thus
most definitely has nothing whatsoever to do with Austrian ~conomics).'~
Ludwig von Mises, the twentieth century's foremost Austrian economist and
life-long critic of historicism, has thus characterized its doctrine: "The funda-
mental thesis of historicism is the proposition that . . . there is no knowledge but
that provided by history. . . . The honest historicist would have to say: Nothing
can be asserted about the future. Nobody can know how a definite policy will
work in the future. All we believe to know is how similar policies worked in the
past. Provided all relevant conditions remain unchanged, we may expect that the
future effects will not widely differ from those of the past. But we do not know
whether or not these relevant conditions will remain unchanged. Hence we
cannot make any prognostication about the-necessarily future--effects of any
measure considered. We are dealing with the history of the past, not with the
history of the future."13 That this is also an accurate description of Lachrnann's
position is made perfectly clear by Lachrnann's following comment on the so-
called Austrian theory of the trade cycle: "Here we have a body of anabcal thought
designed to meet the requirements set out above: to depict a recurrent pattern

n methodological views of Frank Knight in particular, see his The Ethics of6mpetition and
9 ~ the
Otber Erscys (New York: Harper Bros., 1935), and, idem, On the Hiswry and Method of Economics
(Chicago: University of Chicago Press, 1956).
1°Lachmann, The Market as an h n o m i c Process, p. 32.
II
.I I- Ibid., quoted in G.LS. Shackle, Dme in Economia (Amsterdam:North Holland, 1958), p. 105.
Austrians from Carl Menger onward considered the German historicists as anti-economists
and their intellectual foes. The historicists, in articular their leader Gustav Schmoller and his
successor Werner Sombart, amply reciprocated this animosity.
i 3 ~ i s e sTheoryand
, Hiswy, pp.'199, 203-4.
Hoppe: On Certainry and Uncenainy 63

of events with booms and depressions following each other in ceaseless succes-
sion. But can we really believe that agents witnessing these events will learn
nothing from them and act in successive cycles in identical fashion? Is it not more
likely that their action in each cycle will be affected by the lessons they have learnt
from its predecessors, even though, as always happens, different people learn
different lessons from the same events? Once we admit that people learn from
experience, the cycle cannot be reproduced time after time. These considera-
tions suggest that it may be better to give up the doubtful quest for a model of
the business cycle and to regard phenomena such as cyclical fluctuations in output
and prices simply as phenomena of history in the explanation of which changes
in human knowledge will naturally play a part, with the events of each successive
14
cycle requiring different, although often enough similar, explanations."
While in and of itself this does not yet prove Lachmann wrong, it is a first
step in the direction ofa rigorous refutation that the position taken by Lachmann
involves nothing less than an all-out social relativism-indeed: nihilism-that
cannot but immediately strike one as entirely counter-intuitive. The relativistic
consequences of historicism are hinted at clearly in the just quoted passage from
Mises, while they may appear somewhat obscured by Lachmann in restricting his
remarks to but one theory, the theory of the trade cycle (incidentally without
bothering to explain, even if only briefly, what the theory actually states). How-
ever, there can be no doubt whatsoever that the trade cycle theory is cited by
Lachmann as an example and that he actually believes his argument to be equally
applicable to all other economic theorems. In the same way and for the same
reason that there can be no such thing as the theory of the trade cycle, according
to Lachmann, there also can be no such thing as the theory of exchange, the
theory of prices, the theory of money, the theory of interest, the theory of wages,
the theory of socialism, the theory of taxation, the theory of wage and price
controls, or the theory of interventionism. What holds for the phenomenon of
cyclical fluctuations supposedly also holds for all other phenomena: that they
must be regarded as phenomena of history in the explanation of which changes
in human knowledge will naturally play a part, with each successive exchange,
price, use of money, interest, wage, socialism, tax, wage and price control, and
government intervention requiring different, although often enough similar, expla-
nations. But can we really believe this? Can we really believe, as Lachmann does, that
we cannot say anything "applying equally to future and past" exchanges, prices,
monies, or taxes? Can we really believe that, due to the possibility of learning, it may
no longer be true in the future that every voluntary exchange will-ante-be

I4~achmann,The Marker or an konornic Process, pp. 30-3 1.


64 Review ofAustrian Economics 10, No. 1 (1997)

beneficial to both exchangers, and that every coercive exchange such as a tax will
benefit one (the taxman) at the expense of the other (the taxed)? Can we really
believe that each successive socialist experiment requires a different explanation,
and that it is impossible to say anything applicable to each and every form of
socialism, so that as long as there exists no private ownership of the means of
production, and hence no factor prices, economic calculation (cost-accounting) will
be impossible and permanent misallocation (waste) will have to result? Can we really
believe that, as long as socialism is not actual4 abolished, this proposition may no longer
hold true, because agents can learn from experience and may no longer act in an
identical fashion? Can we really believe that if a central bank were to double the paper
money supply overnight, this would not, now and forever, lead to a drop in the
purchasing power of money as well as a systematic income redistribution in favor of
the central bank and the early receivers of the newly-created money at the expense
of those receiving it later or not at all? Can we really believe that if the minimum
wage were fixed today at one million dollars per hour and if this decree were
strictly enforced and no increase in the money supply were to take place, this
measure might not lead to mass unemployment and a breakdown of the division
of labor because people can learn from experience? To be sure, Lachmann believes
all of this, and it is easy to understand why some other people-taxmen, social-
ists, central bankers, and minimum wage legislators-would like us to believe as
he does. But it is difficult to imagine how anyone but Lachmann-includingeven
those who would personally benefit from us believing that the future effects of
various policies can never be known in advance-can actually consider any of
this seriously.
As already indicated in section I1 above, the fundamental logical error
involved in Lachmann's reasoning consists in the fact that it does not follow from
the proposition that human actors face an uncertain future that everything
IS
regarding our future must be considered uncertain. Nor does it follow from the
fact that humans can learn, and hence their actions may change in the course of
time, that everything concerning the future of human actions may possibly change
in the course of time. Quite to the contrary. To draw these conclusions, as Lachmann
does, is self-contradictory for evidently Lachmann claims to know for certain the
unhowability of future knowledge and, by logical extension, of actions. Yet then he
does h o w something about future knowledge and action. He must assume to know
something about knowledge and action as such. Likewise, in claiming to know that
humans are capable of learning and alteringtheir actions in accordance with what
they may learn, Lachmann must admit knowing something about man as such.

"see also Hoppe, Kritik der kausalwissensrh~dichenSozia~orschung,chap. 3, esp. p. 47.


Hoppe: On Certainty and Uncertainty 65

He must assume to know not only that man may change his future behavior, but
also that these changes are the result of a process oflearning; that is, that they are
the result of man being able to distinguish between success and failure, between
confirmation and falsification, and draw conclusions dependent upon such cate-
gorically distinct experiences; and hence, that all possible changes in the behavior
of man, unpredictable as their specific content may be, follow a predictable
pattern-a uniform and constant logic of human action and learning. To use a
~ e r f e c at n a l o g while it is true that I am unable to predict eveything that I will
--

say o r write in the future, this does not imply that I cannot predict anything about
my future speaking and writing. I can predict, and indeed I can predict with
perfect certainty, and regardless of whether I will speak o r write in English or
German, that, as long as I will speak o r write at all, in any language whatsoever,
all of my speaking and writing will have a constant and invariable logical (propo-
sitional) structure: that I must use identifyingexpressions, such as proper names,
and predicators to assert o r deny some specific property of the identified or
named object, for instance.I6 In the same way it holds that even though I cannot
predict what goals I may pursue in the future, what means I will deem appropri-
ate to reach these goals, and what other conceivable courses of action I will
choose to reject in order to do what I will actually do (my opportunity cost), I
can still predict that as long as I act at all, there will be goals, means, choices, and
costs; that is, I can predict the general, logical structure of each and every one
of my actions, whether past, present o r future. And this is precisely what
economic theory or, as Mises has termed it, praxeolou, is all about: providing
knowledge regarding actions as such and knowledge about the structure which
any future knowledge and learning must have by virtue of the fact that it invari-
ably must be the knowledge and learning of actors.
To be sure, the knowledge of the invariant logical structure of acting and
learning is acquired knowledge, too, as is all human knowledge. Man is not
endowed with it. However, once learned, the knowledge conveyed by praxeology
as well as that conveyed by propositional logic can be recognized as necessarily
t r u e - 4 priori valid-knowledge, such that no future learning from experience
could possibly falsify it. While all of my knowledge regarding the external world

I6see Paul Lorenzen, Normative Logic and Ethics (Mannheim: Bibliographischeslnstitut, 1969),
chap. 1. Lorenzen explains (p. 16): "I call a usage a convention if I know of another usage which I
could accept instead. . . . However, I do not know of another behavior which could replace the use
of elementary sentences. If I did not accept proper names and predicators, I would not know how
to speak at all. . . . Each proper name is a convention, . . . but to use proper names at all is not a
convention: it is a unique pattern of linguistic behavior. Therefore, I am going to call it 'logical'.
The same is true with predicators. Each predicator is a convention. This is shown by the existence
of more than one natural language. But all languages use predicators." See also Wilhelm Kamlah
and Paul Lorenzen, Logische Ropaedeutik (Mannheim: Bibliographisches Institut, 1968), chap. 1.
66 Review ofAustrian Economics 10. No. 1 (1997)

is, and forever will be tainted by uncertainty (it is not inconceivable that the law
of gravitation may no longer hold in the future or that the sun will not rise
tomorrow), my knowledge concerning the structure of my future action and
learning is and forever will be non-hypothetically true: it is inconceivable that,
as long as I am alive, I will not act and reach or not reach my goal and revise or
not revise my knowledge depending on the outcome of my actions. Learning is
the learning from success and failure, and there can be no learning of the fact
that there is no success or failure. Thus, writes Mises, "man as he exists on this
planet in the present period of cosmic history may one day disappear. But as long
as there are beings of the species Homo sapiens there will be human action of
the categorical kind praxeology deals with. In this restricted sense praxeology
provides exact knowledge of future conditions. . . . The predictions of praxeol-
ogy are, within their range of applicability, absolutely certain."17
How is it possible, then, especially in light of the fact that Lachmann was
familiar with Mises and his writings, that he could have committed an elementary
logical blunder such as not to recognize that it does not follow from the fact that
we are capable of learning that e v e y t h i n g about the future of human actions is
unknowable? How could he not recognize that only those aspects of our actions
which may actually be affected by learning can be considered unpredictable,
while those aspects that are a necessary part of any action and learning and thus
cannot be altered by future learning-the underlying logical structure of action
and learning itself-annot? The answer to this riddle lies in the fact that
although he considered himself a staunch opponent of the positivist philosophy,
Lachmann still fell prey to one of its fundamental misconceptions. Like Friedrich
A. Hayek, his second teacher, Lachmann, whether wittingly or not, accepted the
view of Hayek's friend and prot6g6 Karl R. Popper that all scientific knowledge
must be such that, in principle, it is falsifiable by experience, and that all
knowledge that is not falsifiable is not genuine knowledge at all but represents
merely empirically empty tautologies, i.e., arbitrary definitions (formalisms). It
is thus that Lachmann can write in response to the challenge posed to his thesis
of an unknowable future by Mises and his idea of a logic of action that "precisely
by virtue of the logical necessity inherent in it, it is impotent to engender
empirical generalizations. Its truth is purely abstract and formal truth. The
means and ends it connects are abstract entities. In the real world the concrete
means used and ends sought are ever-changing as knowledge changes and what
seemed worthwhile yesterday no longer seems so today. We appeal in vain to the

17
Ludwig von Mises, The Ultimore Foundation ojkonomic Science (Kansas City: Sheed Andrews
and McMeel, 1978), pp. 84-85.
Hoppe: On Certaing and U n c e n a i n g 67

logic of means and ends to provide us with support for empirical generaliza-
tions.""
But surely, as popular as this view of regarding all non-hypothetically true
propositions-such as the laws of propositional logic, for instance-as empiri-
cally-empty formalisms has become in the wake of the rise of the positivist
philosophy, it is completely fallacio~s.'~ In referring to highly-abstract entities
such as objects and properties, rather than concrete ones such as my cactus and
its red blossoms, I am still speaking about real phenomena. The term "tree" is
more abstract than the term "pine tree," but the former has no less an empirical
content than the latter. In the same vein, in saying something about ends, means,
exchange, money, o r interest-rather than about my desire to please my wife with
flowers, a trade of two oranges against three apples, US dollars, or my exchange of
two present socks for four socks three months hence-1 am still stating something
about real phenomena with an empirical content. Notes Mises, "if one accepts the
terminology of logical positivism and especially also that of Popper, a theory or
hypothesis is 'unscientific' if in principle it cannot be refuted by experience. Conse-
quently, all a prior] theories, including mathematics and praxeology, are 'unscientific.'
This is merely a verbal quibble. No serious man wastes his time in discussing such a
terminological question. Praxeology and economics will retain their paramount
significance for human life and action however people may classify and describe
them.n20
In light of Lachmann's multiple logical errors, one can now turn back to our
rhetorical questions raised in response to his claim of the impossibility of any and all
economic theory and prediction. The reason it appeared absurd that one should be
unable to predict anything regarding each and every voluntary exchange, tax, social-
ism, money supply increase, and minimum wage law, is that while man may learn
many things and alter his behavior in many ways, he is unable to experience and

IsLachmann, The Market as an Economic Prmess, p. 3 1; for the similar views of Hayek see his
"Economics and Knowfedge," in Friedrich A. Hayek, Individualism and Economic Order (Chicago:
University of Chicago F'ress, 1948).
19see Arthur Pap, Semantics and Necessoy T ~ t (New h Haven, Conn.: Yale University Press,
1958); Brand Blanshard, Reason andAnalysis (LaSalle, Ill.: Open Court, 1962); Friedrich Kambartel,
Erjahmng und S t d t u r (Frankfurt/M.:Suhrkamp, 1968); Hoppe, The Economics and Ethics ofprivate
Propen , chap. 6.
"Mises, The Ultimate Foundation ofEnnomic Science, p. 70. Equally incomprehensible as the
charge that praxeology is empirically empty because its propositions are non-falsifiable is the
charge brought against Mises and Menger by O'Driscoll and Rizw (The Economics of Erne and
Ignorance, p. 23), that the belief in the existence of "apodictic praxeological theoremsn and "exact
economic laws" implies the assumption of some sort of "rigid determinism!" And would one also
have to give up the belief in the existence of universal and unchanging laws of logic if one were to
adopt O'Driscoll's and Rizzo's indeterministic "dynamic subjectivism"?
68 Review ofAustrian Economics 10, No. 1 ( 1 997)

learn anything that is at variance with the laws of logic and the nature of man as
an actor. I may not be able to predict that I will engage in voluntary exchanges,
when, what it is that will be exchanged, o r the exchange ratio at which the goods
o r services in question will be traded, etc., because all of this may indeed be
affected by my and others' knowledge and change as this knowledge changes. But
I can predict with perfect certitude that f a voluntary exchange takes place,
regardless of where, when, what, and a t what exchange ratio, both exchange
partners must have had opposite preference orderings and must have expected
to benefit from the exchange. No possible learning can ever change this. Like-
wise, I may not be able to predict that o r when a socialist experiment will be
undertaken or discontinued. Nor will I ever be able to predict such an experi-
ment's many specific features. All of this may be affected by learning. But
regardless of whatever people may learn and how their learning may shape the
peculiar shape of socialism, I can'still predict with absolute certainty that as long
as one is in fact dealing with socialism, any and all economic calculation will be
impossible and permanent misallocations of production factors must result
because this consequence is already logically implied in what socialism is. Simi-
larly, I may not be able to forecast that a money will actually come into existence,
and it is certainly possible that mankind may one day revert back to barter. Nor
can I predict with certainty what specific kind of money will be employed in the
future. But I can predict with perfect certitude that if there is any money in use
at all, an increase in its supply must lead to a reduction in its purchasing power
below what it otherwise would have been. This follows simply from the defini-
tion of money as a medium ofexchange. Lastly, Lachmann also errs regarding the
example of the Austrian theory of the trade cycle. He claims that due to the fact
that businessmen can learn-they may hear of or read about Mises's the-
ory-they may possibly alter their future behavior in such a way that the effects
predicted by the theory will no longer ensue.21But such a claim simply involves
a misunderstanding of what the theory actually states. True enough, people can
learn from Mises, and this may actually prevent business cycles from occurring
at all, just as people may learn from Mises never to engage in a socialist experi-
ment in the first place. However, this is entirely beside the point, for the theory
states that ija bank creates additional paper-money credit, above and beyond the
credit made available by the public's voluntary savings, and ijthis additional credit is
in fact placed into the hands of borrowers and the interest rate is thus lowered
below what it otherwise would have been, i.e., the natural rate of interest, then,

' ' ~ u d w iLachmann,


~ 'The Role of Expectations in Economics as a Social Science," in idem,
Capital, Expectations, and the Market ROCPSI
(Kansas City: Sheed Andrews and McMeel, 1977).
Hoppe: On Certainty and Uncenaing 69

and only then, will there be first a boom--over-investment-and consequently


a bust-the systematic liquidation of some of the investments as malinvestment.
Whatever businessmen may learn after a credit expansion has actually taken
place cannot possibly affect this predicted outcome in the slightest, because an
intertemporal discoordination is already logically implied in the stated premises.
And if the if-clause is not fulfilled, then the theory of the trade cycle is not
22
refuted, of course. It simply does not apply.

Having rejected Lachmann's first contention of the impossibility of economic


theory applicable to past and future alike, and havingargued the case of Knight's
and in particular Mises's instead, not only of the possibility of such theory but,
even more strongly, of a priori theory and apodictic (non-hypothetical) prediction,
in this final section Lachmann's second contention-the "kaleidic" nature of the
social world and the haphazardous character of entrepreneurial prediction-will
have to be examined.
Even if the existence of a logic of action-praxeology-is admitted, as it
must be, it does not follow that the knowledge provided by it can render our
future certain. Praxeology allows us to predict with certainty some future events
and aspects of the world of human actions, but its range of applicability is strictly
limited. There are many events and aspects, and indeed far more of far greater
practical significance, about which praxeology has nothing to say. As Mises
explains, "there is, but for Robinson Crusoe before he met his man Friday, no
action that could be planned o r executed without paying full attention to what
the actor's fellow men will do. Action implies understanding other men's reac-
t i o n ~ . ""The
~ ~ task with which acting man, that is, everybody, is faced in all
relations with his fellows does not refer to the past; it refers to the future. To
know the future reactions of other people is the first task of acting man. . . . It is
obvious that this knowledge which provides a man with the ability to anticipate
to some degree other people's future attitudes is not a priori knowledge. The a
priori discipline of human action, praxeology, does not deal with the actual
content of value judgments; it deals only with the fact that men value and then
act according to their valuations. What we know about the actual content of
judgments of value can be derived only from experience."24 Quite apart from

"see Ludwig von Mises, "'Elastic Expectations' and the Austrian Theory of the Trade Cycle,"
Economica 10 (1943): 251-52; also George Selgin, "Raxeology and Understanding," Renew of
Austrian Economics 2 (1988): 54.
, Ultimate Foundotion $Economic Science, p. 49.
2 3 ~ i s e sThe
24
Mises, Theory and Histoy, p. 3 11.
70 Review ofAustrian Economics 10, No. 1 ( 1 997)

whatever praxeology, technology, and insurance can possibly teach us about the
future, then, Mises (as well as Knight) would agree with Lachmann that there
remains as one of mankind's most pressing problems the need to predict our
fellow men's concrete value judgments, the specific means they will choose to
bring their valued ends about, and their evaluations once the results of their
actions are in. And as has already been explained, they would also agree with
Lachmann that because humans are capable of learning and their learning may
affect their values, choices of means, and evaluations of outcomes, the positivist-
falsificationist prescriptions of how to deal with this problem are logically inap-
propriate and impotent. But what else can we do? Or can nothing be done to deal
with this aspect of uncertainty?
While it may appear that Lachmann's answer to these questions is similar to
Mises's-both refer throughout their writings to the same group of philosophers
of the Geisteswiaenschajen and the social sciences, most notably Max Weber and
Alfred Schuetz, and both mention the method of understanding (Verstehen)-this
impression is mistaken (although due to Lachmann's generally less-than-clear
writing and a considerable amount of hedging on his part, this issue is admittedly
somewhat difficult to decide).25For whereas Mises's answer to the above questions
is an unambiguous yes, there exists a method of dealing with the ineradicable
uncertainty of future human choices, and even though this method is not, and never
can be, perfect, by not availing ourselves of it we would rob ourselves of the very
intellectual tool of successful action and encounter more frequent disappoint-
ments than otherwise would be the case. Lachmann seems to hold precisely this:
that regardless of what we do, our successes or failures in predicting our fellow
men's future actions are purely random.
As for Mises's position, it is essential to recognize that-and why-he
rejects the view that the future of human actions may be considered random or
haphazard. To entertain such a view can mean one of two things. It can mean that
we know literally nothing. But this is clearly false, for we do know something: we
know that the future events in question are human actions and will display the
structure inherent in each and every action, and hence, that while our knowledge
26
may be deficient, we are still in a position to say more than simply ignoramus.
Or it can mean that with regard to the problem of future human choices, we
know everything about the behavior of the whole class of events, but we do not
know anything about any singular choice except that it is an element of the entire
class of human choices. The view that human actions may be regarded as in-
stances of "class probability" has already been rejected above. We do not, and
or a similar assessment see Selgin, "Raxeology and Understanding."
Mises, Human Action, p. 107.
Hoppe: On Certainty and Uncertainty 71
never will, know everything about the whole class of human actions. But from
this it does not follow that we will have to confess complete ignorance regarding
singular human choices (apart from the known fact that they are all choices). In
fact, we d o know something (more) about each singular event: we know that each
singular event is the result of individual actors acting based on individual knowl-
edge subject to changes by individual learning, such that each event as it unfolds
in human history past and future, must be conceived of as a unique, and non-re-
peatable event (with each event being in a class by itself); and we also know that
in order to grasp the past o r anticipate the future actions of our fellow men, we
will have to pay attention and try to understand their individual knowledge, their
individual values and personal know-how. It is thus that Mises characterizes the
epistemological task faced by man in his dealings with his fellows as one of "case
probability." "Case probability (or the specific understanding of the sciences of
human action) . . . means: We know, with regard to a particular event, some of
the factors which determine its outcome; but there are other determining factors
about which we know nothing."27 Categorically different as this situation of case
probability is from that of class probability, it is hardly a situation in which the
future is random o r haphazard. Indeed, in some respect we are in a better (not
worse) epistemological position in the field of human history, past and future,
than we are in the field of natural events, of technology and insurance. For in the
latter field we are categorically precluded from the possibility of understanding.
Each singular event must be treated as a member of a class ofhomogeneous, except
for their class membership indistinguishable singular events. In contrast, in the
field of past and future human history, we are capable of distinguishing between
every singular event (each event can be treated as heterogeneous); and to improve
our grasp of the past, and our anticipations of the future actions of our fellows,
we know and are capable of learning something about the individual causes-the
personal knowledge-uniquely affecting the outcome of each and every singular
human event (with each event deserving of its own special attention).
While neither random nor haphazard, then, the task of anticipating our
fellows' actions based or1 an understanding of their individuality is not without
its inescapable difficulties and imperfections, for every understanding of an
individual is always an understanding of his past values and knowledge. However,
as Mises was quoted above, our first task in life is to know the&ture reactions of

" ~ i s e s ,Humon Action, pp. 107-10. Ibid., p. 59, Mises notes, that "historical events have one
common feature: they are human action. History comprehends them as human actions; it conceives
their meaning by the instrumentality cognition and understands their meaning in looking at their
individual and unique features. What counts for history is always the meaning of the men
concerned: the meaning that they attach to the state of affairs they want to alter, the meaning they
attach to their actions, and the meaning they attach to the effects produced by the actions.
72 Review ofAustrian Economics 1 0 , No. 1 ( 1 997)

other people. "Knowledge of their past value judgments and actions, although
indispensable, is only a means to this end."*' Thus, in all of our attempts of
anticipating the future, in addition to an understanding of the past actions of a
given individual, we must also necessarily make a judgment regarding the relative
stability or instability of the various parts of his system of values and knowledge
as displayed in the past; that is, we must form an opinion about his personality or
character. As Mises explains, we must "assume that, by and large, the future
conduct of people will, other things being equal, not deviate without special
reason from their past conduct, because we assume that what determined their
past conduct will also determine their future conduct. However different we may
know ourselves to be from other people, we try t o guess how they will react to
changes in their environment. Out of what we know about a man's past behavior,
we construct a scheme about what we call his character. We assume that this
character will not change if no special reasons interfere, and, going a step farther,
we even try to foretell how definite changes in conditions will affect his reac-
t i o n ~ . " 'Likewise,
~ if we are concerned about the future behavior of groups of
individuals (rather than only a single one), we cannot but classify individuals
according to the similarity o r dissimilarity of their character or personality; that
is, we cannot but form ideas of group c h a r a c t e r s i d e a l types-and sort indi-
viduals according to their membership in such types. "If an ideal type refers to
people," explains Mises, "it implies that in some respect these men are valuing
and acting in a uniform o r similar way. When it refers to institutions, it implies
that these institutions are products of uniform o r similar ways of valuing and
acting o r that they influence valuing and acting in a uniform or similar way."30
Our anticipations, based on an understanding of the past, and the construc-
tion of character and ideal types and the classification of individuals and. groups
into such types, are necessarily hypothetical, o r rather, tentative predictions. In
ascribing a certain character to an actor, we attempt to reduce the uncertainty
surrounding his future behavior. We form a tentative judgment concerning more
o r less stable parts of his personality and predict that the future changes in his
behavior, whatever they may be, will be changes in line with his character, i.e.,
changes which follow a general-predictable-pattern. Our prediction may
turn out to be successful o r not. We may have misclassified the actor(s). Or,

2 8 ~ i s e sTheov
, and History, p. 3 1 1 .
2 9 ~ i s e sThe
, Ultimore Foundation ofEconomic Science, pp. 49-50; and he continues then to say:
"Compared with the seemingly absolute certainty provided by some of the natural sciences, these
assumptions and all the conclusions derived from them appear as rather shaky; the postivists may
ridicule them as unscientific. Yet they are the only available approach to the problems concerned
and indispensable for any action to be accomplished in a social environment."
3 0 ~ i s e sTheoiy
, and History, p. 3 16.
Hoppe: On Certainy and Uncertainty 73
contrary to our judgment, the actor(s) may change their very character; and
indeed, over the course of time some character types may die out and new ones
may emerge, requiring the development of a different and changing system of
classification. O r our character constructs may turn out too abstract o r too
specific; that is, even though they may yield correct predictions, we may find, in
retrospect, that what they predict is of lesser importance than anticipated. The
prediction may turn out to say too little of much importance, or too much of
little importance, requiring further typological revisions. Moreover, whether we
evaluate our predictions as successful or not, the meaning of success and failure
is necessarily ambiguous. In the natural sciences, success means that so far your
hypothesis has not been falsified; apply it again; and failure means that your
hypothesis as it stands is wrong; change it. In our dealings with our fellow men,
the implications are not, and never can be, as clear-cut. Maybe our prediction
was wrong because some people, as can happen sometimes, acted out of charac-
ter-in this case we would want to use our hypothesis again even though i t had
been apparently falsified. O r maybe our prediction was successful, but the
individual in question has meanwhile undergone a change in his character-in
this case we would not want to use our hypothesis again even though it had just
been seemingly confirmed. O r maybe the actor in question knew our prediction
and deliberately acted so as to confirm o r falsify our hypothesis, in which case
we might or might not want to change our future prediction. Every success and
every failure, then, bears only inconclusive results and necessitates another
tentative judgment, a new and updated understanding of the actors concerned
and a renewed assessment of their characters in light of their most recent actions,
and so on. Thus, in contrast to the situation in the natural sciences, where success
and failure have an unambiguous meaning, where we are allowed to conclude that
what was false in the past will also be so in the future and what worked once will
likely work again, and where we may thus successively acquire a growing stock of
knowledge, in dealing with the problem of anticipating our fellow men's actions,
we can never rest on our past laurels but must always start again fresh and judge
the applicability of our past knowledge anew, we can never possess a stock of
knowledge that we may blindly rely upon in the future.
Nothing in this-Mises's-view regarding the nature of human history, past
and future, is likely to strike anyone as new or revolutionary Indeed, if it were not
for the fact of the very different positivistic view of the matter, it would appear almost
trivial and a self-evident truism. As Mises notes, "the methods of scientific inquiry
[in the social sciences] are categorically not different from the procedures applied
by everybody in his daily mundane comportment. They are merely more refined
and as far as possible purified of inconsistencies and contradictions. Under-
74 Review ofAustrian Economics 1 0 , No. 1 ( 1 9 9 7 )

standing is not a method of procedure peculiar only to historians. It is practiced


by infants as soon as they outgrow the merely vegetative stage of their first days
and weeks. There is not conscious response of man to any stimuli that is not
31
direct by understanding. It is not entirely surprising, then, that Lachmann, too,
while his methodological considerations (in distinct contrast to Mises's) are
largely unsystematic and marred by an abundance of metaphorical expression
and a lack of analpcal rigor, should at times appear to be in essential agreement
with this commonsensical view as embraced by Mises. Lachmann, too, makes
32
frequent reference to understanding, ideal types, and institutions. Yet despite
such apparent similarities, Mises and Lachmann reach completely different
conclusions as regards the nature of human-entrepreneurial-uncertainty.
Whereas for Mises the result of the method of understanding is moderate
uncertainty, for Lachmann it is radical uncertainty. How is this to be explained?
In putting the best possible-because it is the most consistent-face on
Lachmann, the disagreement between his and Mises's position may be said to
boil down to one regarding a contingent-empirical-fact. There is agreement
on the method to be employed; there is disagreement only on how successful this
method actually is-remarkably so and most of the time, as Mises would con-
tend, or insignificantly and only occasionally so, as would Lachmann. Instead of
disagreeing on principle, on methodology, they only disagree on a matter of fact:
whether the social world is, in fact, kaleidic or not. But what of the facts, then?
Although the empirical question of whether we inhabit a kaleidic world or not
may appear to be of rather minor importance, given the fact that we must deal
with it in any case and we have nothing but understanding available to us to do
so, and although questions of this nature may easily degenerate into idle semantic
quibbles such as whether a glass of water is half empty or half full, empirical
questions-disagreements on matters of fact-are accessible to empirical re-
search and can, in principle, be decided upon based on the observation of the
facts. In the bright light of empirical facts, however, Lachmann's theory of radical
uncertainty fares no better than in the pale light of logic.
So as to generate a radically-uncertain world of kaleidic change, Lachmann
must assume, as a matter of empirical fact, that individual actors do not possess
any such thing as a character. Understanding, as has been explained, is always
understanding of past actions. In order to be able to successfully predict future
actions based on an understanding of past actions, it is necessary that one assume
that the past and the future are somehow related-not in the sense that the past

31
Mises, The Ultimate Foundation ofEconomic Science, p. 48.
3 2 ~ e Lachmann,
e The Market as an Economic Process, pp. 34-42.
Hoppe: On Certainty and Uncertainty 75

would determine the future, but rather in the sense that the past values and
know-how of an individual (which determined his past actions) shape and
constrain his future values and know-how (which determine his future actions).
Indeed, if this were not assumed to be the case and an individual's past values
and actions were viewed as completely unrelated to his future values and actions,
the study of history would be entirely useless. We only stud y an individual's past
because we believe that this knowledge is valuable in helping us anticipate
somethin g regarding his future conduct. Without this belief, the study of histor y
must be regarded as a sheer waste of time. In Mises's view, the link connecting
an individual's past with his future and the empirical reason for our concern for
the study of history is the existence of individual characters and personalities. It
is the existence ofa person's character, changing though it may be over the course
of time, that assures the continuity of change: patterned social change instead of
kaleidic flux. Accordingly, only if individual actors were assumed to be com-
pletely-disjointed personalities, such that my actions tomorrow were always
entirely unrelated and unaffected by my actions today or yesterday, could Lach-
mann's scenario of radical uncertainty ever become reality. While this would indeed
be a nightmare if it ever existed, it can safely be said that it has no resemblance
whatsoever either to us or to the world we inhabit. Indeed, it is difficult to imagine
how a world of disjointed personalities could be reconciled even with human biolou.
Solely on account of our physical bodily nature-which is a contingent fact, but as
long as we are alive a relatively stable contingency--we cannot possibly be quite
like Lachmann thinks we are, o r else we would quickly die out.
As a matter of fact, actors, from the earliest stages of infancy on, display a
personal character, they possess a personal identity and conceive of their past and
future as forming a whole: their personal life history. We do not start building a
house today and then, tomorrow, without any special reason, do something
entirely unrelated. Rather, our past actions influence, circumscribe, and con-
strain our future actions. We do not always begin from scratch, but most of the
time we continue what was already begun and planned as a part of a lengthy
sequence of actions. And even if we abandon one such integrated plan, we
typically adopt another one. Otherwise, if there were no such continuity in our
actions, it would be impossible to explain one of the most striking features of
human life-the existence and continued employment of a stock of capital
goods. To produce a capital good is to begin something stretching into the future,
and to employ an existing capital good is to continue something begun in the
past. If the future were indeed unrelated to the past, it should be expected that
capital goods, insofar as they come into existence at all, will just as quickly be
abandoned in the future as they may have been adopted in the past. However,
76 Review of Austrian Economics 10, No. 1 ( 1 99 7)

while there exist some ruins of abandoned capital goods, most of yesterday's
capital goods are still employed today and tomorrow-which is empirical proof
of the past's continuing influence o n the future. As the author of a book on
capital, Lachmann ;fall people should have been able to recognize this, and this
alone should have given him reason enough to discard his thesis of kaleidic
change and radical uncertainty.
Moreover, equally difficult for Lachmann to explain would be another fun-
damental feature of human history-the existence of enduring differences
among various individuals in their ability to forecast the future; that is, not only
the fact that I may be better able to predict the actions of A, B, and C, while you
may be better able to predict those of D, E, and F, but also the fact that you and
I, confronted with one and the same group of individuals G, H, and J, may display
lastingly-different forecasting abilities. From Mises's view these facts pose no
problem. Different individuals d o not, and cannot possibly know (understand)
everyone's past equally well. They know different individuals differently well,
and accordingly, their forecasting ability should be expected to be different
dependent on whose actions need to be predicted. Likewise, assuming that
different individuals are concerned with forecasting the actions of the same
individual o r group of individuals, it should be expected that there will be
systematically-and hence enduringly-different success rates among these
forecasters. For in Mises's view, every prediction requires not only an under-
standing of the past but also a tentative judgment, influenced but not determined
by the knowledge of the past, as to the underlying character structure of the
individual adtors concerned. As an essentially cognitive task involving different
and complex intellectual operations, nothing should be less surprising than the
fact that different individuals, with strikingly-different talents in all other areas
of intellectual endeavor, will also perform differently when it comes to predicting
their fellow men. However, if an individual's past and future were indeed unre-
lated, as Lachmann believes is the case, then everyone should be expected to
predict everyone else's behavior equally well (or badly). A person with an
understanding of an individual's past actions should not be able to predict his
future actions any more successfully than someone else not so acquainted with
the individual in question. Because the past is unconnected to the future, not
knowing it cannot make a difference in our forecasting abilities. And since
without our knowledge of past actions there is nothing left to go on to form a
character judgment, we are all equally ignorant and without a rudder; hence,
there also should be no lasting difference in our rate of success o r failure.
Successes and failures should be expected to be randomly distributed among
actors and personal fortunes to dissipate as quickly as they are found.
Hoppe: On Certainty and Uncenaing 77

It is almost needless to say that none of this fits historical reality. Based on
my long understanding of my wife, for instance, 1 can anticipate her actions and
reactions in almost all foreseeable circumstances; and vice versa, she can predict
me almost to perfection. There are few if any surprises, and probably no one else
could predict us better than we can predict each other. Likewise, I can predict,
with great precision and better than almost everybody else, the behavior of my
children, while they have (still) considerably more difficulty understanding me
and my character. Similarly, 1 can anticipate better than almost anybody else the
actions and reactions of many of my family and friends under a great variety of
circumstances, and they, knowing me, can successfully predict many or even most
of my reactions. There is nothing radical or kaleidic about the uncertainty
involved. As well, I know quite a bit about the history of men and women,
Germans, Austrians, Turks, Americans, Italians, Mexicans, Protestants, Catho-
lics, Jews, Blacks, Asians, university professors, politicians, businessmen, private
and public employees, and so on, and in many respects I can predict the behavior
of the members of these groups very successfully, and certainly more successfully
than the average person. Moreover, as far as predictions about the behavior of
one and the same (group of) individual(s) by different predictors are concerned,
even if all predictors have equal access to the record of past events and can base
their prediction on an understanding of this past, they are most definitely not
equally successful in their predictions. Most importantly, in the narrower field of
capitalist-entrepreneurship, where forecasters must estimate their present and
current production costs and form a judgment regarding future consumer de-
mand in order to successfully complete an anticipated exchange of present
money against future money, and where there exists a set of objective criteria for
success-profit and loss, continued operation and bankruptcy, and growth,
stagnation, or decline of capital values-the degree of success among different
individuals is strikingly different. While many of those who try fail and drop from
the rank of a capitalist-entrepreneur to become involved in less risky and intel-
lectually-demanding tasks, many others succeed to stay in business year after
year, and some have succeeded in accumulating great fortunes during their life,
and even to bring up heirs capable of preserving or enhancing their fortune
beyond their own lifetime. This empirical fact, too, stands in open contradiction
to the idea of kaleidic change and rather confirms the great cognitive value of the
method of understanding (even more so in light of the fact that the superior
predictive capability of the capitalist-entrepreneurs simultaneously reduces the
uncertainty facing all of their employees by providing them with a present
income even if they themselves could not have correctly anticipated the future
demand for their own line of work).
78 Review ofAustrian Economics 10, No. 1 ( 1 997)
1
Certainly all of this-the predictive power of the method of understanding
as manifested in the empirical facts of capital formation and maintenance, of
successful everyday-life entrepreneurship (forecasting of family, friends, col-
leagues, and acquaintances), and of enduring business successes-in conjunc-
tion with the apodictic certitude provided by praxeology and the wide-ranging
practical certainty afforded by technology and insurance sflould be more than
sufficient to dispel all talk about radical uncertainty and kaleidic social change as
either contradictory and meaningless or patently false.
FREE MARKET TRANSPORTATION:
DENATIONALIZING THE ROADS*

by Walter Block
Department of Economics
Rutgers University, Newark

Introduction
Were a government to demand the sacrifice of 46,700 citizens' each year,
there is no doubt that an outraged public would revolt. If an organized
religion were to plan the immolation of 523,335 of the faithful in a decade,'
there is no question that it would be toppled. Were there a Manson-type cult
that murdered 790 people to celebrate Memorial Day, 770 to usher in the
Fourth of July, 915 to commemorate Labor Day, 960 at Thanksgiving, and
solemnized Christmas with 355 more deaths,3 surely The New York Times
would wax eloquent about the carnage, calling for the greatest manhunt this
nation has ever seen. If Dr. Spock were to learn of a disease that killed 2,077
children4 under the age of five each year, or were New York City's Andrew
Stein to uncover a nursing home that allowed 7,346 elderly people to die
a n n ~ a l l y ,there
~ would be no stone unturned in their efforts to combat the
enemy. To compound the horror, wereprivate enterprise responsible for this
butchery, a cataclysmic reaction would ensue: investigation panels would be
appointed, the justice department would seek out antitrust violations, com-
pany executives would be jailed, and an outraged hue and cry for nationali-
zation would follow.
The reality, however, is that the government is responsible for such
slaughter-the toll taken on our nation's roadways. Whether at the local,
state, regional, or national level, it is government that builds, runs, manages,
administers, repairs, and plans for the roadway network. There is no need
for the government to take over; it is already fully in charge, and with a
vengeance. I believe there is a better way: the market place. Explaining how
a free market can serve to provide road and highway service, as it has
furnished us with practically every other good and service at our disposal, is
the objective of this article.

* The author wishes to express a debt af gratitude to Charles G. Koch and Edward H. Crane 111
of the Cato Institute, without whose efforts this work could not have been undertaken.
209
210 THE JOURNAL OF LIBERTARIAN STUDIES

Before dismissing the idea as impossible, consider the grisly tale of


government road management. Every year since 1925 has seen the death of
more than 20,000 people. Since 1929, the yearly toll has never dropped
below 30,000 per year. In 1962, motor vehicle deaths first reached the 40,000
plateau and have n o t since receded below that level. T o give just a hint of the
callous disregard in which human life is held by the highway authorities,
consider the following statement about the early days of government high-
way design and planning:

The immediate need was to get the country out of the mud, to get a
connected paved road system that would connect all county seats and
population centers with mudless, dustless roads. These were the pioneer-
ing years. Safery, volume, and traffic operarions were nor considereda
problem. But by the middle thirties there was an awakening and a
recognition that these elements were vital to efficient and safe operation
of the highway system. [Emphasis added.16

By the "middle thirties," indeed, nearly one-half million people had fallen
victim to traffic fatalities.'
Rather than invoking indignation on the part of the public, government
management of the roads and highways is a n accepted given. Apart from a
Ralph Nader, who only inveighs against unsafe vehicles (only a limited part
of the problem), there is scarcely a voice raised in opposition.
The government seems t o have escaped opprobrium because most people
blame traffic accidents on a host of factors other than governmental
mismanagement: drunkenness, speeding, lack of caution, mechanical fai-
lures, etc. Typical is the treatment undertaken by Sam Peltzman,x who lists
n o less than thirteen possible causes of accident rates without even once
mentioning the fact of government ownership and management.

Vehicle speed . . . alcohol consumption . . . the number ofyoungdrivers


. . . changes in drivers' incomes. . . the money costs of accidents. . . the
average age of cars . . . the ratio of new cars to all cars (because it has
been suggested that while drivers familiarize themselves with their new
cars, accident risk may increase) . . . trafic density. . . expenditures on
traffic-law enforcement by state highway patrols . . . expenditures on
roads . . . the ratio of imports to total cars (because there is evidence that
small cars are more lethal than large cars if an accident occurs) . . .
education of the population . . . and the availability of hospital care
(which might reduce deaths if injury occurs).

Further, David M. Winch cites another reason for public apathy: the
belief that "[mlany persons killed on the roads are partly to blame for their
death . . ."9 True, many victims of road accidents are partly responsible. But
this in n o way explains public apathy toward their deaths. For people killed
in New York City's Central Park during the late evening hours, are also a t
FREE MARKET TRANSPORTATION 21 1

least partially to blame for their own deaths; it takes a monumental indiffer-
ence, feeling of omnipotence, absent-mindedness or ignorance to embark
upon such a stroll. Yet the victims are pitied, more police are demanded, and
protests are commonly made.
The explanation of apathy toward highway mismanagement that seems
most reasonable is that people simply d o not see any alternative to govern-
ment ownership. Just as no one "opposes" or "protests" a volcano, which is
believed to be beyond the control of man, there are very few who oppose
governmental roadway control. Along with death and taxes, state highway
management seems to have become an immutable, if unstated, fact. The
institution of government has planned, built, managed and maintained our
highway network for so long that few people can imagine any other work-
able possibility. While Peltzman puts his finger on theproximate causes of
highway accidents, such as excessive speed and alcohol, he has ignored the
agency, government, which has set itself up as the manager of the roadway
apparatus. This is akin to blaming a snafu in a restaurant on the fact that the
oven went out, or that the waiter fell on a slippery floor with a loaded tray.
Of course the proximate causes of customer dissatisfaction are uncooked
meat or food in their laps. Yet how can these factors be blamed, while the
part of restaurant management is ignored? It is the restaurant manager's job
to insure that the ovens are performing satisfactorily, and that the floors are
properly maintained. If he fails, the blame rests on his shoulders, not on the
ovens or floors. We hold the trigger man responsible for murder, not the
bullet.
The same holds true with highways. It may well be that speed and alcohol
are deleterious to safe driving; hut it is the road manager's task to ascertain
that the proper standards are maintained with regard to these aspects of
safety. If unsafe conditions prevail in a private, multi-story parking lot, or in
a shopping mall, or in the aisles of a department store, the entrepreneur in
question is held accountable. It is he who loses revenue unless and until the
situation is cleared up. It is logically fallacious to place the blame for
accidents on unsafe conditions, while ignoring the manager whose responsi-
bility it is to ameliorate these factors. It is my contention that all that is
needed to virtually eliminate highway deaths is a non-utopian change, in the
sense that it could take place now, even given our present state of knowl-
edge, if only society would change what it can control: the institutional
arrangements that govern the nation's highways.

Answering the Charge "Impossible"


Before I explain how a fully free market in roads might function, it appears
appropriate to discuss the reasons why such a treatment is likely not to
receive a fair hearing.
212 THE JOURNAL OF LIBERTARIAN STUDIES

A fully private market in roads, streets, and highways is likely to be


rejected out of hand, first, because of psychological reasons. The initial
response of most people goes something as follows: "Why, that's impossible.
You just can't d o it. There would be millions of people killed in traffic
accidents; traffic jams the likes of which have never been seen would be an
everyday occurrence; motorists would have to stop every twenty-five feet
and put one-hundredth of a penny in each Little old lady's toll box. Without
eminent domain, there would be all sorts of obstructionists setting up
roadblocks in the oddest places. Chaos, anarchy, would reign. Traffic would
grind to a screeching halt, as the entire fabric of the economy fell about our
ears."
If we were to divide such a statement into its cognitive and psychological
(or emotive) elements, it must be stated right at the outset that there is
nothing at all reprehensible about the intellectual challenge. Far from it.
Indeed, if these charges cannot be satisfactorily answered, the whole idea of
private roads shall have to be considered a failure.
But there is also an emotive element which is responsible, perhaps, not for
the content of the objection, but for the hysterical manner in which it is
usually couched and the unwillingness, even, to consider the case. The
psychological component stems from a feeling that government road ma-
nagement is inevilable and that any other alternative is therefore unthink-
able. It is this emotional factor that must he flatly rejected.
We must realize that just because the government has always L0 built and
managed the roadway network, this is not necessarily inevitable, the most
efficient procedure, nor even justifiable. On the contrary, the state of affairs
that has characterized the past is, logically, almost entirely irrelevant. Just
because "we have 'always' exorcised devils with broomsticks in order to cure
disease" does not mean that this is the best way.
We must ever struggle to throw off the thralldom of the status quo. T o
help escape "the blinds of history" consider this statement by William C.
Wooldridge:
Several years ago I was a student at St. Andrews. University in
Scotland, and I found that placing a telephonecall constituted one of the
environment's greatest challenges. Private phones were too expensive to
be commonplace, so a prospective telephoner first had to accumulate
four pennies for each call he desired to make, a project complicated by
the absence of any nearby commercial establishment open beyond the
hour of six or seven. Next, the attention of an operator had to be
engaged, in itself a sometimes frustrating undertaking, whether because
of inadequate manpower or inadequate enthusiasm on the switchboard I
never knew. Finally, since the landward side of town apparently boasted
no more telephones than the seaward, a long wait frequently followed
even a successful connection, while whoever had answered the phone
FREE M A R KET TRANS PO RT ATIO N 213

searched out the party for whom the call was intended. A few repetitions
of this routine broke my telephone habit altogether, and I joined my
fellow students in communicating in person or by message when it was
~~~~~ ~
-
feasible.~.and not communicatine at all when it was not.
Nevertheless, the experience rankled, so I raised the subject one night
in the cellar of a former bishop's residence, which now accommodates
the student union's beer bar. Why were the telephones socialized? Why
weren't thev . a .orivatelv owned utilitv. since there was so little to lose in
the way of service by denationalization?
The reaction was not, as might he expected, in the least defensive, but
instead positively condescending. It should he self-evident to even a
chauvinistic American that as important a service as the telephone
system could not he entrusted to private business. It was inconceivable
to operate it for any other than the public interest. Who ever had heard
of a private telephone company?
That incredulity slackened only slightly after a sketchy introduction to
Mother Bell (then younger and less rheumatic than today), hut at least
the American company's example demonstrated that socialized tele-
-
nhone service was not a n invariable eiven in the eauation of the universe.
My friends still considered the private telephone idea theoretically
misbeeotten and ooliticallv. urevosterous,
. . hut no longer could it remain
literaliy inconceivable, for there we all were sitting around a table in the
bishop's basement talking about it. It had been done. It might-heaven
forfend-be done again. The talk necessarily shifted from possibility to
desirability, t o what lawyers call the merits of the case.
Like the St. Andrews students, Americans show a disposition to
accept our government's customary functions as necessarily the exclu-
sive province of government; when city hall has always done something,
it is difficult t o imagine anyone else doing it.
When an activity is being undertaken for the first time, the overation
of the Telstar comkunicat&s satellite, for instance, people keenly feel
and sharply debate their option for public or private ownership. Discus-
sion of the costs and advantages of each alternative accompanies the
final choice. But once the choice is made and a little time passes, an aura
of inevitability envelops the status quo, and consciousness of any alter-
native seeps away with time.
Todav. most Americans nrobablv feel the teleeranh naturallv belongs
within ihe private sphere, and few doubt the ~os;Office shouldnaturaiy
be a ~ u b l i cmonooolv.
. . "Naturallv." however. in such a context means
only that's-the-way-it's-heen-for-as-long-as-wean-remember, an Amer-
icanized version of Pope's declaration that "Whatever is is right." Yet
few could think of a convincing a priori rationale for distinguishing the
postal from the telegraphic mode of communication. At least one
Postmaster General could not: in 1845 his Annual Report prophesied
intolerable competition from the telegraph and suggested it might ap-
orooriatelv be committed to the government. At that earlv -
. staee in its
bisiory, t i e telegraph might c o ~ e i v a h l yhave become a government
monooolv for the same reasons the Post Office alreadv was. but the mere
passage of time has obliterated any consideration ofwhet'her they were
good reasons or bad reasons."
214 THE JOURNAL OF LIBERTARIAN STUDIES

I n advocating a free market in roads, on one level, we shall be merely


arguing that there is nothing unique about transportation; that the economic
principles we accept as a matter of course in practically every other arena of
human experience are applicable here too. O r a t the very least, we cannot
suppose that ordinary economic laws are nol apropos in road transportation
until after the matter has been considered in some detail.
Says Gabriel Roth:
. . . [Tlhere is a[n] approach to the problem of traffic congestion-the
economic approach-which offers a rational and practical solution. . . .
The first step is to recognize that road space is a scarce resource. The
second, to apply to it the economic principles that we find helpful in the
manufacture and distribution of other scarce resources, such as electric-
ity or motor cars or petrol. There is nothing new or unusual about these
principles, nor are they particularly difficult. What isdifficull is ro applj'
them ro roads, probablj' because we have aN been broughr up to regard
roads as community assetsfreely available lo all comers. The difficulty
does not lie so much in the technicalities of the matter, but rather in the
idea that roads can usefully be regarded as chunks of real estate.
[Emphasis added.]'Z

Unfortunately, even those economists who, like Roth, call explicitly for a
consideration of the similarities between roads and other goods are unwill-
ing to carry the analogy through to its logical conclusion: free enterprise
highways and streets. Instead, they limit themselves to advocacy of road
pricing, but to be administered, always, by governmental authorities.
What reasons are there for advocating the free market approach for the
highway industry? First and foremost is the fact that the present government
ownership and management has failed. The death toll, the suffocation
during urban rush hours, and the poor state of repair of the highway stock,
are all eloquent testimony t o the lack of success which has marked the reign
of government control. Second, and perhaps even more important, is a
reason for this state of affairs. It is by no means an accident that government
operation has proven to be a debacle, and that private enterprise can succeed
where government has failed.
It is not only that government has been staffed with incompetents. The
roads authorities are staffed, sometimes, with able management. Nor can it
be denied that a t least some who have achieved high rank in the world of
private business have been incompetent. The advantage enjoyed by the
market is the automatic reward and penalty system imposed by profits and
losses. When customers are pleased, they continue patronizing those mer-
chants who have served them well. These businesses are thus allowed to earn
a profit. They can prosper and expand. Entrepreneurs who fail to satisfy, o n
the other hand, a r e soon driven to bankruptcy.
This is a continual process repeated day in, day out. There is always a
FREE MARKET TRANSPORTATION 215

tendency in the market for the reward of the able, and the deterrence of
those who are not efficient. Nothing like perfection is ever reached, but the
continual grinding down of the ineffective, and rewarding of the competent,
brings about a level of managerial skill unmatched by any other system.
Whatever may be said of the political arena, it is one which completely lacks
this market process. Although there are cases where capability rises to the
fore, there is no continual process which promotes this.
Because this is well known, even elementary, we have entrusted the market
to produce the bulk of our consumer goods and capital equipment. What is
difficult to see is that this analysis applies to the provision of roads no less
than to fountain pens, frisbees, or fishsticks.

A Free Market in Roads


Let us now turn to a consideration of how a free market in roads might
operate.'' Along the way, we will note and counter the intellectual objections
to such a system. Alltransport thoroughfares would be privately owned: not
only the vehicles, buses, trains, automobiles, trolleys, etc., that travel upon
them, but the very roads, highways, byways, streets, sidewalks, bridges,
tunnels, crosswalks themselves upon which journeys take place. The transit
corridors would be as privately owned as is our fast food industry.
As such, all the usual benefits and responsibilities that are incumbent
upon private enterprise would affect roads. The reason a company or
individual would want to build or buy an already existing road would be the
same as in any other business-to earn a profit. The necessary funds would
be raised in a similar manner-by floating an issue of stock, by borrowing,
or from past savings of the owner. The risks would be the same-attracting
customers and prospering, or failing to d o so and going bankrupt. Likewise
for the pricing policy; just as private enterprise rarely gives burgers away for
free, use of road space would require payment. A road enterprise would face
virtually all of the problems shared by other businesses: attracting a labor
force, subcontracting, keeping customers satisfied, meeting the price of
competitors, innovating, borrowing money, expanding, etc. Thus, a highway
or street owner would he a businessman as any other, with much the same
problems, opportunities, and risks.
In addition, just as in other businesses, there would be facets peculiar to
this particular industry. The road entrepreneur would have to try to contain
congestion, reduce traffic accidents, plan and design new facilities in coordi-
nation with already existing highways, as well as with the plans of others for
new expansion. He would have to set up the "rules of the road" so as best to
accomplish these and other goals. The road industry would be expected to
carry on each and every one of the tasks now undertaken by public roads
authorities: fill potholes, install road signs, guard rails, maintain lane mark-
216 THE JOURNAL OF LIBERTARIAN STUDIES

ings, repair traffic signals, and so on for the myriad of "road furniture" that
keeps traffic moving.
Applying the concepts of profit and loss to the road industry, we can see
why privatization would almost certainly mean a gain compared to the
present nationalized system of road management.
As far as safety is concerned, presently there is no road manager who loscs
financially if the accident rate on "his" turnpike increases, or is higher than
other comparable avenues of transportation. A civil servant draws his
annual salary regardless of the accident toll piled up under his domain. But if
he were a private owner of the road in question, in competition with
numerous other highway companies (as well as other modes of transit such
as airlines, trains, boats, etc.), completely dependent for financial sustenance
on the voluntary payments of satisfied customers, then he would indeed lose
out if his road compiled a poor safety record (assuming that customers
desire, and are willing to pay for, safety). He would. then, have every
incentive to try to reduce accidents, whether by technological innovations,
better rules of the road, improved methods of selecting out drunken and
other undesirable drivers, etc. If he failed, or did less well than his competi-
tion, he eventually would be removed from his position of responsibility.
Just as we now expect better mousetraps from a private enterprise system
which rewards success and penalizes failure, so could we count on a private
ownership setup to improve highway safety. Thus, as a partial answer to the
challenge that private ownership would mean the deaths of millions of
people in traffic accidents, we reply, "There are, at present, millions of
people who have been slaughtered on our nation's highways; a changeover
to the enterprise system would lead to a precipitous decline in the death and
injury rate, due to the forces of competition."
Another common objection to private roads is the spectre of having to
halt every few feet and toss a coin into a tollbox. This simply would not
occur on the market. To see why not, imagine a commercial golf course
operating on a similar procedure: forcing the golfers to wait in line at every
hole, or demanding payment every time they took a swipe at the ball. It is
easy to see what would happen to the cretinous management of such an
enterprise: it would very rapidly lose customers and go broke.
If roads were privately owned, the same process would occur. Any road
with say, 500 toll booths per mile, would be avoided like the plague by
customers, who would happily patronize a road with fewer obstructions,
even at a higher money cost per mile. This would be a classical case of
economies of scale, where it would pay entrepreneurs to buy the toll collec-
tion rights from the millions of holders, in order to rationalize the system
into one in which fewer toll gates blocked the roads. Streets that could be so
organized would prosper as thoroughfares; others would not. So even if the
FREE MARKET TRANSPORTATION 217

system somehow began in this patchwork manner, market forces would


come to bear, mitigating the extreme inefficiency.
There is no reason, however, to begin the market experiment in this way.
Instead of arbitrarily assigning each house on the block a share of the road
equal to its frontage multiplied by one-half the width of the street in front of
it (the way in which the previous example was presumably generated in
someone's nightmare vision), there are other methods more in line with
historical reality and with the libertarian theory of homesteading property
rights.
One scenario would follow the shopping center model: a single owner-
builder would buy a section of territory, build roads, and (fronting them)
houses. Just as many shopping center builders maintain control over park-
ing lots, malls, and other "in common" areas, the entrepreneur would
continue the operation of common areas such as the roads, sidewalks, etc.
Primarily residential streets might be built in a meandering, roundabout
manner replete with cul-de-sacs, to discourage through travel. Tolls for
residents, guests, and deliveries might be pegged at low levels, or be entirely
lacking (as in the case of modern shopping centers), while through traffic
might be charged at prohibitive rates. Standing in the wings, ensuring that
the owner effectively discharges his responsibilities, would be the profit and
loss system.
Consider now a road whose main function is to facilitate through traffic. If
it is owned by one person or company, who either built it or bought the
rights of passage from the previous owners, it would be foolish for him to
install dozens of toll gates per mile. In fact, toll gates would probably not he
the means of collection employed by a road owner at all. There now exist
highly inexpensive electrical devices14 which can register the passage of an
automobile past any fixed point on a road. Were suitable identifying elec-
tronic tapes attached to the surface of each road vehicle, there would he no
necd for a time-wasting, labor costly system of toll collection points. Rather,
as the vehicle passes the check point, the electrical impulse set up can be
transmitted to a computer which can produce one monthly bill for all roads
used, and even mail it out automatically. Road payments could be facilitated
in as unobtrusive a manner as utility hills are now.
Then there is the eminent domain challenge: the allegation that roads
could not be efficiently constructed without the intermediation of
government-imposed eminent domain laws which are not at the disposal of
private enterprise. The argument is without merit.
We must first realize that even with eminent domain, and under the system
of government road construction, there are stilllimits as to where a new road
may be placed. Not even a government could last long if it decided to tear
down all the skyscrapers in Chicago's Loop in order to make way for yet
218 T HE J O U R NA L OF LI BERT A RI AN STUDIES

another highway. The logic of this limitation is obvious: it would cost


billions of dollars to replace these magnificent structures; a new highway
near these buildings, but one which did not necessitate their destruction,
might well be equally valuable, but at an infinitesimal fraction of the cost.
With or without eminent domain, then, such a road could not be built.
Private enterprise could not afford to d o so, because the gains in siting the
road over carcasses of valuable buildings would not be worthwhile; nor
could the government accomplish this task, while there was still some
modicum of common sense prohibiting it from operating completely outside
of any economic bounds.
It is true that owners of land generally thought worthless by other people
would be able to ask otherwise exorbitant prices from a developer intent
upon building a straight road. Some of these landowners would demand
high prices because of psychic attachment (e.g.. the treasured old home-
stead); others solely because they knew that building plans called for their
particular parcels, and they were determined to obtain the maximum income
possible.
But the private road developer is not without defenses, all of which will
tend to lower the price he must pay. First, there is no necessity for an
absolutely straight road, nor even for one that follows the natural contours
of the land. Although one may prefer, on technical grounds, path A, it is
usually possible to utilize path B. . . . .Z, all at variously higher costs. If so,
then the cheapest of these alternatives provides an upper limit to what the
owners along path A may charge for their properties. For example, it may be
cheaper to blast through an uninhabited mountain rather than pay the
exorbitant price of the farmer in the valley; this fact tends to put a limit upon
the asking price of the valley farmer.
Secondly, the road developer, knowing that he will be satisfied with any of
five trajectories, can purchase options to buy the land along each site. If a
recalcitrant holdout materializes on any one route, he can shift to his second,
third, fourth or fifth choice. The competition between owners along each of
these passageways will tend to keep the price down.
Thirdly, in the rare case of a holdout who possesses an absolutely essential
plot, it is always possible to build a bridge over this land or to tunnel
underneath. Ownership of land does not consist of property rights'up to the
sky or down to the core of the earth; the owner cannot forbid planes from
passing overhead, nor can he prohibit a bridge over his land, as long as it
does not interfere with the use of his land. Although vastly more expensive
than a surface road, these options again put an upper bound on the price the
holdout can insist upon.
There is also the fact that land values are usually influenced by their
neighborhood. What contributes to the value of a residence is the existence
FREE M A R KE T TRANSPORTAT ION 219

of neighboring homes, which supply neighbors, friends, companionship.


Similarly, the value of a commercial enterprise is enhanced by the proximity
of other businesses, customers, contacts, even competitors. In New York
City, the juxtaposition of stock brokerage firms, flower wholesalers, a
jewelry exchange, a garment district, etc., all attest to the value of being
located near competitors. If a road 150 feet wide sweeps through, completely
disrupting this "neighborliness," much of the value of the stubborn landown-
er's property is dissipated. The risk of being isolated again puts limitations
upon the price which may he demanded.
In an out-of-the-way, rural setting, a projected road may not be expected
to attract the large number of cash customers necessary to underwrite lavish
expenditures on the property of holdouts. However, it will be easier to find
alternative routes in a sparsely settled area. Urban locations present the
opposite problem: it will be more difficult to find low-cost alternatives, but
the expected gains from a road which is expected to carry millions of
passengers may justify higher payments for the initial assemblage.
Of course, eminent domain is a great facilitator; it eases the process of
land purchase. Seemingly, pieces of land are joined together at an exceed-
ingly low cost. But the real costs of assemblage are thereby concealed.
Landowners are forced to give up their property at prices determined to be
"fair" by the federal bureaucracy, not at prices to which they voluntarily
agree. While it appears that private enterprise would have to pay more than
the government, this is incorrect. The market will have to pay the full,
voluntary price, but this will, paradoxically, be less than the government's
real payment (its money paymentsplus the values it has forcibly taken from
the original owners). This is true because the profit incentive to reduce costs
is completely lacking in state "enterprise." Furthermore, the extra costs
undergone by the government in the form of bribes, rigged bidding, cost-
plus contracts, etc., often would bloat even limited government money
outlays past the full costs of private road developers.
Another objection against a system of private roads is the danger of being
isolated. The typical nightmare vision runs somewhat as follows: "A man
buys a piece of land. He builds a house on it. He stocks it with food, and
then brings his family to join him. When they are all happily ensconced, they
learn that the road fronting their little cottage has been purchased by an
unscrupulous street owning corporation, which will not allow him or his
family the use of the road at any but an indefinitely high price. The family
may 'live happily ever after', but only as long as they keep to their own
house. Since the family is too poor to afford a helicopter, the scheming road
owner has the family completely in his power. He may starve them into
submission, if he so desires."
This does indeed appear frightening, but only because we are not accus-
220 T H E JOURNAL OF LIBERTARIAN STUDIES

tomed to dealing with such a problem. It could not exist under the present
system, so it is difficult to see how it could be solved by free market
institutions. Yet, the answer is simple: no one would buy any plot of land
without first insuring that he had the right to enter and leave at will.'*
Similar contracts are now commonplace on the market, and they give rise
to no such blockade problems. Flea markets often rent out tables to separate
merchandisers; gold and diamond exchanges usually sublet booths to indi-
vidual, small merchants; desk space is sometimes available to people who
cannot afford an entire office of their own. The suggestion that these
contracts are unworkable or unfeasible, on the grounds that the owner of the
property might prohibit access to his subtenant, could only be considered
ludicrous. Any lawyer who allowed a client to sign a lease which did not
specify the rights of access in advance would be summarily fired, if not
disbarred. This is true in the present, and would also apply in an era of
private roads.
It is virtually impossible to predict the exact future contour of an industry
that does not presently exist. The task is roughly comparable to foretelling
the makeup of the airline industry immediately after the Wright Brothers'
experiments at Kitty Hawk. How many companies would there be? How
many aircraft would each one own? Where would they land? Who would
train the pilots? Where could tickets he purchased? Would food and movies
be provided in flight? What kinds of uniforms would be worn by the
stewardesses? Where would the financing come from? These are all questions
not only impossible to have answered at that time, but ones that could
hardly have arisen. Were an early advocate of a "private airline industry"
pressed to point out, in minute detail, all the answers in order to defend the
proposition that his idea was sound, he would have had to fail.
In like manner, advocates of free market roads are in no position to set up
the blueprint for a future private market in transport. They cannot tell how
many road owners there will be, what kind of rules of the road they will set
up, how much it will cost per mile, how the entrepreneurs will seek to reduce
traffic accidents, whether road shoulders will he wider or narrower, or which
steps will be taken in order to reduce congestion. Nor can we answer many
of the thousands of such questions that are likely to arise.
For one thing, these are not the kinds ofquestions that can he answered in
advance with any degree of precision, and not only in transportation. The
same limitations would have faced early attempts to specify industrial setups
in computers, televisions, or any other industry. It is impossible to foretell
the future of industrial events because, given a Cree market situation, they are
the result of the actions of an entire cooperatingeconomy, even though these
actions may not be intended by any individual actor.'6 Each person bases his
actions on the limited knowledge at his disposal.
Nevertheless, we shall attempt a scenario, though not for the purpose of
FREE MARKET TRANSPORTATION 22 1

mapping out, forevermore, the shape of the road market of the future. We
realize that such patterns must arise out of the actions of millions of market
participants, and will be unknown to any of them in advance. Yet if we are to
consider objections to a road market intelligently, we must present a general
outline of how such a market might function. We will now consider some
problems that might arise for a road market, and some possible solutions.

1. Who will decide upon the rules of the road?


This question seems important because we are accustomed to governments
determining the rules of the road. Some people even go so far as to just;f:j
the very existence of government on the ground that someone has to fashion
highway rules, and that government seems to be the only candidate.
In the free market, each road owner will decide upon the rules his
customers are t o follow, just as nowadays rules for proper behavior in some
locations are, to a great extent, determined by the owner of the property in
question. Thus, roller and ice skating emporia decide when and where their
patrons may wander, with o r without skates. Bowling alleys usually require
special bowling shoes, and prohibit going past a certain line in order to
knock down the pins. Restaurants demand that diners communicate with
their waiter and busboy, and not go marching into the kitchen to consult
with the chef.
There are no "God-given" rules of the road. While it might have been
convenient had Moses been given a list of the ten best rules for the road, he
was not. Nor have legislators been given any special dispensations from on
high. It is therefore man's lot to discover what rules can best minimbe costs
and accidents, and maximize speed and comfort. There is no better means of
such discovery than the competitive process. Mr. Glumph of the Glumph
Highway Company decides upon a set of rules. Each of his competitors
decides upon a (slightly) different version. Then the consumer, by his choice
to patronize or not, supports one or the other. T o the extent that he
patronizes Glumph and avoids his competitors, he underwrites and supports
Glumph's original decisions. If Glumph loses too many customers, he will be
forced to change his rules (or other practices) o r face bankruptcy. In this way
the forces of the market will be unleashed to d o their share in aiding the
discovery process. We may never reach the all-perfect set of rules that
maximizes the attainment of all conceivable goals, but the tendencj. toward
this end will always operate.

2. I f a free market in roads is allowed and bankruptcies occur, what will be


done about the havoc created for the people dependent upon them?
Bankrupt road companies may well result from the operations of the
market. There are insolvencies in every area of the economy, and it would be
222 THE JOURNAL OF LIBERTARIAN STUDIES

unlikely for this curse to pass by the road sector. Far from a calamity,
however, bankruptcies are paradoxically a sign of a healrhy economy.
Bankruptcies have a funclion. Stemming from managerial error in the
face of changing circumstances, bankruptcies have several beneficial effects.
They may be a signal that consumers can no longer achieve maximum
benefit from a stretch of land used as a highway; there may be an alternative
use that is ranked higher. Although the subject might never arise under
public stewardship, surely sometime in the past ten centuries there were
roads constructed which (from the vantage point of the present) should not
have been built; or, even if they were worth building originally, have long
since outlasted their usefulness. We want a capacity in our system to
acknowledge mistakes, and then act so as ro correcr [hem. The system of
public ownership is deficient, in comparison, precisely because bankruptcy
and conversion to a more valuable use never exists as a serious alternative.
The mistakes are, rather, "frozen in concrete," never to be changed.
Would we really want to apply the present non-bankruptcy system now
prevailing in government road management to any other industry? Would it
be more efficient to maintain every single grocery store, once built, forever-
more? Of course not. It is part of the health of the grocery industry that
stores no longer needed are allowed to pass on, making room for those in
greater demand. No less is true of the roadway industry. Just as it is
important for the functioning of the body that dead cells he allowed to
disappear, making way for new life, so is it necessary for the proper func-
tioning of our roadway network that some roads be allowed to pass away.
Bankruptcy may serve a second purpose. A business may fail not because
there is no longer any need for the road, but because private management is
so inept that it cannot attract and hold enough passengers to meet all its
cpsts. In this case, the function served by bankruptcy proceedings would he
to relieve the ineffective owners of the road, put it into the hands of the
creditors and, subsequently, into the hands of better management.

3. How would traffic snarls be countered in the free market?


If the roads in an entire section of town (e.g., the upper east side of
Manhattan), or all of the streets in a small city were completely under the
control of one company, traffic congestion would present no new problem.
The only difference between this and the present arrangement would be that
a private company, not the government road authority, would he in charge.
As such, we could only expect the forces ofcompetition to improve matters.
For example, one frequent blocker of traffic, and one which in no way aids
the overall movement of motorists, is the automobile caught in an intersec-
tion when the light has changed. This situation arises from entering an
intersecting cross street, in the hope of making it across so that, when the
light changes, one will be ahead of vehicles turning off that street. In the
FREE MARKET TRANSPORTATION 223

accompanying diagram #I (see below) a motorist is traveling west along the


Side Street. Although the Side Street west of Main Street is chock full of
cars, he nevertheless enters the intersection between Main Street and Side
Street; he hopes that, by the time Main Street again enjoys the green light,
the cars ahead of him will move forward, leaving room for him to leave the
intersection.
(North)
Diagram I
I Main Street

Side Street

All too often, however, what happens is that traffic ahead of him on Side
Street remains stationary, and the motorist gets caught in the middle of the
intersection. Then, even when the traffic is signaled to move north on Main
Street, it cannot; because of the impatience of our motorist, he and his
fellows are now stuck in the intersection, blocking northbound traffic. If this
process is repeated on the four intersections surrounding one city block (see
diagram #2) it can (and does) bring traffic in the entire surrounding area to a
virtual standstill.
Diagram 2

Broadway Main Street

Side Street

Maple Street

Currently, government regulations prohibit entering an intersection when


there is no room on the other side. This rule is beside the point. The question
is not whether a traffic system legally cal/sfor certain actions, but whether
this rule succeeds or not. If the mere passage of a law could suffice, all that
224 THE JOURNAL O F LIBERTARIAN STUDIES

would be needed to return to the Garden of Eden would be "enabling


legislation." What is called for, in addition to the proper rules of the road, is
the actual attainment of motorists'conformity with those rules. As far as this
problem is concerned, private road companies have a comparative advan-
tage over governments. For, as we have seen, if a government fails in this
kind of mission, there is no process whereby it is relieved of its duties;
whereas, let a private enterprise fail and retribution, in the form of bank-
ruptcy, will be swift and total. Another street company, and still another. if
needed, will evolve through the market process, to improve matters.
It is impossible to tell, in advance, what means the private street compan-
ies will employ t o rid their territories of this threat.
Just as private universities, athletic stadiums, etc., now enforce rules
whose purpose is the smooth functioning of the facility, so might road
owners levy fines t o ensure obedience to rules. For example, automobiles
stuck in an intersection could be registered by the road's computer-
monitoring system, and charged a n extra amount for this driving infraction,
on an itemized bill.*

4. What problems would ensue of each street owned by a separate companj',


or individual?

It might appear that the problems are insoluble. For each owner would seem
to have an incentive to encourage motorists on his own street to try as hard
as they can to get to the next block, to the total disregard of traffic on the
cross street. (The more vehicles passing through, the greater the charges that
can be levied.) Main Street, in this scenario, would urge its patrons, traveling
north, to get into the intersection between it and Side Street, so as t o pass o n
when the next light changed. The Side Street management would d o the
same: embolden the drivers heading west to try to cross over Main Street,
regardless whether there was room o n the other side. Each street owner
would, in this view, take an extremely narrow stance; he would try to
maximize his own profits, and not overly concern himself with imposing
costs on the others.
The answer to this dilemma is that it could never occur in a free market,
based on specified individual private property rights. For in such a system,
all aspects of the roadway are owned, including the intersection itself: In the
nature of things, in a full private property system, the intersection must be
owned either by the Main Street Company, the Side Street Company, or by
some third party. As soon as the property rights to the intersection between
the two streets are fully specified (in whichever of these three ways) all such
problems and dilemmas cease.
* I owe this paint to David Ramsay Steele, of the Department of Sociology. University of
Hull.
FREE MARKET TRANSPORTATION 225

Suppose the Main Street Company had been the first on the scene. It is
then the full owner of an unbroken chain of property, known as Main Street.
Soon after, the Side Street Company contemplates building. Now the latter
company knows full well that allof Main Street is private property. Building
a cross street to run over the property of Main Street cannot be justified. The
Main Street Company, however, has every incentive to welcome a Side
Street, if not to build one itself, for the new street will enhance its own
property if patrons can use it to arrive at other places. A city street that has
no cross street options does not really function as an access route; it would
be more like a limited access highway in the middle of a city. The two
companies shall have to arrive at a mutually satisfactory arrangement.
Presumably, the Side Street Company will have to pay for the right to build
a cross street. On the other hand, if the owners of Main Street intend to use
it as a limited access highway, then the Side Street Company shall have to
build over it, under it, or around it, but not across it. (As part of the contract
between the two parties, there would have to be an agreement concerning
automobiles getting stuck in the intersection. Presumably this would be
prohibited.)
Since original ownership by the Side Street Company would be the same
analytically as the case we have just considered, but with the names of the
companies reversed, we may pass on to a consideration of ownership by a
third party.
If the intersection of the two streets is owned by an outsider, then it is he
who decides conflicts between the two road companies. Since his interests
would best be served by smoothly flowing traffic, the presumption is that the
owner of the intersection would act so as to minimize the chances of
motorists from either street being isolated in the intersection as the traffic
light changed.
This analysis of the ownership situation concerning cross streets and their
intersections will enable us to answer several other possibly perplexing
problems.

5 . How would green light time be parceled out under free enterprise?
Of course, most street owners, if they had their choice, would prefer the
green light for their street 100% of the time. Yet, this would be tantamount
to a limited access highway. If it is to be a city street, a road must content
itself with less. What proportion of red and green lights shall be allotted to
each street?
If all the streets in one neighborhood are owned by one company, then it
decides this question, presumably with the intention of maximizing its
profits. Again, and for the same reasons, we can expect a more eff'ectivejob
from such a "private" owner, than from a city government apparatus.
In the case of intersection ownership by a third party, the two cross street
226 THE JOURNAL OF LIBERTARIAN STUDIES

owners will bid for the green light time. Ceteris paribus, the presumption is
that the owner of the street with the larger volume of street traffic will
succeed in bidding for more of the green light time. If the owner of the larger
volume street refused to bid for a high proportion of green light time, his
customers would tend to patronize competitors-who could offer more
green lights, and hence a faster trip.
A similar result would take place with two street owners, no matter what
the property dispersal.': It is easy to see this if the larger street company
owns the intersections. The larger company would simply keep a high
proportion (213, 314, or perhaps even 415) of green light time for itself,
selling only the remaining small fraction to the intersecting side street. But
much the same result would ensue if the smaller road owned the common
intersections! Although the relatively lightly traveled road company might
like to keep the lion's share of the green lights for itself, it will find that it
cannot afford to d o so. The more heavily traveled street, representing a
clientele willing and able in the aggregate to pay far more for green light
privileges, will make it extremely tempting for the small street owner to
accept a heavy payment, in order to relinquish most of its green light time. In
other words, the customers of the main street, through indirect payments via
the main street owner, will bid time away from the smaller number of
customers using the minor street. This principle is well established in busi-
ness, and is illustrated every time a firm sublets space, which it could have
used to satisfy its own customers. because it receives more income subletting
than retaining the premises for its own use.
The provision of staggered traffic lights (the lights continually turn green.
for example, as an auto proceeding at 25 M.P.H. approaches them) may
present some conceptual difficulties but, again, they are easily overcome. Of
course, there are virtually no problems if either one company owns all the
roads, or if the main road (the one to be staggered) is continuously owned.
The only question arises when the side streets are continuously owned, and it
is the main avenues which are to receive the staggered lights. (We are
assuming that staggering cannot efficiently be instituted for both north-
south and intersecting east-west streets, and that staggering is better placed
on the inain roads than the side ones.)
Under these conditions, there are several possible solutions. For one, the
main avenues_ being able to make better use of the staggering system, may
simply purchase (or rent) the rights to program the lights so that staggering
takes place on the main roads. The side roads, even as owners of the
intersections, would only be interested in the proportion of each minute.that
their lights could remain green; they would be indifferent to the necessity of
staggering. Since this is precisely what the main roads desire, it seems that
some mutually advantageous agreement could feasibly be made.
Another possibility is that the main roads, better able to utilize the
FREE MARKET TRANSPORTATION 227

staggering capabilities which intersection ownership confers (and perhaps


better able to utilize the other advantages bestowed upon their owners) will
simply arrange to purchase the intersections outright. If so, the pattern
would change from one where the sidestreet corporations owned the inter-
sections to one in which these came under the possession of the main street
companies.
Still another alternative would be integration of ownership. We have no
idea as to the optimal size of the road firm (single block, single road,
continuous road, small city, etc.), so thoughts in this direction can only be
considered speculative. With regard to the ease of coordinating staggered
light systems, however, it may well be that larger is better. If so, there will be
a market tendency for merger, until these economies are exhausted.
Let us recapitulate. We have begun by indicating the present mismanage-
ment of roads by government. We have claimed that improvements, given
the status quo of government management, are not likely to suffice.We have
briefly explored an alternative-the free market in road ownership and
management-and shown how it might deal with a series of problems, and
rejected some unsophisticated objections. We are now ready to examine in
some detail how private road owners actually might compete in the market
place.

How Private Road Owners Might Compete


On the rare occasions when the feasibility of private road ownership has
been considered by mainstream economists, it has been summarily rejected,
based on the impossibility of competition among private road owners.
Seeing this point as almost intuitively obvious, economists have not em-
barked on lengthy chains of reasoning in refutation. Thus, says Smerk,
rather curtly, "Highways could not very well be supplied on a competitive
basis, hence they are provided by the various levels of g~vernment."'~
Economists, however, are willing to expound, at great length, upon the
need for the conditions of perfect competition, if efficiency is to prevail in the
private sector. One of the main reasons the idea of private enterprise for
roads has not been accepted is the claim that perfect competition cannot
exist in this sphere.
A typical example of this kind of thinking is that of Haveman.lY Says he:
A number of conditions must be met if the private sector of the
economy-the market system-is to function efficiently. Indeed, these
conditions are essential if the private sector is to perform in the public
interest. . . . [1]t is the absence of these conditions which often gives rise
to demands for public sector [government] action.

These conditions of perfect competition are widely known: numerous


buyers and sellers, so that no one of them is big enough to "affect price"; a
228 THE JOURNAL OF LIBERTARIAN STUDIES

homogeneous good; and perfect information. One problem with the strict
requirement that a n industry meet these conditions, o r else be consigned t o
government operation, is that there is virtually n o industry in a real-life
economy that would remain in the private sector! Almost every industry
would have to be nationalized, were the implicit program of Haveman
followed. This is easy to see, once we realize how truly restrictive are these
conditions. The homogeneity requirement, by itself, would be enough to bar
most goods and services in a modern, complex economy. Except for thumb
tacks, rubber bands, paper clips, and several others of this kind, there are
hardly any commodities which d o not differ, even slightly, in the eyes of
most consumers. Perfect information bars even the farm staples from
inclusion in the rubric of perfect competition. This can be seen in a healthy,
functioning Chicago mercantile exchange. If there were full information
available to all a n d sundry, there could be n o such commodities market.
Not "affecting price" also presents difficulties. No matter how small a part
of the total market a single individual may be, he can always hold out for a
price slightly higher than that commonly prevailing. Given a lack of perfect
information, there will usually (but not always) be someone willing to
purchase a t the higher price.
Therefore, the objection t o private roads on the ground that they are
inconsistent with perfect competition cannot be sustained. It is true that this
industry could not maintain the rigid standards required for perfect competi-
tion, but neither can most. I n pointing out thatperfect competition cannot
apply to roads, we have by n o means conceded that competition between the
various road owners would n o t be a vigorous, rivalrous process. O n the
contrary, were we to allow that perfect competition couldapply to roads, we
would then have to retract o u r claim that vigoroos competition could also
ensue. For perfect competition, and competition in the ordinary sense of
that word (implying rivalry, attempts to entice customers away from one
another) a r e opposites, and inconsistent with each other.20
In the perfectly competitive model, each seller can sell all he wants, a t the
given market price. (This is the assumption that each perfect competitor
faces a perfectly elastic demand curve.) A typical rendition of this point of
view is furnished by Stonier and Hague:>'
The shape of the average revenue curve [demand curve] of the individ-
ual firm will depend on conditions in the market in which the firm sells
its product. Broadly speaking, the keener the competition of its rivals
and the greater the number of fairly close substitutes for its product, the
more elastic will a firm's average revenue curve be. As usual, it is possible
to be precise about limiting cases. One limiting case will occur when
there are so many competitors producing such close substitutes [the
perfectly competitive model] that the demand for the product of each
individual firm is infinitely elastic and its average revenue curve is a
horizontal straight line. This will mean that the firm can sell as much of
its product as it wishes at the ruling market price. If the firm raises its
FREE M A R KET TRANS PORT ATION 229

price, then. owing to the ease with which the same, or a very similar,
product can be bought from competitors, it will lose all its customers. If
the firm were to lower its price, it would be swamped by orders from
customers wishing to take advantage of its price reduction. The de-
mand-and the elasticity of demand-for its product would be infinite.
Under these conditions, competition in the usual sense of opposition,
contention, rivalry, etc. would be completely lacking. Where is the need t o
attract the customers of other firms to oneself if each so-called "competitor"
can "sell as much of its product as it wishes a t the ruling market price?" Why
go out and compete if one is guaranteed all the customers one could possibly
want? If "competition" is supposed to indicate rivalrous behavior, one would
think that "perfect competition" would denote a sort of super-
contentiousness. Instead, through dint of misleading definition, it means the
very opposite: a highly passive existence, where firms d o not have t o go out
and actively seek customers.
Again, we can see that rejecting the possibility of perfect competition for a
roads industry is by n o means equivalent to conceding that there can he n o
rivalrous competition between the different road owners. Paradoxically,
only if perfect competition were applicable to roads, might we have t o
consider the possibility that the process of competition might not be adapt-
able to highways.
In contrast to the passive notion of perfect competition, which has held
center stage in the economics profession for the last few decades, there is a
new comprehension of competition, in the market process sense, that is now
drawing increasing attention.
Instead of concentrating o n the maximization of ends, assuming given
scarce means, a s does the Robbinsian22 notion of perfect competition, the
market process view makes the realistic assumption that the means, al-
though scarce, are in n o way given; rather, knowledge of them must actively
be sought out. The allocation of scarce means among competing ends is a
passive procedure when the means and the ends are known. All that need be
done can be accomplished by a suitably programmed computer. But the
active seeking out of the ends and the means in the first place is a task that
can be accomplished only by entrepreneurial talent; active, not passive. The
entrepreneur, denied his crucial role in the perfectly competitive world view,
takes center stage in the market process conception.
Instead of merely economizing, the entrepreneur seeks new and hitherto
unknown profit opportunities; n o t content t o allocate given means to al-
ready selected ends, the businessman blazes new trails, continually on the
lookout for new ends, and different means. States Israel Kirzner,23 one of the
pathbreakers in this way of looking a t o u r economy:
We have seen that the market proceeds through entrepreneurial
competition. In this process market participants become aware of op-
portunities for profit: they perceive price discrepancies (either between
230 THE JOURNAL OF LIBERTARIAN STUDIES

the prices offered and asked by buyers and sellers of the same good or
between the price offered by buyers for a product and that asked by
sellers for the necessary resources) and move to capture the difference for
themselves through their entrepreneurial buying and selling. Competi-
tion, in this process, consists of perceiving possibilities of offering
opportunities to other market participants which are more attractive
than those currently being made available. It is an essentially rivolrous
process . . . [which] . . . consists not so much in the regards decision-
makers have for the likely future reactions of their competitors as in
their awareness that in making their present decisions they themselves
are in a position to do better for the market than their rivals are prepared
to do; it consists not of market participants' reacting passively to given
conditions, but of their actively grasping profit opportunities by posi-
tively changing the existing conditions.
It is this competirive market process that can apply to the road industry.
Highway entrepreneurs can continually seek newer and better ways of
providing services t o their customers. There is n o reason why street corpora-
tions should not actively compete with other such firms for the continued
and increased tolls of their patrons. There may not be millions of buyers and
sellers of road transport service a t each and every conceivable location (nor
is there for any industry) but this does not preclude vigorous rivalry a m o n g
the market participants, however many.
How might this work?
North Diagram 3

A B C D E F G H 1
FREE MARKET TRANSPORTATION 23 1

Let us consider, for the sake of simplicity, a town laid out into 64 blocks,
as in a checker board (see diagram 3). We can conveniently label the north-
south or vertical avenues A through I, and the east-west or horizontal streets
1st through 9th. If a person wants to travel from the junction of First Street
and Avenue A to Ninth Street and Avenue 1, there are several paths he may
take. He might go east along First Street to Avenue I, and then north along
Avenue I, to Ninth Street, a horizontal and then a vertical trip. Or he may
first go north to Ninth Street, and then east along Ninth Street to Avenue I.
Alternatively, he may follow any number of zig-zag paths: east along First
Street to Avenue B; north along Avenue B to Second Street; east again,
along Second Street to Avenue C; north on C to Third Street . . . etc.
Additionally, there are numerous intermediate paths between the pure zig-
zag and the one turn.
These possibilities d o not open an indefinitely large number of paths, as
might be required by the dictates of perfect competition. However, they are
sufficiently numerous to serve as the basis for rivalrous competition, where
one road entrepreneur, or set of entrepreneurs, seeks to offer better and
cheaper channels for transportation than others.
Let us consider the traffic that wishes to go from the junction of First
Street and Avenue D to Ninth Street and Avenue D. (Intersections can be
seen as whole towns or cities, and streets as actual or potential highways.) If
Avenue D is owned by one firm, it might be thought that here, no competi-
tion is possible. For the best route is obviously right up Avenue D from First
to Ninth Street. Even though this is true, there is still potential competition
from Avenues C and E (and even from Band F).If the Avenue D Corpora-
tion charges outrageous prices, the customer can use the alternative paths of
C or E (or, in a pinch, to B or F, or even A or G , if need be). A second source
of potential competition derives, as we have seen, from the possibility of
building another road above the road in question, or tunneling beneath it.
Consider again, the management of Avenue D, which is charging an outra-
geously high price. In addition to the competition provided by nearby roads,
competition may also be provided by double, triple, or quadruple decking
the road.
The transportation literature is not unaware of the possibility of double
decking roads, tunneling, or adding overhead ramps. For example, Wilfred
Owenz4 tells us:
The Port of New York Authority Bus Terminal helps relieve mid-
Manhattan traffic congestion. Approximately 90% of intercity bus de-
partures and intercity bus passengers from mid-Manhattan originate at
this terminal. The diversion of this trafficon overhead ramps from the
terminal to the Lincoln Tunnel has been equivalent to adding three
cross-town streets.
232 THE JOURNAL OF LIBERTARIAN STUDIES

J o h n Burchard lauds double decking as follows:


On one short span of East River Drive [in New York City] there are
grassed terraces carried over the traffic lanes right out to the edge of the
East River, a special boon for nearby apartment dwellers. The solution
was perhaps triggered by the fact that space between the established
building lines and the river was so narrow as to force the superposirion
of the north and soulh lanes. But this did not do more than suggest the
opportunity. Applause goes to those who grasped it, hut none to those
who with the good example in view so consistently ignored it thereafter.
[Emphasis added.]>>
From Burchard's limited perspective, it is indeed a mystery that some
should have taken this step and that, once it was taken and proven success-
ful, it should not have been emulated. From the vantage point of a market in
roads, the mystery disappears: one bureaucrat stumbled, out of necessity,
onto a good plan. Having n o financial incentive toward cost minimization,
n o others saw fit t o expand this innovation. On the market, given that it is
economical to double deck, there will be powerful forces tending toward this
result: the profit a n d loss system.
An authoritative reference to double decking was made by Charles M.
Noble, former Director of the Ohio Department of Highways and chief
engineer of the New Jersey Turnpike Authority:

It seems clear that, ultimately, many urban freeways will become


double or tripledeck facilities, with upper decks carrying the longer
distance volumes, possibly with reversible lanes, and probably operating
with new interchanges to avoid flooding of existing interchanges and
connecting streets.26
It is impossible t o foretell exactly how this competition via multiple
decking might work out in the real world. Perhaps one company would
undertake t o build and maintain the roads, a s well a s the bridgework
supporting all the different decks. I n this scenario, the road deck owner
might sublease each individual deck, much in the same way a s the builder of
a shopping center does not himself run any of the stores, preferring t o sublet
them to others. Alternatively, the main owner-builder might decide to keep
one road for himself, renting out the other levels t o different road compan-
ies. This would follow the pattern of the shopping center which builds a large
facility for itself, but leases out the remainder of the space.
Whatever the pattern of ownership, there would be several, not just one
road company in the same "place"; they could compete with each other. If
Avenue D, a s in our previous example, becomes multiple decked, then
traveling from First Street and Avenue D to Ninth Street and Avenue D
need not call for a trip along Avenue C o r E, in order to take advantage of
competition. One might also have the choice between levels w,x,y,z, all
running over Avenue D!
FRE E M A RK ET T RANS P ORT AT ION 233

Let us consider the objections of 2. Haritos:


There is joint road consumption by consumers with different demand
functions. The road is not as good as steel which may be produced to
different specifications of quality and dimensions. The economic charac-
teristics necessitate the production of one kind of road for all users at
any given place."
This statement is at odds with what we have just been saying. In our view,
the double or triple decking of roads allows for the production of at least
several kinds of road along any given roadway. We would then be forced to
reject Haritos's contention. One point of dispute is the equivocation in his
use of the word "place."
For in one sense, Haritos is correct. If we define "place" as the entity
within which two different things cannot possibly exist, then logic forces us
to conclude that two different roads cannot exist in the same place. But by
the same token, this applies t o steel as well. Contrary to Haritos, a road
occupies the same logical position as steel. If roads cannot be produced to
different specifications of quality and dimensions at any given place. then
neither can steel.
But if we reverse matters, and use the word "place" in such a way that two
different things (two different pieces of steel, with different specifications)
can exist in one place (side by side, or close to each other) then steel may
indeed he produced to different specifications at any given place, but so may
roads! For many different roads, through the technique of multiple decking,
can flow along the same pathway, or exist in the same "place."
Another objection charges that competition among roadway entrepre-
neurs would involve wastefulduplication. Says George M. Smerk: "[Clompe-
tition between public transport companies, particularly public transit firms
with fixed facilities, would require an expensive and undesirable duplication
of plant."zx
This is a popular objection to market competition in many areas; railroad
"overbuilding," in particular, has received its share of criticism on this score.
However, it is fallacious and misdirected.
We must first of all distinguish between investment ex ante and expost. In
the ex ante sense. all investment is undertaken with the purpose of earning a
profit. Wasteful overbuilding o r needless duplication cannot exist in the ex
ante sense; no one intends, at the outset of his investment, that it should be
wasteful or u n p r ~ f i t a b l e Ex
. ~ ~ante investment must of necessity, be non-
wasteful.
Ex post perspective is another matter. The plain fact of our existence is
that plans are often met by failure; investments often go awry. From the
vantage point of history, an investment may very often be judged unwise,
wasteful and needlessly duplicative. But this hardly constitutes a valid
argument against private roads! For the point is that all investors are liable
234 T H E JOURNAL OF LIBERTARIAN STUDIES

to error. Unless it is contended that government enterprise is somehow less


likely to commit error than entrepreneurs who have been continuously
tested by the market process of profit and loss, the argument makes little
sense. (There are few, indeed, who would be so bold as to make the claim
that the government bureaucrat is a better entrepreneur than the private
businessman.)
Very often criticisms of the market, such as the charge of wasteful
duplication on the part of road owners, stems from a preoccupation with the
perfectly competitive model. Looking at the world from this vantage point
can be extremely disappointing. The model posits full and perfect informa-
tion, and in a world of perfect knowledge there of course can be no such
thing as wasteful duplication. Ex post decisions would be as successful as
those ex ante. By comparison, in this respect, the real world comes off a
distant second best. It is perhaps understandable that a person viewing the
real world through perfectly competitive-tinged sunglasses should experi-
ence a profound unhappiness with actual investments that turn out to be
unwise, or needlessly duplicative.
Such disappointment, however, is not a valid objection to the road
market. What must be rejected is not the sometimes mistaken investment of
a private road firm, but rather the perfectly competitive model which has no
room in it for human error.
An intermediate position o n the possibility of road competition is taken
by Gabriel Roth. He states:

. . . while it is possible to envisage competition in the provision of roads


connecting points at great distances apart-as occurred on the railways
in the early days-it is not possible to envisage competition in the
provision of access roads in towns and villages, for most places are
served by one road only. A highway authority is in practice in a monop-
oly position. If any of its roads were to make large profits, we could not
expect other road suppliers to rush in to fill the gap. If losses are made
on some roads, there are no road suppliers to close them down and
transfer their resources to other sectors of the economy.'O
Here we find several issues of contention. First, it is a rare small town or
village that is served by oncv one road, path, or cattle track. Most places
have at least several. But even allowing that in many rural communities there
is only one serviceable road, let us note the discrepancy in Roth between
roads and other services. Most local towns and villages are also served by
only one grocer, butcher, baker, etc. Yet Roth would hardly contend that
competition cannot thereby exist in these areas. He knows that, even though
there is only one grocer in town, there is potential, if not actual competition
from the grocer down the road, or in the next town.
The situation is identical with roads. As we have seen, there is always the
likelihood of building another road next to the first, if the established one
FREE MARKET TRANSPORTATION 235

proves highly popular and profitable. There is also the possibility of building
another road above, or tunneling beneath the first road. In addition, compe-
tition is also brought in through other transportation induslries. There may
he a trolley line, railroad or subway linking this town with the outside world.
If there is not, and the first established road is very profitable, such competi-
tion is always open in a free market.
Finally, we come to the statement, "If losses are made on some roads,
there are no road suppliers to close them down and transfer their resources
to other sectors of the economy." We agree, because a road is generally
fixed, geographically. An entrepreneur would no more "move" a no longer
profitable road, than he would physically move an equivalently unprofitable
farm, or forest. More importantly, even if it were somehow economically
feasible to "move" an unprofitable road to a better locale, there are no such
road suppliers simply because private road ownership is now prohibited.
With Roth's statement, we also come to the spectre of monopoly, and to
claims that a private road market must function monopolistically. Why are
such claims made? There are two reasons usually given. First,
indivisibilities-the fact that many factors of production cannot be effi-
ciently utilized at low levels of output. A steel mill or automobile factory
cannot be chopped in half and then be asked to produce one-half of the
output it had previously been producing.
Says Mohring, "But indivisibilities d o exist in the provision of transporta-
tion facilities. Each railroad track must have two rails, and each highway or
country road must be at least as wide as the vehicles that use it."" In similar
vein, says Haritos, "To get from A to B, you need a whole lane, not just half,
for the full distance, not half of it."32 And, in the words of Peter Winch, ". . .
indivisibility of highways make it impractical to have competing systems of
roads, and the responsible authority must therefore be a monopoly."33
We d o not believe that the existence of indivisibilities is enough to
guarantee monopoly, defined by many as a situation in which there is a
single seller of a commodity.3"here are indivisibilities in every industry,
and in all walks of life. Hammers and nails, bicycles and wheelbarrows,
locomotives and elevators, tractors and steel mills, professors and podia-
trists, ballet dancers and bricklayers, musicians and motorists, ships and
slippers, buckets and broomsticks, none of them can be chopped in half
(costlessly) and be expected to produce just half of what they had been
producing before. A railroad needs two rails (with the exception, of course,
of the monorail), not one, or any fraction thereof. Also, in order to connect
points A and B, it must stretch completely from one point to the other. It
may not end halfway between them, and offer the likelihood of transporta-
tion between the two points.
Does this establish the need for government takeover of railroads? Of
course not. Yet they exhibit the concept of indivisibilities just as d o roads
236 THE JOURNAL OF LIBERTARIAN STUDIES

and highways. If indivisihilities justify government involvement in road-


ways, then they should justify it in aN othercases wherein indivisibilities can
he found. Since the advocates of the indivisibility argument are not willing
to extend it to broomsticks, slippers, steel mills, and practically every other
good and commodity under the sun, logic compels them to retract it in the
case of highways.

Conclusion
So what d o we conclude? Having debunked the notion that private owner-
ship of the roads is not "impossible," and that, in fact, it may offer a variety
of exciting alternatives to the present system, we return to the question of
why should it even be considered. There we come face-to-face again with the
problem of safety. A worse job than that which is presently being done by
the government road managers is difficult to envision. We need only con-
sider what transpires when safety is questioned in other forms of transporta-
tion to see a corollary. When an airline experiences an accident, it often
experiences a notable dropping off of passengers. Airlines with excellent
safety records, who have conducted surveys, have found that the public is
aware of safety and will make choices based upon it.
Similarly, private road owners will be in a position to establish regulations
and practices to assure safety on their roads. They can impact on the driver,
the vehicle, and the road-the key elements of highway safety. They can
react more quickly than the government bureaucracy in banning such
vehicles as "exploding Pintos." The overriding problem with the National
Highway Traffic Safety Administration, and with all similar governmental
systems of insuring against vehicle defects, for example, is that there is no
competition allowed. Again, in a free market system, opportunities would
open up for innovative approaches to safety problems. Should stiffer penal-
ties he shown unsuccessful in reducing unsafe vehicles and practices, an
incentive system may be the answer. We cannot paint all the details of the
future from our present vantage point. But we do know that "there has to be
a better way."

NOTES
I . The number of people who were victims of motor vehicle accidents in 1976, in Accidenl
Focrs (Chicago: National Safety Council, 1977), p. 13.
2. The number of road and highway deaths in the decade, 1967-1976, in ibid.
3. Data for 1968. in ibid., p. 57.
4. Data far 1969, in ibid., p. 60.
5. Data for 1969, in ibid.
6. Statement by Charles M. Noble, distinguished trafic engineer who served as director of the
Ohio Department of Highways, chief engineer of the New Jersey Turnpike, and was
recipient of the Matson Memorial Award for Outstanding Contributions to the Advance-
FREE MARKET TRANSPORTATION 237

ment of Traffic Engineering. "Highway Design and Construction Related to Trahic Opera-
tions and Safety," Traffic Quarlerly (Nov. 1971). p. 534.
7. Accident Facts. p. 13.
8. Regulation and Aulomubile S q l e ~ y(Washington, D.C.: American Enterprise Institute for
Public Policy Research. 1975). pp. 8, 9.
9. David M. Winch. The Economics of Highway Planning (Toronto: The University of
Toronto Press, 1963) p. 87.
10. Strictlv .
, soeakine.
" this is far from the truth. Before the 19th centurv.
, . most roads and hridees
"
in England and the U.S. were built by quasi-private stock companies.
I I. William C. Wooldridge, Uncle Sam, the Monopoly Man (New Rochelle. N.Y.: Arlington
House. 1970). pp. 7-9.
12. Gabriel Roth, Paying /or Roads-The Economic3 qf T d f f i c Congestion (Baltimore:
Penguin Books, 1967), p. 16. See also:
"The highway situation can be improved substantially by visualizing the similarities
between the highway problem and a host of comparable problems to which economists
have applied same rather ancient ideas: namely, those of 'good old supply and demand
analysis."' O H . Brownlee and Walter W. Heller, "Highway Development and Financing."
Americon Economic Revieu, (May 1956). p. 233.
"The provision of highways involves basically the same problems as any other economic
activity. Scarce resources must be used to satisfy human wants by the provision of goods
and services, and decisions must be made as to haw much of our resources will be devoted
to one particular service, and who is going to make the necessary sacrifice." Winch.
Economics of Highway Planning, p. 141.
". . . Many of the characteristics that are held to make transpartation'diRerent' arc in fact
found in other industries as well. and . . . t h e same forms ofanalvsis that are aoolicahle in

hut Ikr,. ~n mdn) ;.orer th.cn lor .i nGu3p:lper C'.,ngc~t~on .,ra#r,in ,upcrm.irkct,. 11111
~~tr.rtt.il~ttc. .>r 'n:tpnhorhu.ki cltritr' .Ire pcr\a,ltc (:u.lornr.r rlmr ;..rt I, ~n\olseclin
~ F I I I I I A.$natr;tlt '' \\IIII.IIII \ t ; k r ~ \ . "KCICU 31 H c ~ h c r\~l t ~ h r t n g .I ~ . I , I ~ , , ~ ~ ~ ,t,, I ,/ .I. .~I -
nomizs." (unpublished manuscript).
13. The present author wishes to express a debt of gratitude to the two trailblazers into this
subject: Jarret B. Wollstein, Public Services Under Laissc; Faire (New York: Arno Press,
1974). and Murray N. Rothbard, For n New Liberty (New York: Macmillan, 1973). pp.
202-218.
14. William Vickrey, "Pricing and Resource Allocation in Transportation and Public Utilities,"
Americon Economic R ~ v i e w(May 1963), p. 452; Vickrey, "Breaking the Bottleneck by
Sophisticated Pricing of Roadway Use," General Morors Quorlerlj (Spring 1974). p. 24.
15. Says Murray N. Rathbard: "The answer is that everyone, in purchasing homes or street
service in a libertarian society, would make sure that the purchase or lease contract provides
full access for whatever term of years is specified. With this sort of'easement' provided in
advance by contract, no such sudden blockade would be allowed, since it would be an
invasion of the property right of the landowner." For o New Liberty, p. 205.
16. F. A. Hayek, The Constitulion o/Liberty (Chicago: University of Chicago Press. 1960). p.
160.
17. We assume away here the presence of psychic income phenomena. See the present authois
"Caase and Demsetr on Private Property Rights," The JournolofLiberrarion Studies, Vol.
I, No. 2 (Spring 1977) p. I 1 1.
18. George M. Smerk, W b o n Transponotion: The Federal Role (Bloamington, Ind.: Indiana
University Press, 1965) p. 228.
19. Robert H. Haveman, The Economics qf the Public Seelor (New York: John Wiley and
Sons. 1970). rr. 23. For a telline criticism of the "control over oricc" confusion. see Murrav
N. ~ a t h b a r d ,Mon. ~conomy-andSlate (LOS Angeles: ~ a s h ' p u h .Co.. 1971). pp. 87-90.
20. Cf. Israel Kirzner, Compelition and Entrepreneurship (Chicago: University of Chicago
Press, 1973).
238 THE JOURNAL O F LIBERTARIAN STUDIES

Alfred W. Stonier and Douglas C. Hague, A Texrbook ofEconomic Theory (3rd Ed., New
York: John Wiley and Sons, 1964), p. 104.
See Lionel Robbins, A n Essas on rhe Nature and Signifreonce of Economic Science
(London: Macmillan, 1932).
23. Kirzner, Comperirion and Enrrepreneurrhip, pp. 122-123.
24. The Merropoliran Tronsporrarion Problem (Washington, D.C.: The Braokings Institution,

25.
-,~~,.
1956) n. ~119 ~ . .
John Burchard, "Design and Urban Beauty in the Central City," in J. Q. Wilson, ed., fie
Mererropoliron Enigma (Garden City, N.Y.: Doubleday. 1970). p. 245.
26. Noble, "Highway Design," pp. 546-547.
27. Z. Haritas, "Theory of Road Pricing," 13 Tronsporrdion Journol (Spring 1974), p. 57.
28. Smerk, Orbon Transporrorion. p. 228.
29. Even if someone intends, for same reason, to purposefully invest in a "lasing" praposition,
we would still deny, exnnre, that he intends to worsen his posilion. That people act in order
to benefit themselves is an axiom of economics. If a person intends to lose mone.v through
his investment. it could only be because, by so doing, he thinks he will increase his psychic
income by enough to more than compensate himself for his loss of money. In short. hc is
engaging in charity.
30. Roth, Poying/or Roods. p. 63.
31. Herbert Mahring, "Urban Highway Investmenls," in Robert Dorfman, ed.. Measuring
Benqlirs of Governmmr lnv~srmenls(Washington, D.C.: The Brookings Institution. 1965),
n 240
r. ~ ~

32. Haritas, "Theory of Road Pricing," p. 56.


33. Winch, Economics o/ Highway Planning, p. 3.
34. Fur an explanation of "monopoly" as a government grant of exclusive privilege, see
Rathbard, Man. Economy, and Slale. pp. 586-619.
Rethinking Patent Law
Gene Callahan*

Several stories recently in the news call for a fresh look at patent law. For the last
few months there has, quite rightly, been great consternation throughout the
software world over Amazon.com's "one-click" patent, whereby the company has
patented the idea of purchasing items with a single mouse click. James Gleick,
writing in the NY Times Sunday Magazine of March 12, said: "When 21st-century
historians look back at the breakdown of the United States patent system, they will
see a turning point in the case of Jeff Bezos and Amazon.com and their special
invention: 'The patented One Clickr feature,' Bezos calls it."

More horrifically, British Telecom announced a couple of weeks ago that they have a
patent on hyperlinks, and that they mean to begin enforcing it. Apparently, in 1989,
someone at BT succeeded in registering this patent, despite several decades of "prior
art." After doing nothing with it for over a decade, BT suddenly woke up to the fact
that they had the opportunity to collect tolls on the Information Superhighway.

Adding to the list of current worries, the completion of the mapping of the human
genome last month raises the specter of the patenting of genetic information.

As Gleick says, "In ways that could not have been predicted even a few years ago,
the patent system is in crisis." Innovation in high technology fields is overwhelming
the capabilities of patent examiners, who cannot be expected to judge these issues
well. It is impossible for a trained engineer working full-time in a specialized section
of the computer field, say, database technology, to keep up with more than a small
percentage of the advances in the area.

However, this is not really a new problem, but, rather, the worsening of an old one.
Gleick quotes the commissioner of Patents and Trademarks, Q. Todd Dickinson, as
claiming: "The patent system has done its job for two centuries of protecting and
nurturing and rewarding innovation. The system has worked."

But what is the evidence that patent law ever "worked"? Certainly, the U.S. has had
a great history of invention. Some of these inventions might not have existed if
patents did not exist. On the other hand, we may have had other inventions that
would have existed except for patent law. The late economist Murray Rothbard says,
in Man, Economy and State:

It is by no means self-evident that patents encourage an increased


absolute quantity of research expenditures. But certainly patents
distort the type of research expenditure being conducted. For while it
is true that the first discoverer benefits from the privilege, it is also
true that competitors are excluded from production in the area of the
patent for many years... Moreover, the patentee is himself discouraged

*"Rethinking Patent Law," Mises.org Daily Article, July 8, 2000.


http://www.mises.org/fullstory.aspx?control=468&FS=Rethinking+Patent+Law

1
from engaging in further research in this field, for the privilege permits
him to rest on his laurels....

And, as intellectual property lawyer Stephan Kinsella points out, "...maybe more
money for R&D would be available if it were not being spent on patents and
lawsuits."

The idea that patent law "used to work" relies heavily on the indefensible notion that
someone could objectively determine whether "too little" invention is occurring.
Gleick says, "[Patent law] fueled industrial progress in the early United States..." But
how does he know? Did he examine the history of an alternate-universe United
States and observe that it had less industrial progress? All we can say for certain is
that the early United States had both patent law and rapid industrial progress.
Perhaps it had rapid industrial progress despite patent law. Or perhaps it was
powdery wigs that led to America's prosperity. We can gain an understanding of
whether patent law "worked" only with the aid of a coherent theory of property
rights and their effect on economic progress.

If we examine these foundations, we find that patents are not grounded in common
law notions of property rights, but, instead, are a government intervention that
strips the property rights of those who, through independent invention, arrive at the
same device as a patent holder. To again quote Rothbard, "Patents prevent a man
from using his invention even though all the property is his and he has not stolen the
invention, either explicitly or implicitly, from the first inventor."

Most of the positive aspects of patents can be gained through trade secrets and
licensing agreements, while avoiding many of these negative ones. The conclusion of
Gleick's article is well reasoned and persuasive—except that what he views as an
argument for "reforming" the patent system is actually an argument for eliminating
it:

One thing is certain: the modern Internet entrepreneur is not a species


in need of extra government incentives. If one-click ordering had not
been patentable, surely Jeff Bezos would have invented it anyway in
May 1997, put it to work in September 1998 and seen it copied in
subsequent years by Barnes & Noble and thousands of other Internet
merchants, all learning from his success, to the benefit of consumers.

Surely he would have become a very rich man; and his future success
would depend on his ability to continue outperforming his competitors,
and to continue innovating.

2
In Praise of Bugs
by Gene Callahan*

Few pundits are willing to question the overall efficiency of the market economy, but
claims of market failure are still commonplace. One area where this complaint has
been heard with some frequency is that of software reliability. Wall Street Journal
tech columnist Walter Mossberg wrote a column last year entitled "I'm Tired of the
Way Windows Freezes!" in which he indicts the reliability of his PC software.

As Mossberg puts it, "[Computers] should just work, all the time." In a similar vein,
San Jose Mercury News tech columnist Dan Gillmor complains, "...the attitude [of the
technical industry ] toward reliability and customer service has been scandalous."

Over the years, any number of other writers have sounded similar themes: computer
systems are too buggy, if programmers built houses we’d be afraid to live in them,
and so on. In the view of these writers, software defects are a moral issue, instead
of simply a result of the well-known trade-off between schedule, cost, and quality.
For them, there is no trade-off possible—defects are a moral failing, and a complete
absence of defects must be assured, whatever achieving this goal does to the cost
and the schedule.

But is achieving bug-free software always in the customer’s best interest? Consider
an example. I once went to work for a partnership that trades stocks with the
partners’ capital. There, the people who specified the software, the people who
managed its development, the people who paid for this development and the end
users were all the same people! There is little risk that the same group of people, in,
for instance, their role managing the development, are misrepresenting their own
interests in their role as users of the end product.

Nevertheless, I was shocked at the haste with which my first development effort was
put into production, practically untested. One of the partners explained to me that
this was not recklessness or ignorance, but simple accounting sense. For a company
creating an automated trading system, one measure of its quality would be the ratio
of "good trades" (i.e., trades the designers intended the system to make) to "bad
trades." If the average cost for a bad trade is $600, and the average benefit of a
good one $400, then at the point the system would generate 61% good trades, it is
profitable. Any pre-release testing beyond that point is costing the firm money.
Further testing may make the system more profitable, but by 61% it is worth
releasing.

After the publication of Mossberg’s column, one woman wrote to him: "I never have
to reboot my refrigerator, no matter what I put in it." But a refrigerator does the
same thing with all inputs—keeps them cold. It doesn’t have to connect to your head
of cabbage, format your waffles, recalculate the spiciness of your horseradish, or
spell check the labels on your pickles. A refrigerator is a fairly simple device, and a

*"In Praise of Bugs," Mises.org Daily Article, March 27, 2000. http://www.mises.org/story/404
refrigeration engineer could explain the inner workings of one to Mossberg’s
correspondent in about half an hour.

On the other hand, modern computer systems are among the most complex devices
humans have ever constructed. To achieve a moderate understanding of the inner
workings of Windows NT or Linux, starting from scratch, would take years. Sounding
the same theme as Mossberg’s correspondent, Gillmor writes, "The appliances we
use at home do not crash." He seems blissfully unaware of the existence of washing
machine repairmen, plumbers, electricians, telephone repairmen, and the dozens of
other trades that help maintain our homes.

Consumers' fantasies about life in an ideal world where there is a surplus of


everything is irrelevant to economics. In such a world there would no longer be
economic goods, and the science itself would cease to be of importance. Consumers
would no doubt love to have software that contained every feature they might ever
want to use, was completely without defects, and merely appeared on a small
portion of their hard drive at no cost.

But here in the real world, where resources are scarce, consumption involves
choosing A while foregoing B. Software can be made more reliable only by leaving
out features, or increasing the cost of developing it, or both. Consumers’ preferences
in regard to this trade-off are embodied in their actual purchases.

Gillmor says: "[Consumers] just don't want to consider the possibility that low prices
can mean not-so-great service… People have to patronize the companies that
provide quality, and have to be willing to pay more." He doesn’t seem to consider
that consumers might be aware of this possibility and could rationally choose to
trade quality for price. Someone using an online brokerage might decide that saving
$15 a trade is worth suffering the service being down for one hour a month. But for
Gillmor making this seemingly rational trade-off is a sign of obtuseness on the part
of the consumer.

Even in the market most thoroughly dominated by Microsoft, desktop operating


systems, consumers are able to make their own choices on software reliability. There
are, after all, two major varieties of Windows on the market. Windows 98, the
cheaper of the two, is much more prone to crashing than Windows NT, the more
expensive. This fact is well publicized in reviews and advice columns. Yet consumers
overwhelmingly opt for Windows 98. Why shouldn’t they have this option?

Microsoft may or may not have a monopoly in some or all of its markets. Whatever
the case, Microsoft certainly spends a great deal of time and effort putting out new
releases of its products. As is often lamented, these releases tend to focus on new
features, and generally contain about the same number of problems as pervious
releases. But if customers truly cared about the bugs more than the new features,
even as a monopolist, wouldn’t Microsoft want to focus on that area, so as to sell
more upgrades?

There is no reason to conclude that consumers are not getting the level of software
reliability they prefer, given the scarcity of resources available to produce software.
But let us imagine for a moment that this were not the case. Either explicitly or
implicitly, views like those described above contain calls for the government to "do
something" about the problem. Once interventionists believe that they have found an
area in which the market’s behavior is, in some sense, "less than optimal," they feel
that they have fully justified the case for government intervention. But, as Nobel-
Prize-winning economist Ronald Coase points out, they have barely begun: Even if
most software is, in some sense, "too buggy," what evidence exists that some
government intervention could improve the situation?

A regime of government-enforced strict liability for all software products would


decimate the industry, making the risks of developing software prohibitive for all but
behemoths like Microsoft—hardly the result the interventionists desire! Another
common suggestion is to enforce a licensing system for software engineers.
However, such schemes, by driving up the cost of entry, serve to protect the salary
of those who can acquire the licenses and to raise the cost of software. I know of no
evidence that practitioners who have, for instance, a masters in Computer Science
produce software that is more reliable than those who have entered the field with no
formal training.

The attempt to replace the actual preferences of consumers, as expressed in their


willingness to pay real prices for real products, with fanciful musings about an ideal
world in which one’s ends are achieved without expending any means except
jawboning is doomed to disappoint. Such frivolity is not an attempt to strive toward
an unrealizable standard, as there is no striving involved on the part of the
daydreamer! Instead, these ideas, when acted upon by the state, only serve to
cripple our ability to create the less-than-perfect goods that we less-than-perfect
beings actually can produce.
The Idea of Liberty is Western
Ludwig von Mises*

The history of civilization is the record of a ceaseless struggle for liberty.

Social cooperation under the division of labor is the ultimate and sole source of
man's success in his struggle for survival and his endeavors to improve as much as
possible the material conditions of his well-being. But as human nature is, society
cannot exist if there is no provision for preventing unruly people from actions
incompatible with community life. In order to preserve peaceful cooperation, one
must be ready to resort to violent suppression of those disturbing the peace. Society
cannot do without a social apparatus of coercion and compulsion, i.e., without state
and government. Then a further problem emerges: to restrain the men who are in
charge of the governmental functions lest they abuse their power and convert all
other people into virtual slaves. The aim of all struggles for liberty is to keep in
bounds the armed defenders of peace, the governors and their constables. Freedom
always means: freedom from arbitrary action on the part of the police power.

The idea of liberty is and has always been peculiar to the West. What separates East
and West is first of all the fact that the peoples of the East never conceived the idea
of liberty. The imperishable glory of the ancient Greeks was that they were the first
to grasp the meaning and significance of institutions warranting liberty. Recent
historical research has traced back to Oriental sources the origin of some of the
scientific achievements previously credited to the Hellenes. But nobody has ever
contested that the idea of liberty was created in the cities of ancient Greece. The
writings of Greek philosophers and historians transmitted it to the Romans and later
to modern Europe and America. It became the essential concern of all Western plans
for the establishment of the good society. It begot the laissez-faire philosophy to
which mankind owes all the unprecedented achievements of the age of capitalism.

The meaning of all modern political and judicial institutions is to safeguard the
individuals' freedom against encroachments on the part of the government.
Representative government and the rule of law, the independence of courts and
tribunals from interference on the part of administrative agencies, habeas corpus,
judicial examination and redress of acts of the administration, freedom of speech and
the press, separation of state and church, and many other institutions aimed at one
end only: to restrain the discretion of the officeholders and to render the individuals
free from their arbitrariness.

The age of capitalism has abolished all vestiges of slavery and serfdom. It has put an
end to cruel punishments and has reduced the penalty for crimes to the minimum
indispensable for discouraging offenders. It has done away with torture and other
objectionable methods of dealing with suspects and lawbreakers. It has repealed all

*Ludwig von Mises, "The Idea of Liberty is Western," Money, Method, and the Market Process (Norwell,
Mass.: Kluwer Academic Publishers, 1990), chap. 21.

1
privileges and promulgated equality of all men under the law. It has transformed the
subjects of tyranny into free citizens.

The material improvements were the fruit of these reforms and innovations in the
conduct of government affairs. As all privileges disappeared and everybody was
granted the right to challenge the vested interests of all other people, a free hand
was given to those who had the ingenuity to develop all the new industries which
today render the material conditions of people more satisfactory. Population figures
multiplied and yet the increased population could enjoy a better life than their
ancestors.

Also in the countries of Western civilization there have always been advocates of
tyranny—the absolute arbitrary rule of an autocrat or an aristocracy on the one hand
and the subjection of all other people on the other hand. But in the Age of
Enlightenment the voices of these opponents became thinner and thinner. The cause
of liberty prevailed. In the first part of the nineteenth century the victorious advance
of the principle of freedom seemed to be irresistible. The most eminent philosophers
and historians got the conviction that historical evolution tends toward the
establishment of institutions warranting freedom and that no intrigues and
machinations on the part of the champions could stop the trend toward liberalism.

II

In dealing with the preponderance of the liberal social philosophy there is a


disposition to overlook the power of an important factor that worked in favor of the
idea of liberty, viz., the eminent role assigned to the literature of ancient Greece in
the education of the elite. There were among the Greek authors also champions of
government omnipotence, such as Plato. But the essential tenor of Greek ideology
was the pursuit of liberty. Judged by the standards of modern liberal and democratic
institutions, the Greek city-states must be called oligarchies. The liberty which the
Greek statesmen, philosophers and historians glorified as the most precious good of
man was a privilege reserved to a minority. In denying it to metics and slaves they
virtually advocated the despotic rule of an hereditary caste of oligarchs. Yet it would
be a grave error to dismiss their hymns to liberty as mendacious. They were no less
sincere in their praise and quest of freedom than were, two thousand years later, the
slaveholders George Washington and Thomas Jefferson. It was the political literature
of the ancient Greeks that begot the ideas of the Monarchomachs, the philosophy of
the Whigs, the doctrines of Althusius, Grotius, and John Locke, and the ideology of
the fathers of modern constitutions and bills of rights. It was the classical studies,
the essential feature of a liberal education, that kept awake the spirit of freedom in
England of the Stuarts and George III, in France of the Bourbons, and in Italy,
subject to the despotism of a galaxy of princes.

No less a man than Bismarck, among the nineteenth-century statesmen the foremost
foe of liberty, bears witness to the fact that even in the Prussia of Frederick William
III the Gymnasium was a stronghold of republicanism. [1] The passionate endeavors
to eliminate the classical studies from the curriculum of the liberal education and
thus virtually to destroy its very character were one of the major manifestations of
the revival of the servile ideology.

2
It is a fact that a hundred years ago only a few people anticipated the overpowering
momentum which the antiliberal ideas were destined to acquire in a very short time.
The ideal of liberty seemed to be so firmly rooted that everybody thought that no
reactionary movement could ever succeed in eradicating it. It is true, it would have
been a hopeless venture to attack freedom openly and to advocate unfeignedly a
return to subjection and bondage. But antiliberalism got hold of people's minds
camouflaged as superliberalism, as the fulfillment and consummation of the very
ideas of freedom and liberty. It came disguised as socialism, communism, and
planning.

No intelligent man could fail to recognize that what the socialists, communists, and
planners were aiming at was the most radical abolition of the individual's freedom
and the establishment of government omnipotence. Yet the immense majority of the
socialist intellectuals were convinced that in fighting for socialism they were fighting
for freedom. They called themselves left-wingers and democrats, and nowadays they
are even claiming for themselves the epithet liberals.

These intellectuals and the masses who followed their lead were in their
subconsciousness fully aware of the fact that their failure to attain the far-flung goals
which their ambition impelled them to aim at was due to deficiencies of their own.
They were either not bright enough or not industrious enough. But they were eager
not to avow their inferiority both to themselves and to their fellow men and to search
for a scapegoat. They consoled themselves and tried to convince other people that
the cause of their failure was not their own inferiority but the injustice of society's
economic organization. Under capitalism, they declared, self-realization is only
possible for the few. "Liberty in a laissez-faire society is attainable only by those who
have the wealth or opportunity to purchase it." [2] Hence, they concluded, the state
must interfere in order to realize "social justice." What they really meant is, in order
to give to the frustrated mediocrity "according to his needs."

III

As long as the problems of socialism were merely a matter of debates people who
lack clear judgment and understanding could fall prey to the illusion that freedom
could be preserved even under a socialist regime. Such self-deceit can no longer be
nurtured since the Soviet experience has shown to everybody what conditions are in
a socialist commonwealth. Today the apologists of socialism are forced to distort
facts and to misrepresent the manifest meaning of words when they want to make
people believe in the compatibility of socialism and freedom.

The late Professor Laski—a self-styled noncommunist or even anticommunist—told


us that "no doubt in Soviet Russia a Communist has a full sense of liberty; no doubt
also he has a keen sense that liberty is denied him in Fascist Italy." [3] The truth is
that a Russian is free to obey all the orders issued by the great dictator. But as soon
as he deviates a hundredth of an inch from the correct way of thinking as laid down
by the authorities, he is mercilessly liquidated. All those politicians, office-holders,
authors, musicians, and scientists who were "purged" were—to be sure—not
anticommunists. They were, on the contrary, fanatical communists, party members
in good standing, whom the supreme authorities, in due recognition of their loyalty
to the Soviet creed, had promoted to high positions. The only offense they had

3
committed was that they were not quick enough in adjusting their ideas, policies,
books or compositions to the latest changes in the ideas and tastes of Stalin. It is
difficult to believe that these people had "a full sense of liberty" if one does not
attach to the word liberty a sense which is precisely the contrary of the sense which
all people always used to attach to it.

Fascist Italy was certainly a country in which there was no liberty. It had adopted the
notorious Soviet pattern of the "one party principle" and accordingly suppressed all
dissenting views. Yet there was still a conspicuous difference between the Bolshevik
and the Fascist application of this principle. For instance, there lived in Fascist Italy a
former member of the parliamentary group of communist deputies, who remained
loyal unto death to his communist tenets, Professor Antonio Graziadei. He regularly
received the pension which he was entitled to claim as professor emeritus, and he
was free to write and to publish, with the most eminent Italian publishing firms,
books which were orthodox Marxian. His lack of liberty was certainly less rigid than
that of the Russian communists who, as Professor Laski chose to say, "no doubt"
have "a full sense of liberty."

Professor Laski took pleasure in repeating the truism that liberty in practice always
means liberty within law. He went on saying that the law always aims at "the
conference of security upon a way of life which is deemed satisfactory by those who
dominate the machinery of state." [4] This is a correct description of the laws of a
free country if it means that the law aims at protecting society against conspiracies
intent upon kindling civil war and upon overthrowing the government by violence.
But it is a serious misstatement when Professor Laski adds that in a capitalistic
society "an effort on the part of the poor to alter in a radical way the property rights
of the rich at once throws the whole scheme of liberties into jeopardy." [5]

Take the case of the great idol of Professor Laski and all his friends, Karl Marx. When
in 1848 and 1849 he took an active part in the organization and the conduct of the
revolution, first in Prussia and later also in other German states, he was—being
legally an alien—expelled and moved, with his wife, his children, and his maid, first
to Paris and then to London. [6] Later, when peace returned and the abettors of the
abortive revolution were amnestied, he was free to return to all parts of Germany
and often made use of this opportunity. He was no longer an exile, and he chose of
his own account to make his home in London. [7] Nobody molested him when he
founded, in 1864, the International Working Men's Association, a body whose
avowed sole purpose it was to prepare the great world revolution. He was not
stopped when on behalf of this association he visited various Continental countries.
He was free to write and to publish books and articles which, to use the words of
Professor Laski, were certainly an effort "to alter in a radical way the property rights
of the rich." And he died quietly in his home, 41, Maitland Park road, on March 14,
1883.

Or take the case of the British Labor Party. Their effort "to alter in a radical way the
property rights of the rich" was, as professor Laski knew very well, not hindered by
any action incompatible with the principle of liberty.

Marx, the dissenter, could at ease live, write and advocate revolution in Victorian
England just as the Labor Party could at ease engage in all political activities in post-

4
Victorian England. In Soviet Russia not the slightest opposition is tolerated. This is
what the difference between liberty and slavery means.

IV

The critics of the legal and constitutional concept of liberty and the institutions
devised for its practical realization are right in their assertion that freedom from
arbitrary action on the part of the officeholders is in itself not yet sufficient to make
an individual free. But in emphasizing this indisputable truth they are running against
open doors. For no advocate of liberty ever contended that to restrain the
arbitrariness of officialdom is all that is needed to make the citizens free. What gives
to the individuals as much freedom as is compatible with life in society is the
operation of the market system. The constitutions and bills of rights do not create
freedom. They merely protect the freedom that the competitive economic system
grants to the individuals against encroachments on the part of the police power.

In the market economy people have the opportunity to strive after the station they
want to attain in the structure of the social division of labor. They are free to choose
the vocation in which they plan to serve their fellow men. In a planned economy they
lack this right. Here the authorities determine each man's occupation. The discretion
of the superiors promotes a man to a better position or denies him such promotion.
The individual entirely depends on the good graces of those in power. But under
capitalism everybody is free to challenge the vested interests of everybody else. If
he thinks that he has the ability to supply the public better or more cheaply than
other people do, he may try to demonstrate his efficiency. Lack of funds cannot
frustrate his projects. For the capitalists are always in search of men who can utilize
their funds in the most profitable way. The outcome of his business activities
depends alone on the conduct of the consumers who buy what fits them best.

Neither does the wage earner depend on the employer's arbitrariness. An


entrepreneur who fails to hire those workers who are best fitted for the job
concerned and to pay them enough to prevent them from taking another job is
penalized by a reduction of net revenue. The employer does not grant to his
employees a favor. He hires them as an indispensable means for the success of his
business in the same way in which he buys raw materials and factory equipment.
The worker is free to find the employment which suits him best.

The process of social selection that determines each individual's position and income
is continuously going on in the capitalist society. Great fortunes are shrinking and
finally melting away completely while other people, born in poverty, ascend to
eminent positions and considerable incomes. Where there are no privileges and
governments do not grant protection to vested interests threatened by the superior
efficiency of newcomers, those who have acquired wealth in the past are forced to
acquire it every day anew in competition with all other people.

Within the framework of social cooperation under the division of labor everybody
depends on the recognition of his services on the part of the buying public of which
he himself is a member. Everybody in buying or abstaining from buying is a member
of the supreme court which assigns to all people—and thereby also to himself—a
definite place in society. Everybody is instrumental in the process that assigns to

5
some people a higher and to others a smaller income. Everybody is free to make a
contribution which his fellow men are prepared to reward by the allocation of a
higher income. Freedom under capitalism means: not to depend more on other
people's discretion than these others depend on one's own. No other freedom is
conceivable where production is performed under the division of labor and there is no
perfect economic autarky of everybody.

There is need to stress the point that the essential argument advanced in favor of
capitalism and against socialism is not the fact that socialism must necessarily
abolish all vestiges of freedom and convert all people into slaves of those in power.
Socialism is unrealizable as an economic system because a socialist society would
not have any possibility of resorting to economic calculation. This is why it cannot be
considered as a system of society's economic organization. It is a means to
disintegrate social cooperation and to bring about poverty and chaos.

In dealing with the liberty issue one does not refer to the essential economic problem
of the antagonism between capitalism and socialism. One rather points out that
Western man as different from the Asiatics is entirely a being adjusted to life in
freedom and formed by life in freedom. The civilizations of China, Japan, India, and
the Mohammedan countries of the Near East as they existed before these nations
became acquainted with Western ways of life certainly cannot be dismissed as
barbarism. These peoples already many hundreds, even thousands of years ago
brought about marvelous achievements in the industrial arts, in architecture, in
literature and philosophy and in the development of educational institutions. They
founded and organized powerful empires. But then their effort was arrested, their
cultures became numb and torpid, and they lost the ability to cope successfully with
economic problems. Their intellectual and artistic genius withered away. Their artists
and authors bluntly copied traditional patterns. Their theologians, philosophers, and
lawyers indulged in unvarying exegesis of old works. The monuments erected by
their ancestors crumbled. Their empires disintegrated. Their citizens lost vigor and
energy and became apathetic in the face of progressing decay and impoverishment.

The ancient works of Oriental philosophy and poetry can compare with the most
valuable works of the West. But for many centuries the East has not generated any
book of importance. The intellectual and literary history of modern ages hardly
records any name of an Oriental author. The East has no longer contributed anything
to the intellectual effort of mankind. The problems and controversies that agitated
the West remained unknown to the East. In Europe there was commotion; in the
East there was stagnation, indolence, and indifference.

The reason is obvious. The East lacked the primordial thing, the idea of freedom
from the state. The East never raised the banner of freedom, it never tried to stress
the rights of the individual against the power of the rulers. It never called into
question the arbitrariness of the despots. And, first of all, it never established the
legal framework that would protect the private citizens' wealth against confiscation
on the part of the tyrants. On the contrary, deluded by the idea that the wealth of
the rich is the cause of the poverty of the poor, all people approved of the practice of
the governors of expropriating successful businessmen. Thus big scale capital

6
accumulation was prevented, and the nations had to miss all those improvements
that require considerable investment of capital. No "bourgeoisie" could develop, and
consequently there was no public to encourage and to patronize authors, artists, and
inventors.

To the sons of the people all roads toward personal distinction were closed but one.
They could try to make their way in serving the princes. Western society was a
community of individuals who could compete for the highest prizes. Eastern society
was an agglomeration of subjects entirely depending on the good graces of the
sovereigns. The alert youth of the West looks upon the world as a field of action in
which he can win fame, eminence, honors, and wealth; nothing appears too difficult
for his ambition. The meek progeny of Eastern parents know of nothing else than to
follow the routine of their environment. The noble self-reliance of Western man found
triumphant expression in such dithyrambs as Sophocles' choric Antigone-hymn upon
man and his enterprising effort and Beethoven's Ninth Symphony. Nothing of the
kind has ever been heard in the Orient.

Is it possible that the scions of the builders of the white man's civilization should
renounce their freedom and voluntarily surrender to the suzerainty of omnipotent
government? That they should seek contentment in a system in which their only task
will be to serve as cogs in a vast machine designed and operated by an almighty
planmaker? Should the mentality of the arrested civilizations sweep the ideals for the
ascendancy of which thousands and thousands have sacrificed their lives?

Ruere in servitium, they plunged into slavery, Tacitus sadly observed in speaking of
the Romans of the age of Tiberius.

[Reprinted here from American Affairs (October 1950)—Ed.]

[1] Cf. Otto von Bismark, Gedanken und Erinnerungen, vol. 1 (New York: Cotta,
1898), p. 1.

[2] Cf. H. Laski, "Liberty" in Encyclopaedia of the Social Siences, vol. 9 (New York:
Macmillan, 1930), p. 448.

[3] Cf. Ibid., p. 445-46.

[4] Cf. Ibid., p. 446.

[5] Cf. Ibid., p. 446.

7
[6] About Marx's activities in the years 1848 and 1849 see: Karl Marx,
"Chronikseines Lebens in Einzeldaten" (Moscow: Marx-Engels-Lenin-Institute, 1934),
pp. 48-81.

[7] In 1845 Marx voluntarily renounced his Prussian citizenship. When later, in the
early 1860's, he considered a political career in Prussia, the ministry denied his
application for restoring his citizenship. Thus a political career was closed to him.
Perhaps this fact decided him to remain in London.

8
The Plight of the Underdeveloped Nations
Ludwig von Mises*

Foreign investment was an achievement of laissez-faire capitalism. It developed step


by step only in the nineteenth century. Writing in 1817, Ricardo could still assert that
most men of property are "satisfied with a low rate of profits in their own country,
rather that seek a more advantageous employment for their wealth in foreign
nations." [1]

What impelled entrepreneurs and capitalists toward foreign investment was, of


course not "altruism," but the eagerness to earn profits by supplying the domestic
consumers in the best possible and cheapest way with those commodities they
demanded most urgently. They went into foreign countries in order to supply the
home market directly or indirectly (i.e., by triangular trade) with raw materials and
foodstuffs which could otherwise not have been obtained at all or only at higher
costs. If the consumers had been more eager for the acquisition of a greater quantity
of goods that could be produced at home without the aid of foreign resources than
for imported food and raw materials, it would have been more profitable to expand
domestic production further than to invest abroad.

But foreign investment benefited the receiving nations no less than the investing
nations. These receiving nations were backward and underdeveloped insofar as they
had been slow in developing those ideological and institutional conditions which are
the indispensable prerequisite of large scale capital accumulation. While amply
endowed by nature, they lacked the capital needed for the exploitation of their
dormant resources. On account of the paucity of capital available, the marginal
productivity of labor and thereby wage rates were low when compared with the state
of affairs in the capitalistic countries. The inflow of foreign capital raised wage rates
and improved the masses' average standard of living.

The socialists provide a different interpretation of the problems involved. As they see
it, a business enterprise is a contrivance to exploit unfairly the workers employed. Its
very existence and operation are contrary to the external laws of morality. There is
but one means to put an end to this exploitation, namely socialization, i.e., the
expropriation of the private capitalists and entrepreneurs and the transfer of their
plants, mines, and farms to the hands of the state. This is what the labor
government is anxious to achieve in the United Kingdom and what the Iranian
government, imbued with a truly Fabian spirit, is just doing in its own country. If it is
right for the British to nationalize the the British coal mines, it cannot be wrong for
the Iranians to nationalize the Iranian oil industry. If Mr. Attlee [2] were consistent,
he would have congratulated the Iranians on their great socialist achievement. But
no socialist can be or ever was consistent.

*Ludwig von Mises, "The Plight of the Underdeveloped Nations," Money, Method, and the Market Process
(Norwell, Mass.: Kluwer Academic Publishers, 1990), chap. 12.
1

1
It is hopeless for the British to dissuade the Iranians from nationalizing the British-
owned wells, refineries, and pipe lines by pointing out the disadvantages that will
certainly result for the people of Iran. They themselves did not pay heed to such
"reactionary" talk when the problem of nationalizing various British industries was at
issue.

Under the present state of international law every sovereign nation is free to deal as
it pleases with all property situated within its boundaries. A foreign government may
diplomatically protest and support claims of its citizens for an indemnification. But if
the government of the nationalizing nation is not prepared to yield to such diplomatic
overtures, that settles the matter. It is enough to refer to such precedents as the
case of Russia in 1917 or the case of the Mexican expropriation of the oil industry.

The foreign government may submit the case to the International Court of Justice.
But the decisions of this Court are practically unenforceable.

If the foreign government resorts to the ultima ratio regum, to military intervention,
this would under the charter of the United Nations represent a clear case of
aggression.

The pundits of international law and the lawyers of the United Nations will certainly
write very profound reports and treatises about the legal aspect of the Anglo-Iranian
conflict. Such utterances are not worth the paper on which they are printed. The
simple truth is that if the government of Iran does not of its own accord change its
mind because it may expect some immediate political and material gain from such a
change, nothing can prevent it from expropriating the oil industry. For it is obvious
that Great Britain cannot win anything by military measures. Even in the unlikely
event of a British success, the British would discover that bayonets are very
uncomfortable to sit upon in a business office. Besides there is the spectre of a
Russian occupation of the greater part of Iran and the still more threatening danger
of a new world war.

II

The immediate consequences of the Iranian oil expropriation are very sad indeed. It
seriously affects the military plans of the Western powers and revolutionizes
conditions on the world oil market.

Still more important are the remoter consequences of the affair. Foreign investment
of private enterprises and citizens already came to an almost complete standstill
years ago. The private investor has learned from experience that investing abroad is
virtually tantamount to throwing away one's own wealth. It is true, not all receiving
countries resorted to undisguised expropriation of property and repudiation of loans.
But many of the "good" countries too have effectively robbed the foreign investors
and creditors by foreign exchange control and discriminatory taxation. It is of little
use for an American or a Swiss to own a blocked balance with a Ruritanian bank,
especially if he notices that the purchasing power and the equivalent in hard
currency of the Ruritanian monetary unit is dropping more and more.

2
The American Administration recommends as an adequate substitute for private
investment abroad public investment and loans either granted directly by the
governmental (national or international) banks or guaranteed by such banks. The
idea is that the governments, first of all the American government, should fill the gap
that the anti-capitalistic policies of the underdeveloped countries have willfully
created. But the example of Iran shows that such governmental investments and
loans are also not safe against predatory ventures. Why should the American
government pump American funds into Ruritania if the Ruritanian parliament is free
to deal with them as it pleases? Are there no investment opportunities left within the
United States? It is rather unrealistic to assume that Congress will continue to
tolerate a policy that subsidizes foreign countries at the expense of the American
taxpayer. There is no use in fooling ourselves. The hopes that the much talked about
Point Four [3] may work as a satisfactory substitute for the disintegrated
international capital market have proved fallacious.

III

It is this disintegration of the international capital market that creates the plight of
the underdeveloped countries.

These countries were in the last decades benefited by the modern methods of
fighting epidemics and other diseases which the capitalistic West has developed.
Mortality rates dropped and the average length of life was prolonged. Population
increased considerably. But the economic policies of these nations are preventing an
expansion of the insufficient amount of domestic saving and capital accumulation;
sometimes they even directly induce capital de-accumulation. As there is no longer
any importation of foreign capital worth mentioning, the per head quota of capital
invested decreases. The outcome is a drop in the marginal productivity of labor. But
at the same time the governments and the labor unions try to enforce wage rates
which exceed the marginal productivity of labor. The result is spreading
unemployment.

Unaware of the causes of unemployment the governments try to remove it by


various measures which, although entirely futile, are so costly that they by far
exceed the public revenue and are financed by the issuance of additional fiat money.
Inflation still more discourages domestic saving and capital formation.

The governments of all these underdeveloped countries indefatigably talk of the


necessity to "industrialize" and to modernize the outdated methods of agricultural
production. But their own policies are the main obstacle to any improvement and
economic progress. There cannot be any question of imitating the technological
procedures of the capitalistic countries if there is no capital available. Whence should
this capital come if domestic capital formation as well as the inflow of foreign capital
are sabotaged?

About two hundred years ago conditions in England were hardly better, perhaps even
worse than they are today in India and China. The then prevailing system of
production was lamentably inadequate. In its frame there was no room left for an
ever increasing part of the population. Masses of destitute paupers were barely living
on the verge of starvation. The ruling landed aristocracy did not know of any means

3
to cope with these wretched people other than the poorhouse, the workhouse, and
the prison. But then came the "Industrial Revolution." Laissez-faire capitalism
converted the starving beggars into self-supporting breadwinners. It improved
conditions step by step until, at the end of the Victorian age, the average standard of
living of the common man was the highest in Europe, much higher than that of
people whom earlier ages had considered as sufficiently well-to-do.

What the underdeveloped nations must do if they sincerely want to eradicate penury
and to improve the economic conditions of their destitute masses is to adopt those
policies of "rugged individualism" which have created the welfare of Western Europe
and the United States. They must resort to laissez faire; they must remove all
obstacles fettering the spirit of enterprise and stunting domestic capital accumulation
and the inflow of capital from abroad.

But what the governments of these countries are really doing today is just the
contrary. Instead of emulating the polices that created the comparative wealth and
welfare of the capitalistic nations, they are choosing those contemporary policies of
the West which slow down the further accumulation of capital and lay stress on what
they consider to be a fairer distribution of wealth and income. Leaving aside the
problem whether or not these policies are beneficial to the economically advanced
nations, it must be emphasized that they are patently nonsensical when resorted to
in the economically backward countries. Where there is very little to be distributed, a
policy of an allegedly "fairer" redistribution is of no use at all.

IV

In the second part of the nineteenth century the shrewdest among the patriots of the
underdeveloped nations began to contrast the unsatisfactory conditions of their own
countries with the prosperity of the West. They could not help realizing that the
Europeans and Americans have better succeeded in fighting penury and starvation
than their own peoples. To make their own peoples as prosperous as those of the
West became their foremost aim. So they sent the elite of their youth to the
universities of Europe and America to study economics and thus to learn the secret
of raising the standard of living. Hindus, Chinese, Africans, and members of other
backward nations thronged the lecture halls, eagerly listening to the words of the
famous British, American, and German professors.

This is what these professors—Marxians, Fabians, Veblenians, socialists of the chair,


champions of government omnipotence and all-round planning, peacemakers of
inflation, deficit spending and confiscatory taxation—taught their students: rugged
individualism, the policy of laissez faire and private enterprise are the worst evils
that ever befell mankind. They enriched a few robber barons and condemned the
masses of decent people to ever-increasing poverty and degradation. But fortunately
the black age of capitalism is approaching its end. People will no longer let
themselves be fooled by the spurious doctrines of the sycophants of the bourgeoisie,
the depraved apologists of a manifestly unfair social order. We, the adamant
advocates of justice and riches for all, have for ever exploded the fallacies and
paralogisms of the orthodox authors. The Welfare State will bring prosperity and
security to everybody. The economics of abundance and plenty will be substituted for

4
the economics of scarcity. Production for use will be substituted for production for
profit. There will be freedom from want; i.e., everybody will get all he wants.

Never did these professors mention the—in their opinion manifestly absurd—truism
that there is no means to improve the conditions of any nation or the whole of
mankind other than to increase the per head quota of capital invested. On the
contrary. They indulged in expounding the Keynesian dogma of the dangers of
saving and accumulating capital. Never did they refer to the fact that nature—not the
capitalists—has made the means of human sustenance scarce. As they saw it, the
State had inexhaustible funds at its disposal that enabled the government to spend
without any limits. They have even today not yet realized that progressive taxation
has already exhausted this alleged surplus in all other countries and will have
exhausted it even in the United States very soon.

Indoctrinated with these principles the graduates of the Western universities


returned to their countries and tried to put into effect what they had learned. They
were sincerely convinced that to create prosperity for all nothing else was needed
than to apply the formulas of Occidental pseudo-progressivism. They thought that
industrialization means labor unions, minimum wage rates and unemployment doles
and that trade and commerce means controls of every kind. They wanted to
nationalize before they had permitted business to build plants and enterprises which
could be expropriated. They wanted to establish a new fair deal in countries whose
distress consisted precisely in the fact that they had not known what is today
disparaged as the old and unfair deal.

All these radical intellectuals of the underdeveloped countries blame Europe and
America for the backwardness and poverty of their own peoples. They are right, but
for reasons which are very different from those they themselves have in mind.
Europe and America did not cause the plight of the underdeveloped nations, but they
have prolonged its duration by implanting in their intellectuals the ideologies which
are the most serious obstacle to any improvement of conditions. The socialists and
interventionists of the West have poisoned the mind of the East. They are
responsible for the anti-capitalistic bias of the East and for the sympathies with
which those Eastern intellectuals look upon the Soviet system as the most
intransigent realization of Marxian ideas.

All underdeveloped countries are flooded with translations of the writings of Marx,
Lenin, and Stalin and of the books of all shades of non-Marxian socialism and anti-
capitalism. But only very rarely have books expounding the operation of the market
economy and critically analyzing the dogmas of the socialist creed been published in
one of the languages of these nations. Little wonder that their reading public believes
that the description of capitalism as provided by the Communist Manifesto exactly
fits present day American conditions, that, for instance, the laborer "sinks deeper
and deeper" with the progress of industry and that "the bourgeoisie is incompetent
to assure an existence to its slave within his slavery." Little wonder that they look
upon the Soviet system as the model of a better future.

We must comprehend that it is impossible to improve the economic conditions of the


underdeveloped nations by grants in aid. If we send them foodstuffs to fight famines,
we merely relieve their governments from the necessity of abandoning their

5
disastrous agricultural policies. In the past, for instance, Yugoslavia's main problem
was how to find foreign markets for its considerable surplus of cereals, pigs, fruits,
and lumber. Today the country that includes the most fertile land of Europe outside
Russia and Romania is famine stricken. If we send to the poor countries
manufactures or "lend" them dollars, we virtually pay for the deficits of their
nationalized transportation and communication systems and their socialized mines
and processing industries. The truth is that the United States is subsidizing all over
the world the worst failure of history: socialism. But for these lavish subsidies the
continuation of the socialist schemes would have become long since unfeasible.

The problem of rendering the underdeveloped nations more prosperous cannot be


solved by material aid. It is a spiritual and intellectual problem. Prosperity is not
simply a matter of capital investment. It is an ideological issue. What the
underdeveloped countries need first is the ideology of economic freedom and private
enterprise and initiative that makes for the accumulation and maintenance of capital
as well as for the employment of the available capital for the best possible and
cheapest satisfaction of the most urgent wants of the consumers.

In no other way can the United States contribute to the improvement of the
economic conditions of the underdeveloped countries than by transmitting to them
the ideas of economic freedom.

[1] [David Ricardo, On the Principles of Political Economy and taxation, vol. 1 of The
Works and Correspondence of david Ricardo, Piero Sraffa, ed. (Cambridge:
Cambridge University Press, 1951-1973), p. 137—Ed.]

[2] [Lord Clement Attlee was leader of the British Labor Party from 1935-1955 and a
committed socialist. He was prime minister of England from 1945-1951—Ed.]

[3] [Point Four of the Atlantic Charter was concerned with equality of access to trade
and raw materials of the world and to securing for all nations an improved labor
standard, economic adjustment, and social security—Ed.]

6
7le Iloml offibrnotim Ydirs, Vol m, No. I Wimu 1989)

World War I as Fulfillment:


Power and the Intellectuals*
by Murray N. Rothbard

Depament of Economics, University of Nevaah, L a Vegas

I. Introduction
In contrast to older historians who regarded World War I as the destruction of
progressive reform, I am convinced that the war came to the United States as the
"fulfdlment," the culmination, the veritable apotheosis of progressivism in
American life.' I regard progressivism as basically a movement on behalf of Big
Government in all walks of the economy and society, in a fusion or coalition between
various p u p s of big businessmen, led by the House of Morgan, and rising groups
of technocratic and statist intellectuals. In this fusion, the values and interests of
both groups would be pursued through government. Big business would be able
to use the government to cartelize the economy, restrict competition, and regulate
production and prices, and also to be able to wield a militaristic and imperialist
foreign policy to force open markets abroad and apply the sword of the State to
protect foreign investments. Intellectuals would be able to use the government to
restrict entry into their professions and to assume jobs in Big Government to
apologize for, and to help plan and staff, government operations. Both groups also
believed that, in this fusion, the Big State could be used to harmonize and interpret
the "national interest" and thereby provide a "middle way" between the extremes
of "dogeatdog" laissez faire and the bitter conflicts of proletarian Marxism. Also
animating both groups of progressives was a postmillennia1 pietist Protestantism
that had conquered "Yankee" areas of northern Protestantism by the 1830s and
had impelled the pietists to use local, state, and finally federal governments to stamp
out "sin," to make America and eventually the world holy, and thereby to bring
about the Kingdom of God on earth. The victory of the Bryanite forces at the
Democratic national convention of 1896 destroyed the Democratic Party as the

* An earlier version of this paper was delivered at a Pacific Institute Conference


on "Crisis and Leviathan," at Menlo Park, CA, October 1986.
82 THE JOURNAL OF LIBERTARIAN STUDIES Winter

vehicle of "liturgical" Roman Catholics and German Lutherans devoted to personal


liberty and laissez faire and created the roughly homogenized and relatively n o n i d e
logical party system we have today. After the turn of the century, this develop-
ment created an ideological and power vacuum for the expanding number of
progressive technocrats and administrators to fiu. In that way, the locus of govern-
ment shifted from the legislature, at least partially subject to democratic check,
to the oligarchic and technocratic executive branch.
World War I brought the fulfdlment of all these progressive trends. Militarism,
conscription, massive intervention at home and abroad, a collectivized war economy,
all came about during the war and created a mighty cartelized system that most
of its leaders spent the rest of their lives trying to recreate, in peace as well as
war. In the World War I chapter of his outstanding work, Crisis and Leviathan,
Professor Robert Higgs concentrates on the war economy and illuminates the
interconnections with conscription. In this paper, I would like to concentrate on
an area that Professor Higgs relatively neglects: the coming to power during the
war of the various groups of progressive intelle~tuals.~ I use the term "intellec-
tual" in the broad sense penetratingly described by F. A. Hayek: that is, not merely
theorists and academicians, but also all manner of opinion-molders in society-
writers, journalists, preachers, scientists, activists of all sort-what Hayek calls
"secondhand dealers in ideas."' Most of these intellectuals, of whatever strand
or occupation, were either dedicated, messianic poshdennial pietists or else former
pietists, born in a deeply pietist home, who, though now secularized, still pos-
sessed an intense messianic belief in national and world salvation through Big
Government. But, in addition, oddly but characteristically, most combined in their
thought and agitation messianic moral or religious fervor with an empirical, allegedly
"value-free" and strictly "scientific" devotion to social science. Whether it be
the medical profession's combined scientific and moralistic devotion to stamping
out sin or a similar position among economists or philosophers, this blend is typical
of progressive intellectuals.
In this paper, I will be dealing with various examples of individual or groups
of progressive intellectuals, exulting in the triumph of their creed and their own
place in it, as a result of America's entry into World War I. Unfortunately, l i t a -
tions of space and time preclude dealing with all facets of the wartime activity
of progressive intellectuals; in particular, I regret having to omit treatment of
the conscription movement, a fascinating example of the creed of the "therapy"
of "discipline" led by upper-class intellectuals and businessmen in the J. P.
Morgan ambit.' I shall also have to omit both the highly significant trooping to
the war colors of the nation's preachers, and the wartime impetus toward the
permanent centralization of scientific research.'
There is no bener epigraph for the remainder of this paper than a congratulatory
note sent to President Wilson after the delivery of his war message on April 2,
1917. The note was sent by Wilson's son-in-law and fellow Southern pietist and
1989 MURRAY N. ROTHBARD-WORLD WAR I AS FULFLLMENT 83

progressive, Secretary of the Treasury William Gibbs McAdoo, a man who had
spent his entire life as an industrialist in New YorkCity, solidly in the J. P. Morgan
ambit. McAdoo wrote to Wilson: "You have done a great thimg nobly! I firmly
believe that it is God's will that America should do this transcendent service for
humanity throughout the world and that you are His chosen instrument."6 It was
not a sentiment with which the president could disagree.

11. Pietism and Prohibition


One of the few important omissions in Professor Higgs's book is the crucial role
of postmillennial pietist Protestantism in the drive toward statism in the United
States. Dominant in the "Yankee" areas of the North from the 1830s on, the
aggressive "evangelical" form of pietism conquered Southern Protestantism by
the 1890s and played a crucial role in progressivism after the turn of the cenhlry
and through World War I. Evangelical pietism held that requisite to any man's
salvation is that he do his best to see to it that everyone else is saved, and doing
one's best inevitably meant that the State must become a crucial instmment in
maximizing people's chances for salvation. In particular, the State plays a pivotal
role in stamping out sin, and in "making America holy." To the pietists, sin
was very broadly defined as any force that might cloud men's minds so that they
could not exercise their theological free will to achieve salvation. Of particular
importance were slavery (until the Civil War), Demon Rum, and the Roman
Catholic Church, headed by the Antichrist in Rome. For decades after the Civil
War, "rebellion" took the place of slavery in the pietist charges against their
great political enemy, the Democratic party.' Then in 1896, with the evangelical
conversion of Southern Protestantism and the admission to the Union of the
sparsely populated and pietist Mountain states, William Jennings Bryan was able
to put together a coalition that transformed the Democrats into a pietist party and
ended forever that party's once proud role as the champion of "liturgical"
(Catholic and High German Lutheran) Christianity and of personal liberty and
laissez faire.8.9
The pietists of the nineteenth and early twentieth centuries were all postmillen-
nialist: They believed that the Second Advent of Christ will occur only afrer the
millennium-a thousand years of the establishment of the Kingdom of God on
earth-has been brought about by human effort. Postmillennialists have therefore
tended to be statists, with the State becoming an important instrument of stamp-
ing out sin and Christianizing the social order so as to speed Jesus' return.1°
Professor Timberlake neatly sums up this politico-religious conflict:
Unlike those extremist and apocalyptic sects that rejected and withdrew from
the world as hopelessly corrupt, and unlike the more conservative churches,
such as the Roman Catholic, Protestant Episcopal, and Lutheran, that tended
to assume a more relaxed attitude toward the influenceof religion in culture,
evangelical Protestantism sought to overcome the corruption of the world
84 THE JOURNAL OF LIBERTARIAN STUDIES Winter

in a dynamic manner, not only by converting men to belief in Christ but also
by Christianizing the social order through the power and force of law.
According to this view, the Christian's duty was to use the secular power
of the state to transform culture so that the community of the faithful might
be kept pure and the work of saving the unregenerate might be made easier.
Thus the function of law was not simply to restrain evil but to educate and
uplift."
Both prohibition and progressive reform were pietistic, and as both movements
expanded after 1900 they became increasingly intertwined. The Prohibition Party,
once confined-at least in its platform-to a single issue, became increasingly
and frankly progressive after 1904. The Anti-Saloon League, the major vehicle
for prohibitionist agitation after 1900, was also markedly devoted to progressive
reform. Thus at the League's annual convention in 1905, Rev. Howard H. Russell
rejoiced in the growing movement for progressive reform and particularly hailed
Theodore Roosevelt, as that "leader of heroic mould, of absolute honesty of
character and purity of life, that foremost man of this world. . . ."" At the Anti-
Saloon League's convention of 1909, Rev. Purley A. Baker lauded the labor union
movement as a holy crusade for justice and a square deal. The League's 1915
convention, which attracted 10,000 people, was noted for the same blend of
statism, social service, and combative Christianity that had marked the national
convention of the Progressive Party in 1912." And at the League's June 1916
convention, Bishop Luther B. Wilson stated, without contradiction, that everyone
present would undoubtedly hail the progressive reforms then being proposed.
During the Progressive years, the Social Gospel became pan of the mainstream
of pietist Protestantism. Most of the evangelical churches created commissions
on social service to promulgate the Social Gospel, and virtually all of the denomina-
tions adopted the Social Creed drawn up in 1912 by the Commission of the Church
and Social Service of the Federal Council of Churches. The creed called for the
abolition of chid labor, the regulation of female labor, the right of labor to organize
(i.e., compulsory collective bargaining), the elimination of poverty, and an
"equitable" division of the national product. And right up there as a matter of
social concern was the liquor problem. The creed maintained that liquor was a
grave hindrance toward the establishment of the Kingdom of God on earth, and
it advocated the "protection of the individual and society from the social,
economic, and moral waste of the liquor traffic.""
The Social Gospel leaders were fervent advocates of statism and of prohibi-
tion. These included Rev. Walter Rauschenbusch and Rev. Charles Stelzle, whose
tract Why Prohibition! (1918) was distributed, after the United States' entry into
World War I, by the Commission on Temperance of the Federal Council of
Churches to labor leaders, members of Congress, and important government
officials. A particularly important Social Gospel leader was Rev. Josiah Strong,
whose monthly journal, R e Gospel of the Kingdom, was published by Strong's
1989 MURRAY N. ROTHBARD-WORLD WAR I AS FULFLLMENT 85

American Institute of Social Service. In an article supporting prohibition in the


July 1914 issue, The Gospel of the Kingdom hailed the progressive spirit that
was at last putting an end to "personal liberty":
"Personal Liberty" is at last an uncrowned, dethroned king, with no one
to do him reverence. The social consciousness is so far developed, and is
becoming so autocratic, that institutionsand governments must give heed to
its mandate and share their life accordingly. We are no longer frightened
by that ancient bogy-"paternalism in government." We affirm boldly, it
is the business of govemment to be just that-paternal. . . . Nothing human
can be foreign ro a true governmenr.15
As true crusaders, the pietists were not content to stop with the stamping out
of sin in the United States alone. If American pietism was convinced that
Americans were God's chosen people, destined to establish a Kingdom of God
within the United States, surely the pietists' religious and moral duty could not
stop there. In a sense, the world was America's oyster. As Professor Timberlake
put it, once the Kingdom of God was in the course of being established in the
United States, "it was therefore America's mission to spread these ideals and
institutions abroad so that the Kmgdom could be established throughout the world.
American Protestants were accordimgly not content merely to work for the kingdom
of God in America, but felt compelled to assist in the reformation of the rest
of the world also."'6
American entry into World War I provided the fullfillment of prohibitionist
dreams. In the first place, all food production was placed under the control of
Herbert Hoover, Food Administration czar. But if the U.S. government was to
control and allocate food resources, shall it permit the precious scarce supply
of grain to be siphoned off into the "waste," if not the sin, of the manufacture
of liquor? Even though less than two percent of American cereal production went
into the manufacture of alcohol, think of the starving children of the world who
might otherwise be fed. As the progressive weekly 7he Independent demagogically
phrased it. "Shall the many have food, or the few have drink?"
For the ostensible purpose of "conserving" grain, Congress wrote an amend-
ment into the Lever Food and Fuel Control Act of August 10, 1917, that absolutely
prohibited the use of foodstuffs, hence grain, in the production of alcohol. Con-
gress would have added a prohibition on the manufacture of wine or beer, but
President Wilson persuaded the Anti-Saloon League that he could accomplish the
same goal more slowly and thereby avoid a delaying filibuster by the wets in
Congress. However, Herbert Hoover, a progressive and a prohibitionist, per-
suaded Wilson to issue an order, on December 8, both greatly reducing the
alcoholic content of beer and limiting the amount of foodstuffs that could be used
in its manufacture."
The prohibitionists were able to use the Lever Act and war patriotism to good
effect. Thus, Mrs. W. E. Lindsey, wife of the governor of New Mexico, delivered
a speech in November 1917 that noted the Lever Act, and declared:
86 THE JOURNAL OF LIBERTARIAN STUDIES Winter

Aside from the long list of awful tragedies following in the wake of the liquor
traffic, the economic waste is too great to be tolerated at this time. With so
many people of the allied nations near to the door of starvation, it would
be criminal ingratitude for us to continue the manufacture of whiskey."
Another rationale for prohibition during the war was the alleged necessity to
protect American soldiers from the dangers of alcohol to their health, their morals,
and their immortal souls. As a result, in the Selective Service Act of May 18,
1917, Congress provided that dry zones must he established around every army
base, and it was made illegal to sell or even to give liquor to any member of
the military establishment within those zones, even in one's private home. Any
inebriated servicemen were suhject to courts-martial.
But the most severe thrust toward national prohibition was the Anti-Saloon
League's proposed eighteenth constitutional amendment, outlawing the manu-
facture, sale, transportation, import or export of all intoxicating liquors. It was
passed by Congress and submitted to the states at the end of December 1917.
Wet arguments that prohibition would prove unenforceable were met with the
usual dry appeal to high principle: Should laws against murder and robbery he
repealed simply because they cannot be completely enforced? And arguments that
private property would be unjustly confiscated were also brushed aside with the
contention that property injurious to the health, morals, and safety of the people
had always been subject to confiscation without compensation.
When the Lever Act made a distinction between hard liquor (forbidden) and
beer and wine (limited), the brewing industry tried to save their skins by cutting
themselves loose from the taint of distilled spirits. "The true relationship with
beer," insisted the United States Brewers Association, "is with light wines and
soft drinks-not with hard liquors. . . ." The hrewers affirmed their desire to
"sever, once for all, the shackles that hound our wholesome productions . . . to
ardent spirits. . . ." But this craven attitude would do the brewers no good. After
all, one of the major objectives of the drys was to smash the brewers, once and
for all, they whose product was the very embodiment of the drinking habits of
the hated German-American masses, both Catholic and Lutheran, liturgicals and
beer drinkers all. German-Americans were now fair game. Were they not all agents
of the satanic Kaiser, bent on conquering the world? Were they not conscious
agents of the dreaded Hun Kultur, out to destroy American civilization? And were
not most hrewers German?
And so the Anti-Saloon League thundered that "German brewers in this country
have rendered thousands of men inefficient and are thus crippling the Republic
in its war on Prussian militarism." Apparently, the Anti-Saloon League took no
heed of the work of German hrewers in G e m n y , who were presumably perfor-
ming the estimable service of rendering "Prussian militarism" helpless. The
hrewers were accused of being pro-German, and of subsidizing the press (appar-
ently it was all right to he pro-English or to subsidize the press if one were not
1989 MURRAY N. ROTHBARD-WORLD WAR I AS FULFILLMENT 87

a brewer). The acme of the accusations came from one prohibitionist: "We have
German enemies," he warned, "in this country too. And the worst of all our
German enemies, the most treacherous, the most menacing are Pabst, Schlitz,
Blatz, and Miller."19
In this sort of atmosphere, the brewers didn't have a chance, and the Eigh:
teenth Amendment went to the states, outlawing all forms of liquor. Since twenty-
seven states had already outlawed liquor, this meant that only nine more were
needed to ratify this remarkable amendment, which directly involved the federal
constitution in what had always been, at most, a matter of police power of the
states. The thirty-sixth state ratified the Eighteenth Amendment on January 16,
1919, and by the end of February all but three states (New Jersey, Rhode Island,
and Connecticut) had made liquor unconstitutional as well as illegal. Technically,
the amendment went into force the following January, but Congress speeded
matters up by passing the War Prohibition Act of November 11, 1918, which
banned the manufacture of beer and wine after the following May and outlawed
the sale of all intoxicating beverages after June 30, 1919, a ban to continue in
effect until the end of demobilization. Thus total national prohibition really began
on July 1, 1919, with the Eighteenth Amendment taking over six months later.
The constitutional amendment needed a congressional enforcing act, which Con-
gress supplied with the Volstead (or National Prohibition) Act, passed over
Wilson's veto at the end of October 1919.
With the battle against Demon Rum won at home, the restless advocates of
pietist prohibitionismlooked for new lands to conquer. Today America, tomorrow
the world. In June 1919 the triumphant Anti-Saloon League called an interna-
tional prohibition conference in Washington and created a World League Against
Alcoholism. World prohibition, after all, was needed to finish the job of making
the world safe for democracy. The prohibitionists' goals were fervently expressed
by Rev. A. C. Bane at the Anti-Saloon League's 1917 convention, when victory
in America was already in sight. To a wildly cheering throng, Bane thundered:
Amencs will "go over the lop" in h u m n i r ) ' ~greatest battle [aganst liquor]
a d plant the vetonou, while standard of Prnhihition uwn the nuion's loR1es1
eminence. Then catching sight of the beckoning hands of our sister nations
across the sea, struggling with the same age-long foe, we will go forth with
the spirit of the missionary and the cmsader to help drive the demon of drink
from all civilization. With America leading the way, with faith in Omnipo-
tent God, and bearing with patriotic hands our stainless flag, the emblem
of civic purity, we will soon . . . bestow upon mankind the priceless gift
of World Prohibiti~n.'~
Fortunately, the prohibitionists found the reluctant world a tougher nut to crack.

111. Women at W a r and at the PnUs


Another direct outgrowth of World War I, coming in tandem with prohibition
but lasting more permanently, was the Nineteenth Amendment, submitted by Con-
88 THE JOURNAL OF LIBERTARIAN STUDIES Winter

gress in 1919 and ratified by the following year, which allowed women to vote.
Women's suffrage had long been a movement directly allied with prohibition.
Desperate to combat a demographic trend that seemed to be going against them,
the evangelical pietists called for women's suffrage (and enacted it in many
Western states). They did so because they knew that while pietist women were
socially and politically active, ethnic or liturgical women tended to be culturally
bound to hearth and home and therefore far less likely to vote. Hence, women's
suffrage would greatly increase pietist voting power. In 1869 the Prohibitionist
Party became the first party to endorse women's suffrage, which it continued
to do. The Progressive Party was equally enthusiastic about female suffrage; it
was the first major national Party to permit women delegates at its conventions.
A leading women's suffrage organization was the Women's Christian Temperance
Union, which reached an enormous membership of 300,000by 1900. And three
successive presidents of the major women's suffrage group, the National American
Woman Suffrage Association-Susan B. Anthony, Mrs. Carrie Chapman Catt
and Dr. Anna Howard Shaw-all began their activist careers as prohibitionists.
Susan B. Anthony put the issue clearly:
There is an enemy of the homes of this nation and that enemy is drunken-
ness. Everyone connected with the gambling house, the brothel and the salwn
works and votes solidly against the enfranchisement of women, and, I say,
if you believe in chastity, if you believe in honesty and integrity, then . . . take
the necessary steps to put the ballot in the hands of women."
For its part, the German-American Alliance of Nebraska sent out an appeal during
the unsuccessful referendum in November 1914 on women suffrage. Written in
German, the appeal declared, "Our German women do not want the right to vote,
and since our opponents desire the right of suffrage mainly for the purpose of
saddling the yoke of prohibition on our necks, we should oppose it with all our
might. . . ."2'
America's entry into World War I provided the impetus for overcoming the
substantial opposition to woman suffrage, as a corollary to the success of prohi-
bition and as a reward for the vigorous activity by organized women in behalf
of the war effort. To close the loop, much of that activity consisted in stamping
out vice and alcohol as well as instilling "patriotic" education into the minds
of often suspect immigrant groups.
Shortly after the U.S. declaration of war, the Council of National Defense
created an Advisory Committee on Women's Defense Work, known as the
Woman's Committee. The purpose of the committee, writes a celebratory contem-
porary account, was "to coordinate the activities and the resources of the organized
and unorganized women of the country, that their power may be immediately
utilized in time of need, and to supply a new and direct channel of cooperation
between women and governmental department^."^' Chairman of the Woman's
Committee, working energetically and full time, was the former president of the
1989 MURRAY N. ROTHBARD-WORLD WAR 1 AS FULFLLMENT 89

National American Woman Suffrage Association, Dr. Anna Howard Shaw, and
another leading member was the suffrage group's current chairman and an equally
prominent suffragette, Mrs. Carrie Chapman Catt.
The Woman's Committee promptly set up organizations in cities and states
across the country, and on June 19, 1917 convened a conference of over fifty
national women's organizations to coordinate their efforts. It was at this con-
ference that "the first definite task was imposed upon American women" by the
indefatigable Food Czar, Herbert H o o ~ e r . ~Hoover
' enlisted the cooperation of
the nation's women in his ambitious campaign for controlling, restricting, and
cartelizing the food industry in the name of "conservation" and elimination of
"waste." Celebrating this coming together of women was one of the Woman's
Committee members, the Progressive writer and muckraker Mrs. Ida M. Tarbell.
Mrs. Tarbell lauded the "growing consciousness everywhere that this great enter-
prise for democracy which we are launching [the U.S. enuy into the war] is a
national affair, and if an individual or a society is going to do its bit it must act
with and under the government at Washington." "Nothing else," Mrs. Tarbell
gushed, "can explain the action of the women of the country in coming together
as they are doing today under one centralized d i r e c t i ~ n . " ~ ~
Mrs. Tarbell's enthusiasm might have been heightened by the fact that she was
one of the directing rather than the directed. Herbert Hoover came to the women's
conference with the proposal that each of the women sign and distribute a "food
pledge card" on behalf of food conservation. While support for the food pledge
among the public was narrower than anticipated, educational efforts to promote
the pledge became the basis of the remainder of the women's conservation
campaign. The Woman's Committee appointed Mrs. Tarbell as chairman of its
committee on Food Administration, and she not only tirelessly organized the
campaign but also wrote many letters and newspaper and magazine articles on
its behalf.
In addition to food control, another important and immediate function of the
Woman's Committee was to attempt to register every woman in the country for
possible volunteer or paid work in support of the war effort. Every woman aged
sixteen or over was asked to sign and submit a registration card with all pertinent
information, including training, experience, and the sort of work desired. In that
way the government would know the whereabouts and training of every woman,
and government and women could then serve each other best. In many states,
especially Ohio and lllinois, state govenunents set up schools to train the registrars.
And even though the Woman's Committee kept insisting that the registration was
completely voluntary, the state of Louisiana, as Ida Clarke puts it, developed
a "novel and clever" idea to facilitate the program: women's registration was
made compulsory.
Louisiana's Governor Ruftin G. Pleasant decreed October 17, 1917 compulsory
registration day, and a host of state officials collaborated in its operation. The
90 THE JOURNAL OF LIBERTARIAN STUDIES Winter

State Food Commission made sure that food pledges were also signed by all,
and the State School Board granted a holiday on October 17 so that teachers could
assist in the compulsory registration, especially in the rural districts. Six thou-
sand women were officially commissioned by the state of Louisiana to conduct
the registration, and they worked in tandem with state Food Conservation officials
and parish Demonstration Agents. In the French areas of the state, the Catholic
priests rendered valuable aid in personally appealing to all their female parishioners
to perform their registration duties. Handbills were circulated in French, house-
to-house canvasses were made, and speeches urging registration were made by
women activists in movie theaters, schools, churches, and courthouses. We are
informed that all responses were eager and cordial; there is no mention of any
resistance. We are also advised that "even the negroes were quite alive to the
situation, meeting sometimes with the white people and sometimes at the call of
their own pastors."26
Also helping out in women's registration and food control was another, smaller,
but slightly more sinister women's organization that had been launched by
Congress as a sort of prewar wartime group at a large Congress for Constructive
Patriotism, held in Washington, D.C. in late January 1917. This was the National
League for Woman's Service (NLWS), which established a nationwide organiza-
tion later overshadowed and overlapped by the larger Woman's Committee. The
difference was that the NLWS was set up on quite frankly military lines. Each
local working unit was called a "detachment" under a "detachment commander,"
districtwide and statewide detachments met in annual "encampments," and every
woman member was to wear a uniform with an organization badge and insignia.
In particular, "the basis of training for all detachments is standardized, physical
drill. "17
A vital part of the Woman's Committee work was engaging in "patriotic educa-
tion." The government and the Woman's Committee recognized that immigrant
ethnic women were most in need of such vital instruction, and so it set up a
committee on education, headed by the energetic Mrs. Carrie Chapman Can. Mrs.
Catt stated the problem well to the Woman's Committee: Millions of people in
the United States were unclear on why we were at war, and why, as Ida Clarke
paraphrases Mrs. Can, there is "the imperative necessity of winning the war if
future generations were to be protected from the menace of an unscrupulous
militari~m."'~ Presumably U.S. militarism, being "scrupulous," posed no
problem.
Apathy and ignorance abounded, Mrs. Catt went on, and she proposed to
mobilize twenty million American women, the "greatest sentiment makers of
any community," to begin a "vast educational movement" to get the women
"fervently enlisted to push the war to victory as rapidly as possible." As Mrs.
Catt continued, however, the clarity of war aims she called for really amounted
, to pointing out that we were in the war "whether the nation likes it or does not
1989 MURRAY N. ROTHBARD-WORLD WAR 1 AS FULFlLLMENT 91

like it," and that therefore the "sacrifices" needed to win the war "willingly
or unwillingly must be made." These statements are reminiscent of arguments
supporting recent military actions by Ronald Reagan ("He had to do what he
had to do"). In the end, Mrs. Catt could come up with only one reasoned argu-
ment for the war, apart from this alleged necessity, that it must be won to make
it "the war to end war~."~9
The "patriotic education" campaign of the organized women was largely to
"Americanize" immigrant women by energetically persuading them (a) to become
naturalized American citizens and (b) to learn "Mother English." In the cam-
paign, dubbed "America First," national unity was promoted through getting
immigrants to learn English and trying to get female immigrants into afternoon
or evening English classes. The organized patriot women were also worried about
preserving the family structure of the immigrants. If the children learn English
and their parents remain ignorant, children will scorn their elders, "parental
discipline and control are dissipated, and the whole family fabric becomes
weakened. Thus one of the great conservative forces in the community becomes
inoperative." To preserve "maternal control of the young", then, "American-
ization of the foreign women through language becomes imperative." In Erie,
Pennsylvania, women's clubs appointed "Block Matrons," whose job it was to
get to know the foreign families of the neighborhood and to back up school
authorities in urging the immigrants to learn English, and who, in the rather naive
words of I& Clarke, "become neighbors, friends, and veritable mother confessors
to the foreign women of the block." One would like to have heard some com-
ments from recipients of the attentions of the Block Matrons.
All in all, as a result of the Americanization campaign, Ida Clarke concludes,
"the organized women of this country can play an important part in making ours
a country with a common language, a common purpose, a common set of ideals-a
unified America."'o
Neither did the government and its organized women neglect progressive
economic reforms. At the organizing June 1917 conference of the Woman's Com-
mittee, Mrs. Carrie Catt emphasized that the greatest problem of the war was
to assure that women receive "equal pay for equal work." The conference sug-
gested that vigilance committees be established to guard against the violation of
"ethical laws" governing labor and also that all laws restricting ("protecting")
the labor of women and children be rigorously enforced. Apparently, there were
some values to which maximizing production for the war effort had to take second
place. Mrs. Margaret Dreier Robins, president of the National Women's Trade
Union's League, hailed the fact that the Woman's Committee was organizing
committees in every state to protect minimum standards for women and children's
labor in industry and demanded minimum wages and shorter hours for women.
Mrs. Robins particularly warned that "not only are unorganized women workers
in vast numbers used as underbidders in the labor market for lowering industrial
92 THE JOURNAL OF LIBERTARIAN STUDIES Winter

standards, but they are related to those groups in industrial centers of our country
that are least Americanized and most alien to our institutions and ideals." And
so "Americanization" and cartelization of female labor went hand in hand.3'Jz

IV. Saving Our Boys from Alcohol and Vice


One of organized womanhood's major contributions to the war effort was to col-
laborate in an attempt to save American soldiers from vice and Demon Rum.
In addition to establishing rigorous dry zones around every military camp in the
United States, the Selective Service Act of May 1917 also outlawed prostitution
in wide zones around the military camps. To enforce these provisions, the War
Department had ready at hand a Commission on Training Camp Activities, an
agency soon imitated by the Department of the Navy. Both commissions were
headed by a man tailormade for the job, the progressive New York settlement-
house worker, municipal political reformer, and former student and disciple of
Woodrow Wilson, Raymond Blaine Fosdick.
Fosdick's background, life, and career were paradigmatic for progressive
intellectuals and activists of that era. Fosdick's ancestors were Yankees from
Massachusetts and Connecticut, and his great-grandfather pioneered westward
in a covered wagon to become a frontier farmer in the heart of the Burned-Over
District of transplanted Yankees, Buffalo, New York. Fosdick's grandfather, a
pietist lay preacher born again in a Baptist revival, was a prohibitionist who mar-
ried a preacher's daughter and became a lifelong public school teacher in Buffalo.
Grandfather Fosdick rose to become Superintendant of Education in Buffalo and
a battler for an expanded and strengthened public school system.
Fosdick's immediate ancestry continued in the same vein. His father was a public
school teacher in Buffalo who rose to become principal of a high school. His
mother was deeply pietist and a staunch advocate of prohibition and women's
suffrage. Fosdick's father was a devout pietist Protestant and a "fanatical"
Republican who gave his son Raymond the middle name of his hero, the veteran
Maine Republican James G. Blaine. The three Fosdick children, elder brother
Harry Emerson, Raymond, and Raymond's twin sister, Edith, on emerging from
this atmosphere, all forged lifetime careers of pietism and social service.
While active in New York reform administration, Fosdick made a fateful friend-
ship. In 1910, John D. Rockefeller, Jr., like his father a pietist Baptist, was chair-
man of a special grand jury to investigate and to try to stamp out prostitution
in New York City. For Rockefeller, the elimination of prostitution was to become
an ardent and lifelong crusade. He believed that sin, such as prostitution, must
be criminated, quarantined, and driven underground through rigorous suppres-
sion. In 1911, Rockefeller began his crusade by setting up the Bureau of Social
Hygiene, into which he poured $5 million in the next quarter century. Two years
later he enlisted Fosdick, already a speaker at the annual dinner of Rockefeller's
1989 MURRAY N. ROTHBARD-WORLD WAR I AS FULFILLMENT 93

Baptist Bible class, to study police systems in Europe in conjunction with activ-
ities to end the great "social vice." Surveying American police after his stint
in Europe at Rockefeller's behest, Fosdick was appalled that police work in the
United States was not considered a "science" and that it was subject to "sordid"
political influences."
At that point, the new Secretary of War, the progressive former mayor of
Cleveland Newton D. Baker, became disturbed at reports that areas near the army
camps in Texas on the Mexican border, where troops were mobilized to combat
the Mexican revolutionary Pancho Villa, were honeycombed with saloons and
prostitution. Sent by Baker on a fact-finding tour in the summer of 1916, scoffed
at by tough army officers as the "Reverend," Fosdick was horrif~edto fmd saloons
and brothels seemingly everywhere in the vicinity of the military camps. He
reported his consternation to Baker, and, at Fosdick's suggestion, Baker cracked
down on the army commanders and their lax attitude toward alcohol and vice.
But Fosdick was beginning to get the glimmer of another idea. Couldn't the sup-
pression of the bad be accompanied by a positive encouragement of the good,
of wholesome recreational alternatives to sin and liquor that our boys could enjoy?
When war was declared, Baker quickly appointed Fosdick to be chairman of the
Commission on Training Camp Activities.
Armed with the coercive resources of the federal government and rapidly
building his bureaucratic empire from merely one secretary to a staff of thousands,
Raymond Fosdick set out with determination on his twofold task: stamping out
alcohol and sin in and around every militaly camp, and filling the void for
American soldiers and sailors by providing them with wholesome recreation. As
head of the Law Enforcement Division of the Training Camp Commission, Fosdick
selected Bascom Johnson, attorney for the American Social Hygiene Association."
Johnson was commissioned a major, and his staff of forty aggressive attorneys
became second lieutenants.
Employing the argument of health and military necessity, Fosdick set up a Social
Hygiene Division of his commission, which promulgated the slogan "Fit to
Fight." Using a mixture of force and threats to remove federal troops from the
bases if recalcitrant cities did not comply, Fosdick managed to bludgeon his way
into suppressing, if not prostitution in general, then at least every major red light
district in the country. In doing so, Fosdick and Baker, employing local police
and the federal Military Police, far exceeded their legal authority. The law
authorized the president to shut down every red light district in a five-mile zone
around each military camp or base. Of the 110 red light districts shut down by
military force, however, only 35 were included in the prohibited zone. Suppres-
sion of the other 75 was an illegal extension of the law. Nevertheless, Fosdick
was triumphant: "Through the efforts of this Commission [on Training Camp
Activities] the red light district has practically ceased to be a feature of American
city life."35 The result of this permanent destmction of the red light district, of
94 THE JOURNAL OF LIBERTARIAN STUDIES Winter

course, was to drive prostitution onto the streets, where consumers would be
deprived of the protection of either an open market or of regulation.
In some cases, the federal anti-vice crusade met considerable resistance.
Secretary of Navy Josephus Daniels, a progressive from North Carolina, had to
call out the marines to patrol the streets of resistant Philadelphia, and naval troops,
over the strenuous objections of the mayor, were used to crush the fabled red
light district of Storyville, in New Orleans, in November 1917.36
In its hubris, the U.S. Army decided to extend its anti-vice crusade to foreign
shores. General John J. Pershing issued an official bulletin to members of the
American Expeditionary Force in France urging that "sexual continence is the
plain duty of members of the A.E.F., both for the vigorous conduct of the war,
and for the clean health of the American people after the war." Pershing and
the American military tried to close all the French brothels in areas where
American trwps were located, but the move was unsuccessFu1 because the French
objected bitterly. Premier Georges Clemenceau pointed out that the result of the
"total prohibition of regulated prostitution in the vicinity of American troops"
was only to increase "venereal diseases among the civilian population of the
neighborhood." Finally, the United States had to rest content with declaring
French civilian areas off limits to the troops."
The more positive pan of Raymond Fosdick's task during the war was supply-
ing the soldiers and sailors with a constructive substitute for sin and alcohol,
"healthful amusements and wholesome company." As might be expected, the
Woman's Committee and organized womanhood collaborated enthusiastically.
They followed the injunction of Secretary of War Baker that the government
"cannot allow these young men . . . to be surrounded by a vicious and demor-
alizing environment, nor can we leave anything undone which will protect them
from unhealthy influences and crude forms of temptation." The Woman's Com-
mittee found, however, that in the great undertiking of safeguarding the health
and morals of our boys, their most challenging problem proved to be guarding
the morals of their mobilized young girls. For unfortunately, "where soldiers
are stationed . . . the problem of preventing girls from being misled by the
glamour and romance of war and beguiling uniforms looms large.'' ForNnately,
perhaps, the Maryland Committee proposed the establishment of a "Patriotic
League of Honor which will inspire girls to adopt the highest standards of
womanliness and loyalty to their country."38
No group was more delighted with the achievements of Fosdick and his Miltary
Training Camp Commission than the burgeoning profession of social work.
Surrounded by handpicked aides from the Playground and Recreation Associa-
tion and the Russell Sage Foundation, Fosdick and the others "in effect tried
to create a massive settlement house around each camp. No army had ever seen
anything like it before, but it was an outgrowth of the recreation and community
organization movement, and a victory for those who had been arguing for the
1989 MURRAY N. ROTHBARD-WORLD WAR I AS FULFILLMENT 95

creative use of leisure time."39 The social work profession pronounced the
program an enormous success. The influential Survey magazine summed up the
result as "the most stupendous piece of social work in modem times."40
Social workers were also exultant about prohibition. In 1917, the National Con-
ference of Charities and Corrections (which changed its name around the same
time to the National Conference of Social Work) was emboldened to drop whatever
value-free pose it might have had and come out squarely for prohibition. On
returning from Russia in 1917, Edward T. Devine of the Charity Organization
Society of New York exclaimed that "the social revolution which followed the
prohibition of vodka was more profoundly important . . . than the political revolu-
tion which abolished autocracy." And Robert A. Woods of Boston, the Grand
Old Man of the settlement house movement and a veteran advocate of prohibi-
tion, predicted in 1919 that the Eighteenth Amendment, "one of the greatest and
best events in history," would reduce poverty, wipe out prostitution and crime,
and liberate "vast suppressed human potentialities.""
Woods, president of the National Conference of Social Work during 1917-18,
had long denounced alcohol as "an abominable evil." A postmillennial pietist,
he believed in "Christian statesmanship" that would, in a "propaganda of the
deed," Christianize the social order in a corporate, communal route to the
glorification of God. L i e many pietists, Woods cared not for creeds or dogmas
but only for advancing Christianity in a communal way; though an active
Episcopalian, his "parish" was the community at large. In his settlement work,
Woods had long favored the isolation or segregation of the "unfit," in particular
"the tramp, the drunkard, the pauper, the imbecile," with the settlement house
as the nucleus of this reform. Woods was particularly eager to isolate and punish
the drunkard and the tramp. "Inveterate drunkards" were to receive increasing
levels of "punishment," with ever lengthier jail terms. The "tramp evil" was
to be gotten rid of by rounding up and jailing vagrants, who would be placed
in tramp workhouses and put to forced labor.
For Woods the world war was a momentous event. It had advanced the process
of "Americanization,"a "great humanizing process through which all loyalties,
all beliefs must be wrought together in a better o ~ d e r . ' " ~The war had wonder-
fully released the energies of the American people. Now, however, it was
important to carry the wartime momentum into the postwar world. Lauding the
war collectivist society during the spring of 1918, Robert Woods asked the crucial
question, "Why should it not always be so? Why not continue in the years of
peace this close, vast, wholesome organism of service, of fellowship, of con-
structive creative power?"''

V. The New Republic Collectivists


The New Republic magazine, founded in 1914 as the leadimg intellectual organ
of progressivism, was a living embodiment of the burgeoning alliance between
96 THE JOURNAL OF LIBERTARIAN STUDIES Winter

big business interests, in particular the House of Morgan, and the growing legion
of collectivist intellectuals. Founder and publisher of the New Republic was Willard
W. Straight, partner of 1. P. Morgan & Co., and its fmancier was Straight's wife,
the heiress Dorothy Wbitney. Major editor of the influential new weekly was
the veteran collectivist and theoretician of Teddy Roosevelt's New Nationalism,
Herbert David Croly. Croly's two coeditors were Walter Edward Weyl, another
theoretician of the New Nationalism, and the young, ambitious former official
of the Intercollegiate Socialist Society, the future pundit Walter Lippmam. As
Woodrow Wilson began to take America into World War I, the New Republic,
though originally Rooseveltian, became an enthusiastic supporter of the war, and
a virtual spokesman for the Wilson war effort, the wartime collectivist economy,
and the new society molded by the war.
On the higher levels of ratiocination, unquestionably the leading progressive
intellectual, before, during, and after World War I, was the champion of
pragmatism, Professor John Dewey of Columbia University. Dewey wrote
frequently for the New Republic in this period and was clearly its leading theoret-
ician. A Yankee born in 1859, Dewey was, as Mencken put it, "of indestructible
Vermont stock and a man of the highest bearable sobriety." John Dewey was
the son of a small town Vermont grocer.44Although he was a pragmatist and
a secular humanist most of his Life, it is not as well known that Dewey, in the
years before 1900, was a postmillemial pietist, seeking the gradual development
of a Christianized social order and Kingdom of God on earth via the expansion
of science, community, and the State. During the 1890s, Dewey, as professor
of philosophy at the University of Michigan, expounded his vision of postmillen-
nial pietism in a series of lectures before the Students' Christian Association.
Dewey argued that the growth of modem science now makes it possible for man
to establish the biblical idea of the Kingdom of God on earth. Once humans had
broken free of the restraints of orthodox Christianity, a truly religious Kingdom
of God could be realized in "the common incarnate Life, the purpose . . .
animating all men and binding them together into one harmonious whole of
sympathy ."&5 Religion would thus work in tandem with science and democracy,
all of which would break down the barriers between men and establish the
Kingdom. After 1900 it was easy for John Dewey, along with most other post-
millennia1 intellectuals of the period, to shift gradually but decisively from
postmillemial progressive Christian statism to progressive secular statism. The
path, the expansion of statism and "social control" and planning, remained the
same. And even though the Christian creed dropped out of the picture, the
intellectuals and activists continued to possess the same evangelical zeal for the
salvation of the world that their parents and they themselves had once possessed.
The world would and must still be saved through progress and statism.46
A pacifist while in the midst of peace, John Dewey prepared himself to lead
the parade for war as America drew nearer to armed intervention in the Euro-
1989 MURRAY N. ROTHBARD-WORLD WAR I AS FULFILLMENT 97

pean struggle. First, in January 1916 in the New Republic, Dewey attacked the
"professional pacifist's" outright condemnation of war as a "sentimental phan-
tasy ," a confusion of means and ends. Force, he declared, was simply "a means
of getting results," and therefore wuld neither be lauded or condemned per se.
Next, in April Dewey signed a pro-Allied manifesto, not only cheering for an
Allied victory but also proclaiming that the Allies were "struggling to preserve
the liberties of the world and the highest ideals of civilization." And though Dewey
supported U.S. entry into the war so that Germany could be defeated, "a hard
job, but one which had to be done," he was far more interested in the wonderful
changes that the war would surely bring about in the domestic American polity.
In particular, war offered a golden opportunity to bring about collectivist social
control in the interest of social justice. As one historian put it,
because war demanded paramount commitment to the national interest and
necessitated an unprecedented degree of government planning and economic
regulation in that interest, Dewey saw the prospect of permanent socializa-
tion, permanent replacement of private and possessive interest by public and
social interest, both within and among nations."
In an interview with the New York World a few months after U.S. entry into
the war, Dewey exulted that "this war may easily be the beginning of the end
of business." For out of the needs of the war, "we are beginning to produce
for use, not for sale, and the capitalist is not a capitalist . . . [in the face ofl the
war." Capitalist conditions of production and sale are now under government
control, and "there is no reason to believe that the old principle will ever be
resumed. . . . Private property had already lost its sanctity . . . industrial
democracy is on the way."'o In short, intelligence is at last being used to tackle
social problems, and this practice is destroying the old order and creating a new
social order of "democratic integrated control." Labor is acquiring more power,
science is at last being socially mobilized, and massive government controls are
socializing industry. These developments, Dewey p r o c l a i i , were precisely what
we are fighting for.49
Furthermore, John Dewey saw great possibilities opened by the war for the
advent of worldwide collectivism. To Dewey, America's entrance into the war
created a "plastic juncture" in the world, a world marked by a "world organiza-
tion and the beginnings of a public control which crosses nationalistic boundaries
and interests," and which would also "outlaw war."'O
The editors of the New Republic took a position similar to Dewey's, except
that they arrived at it even earlier. In his editorial in the magazine's fust issue
in November 1914, Herbert Croly cheerily prophesied that the war would stimulate
America's spirit of nationalism and therefore bring it closer to democracy. At
first hesitant about the collectivist war economies in Europe, the New Republic
soon began to cheer and urged the United States to follow the lead of the warring
European nations and socialize its economy and expand the powers of the State.
98 THE JOURNAL OF LIBERTARIAN STUDIES Winter

As America prepared to enter the war, the New Republic, examining war collec-
tivism in Europe, rejoiced that "on its administrative side socialism [had] won
a victory that [was] superb and compelling." Tme, European war collectivism
was a bit grim and autocratic, but never fear, America could use the selfsame
means for "democratic" goals.
The New Republic intellectuals also delighted in the "war spirit" in America,
for that spirit meant "the substitution of national and social and organic forces
for the more or less mechanical private forces operative in peace. . . ." The pur-
poses of war and social reform might be a bit different, but, after all, "they are
both purposes, and luckily for mankind a social organization which is efficient
is as useful for the one as for the other."" Lucky indeed.
As America prepared to enter the war, the New Republic eagerly looked forward
to imminent collectivization, sure that it would bring "immense gains in national
efficiency and happiness." After war was declared, the magazine urged that the
war be used as "an aggressive tool of democracy." "Why should not the war
serve," the magazine asked, "as a pretext to be used to foist innovations upon
the country?" In that way, progressive intellectuals could lead the way in
abolishing "the typical evils of the sprawling half-educated competitive
capitalism."
Convinced that the United States would attain socialism through war, Walter
Lippmann, in a public address shortly after American entry, trumpeted his
apocalyptic vision of the future:
We who have gone to war to insure democracy in the world will have raised
an aspiration here that will not end with the overthrow of the Prnssian
autocracy. We shall turn with fresh interests to our own tyrannies-to our
Colorado mines, our autocratic steel industries, sweatshops, and our slums.
A force is loose in America. . . . Our own reactionaries will not assuage
it. . . . We shall know how to deal with them.52
Walter Lippmann, indeed, had been the foremost hawk among the New Republic
intellectuals. He had pushed Croly into backing Wilson and into supporting
intervention, and then had collaborated with Colonel House in pushing Wilson
into entering the war. Soon Lippmann, an enthusiast for conscription, had to
confront the fact that he himself, only twenty-seven years old and in fine health,
was eminently eligible for the draft. Somehow, however, Lippmann failed to unite
theory and praxis. Young Felix Frankfurter, progressive Harvard Law Professor
and a close associate of the New Republic editorial staff, had just been selected
as a special assistant to Secretary of War Baker. Lippmann somehow felt that
his own inestimable services could be better used planning the postwar world
than battling in the trenches. And so he wrote to Frankfurter asking for a job
in Baker's office. "What I want to do," he pleaded, "is to devote all my time
to studying and speculating on the approaches to peace and the reaction from
the peace. Do you think you can get me an exemption on such high-falutin
1989 MURRAY N. ROTHBARD-WORLD WAR I AS FULFILLMENT 99

grounds?" He then rushed to reassure Frankfurter that there was nothing "per-
sonal" in this request. After all, he explained, "the thiigs that need to be thought
out, are so big that there must be no personal element mixed up with this."
Frankfurter having paved the way, Lippmann wrote to Secretary Baker. He assured
Baker that he was only applying for a job and draft exemption on the pleading
of others and in stem submission to the national interest. As Lippmann put it
in a remarkable demonstration of cant:
I have consulted all the people whose advice I value and they urge me to
apply for exemption. You can well understand that this is not a pleasant thing
to do, and yet, after searching my soul as candidly as I know how, I am con-
vinced that I can serve my bit much more effectively than as a private in
the new armies.
No doubt.
As icing on the cake, Lippmam added an important bit of "disinformation."
For, he piteously wrote to Baker, the fact is "that my father is dying and my
mother is absolutely alone in the world. She does not know what his condition
is, and I cannot tell anyone for fear it would become known." Apparently, no
one else "knew" his father's condition either, including his father and the medical
profession, for the elder Lippmam managed to peg along successfully for the
next ten years.53
Secure in his draft exemption, Walter Lippmann hied off in high excitement
to Washington, there to help run the war and, a few months later, to help direct
Colonel House's secret conclave of historians and social scientists setting out to
plan the shape of the future peace treaty and the postwar world. Let others fight
and die in the trenches; Walter Lippmann had the satisfaction of knowing that
his talents, at least, would be put to their best use by the newly emerging collec-
tivist State.
As the war went on, Croly and the other editors, having lost Lippmam to the
great world beyond, cheered every new development of the massively controlled
war economy. The nationalization of railroads and shipping, the priorities and
allocation system, the total domination of all parts of the food industry achieved
by Herbert Hoover and the Food Administration, the prounion policy, the high
taxes, and the draft were all hailed by the New Republic as an expansion of
democracy's power to plan for the general good. As the Armistice ushered in
the postwar world, the New Republic looked back on the handiwork of the war
and found it good: "We revolutionized our society." All that remained was to
organize a new constitutional convention to complete the job of reconstructing
America. 54
But the revolution had not been fully completed. Despite the objections of Ber-
nard Baruch and other wartime planners, the govenunent decided not to make
most of the war collectivist machinery permanent. From then on, the fondest
ambition of Baruch and the others was to make the World War I system a perma-
100 THE JOURNAL OF LIBERTARIAN STUDIES Winter

nent institution of American life. The most trenchant epitaph on the World War
I polity was delivered by Rexford Guy Tugwell, the most frankly collectivist of
the Brain Trusters of Franklin Roosevelt's New Deal. Looking hack on
"America's wartime socialism" in 1927, Tugwell lamented that if only the war
had lasted longer, that great "experiment" could have been completed: "We were
on the verge of having an international industrial machine when peace broke,"
Tugwell mourned. "Only the Armistice prevented a great experiment in control
of production, control of prices, and control of consumption."55 Tugwell need
not have been troubled; there would soon be other emergencies, other wars.
At the end of the war, Lippmann was to go on to become America's foremost
journalistic pundit. Croly, having broken with the Wilson Administration on the
harshness of the Versailles Treaty, was bereft to find theNew Republic no longer
the spokesman for some great political leader. During the late 1920s he was to
discover an exemplary national collectivist leader abroad-in Benito M u ~ s o l i n i . ~ ~
That Croly ended his years as an admirer of Mussolini comes as no surprise when
we realize that from early childhood he had been steeped by a doting father in
the authoritarian socialist doctrines of Auguste Comte's Positivism. These views
were to mark Croly throughout hi life. Thus, Herbert's father, David, the founder
of Positivism in the United States, advocated the establishment of vast powers
of government over everyone's life. David Croly favored the growth of trusts
and monopolies as a means both to that end and also to eliminate the evils of
individual competition and "selfishness." Like his son, David Croly railed at
the Jeffersonian "fear of government" in America, and looked to Hamilton as
an example to counter that trend."
And what of Professor Dewey, the doyen of the pacifist intellectuals-turned
drumbeaters for war? In a little known period of his life, John Dewey spent the
immediate postwar years, 1919-21, teaching at Peking University and travelling
in the Far East. China was then in a period of turmoil over the clauses of the
Versailles Treaty that transferred the rights of dominance in Shantung from
Germany to Japan. Japan had been promised this reward by the British and French
in secret treaties in return for entering the war against Germany. The Wilson
Administration was tom between the two camps. On the one hand were those
who wished to stand by the Allies' decision and who envisioned using Japan as
a club against Bolshevik Russia in Asia. On the other were those who had already
begun to sound the alarm about a Japanese menace and who were committed to
C h i , often because of connections with the American Protestant missionaries
who wished to defend and expand their extraterritorial powers of governance in
China. The Wilson Administration, which had originally taken a proChinese
stand, reversed itself in the spring of 1919 and endorsed the Versailles provisions. ,
Into this complex situation John Dewey plunged, seeing no complexity and of
course considering it unthinkable for either him or the United States to stay out
of the entire fray. Dewey leaped into total support of the Chinese nationalist posi-
1989 MURRAY N. ROTHBARD-WORLD WAR I AS FULFILLMENT LO1

tion, hailing the aggressive Young China movement and even endorsing the pro-
missionary YMCA in China as "social workers." Dewey thundered that while
"I didn't expect to be a jingo," that Japan must be called to account and that
Japan is the great menace in Asia. Thus, scarcely had Dewey ceased being a
champion of one terrible world war than he began to pave the way for an even
greater one.J8

VI. Economics in Service of the State:


The Empiricism of Richard T. Ely
World War I was the apotheosis of the growing notion of intellectualsas servants
of the State and junior partners in State rule. In the new fusion of intellectuals
and State, each was of powerful aid to the other. Intellectuals could serve the
State by apologizing for and supplying rationales for its deeds. Intellectuals were
also needed to staff important positions as planners and controllers of the society
and economy. The State could also serve intellectuals by restricting entry into,
and thereby raising the income and the prestige of, the various occupations and
professions. During World War I, historians were of particular importance in
supplying the government with war propaganda, convincing the public of the
unique evil of Germans throughout history and of the satanic designs of the Kaiser.
Economists, particularly empirical economists and statisticians, were of great
importance in the planning and control of the nation's wartime economy. Historians
playing preeiminent roles in the war propaganda machine have been studied fairly
extensively; economists and statisticians, playing a less blatant and allegedly
"value-free" role, have received far less attention.39
Although it is an outworn generalization to say that nineteenth century
economists were stalwart champions of laissez faire, it is still true that deductive
economic theory proved to be a mighty bulwark against government intervention.
For, basically, economic theory showed the harmony and order inherent in the
free market, as well as the counterproductive distortions and economic shackles
imposed by state intervention. In order for statism to dominate the economics
profession, then, it was important to discredit deductive theory. One of the most
important ways of doing so was to advance the notion that, to be "genuinely
scientific," economics had to eschew generalization and deductive laws and simply
engage in empirical inquiry into the facts of history and historical institutions,
hoping that somehow laws would eventually arise from these detailed investi-
gations. Thus the German Historical School, which managed to seize control of
the economics discipline in Germany, fiercely proclaimed not only its devotion
to statism and government control, but also its opposition to the "abstract"
deductive laws of political economy. This was the first major group within the
economics profession to champion what Ludwig von Mises was later to call "anti-
economics." Gustav Schmoller, the leader of the Historical School, proudly
102 THE JOURNAL OF LIBERTARIAN STUDIES Winter

declared that his and his colleagues' major task at the University of Berlin was
to form "the intellectual bodyguard of the House of Hohenzollern."
During the 1880s and 1890s bright young graduate students in history and the
social sciences went to Germany, the home of the Ph.D. degree, to obtain their
doctorates. Almost to a man, they returned to the United States to teach in col-
leges and in the newly created graduate schools, imbued with the excitement of
the "new" economics and political science. It was a "new" social science that
lauded the German and Bismarckian development of a powerful welfare-warfare
State, a State seemingly above all social classes, that fused the nation into an
integrated and allegedly harmonious whole. The new society and polity was to
be run by a powerful central government, cartelizing, dictating, arbitrating, and
controlling, thereby eliminating competitive laissez-faire capitalism on the one
hand and the threat of proletarian socialism on the other. And at or near the head
of the new dispensation was to be the new breed of intellectuals, technocrats,
and planners, directing, staffing, propagandizing, and "selfessly" promoting the
common good while ruling and lording over the rest of society. In short, doing
well by doing good. To the new breed of progressive and statist intellectuals in
America, this was a heady vision indeed.
Richard T. Ely, virtually the founder of this new breed, was the leading
progressive economist and also the teacher of most of the others. As an ardent
postmillennialist pietist, Ely was convinced that he was serving God and Christ
as well. Like so many pietists, Ely was born (in 1854) of solid Yankee and old
Puritan stock, again in the midst of the fanatical Burned-Over District of western
New York. Ely's father, Ezra, was an extreme Sabbatarian, preventing his family
from playing games or reading books on Sunday, and so ardent a prohibitionist
that, even though an impoverished, marginal farmer, he refused to grow barley,
a crop uniquely suitable to his soil, because it would have been used to make
that monstrously sinful product, beer.6Waving been graduated from Columbia
College in 1876, Ely went to Germany and received his Ph.D. from Heidelberg
in 1879. In several decades of teaching at Johns Hopkins and then at Wisconsin,
the energetic and empire-buildingEly became enormously influential in American
thought and politics. At Johns Hopkins he turned out a gallery of influential
students and statist disciples in all fields of the social sciences as well as economics.
These disciples were headed by the prounion institutionalist economist John R.
Commons, and included the social-control sociologists Edward Alsworth Ross
and Albion W. Small; John H. Finlay, President of City College of New York;
Dr. Albert Shaw, editor of the Review of Reviews and influential adviser and
theoretician to Theodore Roosevelt; the municipal reformer Frederick C. Howe;
and the historians Frederick Jackson Turner and J. Franklin Jameson. Newton
D. Baker was trained by Ely at Hopkins, and Woodrow Wilson was also his student
there, although there is no direct evidence of intellectual influence.
1989 MURRAY N. ROTHBARD-WORLD WAR I AS FULFILLMENT 103

In the mid-1880s Richard Ely founded the American Economic Association


in a conscious attempt to commit the economics profession to statism as against
the older laissez-faire economists grouped in the Political Economy Club. Ely
continued as secretary-treasurer of the AEA for seven years, until his reformer
allies decided to weaken the association's commitment to statism in order to induce
the laissez-faire economists to join the organization. At that point. Ely, in high
dudgeon, left the AEA.
At Wisconsin in 1892, Ely formed a new School of Economics, Political Science,
and History, surrounded himself with former students, and gave birth to the
Wisconsin Idea which, with the help of John Commons, succeeded in passing
a host of progressive measures for government regulation in Wisconsin. Ely and
the others formed an unofficial but powerful braintrust for the progressive regime
of Wisconsin Governor Robert M. La Follette, who got his start in Wisconsin
politics as an advocate of prohibition. Though never a classroom student of Ely's,
La Follette always referred to Ely as his teacher and as the molder of the Wisconsin
Idea. And Theodore Roosevelt once declared that Ely "first introduced me to
radicalism in economics and then made me sane in my radi~alism."~'
Ely was also one of the most prominent postmillennialist intellectuals of the
era. He fervently believed that the State is God's chosen instrument for reform-
ing and Christianizing the social order so that eventually Jesus would arrive and
put an end to history. The State, declared Ely, "is religious in its essence," and,
furthermore, "God works through the State in carrying out His purposes more
universally than through any other institution.'' The task of the church is to guide
the State and utilize it in these needed reforms.62
An inveterate activist and organizer, Ely was prominent in the evangelical
Chautauqua movement, and he founded there the "Christian Sociology" summer
school, which infused the influential Chautauqua operation with the concepts and
the personnel of the Social Gospel movement. Ely was a friend and close associate
of Social Gospel leaders Revs. Washington Gladden, Walter Rauschenbusch, and
Josiah Strong. With Strong and Commons, Ely organized the Institute of Chris-
tian S o c i ~ l o g yEly
. ~ ~also founded and became the secretary of the Christian Social
Union of the Episcopal Church, along with Christian Socialist W. D. P. Bliss.
All of these activities were infused with poshnillennial statism. Thus, the Institute
of Christian Sociology was pledged to present God's "kingdom as the complete
ideal of human society to be realized on earth." Moreover,
Ely viewed the state as the greatest redemptive force in society. . . . In Ely's
eyes, government was the God-given instrument through which we had to
work. Its preeminence as a divine instrument was based on the post-
Reformation abolition of the division between the sacred and the secular and
on the State's power to implement ethical solutions to public problems. The
same identificationof sacred and secular which took place among liberal clergy
enabled Ely to both divinize the state and socialize Christianity: he thought
of government as God's main instrument of redemption. . . ."
IW THE JOURNAL OF LIBERTARIAN STUDIES Winter

When war came, Richard Ely was for some reason (perhaps because he was
in his sixties) left out of the excitement of war work and economic planning in
Washington. He bitterly regretted that "I have not had a more active part then
I have had in this greatest war in the world's history."6S But Ely made up for
his lack as best he could; virtually from the start of the European war, he whooped
it up for militarism, war, the "discipline" of conscription, and the suppression
of dissent and "disloyalty" at home. A lifelong militarist, Ely had tried to volunteer
for war service in the Spanish-American War, had called for the suppression of
the Philippine insurrection, and was particularly eager for conscription and for
forced labor for "loafers" during World War I. By 1915 Ely was agitating for
immediate compulsory military service, and the following year he joined the
ardently prowar and heavily big business-influenced National Security League,
where he called for the liberation of the German people from " a u t ~ c r a c y . " ~ ~
In advocating conscripticn, Ely was neatly able to combine moral, economic,
and prohibitionist arguments for the draft: "The moral effect of taking boys off
street comers and out of saloons and drilling them is excellent, and the economic
effects are likewise benefi~ial."~'Indeed, conscription for Ely served almost as
a panacea for all ills. So enthusiastic was he about the World War I experience
that Ely again prescribed his favorite cure-all to alleviate the 1929 depression.
He proposed a permanent peacetime "industrial army" engaged in public works
and manned by conscripting youth for strenuous physical labor. This conscrip-
tion would instill into America's youth the essential "military ideals of hardihood
and discipline," a discipline once provided by life on the farm but unavailable
to the bulk of the populace now growing up in the effete cities. This small, standing
conscript army could then speedily absorb the unemployed during depressions.
Under the command of "an economic general staff," the industrial army would
"go to work to relieve distress with all the vigor and resources of brain and brawn
that we employed in the World War."68
Deprived of a position in Washington, Ely made the stamping out of "dis-
loyalty" at home his major contribution to the war effort. He called for the total
suspension of academic freedom for the duration. Any professor, he declared,
who stated "opinions which hinder us in this awful struggle" should be "fired"
if not indeed "shot." The particular focus of Ely's formidable energy was a zealous
campaign to try to get his old ally in Wisconsin politics, Robert M. La Follette,
expelled from the U.S. Senate for continuing to oppose America's participation
in the war. Ely declared that his "blood boils" at La Follette's "treason" and
attacks on war profiteering. Throwing himself into the battle, Ely founded and
became president of the Madison chapter of the Wisconsin Loyalty Legion and
mounted a campaign to expel La F ~ l l e t t eThe. ~ ~campaign was meant to mobilize
the Wisconsin faculty and to support the ultrapatriotic and ultrahawkish activities
of Theodore Roosevelt. Ely wrote to TR that "we must crush La Follettism."
In his unremitting campaign against the Wisconsin Senator, Ely thundered that
1989 MURRAY N. R0THBARI)-WORLD WAR I AS FULFILLMENT 105

La Follette "has been of more help to the Kaiser than a quarter of a million
troops."70 "Empiricism" rampant.
The faculty of the University of Wisconsin was stung by charges throughout
the state and the country that its failure to denounce La Follette was proof that
the university-long affiliated with La Follette in state politics-supported his
disloyal antiwar policies. Prodded by Eiy, Commons, and others, the university's
War Committee drew up and circulated a petition, signed by the university presi-
dent, all the deans, and over 90 percent of the faculty, that provided one of the
more striking examples in United States history of academic truckling to the State
apparatus. None too subtly using the constitutional verbiage for treason, the peti-
tion protested "against those utterances and actions of Senator La Follette which
have given aid and comfort to Germany and her allies in the present war; we
deplore his failure loyally to support the government in the prosecution of the
war."'O
Behind the scenes, Ely tried his best to mobilize America's historians against
La Follette, to demonstrate that he had given aid and comfort to the enemy. Ely
was able to enlist the services of the National Board of Historical Service, the
propaganda agency established by professional historians for the duration of the
war, and of the government's own propaganda arm, the Committee on Public
Information. Warning that the effort must remain secret, Ely mobilized historians
under the aegis of these organizations to research German and Austrian newspapers
and journals to try to build a record of La Follette's alleged influence, "indicating
the encouragement he has given Germany." The historian E. Merton Coulter
revealed the objective spirit animating these researches: "I understand it is to
be an unbiased and candid account of the Senator's [La Follette's] course and
its effect-but we all know it can lead hut to one conclusion-something little
short of treason.""
Professor Gmber well notes that this campaign to get La Follette was "a
remarkable example of the uses of scholarship for espionage. It was a far cry
from the disinterested search for truth for a group of professors to mobilize a
secret research campaign to find ammunition to destroy the political career of
a United States senator who did not share their view of the war."72 In any event,
no evidence was turned up, the movement failed, and the Wisconsin professoriat
began to move away in distrust from the Loyalty Legion.73
After the menace of the Kaiser had been extirpated, the Armistice found Pro-
fessor Ely, along with his compatriots in the National Security League, ready
to segue into the next round of patriotic repression. During Ely's anti-La Follette
research campaign he had urged investigation of "the kind of influence which
he [La Follette] has exerted against our country in Russia." Ely pointed out that
modem "democracy" requires a "high degree of conformity" and that therefore
the "most serious menace" of Bolshevism, which Ely depicted as "social disease
germs," must be fought "with repressive measures."
106 THE JOURNAL OF LIBERTARIAN STUDIES Winter

By 1924, however, Richard T. Ely's career of repression was over, and what
is more, in a rare instance of the workings of poetic justice, he was hoist with
his own petard. In 1922 the much traduced Robert La Follette was reelected to
the Senate and also swept the Progressives back into power in the state of Wis-
consin. By 1924 the Progressives had gained control of the Board of Regents,
and they moved to cut off the water of their former academic ally and empire-
builder. Ely then felt it prudent to move out of Wisconsin together with his
Institute, and while he lingered for some years at Northwestern, the heyday of
Ely's fame and fortune was over.

VII. Economics in Service of the State:


Government and Statistics
Statistics is a vital, though much underplayed, requisite of modern government.
Government could not even presume to control, regulate, or plan any portion
of the economy without the service of its statistical bureaus and agencies. Deprive
government of its statistics and it would be a blind and helpless giant, with no
idea whatever of what to do or where to do it. It might be replied that business
firms, too, need statistics in order to function. But business needs for statistics
are far less in quantity and also different in quality. Business may need statistics
in its own micro area of the economy, but only on its prices and costs; it has
little need for broad collections of data or for sweeping, holistic aggregates.
Business could perhaps rely on its own privately collected and unshared data.
Furthermore, much entrepreneurial knowledge is qualitative, not enshrined in
quantitative data, and of a particular time, area, and location. But government
bureaucracy could do nothing if forced to be confined to qualitative data. Deprived
of profit and loss tests for efficiency, or of the need to serve consumers effi-
ciently, conscripting both capital and operating costs from taxpayers, and forced
to abide by fixed, bureaucratic rules, modern government shorn of masses of
statistics could do virtually nothing."
Hence the enormous importance of World War I, not only in providing the
power and the precedent for a collectivized economy, but also in greatly accel-
erating the advent of statisticians and statistical agencies of government, many
of which (and who) remained in government, ready for the next leap forward
of power.
Richard T. Ely, of course, championed the new empirical "look and see"
approach, with the aim of fact-gathering to "mold the forces at work in society
and to improve existing conditions."" More importantly, one of the leading
authorities on the growth of government expenditure has linked it with statistics
and empirical data: "Advance in economic science and statistics . . . strengthened
belief in the possibilities of dealing with social problems by collective action.
It made for increase in the statistical and other fact-finding activities of
1989 MURRAY N. ROTHBARD-WORLD WAR I AS FULFILLMENT 107

govenunent."76 As early as 1863, Samuel B. Ruggles, American delegate to the


International Statistical Congress in Berlin, proclaimed that "statistics are the
very eyes of the statesman, enabling h i to survey and scan with clear and com-
prehensive vision the whole structure and economy of the body
Conversely, this means that stripped of these means of vision, the statesman
would no longer be able to meddle, control and plan.
Moreover, government statistics are clearly needed for specific types of
intervention. Government could not intervene to alleviate unemployment unless
statistics of unemployment were collected-and so the impetus for such collec-
tion. Carroll D. Wright, one of the first Commissioners of Labor in the United
States, was greatly influenced by the famous statistician and German Historical
School member, Ernst Engel, head of the Royal Statistical Bureau of Prussia.
Wright sought the collection of unemployment statistics for that reason, and in
general, for "the amelioration of unfortunate industrial and social relations."
Henry Carter Adams, a former student of Engel's, and, like Ely, a statist and
progressive "new economist," established the Statistical Bureau of the Interstate
Commerce Commission, believing that "ever increasing statistical activity by
the government was essential-for the sake of controlling naturally monopolistic
industries. . . ." And Professor Irving Fisher of Yale, eager for government to
stabilize the price level, conceded that he wrote The Making of Index Numbers
to solve the problem of the unreliability of index numbers. "Until this difficulty
could be met, stabilization could scarcely be expected to become a reality."
Carroll Wright was a Bostonian and a progressive reformer. Henry Carter
Adams, the son of a New England pietist Congregationalist preacher on missionary
duty in Iowa, studied for the ministry at his father's alma mater, Andover
Theological Seminary, but soon abandoned this path. Adams devised the account-
ing system of the Statistical Bureau of the ICC. This system "served as a model
for the regulation of public utilities here and throughout the world."7a
Irving Fisher was the son of a Rhode Island Congregationalistpietist preacher,
and his parents were both of old Yankee stock, his mother a strict Sabbatarian.
As befitted what his son and biographer called his "crusading spirit," Fisher
was an inveterate reformer, urging the imposition of numerous progressive
measures including Esperanto, simplified spelling, and calendar reform. He was
particularly enthusiastic about purging the world of "such iniquities of civiliza-
tion as alcohol, tea, coffee, tobacco, refined sugar, and bleached white
flour. . . ."79 During the 1920s Fisher was the leading prophet of that so-called
New Era in economics and in society. He wrote three books during the 1920s
praising the noble experiment of prohibition, and he lauded Governor Benjamin
Strong and the Federal Reserve System for following his advice and expanding
money and credit so as to keep the wholesale price level virtually constant. Because
of the Fed's success in imposing Fisherine price stabilization, Fisher was so sure
that there could be no depression that as late as 1930 he wrote a book claiming
108 THE JOURNAL OF LIBERTARIAN STUDIES Winter

that there was and could be no stock crash and that stock prices would quickly
rebound. Throughout the 1920s Fisher insisted that since wholesale prices
remained constant, there was nothing amiss about the wild boom in stocks. Mean-
while he put his theories into practice by heavily investing his heiress wife's
considerable fortune in the stock market. After the crash he frittered away his
sister-in-law's money when his wife's fortune was depleted, at the same time
calling frantically on the federal government to inflate money and credit and to
reinflate stock prices to their 1929 levels. Despite his dissipation of two family
fortunes, Fisher managed to blame almost everyone except himself for the
debacle.80
As we shall see, in view of the importance of Wesley Clair Mitchell in the
burgeoning of government statistics in World War I, Mitchell's view on statistics
are of particular importan~e.~' Mitchell, an institutionalist and student of Thor-
stein Veblen, was one of the prime founders of modern statistical inquiry in
economics and clearly aspired to lay the basis for "scientific" government plan-
ning. As Professor Dorfman, friend and student of Mitchell's, put it:
"clearly the type of social invention most needed today is one that offers
defmite techniques through which the social system can be controlled and
operated to the optimum advantage of its members." (Quote from Mitchell.)
To this end he constantly sought to extend, improve and refme the gathering
and compilation of data. . . . Mitchell believed that business-cycle
analysis . . . might indicate the means to the achievement of orderly social
control of business a~tivity.'~
Or, as Mitchell's wife and collaborator stated in her memoirs:
. . . he [Mitchell] envisaged the great contribution that government could
make to the understandingof economic and social problems if the statistical
data gathered independently by various Federal agencies were systematized
and pianned so that the inte~relationshipsamong them could be studied. The
idea of developing social statistics, nor merely as a record bur as a basis for
planning, emerged early in his own w0rk.~3
Particularly important in the expansion of statistics in World War I was the
growing insistence, by progressive intellectuals and corporate liberal businessmen
alike, that democratic decision-making must be increasingly replaced by the
administrative and technocratic. Democratic or legislative decisions were messy,
"inefficient," and might lead to a significant curbing of statism, as had happened
in the heyday of the Democratic party during the nineteenth century. But if deci-
sions were largely administrative and technocratic, the burgeoning of state power
could continue unchecked. The collapse of the laissez-fairecreed of the Democrats
in 1896 left a power vacuum in government that administrative and corporatist
types were eager to fdl. Increasingly, then, such powerful corporatist big business
groups as the National Civic Federation disseminated the idea that governmental
decisions should be in the hands of the efficient technician, the allegedly value-
1989 MURRAY N. ROTHBARD-WORLD WAR I AS FULFILLMENT 109

free expert. In short, government, in virtually all of its aspects, should be "taken
out of politics." And statistical research with its aura of empiricism, quantitative
precision, and nonpolitical value-freedom, was in the forefront of such emphasis.
In the municipalities, an increasingly powerful progressive reform movement
shifted decisions from elections in neighborhood wards to citywide professional
managers and school superintendants. As a corollary, political power was increas-
ingly shifted from working class and ethnic German Lutheran and Catholic wards
to upper-class pietist business groups."
By the time World War I arrived in Europe, a coalition of progressive intellec-
tuals and corporatist business men was ready to go national in sponsoring allegedly
objective statistical research institutes and think tanks. Their views have been
aptly summed up by David Eakins:
The conclusion being drawn by these people by 1915 was that fact-fmding
and policymaking had to be isolated from class sttuggle and freed from political
pressure groups. The reforms that would lead to industrial peace and social
order, these experts were coming to believe, could only be derived from data
determined by objective fact-finders (such as themselves) and under the
auspices of sober and respectable organizations (such as only they could con-
struct). The capitalist system could be improved only by a single-minded
reliance upon experts detached from the hurly-burly of democratic policy-
making. The emphasis was upon eff~ciency-and democratic policymaking
was inefficient. An approach to the making of national economic and social
policy outside traditional democratic political processes was thus emerging
before the United States fonnally entered World War I."
Several corporatist businessmen and intellectuals moved at about the same time
toward founding such statistical research institutes. In 190647, Jerome D. Greene,
secretary of the Harvard University Corporation, helped found an elite Tuesday
Evening Club at Harvard to explore important issues in economics and the social
sciences. In 1910 Greene rose to an even more powerful post as general manager
of the new Rockefeller Institute for Medical Research, and three years later Greene
became secretary and CEO of the powerful philanthropic organization, the.
Rockefeller Foundation. Greene immediately began to move toward establishing
a Rockefeller-funded institute for economic research, and in March 1914 he called
an exploratory group together in New York, chaired by his friend and mentor
in economics, the first Dean of the Harvard Graduate School of Business, Edwin
F. Gay. The developing idea was that Gay would become head of a new, "scien-
tific" and "impartial" organization, The Institute of Economic Research, which
would gather statistical facts, and that Wesley Mitchell would be its director.86
Opposing advisers to John D. Rockefeller, Jr., won out over Greene, however,
and the Institute plan was s~uttled.~' Mitchell and Gay pressed on, with the lead
now taken by Mitchell's long-time friend, chief statistician and vice-president
of A.T. & T., Malcolm C. Rorty. Rorty lined up support for the idea from a
number of progressive statisticians and businessmen, including Chicago publisher
110 THE JOURNAL OF LIBERTARIAN STUDIES Winter

of business books and magazines, Arch W. Shaw; E. H. Goodwin of the U.S.


Chamber of Commerce; Magnus Alexander, statistician and assistant to the presi-
dent of General Electric, like A.T. & T. a Morgan-oriented concern; John R.
Commons, economist and aide-de-camp to Richard T. Ely at Wisconsin; and
Nahum I. Stone, statistician, former Marxist, a leader in the "scientific manage-
ment" movement, and labor manager for the Hickey Freeman clothing company.
This group was in the process of forming a "Committee on National income"
when the United States entered the war, and they were forced to shelve their plans
t e m p ~ r a r i l yAfter
. ~ ~ the war, however, the group set up the National Bureau of
Economic Research, in 1920.89
While the National Bureau was not to take fmal shape until after the war, another
organization, created on similar lines, successfully won Greene's and Rockefeller's
support. In 1916 they were persuaded by Raymond B. Fosdick to found the
Institute for Government Research (IGR).90 The IGR was slightly different in
focus from the National Bureau group, as it grew directly out of municipal
progressive reform and the political science profession. One of the important
devices used by the municipal reformers was the private bureau of municipal
research, which tried to seize decision-making from allegedly ''corrupt" demo-
cratic bodies on behalf of efficient, nonpartisan organizations headed by pro-
gressive technocrats and social scientists. In 1910 President William Howard Taft,
intrigued with the potential for centralizing power in a chief executive inherent
in the idea of the executive budget, appointed the "father of the budget idea,"
the political scientist Frederick D. Cleveland, as head of a Commission on
Economy and Efficiency. Cleveland was the director of the New York Bureau
of Municipal Research. The Cleveland Commission also included political scientist
and municipal reformer Frank Goodnow, professor of public law at Columbia
University, first president of the American Political Science Association and presi-
dent of Johns Hopkins; and William Franklin Willoughby, former student of Ely,
Assistant Director of the Bureau of Census, and later President of the American
Association for Labor Legi~lation.~' The Cleveland Commission was delighted
to tell President Taft precisely what he wanted to hear. The Commission recom-
mended sweeping administrative changes that would provide a Bureau of Central
Administrative Control to form a "consolidated information and statistical arm
of the entire national government." And at the heart of the new Bureau would
be the Budget Division, which was to develop, at the behest of the president,
and then present "an annual program of business for the Federal Government
to be financed by C o n g r e s ~ . " ~ ~
When Congress balked at the Cleveland Commission's recommendations, the
disgruntled technocrats decided to establish an Institute for Government Research
in Washington to battle for these and similar reforms. With funding secured from
the Rockefeller Foundation, the IGR was chaired by Goodnow, with Willoughby
as its dire~tor.~'Scan Robert S . Brookings assumed responsibility for the
financing.
1989 MURRAY N. ROTHBARD-WORLD WAR I AS FULFLLMENT 111

When America entered the war, present and future NBER and IGR leaders
were all over Washington, key figures and statisticians in the collectivized war
economy.
By far the most powerful of the growing number of economists and statisti-
cians involved in World War I was Edwin F. Gay. Arch W. Shaw, an enthusiast
for rigid wartime planning of economic resources, was made head of the new
Commercial Economy Board by the Council for National Defense as soon as
America entered the war.94 Shaw, who had taught at and served on the ad-
ministrative board of Harvard Business School, staffed the Board with Harvard
Business people; the secretary was Harvard economist Melvin T. Copeland, and
other members included Dean Gay. The Board, which later became the powerful
Conservation Division of the War Industries Board, focused on restricting com-
petition in industry by eliminating the number and variety of products and by
imposing compulsory uniformity, all in the name of "conservation" of resources
to aid the war effort. For example, garment firms had complained loudly of severe
competition because of the number and variety of styles, and so Gay urged the
garment firms to form a trade association to work with the government in curb-
ing the surfeit of competition. Gay also tried to organize the bakers so that they
would not follow the usual custom of taking back stale and unsold bread from
retail outlets. By the end of 1917, Gay was tired of using voluntary persuasion
and was urging the government to use compulsory measures.
Gay's major power came in early 1918 when the Shipping Board, which had
officially nationalized all ocean shipping, determined to restrict drastically the
use of ships for civilian trade and to use the bulk of shipping for transport of
American troops to France. Appointed in early January 1918 as merely a "special
expert" by the Shipping Board, Gay in a brief time became the key figure in
redirecting shipping from civilian to military use. Soon Edwin Gay had become
a member of the War Trade Board and head of its statistical department, which
issued restrictive licenses for permitted imports; head of the statistical depart-
ment of the Shipping Board; representative of the Shipping Board on the War
Trade Board; head of the statistical committee of the Department of Labor; head
of the Division of Planning and Statistics of the War Industries Board (WIB);
and, above all, head of the new Central Bureau of Planning and Statistics. The
Central Bureau was organized in the fall of 1918, when President Wilson asked
WIB chairman Bernard Baruch to produce a monthly survey of all the govern-
ment's war activities. This "conspectus" evolved into the Central Bureau, respon-
sible directly to the President. The importance of the Bureau is noted by a recent
historian:
The new Bureau represented the "peak" statistical division of the mobiliza-
tion, becoming its "seer and prophet" for the duration, coordinating over
a thousand employees engaged in research and, as the agency responsible
for giving the president a concise picture of the entire economy, becoming
the closest approximation to a "central statistical commission." During the
112 THE JOURNAL OF LIBERTARIAN STUDIES Winter

latter stages of the war it set up a clearinghouse of statistical work, organized


liaisons with the statistical staff of all the war boards, and centralized the
data production process for the entire war bureaucracy. By the war's end,
Wesley Mitchell recalled, "we were in a fair way to develop for the first
time a systematic organization of federal statistic^."^^
Within a year, Edwin Gay had risen from a special expert to the unquestioned
czar of a giant network of federal statistical agencies, with over a thousand
researchers and statisticians working under his direct control.
It is no wonder then that Gay, instead of being enthusiastic about the American
victory he had worked so hard to secure, saw the Armistice as "almost . . . a
personal blow" that plunged him "into the slough of despond." All of his empire
of statistics and control had just been coming together and developing into a mighty
machine when suddenly "came that wretched A r m i ~ t i c e . "Truly
~ ~ a tragedy of
peace.
Gay tried valiantly to keep the war machinery going, continually complaining
because many of his aides were leaving and bitterly denouncing the "hungry pack"
who, for some odd reason, were clamoring for an immediate end to all wartime
controls, including those closest to his heart, foreign trade and shipping. But one
by one, despite the best efforts of Baruch and many of the wartime planners,
the WIB and other war agencies di~appeared.~' For a while, Gay pinned his hopes
on his Central Bureau of Planning and Statistics (CBPS), which, in a fierce bout
of bureaucratic infighting, he attempted to make the key economic and statistical
group advising the American negotiators at the Versailles peace conference,
thereby displacing the team of historians and social scientists assembled by Col-
onel House in the Inquiry. Despite an ofticial victory, and an eight volume report
of the CBPS delivered to Versailles by the head of CBPS European team, John
Foster Dulles of the War Trade Board, the bureau had little influence over the
final treaty.98
Peace having finally and irrevocably arrived, Edwin Gay, hacked by Mitchell,
tried his best to have the CBPS kept as a permanent, peacetime organization.
Gay argued that the agency, with himself of course remaining as its head, could
provide continuing data to the League of Nations, and above all could serve as
the president's own eyes and ears and mold the sort of executive budget envi-
sioned by the old Taft Commission. CBPS staff member and Harvard economist
Edmund E. Day contributed a memorandum outlining specific tasks for the bureau
to aid in demobilization and reconstruction, as well as rationale for the bureau
becoming a permanent part of government. One thing it could do was to make
a "continuing canvass" of business conditions in the United States. As Gay put
it to President Wilson, using a favorite organicist analogy, a permanent Board
would serve "as a nervous system to the vast and complex organization of the
govenunent, furnishing to the controlling brain [the President] the information
necessary for directing the efficient operation of the various members."99 Although
1989 MURRAY N. ROTHBARD-WORLD WAR I AS FULFILLMENT 113

the President was "very cordial" to Gay's plan, Congress refused to agree, and
on June 30, 1919 the Central Bureau of Planning and Statistics was finally
terminated, along with the War Trade Board. Edwin Gay would now have to
seek en~ploymentin, if not the private, at least the quasi-independent, sector.
But Gay and Mitchell were not to be denied. Nor would the Brookings-
Willoughby group. Their objective would be met more gradually and by slightly
different means. Gay became editor of the New York Evening Post under the aegis
of its new owner and Gay's friend, J. P. Morgan partner Thomas W. Lamont.
Gay also helped to form and become first president of the National Bureau of
Economic Research in 1920, with Wesley C. Mitchell as research director. The
Institute for Government Research achieved its major objective, establishing a
Budget Bureau in the Treasury Department in 1921, with the director of the IGR,
William F. Wiloughby, helping to draft the bill that established the bureau.'w
The IGR people soon expanded their role to include economics, establishing an
Institute of Economics headed by Robert Brookings and Arthur T. Hadley of Yale,
with economist Harold G. Moulton as director.I0' The Institute, funded by the
Carnegie Corporation, would be later merged, along with the IGR, into the Brook-
ings Institution. Edwin Gay also moved into the foreign policy field by becoming
secretary-treasurer and head of the Research Committee of the new and extremely
influential organization, the Council on Foreign Relations (CFR).lOZ
And finally, in the field of government statistics, Gay and Mitchell found a
more gradual but longer-range route to power via collaboration with Herbert
Hoover, soon to be Secretary of Commerce. No sooner had Hoover assumed
the post in early 1921 when he expanded the Advisory Committee on the Census
to include Gay, Mitchell, and other economists and then launched the monthly
Survey of Current Business. The Survey was designed to supplement the infor-
mational activities of cooperating trade associations and, by supplying business
information, aid these associations in Hoover's aim of carteliiing their respec-
tive industries. Secrecy in business operations is a crucial weapon of competi-
tion, and conversely, publicity and sharing of information is an important tool
of cartels in policing their members. The Survey of Current Business made
available the current production, sales, and inventory data supplied by cooperating
industries and technical journals. Hoover also hoped that by building on these
services, eventually "the statistical program could provide the knowledge and
foresight necessary to combat panic or speculative conditions, prevent the develop
ment of diseased industries, and guide decision-making so as to iron out rather
than accentuate the business cycle."lo3 In promoting his cartelization doctrine,
Hoover met resistance both from some businessmen who resisted prying ques-
tionnaires and sharing competitive secrets and from the Justice Department. But,
a formidable empire-builder, Herbert Hoover managed to grab statistical services
from the Treasury Department and to establish a "waste elimination division"
to organize businesses and trade associations to continue and expand the wartime
114 THE JOURNAL OF LIBERTARlAN STUDIES Winter

"conservation" program of compulsory uniformity and restriction of the number


and variety of competitive products. As assistant secretary to head up this pro-
gram, Hoover secured engineer and publicist Frederick Feiker, an associate of
Arch Shaw's business publication empire. Hoover also found a top assistant and
lifelong disciple in Brigadier General Julius Klein, a protege of Edwin Gay's,
who bad headed the Latin American division of the Bureau of Foreign and
Domestic Commerce. As the new head of the bureau, Klein organized seventeen
new export commodity divisions-reminiscent of commodity sections during
wartime collectivism-each with "experts" drawn from the respective industries
and each organizing regular cooperation with parallel industrial advisory com-
mittees. And through it all Herbert Hoover made a series of well-publicized
speeches during 1921, spelling out how a well-designed government trade pro-
gram, as weU as a program in the domestic economy, could act both as a stimulant
to recovery and as a permanent "stabilizer," while avoiding such unfortunate
measures as abolishing tariffs or cutting wage rates. The best weapon, both in
foreign and domestic trade, was to ''eliminate waste" by a "cooperative mobiiiza-
tion" of government and industry.lo4
A month after the Armistice, the American Economic Association and the
American Statistical Assmiation met jointly in Richmond, Virginia. The presiden-
tial addresses were delivered by men in the forefront of the exciting new world
of government planning, aided by social science, that seemed to loom ahead. In
his address to the American Statistical Association, Wesley Clair Mitchell
proclaimed that the war had "led to the use of statistics, not only as a record
of what had happened, but also as a vital factor in planning what should be done."
As he had said in his final lecture in Columbii University the previous spring,
the war had shown that when the community desires to attain a great goal "then
within a short period far-reaching social changes can be achieved." "The need
for scientific planning of social change," he added, "bas never been greater,
the chance of making those changes in an intelligent fashion . . . has never been
so good." The peace will bring new problems, he opined, but "it seems impos-
sible" that the various countries will "attempt to solve them without utilizing
the same sort of centralized directing now employed to kill their enemies abroad
for the new purpose of reconstructing their own life at home. . . ."
But the careful empiricist and statistician also provided a caveat. Broad social
planning requires "a precise comprehension of social processes" and that can
be provided only by the patient research of social science. As he had written to
his wife eight years earlier, Mitchell stressed that what is needed for government
intervention and planning is the application of the methods of physical science
and industry, particularly precise quantitative research and measurement. In
contrast to the quantitative physical sciences, Mitchell told the assembled statis-
ticians, the social sciences are "immature, speculative, filled with controversy"
and class struggle. But quantitative knowledge could replace such struggle and
1989 MURRAY N. ROTHBARD-WORLD WAR I AS FULFILLMENT 115

conflict by commonly accepted precise knowledge, "objective" knowledge


"amenable to mathematical formulation" and "capable of forecasting group
phenomena." A statistician, Mitchell opined, is "either right or wrong," and
it is easy to demonstrate which. As a result of precise knowledge of facts, Mitchell
envisioned, we can achieve "intelligent experimenting and detailed planning rather
than . . . agitation and class struggle."
To achieve these vital goals none other than economists and statisticians would
provide the crucial element, for we would have to be "relying more and more
on trained people to plan changes for us, to follow them up, to suggest
alterations."lo'
In a similar vein, the assembled economists in 1918 were regaled with the
visionary presidential address of Yale economist Irving Fisher. Fisher looked
forward to an economic "world reconstruction" that would provide glorious
opportunities for economists to satisfy their constructive impulses. A class sttuggle,
Fisher noted, would surely be continuing over distribution of the nation's wealth.
But by devising a mechanism of "readjustment," the nation's economists could
occupy an enviable role as the independent and impartial arbiters of the class
struggle, these disinterested social scientists makimg the crucial decisions for the
public good.
In shon, both Mitchell and Fisher were, subtly and perhaps half-consciously,
advancing the case for a postwar world in which their own allegedly impartial
and scientific professions could levitate above the narrow struggles of classes for
the social product, and thus emerge as a commonly accepted, "objective" new
ruling class, a twentieth-century version of the philosopher-kings.
It might not be amiss to see how these social scientists, prominent in their own
fields and spokesmen in different ways for the New Era of the 1920s. fared in
their disquisitions and guidance for the society and the economy. Irving Fisher,
as we have seen, wrote several works celebrating the alleged success of prohibi-
tion, and insisted even after 1929, that since the price level had been kept stable,
there could be no depression or stock market crash. For his pan, Mitchell
culminated a decade of snug alliance with Herbert Hoover by directing, along
with Gay and the National Bureau, a massive and hastily written work on the
American economy. Published in 1929 on the accession of Hoover to the presi-
dency, with all the resources of scientific and quantitative economics and statistics
brought to bear, there is not so much as a hint in Recent Economic Changes in
the United States that there might be a crash and depression in the offing.
The Recent Economic Changes study was originated and organized by Herbert
Hoover, and it was Hoover who secured the financing from the Carnegie Cor-
poration. The object was to celebrate the years of prosperity presumably produced
by Secretary of Commerce Hoover's corporatist planning and to find out how
the possibly future President Hoover could maintain that prosperity by absorbing
its lessons and making them a permanent pan of the American political stmc-
116 THE JOURNAL OF LIBERTARIAN STUDIES Winter

ture. The volume duly declared that to maintain the current prosperity, economists,
statisticians, engineers, and enlightened managers would have to work out "a
technique of balance" to be installed in the economy.
Recent Economic Changes, that monument to "scientific" and political folly,
went through three quick printings and was widely publicized and warmly received
on all sides.'06 Edward Eyre Hunt, Hoover's long time aide in organizing his
planning activities, was so enthusiastic that he continued celebrating the hook
and its paean to American prosperity throughout 1929 and 1930.'07
It is appropriate to end our section on government and statistics by noting an
unsophisticated yet perceptive cry from the heart. In 1945 the Bureau of Labor
Statistics approached Congress for yet another in a long line of increases in
appropriations for government statistics. In the process of questioning Dr. A.
Ford Hinrichs, head of the BLS, Representative Frank B. Keefe, a conservative
Republican Congressman from Oshkosh, Wisconsin, put an eternal question that
has not yet been fully and satisfactorily answered:
There is no doubt but what it would be nice to have a whole lot of
statistics. . . . I am just wondering whether we are not embarking on a pro-
gram that is dangerous when we keep adding and addimg and adding to this
thing. . . .
We have been planning and getting statistics ever since 1932 to try to meet
a situation that was domestic in character, but were never able to even meet
that auestion. . . . Now we are involved in an international ouestion. . . .
It looks to me as though we spend a tremendous amount of time with graphs
-
and charts and statistics and nlannine. What mv. w . o.~ l are
e interested in is
what is it all about? Where are we going, and where are you going?'08

Notes I

1. The title of this paper is barnwed from the pianeenng last chapter of James Weinstein's excellent
work, lh Corpomte Ideal in the Liberal State, 1900-1918 (Boston: Beacon Press, 1968). The
last chapter is entitled, "War as Fulfillment."
2. Robert Higgs, Crisis M d h i a r h a n (New York: Oxford University Press, 1987),pp. 123-158.
For my own acmunt of the wllectiv$ed war emnomy of World War I, see Murray N. Rothbard,
"War Collectivism in Wodd War I", in R. Radosh and M. Rnhbard, eds., A New Histop
ofhinrhnn: Essays on the Rise of the Amrican Corporate State (New York: Dunon, 1972),
pp. 66-110.
3. F. A. Hayek, "The Intellechlals md Socialism," in W i e s in Philosophy, Politics M d E m ~ m ' c s
. -
(Chicano: -
UniversiW of Chicaeo Press. 1967). ... 178ff.
. DD
4. On the wnwription movement, see in particular Michael Pearlman, To Make Democracy Safe
for Amn'co: P a r i c i m MdPrmoredmss in the Pmnre~siveEm (Urbana: University of Olinois
.F'~.=ss, 1984). See also John W. Chamben n, " ~ ~ ~ ~ r ifor ~ Colossus:
t i n g The Adoption of
the Draft in the United Stltes in World War I," Ph.D. diss., Columbia University. 1973; John
Patrick Finnegan, Against the Specter of o Dmgon: the Campoign for Amricon Military
Preparedness, 1914-1917Ouestpart, Conn. Greenwmd Press, 1974): and John Gany Clif-
ford, 7he Citizen Soldiers: 7he PPlnttsburg Tmining Gunp Movement (Lexington: University
Press of Kentucky, 1972).
1989 MURRAY N. ROTHBARD-WORLD WAR I AS FULFILLMENT I17

5. On ministers and the war, see Ray H. Abrams, Preachers Present Arms (New York: Rwnd
Table Press, 1933). On the mobilization of science, see David F. Noble, Americo By Design:
Science, Technology and the Rise of C o p m r e Cqitalism (New York: Oxford University Press,
1977). and Ronald C. Tobey, lhe Ame"con Ideology of Narionnl Science, 1919-1930 (Pirts-
burgh: University of Piusburgh Press, 1971).
6. Cited in Gerald Edward Markowitz, "Pmgressive Imperialism: Consensus and Conflict in the
Progressive Movement on Foreign Policy, 1898-1917," Ph.D. diss., University of Wisconsin,
1971, p. 375, an unfortunately neglected work on a highly impomnt topic.
7. Hence the famous imprecation hulled at the end of the I884 campaim that bmubt the Democrats
lnlo the prcrtdcncy for the firs1 llmr slncc the C ~ v dWar. that the ~ r m o c r a y ~Parry
c was the
pany of "Rum. Roman~smand Rebell~an" In that one phrase, the Kcw York Pmteslanl muster
uas able lo sum up the pul~t~cal concerns of thc plcurt movemenl
8 For an mtnxturt~onto the pmu ing l ~ t c r a ~ofr r"ethnorel~gluur" wl~ttralhlnorv in the Unlted
: Fret Press. 1950); and idrm.
X Culnrw (New ~ o i kthe
Statcs. u c Paul ~ l c ~ ~ n c r : 7 hCr~ S of
.
lhe l h r d Ekrtuml Ssxtem. 1853-1892 .(Chaal Hill. N C.: Univcrriw of North Carolma Press.
1979). For the latest research on the formatianof the Repblican Party as a pietist p l y , reflecting
the interconnected h a d of pietist concerns-antislavery, prohibition, and antiCatholicism-
sec William E. Gienapp, "Nativism and the Creation of a Republican Majority in the North
before the Civil War," Journal of Anwicon History 72 (December 1985): 529-559.
9. German Lutherans were largely "high" or liturgical and confessional Lutherans who placed
emphasis on the Church and its creed or sacraments rather than on a pietist, "born-again,"
emotional conversion experience. Scandinavian-Americans, on the other hand, were mainly
vietist Lutherans.
LO. Orthodox Augustinian Christianity, as fallowed by the liturgicals, is "a-millennialist", i.e.,
it believes fhaf fhe "millennium" is simply a metaphor for the emergence of the Chris& Church
and that Jesus will refurn without human aid and at his own unspecified time. Modern "funda-
mentalists,"as rhey have beencalled since theearly years of the oumW century, an "premillen-
nidists," i.e., they believe that Jesus will return to usher in a thousand years of the Kingdom
of God on Earth, a time marked by various "tribulations" and by Armageddon, until history
is finally ended. Premillennialists, or "millennarians," do not have the statist drive of the
postmillennialists; instead, they tend to focus on vredictions and signs- of Armaaeddan - and of
Icsus' advent.
11. James H. Timberlake, Pmhibition and the Pmgressive Movement. 1!9C%1920 (New York:
Atheneum. 1970). pp. 7-8.
12. Quoted in Timberlake, Prohibition. p. 33.
13. The Pmgressive Party convention was a mighty fusion of all the major trends in the progressive
movement: statist economists, techocrafs, social enginan, social workers, professional pietists,
and partners of I. P. Morgan & Co. Social Gospel leaders Lyman AbboU, the Rev. R. Heber
Newton and the Rev. Washinetan - - .
- Gladden. were leadine Proeressive PUN deleeates. The P m
gressive Party pmclaimed itself as the "recmdescenee of the religious spirit in American political
-
life." Theodore Raosevelt's ecceuance m h was s'ificantllv entitled "A Confession of Faith."
and his words uere punclualcJ by "amms" and h) a continual smgmg of pietist Chnnian hymm
by the arwmbled dclcgaler They . m w
. "Onnard Chnstian Soldters." "The Banlc Hvmn of
the Republic," and especially the revivalist hymn, "Follow, Fallow, We Will Follow Jesus,"
with the word "Roosevelt" replacing "Jesus" at every turn. The horrified New York limes
summed up the uunuwal experience by calling the Pmgnssive grmping "a convention of fanatics."
And it added, "It was not a convention at all. It was an assembla~eof religious enthusiasts.
It was such a convention as Peter the Hermit held. It was a ~ e t h o d i s camp
t following done
over inm political terms." Cited in John M e n Gable, lhe Bull Mwse Yeon: lheodore Rmsevelt
and rhe Progressive Pmry (Pon Washington, N.Y.: Kmnikat Press, 1978). p. 75.
14. Timberlake, Prohibition. p. 24.
118 THE JOURNAL OF LIBERTARIAN STUDIES Winter

15. Quoted in Timberlake, Prohibition, p. 27. Iralics in the article. Or, as the Rev. Stelzle put it,
in Why Pmhibition!, "There is no such thing as an absolute individual right Lo do any pmicular
thing, or lo eat or drink any particular thing, or to enjoy the association of one's own family,
or even lo live, if that thing is in conflict with the law of public necessity." Quoted in David
E. Kyvig, Repealing Nmioml Prohibition (Chicago: Univenity of Chicago Press, 1979), p. 9.
16. Timberlake, Prohibition, pp. 37-38.
17. See David Burner, HerbenHmwr: A Public Life (New York: Alfred A. Knopf, 1979), p. 107.
18. James A. Burran, "Prohibition in New Mexico, 1917," New Mexico Hislorim1 W n e r l y 48
(Apnl 19731: 140-141. MR. L ~ n d qof roume rhoued no concern uhalcver fur the German.
allled, and neutral wunvlcr of Europe king sublmed to slawation b) the British naval blwkadc.
The only arcas of S e u Mcrico that rcrtslcJ the pruh~b~tlun crusade in the referendum in the
November 1917 ela'l~onswere the heavily . Hapanic.Calholc
. d~slnul,.
19. Timberlake, Prohibition. p. 179.
20. Quoted in Timberlake, Prohibition, pp. 180-181.
21. Q u in Alan P. G r k , 7he P u P m Erhic and W o r n S&age (New York: Oxford University
a
Press, 1967), p. 78.
22. Grimes, Purimn Ethic. p. 116.
23. Ida Clyde Clarke, Americon Women and the World War (New York: D. Appleton and Co.,
1918). p. 19.
24. Clarke, American Women, p. 27.
25. Ibid., p. 31. Actually M n . Tarbell's muckraking activities were pretty much confmed to
Rockefellerand Standard Oil. She was highly favorable lo business leaden in the Morgan ambit,
as witness her laudatory biographies of Judge Elbert H. Gary, of U.S. Steel (1925) and Owen
D. Young, of General Electric (1932).
26. Ibid., p. 277, pp. 275-279, p. 58.
27. Ibid., p. 183.
28. Ibid., p. 103.
29. Ibid., pp. 104-105.
30. bid., p. 101.
3 1. Ibid., p. 129. Marzaret
. Dreier Robins and her husband Raymond were virmallv -
. a .Damdiematic
progressive couple. Raymond was a Florida-born wanderer and successful gold prospecfor who
underwent a mystical conversion experience in the Alaska wilds and became a pietist preacher.
He moved to Chicago, where he became a leader in C h i i g o settlement house work and municipal
reform. Margaret Dreier and her sister Mary were daughters of a wealthy and socially promi-
nent New York family who worked for and fmanced the emergent National Women's Trade
Union League. Margaret married Raymond Robins in 1905 and moved 0 Chicago, w a n teaming
longtime president of the league. in Chicago, the Robinsesled and organized progressive political
causes for over two decades, becomina - to~leaders
. -
of theProaressive Party from 1912 Lo 1916.
During the Mar. Raymond Roban\ engaged ~ncon\~dcrablcdlpbmat~ractiv~tyas head of a Red
Cross mtsrton lo RLSIUIOn the Robm,cr, m Allen F Davs. bmhwdfor . ReTom. rhe Slntol
Senlements and the Progressive Movement, 1890-1914 (New York: Oxford University Press,
1967).
32. For more on women's war work and woman suffrage, see the standard history of the suffrage
movement, Eleanor Flexner, Cenhrrv of S l P ~ ~ n llhe e : Wornon's Rinhrs Movement in the Unired
Sfder (New Yurk Atheneum, 1%8). 2 8 ~ 2 8 9Intcrerungl). The Nallonzl War Labor Board
(NWLBl f d .y adopted . the wnrepl of "equal
. . pa). fur equal uurk" m uder to lmu the cmploy. .-
men1 of women workers by imposing higher w s u on theemployer. The "only check," affirmed
the NWLB, on excessive employment of women "is to make it no more profitable Lo employ
women lhan men." Quoted Valerie I. Conner, "'The Mothers of the Race' in world W&
I: The National War Labor Board and Women in industry," Lobor Histop 21 (Winter 1979-80):
34.
I989 MURRAY N. ROTHBARD-WORLD WAR I AS FULFILLMENT 119

33. See Raymond B. Fosdick, Chronicle of o Generorion: An Autobiography (New York: Harper
& Bms., 1958). p. 133. Also see Peter Collier and David Horowitz, Ihe Rockefellers: An
American O y m r y (New York: New American Library, 1976). pp. 103-105. Fosdick was
patticularly appalled that American pamlmen on street duty actually smoked cigars! Fosdick,
Chronicle, p. 135.
34 The American S w a l Hygrenc Assocralion, wilh ilr ~nflucnlialjournal Sor#al Hygtene, war thr
mqo1 organim~~on in what uas known as the "punly cluude " The a>\u.lallon *as launched
when lhc New Yurk ph)sr~anDr Pnncc A. Murruw, mspscd b) Ule agtlation agamv venereal
d~ww and in favor of lhc runlmence urged by the F r m h syphdognpher. l e a n - A l i d Fourn~er.
formed in 1905 rhc American Sotlet) for S a n i w and Moral Prnphylar~s(ASSMP) Soon.
the term, proposed b) lhc Ch~iagubrwr'h of ASSMP. " w i a l hygbene" and "sex hyganc."
became uldel) uwJ for lhcrr medical and sclcnlific patina, and in 1910 ASSMP changed iu
m l e to the Amcncan F u l e r ~ l ~ ofor n Sex Hygicnc (AFSH). Flnall), in lalc 1913. AFSH. an
urglntatlnn of ph)ricidn\. comb~neduilh the Nat~onalVlgilancc Asuclalldn (formerly lhe
Amerlan Purq Alliance). a gmup of clergymen and ,nclal uurken, w form ihc all.crnbmcing
Amen;sn Sor.tal Hygicnc Aswc~al~on (ASHA,.
ln t h ~ u s r.dhb~lene
.. movement, the moral and medical ucnl hand m hmd. Thus Dr Mormw
welcomed the new knowledge about venereal disease because it demonstrated that "punish-
ment for sexual sin" no longer had Lo be "reserved for the hereafter."
Thc firs preudea or ASHA was lhe prer~dcaof Hanard Unlrer5~t).Charles W Ellot In
h ~ address
r lo the fin1 mcelmg. Elrol made clear that total abslmence from alcohol, a,baccu.
and even spices was pan and parcel of the antiprostitution and purity crusade.
On physicians, the purity crusade, and the formation of ASHA, see Ronald Hamowy,
n Sin:'Self-Abuse' in 1% Century America," Zhe Journal
" ~ e d i c i n eand the ~ k n i t i o of
of tibenorion Sfdies I (Summer 1972): 247-259; lames Wunsch, "Prostitution and Public
Policy: From Regulation to Suppression, 1858-1920," Ph.D. diss., University of Chicago,
1976; and Roland R. Wagner, "Vittue Against Vice: A Shidy of M o d Reformers and Pro-
stitution in the Progressive Era," Ph.D. diss., University of Wisconsin, 1971. On M o m w ,
also see John C. Burnham, "The Progressive Era Revolution in American Attitudes Toward
Sex," J o u m l ofAmerican Hisrory 59 (March 1973): 899; and Paul Boyer, Urban Mosses and
Moral Order in America, 1820-1920 (Cambridge: Harvard University Press, l978), p. 201.
Also see Bumham, "Medical Specialists and Movements Toward Social Conml in the Pro-
gressive Era: Three Examples," in I. Israel, ed., Building rhe Orgoflizan'oM/Sociefy: Essays
in Associario~/Anivifies in Modem America (New York: Free Press. 1972). pp. 24-26.
35. In Daniel R. Beaver, N m n D. &*erandfheAmerican War Effon 1917-1919 (LinwIn, Nebr.:
University of Nebraska Press, 1966). p. 222. Also see ibid., pp. 221-224; and C. H. Cramer,
Newton D. Baker: A. Biography (Cleveland: World Publishing Co., l%l), pp. 99-102.
36. Fosdick, Chronicle, pp. 145-147. While prostitution was indeed banned in Storyville &I 1917.
Storyville, w n m r y to legend, never "closed", rhe saloons and dance balls remained open.
and wnuary to orthodoxaccounts, jazz was never really shut down in Storyville or New Orleans,
and it was therefore never forced up river. For a revisionist view of the impact of the closure
uf Storyrrllcon lhc hr,tog o f j z z , scc Tom W l l , G o r g c L e ~ mA J e m m f r o m N e w OIIPMS
(Bcrkcle) Unl\entt) of Caltfarnta P m s . 1977). pp 6 7 , and Al Row. Stom-dlt. NPBOrltom
( ~ o n t ~ o i e r~la.:~niversity
y, of ~ l a b a m press:
a 1974). Also, on later Storyville, see Boyer,
Urbon Masses, p. 218.
37. See Hamowy, "Crimination of Sin," p. 226 n. The quote from Clemenceau is in Fosdick,
Chronicle, p. 171. Newton Baker's loyal biographer declared that Clemenceau, in this response,
-
showed "his animal nroelivities as the 'Tiner of France'". Cnuner. Newon Baker. D. 101.
38. Clarke, Amedcan Women, pp. 90, 87.93. In some cases, organized women took the offensive
to help stamD aB vice and liquor in their wmmunily. Thus in Texas in I917 the Texas Women's
~ n t i - v i c e&mminee led in;he creation of a "white Zane" around all the military bases. By
120 THE JOURNAL OF LIBERTARIAN STUDIES Winter

autumn the Committee expanded into the Texas Social Hygiene Association to cwniinate the
work of eradicating prostitution and saloons. San Antonio proved to be its biggest problem.
Lewis L. Gould, Progressives and Prohibitionists: Terar Democrats in the Wilson Era (Austin:
University of Texas Press, 1973), p. 227.
39. Davis, S~carheadsforRefom. p. 225.
40. Fodak, Chn,ndrlr, p. 144. Aficr the War. Raymond Fasd~;k went on to fame and fununc,
fin! as Under Serreur, General of Ule Ledcur - of Sation\. and then for the resl of hs lrfe as
il member of the small lnncr C I ~ I Cr l o to ~ John D. Rockefeller. Ir. In that capacny. Fodirk
rase to hecome head adf the Rockefcllcr Fuundatiun and Rwkefcllcr's official biographer. Mcan-
while, Fosdick's bmther, Rev. Harry E m e m , bmme Rockefeller's hand-picked&ish minister,
first at Park Avenue Presbyterian Church and then at the new interdenominational Riverside
Church, built with Rockefeller funds. Harry Emerson Fosdick was Rockefeller's principal aide
-
in batdine. wirhin the Protestant Church, in favor of w d e n n i a l , sratist. "liberal" Profestantism
and against Ihe rising tlde of premillennial Christianity, known as "fundamenfalist" since the
years before World War I. See Collier and Horowitz, 7he Rockefellers pp. 140-142, 151-153.
41. Davis, Spearheads for Reform. p. 226; Tlrnbedake, Prohibition, p. 66; Boyer, Urban Masses,
p. 156.
42. Eleanor H. Woods, Roben A. Woods; Chompion of Democracy (Boston: Houghton Mifflin,
1929), p. 316. Also see ibid., pp. 201-202, 250ff.. 268ff.
43. Davis, Spearheads for Reform, p. 227.
44. H. L. Mencken. "Pmfessor Veblen." in A Memken Chrestomarhv (New York:Alfred A. Knmf,
1949), p. 267.
45. Ouoted in the imDatant article bv Jean B. Ouandt. "Relieion - and Social Thoueht: The Seculariza-
#tonof P m m ~ l l c n n ~ a l ~'Amenrun
~m. Q u n t r l , 25 i0nubc.r 19731 404 Alw we luhn Bleuetl,
.
S J "Demc,crao as Rclreton - Un~t)~n Human Relallonr." ~n Blcuen. ed , JuhnDeno. Hlr
Thought und influence (New York: Fordham University Press, 1960), pp. 33-58; and John
Dewey: me Early Work,1882-1989, eds., I. Boydstan et al., (Carbondale: Southern nlinols
University Press, 1x9-71), vols. 2 and 3.
46. On the - eeneral secularization of wstmillennial pietism after IWO, see Quandt, "Religion and
Social Thought," pp. 3 W 4 0 9 ; and James H. Mwrhead, "The Erosion of Postmillennialism
in American Religious Thought, 1865-l925", Church History 53 (March 1984): 61-77.
47. Cam1 S. Gruber, Mon o n d M i n e ~World : Wor Iundrhe Uses of the Higher Leamhg in Amerim
(Baton Rouee: " Louisiana State Univeniw Press, 1975). . .D. 92.
48. Quoted in Gmber, Mars andMinerva, pp. 92-93. Also see William E. Leucbtenburg, "The
New Deal and rhe Analogue of War," in J. Braeman, R. Bremner, and E. Walters, eds., h g e
and Continuity in Twentieth-Century America (New Yark: H a p r & Row, l966), p. 89. Far
.. .
similar reasons. Thorstein Veblen. ~roohetof the alleged - dichotomy. of .production for profit
vs. production for use, championed the war and began to come out openly for socialism in an
anicle in the New Reoublic in 1918. later reprinted in his me Vested Interests and the State
ofthe industrdd Ans (19191 See Charles Hwschfeld, "Nstlonalisl Progre,s~v~sm and World
War I." Mnd-~rnncu45 (July . . 1%3), p. 150. Also see Dmid Rieiman. 'Ihooretn Veblen: A
Critical Inre~retation(New York: Charles Scribner's Sons, 1960). pp. 30-31.
49. Hirschfeld, "Nationalist Progressivism," p. 150.
50. Gmber, Mars and Minervn, p. 92.
51. -
Hirschfeld. "Nationalist Pmeressivism," - - that for the New Republic
p. 142. It is intriauin~
intellecDlals, a c h l l y existent private individuals are dismissed as "mechanical," whereas nonex-
istent entities such as "national and social" forces are hailed as being "organic."
52. Quoted in Hirschfeld, "Nationalist Pmgressivism," p. 147. A minority of pmwar Socialists
broke off from the antiwar Socialist Party to form the Social Democratic League, and to join
a prowar front organized and financed by the Wilson administration, the American Alliance
1989 MURRAY N. ROTHBARD-WORLD WAR I AS FULFILLMENT I21

for Labor and Democracy. The umwar socialists welcomed the war as urovidina- "startlina-
progress in collectivism," and opined that after the war, the existent state socialism wuld be
advanced toward "demoeratic collectivism."The pmwar ylcialists included John Spargo, Algie
Simons, W. 1.Ghent, Robert R. LaMonte, Charles Edward Russell. 1.G. Phelps Stokes, Upton
- - -
Sinclair. and William English Walline. Wallina so succumbed to war fever that he denounced
the Socialist Party as a wnscious tool of the Kaiser and advocated the suppression of freedom
of speech for pacifists and for antiwar socialists. See Hirschfeld, "Nationalist Progressivism,"
p. 143. On Walling, see James Gilbert, Designing rhe Industrial Stme: The lnrellecrual Pursuir
of Collecrivism in Amrica, 1880-1940(Chicago: Quadrangle Books, 1972), pp. 232-233. On
the American Alliance for Labor and Democracy and its mle in the war effon, see Ronald Radmh,
Amerimn Lobor and Unired S r m Foreign Policy (New York: Ramlorn House, l%9), pp. 58-71.
53. In fact, Jacob Lippmann was to wntract cancer in 1925 and die two years later. Moreover,
Liipmann, before and after Jacob's death, was supremely indifferent to his father. Ronald Steel,
Wolrer Lippmann and the American Century (New York: Random House, l981), p. 5, pp.
116-1 17. On Walter Lippmann's enthusiasm for conscription, at least for others, see Beaver,
Newton Baker, pp. 26-27.
54. Hirschfeld, "Nationalist Progressivism," pp. 148-150. On theNew Republic and the war, and
particularly on John Dewey, also see Christopher Lasch, 7he New Rodicnlism in Amrico,
1889-1963: The I n f e l l e c ~ l o s ASocial Type (New York: Vintage Books, 1%5), pp. 181-224,
especially pp. 202-204. On the three New Republic editors, see Charles Forcey, 7he C m r m d r
oflibemlism: Cmly. Wql, Lippmm and the Progressive Em. 1 W 1 9 2 5 (New York: Oxford
University Press, 1961). Also see David W. Noble, "The New Republic and the Idea of Pro-
gress, 1914-1920," Mississippi Volley Historical Review. 38 (December 1951): 387-402. In
a book titled The Endoffhe War (1918). New Republic editor Walter Weyl assured his readers
that "the new economic solidariw once eained.
Leuchtenburg. "New Deal," p. 90.
- -
. can never aeain be surrendered." Cited in

55. Rexford GUYTuwcll. "America's War-Time Socialism" 7he Nation (1927). . ..


.. DD. 364-365.
Quoted in Leuchtenburg, "The New Deal." pp. 90-91.
56. . -.
In Januarv 1927 Crolv wrote aNewRe~ubliceditorial."An A w l o m for Fascism." endorsine
an accompanying article. "Fascism for the Italians," wrimn by the distinguished philosopher
Horace M. Kallen, a disciple of John Dewey and an exponent of progressive pragmatism. Kallen
praised Mussolini for his pragmatic approach, and in particular for the elon viral that Mussolini
had infused into Italian life. Tme, Professor Kallen conceded, fascism is coercive, but surely
this is only a temporary expedient. Noting fascism's excellent achievement in economics, educa-
tion, and administrative reform, Kallen added that "in this respect the Fascist revolution is not
unlike the Communist revolution. Each is the application by force . . . of an idealogy to a cow
dition. Each should have Ule freest omrorlunity once it has made a start. . . ." The accom-
panying New Republic editorial endorsed alli in's thesis and added that "alien critics should
beware of outlawinz.a.lalitical experiment which aroused in a whole nation an increased moral
energy and dignified its activities by subordinating them to a deeply felt common purpose."
NewRepublic49 (January 12, 1927)..pp. . 207-213. Cited in John Patrick Dimins,
.. "Mussolini's
Italy: The View from America," Ph.D. diss., University of Southern California, 1%4, pp.
214-217.
57. Born in Ireland, David Croly bxame a distinguished journalist in New Yark City and rose
to the editorship of the New York World. Cmly organized the fim Positivist Circle in the United
States and financed an American speaking tour for the Comtian Henry Edgar. The Positivist
Circle met at Cmly's home, and in 1871 David Croly published A Posirivisr Primer. When
Herbert was bom in 1869, he was consecrated by his father to the Goddess Humanity, the symbol
of Comte's Religion of Humanity. See the illuminating recent biography of Herbert by David
W. Levy, Herben Croly of rhe New Republic (Princeton: Princeton University Press, 1985).
122 THE JOURNAL OF LIBERTARIAN STUDIES Winter

58. See Jerry Israel, Progressivism and the Open Dmr: America ond C h , 1905-1921 (Pinsburgh:
University of Pittsburgh Press, 1971).
59. For a refreshingly acidulous portrayal of the actions of the historians in World War I, see C.
Hartley Grattan, "The Historians Cut Loose," American Mercup, August 1927, reprinted in
Harry Elmer Barnes, In Quest of Truth ond Jutice, 2nd ed. (Colorado Springs: Ralph Myles
Publisher, 1972), pp. 142-164. A more extended account is George T. Blakey, H i s t o ~ n on r
the Homefont: American Propagandists for the Great War (Lexington: University Press of
Kentucky, 1970). Gruber, Mars ond Minervn, deals with academia and social scientisu, but
concentrates an historians. l a m a R. Mock and Cedric Lvson, Wonlr thor Won he War (Princetan
University Press, 1939). presents the story of the "Creel Committee," the Committee on Public
Information, the official .pmpazanda .. ministry during the war.
60. See the useful biography of Ely, Benjamin G. ~ a d e r The , Acodernic Mind ond Reform: The
Influence of Richard T. Ely in American Life (Lexington: University Press of Kentucky, 1966).
61. Sidney Fie,Laissez F& mtd the Cewml-Welfare %ole: A Srudy of Conpin in A m e r i m %ugh
1865-1901 (Ann Arbor: Univeniw of Michigan ..
- Press. 1956).. DD. 239-240.
62. Fine, h i s s e r Faire, pp. 180-181.
63. John Rogers . Commons was of old Yankee stock, descendant of John Roeers. " Puritan martvr
in England, and born in the Yan!cee area of the Western Reserve in Ohio and reared in Indiana.
His Vermont mother was a graduate of the hotbed of pietism, Oberlin College, and she sent
John to Oberlin in the hopes that he would become a minister. While in college, Commons
and his mother launched a prohibitionist publication at the request of the Anti-Saloon League.
After graduation. Commons went to Johns Hapkins to study under Ely, but flunked out of graduate
schwl. See John R. Commons, Mvself(Madison.
. . . Wisc.: Universitv of Wisconsin Press.. 1964). .
Also see Joseph Dorfman, 7he Economic Mind in American ~ivi&tion (New York: Viking,
1949). vol. 3, 276-277; Mary 0. Fumer, Advocacy and Objectivity: A Crisis in the Profes-
s i o ~ l i z a t i o nofAmerican Social Science, 1865-1905 (Lexington: University Press of Kentucky,
197% .pp. . 198-204.
64. Quandt, "Religion and Social Thought," pp. 4 0 2 4 3 . Ely did m t expect the m i l l e d Kingdom
to be far off. He believed that it was the task of the universities and of the social sciences "to
teach the complexities of the Christian duty of brotherhood in order to arrive at rhe New
Jerusalem "which we are all eagerly . . awaiting."
. Thechurch's mission was ta attack every evil
institution, "until the earth becomes a new earth, and all its cities, cities of God."
65. Gmber, Mors rind Minema, p. 114.
66 See Racier. ArodemtcMtnd, pp 181-191. On top hag bustness affilin~on$of S a l ~ n n dSecunly
h p c l a d e n . c$peclall) J P Morgan mJ others in the Morgan amb~l,wu C . Hartley (innan.
Wh, We Fought (New Ynrk Vanguard Prcs$, 19291 pp 111-118, and Koben D Wurd, The
Onelnand Activ~uc,of the Sauorwl Security . I w -s e . 1Y14-1919."Mt1~1~11)~t
.. V d l ~ ~ t l i ( t ~ ~ n c ~ o 1
view, 47 (June 1960): 51-65.
67. The Chamber of Commerce of the United Stltes spelled out the long-run economic benefit of
conscription, that for America's youth it would "substihtte a period of helpful discipline for
a period of demoralizing freedom from restraint." John Patrick Finnegan, Against the Specter
o f n Dmgon: The Campaign forlignforricm Militmy Preparedness, 1914-1917(Westpan, Conn.:
Greenwood Press, 1974). p. 110. On the bmad and enthusiastic support given to the drali by
the Chamber of Commerce, see Chase C. Mmney and Manha E. Layman, "Some Phases of
the Compulsory Military Training Movement, 1914-1920," Mississippi Volley HinoricalRevlew
38 (March 1952): MO.
68. Richard T. Ely, Hard Zimimes: The Way In ond the Way Out (1931), cited in Joseph Dorfman,
7he Economic Mind in American Civilirorion (New Yark: Viking, 1949). vol. 5, p. 671; and
in Leuchtenburg, "The New Deal," p. 94.
1989 MURRAY N. ROTHBARD-WORLD WAR I AS FULFILLMENT 123

69. Ely drew up a superpatriotic pledge for the Madison chapter of the Loyalty Legion, pledging
. . The .vledge
its members to "starnu out dislovaltv." - also exoressed unqualified suppon
.. for the
Espionage A n and vowed to "work against La Follettism in all its anti-war forms." Rader,
Acodem'c Mind, pp. 183ff.
70. Gruber, Mom and Minema, p. 207.
71. Ibid... PD ... 208. 20811.
72. Ibid., pp. 209-210. Ln his autobiography, written in 1938, Richard Ely rewrote history to a v e r
up -
. his ignominious mle in the. . - He acknowledged
get-La Follene campaign. - signing
. - the faculty
petition, but then had the temerity to claim that he "was not one of the ring-leaders, as La
Follette thought, in circulating this petition. . . ." There is no mention of his secret research
campaign against La Follette.
73. For more an the anti-La Follelte campaign, see H. C. Peterson and Gilbert C. Fite, Opponents
uf War 1917-1918(hlJdmn ~ m v e i t y ~k l u o m i k n s r . 1957). pp. 68-72; Paul L. MU*).
World Wur Iundrhe OnainofCialLjbcnier
. . in rhc Untr~dSli~res (New York: W . W. Nunon.
1979), p. 120; and Belle Case La Follette and Fola La Follette, Roben M . LaFolletle (New
Yark: Macmillan, 1953). volume 2.
74. Thus, T. W. Hutchison, from a very different perspective, notes the convast between Carl
Menger's stress on the beneficent, unplanned phenomena of society, such as the free market,
and tk growth of "social self-wnsciousness" and government planning. Hutchison recognizes
that a clucial component of Ulat social self-consciousness is govemment statistics. T. W.
Hutchison, A Review of Economic Doctrines, 1870-1929 (Oxford: Clarendon Press, 1953).
pp. 150-151. 427.
75. Fine, Loissez-Foire, p. 207.
76. Solomon Fabncant. 7hr Trend of Golrrnmenr Ao,,rty in thr Untrrd Srurrr jtnce 1YW (New
Y a r k Nauonal Burrru of Ewnumlr Research. 1952). p. 143 Slm~larl).an vuthurlwl~veuurk
on the growth of government in England puts it this way: "The accumulation of factual infor-
mation a h t social wnditions and t x development of m m i c s and the social ssienees increased
i
the pressure for government intervention. . . . As stltistics improved and students of social
conditions multiplied, the continued existence of such conditions was kept before the public.
l n c r w ~ n gkn,,uledge of then1 arousal lnflucnual circles and furnahed worhnp cla,s movements
~ i l tha c l d weapons Mows A b m v r u and Vera F. Elwsberg. l l w Gwnrh ofPublr~Employ-
"
~ ~

men1 in Greor ~ r i t o i n(Princeton: National Bureau of ~ c o n o i Research,


c 1957), pp. 22-23,
30. Also see M. I. Cullen, 7he Stotislicol Movemnr in Early Victorinn Brimin: n hle Founda-
tions of Enlpiricnl Social Research (New York: Barnes & Noble, 1975).
77. See Joseph Doriman, "The Role of the German Historical School in American Economic
Thuught." Ampricon t ~ o n ~ , m i r R e vPoperrondPrureedinp45
~~n, (Ma) 1955). p. 18. Georgc
Hildchrand remarked un the indurti\e rmphas~rof the G e m n Htrlortcal Suhwl that "perhap,
there ir. then. vrmc connwtton betuecn this kind of teaching and thu pupularit) ufr.mJe ideas
of .ph,s~cal
. planning
. In more rwent tlmcs." Gmrgc . H Hildebrand. "lntemntonal Flou uf
Economic Ideas-Discussion," ibid., p. 37.
78. Dorfman, "Role," p. 23. On Wright and Adams, see Joseph Doriman. 7he Econom'c Mind
in American Civilirotion (New York: Viking Press, 1949), vol. 3, 164-174, 123; and Boyer,
Urban Mosses, p. 163. Funhermore, the first professor of statistics in the United States, Roland
P. Falkner, was a devofed shldent of Engel's and a vanslator of the works of Engel's assistant,
August Meiuen.
79. Irving Norton Fisher, My Fatherlming Fisher (New York: Comet Press, 1956), pp. 146-147.
Also for Fisher, see Irving Fisher, SlabilisedMoney (London: Allen & Unwin, 193% p. 383.
80. Fisher, My Fohter, pp. 264-267. On Fisher's role and influence during this period, see Murray
N. Rothbard, Amrico S Great Depression, 4thed. (New York: Richardson & Snyder, 1983).
124 THE JOURNAL OF LIBERTARIAN STUDIES Wintel

Also see Joseph S. Davis, 7he Wor!A Between the Wars, 1919-39, An Eonomist'r View
i

(Baltimore: Johns Hopkins University Press, 1975), p. 194; and Melchior Palyi, 7he Tw light
of Gold, 1914.1936: My& and Realities (Chicago: Henry. Regnery, . . 1972), . . 240, 249.
pp.
81. Wcrlc) C. Mltchcll was of old Yankee piellst stocl. HISgrandparent, were larmcr* ~n Maine
and then in Western New York His father fallowed the path of man) Yankecc in migraung
to a farm in northern Illinois. Mitchell attended the university of chicago, where he was skongG
influenced by Veblen and John Dewey. Dorfman, Economic Mind, vol. 3, 456.
82. Dorfman, Economic Mind, vol. 4, 376, 361.
83. Emphasis added. Lucy Sprague Mitchell, Two Lives (New York: Simon and Schuster, 1953),
p. 363. For more on this entire topic, see Murray N. Rothbard, "The Politics of Political
Economists: Comment," Lhurnerly Journal of Economics 74 (November 1960): 659-6565,
R4. See in particular lame, Welnste~n,lb Gwporutr 1ded in rhp DbemISturr. 19(WIY18(Boswn.
Bearan Pres\. 1968);and Samuel P Hays, "The Polttlcs of Reform in .Uunrival tinvernmcnt
in the Progressive Era;' Pacific ~ o n h w e s tQuanerly 59 (October 19611, 157-169.
85. David Eakins, "The Origins of Corporate Liberal Policy Research, 1916-1922: The Political-
Economic Expen and the Decline of Public Debate," in Israel, ed., Building the Orgnnim-
tiowl Society,. .p. 161.
86. Herben Heawn, Edwin F Goy, A Scholar in Anion (Cambridge: Harvard University Press,
1952). Edwin Gav was born in Detroit of old New Eneland - stock. His father had been born
in Boston and went into his father-in-law's lumber business in Michigan. Gay's mother was
the daughter of a wealthy preacher and lumberman. Gay entend the University of Michigan,
was heavily influenced by the teaching of John Dewey, and then stayed in graduate school in
Germany for over a dozen years, finally obtaining his Ph.D. in econmic history at the Univer-
sity of Berlin. The major German lnfiuenceson Gay were GusW Schmoller, head of the Hiswrical
School, who emphasized that emnomics must be an "inductive science," and Adolf Wagner,
also at the University of Berlin, who favored large-scale government intervention in the economy
in behalf of Christian ethics. Back at Harvard. Gay was Ihe major single force, in collaboration
with the Boston Chamber of Commerce, in pushing through a factory inspection act in
Massachusem, and in early 1911 Gay became president of rhe Massachusetts branch of the
American Association for Labor Legislation, an organization founded by Richard T. Ely and
dedicated to agitating for government intervention in the area of labor unions, minimum wage
rates, unemployment, public works, and welfare.
87. On the pulling and hauling among Rockefeller advisers on the Jnsti~te,see David M. Grossman,
"American Foundations and the Suppon of Economic Research, 1913-29," Minervo 22 (Spring-
Summer 1982): 62-72.
88. See Eakins, "Origins," pp. 166-167; Grossman, "American Foundations," pp. 76-78; Heaton,
Edwin F. Gqv. On Stone, see D o b , E c o ~ m ' Mind, c vol. 4 , 4 2 , 6 0 4 1 ; and Samuel Haber,
Eficiency and Up/@ Sdrnrific Mmgemenr in the Progressive Em 1SiL1920 (Chicago: Univer-
sity of Chicago Press, 19M), pp. 152, 165. During his Marxist period, Stone had translated
Man's Poveny of Philosophy.
89. See Guy Alchon, lh Invisible Hand of Planning: Cnpitolism, Social Science, and the Srnte
in the 19205 (Princeton: Princeton University Press, 1985), pp. 54ff.
90. Collier and Horowia, lhe RockefeNers, p. 140.
91. Eakins, "Origins," p. 168. Also see Furner, Advocacy end Objectivity, pp. 282-286.
92. Stephen Skowronek, BuiIdinp a New American Stare: lhe Emomion ofNorio~1Mministmtive
Copacirier, 1877-1920 (Cambridge: Cambridge University Press, 1982), pp. 187-188.
93. Vice-chairman of the IGR was retired St. Louis merchant and lumberman and former president
of Washington University of St. Louis, Roben S. Bmkings. Secretary of the IGR was James
F. Cunis, formerly Assistant Secretary of the Treasury under Tali and now secretary and deputy
governor of the New York Federal Reserve Ba*. Others on the board of the IGR were
ex-President Tan; railroad executive Fnderick A. Delano, uncle of Franslin D. Rmsevelt and
1989 MURRAY N. ROTHBARD-WORLD WAR I AS FULFILLMENT 125

member of the Federal Reserve Board; Arthur T. Hadley, economist and president of Yale;
Charles C. Van Hise, progressive president of the University of Wisconsin, and ally of Ely;
reformer and influential young Harvard Law professor, Felix Frankfurter; Theodore N. Vail,
chairman of A.T. & T.; progressive engineer and businessman. Herbert C . Hoover; and fman-
cier R. Fulton Cutting, an officer of the New York Bureau of Municipal Research. Ealrins,
"Origins," pp. 168-169.
94. On the Commercial Economy Board, see Orosvenor B. Clarkson, Industrial America in rhe
World Wac 7ke Strategy Behind the Line, 1917-1918 (Eloston: Houghton Mifilin, 1923), pp.
211ff.
95. Alchon, Invisible Hand, p. 29. Mitchell headed the price statistics section of the Price-Fixing
Committee of the War Industries Board.
96. Heaton, Edwin Gay, p. 129.
97. See Rothbard, "War Collectivism," pp. 100-112.
98. See Heaton, Edwin Gay, pp. 129ff; and the excellent book on the Inquiry, Lawrence E.
Gelfand, 7he inquiry: American Preparmionsfor Peace, 1917-1919 (New Haven: Yale Uni-
versity Press, 1963), pp. 166-168, 177-178.
99. Heaton, Edwin Goy, p. 135. Also see Alchon, Invisible Hand, pp. 35-36.
IW. In 1939 the Bureau of the Budget would be vansferred to the Executive Office, thus completing
the IGR abiective.
101. Maulton was a professor of economics at the University of Chicago, and vice-president of the
- - .m.
Chicago Association of Commerce. See Eakiis. "Origins."
Mind, vol. 4, 11, 195-197.
. 172-177; Dmfman. Economic
1M. Gav had been recommended to the -group . bv. one of its founders, Thomas W. Lamont. It was
Gay's suggestion that the CFR begin its major project by establishing an "authoritative" journal,
Forcign Affairs. And it was Gay who selected his H m a r d historian colleague Archibald Cary
Coolidge as the first editor and the New York Post reporter Hamilton Fish Amstrong as assis-
tant editor and executive director of the CFR. See Lawrence H. Shourr and William Minter.
Imperial Bmin Tmsr: lhe Council on Foreign Relations ond United States Foreign Policy (New
York: Monthly Review Press, 1977). pp. 16-19, 105, 110.
103. Ellis W. Hawley, "Herbert Hoover and Economic Stabilization, 192-22," in E. Hawley, ed.,
Herben Hmver ar Secrcrnry of Commerce: Snrdies in New Era 7houghr and Pmctice Oowa
City: University of Iowa Press, 1981). p. 52.
104. Hawley, "Herbert Hoover," p. 53. Also see ibid., pp. 42-54. On the continuing collaboration
between Hoover, Gay, and Mitchell throughout the 1920s see Alchon, Invisible Hand.
105. Alchon, lnvirible Hond. pp. 3 9 4 2 ; Dorfman, Economic Mind, vol. 3, 490.
106. One exception was the critical review in the Commercial and Financial Chronicle (May 18,
- the reader that the capacity
1929). which derided the impression given . . of the United Stales
"for continued prosperity is well-nigh unlimited." Quoted in Davis, World Between the Wars,
p. 144. Also on Recent Economic Changes and economists' opinions at the time, see ibid.,
pp. 136-151, 403417; David W. Eakins, "The Development of Corporate Liberal Policy
Research in the United States. 1885-1965," Ph.D. diss.. doctoral dissertation University of
Wisconsin, 1966). pp. 166-169, 205; and Edward Angly, a m p . , Oh Y e d ? (New York: ~ i k -
ing Press, 1931).
107. In 1930, Hunt published a book-length, popularizing summary, An Audir ofAmPrico. On Recenr
Economic Changes, also see Alchon, InvisibleHand, pp. 129-133, 135-142, 145-151, 213.
108. Deponmenr of Labor-FSA Appropriation Bill for 1945. Hearings Before the Subcommittee
on Appropriations. 78th Congress, 2nd Session, Part I Washington, 1945), pp. 258f.. 276f.
Quoted in Rothbard, "Polities of Political Economists," p. 665. On the growth of efonomistr
and statisticians in government, especially during watiime, see also Herbert Stein, "The
Washington Economics Industry," American Economic Association Papers and Proceedings
76 (May 1986). pp. 2-3.
Journolo/Ll&nn?l~nStudlr. Vol. I . No.2. op. 111-115. Pergamon Pres 3977. PrinlcdinGrealBritun.

COASE AND DEMSETZ ON PRIVATE PROPERTY RIGHTS

WALTER BLOCK

Deportment ojEconomim, Rutgers University

In his seminal work, "The Problem of Social allowing him to pollute: The farmer can only
Cost," Coase held that in cases of private be compensated by receiving at least the $100,000
property right disputes involving what have which he would lose in damages and the manu-
been called externalities, "with costless market facturer can get away with paying only $75,000
transactions, the decision of the courts to install the SPD.
concerning liability for damage would be If the court does not find the manufacturer
without effect on the allocation of resources."l~l liable, then the farmer cannot get an injunction.
I shall try to show that this view is mistaken The manufacturer is not legally bound to install
because it does not take account of psychic the SPD. But note: The farmer stands to gain
income. I shall then consider what can only be $100,000 (in undamaged crops) if he can convince
considered immoral implications Demsetz draws the manufacturer to do something which costs
from Coase's view of property. only $75,000 (install the SPD). There will be a
Let us suppose that the damage to a farmer's bargaining situation where a bribe from the
crops from a neighboring factory amounts to farmer to the manufacturer of something between
$100,000; that there is no way that the farmer $75,000 and $100,000 will make them both better
himself can prevent the damage to his crops; that off. For instance, a payment of S9b.000 will
bargaining transactions between the farmer and save the farmer $10,000 (the farmer can save
the manufacturer are costless; that changes in the $100,000 worth of crops at a cost of only $90,000)
distribution of wealth between them can be and will earn $15,000 for the manufacturer
ignored; and finally, that the manufacturer can (the manufacturer receives $90,000 for installing
stop the crop damage by installing a smoke a $75,000 SPD). What if the farmer just does
prevention device (SPD) which will cost him not happen to have $90,000 lying around? This
$75,000. is not an insurmountable problem. The farmer
Under these conditions, Coase would argue does have $100,000 worth of crops lying around,
that whether the court assigns crop damage which, presumably, will serve as collateral for
liability to the manufacturer or not, the SPD a $90,000 loan. The farmer will obtain the
will be installed. This means that the allocation $90,000 loan, pay the manufacturer the $90,000,
of resources between farming and manufacturing sell his crops for $100,000, and then pay off the
will not depend on the court decision. This cost of the loan out of his $10,000 gain.
means, moreover, that the value of production Now let us consider a case exactly like the
will be maximized, since a $75,000 cost will gain preceding except for one thing: instead of there
$100,000. How does this work? being $100,000 worth of crops lying around
If the court finds the manufacturer liable. that can be ruined by smoke pollution, there is
and grants the farmer an injunction to stop the but one flower bed that can be so mined.
smoke pollution, the manufacturer is legally But this a rather special flower bed (to the
bound to install the SPD (or to cease operation). farmer). Its pecuniary value to other people is
He will not be able to bribe the farmer into nil; however, the farmer's mother, on her death
112 WALTt!R BLOCK

bed, asked him to care for it. It is so valuable values a military life would entail. How can we
to the farmer in a psychic sense, that only, as it be sure that he would be "precisely" the highest
happens, $100,000 would compensate the bidder under the 'let-him-buy-his-way-out'
farmer for the ruination of the flower bed. property right system? He might be too poor
If the court finds the manufacturer liable, to pay "precisely" the highest bid. He might be
then the psychic loss case works out as did the too poor to even pay a bribe that would keep
pecuniary loss case: the manufacturer will have him out of military service at ail. His reserves
to install the SPD since he can install for less of "human capital" might well be so low so as
($75,000) than what a bribe will cost him to be unable to borrow money to bribe his way
($100,000 or more). out even if human beings could be used as
If the court does not find the manufacturer collateral. In s h m , Demsetz is correct only if
liable, then, as before, a bribe of something we may safely ignore psychic losses on the part
between $75,000 and $100,000 (say $90,000) of people who are unable to afford the bribe.
will insure the installation of the SPD. If the Yet this case is one where this procedure would
farmer has $90,000 with which to save his seem particularly dangerous. Psychic, not (so
flower bed, the SPD will be installed. much) pecuniary, losses are likely to be very
Coase's view breaks down when we consider important; and draftable men are likely to be at
the case of psychic income loss where the loser a stage in their lives where they are unlikely to
does not have the wherewithal to make a bribe have been able to accumulate much capital.
greater than the cost of the SPD ($75,000). All A few words are in order here on the almost
the psychic income in the world may not be revolutionary changes in moral outlook implicit
enough collateral to support a $90,000 loan to in this view of property rights. In the traditional
save a flower bed. moral view of private property rights, the "let-
In this case, the allocation of resources will him-buy-his-way-out" property right system
depend on the decision of the court. If the would be, if anything, a contradiction in terms,
court holds the polluter responsible, the SPD and not really a private property right system
will be installed; if the court does not hold the at all. According to traditional morality, each
polluter responsible, the SPD will not be installed. person is a self-owner. Any attempt to involve
We now turn to a more realistic example to the individual in a "let-him-buy-his-way-out"
illustrate psychic income. Demsetz holdsf21that system would necessarily involve enslaving him
the same citizens would join the military "no first. To first enslave a individual and to then
matter whether taxpayers must hire military offer him the possibility of buying his way out
volunteers or whether draftees must pay tax- would have been thought of as equivalent to
payers to be excused from service. For tax- asking the individual to pay ransom to his
payers will hire only those military (under the kidnappers. To say the least, this would be
'buy-him-in' property right system) who would anathema to a system of private p r o p w rights.
not pay to be exempted (under the 'let-him-buy- And to further declare that "it makes no
his-way-out' system). The highest bidder under difference"whether an individual is kidnapped
the 'let-him-buy-his-way-out' property right and then offered the possibility of paying ransom
system would be precisely the last to volunteer or whether the individual is not kidnapped but
under a 'buy-him-in' system." rather offered employment on a voluntary basis,
When the phenomena of psychic income is would have been thought of as just adding
incorporated into the analysis, however, it is by insult to injury.
no means certain that "the highest bidder under Demsetz considers ahother inte~estingcaset3l:
the 'let-him-buy-his-way-out' property right "Whether or not a new product will be
system would be precisely the last to volunteer profitable is, in tbe absence of exchange
under a 'buy-him-in' system." Consider a and police costs, independent of which
died-in-the-wool-pacifist who would be the last property right assignment is chosen:
to volunteer under the 'buy-him-in' system (A) Producers of new products are assigned the
because of the extraordinary sacrifice of psychic right to sell new products without compen-
COASE AND DEMSETZ ON PRIVATE PROPERTY RIGHTS 113

- sating competitors who are injured. wsts wuld be reduced by giving the initial assignment of
Producers of old products are assigned to rights to set owners. If set owners arc given t h c x rights,
some homeowners wiU contract to buy thcm from wt ownen
retain their customers." but, by assumption, the number and presumably thecost of
I have already. argued
- that this is correct only such exchanges would be lcss than under the alternative
if negoliat,on income or wealth asstgnmmc of rights. A number of seu that approximates
thecfhctcnt number would be ainved at w ~ t hthe use of lcss
psychic effects,can be resources for conduct~neexchannes ~f set ouncrr are %wen
Here I am concerned t o point out the deviation the right rather than ho&emuner~L4~
from traditional private property views.
According to the traditional or libertarian Consider the case of very rich sadists who
view, old producers do not, cannot, must not, have a maniacally strong desire to torture poor
have any right to retain their customers, if for people; such a strong desire, it might be added,
no other reason than that they do not own their that most sadists would be able to purchase
customers in.the first place. All they own is most of the torture rights from their poorer
what they produce. More exactly, all they own fellows. According to the criteria of minimizing
are thephysicalgoods that they produce. They exchange costs, it would seem that the sadists
cannot own the value of what they produce, should be given the "right to torture" in the
because the value of a good is determined by first place. It need hardly be pointed out,
other producers and consumers, (as well as by except perhaps to the most thoroughgoing
their own valuations), but none of these people advocate of the "Coase - Demsetz" view1jI. that
are owned by the old producers. It is true that granting rights to torture is incompatible with
the advent of new producers can lower the a free enterprise, private property system.
value of what the producers own. So can the Coase also gives advice on assigning property
refusal of old customers to continue patroni- rights. He considers tKe case where negotiation
zation. So can weather conditions, etc. costs are greater than the expected gains to be
According to this traditional view of the free obtained from such negotiations. He holds that:
enterprise system, everyone has a right to try to "In a world in which there are high costs of
compete. Likening destruction of physical rearranging the rights established by the legal
property to the destruction of the value of system, the courts, in cases relating to nuisance,
property by forbidding the latter as well as the are, in effect, making a decision on the economic
former can only be considered a travesty of the problem and determining how resources are to
free enterprise, private property system. be employed"161.
Let us now consider non-zero transactions An example will illustrate: Assume the
costs. Demsetz has advice to give on the previous case where installation of a smoke
assignation of property rights in the case of prevention device will cost $75,000, where
high transactions costs, where he concedes that monetary harm due to smoke is $100,000, where
court decisions are relevent to the allocation of income effects are insignificant, but where the
resources. Demsetz calls attention to realignment costs of negotiation are $200,000.
costs and holds that they should have an im- If the judge decides in favor of the farmer, the
portant part to play in such assignments. Re- devise will be installed-not because it will not
alignment costs are the costs of transacting that pay the manufacturer to bribe the farmer into
occur after the new assignment of property accepting the smoke-but because it will be too
rights. expensive to negotiate the bribe.
In short, "The courts directly influence
"For example, let us consider the property right problems
associated with the introduction of home air conditioners.
economic activity...when market transactions
The question arises as to whether homeowners should are so costly as to make it difficult to change
have the right to prevent noise levels from rising above a the arrangement of rights established by the
aiven intensity or whether air conditioner owners should
. law[7l."
have the richt to run their sets even t h o u ~ hnoise levels.on
~u ~~~~~~ ~~ ~~. -~~
Coase then concludes:
~ ~~ ~~~

surroundrng land will be ra~rcd. If it is generally true that


owners owrate the~rsets that they uill purchase most o f the
noise control rights from their ne~ghborr. then exchange "It would therefore seem desirable that the courts should
settled out of court based on court precedents.
understand the economic cQnscquencss of their dccislons
and should, insofar as this is possible without creating too
Substituting the "flexible" court judgment of
much uncertainty about the legal position itself, take these
costs for rigid rule will impose extra costs in the
consequents into account when making their decision^'"^'.
form of more cases reaching the courts for ad-
Coase urges the courts to make "a comparison judication, since precedents are not based on
between the utility and harm produced (as) an flexible judgments and evaluations.
element in deciding whether a harmful effect There is the further problem of added un-
should be considered a nuisance"[9]. certainty and consequent diminished ability to
In effect, I take Coase to be advising the court forecast and plan ahead. It is questionable
to decide in favor of that party which, in the whether it is possible to substitute judgment
absence of negotiation costs, would be unable for rigid rules "without creating too much un-
to be bribed in the normal course of negotiations. certainty about the legal position itself." The
In other words, the court should give the question is a marginal one: at what point do
manufacturer the right to belch forth smoke the gains (if, indeed, there are any) of more
upon the farmer if the monetary costs of in- scope for judgments and evaluations of harm
stalling a smoke prevention device were greater begin to be outweighed by the losses tied to in-
than the resultant monetary harm to crops. And ability to plan ahead?
the court should decide in favor of the farmer Two analogies come to mind. One is the con-
if the monetary costs of the smoke prevention cept of "rule of law" associated with Friedrich
device were less than concomitant financial Hayek. According to this philosophy men are
damage to crops. freer contending with publicized rigid laws than
One might fear that such advice is not likely with "judgments," "opinions," "estimates."
to maximize the value of production; that having "Laws" that judge "each case on its merits"
the courts "adopt a rigid rule" might well "give like this would be more akin to absence of law
economically more satisfactory results" than than to its presence. (One cannot make too
having the courts follow Coase's advice; that, much of this philosophy with its emphasis. on
in reality, it will not be likely for the court to the form of the law and its disemphasis on the
take these economic consequences of their content of law. Laws that sentence all people
decision into account without creating too much to death at age f o w can be weU publicized, rigid,
uncertainty about the legal position itself. known in advance and are consonant in all ways
First of 311, the judges might act "very with Hayek's rule of law; they are haray con-
foolishly" and award the property rights to the ducive to freedom or justice, however.)
wrong person. The task of comparing losses if The other analogy is from the field of
the externality is allowed to continue, with losses monetary policy. Milton Friedman has long
necessitated by the cessation of the externality, been an effective spokesman for the view sup-
is one calling for no mean level of skill. Can it porting monetary "rules" as against monetary
be expected that judges appointed largely "authority." His contention, made famous by
through the political process will judge correctly the 5% rule, is that it would be an improvement
(more than half the time)? to reduce the myriad activity of the Fed to one
Moreover, there is no market test to ensure of increasing the money supply at a steady 5 %
that judges who are inept at evaluating relative per year. The arguments he marshalls are too
losses make way for judges who have greater well known to bear repition here; my point is
ability. that these arguments can be seen as defending
Even assuming that the courts will not be too the view that rigid rules might well be more
inefficient in guessing relative costs, there are efficient than allowing judges the "authority"
still problems with Coase's advice. to tinker wound and estimate the benefits and
Presently, for every legal case that reaches harms associated with externalities.
the courts for final judgment, there are hund- But more important than any of these utili-
reds if not thousands of potential disputes that tarian considerations, we must reject Coase's
are not tried in the courts. Many cases can be advice because it is just plain downright immoml.
COASE AND DEMSETZ ON PRIVATE PROPERTY RIGHTS l IS

It is evil and vicious to violate our most cherished NOTES


and precious property rights in an ill conceived I. Journal of Law and Economiu; (Oct. 1960). page LO.
attempt to maximize the monetary value of 2. "Toward a theory of property rights" by H. Demsetz in
production. As the merest study of praxeological Pro~o~dingsof lheAEA. Spring 1967.
axioms will show, it is also impossible 'for an 3. "Some aspects of propmy rights", pp. 62-63. JLE, Oct.
outside observer (the judge) to maximize the 1966.
psychic value of production. I must conclude, 4. "Someaspects", op. cir. p. 66.
5. This is not meant so as to obliterate distinctions in the
then, with some advice of my own to the two men's views. It is meant merely as a shorthand
Chicagoans, Coase and Demsetz: a study of device.
Austrian economics has great value, apart from 6. Sechis "The Problem of Social Cost." J.L.E., Oct. IW,
its intrinsic merits; it will prevent straying from ScctionVII, pp. 19 - 28.
the paths of righteousness. 7. Ibid. p. 19.
8. Ibid, p. 19.
9. Ibid, p. 20.

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