Mises Daily : Mises Institute on Austrian Economics and Libertarianism

Another Case of the Anticapitalistic Mentality

Wed, 16 May 2012 00:00:00 -0500

[What Money Can't Buy: The Moral Limits of Markets • By Michael J. Sandel • Farrar, Straus and Giroux, 2012 • 244 pages]

Michael Sandel, a popular government professor at Harvard, asks a good question, but his answer leaves a great deal to be desired. Are there things, he wants to know, that should not be bought and sold on the free market?

What role should markets play in public life and personal relations? How can we decide which goods should be bought and sold, and which should be governed by nonmarket values? (p. 11)

Clearly there are limits to the proper scope of the market: you cannot legitimately buy and sell people. Further, contracts to violate people's rights are also illicit. Beyond these commonsense restrictions, should not people be free to make whatever market arrangements they wish? This simple view is not to Sandel's liking.

He recognizes the position just suggested, but he rejects it.

The first [defense of markets over queues] is a libertarian argument. It maintains that people should be free to buy and sell whatever they please, as long as they don't violate anyone's rights. Libertarians oppose laws against ticket scalping for the same reason they oppose laws against prostitution, or the sale of human organs: they believe such laws violate individual liberty, by interfering with the choices made by consenting adults. (p. 29)

Sandel suggests that the free choices here appealed to are sometimes less free than they appear. Suppose, he inquires, that a poor person has only one opportunity to better his position. Is the person really free to reject the opportunity? "Market choices are not free if some people are desperately poor or lack the ability to bargain on fair terms" (p. 112). As an example, he mentions an odd scheme by Barbara Harris that offered $300 to women addicted to drugs who agreed to sterilization or long-term birth control. He says,

Although no one is holding a gun to her head, the financial inducements may be too tempting to resist … her choice … may really not be free. She may be coerced, in effect, by the necessity of her situation. (p. 45)

It hardly seems plausible to think that a tempting offer is coercive: if a college student who works part time at McDonalds receives an award of $100,000 on condition that he bid his job goodbye, he is likely to find it very difficult to turn down his opportunity. That hardly suffices to make the offer coercive. A threat is very different from an offer, however tempting; and it is the former, not the latter, that is coercive.[1]

Indeed, it is not clear how strongly Sandel is committed to the claim that offers difficult to turn down metamorphose into threats; and in any case, he objects to many market exchanges where no coercion in his extended sense occurs.

His main argument against various market exchanges is a different one. It is that buying and selling changes the meaning of a great many of our social practices. What he has in mind is best explained by an example. The example will also show, by the way, how remarkably easy he finds it to get upset. Nowadays, he tells us with outrage, people can avoid waiting in long lines. They can hire others to stand in line for them. One might at first be tempted to think this a good thing. If you hire someone as a substitute, you are in your own estimation better off, because you prefer hiring him to waiting. In like fashion, the person who waits thinks that it is worth it to do so. Both parties to the trade are better off. What could be easier to grasp?

Sandel does not agree. For example,

Think again about the Public Theater's free summer Shakespeare performance [in New York]. "We want people to have that experience for free," said the spokesperson, explaining the theater's opposition to hired line standers.… The Public Theater sees its free outdoor performances as a public festival, a kind of civic celebration. Charging for admission, or allowing scalpers to profit from what is meant to be a gift, is at odds with this end. It changes a public festival into a business, a tool for private gain. (p. 33)

Sandel's argument, then, is that buying and selling strikes against the meaning of various social practices. But why should we think, to take the example just mentioned, that performing a Shakespeare play in a park has as part of its meaning that admission to the play is free, with no paid line standers allowed? Would the play cease to be a play if those horrid paid line standers and scalpers plied their respective trades?

Sandel might answer that even if the play could be performed before a paying audience, it wouldn't be the same event as a performance before an audience that got in for free. But then he has simply built into the definition of the play's performance that the audience not pay admission. (Is it permissible, by the way, if the actors are paid? Are they required to donate their services?) Under this supposition, Sandel would be right that the meaning of performing the play would change; but this is just the consequence of the way he has elected to characterize what the performance of the play includes. Why should we be concerned with Sandel's preferred play, rather than a privately performed play? The latter is just a different social practice. Why is it worse than the free performance?

The answer to this uncovers the key assumption of Sandel's book. Though he does not wish to abolish the market — he thinks, for example, that it is all right to for stores to rent videos — he regards economic freedom with deep disquiet. He would not agree with the wag who suggested that the most beautiful word in the English language is "cash." To the contrary, he views the market as corrupting. People who attend to economic gain put aside the nobler motive of sacrificing together for the common good.

Sandel's denigration of filthy lucre frequently reaches absurdity. He opposes selling tickets for prime camping sites at Yosemite National Park on Craigslist at a higher price than the nominal cost set by the park service. He does so even though demand "is so intense, especially for the summer, that the campsites are fully booked within minutes of becoming available" (p. 36). To allow the dread hand of the market to besmirch Yosemite is to fail adequately to grasp the meaning of national parks. "They are places of natural wonder and beauty, worthy of appreciation, even awe. For scalpers to auction access to such places seems a kind of sacrilege" (p. 37). Holy space must not be profaned by money. Like Jesus, Sandel would drive the moneychangers out of the temple. What he has given us here is not a reasoned argument, but an expression of a pseudoreligious faith.

His faith these days is under constant assault.

The corrosive effect of advertising matters less in the grocery aisle than in the public square, where naming rights [i.e., the right to name buildings, streets, stadiums, etc., in return for a payment] and corporate sponsorships are becoming widespread. They call it "municipal marketing," and it threatens to bring commercialism into the heart of civic life. (p. 189)

The market's effect is "corrosive": it "threatens" civic life. Why should we accept the implicit value judgments that lie behind Sandel's emotive language? He does not tell us: instead, he again and again excoriates the evil market.

Even baseball is not immune from Sandel's vaporings. His complaint should by now be familiar. No longer do people enjoy baseball as a public festival, with rich and poor sitting in seats that differ little in price. Now, big business has taken over: luxury "skyboxes" serve to separate wealthy persons and corporations from the rest of us, and advertising is ubiquitous.

Sandel acknowledges that people do not go to baseball games "primarily for the sake of a civic experience." Nevertheless, the civics lesson needs to be present: "But the public character of the setting imparts a civic teaching — that we are all in this together, that for a few hours at least, we share a sense of place and civic pride" (p. 173). Why cannot we just enjoy ourselves, without the Aesop's fable?

Sandel never stops complaining. He tells us that in

1965, when I [Sandel] was twelve years old, the best seats in the park [in Minneapolis] cost $3; bleacher seats were $1.50.… The business of baseball has changed a lot since then.… Not surprisingly, ticket prices have soared. A box seat at a Twins game is $72, and the cheapest seat in the park costs $11. (p. 164)

Before we join Sandel in his lamentation for the ordinary fan, who has been driven out of the ballpark by greedy businessmen, we might usefully ask an elementary question that apparently never occurred to our Harvard professor and common scold. What is the purchasing power today of $1.50 in 1965? According to the CPI Inflation Calculator of the Bureau of Labor Statistics, the answer is $10.92. True, eight cents is eight cents: but one doubts most people would take this increase to be an example of soaring prices. Also — what a thought! — perhaps charging high prices for box seats helped the owners to keep prices low for the less-well-off customers.

I cannot hope to do justice to the very wide range of market invasions that arouse Sandel to his jeremiad. One more of his complaints must here suffice. He appeals to the famous book The Gift Relationship (1970), by the British student of "social policy" and adviser to the Labour Party Richard Titmuss. He contrasted the British system of voluntary unpaid blood donations with the practice in the United States, which includes both voluntary and paid donations. The American system, he contended, "leads to chronic shortages, wasted blood, higher costs, and a greater risk of contaminated blood" (p. 123).

Why these dire consequences? If some people are paid to give blood, this drives out donations for altruistic reasons: "the market values that suffuse the system exert a corrosive effect on the norm of giving" (p. 124).

Kenneth Arrow objected to this that people who want to donate blood without compensation are not prevented by a commercial alternative from doing so. Sandel finds this response unconvincing.

The answer [to Arrow's objection] is that commercializing blood changes the meaning of donating it. For consider: in a world where blood is routinely bought and sold, is donating a pint of blood at your local Red Cross still an act of generosity? Or is it an unfair labor practice that deprives needy persons of gainful employment selling their blood? (p. 126)

If you want to be generous, why not donate money so the hospital can attract more paid donors? Thus does a paying system crowd out unpaid donors.

This is more than a little lame. Do people who want to donate blood just because they think this an act of beneficence refrain from doing so for the bizarre reasons that Sandel adduces? Arrow seems perfectly correct: if you want to volunteer, the fact that others are paid should not and probably does not stop you. Further, that someone receives money for a donation hardly suggests that he does not think blood donation a good in itself, with motivating force. Persons can be motivated at the same time both by self-interest and concern for others.

Sandel responds to another objection to the arguments of Titmuss, again raised by Arrow. Earlier, Sir Dennis Robertson had suggested the point more generally. Arrow and Robertson noted that altruism is a scarce resource: it is unwise for society to rely on it unduly. The economist, realizing this, promotes "policies that rely, whenever possible, on self-interest rather than altruism or moral considerations … [thus saving] society from squandering its scarce supply of virtue" (p. 128).

Against this, Sandel appeals to the weighty authority of Aristotle. Does not moral virtue grow in the exercise of it? The economist's way of thinking "ignores the possibility that our capacity for love and benevolence is not depleted with use but enlarged with practice.… Aristotle taught that virtue is something we cultivate with practice" (p. 126).

Aristotle's point is characteristically wise; but Sandel has unaccountably failed to see that it is perfectly consistent with the claim that virtue is a scarce resource. The growth of virtue with practice does not imply that virtue can expand to an extent that makes it unnecessary to seek to conserve it.

$10.00 $5.00

There is yet one more problem with Sandel's account of blood transfusions. He endeavors to respond to Arrow's criticisms of Titmuss, but he fails to consider a matter of no slight significance. Titmuss's claims for the superiority of the British system are highly controversial; other studies have found that a market system works as well or better. Sandel evidently thinks the controversy unworthy of mention, if indeed he is aware of it at all.[2]

Sandel calls explicitly for no more than "public discourse" on the proper scope of the market. But no reader of the book can be in doubt about what he wants the outcome of that discourse to be: the coercive displacement of the free market in favor of the communitarian exhortations to self-sacrifice he finds so edifying. If one did not know that Sandel existed, one might suspect that this book was a Randian parody of an altruist intellectual.

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David Gordon covers new books in economics, politics, philosophy, and law for The Mises Review, the quarterly review of literature in the social sciences, published since 1995 by the Mises Institute. He is author of The Essential Rothbard, available in the Mises Store. Send him mail. See David Gordon's article archives.

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Notes

[1] For the classic account of the complexities of coercion, and the distinction between threats and offers, see Robert Nozick, "Coercion," in his Socratic Puzzles (Harvard University Press, 1997), pp. 15–44; see in particular the discussion on p. 24 of the offer to the addict. The legal theorist Robert Hale held the strange view that all offers were at the same time threats. If I offer to sell you a pound of bananas for 79 cents, e.g., I am threatening to withhold the fruit from you if you do not give me the money. In like fashion, you coerce me by threatening not to buy the bananas. See Mises's incredulous remarks on Hale's position.

[2] For an excellent summary and analysis of the literature, see Jeremy Shearmur, "Trust, Titmuss, and Blood," Economic Affairs, Volume 21, March 2001, pp. 29–33.

The True Conception of the Use of Goods

Wed, 16 May 2012 00:00:00 -0500

[Capital and Interest (1890)]

All material goods (Sachgüter) are of use to mankind through the action of the natural powers that reside in them. They are a part of the material world, and for that reason all their working, including their useful working, must bear the character that working generally has in the material world; it is a working of natural powers according to natural laws. What distinguishes the working of material goods from the working of other kinds of natural things, harmless or hurtful, is the single circumstance, that the results of such working admit of being directed towards the advantage of man, this direction also being under the rule of natural laws. That is to say, all things are endowed simply with working natural powers, but experience shows that these powers only admit of being directed to a definitely useful end, when the matter which possesses these powers has taken on certain forms that are favorable to them being so directed. All matter on the surface of the earth, for instance, among other forms of energy, possesses an amount of energy corresponding to its distance from the centre of the earth. But while men can do nothing with this form of energy when stored up in a mountain, that same energy is useful to them when the matter possessing it has taken on some form they wish — that is, some form in which the energy is available; say, that of a clock pendulum, or a paper weight, or a hammer. The energy of chemical affinity which carbon possesses is identical in every molecule of it. We get a direct economic utility, however, from the results of this energy only when the carbon has taken such forms as that of wood or coal; not when it exists as part of one of the constituents of the air. We may therefore say that the nature of material goods, as opposed to those material things that are not useful, is that they are such special forms of matter as admit of the natural powers they possess being directed to the advantage of man.

From this follow two important inferences, of which one concerns the character of the useful functions of material goods, and the other concerns the character of the use (Gebrauch) of goods.

The function of goods can consist in nothing else than in a giving off, or rendering up, or putting forth of power; or, to use the terminology of physical science, the passing of energy into work. On the natural side it shows a complete parallelism with the character of the useful function performed by a manual laborer. In the same way as a porter or a navvy is of use, when he puts forth the natural power residing in his body in the form of rendering useful services, so are material goods of use through concrete forthputting of the natural powers inherent in them and capable of direction — physically speaking, through the forthputting in work of the available forms of energy they possess. It is by the passing of available energy into work that the "use" of goods is obtained by man.[1]

The use (Gebrauch) of a thing then is realized in this way: man takes the peculiar forms of energy of the good at the proper time, supplies the conditions necessary to render them available where they previously existed in an unavailable form, and then brings these forms of energy into proper connection with that object in which the useful effect is to take place. For instance, in order to "use" the locomotive the stoker fills the boiler with water, applies heat, and thus obtains in an available form the heat energy of the steam, which is transferred into energy of motion of the locomotive. This last-named energy is then transferred by connection to the carriages that convey persons or goods. Or one brings a book into the necessary relation with his eye for the image, which is continually being formed by reflection, to fall on the retina; or brings the house which continually offers shelter into proper relation with his whole person. But any "use" of material goods which does not consist in the receiving from them of useful results due to their inherent powers or forms of energy, is absolutely unthinkable.

I think I need have no fear of the propositions I have just advanced meeting with any scientific opposition. The conception laid down is no longer strange in our economic literature;[2] and in the present state of the natural sciences the acceptance of it has indeed become a peremptory necessity. If by any chance it should be objected that this conception is one that belongs to the natural sciences and is not an economic one, I answer that in these questions economic science must leave the last word to natural science. The principle of the unity of all science demands it. Economic science does not explain the facts that belong to its province to the very bottom, any more than any other science does. It solves only one portion of the causal connection that binds together the phenomena of things, and leaves it to other sciences to carry the explanation farther. Not to mention other limiting sciences, the sphere of economic explanation lies between the sphere of psychological explanation on the one hand, and that of the natural sciences on the other. To give a concrete example. Economic science will explain thus far the circumstance that bread has an exchange value: it will point out that bread is able to satisfy the want of sustenance, and that men have a tendency to ensure the satisfaction of their wants, if necessary by making a sacrifice. But that men have this tendency, and why they have it, is not explained by economic science but by psychology. To explain that men want sustenance and why, falls within the domain of physiology. Finally, it also falls within the sphere of physiology to explain that bread is able to satisfy that want, and why it is able to do so, but physiology does not finish the explanation within its own sphere; it has to call in assistance from the more general physical sciences.

Now it is clear that all explanations given by economic science have a value only under this condition, that they are continuous with the related sciences. The explanations of economics cannot rest on anything that a science related to it is bound to declare untrue or impossible; otherwise the thread of the explanation is broken from the first. It must on that account keep exactly in touch with the related sciences at the points where they limit it, and one such point is just this question as to the working of material goods.

The one thing of which I have, perhaps, some reason to be afraid is, that the employment of this physical conception in regard to a certain limited class of material goods, especially to the so-called "ideal goods," may be somewhat startling at the first glance to some readers. That, e.g. a fixed and stationary dwelling-house, a volume of poems, or a picture of Raphael should be of use to us through the forthputting of inherent properties connected with one or other of the forms of energy, or, as we may shortly express it, the forthputting of its natural powers, may at first, I admit, be a little strange. Objections like these, however, which have their origin more in feeling than in understanding, may be removed by a single consideration. All the things that I have named enter into the relation which makes them "goods" only in virtue of the peculiar natural powers which they possess, and possess, indeed, in peculiar combination. That a house shelters and warms, is nothing else than a result of the forces of gravity, cohesion, and resistance, of impenetrability, of the non-conducting-quality of building materials. That the thoughts and feelings of the poet reproduce themselves in us is mediated, in a directly physical way, by light, color, and form of written characters; and it is this physical part of the mediation which is the office of the book. There must of course have been a poet soul in whom ideas and feelings waked, and, again, it is only in a spirit and through spiritual forces that they can be reawakened; but the way of spirit to spirit lies some little distance through the natural world, and over this distance even the spiritual must make use of the vehicle of natural powers. Such a natural vehicle is the book, the picture, the spoken word. Of themselves they give only a physical suggestion, nothing more; the spiritual we give of our own on accepting the suggestion; and if we are not prepared beforehand for a profitable acceptance of it — if we cannot read, or, reading, cannot understand, or cannot feel — it remains simply a physical suggestion.

With these explanations perhaps I may consider it established beyond question that material goods exert their economical use through the forthputting of the natural powers residing in them.

The individual useful forthputtings of natural powers that are obtainable from material goods I propose to designate as "Material Services."[3] In itself, indeed, the word Use (Nutzung) would not be inappropriate, but to adopt it would be to surrender our conception to all the obscurity that now, unfortunately, hangs over that ambiguous expression.[4]

The conception of material services is, in my opinion, destined to be one of the most important elementary conceptions in economic theory. In importance it does not come behind the conception of the economic good.[5] Unfortunately up till now it has received little attention and little development. From the nature of our task it is indispensable that we should repair this neglect, and follow out some of the more important relations into which the material services enter in economic life.

First of all, it is clear that everything which would lay claim to the name of a "good"must be capable of rendering material services, and that, with the exhausting of this capability, it ceases to have the quality of a good; it falls out of the circle of "goods" back into the circle of simple "things." An exhaustion of this capability must not be thought of as an exhaustion of the capability to exert or to put forth energy in general; for what we have called the "natural powers "of the material are as imperishable as the material itself. But although these powers or forms of energy never cease to exist in some form or other, they may very well cease to be available for material services in this way, that the original good, in the course of doing work, has undergone such a change — be it separation, dislocation, or uniting of its parts with other bodies — that, in its changed form, its energy is no longer available for human use. For instance, when the carbon of the wood burned in the blast furnace has combined with oxygen in the combustion process, its powers cannot again be employed to smelt iron, although these powers are constant, and continue to work according to natural laws. The broken pendulum retains its energy due to gravity just as it did before, but the loss of the pendulum form does not allow of this energy being directed to regulate the clock. The exhaustion of capability to render material services we are accustomed to call the using up or consumption of goods.

While all goods thus agree and must agree in this, that they have to render material services, they differ essentially from one another in the number of services that they have to render. On this rests the familiar division of goods into perishable and nonperishable, or better, into perishable and durable.[6] Many goods are of such a nature that, to render the uses peculiar to them, they must give forth their whole power, as it were, at a blow, in one more or less intense service, so that their first use quite exhausts their capability of service, and is their consumption. These are the so-called perishable goods, such as food, gunpowder, fuel, etc. Other goods, again, are, in their nature, capable of rendering a number of material services in the way of giving off these services successively, within a shorter or longer period of time; and thus after a first, or even after many acts of use, they may retain their capability of rendering further services, and so retain their character of goods. These are the durable goods, such as clothing, houses, tools, precious stones, land, etc.

Where a good successively gives off a number of material services, it may do so in one of two ways: either the services following each other evidently separate themselves from each other, as clearly marked single acts, in such a way that they are easily distinguished, limited, and counted — as, e.g. the single blows of a coining press, or the operations of the automatic printing press of a great newspaper; or they issue from the goods in unbroken, similar continuance — as, e.g. the shelter silently given over long periods of time by a dwelling-house. If, however, it is desired, in cases of this sort, to separate and divide the continuous amount of services — and practical need often requires this — the expedient is adopted that is generally taken in the dividing of continuous quantities; the dividing line that does not suggest itself in the phenomena under consideration is borrowed from some outside circumstance, e.g. from the lapse of a definite time; as when one delivers over to the hirer of a house the services to be rendered by the house during the year.

Another essential feature that meets us in the analysis of material services is their capability of obtaining complete economical independence. The source of this phenomenon is that in very many, indeed in most cases, the satisfaction of a concrete human want does not demand the exhaustion of the entire useful content of a good, but only the rendering of a single material service. In virtue of this the single service in the first instance obtains an independent importance as regards the satisfaction of our wants, and then in practical economic life this independence is fully recognized. We give the recognition (1) wherever we make an independent estimate of the value of isolated services; and (2) wherever we make them into independent objects of business transactions. This latter happens when we sell or exchange single services, or groups of services, apart from the goods from which they proceed. Economical custom and law have created a number of forms in which this is effectuated. Among the most important of these I may name the relations of tenancy, of hire, and of the old commodatum;[7] further, the institution of easements, of fee farm, of copyhold (emphyteusis and superficies). A little consideration will convince us that, as a fact, all these forms of transaction agree in this, that one portion of the services of which a good is capable is divided off and transferred separately, while the rest of the anticipated services, be they many or few, remain with the ownership of the body of the good, in the hands of the owner of the good.[8]

Finally, it is of great theoretic importance to determine the relations that exist between the material services and the goods from which they proceed. On this point I may put down three cardinal propositions, all of which appear to me so obvious that we may dispense here with any detailed proof of them; more especially as I have gone thoroughly into the subject on another occasion.[9]

It seems to me clear that we value and desire goods only on account of the material services that we expect from them. The services, as it were, form the economical substance with which we have to do. The goods themselves form only the bodily shell.
It follows from the above, and appears to me equally beyond doubt, that, where entire goods are obtained and transferred, the economical substance of such transactions always lies in the acquisition and the transference of material services — indeed of the totality of these services. The transference of the goods themselves constitutes only a form — certainly a form that, in the nature of things, is very prominent, but still only an accompanying and limiting form. To buy a good can mean nothing, economically speaking, but to buy all its material services.[10]
From this, finally, comes the important conclusion that the value and price of a good is nothing else than the value and price of all its material services thrown together into a lump sum; and that accordingly the value and price of each individual service is contained in the value and price of the good itself.[11]

$25.00 $20.00

Before going farther let me illustrate these three propositions by a concrete example. I think all readers will agree with me when I say that a cloth manufacturer values and demands looms only because he expects to get from the looms the useful energies peculiar to them; that not only when he hires a loom, but when he buys it, he looks, as a fact, to the acquisition of its services; and that the ownership he acquires at the same time in the body of the machine only serves as greater security that he will obtain these services. Even if this ownership in point of law appears to be the primary thing, economically it is certainly only the secondary. And, lastly, it will be granted, I think, that the use which the whole machine renders is nothing else than the use of all its material services thrown together into one sum; and that similarly the value and price of the whole machine is nothing else, and can be nothing else, than the value and price of all its material services thrown together into one sum.

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Eugen von Böhm-Bawerk, Austrian economist at the University of Vienna, and Austrian finance minister, made the modern intertemporal theory of interest rates possible in his work Capital and Interest. His second book in this series of two, The Positive Theory of Capital, continued on to study the accumulation and influences of capital, proposing an average period of production. This work on capital stood in contrast to the contemporaneous work of John Bates Clark on the marginal productivity of capital, and set off a great debate in economics. Although marginal productivity theory proved more accurate, Böhm-Bawerk's highlighting the importance of thinking clearly about interest rates and their intertemporal nature permanently changed economic theory. In the process, he also helped highlight errors in the economic foundations of socialism, as proposed by Rodbertus and Marx. Böhm-Bawerk was influenced by Carl Menger; Ludwig von Mises and Joseph Schumpeter were Böhm-Bawerk's students. See Eugen von Böhm-Bawerk's article archives.

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Notes

[1] I may remind the reader that, according to the scientific conception of energy — energy being that quality the possession of which confers upon a body the power of doing work — it may exist either as available or unavailable energy; that is, the body may possess energy of which a use can be made, or it may possess energy of which no use can be made. Thus the storage of energy in certain material bodies in an unavailable form, and the change of this unavailable into available energy, by means of which work is done that has a direct influence on the satisfaction of human wants, is just the physical conception applied to economics. — W. S.

[2] Schäffle, in particular, in the third volume of his Bau und Leben, very beautifully puts the same point of view. Schäffle, I may say, forms an honorable exception among economists as regards this objectionable habit of not taking any trouble with the principles that regulate the working of goods.

[3] I have already introduced this term Nutzleistung in my Rechte und Verhältnisse; before that I used it in a work written in 1876 but not printed. It is employed by Knies several times in the second portion of his Kredit, but unfortunately in the same ambiguous sense in which on other occasions he uses the word Nutzung.

(Note by Translator: After much deliberation material service is the nearest rendering I can give to the word Nutzleistung, introduced by Professor Böhm-Bawerk. Every translator finds the difficulty of rendering scientific terms from one language into another, but this difficulty is greater in political economy, where we are bound to use words "understanded of the people." The word Nutzleistung is one of these happy combinations which, as compounded of two familiar words, do not strike a German as peculiar or clumsy, and are yet strict enough to satisfy scientific requirements. But our language does not admit of many such combinations — the literal translation "use rendering " at once shows the impossibility in the present case — and in a translation one does not feel justified in coining a new word. In rendering the word thus it becomes necessary to eliminate a note that follows in the German edition, where Professor Böhm-Bawerk congratulates himself on having escaped Say's services productifs, which might be objected to on the ground that " only a person, not a thing, can render services." The prefix "material" seems to me fairly to meet this objection, as the total expression now implies a service — a forthputting of natural powers in the service of man — rendered by a material object. — W. S.)

[4] After this clause, in the German edition, come the words: "Und andererseits scheint mir der Name Nutzleistung in der That ausserordentlich prägnant zu sein: es sind im eigenstlichen Wortsinn nützliche Kräfteleistungen, die von den Sachgütern ausgehen." — W. S.

[5] It is unfortunate that in English economics we have devoted so little attention to this most elementary conception, on which Menger, in particular, has bestowed so much pains. The poverty of our scientific nomenclature shows this defect very markedly: the word "commodity" is really the only singular equivalent we have for the familiar and suggestive word "goods," although I personally have not scrupled to translate the German Gut by the English "good." There is, indeed, reason for Mr. Ruskin's sarcasm that our most famous treatise on Wealth does not even define the meaning of the word "wealth." — W. S.

[6] Even the so-called nonperishable goods are perishable, however gradually they perish.

[7] Not of the loan; see below.

[8] See also my Rechte und Verhältnisse, p. 70, etc.

[9] In my Rechte und Verhältnisse, p. 60, where, in particular, I have stated the character of the material services as primary elements of our economic transactions, and have deduced the value of goods from the value of the material services.

[10] This idea, though put somewhat differently, is explicitly recognized by Knies, Der Kredit, part ii. pp. 34, 77, 78. He expressly calls the selling price of a house the price of the permanent use of a house in opposition to the hire price, which is the price of the temporary uses of the same good. See also his Geld, p. 86. Schäffle too (Bau und Leben, second edition, iii. ) describes goods as "stores of useful energies" (p. 258).

[11] For more exact statement, see my Rechte und Verhältnisse, p. 64.

From Rags to Resorts

Tue, 15 May 2012 00:00:00 -0500

Self-made billionaire Sheldon Adelson

When most people think of starting a business, or contemplate others doing so, the common belief is that a person should go into a business they have knowledge in — not just something they know about, but something they know lots about. But is expert knowledge of a particular industry really a prerequisite to opening a new business in that industry or taking over an existing business?

Self-made billionaire Sheldon Adelson says the secret to his success was "never knowing anything" about the businesses he entered. That sounds like an exaggeration, but he emphasized that point when speaking to students at UNLV recently, upon receiving the Hospitality Industry Leader of the Year by the UNLV's Harrah Hotel College.

"You could hand me your laptop and I wouldn't know how to turn it on," Adelson told the students. "It was amazing I had success in developing Comdex."

Comdex was a computer expo held in Las Vegas and was one of the largest computer trade shows in the world. Geek Week, as it was called, had a stunning rise from its beginning in 1979, with 167 exhibitors and just over 3,900 attendees to a peak in 2000 of 2,337 exhibitors and over 211,000 visitors.

Adelson's company, the Interface Group, sold the show to Softbank Corp., a Japanese software conglomerate, in 1995 for nearly $1 billion.

Adelson purchased the Sands hotel and casino on the Las Vegas Strip in the early '90s with hopes of building a convention center to house Comdex. "Entrepreneurs are not in the business of making others rich," Adelson said, explaining why he bought the Sands to build his own convention center rather than leasing facilities from the Las Vegas Convention and Visitors Authority, an entity funded by the room tax that operates the competing Las Vegas Convention Center.

Adelson knew little about the gaming industry and says he doesn't even know how to play baccarat, the game that generates most of his company's earnings at casinos in Macau and Singapore, properties that generated more than 83 percent of the company's revenues in the latest quarter.

Gaming insiders laughed at him for thinking he could build a fortune catering to low-rolling convention goers. Now Las Vegas depends on convention traffic to fill its rooms during weeknights. Every new property built in Vegas includes convention space — after Adelson proved the model works.

Scholars in the area of entrepreneurship might call Adelson's acumen Kirznerian alertness, or Schumpeterian innovation, Schultzian adaptation, or Misesian foresight of future consumer preferences. Or more completely, as they explain in their new book, Organizing Entrepreneurial Judgment: A New Approach to the Firm, Nicolai Foss and Peter Klein stress an entrepreneur's judgment making "in the specific context of exercising control over heterogeneous resources in the service of satisfying future imagined customer preferences."

However, for the seventh-richest man in America, it's much simpler. "This is the nature of entrepreneurship. It's the willingness to take a risk," Adelson said. "It's a willingness to do things a little bit different."

Thinking differently included not accepting the Las Vegas business-as-usual practice of kowtowing to the Culinary Union. When Adelson purchased the Sands, he inherited its union employees and didn't necessarily care one way or the other about being a union property. This changed one morning when Adelson went to buy a yogurt.

The Culinary Union employee working behind the counter refused to serve him. The employee who had the job classification that allowed for waiting on customers was on break. The two employees left behind the counter could not, per the union contract, serve him (or anyone). What Adelson quickly realized was; he couldn't operate a 5-star resort with those union rules.

However, the Culinary leadership wouldn't budge, and told Adelson that the Venetian would never get out of the ground if he didn't sign their contract. After all, Las Vegas is a union town, the "new Detroit" they called it. Bartenders and maids can't be outsourced to India.

Adelson believed his employees should vote as to whether they wanted union representation. The union brass would have none of it. They would only organize from the top down, demanding that Adelson sign a "neutrality agreement" that is anything but. Adelson chose to fight, and against all odds, the Venetian remains the only nonunion Strip property to this day. But the fight goes on daily; with labor laws stacked in the union's favor, it takes crafty lawyering and Adelson's iron will to keep them at bay.

Forbes magazine estimates Adelson to be worth $24.9 billion, with the majority of his wealth being Las Vegas Sands Corporation stock. But a look at the price chart for LVS shows that it has been anything but a smooth ride, illustrating Adelson's determination, confidence, and guts.

The company began trading on December 14, 2004, with the shares jumping in price 61 percent the first day of trading to close at $46.56. The stock then steadily marched upward to over $133 in the fall of 2007. People around Vegas thought the shares could hit $200. But the financial crisis eradicated funding for Sands projects in Macau and Singapore. The company was bogged down with over $10 billion in debt and Las Vegas Sands shares went into free fall, declining to under $2 each in early 2009. But while the public believed a bankruptcy filing was possible, Adelson was shaking up Sands' management and investing another $1 billion of his own money in the company.

Recently, Las Vegas Sands reported to Wall Street that it collected more than $1 billion in pretax earnings during just the first quarter of this year, a first for a gaming company.

While academics try and identify what entrepreneurship is and what entrepreneurs do, with the hopes of training future generations of Sheldon Adelsons, what is apparent is that success can't be created without change. And changes to an industry or to the world don't come from tired, internal thinking but from fresh, external thinking.

Also, it's apparent that entrepreneurial abilities lie outside the particular skills and knowledge needed in a specific industry. You don't need to know how to make a Bloody Mary to start a successful saloon. At the same time, knowing how to make a killer martini doesn't mean the bartender has the required business judgment to make the saloon successful.

"Knowledge can be a subtle curse," writes Jonah Lehrer in his impossible-to-put-down Imagine: How Creativity Works. "When we learn about the world, we also learn all the lessons why the world cannot be changed. We get used to our failures and imperfections." Lehrer goes on to point out that to be creative over time, "to not be undone by our expertise — is to experiment with ignorance, to stare at things we don't fully understand."

Studies show that people's creativity tapers off as they get older. But Dean Simonton, a psychologist at UC Davis, explains that it's not age that saps creativity; it's that experience in a discipline makes people risk averse and they become part of the status quo. "If you can keep finding new challenges, then you can think like a young person even when you're old and gray," says Simonton.

Adelson, while now a billionaire many times over, started or acquired 50 businesses, and each time, as the Las Vegas Review-Journal's Howard Stutz writes, "he wasn't sure exactly what he was getting himself into." Suffice it to say, the success of one of the businesses overshadows the other 49. However, Adelson has for the most part been consistently successful, starting with the first business he purchased — Vend-A-Bar, a candy-bar vending company he bought at age 16, using $500 he had saved, a $3,000 loan from a credit union, and a seller-carryback note of $6,500.

The young entrepreneur had to repair half the machines that came with the sale, but he expanded the business selling ice cream at the factories where his machines were located during the summer.

He learned court reporting at night, and became the secretary to Celia D. Wyckoff who had taken over Magazine of Wall Street from her husband after their divorce. By 1963, Adelson was in the mortgage business and at age 30 was a multimillionaire. But at the end of the decade he was broke. In the 1984 book The Computer Entrepreneurs: Who's Making It Big and How in America's Upstart Industry, authors Robert Levering, Michael Katz, and Milton Moskowitz, write of Adelson's brief downturn:

Not one to dwell on failure, he refers to that incident as a "two-hour cry," as opposed to the "half-hour cry" he had a couple years later when he lost $1 million in a condominium development that went bust.

Quickly back on his feet, Adelson purchased a small publishing company, but "He was no more interested in publishing than he was in quantum physics. It was just another company to invest in."

Adelson saw the trade show as "a magazine in the flesh," with the exhibitors as the advertisers, attendees as the readers, and the editorials as the conference. "Hey, I got a magazine. Why can't I do something like this? I'd make a million dollars in three days," said Adelson, and eventually Comdex was born.

$8.00 $5.00

At age 78 Adelson is not slowing down. Besides expanding his Asian presence with possible projects in Japan, Korea, and Vietnam, he intends to test his integrated-gaming-resort model in Spain, at a cost of $35 billion. "We are looking at 12 integrated resorts, 3,000 rooms each. A mini Las Vegas, about half the size of the Las Vegas strip in Spain for the European market," said Adelson, speaking recently ahead of the opening of another Macau property.

Clearly something continues to drive the man Levering, Katz, and Moskowitz call "a Jewish Horatio Alger." Mises perhaps described it best in Human Action: the entrepreneur is "a speculator, a man eager to utilize his opinion about the future structure of the market for business operations promising profits." And while the entrepreneur is confident in his view of the "uncertain future," that view "defies any rules and systemization."

Hard to define and impossible to model, entrepreneurship makes the capitalist world go around and the rest of us much better off.

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Douglas French is president of the Mises Institute and author of Early Speculative Bubbles & Increases in the Money Supply and Walk Away: The Rise and Fall of the Home-Ownership Myth. He received his master's degree in economics from the University of Nevada, Las Vegas, under Murray Rothbard with Professor Hans-Hermann Hoppe serving on his thesis committee. French teaches in the Mises Academy. See his tribute to Murray Rothbard. Send him mail. See Doug French's article archives.

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Rhode Island's Founder Abandons Liberty

Tue, 15 May 2012 00:00:00 -0500

[Conceived in Liberty (1975). An MP3 audio file of this article, narrated by Floy Lilley, is available for download.]

Roger Williams arrived in England at the moment of Puritan victory and at the peak of the revolutionary intellectual ferment. The great libertarian Leveller movement was at the peak of its influence, and religious freedom had given rise to many diverse and enthusiastic sects. Williams plunged again into intimate association with such liberal Puritan leaders as Sir Henry Vane and John Milton. The upsurge of libertarian views had led to a polarization of ideas among the Puritans, a polarization accelerated by the disruption that always follows the victory of a revolutionary coalition. The orthodox Puritans, or Independents, headed by the Rev. John Owen, began to move toward a new state church of their own and toward the suppression of other religious views. The liberal wing of the Puritans, including Vane and Milton, moved in to battle this essentially counterrevolutionary trend, and Williams enthusiastically joined in this struggle.

Eight years before, Williams's Bloody Tenent had been ordered burnt by the Presbyterians then in control of Parliament. Now his writings in behalf of religious liberty received great acclaim in Parliament and in the victorious New Model Army. This was especially true of his published reply to the Rev. John Cotton's attack on the Bloody Tenent. Williams's rebuttal was The Bloody Tenent Yet More Bloody, in which he denounced Massachusetts's persecution of men for their consciences. Williams also proceeded to a keen attack on the Massachusetts oligarchy: a forced payment of tithes created a church leadership "rich and lordly, pompous and princely," and gave it a monopoly on public office. Wasn't the insistence on compulsory church attendance a reflection of the fear of the rulers that, given a free choice, people's attendance in their churches would fall off? Williams pointed also to Holland's commercial greatness continuing side by side with its practice of religious toleration. And he warned prophetically that the Irish question would never be settled so long as the laws persecuting Roman Catholics remained. Only full religious freedom, "free Conferrings, Disputings and Preachings," could reduce civil strife and bloodshed.

Williams even pressed on from his insight into religious liberty to a much wider politico-economic libertarian view: the kings of the earth, he declared, used power "over the bodies and goods of their subjects, but for the filling of their paunches like wolves." These rulers, employing "civil arms and forces to the utmost," pressed for "universal conquest" to establish "rule and dominion over all the nations of the Earth." But, on the contrary, government's proper function is to secure to each individual his "natural and civil rights and liberties … due to him as a man, a subject, a citizen."

In another tract written in that exhilarating spring of 1652, Hireling Ministry None of Christ's, Williams defended the idea of voluntary rather than compulsory donations to churches. He also declared: "I desire not that liberty to myself, which I would not freely and impartially weigh out to all the consciences of the world beside." Government's "absolute duty" was to insure "absolute freedom" for each religious group.

Williams's new writings had a twofold thrust and purpose: to advance the cause of Rhode Island liberty against Massachusetts, and at the same time to wage the good and general fight for liberty against tyranny in England itself. The major complementary tract, setting forth the specific case for Rhode Island, as well as a Baptist defense of religious liberty, was John Clarke's newly published Ill Newes from New-England.

Although Williams and Clarke had no difficulty disposing of Coddington's claims, the larger problem of Rhode Island vis-à-vis Massachusetts was far more difficult. For the crucial decision on which way the Puritan Revolution would turn rested not with Williams's friends but with Oliver Cromwell, head of the New Model Army and a centrist torn between the flaming principles of the liberals and a conservative yearning by orthodox Independents and Presbyterians for a swing back to statism. Cromwell, furthermore, was friendly with the oligarchs of Plymouth and Massachusetts Bay, as well as with Roger Williams. Moreover, the Protector was, fatefully, balking increasingly at the obvious next task of the revolution: the smashing of feudal landholding. The libertarian groundswell of the revolution could not be sustained unless the feudal oligarchy was dispossessed of political power as well as of its restrictive hold of the land of England created by that power and on which that power was now based.

Events moved swiftly, as happens in revolutionary situations, and by May 1653 Cromwell had made his fateful decision — for the landed oligarchy, for statism, and for counterrevolution. Parliament was forcibly dissolved, and military dictatorship assumed by Cromwell. The great Leveller leader John Lilburne was jailed for his libertarian views and the Leveller movement broken up. Only the courageous Sir Henry Vane continued to cry out in protest, charging that Cromwell was plucking up liberty by its very roots. Williams too joined Vane in opposition, at least privately denouncing the Protector as a "usurper" and also attacking Cromwell's aggressive imperialism, typified by his war against the Dutch.

Proceeding skillfully, however, Williams was able to procure an at least tentative confirmation by the English government of Rhode Island's charter claims. Short of funds and discouraged by the new turn on the English scene, and spurred by the turmoil in Rhode Island, Williams returned home in the summer of 1654, leaving John Clarke in London to continue the negotiations.

Williams arrived to find a highly troubled colony. In particular, his beloved Providence was again in great danger. William Coddington had been successfully overthrown, but this by no means ended trouble from Aquidneck. Instead, the Aquidneck government, headed by William Dyer and including Nicholas Easton, had embarked on an aggressive, imperialist course of its own. It had launched piratical attacks on the Dutch of New Netherland, and simultaneously, in spring 1653, combined with a minority of Providence-Warwick people to claim that theirs was the true government of the Rhode Island colony. The Providence-Warwick government had protested, and charged that Aquidneck aggression against the Dutch would "set all New England on fire." At the same time, the Pawtuxet oligarchy again refused to pay taxes to Providence, and once again Massachusetts threatened armed intervention and prevented Providence from pressing its claim.

Any lesser man than the great founder of Rhode Island would have been discouraged enough to give up. For almost two decades Roger Williams had fought for individual liberty, in England, in New England, and especially for his Rhode Island. And now England was retrogressing and Rhode Island was rent in civil strife. But the great peacemaker, who had conciliated so many disputes and conflicts with the Indians, now used his powerful influence to bring the various factions into conciliatory negotiations. Rational persuasion and not force was his instrument in obtaining agreement and a new unity in the colony. Williams's main task was to bring into the negotiations a reluctant Providence, disgusted by the piracy conducted by the Dyer-Easton rulers of Aquidneck against the Dutch. Finally, each of the four towns agreed to choose six commissioners for a conciliation conference, which met at Warwick at the end of August 1654. The decision of the conference was at once a victory for Williams and unity, and a complete defeat for the Easton-Dyer faction. Reunion of the Rhode Island colony was achieved, and all the laws of Aquidneck since the Coddington usurpation were eliminated, thus restoring the old pre-Coddington dispensation to the colony. Coddington himself formally submitted to Rhode Island authority two years later. Roger Williams was then elected president of the reunited colony.

Even the Pawtuxet troubles were finally fading. Benedict Arnold, son of William and leader of the Pawtuxet oligarchy, finally abandoned the oligarchy's long search for outside armed intervention, renounced Massachusetts, submitted himself to Rhode Island, and moved from Pawtuxet to Newport. However, the actual reunion of the rest of the colony with Pawtuxet did not take place for five more years,

A year later, 1655, Oliver Cromwell greatly helped settle the outstanding issues by sending a formal message to Rhode Island, confirming its right to self-government under the charter of 1644.

On this happy event, Williams wrote to Vane on behalf of the town of Providence. Vane had written to Rhode Island wondering why the colonists had fallen into such disorder. Williams replied for Providence that Rhode Island has "long drunk of the cup of as great liberties as any people that we hear of under the whole heaven." Possibly this "sweet cup hath rendered many of us wanton and too active." Rhode Island, Williams pointed out, had been spared the civil war of England, the "iron yoke of wolfish bishops," and the "new chains of Presbyterian tyrants … nor in this colony have we been consumed with the over-zealous fire of the so-called godly Christian magistrates." Williams expanded this recital of Rhode Island liberties to include the political and economic: "Sir, we have not known what an excise means; we have almost forgotten what tithes are, yea, or taxes either, to church or commonwealth."

It was at this very moment, the moment of triumph, that Roger Williams made a radical and fateful shift in his thinking and actions. From a fighter for liberty, Williams suddenly became a statist and an invader of liberty; from a devoted advocate of freedom of conscience, Williams became himself a persecutor of that very conscience. What was the reason or reasons for this sudden turnabout, this betrayal of the causes for which Roger Williams had so long devoted his very life?

No historian can ever look completely into the soul of another man, but he can make some judicious estimates. We may note several probable reasons for the shift. First, there is the subtle corruption wrought by power, even upon the staunchest libertarian. In the last analysis, power and liberty are totally incompatible, and when one gains the upper hand, the other succumbs. The heroic fighter for liberty out of power is often tempted, once the reins of command are in his hands, to rationalize that now "order" must be imposed — by him; that "excessive" liberty must be checked — by him. Williams had been president of Rhode Island only once before, in the 1644–47 period when there was hardly any government in the colony. As soon as the colony was formally organized in 1647, Williams had been happy to retire to the private life of a successful fur trader. He had then only emerged from private life to go to England to save the colony. It was only now, in effect, that he was assuming the political post of head of Rhode Island.

A second reason was the coinciding theoretical error that Williams had made in his letter to Vane, that what Rhode Island had been suffering from was an excess of liberty — the "sweet cup hath rendered many of us wanton." On the contrary, the conflicts in Rhode Island had been caused not by too much liberty, but by too little: the land monopoly and the treachery of the Pawtuxet oligarchs, the Coddington attempt to impose feudal rule, the continuing imperialist pressure of Massachusetts and the United Colonies. It had only been the remarkable sturdiness of the libertarian tradition in Rhode Island that had kept the colony free despite all these dangers, and had enabled it to escape them at last; and the thought and life of Roger Williams had been perhaps the chief ingredient in that tradition. But that great tradition, strong enough to surmount other periods, was not strong enough to survive its betrayal by its own leading architect.

A third reason for Williams's shift was undoubtedly his discouragement at the retrogression of the libertarian movement in the mother country. Williams had been one of the great lights of that movement, and it in turn had inspired and nourished him — in the 1630s, the 1640s, and on his last visit to England. But then it had been an exciting, rising movement; now, because of Cromwell's betrayal, it was rapidly losing heart and being put to rout. Was the now aging Williams strong enough to keep his convictions at the same burning pitch? Was he strong enough to resist all the temptations to follow the Cromwellian path? Evidently the answer is no. We may consider, also, Williams's earlier lapse from the libertarian principle in the days of the Gorton persecution — and Williams's eventual siding with the Pawtuxet faction to expel Gorton from Providence. Purity of principle had been cast aside even then. And this indicates a fourth contributory reason for Williams's change of heart: a tendency to react testily when people more radically individualist than himself appeared upon the scene.

Williams's shift from liberty to tyranny was first revealed, sharply and startlingly, in his imposing upon the people of Rhode Island compulsory military service. The other colonies underwent conscription, but this was a strong blow to the libertarian movement of Rhode Island. Driving through a compulsory-militia bill and the selection of military officers in a Providence town meeting, Williams precipitated vehement opposition. The leaders of this libertarian opposition were the Baptists, who denounced the bearing of arms as un-Christian and conscription as an invasion of religious liberty and of the natural rights of the individual. This opposition was itself radicalized by the crisis precipitated by Williams, and the logic of the pacifist opposition to conscription and arms-bearing led them straight to the ne plus ultra of libertarianism: individualist anarchism. The opposition — led by Rev. Thomas Olney, former Baptist minister at Providence, William Harris, John Field, John Throckmorton, and Williams's own brother Robert — circulated a petition charging that "it was blood-guiltiness, and against the rule of the gospel, to execute judgment upon transgressors, against the private or public weal." In short, government itself was anti-Christian.

The emergence of William Harris as an anarchist was a particularly striking phenomenon. This contentious man, who had been one of the original few to accompany Williams to Providence and had then joined the Pawtuxet oligarchy, had been suddenly aroused by William Arnold. Harris had been one of the victims of Arnold's attempted land-grab under the aegis of Massachusetts. Apparently this sobering experience of how the state can be used to oppress as well as to confer privileges, added to his disfranchisement by Providence a dozen years before for street brawling, had set Harris on the individualist path. His Baptist pacifism completed the process.

Roger Williams bitterly condemned the "tumult and disturbance" caused by the anarchist petition — conveniently failing to place any blame for the tumult on his original imposition of conscription. And Williams sneered at the "pretense" that arms-bearing violated the petitioners's conscience. He then came up with a famous analogy to support his newfound statist philosophy. He likened human society to a ship on which all people were passengers. All may worship as they pleased, he graciously declaimed, but none is to be allowed to defy "the common laws and orders of the ship, concerning their common peace or preservation." And if any should mutiny against their "officers" or "preach or write that there ought to be no commanders or officers because all are equal in Christ, therefore no masters nor officers, no laws nor orders, no corrections nor punishments … the commanders may judge, resist, compel and punish such transgressions." In short, not only were "mutinous" actions to be punished by the state, but even the very advocacy of anarchist principles.

Williams's analogy was superficially attractive, but of dubious relevance. If society inhabits a ship and must obey "its" officers, who are the owners of the social "ship"? What gives one set of men in a country the right to claim "ownership" of that country and the people in it, and therefore the right to command and force others to obey? These were questions that Williams never bothered to raise, let alone answer. He might also have pondered in what way individual persons, pursuing their separate ways on land, were in any way comparable to a ship — and a single ship at that — which has to go in one direction at a time. Why must everyone be on one ship?

Williams's pronouncement did not convince the opposition either. The anarchists rose in rebellion against Williams's government, but were put down by force. Despite this failure, at the 1655 elections a few months later, at which Williams was reelected president, Thomas Olney was elected an assistant, and was seated even though he had participated in the uprising.

Williams now began a systematic campaign of statism in the colony. The central government was aggrandized at the expense of the home-rule rights of the towns. In May 1655 the Assembly decided to bypass its financial dependence on funds raised by the towns, and to appoint officials to levy general taxes directly on the people. The following year it was decreed that no laws of the colony may be "obstructed or neglected under pretense of any authority of any of the town charters."

$100.00 $60.00

Williams also moved to stiffen the laws against immorality. The Assembly decreed the compulsory licensing of liquor dealers and an excise tax on liquor. Sales of spirits to Indians were restricted severely. Punishments were intensified. The four towns had, until then, failed to provide prisons or stocks, so little was the need and so pervasive the spirit of freedom. But the colonial Assembly now moved to fill this gap and also to outlaw "verbal incivilities," which were to be punished by the stocks or payment of a fine. Adultery, which had not been subject to express penalty in the code of 1647, was now to be punished by whipping and a fine. Corporal punishment was to be levied for "loose living" and masters were to be held responsible for the "licentious careers" of servants or minor sons. On the other hand, divorce laws were liberalized, to allow for divorce for reasons of incompatibility.

It is clear that a large part of the motivation for the new statist trend was a desire to curry favor with Cromwell. It was shortly after receipt of Cromwell's official reconfirmation of Rhode Island's charter, in June 1655, that the Assembly passed the law against loose living, on information that Cromwell was restive at the state of morality in the colony. Furthermore, Cromwell in his message had ordered Rhode Island to provide against "intestine commotions." The colony swiftly passed a law against "ringleaders of factions," providing that such ringleaders, when found guilty by the General Court, were to be sent to England for trial. Here was the fulfillment of the ominous hints of Williams's ship analogy.

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Murray N. Rothbard (1926–1995) was dean of the Austrian School. He was an economist, economic historian, and libertarian political philosopher. See Murray N. Rothbard's article archives.

This article is excerpted from Conceived in Liberty (1975), chapter 24, "Rhode Island in the 1650s: Roger Williams' Shift from Liberty."

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The Crisis of Interventionism

Mon, 14 May 2012 00:00:00 -0500

[Human Action (1949). An MP3 audio file of this article, narrated by Jeff Riggenbach, is available for download.]

The interventionist policies as practiced for many decades by all governments of the capitalistic West have brought about all those effects which the economists predicted. There are wars and civil wars, ruthless oppression of the masses by clusters of self-appointed dictators, economic depressions, mass unemployment, capital consumption, famines.

However, it is not these catastrophic events which have led to the crisis of interventionism. The interventionist doctrinaires and their followers explain all these undesired consequences as the unavoidable features of capitalism. As they see it, it is precisely these disasters that clearly demonstrate the necessity of intensifying interventionism. The failures of the interventionist policies do not in the least impair the popularity of the implied doctrine. They are so interpreted as to strengthen, not to lessen, the prestige of these teachings. As a vicious economic theory cannot be simply refuted by historical experience, the interventionist propagandists have been able to go on in spite of all the havoc they have spread.

Yet the age of interventionism is reaching its end. Interventionism has exhausted all its potentialities and must disappear.

The Exhaustion of the Reserve Fund

The idea underlying all interventionist policies is that the higher income and wealth of the more affluent part of the population is a fund which can be freely used for the improvement of the conditions of the less prosperous. The essence of the interventionist policy is to take from one group to give to another. It is confiscation and distribution. Every measure is ultimately justified by declaring that it is fair to curb the rich for the benefit of the poor.

In the field of public finance progressive taxation of incomes and estates is the most characteristic manifestation of this doctrine. Tax the rich and spend the revenue for the improvement of the condition of the poor, is the principle of contemporary budgets. In the field of industrial relations shortening the hours of work, raising wages, and a thousand other measures are recommended under the assumption that they favor the employee and burden the employer. Every issue of government and community affairs is dealt with exclusively from the point of view of this principle.

An illustrative example is provided by the methods applied in the operation of nationalized and municipalized enterprises. These enterprises very often result in financial failure; their accounts regularly show losses burdening the state or the city treasury. It is of no use to investigate whether the deficits are due to the notorious inefficiency of the public conduct of business enterprises or, at least partly, to the inadequacy of the prices at which the commodities or services are sold to the customers. What matters more is the fact that the taxpayers must cover these deficits. The interventionists fully approve of this arrangement. They passionately reject the two other possible solutions: selling the enterprises to private entrepreneurs or raising the prices charged to the customers to such a height that no further deficit remains. The first of these proposals is in their eyes manifestly reactionary because the inevitable trend of history is toward more and more socialization. The second is deemed "antisocial" because it places a heavier load upon the consuming masses. It is fairer to make the taxpayers, i.e., the wealthy citizens, bear the burden. Their ability to pay is greater than that of the average people riding the nationalized railroads and the municipalized subways, trolleys, and busses. To ask that such public utilities should be self-supporting, is, say the interventionists, a relic of the old-fashioned ideas of orthodox finance. One might as well aim at making the roads and the public schools self-supporting.

It is not necessary to argue with the advocates of this deficit policy. It is obvious that recourse to this ability-to-pay principle depends on the existence of such incomes and fortunes as can still be taxed away. It can no longer be resorted to once these extra funds have been exhausted by taxes and other interventionist measures.

This is precisely the present state of affairs in most of the European countries. The United States has not yet gone so far; but if the actual trend of its economic policies is not radically altered very soon, it will be in the same condition in a few years.

For the sake of argument we may disregard all the other consequences which the full triumph of the ability-to-pay principle must bring about and concentrate upon its financial aspects.

The interventionist in advocating additional public expenditure is not aware of the fact that the funds available are limited. He does not realize that increasing expenditure in one department enjoins restricting it in other departments. In his opinion there is plenty of money available. The income and wealth of the rich can be freely tapped. In recommending a greater allowance for the schools he simply stresses the point that it would be a good thing to spend more for education. He does not venture to prove that to raise the budgetary allowance for schools is more expedient than to raise that of another department, e.g., that of health. It never occurs to him that grave arguments could be advanced in favor of restricting public spending and lowering the burden of taxation. The champions of cuts in the budget are in his eyes merely the defenders of the manifestly unfair class interests of the rich.

With the present height of income and inheritance tax rates, this reserve fund out of which the interventionists seek to cover all public expenditure is rapidly shrinking. It has practically disappeared altogether in most European countries. In the United States the recent advances in tax rates produced only negligible revenue results beyond what would be produced by a progression which stopped at much lower rates. High surtax rates for the rich are very popular with interventionist dilettantes and demagogues, but they secure only modest additions to the revenue.[1] From day to day it becomes more obvious that large-scale additions to the amount of public expenditure cannot be financed by "soaking the rich," but that the burden must be carried by the masses. The traditional tax policy of the age of interventionism, its glorified devices of progressive taxation and lavish spending, have been carried to a point at which their absurdity can no longer be concealed. The notorious principle that, whereas private expenditures depend on the size of income available, public revenues must be regulated according to expenditures, refutes itself. Henceforth, governments will have to realize that one dollar cannot be spent twice, and that the various items of government expenditure are in conflict with one another. Every penny of additional government spending will have to be collected from precisely those people who hitherto have been intent upon shifting the main burden to other groups. Those anxious to get subsidies will have to foot the bill themselves for the subsidies. The deficits of publicly owned and operated enterprises will be charged to the bulk of the population.

The situation in the employer-employee nexus will be analogous. The popular doctrine contends that wage earners are reaping "social gains" at the expense of the unearned income of the exploiting classes. The strikers, it is said, do not strike against the consumers but against "management." There is no reason to raise the prices of products when labor costs are increased; the difference must be borne by employers. But when more and more of the share of the entrepreneurs and capitalists is absorbed by taxes, higher wage rates, and other "social gains" of employees, and by price ceilings, nothing remains for such a buffer function. Then it becomes evident that every wage raise, with its whole momentum, must affect the prices of the products and that the social gains of each group fully correspond to the social losses of the other groups. Every strike becomes, even in the short run and not only in the long run, a strike against the rest of the people.

An essential point in the social philosophy of interventionism is the existence of an inexhaustible fund which can be squeezed forever. The whole doctrine of interventionism collapses when this fountain is drained off. The Santa Claus principle liquidates itself.

The End of Interventionism

The interventionist interlude must come to an end because interventionism cannot lead to a permanent system of social organization. The reasons are threefold.

First: Restrictive measures always restrict output and the amount of goods available for consumption. Whatever arguments may be advanced in favor of definite restrictions and prohibitions, such measures in themselves can never constitute a system of social production.

Second: All varieties of interference with the market phenomena not only fail to achieve the ends aimed at by their authors and supporters but bring about a state of affairs which — from the point of view of their authors' and advocates' valuations — is less desirable than the previous state of affairs which they were designed to alter. If one wants to correct their manifest unsuitableness and preposterousness by supplementing the first acts of intervention with more and more of such acts, one must go further and further until the market economy has been entirely destroyed and socialism has been substituted for it.

Third: Interventionism aims at confiscating the "surplus" of one part of the population and at giving it to the other part. Once this surplus is exhausted by total confiscation, a further continuation of this policy is impossible.

Marching ever further on the way of interventionism, first Germany, then Great Britain and many other European countries, have adopted central planning, the Hindenburg pattern of socialism. It is noteworthy that in Germany the deciding measures were not resorted to by the Nazis, but some time before Hitler seized power by Brüning, the Catholic chancellor of the Weimar Republic, and in Great Britain not by the Labor Party but by the Tory prime minister Mr. Churchill. The fact has been purposely obscured by the great sensation made in Great Britain about the nationalization of the Bank of England, the coal mines, and other enterprises. However, these seizures were of subordinate importance only. Great Britain is to be called a socialist country, not because certain enterprises have been formally expropriated and nationalized, but because all the economic activities of all citizens are subject to full control by the government and its agencies. The authorities direct the allocation of capital and of manpower to the various branches of business; they determine what should be produced and in what quality and quantity, and they assign to each consumer a definite ration. Supremacy in all economic matters is exclusively vested in the government. The people are reduced to the status of wards. To the businessmen, the former entrepreneurs, merely quasi-managerial functions are left. All that they are free to do is to carry into effect the entrepreneurial decisions of the authorities within a neatly delimited narrow field.

It has been shown that the managerial system, i.e., the assignment of ancillary tasks in the conduct of business to responsible helpers to whom a certain amount of discretion can be granted, is possible only within the frame of the profit system.[2] What characterizes the manager as such and imparts to him a condition different from that of the mere technician is that, within the sphere of his assignment, he himself determines the methods by which his actions should conform to the profit principle. In a socialist system in which there is neither economic calculation nor capital accounting nor profit computation, there is no room left for managerial activities either. But as long as a socialist commonwealth is still in a position to calculate on the ground of prices determined on foreign markets, it can also utilize a quasi-managerial hierarchy to some extent.

It is a poor makeshift to call any age an age of transition. In the living world there is always change. Every age is an age of transition. We may distinguish between social systems that can last and such as are inevitably transitory because they are self-destructive. It has already been pointed out in what sense interventionism liquidates itself and must lead to socialism of the German pattern. Most of the European countries have already reached this phase, and nobody knows whether or not the United States will follow suit. But as long as the United States clings to the market economy and does not adopt the system of full government control of business, the socialist economies of western Europe will still be in a position to calculate. Their conduct of business still lacks the characteristic feature of socialist conduct; it is still based on economic calculation. It is therefore in every respect very different from what it would become if all the world were to turn toward socialism.

It is often said that one half of the world cannot remain committed to the market economy when the other half is socialist, and vice versa. However, there is no reason to assume that such a partition of the earth and the coexistence of the two systems is impossible. If this is really the case, then the present economic system of the countries that have discarded capitalism may go on for an indefinite period of time. Its operation may result in social disintegration, chaos, and misery for the peoples. But neither a low standard of living nor progressive impoverishment automatically liquidates an economic system. It gives way to a more efficient system only if people themselves are intelligent enough to comprehend the advantages such a change might bring them. Or it may be destroyed by foreign invaders provided with better military equipment by the greater efficiency of their own economic system.

Optimists hope that at least those nations which have in the past developed the capitalist market economy and its civilization will cling to this system in the future too. There are certainly as many signs to confirm as to disprove such an expectation. It is vain to speculate about the outcome of the great ideological conflict between the principles of private ownership and public ownership, of individualism and totalitarianism, of freedom and authoritarian regimentation. All that we can know beforehand about the result of this struggle can be condensed in the following three statements:

$8.00 $5.00

We have no knowledge whatever about the existence and operation of agencies which would bestow final victory in this clash on those ideologies whose application will secure the preservation and further intensification of societal bonds and the improvement of mankind's material well-being. Nothing suggests the belief that progress toward more satisfactory conditions is inevitable or a relapse into very unsatisfactory conditions impossible.
Men must choose between the market economy and socialism. They cannot evade deciding between these alternatives by adopting a "middle-of-the-road" position, whatever name they may give to it.
In abolishing economic calculation the general adoption of socialism would result in complete chaos and the disintegration of social cooperation under the division of labor.

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Ludwig von Mises was the acknowledged leader of the Austrian School of economic thought, a prodigious originator in economic theory, and a prolific author. Mises's writings and lectures encompassed economic theory, history, epistemology, government, and political philosophy. His contributions to economic theory include important clarifications on the quantity theory of money, the theory of the trade cycle, the integration of monetary theory with economic theory in general, and a demonstration that socialism must fail because it cannot solve the problem of economic calculation. Mises was the first scholar to recognize that economics is part of a larger science in human action, a science that Mises called "praxeology." See Ludwig von Mises's article archives.

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Notes

[1]In the United States the surtax rate under the 1942 Act was 52 per cent on the taxable income bracket $22,000–26,000. If the surtax had stopped at this level, the loss of revenue on 1942 income would have been about $249 million or 2.8 per cent of the total individual income tax for that year. In the same year the total net incomes in the income classes of $10,000 and above was $8,912 million. Complete confiscation of these incomes would not have produced as much revenue as was obtained in this year from all taxable incomes, namely, $9,046 million. Cf. A Tax Program for a Solvent America, Committee on Postwar Tax Policy (New York, 1945), pp. 116–117, 120.

[2] Cf. above, pp. 301–305.