Joseph’s Blog – josephrodgers.com

Freedom Is Slavery

One of the most remarkable features of our age is the propensity toward changing the meaning of political terms. A semantic revolution converts the sense traditionally attached to words into its opposite. George Orwell has ingeniously described this tendency in his 1984. The second of the three slogans of Oceania’s party says, “Freedom Is Slavery.”In the opinion of the “progressive” intellectuals, Orwell’s dictum is the talk of a hysteric; nobody, they shout, has ever ventured to utter such a nonsensical proposition.

Unfortunately the facts belie their denial. There prevails in the writings of many contemporary authors the disposition to represent every extension of governmental power and every restriction of the individual’s discretion as a measure of liberation, as a step forward on the road to liberty. Carried to its ultimate logical conclusion, this mode of reasoning leads to the inference that socialism, the complete abolition of the individual’s faculty to plan his own life and conduct, brings perfect freedom. It was this reasoning that suggested to socialists and Communists the idea of arrogating to themselves the appellation liberal.

Professor Robert L. Hale of Columbia University has just published a voluminous book, Freedom through Law: Public Control of Private Governing Power.[1]It is a passionate plea in favor of government control of business and a review of the legislation and the rulings of the courts concerning the subject. As a compilation of legal material such a book may have some merit. But the author aims at more. His ambition is to justify the policy of interventionism from the point of view of the philosophy of law as well as from that of the American constitutional and legal system.

We may pass over the fact that the author entirely fails in this endeavor. For even if he had fully succeeded in proving his point, he would not have advanced any tenable argument in support of the policies he advocates. The question whether the United States should preserve the private-enterprise system or should adopt what is nowadays euphemistically called “direct controls” is not a problem of general philosophy or of jurisprudence. It is a problem of economic policy. It has to be decided according to the effects to be expected from, or already brought about by, the policies concerned. Only economic considerations can clarify such issues.

The case against interventionism is not based on the interpretation of the Constitution. (Incidentally, most of the recent interventionist measures are certainly unconstitutional.) The economists do not raise the question whether or not interventionism is legal or illegal, good or bad, desirable or undesirable. They demonstrate that the various measures of government interference with market phenomena do not produce the results aimed at by the governments resorting to them. These measures rather create a state of affairs which — from the very point of view of the government itself and all the advocates of interventionism — is more undesirable than the previous state of affairs which they were designed to alter. If the government, faced with this inevitable outcome, does not want to repeal its decrees and to return to economic freedom, but goes on with its interventionist policy, it must add to the first decrees more and more decrees until it has regimented every aspect of the citizens' lives, their activities in production as well as the mode of their consumption. Then any kind of freedom — economic or political — disappears, and totalitarianism of the type of the Hitler Zwangswirtschaft emerges. Interventionism is not an economic system that can last. It can not be preserved permanently. It must either be abolished or it must lead step by step to all-around planning by the government, to full socialism, a system in which nobody is free.

State an Apparatus of Coercion

A state or a government is an apparatus of coercion and compulsion. Within the territory that it controls, it prevents all agencies, except those that it expressly authorizes to do so, from resorting to violent action. A government has the power to enforce its commands by beating people into submission or by threatening them with such action. An institution that lacks this power is never called a government. The reasoning that leads Professor Hale to equate every business deal between private citizens with governmental coercion and to call all such transactions the exercise of private governing power runs this way:

Every person has a certain amount of bargaining power on which he depends for his livelihood. Bargaining power is power to exert pressure on those with whom one carries on transactions — in other degree of coercion over other people's liberty, while at the same time his own liberty is subject to some degree of control by others.

The government says to the citizen, Pay taxes or my armed constables will imprison you. The baker says to the prospective customer, If you want me to serve you and to bake bread for you, then you must reward me by doing something for me. In the opinion of Professor Hale there is no difference between the two modes of acting. Both are coercion, both are government of men over men, both are infringements of other people’s liberty. The baker coerces the dentist by selling him bread and the dentist coerces the baker by filling the cavities of his teeth. Wherever you look in this worst of all thinkable worlds you discover restrictions of liberties. But fortunately paternal government steps in to salvage liberty. It saves liberty precisely by curtailing it. For, says Professor Hale,

it is a fallacy to assume that every attempt by the state to control and to revise the economic results of bargaining involves a net curtailment of individual liberty. It may or may not do so. If the liberty of those whom it restrains is less vital than the liberty which those persons would themselves restrain, then state intervention may spell a net gain in individual liberty … It becomes necessary at times for the political state to curtail the freedom of powerful groups to dominate.

Private Governing Power

Some years ago Mrs. X used to prepare the soup for the family meals in her own kitchen. Later she began to buy canned soup manufactured by one of the country’s canneries. A clear-headed observer will argue that the lady for some reason considers this mode of supplying her family with soup as preferable to the previous method. Not so Professor Hale. In his eyes coercion is present. The cannery, in manufacturing soup and selling it to Mrs. X, exercises governing power. As the cannery is a private firm, not a government-owned and -operated factory as in Russia, there is something highly immoral and reprehensible in the matter. For it is private governing power. And as everybody agrees that all governing power belongs by right to the government, it is obvious to Professor Hale that the government must curtail this power of the cannery “to dominate” Mrs. X by manufacturing soup for her.

The way in which Professor Hale describes the operation of the market economy is, to say the least, amazing. Thus he declares,

the customer can deny his money to the retailer, and by threatening to deny it can coerce the retailer to furnish him with the goods.

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Now, millions of people in this way “threaten” the jewelers of Fifth Avenue; they “threaten to deny their money to them.” Yet those “threatened” do not furnish them with bracelets and necklaces. But if a holdup man turns up and threatens the jeweler in his own manner, by brandishing a gun, the outcome is different. It seems therefore that what Professor Hale calls threats and coercion comprehends two entirely different things having entirely different features and consequences. His failure to distinguish these two things from one another would be deplorable in a nontechnical book. In a presumably juridical book it is simply catastrophic.

It would not be necessary to pay much attention to Professor Hale’s volume if his mode of arguing were peculiar to him alone. But these views are in fact fashionable nowadays. For instance, in the Yale Review of Spring, 1952, Professor Sutherland of the Harvard Law School in a similar way suggested restriction of “private government.” We encounter here a new slogan designed to replace the worn-out labels of the New and Fair Deals. Let us hope that this new catchword will not fool anybody.

A Theory of Socialism and Capitalism

In the wake of the downfall of the Berlin Wall, the breakup of the Soviet Union, and the emergence of capitalism in China, I was asked to teach the comparative-economic-systems class at Auburn University for the summer term in 1989. My only exposure to the topic had been as an undergraduate student, where my teacher was a Cold War–era professor who concentrated almost exclusively on the Soviet Union. His implicit message was to fear the Soviet Union, which would soon come to smother the American dream.

My assignment came at the last minute, so there would be no reviewing of textbooks and preparations of lectures in advance. I spent the summer term preparing lectures on the fly and staying one chapter ahead of the students. Also, I had to choose a textbook somehow, even though I wasn’t familiar with my options, which meant I didn’t know what political punch line the author would deliver at the end. My unorthodox choice was the recently published A Theory of Socialism and Capitalism by Hans-Hermann Hoppe.[1]

My first exposure to Hans was at a public lecture he delivered to the economics faculty at Auburn University. As I remember, his topic was the theory of public goods.[2] His German accent was particularly thick at this time and he read his manuscript as only Hans can — with precision and authority.

Public-goods theory was, and largely still is, sacred ground for most economists, and at the time it had not been subjected to many Austrian criticisms. I remember being impressed by Hans’s detailed critique, but even more than that, the utter shock and surprise on the faces of the members of the economics departments. When the lecture was completed you could have heard a pin drop. The economics department was largely “free market” and “Austrian friendly,” but questioning the validity of public-goods theory was apparently a sort of desecration of Holy Scripture. Afterwards, and for several days, I defended Hans and debated his position. I would win over concession after concession in these debates with my professors, but failed to win a single convert.

The book arrived in the bookstore in time for my class, but it looked nothing like a textbook. In fact, the production values of the book were the worst I had ever seen. Neither of these factors mattered to me, but I do note them here to indicate that the deck was stacked against me the first day I walked into class. Plus the class was completely full of students who had little or no interest in comparative economic systems; they simply needed an elective of some type.

To my great surprise, the class went much better than I had hoped and was one of the most gratifying teaching experiences in my career. Free-market-oriented economics students seemed to revel in the complete and utter devastation of socialism that would follow, but even outright socialist students and more unbiased minds appeared to have a certain respect for the material presented in class. Much of the credit for this success I attribute to A Theory of Socialism and Capitalism, because more than three-quarters of class time relied specifically on the book.

The success of the book in reaching the students rests first on that fact that it is a theoretical, rather than empirical, treatise that provides a clear, unambiguous analytical framework to understand any particular economy that a student might face. Second, the book analyzes and debunks, or rather reconstructs, the two major "exceptions" of mainstream economics — monopoly and public-goods theory — and therefore presents economic theory as a unified whole. Third, the moral and ethical aspects of economics and economic policy are introduced in an integrated and scientific fashion, and fourth, the book provides an understanding of economic and social change. Although this latter point may not have been a primary aim of the author, it sure was handy to answer questions regarding why socialism was imploding — especially given that most other professors on campus were teaching that socialism and redistributionism of all kinds were the panacea for social ills.

In addition to all these positive traits of the book, long-time readers of Professor Hoppe will clearly recognize the consistency of his writings over time. Beginning in the Garden of Eden (so as to highlight the role of scarcity), he proceeds deductively to establish the concepts of property, contract, and aggression, and then to establish the meaning of pure capitalism as a social system based on property and the absence of coercion, while pure socialism is a system based on systemic violence and the absence of property rights.

In addition, he shows how each system impacts the personality and prosperity of individuals living in those systems. From beginning to end, his argument is logically deduced and intuitively obvious. Throughout, Hans is always alerting the reader to possible misconceptions and weaknesses that he will address later in the text.

Beginning with the familiar case of Russian-style socialism, capitalism is shown to be superior to an economy run by caretaker-central planners. The absence of opportunity costs for the caretaker inevitably leads to reduced investment, misallocation, and overutilitzation of capital and labor. Added to this critique is the impact on the personal character and personality of individuals in a socialist society because efficient use of resources and catering to the consumer are no longer rewarded, and so people gravitate toward “political” action. Hoppe illustrates all this with a brief look at Russian-style economies and the natural experiment of East and West Germany, but modern westerners need only to take a close look at their own governments’ bureaucracies to understand the impact of socialism on character and personality.

Russian-style socialism is the most obvious and recognizable form of socialism, but social democracy is the most common and dominant form of socialism. Here, the democratic process substitutes for the central authority. Social-democratic socialism allows for some property rights to remain intact, although not immune from attack. It initiates a system of taxation that takes the property of producers and a system of redistribution to enrich nonproducers. The system does solve some problems of Soviet-style socialism and reduces others, but, in the end, it produces essentially the same type of results.

Conservative socialism is at the opposite end of social-democratic socialism, but both also have many similarities. Social democrats want “change,” while conservatives oppose it. Social democrats want to redistribute property while conservatives want to enforce the status quo and “stay the course.” Conservatives support price controls, regulations including antitrust policies, and behavioral controls like prohibitions. Hoppe shows how the reality of mixed economies and ideologies make empirical examinations complex but that his theoretical framework provides clarity to all conservative socialist systems such as feudalism, monarchies, Nazism, and the Republican Party. All lead to impoverishment just like social-democratic socialism.

Although most economists would not understand all the implications of these various types of socialism, many would now agree with Hoppe that Russian-style socialism is bad and that anything beyond moderate conservative or social-democratic socialism is also bad for the economy.

After analyzing these forms of socialism, the book turns to more controversial matters and the case for social engineering, where economists and other academics would prefer to implement only policies that “work” rather than blindly following some ideology. Here, Hans embarks on an all-out onslaught on social engineering and its foundation in positivism. This section and the following digression on epistemology required extensive class coverage supplemented with examples and illustrations, but it was well worth the investment to undermine the so-called pragmatic notion that we should only implement “what works.” Social engineering, with its scientific veneer, is in reality not scientific at all; in practice it is completely normative, and in the end is extremely dangerous.

The most controversial matter occurs in chapter seven: “The Ethical Justification of Capitalism and Why Socialism is Morally Indefensible,” Hoppe’s intriguing “argumentation ethics” defense of libertarian ethics.[3] The students found this interesting for many reasons, but the fact that it was an explicitly argued ethical position was something rather novel for them. I drove home Hans’s core point where he demonstrates the moral superiority of capitalism over socialism in that “one cannot communicate and argue that one cannot communicate and argue” (which, by the way, is contained in a parenthetical statement). Some thought that this was some kind of trick, but most were willing to play along.

With the argument made, I told the students — for effect — that Hoppe's argument against socialism is completely undermined when you examine collective action that is completely voluntary. For example, Major League Baseball establishes and enforces all sorts of rules on its member teams; family units can adopt Russian-style socialism if they wish; homeowner associations can establish, change, and enforce rules on how and when lawns will be mowed and garbage will be collected; fraternities can require that new members be spanked with wooden planks; and entrepreneurs can require that patrons wear shoes or not smoke on their premises.

Anything that socialism claims to accomplish (and much more) can be accomplished with voluntary agreements. One bright, future economist in the class corrected me by pointing out that this really did not undermine Hans’s argument, because it was actually an argument for capitalism. I think the fact that the “American way” is perceived to be more voluntary compared to other societies and that Hans was just taking volunteerism to its logical extreme helped win over many of the students to our position.[4]

Without efficiency or morality to back it, socialism is then revealed as merely a parasitic state using the carrot of political favors and the stick of violence to live off its host. Ultimately, the state uses propaganda of many forms to sustain an ideology that prevents the host from relieving itself of the parasite, and in class we had a wide-ranging discussion as to propaganda of the US government.[5]

Hoppe notes that the best system for achieving and sustaining the goals of the parasite is democratic-majority rule, which of course would be a major theme of his book Democracy: The God that Failed.[6] Ultimately, the state finds its strength in the immortal words of Franklin Roosevelt — "the only thing we have to fear is fear itself" — meaning everything will be fine as long as we have the state to take care of us.

The last two chapters of the book deal with the problems of monopoly and public goods.[7] Here, Hans aptly shows that monopoly is not a problem of the free market but is solely a problem of the government’s own creation. He then demolishes the theory of public goods and explains how the market addresses the issues of public goods and externalities. This was all new information to the students, including the economics majors, and I employed several digressions using mainstream literature to back up Hans’s points.

As I tightened the noose around the neck of the mainstream theories of monopoly and public goods, using both deduction and illustrations, the students paid close attention and asked many questions. In the end, I think the students appreciated this “new version” of economics, where there were no exceptions to the rules of economics and where there was a way in which the moral and ethical implications of economic systems could be analyzed.

The success of the book in reaching my students was based on the fact that it helped explain the turbulent changes that were occurring in the world, such as the fall of the Berlin Wall, the breakup of the Soviet Union, and the acceptance of capitalism in China. In addition, the book presents economic analysis as a unified whole — without the exceptions of monopoly and public goods. Furthermore, the book brings a moral and ethical analysis to comparative economic systems that is integrated into the economic analysis itself. In short, A Theory of Socialism and Capitalism is a treatise that is a “breath of fresh air” for student and teacher alike.

I believe that my experience supports an important point regarding strategy and the future of Austrian economics. Recall the reaction of my professors to the public lecture given by Hans Hoppe on public-goods theory. They were shocked into denial and beyond any attempt to logically debate the issues raised. Yes, public-goods theory could be criticized on any number of levels, but professional economists could not conceive of abandoning the concept in its entirety. On the other hand, undergraduate students who were probably leery of the concepts of natural monopoly and public-goods theory to begin with were open to Hoppe’s criticisms, and many even accepted them. Indeed, I think that most of the students welcomed the opportunity to be exposed to this radical alternative, with several of them embracing it in its entirety.

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The lesson here, I believe, is that Austrian economics should not proceed in a manner solely to gain acceptance among mainstream economists. That is not to say that Austrians should withdraw from debates and not engage with other economists — far from it. Lines of communication and debate should be maintained and discussions about commonalities and disagreements with other schools of economic thought should go forward, as is the great tradition of the Austrian School. However, my experience with students suggests that the most fruitful strategy is to spread the knowledge of the Austrian School to as wide an audience as possible, particularly among those with an open mind. The great practical advantage of the Austrian School is that it is a form of economic analysis that is founded in realism and helps us understand both progress and problems in the real world. Therefore, it is a useful tool for people in the real world, but is of little use, and indeed is a threat, to mainstream academic economists.

One final point I would like to make is that, in 1989 when Hans published A Theory of Socialism and Capitalism, every textbook in comparative economic systems was obsolete because of events surrounding the downfall of communism. In contrast, not only was Hans’s book timely but it has proven itself timeless in that it continues, twenty years later, to be as relevant as ever and a classic treatise on the subject.

Notes

[1] Hans-Hermann Hoppe, A Theory of Socialism and Capitalism: Economics, Politics, and Ethics (Boston: Kluwer Academic Publishers, 1989).

[2] See Hans-Hermann Hoppe, “Capitalist Production and the Problem of Public Goods,” in idem, A Theory of Socialism and Capitalism; idem, “Fallacies of the Public Goods Theory and the Production of Security,” in idem, The Economics and Ethics of Private Property: Studies in Political Economy and Philosophy, 2nd ed. (Auburn, Ala.: Ludwig von Mises Institute, 2006 [1993]).

[3] See also Hoppe, A Theory of Socialism and Capitalism, ch. 2, and idem, The Economics and Ethics of Private Property, chaps. 11–13, 15, and "Appendix: Four Critical Replies."

[4] At least none of the students complained to my department chairman or reported me to the dean’s office.

[5] On the state’s use of ideological propaganda, see Hans-Hermann Hoppe, “Banking, Nation States and International Politics: A Sociological Reconstruction of the Present Economic Order,” Review of Austrian Economics 4 (1990): 62 et seq.; idem, “The Economics and Sociology of Taxation,” in idem, The Economics and Ethics of Private Property, pp. 64–65; and idem, "Banking, Nation States, and International Politics: A Sociological Reconstruction of the Present Economic Order," in idem, The Economics and Ethics of Private Property, pp. 86–87.

[6] Hans-Hermann Hoppe, Democracy — The God that Failed: The Economics and Politics of Monarchy, Democracy, and Natural Order (New Brunswick, N.J.: Transaction Publishers, 2001).

[7] Hans-Hermann Hoppe, “Capitalist Production and the Problem of Monopoly,” in idem, A Theory of Socialism and Capitalism; idem, “Capitalist Production and the Problem of Public Goods.” See also note 2, above.

The only way to address executive compensation and the inevitable boom and bust cycles that will happen in perpetuity in this country is to finally recognize the difference between financial engineering and investing.  For some reason no one in any of our regulatory agencies seems to want to admit or deal with the differences.  Too much pressure from Wall Street ?

In any event, the following is  a post from a year ago. I thought it was worth republishing.

Let me get this straight.  In 2008, funds trying to squeeze out another basis point or two thought they were being conservative  buying insurance on heavily leveraged portfolios of sub prime loans and other debt. Once those loans started to default, it  created a cascading deleveraging event which lead to major financial institutions failing and the “smartest” minds on Wall Street being forced to dump everything to raise cash, which in turn lead to a crisis of confidence and deleveraging that created the worst week in the history of the stock markets. Did I get this right ?

In 1987, funds, trying to squeeze out another basis point or two thought they were being conservative buying insurance on leveraged stock portfolios. Once the stock prices on those portfolios started to drop, their insurance programs pushed them to dump everything AND sell stock index futures to raise cash, which in turn lead to a crisis of confidence and deleveraging that created the worst single day melt down in the history of the stock markets.  Did I get this right ?

Think it wont happen again ? Of course it will.  Whatever money the Fed makes available to  entrepreneurs and businesspeople will be used as intended, to create and grow businesses.

Unfortunately, it  will also be used by financial engineers to try to find a way to make HUGE profits from  highly leveraged,risk laden financial packaging. Why wouldnt they ?

If you can borrow  cheap money  , invest  in some asset that can be marked to an increasing market, borrow  against the gain and buy something else and do it as many times as possible,  wouldnt you ? Its exactly how homeowners In a bull market drove up real estate prices with a few making huge money.

If you could do the same thing, but instead of with houses, with stocks or asset backed securities, and instead of with thousands, do it with billions so you could profits in the 10s of millions or more, wouldnt you ?

Hell yes you would. You certaintly arent going to tell yourself that you could be creating the next big bubble that could rival 1929, or for future generations, would rival 2008, so dont do it. You would go for the money.

Which is the genesis of our problem in the US.  Its not wrong to run with bull markets and leverage to the hilt. That can be a very good thing. But we have to make the upside based on investments, rather than financial engineer…