Archive for capitalism
Adam Smith and the Invisible Hand
Posted by: |By Edmund Opitz, author of The Libertarian Theology of Freedom and Religion and Capitalism: Allies, Not Enemies. This article originally appeared in the June 1976 issue of The Freeman.
We celebrate in 1976 the bicentennial of two significant events, the signing of the American Declaration of Independence, and the publication of The Wealth of Nations by Adam Smith.
Smith had made a name for himself with an earlier volume entitled Theory of the Moral Sentiments, published in 1759, but he is now remembered mainly for his Wealth of Nations, on which he labored for ten years. The Wealth of Nations sold briskly in the American colonies, some 2,500 copies within five years of publication, even though our people were at war. This is a remarkable fact, for there were only three million people living on these shores two centuries ago, and about one-third of these were Loyalists. In England, as in the colonies, there were two opposed political factions—Whigs and Tories. The Tories favored the King and the old regime; the Whigs worked to increase freedom in society. Adam Smith was a Whig; the men we call Founding Fathers were Whigs. There was a Whig faction in the British Parliament and many Englishmen were bound to the American cause by strong intellectual and emotional ties.
Adam Smith’s book was warmly received here, not only because it was a great work of literature, but also because it provided a philosophical justification for individual freedom in the areas of manufacture and trade. The colonies, of course, were largely agricultural; but of necessity there were also artisans of all sorts. There had to be carpenters and cabinet makers, bricklayers and blacksmiths, weavers and tailors, gunsmiths and bootmakers. These colonial manufacturers and farmers had been practicing economic freedom all along; simply because the Crown was too busy with other matters to interfere seriously. There were numerous laws designed to regulate trade, but the laws were difficult to enforce, and so they were ignored.
Mercantilism
The nations of Europe at this time embraced a theory of economic organization called "Mercantilism." Mercantilism was based upon the idea of national rivalry, and each nation sought to get the better of other nations by exporting merchandise in exchange for gold and silver. The goal of Mercantilism was the enhancement of national prestige by accumulating the precious metals, but the goal was not nearly so significant as the means employed to reach it. Mercantilism was the planned economy par excellence; the nation was trussed up in a strait jacket ofregulations just about as severe as the controls imposed today upon the people of Russia or China. The modern authoritarian state, of course, has more efficient methods of surveillance and control than did the governments of the seventeenth and eighteenth centuries, but the basic idea is similar.
Take the theory of Mercantilism and boil it down. What do you get? You get political control over what you eat. Now, if someone holds the power of decision over you as to whether you eat or starve, he’s acquired considerable leverage over every aspect of your life; you do not bite the hand that feeds you! If someone controls your livelihood, you do his bidding, or people start talking about you in the past tense!
Mercantilism, in short, is the prototype of today’s totalitarian state, where government — by controlling the economy — exerts a commanding influence over people in every sector of their lives.
The major theme of The Wealth of Nations has to do with the interaction between government and the economic order. The theory of Mercantilism held that government must control and manage the economy, else production would be chaotic and the right people would not be properly rewarded. Present-day collectivists concur; they want a national plan which taxes away about 40 per cent of the peoples’ earnings in order to redistribute these billions of tax dollars to politically selected individuals and groups.
Questions of Political Power
The actions of the redistributive state — call it the welfare state if you prefer — are political actions. From ancient times to the present, every political theorist — except the Classical Liberals — tried to frame answers for three questions.
The first question was: Who shall wield power? Whether the structure took the form of a monarchy backed by divine right or a democracy based on the so-called will of the majority, it was essential that power be wielded by the small group thought most fit to exercise rule. The ruler’s job is to program our lives toward the achievement of national goals. But it was never power simply for power’s sake; it was political power for the sake of the economic advantage power bestows.
So the second question is: For whose benefit shall this power be wielded? The court at Versailles is a good example of what I mean. The French nobles favored by royalty lived rather well, although they’d rather be caught dead than working. In virtue of their privileged position in the political structure, they got something for nothing. I daresay that each of you can think of parallel instances operating today, even in our own country. Now, when someone in a society gets something for nothing through political channels, there are others in that society who are forced to accept nothing for something! And the third question, of course, is: At whose expense shall this power be wielded? Somebody must be sacrificed.
Let me repeat these three questions, for they provide an apt key to many political puzzles: Who shall wield power? For whose benefit? At whose expense? One might put this in a formula: Votes and taxes for all; subsidies and privileges for us, our friends, and whoever else happens at the moment to pack a lot of political clout. The American system was to be based upon a different idea. It took seriously the ideas of God, the moral order, and the rights of persons. It discarded the notion of using government to arbitrarily disadvantage a selected segment of society, and instead embraced the ideal of equality before the law. Government, in this scheme, functioned somewhat like an umpire on the baseball field. The umpire does not write the rules for baseball; these have emerged and been inscribed in rule books over the years and they lay down the norms as to how the game shall be played.
If any person is on the field it is to be presumed that he has freely chosen to be there, and in his thoughtful moments he knows that the game cannot go on unless there is an impartial arbiter on the field to interpret and enforce last-resort decisions — such as ball or strike, safe or out at first. Government, similarily, enforces the previously agreed upon rules.
This is the political theory of Classical Liberalism, and it marks a radical departure from all other political theories. It declared that the end of government is justice between persons, and maximum liberty for everyone in society. "Justice is the end of government," wrote Madison in the 51st Federalist Paper; "it is the end of civil society."
Government Is Force
The point to be stressed is that the essential nature of government — its license to resort to force at some point — is not changed by merely altering the warrant under which government acts. Divine right or popular sovereignty — it makes no difference to this point: Government is as government does.
Governmental action is what it is, no matter what sanction might be offered to justify what it does. The nature of goverment remains the same even though its sponsorship be changed from monarchial power to majority rule. Government always acts with power; in the last resort government uses force to back up its decrees. The government of a society is its police power, and the nature of government remains the same, even when office holders are elected by a vote of the people. And when the police power — government — is limited to keeping the peace of the community by curbing those who disturb the peace — criminals —then there is maximum liberty for peaceful citizens.
"The history of liberty," wrote Woodrow Wilson in 1912, "is the history of the limitations placed upon governmental power." The 18th century Whigs achieved a limited monarchy in England, and a constitutional republic for the thirteen colonies. This was a victory for freedom over tyranny. Such battles, however, do not stay won, and in our time many people have lost their freedom.
Twentieth century political despotism is much more extensive and severe than the monarchial rule of Smith’s day, which is why The Wealth of Nations is still a relevant book. Smith demonstrated that a country does not need an overall national plan enforced upon people in order to achieve social harmony. This is not to say that a peaceful, orderly society comes about by accident, or as the result of doing nothing. Certain requirements must be met if people are to live at peace with their neighbors. It is required, first of all, that there be widespread obedience to the moral commandments which forbid murder, theft, misrepresentation, and covetousness. The second requirement is for a legal system which secures equal justice before the law for every person. When these moral and legal requirements are met, then the people will be led into a system of social cooperation under the division of labor "as if by an invisible hand."
Adam Smith liked this metaphor of "an invisible hand" and used it in Theory of the Moral Sentiments as well as in The Wealth of Nations. Every person, Smith writes, employs his time, his talents, his capital, so as to direct "industry that its produce may be of the greatest value…. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it…. He intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intentions." Smith concludes this passage by adding, sardonically, "I have never known much good done by those who affected to trade for the public good."
What is Adam Smith telling us? He is saying that if we operate within the proper moral and legal framework, employing our God-given talents to the limit of our powers, then we will find individual fulfillment directly and get the good society as an unexpected bonus.
Equality, Liberty, Justice
The Wealth of Nations is generally regarded as a work on economics, but Smith did not think of himself as an economist. Smith was a professor of Moral Philosophy at the University of Glasgow, where he lectured on ethics, rhetoric, jurisprudence, and political economy. Ask Adam Smith for a thumbnail description of the system of political economy he believed in, and he’d reply that he advocated "the liberal plan of equality, liberty and justice."
These three virtues together characterize the free society, and in fact they are but three facets of a single truth. Equality, as the term is used in the Declaration of Independence, and here by Adam Smith, means the abolition of privilege — one law for all men alike because all men are one in their essential humanity. Because all people are created equal, it is wrong for government to play favorites and bestow advantages on some at the expense of others. The goal is "equal and exact justice for all men, of whatever state or persuasion" — to quote from Jefferson’s First Inaugural. Justice is equality before the law, and this describes a society where each person may freely pursue his own goals, provided he does not infringe the equal right of all the others to pursue theirs.
You’re all familiar with the division of society into a public sector and a private sector; call the former the governmental, coercive sector, if you prefer, and the latter the voluntary sector. When the governmental sector expands, the voluntary sector contracts, and vice versa. The efforts of the old-fashioned Whigs and the Classical Liberals were directed toward the goal of a government limited to maintaining the peace of the community and assuring justice and fair play among people — the umpire role in society. This expanded the voluntary sector and gave us the ideals of freedom of speech, freedom of the press, and religious liberty. And in 1776, Adam Smith provided a rationale for freedom of economic action.
One of the large questions which every society has to face and resolve is: How shall the economic rewards be allocated? Food, clothing, shelter — as well as things like automobiles, television sets, refrigerators, concerts, and trips to Europe — are in limited supply. How shall we "divvy up" the available quantity of these goods? Who gets what?
We know how it was under the old regime: those who wielded political power used it for the economic advantage of themselves and their friends, at the expense of those who lacked political power. There were Haves and Have-nots, and the Haves obtained their wealth by seizing it.
But when men are free, economic rewards are parceled out in a different manner. The free society allocates rewards in the market place; the Haves get that way by pleasing the customers, at which game some are more successful than others.
Consumer Choice
Every one of us in a free society is rewarded in the marketplace by his peers, according to the value willing buyers attach to the goods and services he offers for exchange. This marketplace assessment is made by consumers who are ignorant, venal, biased, stupid; in short, by people very much like us! This does seem to be a clumsy way of deciding how much or how little of this world’s goods shall be put at this or that man’s disposal, and so people of every age look for an alternative.
There is an alternative, and it runs something like this: People are too dumb to know what is good for them, and they fall easy victims of Madison Avenue. Therefore, let’s invite the wise and good to come down from Olympus to sit as a council among men, and we’ll appear before them one by one, to be judged on personal merit and rewarded accordingly. Then we’ll be assured that those who make a million really deserve it, and those who are paupers belong at that level; and we’ll all be contented and happy. What lunacy! The genuinely wise and good would not accept such a role, and I quote the words of the highest authority declining it: "Who made me a judge over you?"
The Alternative Is Worse
The market-place decision that this man shall earn twenty-five thousand, this one ten, and so on, is not, of course, marked by supernal wisdom; no one claims this. But it is infinitely better than the alternative, which is to recast consumers into voters, who will elect a body of politicians, who will appoint bureaucrats, who will "divvy up" the wealth by governmental legerdemain. This mad scheme backs away from the imperfect and crashes into the impossible!
There are no perfect arrangements in human affairs, but the fairest distribution of material rewards attainable by imperfect men is to let a man’s customers decide how much he should earn; this method will distribute economic goods unequally, but nevertheless equitably. Parenthetically, it should be understood that the market does not measure the true worth of a man or a woman. If it did, we would have to rate all who make a lot of money as superior beings — rock music stars, producers of porno films, publishers of dirty books, television commentators, authors of best sellers — and they’re not superior. To the contrary! But such people constitute only a tiny sector of the free economy, and they are a very small price to pay for the blessings of liberty we enjoy.
In a free society, those who earn more than the national average are entitled to enjoy their possessions, for they’ve gained them in a system of voluntary exchange; the well-being the Haves enjoy is matched by the well-being they have bestowed upon other people —as these other people measure it. There is genuine reciprocity in the free society. But opponents of the market are blind to its built-in mutuality. The Left, therefore, will make a determined effort to instill a guilty conscience in everyone who lives above the poverty level. They use Karl Marx’s exploitation theory which alleges that the man who works for wages produces, over and above his wage, a "surplus value" which is garnisheed by his employer. To be employed — they tell us — is to be exploited, and the whole capitalist class should feel guilty for denying the working class its due!
"Surplus Value" Exposed
This naive and vicious notion was demolished even while Marx still lived, by the economist, Böhm-Bawerk — founder of the Austrian School. Bohm-Bawerk did it again in a second book, in 1896, with the result that the exploitation theory is not now promoted even by Communist theoreticians. But the "surplus value" idea does intensify feelings of envy and guilt, so it is still useful as propaganda.
The free economy sounds pretty good in theory, you might say, but what does it do for the poor? Well, it takes most of them out of that category! A free people becomes a properous people. To the extent that the free economy has been allowed to operate in a nation, in like measure has the free economy elevated more people further out of poverty, faster, than any other system.
It is easy to see why this is so. Poverty is a lack of certain things.
A man is poor whose supply of food, clothing, and shelter are meager; he has only one shabby suit, his diet is macaroni and cheese, and he lives in a sparsely furnished room. A man moves out of poverty only as he acquires better clothes, a more varied diet, and then expands into an apartment or a house. People are well off or less well off according as they command more or less of the things which are manufactured or grown. This is axiomatic, and it follows that poverty is overcome by increased productivity and in no other way. America is the world’s most properous nation because America has been the most productive nation; we have more wealth because we produce more wealth.
Who has the biggest stake in the free economy? Who has most to lose if the free economy lapses into the planned state? Not the rich; the poor! The corporate executive type; the shrewd, energetic, hard-driving, far-seeing, imaginative, nimble, smart, tough executive will make a bundle under any system. In Russia he’d be a commissar. It’s the not so smart, not so energetic, not so imaginative, plodder type who has the biggest stake in the free society. This description fits most of us, and there is a place for us in the free society, where we are rewarded quite handsomely. We’d be serfs, or worse, in most other societies — if we survived liquidation!
When people are free, there is no guarantee that they’ll use their freedom wisely. Freedom of speech does not assure witty conversation, eloquent preaching, or lofty utterance. Most talk, as a matter of fact, is banal and shallow and gossipy; but no one on this account suggests we put a political ban on free speech. We have freedom of the press, with the result that we are knee deep in triviality and garbage. But we support freedom of the press anyway, knowing that a governmentally controlled press would be far worse. Freedom of religion opens the door to all kinds of weird cults, as well as to exotic brands of superstition and magic; but no one advocates that we repeal the First Amendment and set up an American National Church!
That is what freedom is all about — putting up with things we don’t like, and living with a lot of people we can barely stand! We must support the processes of freedom even when we cannot endorse every one of the products of freedom. And that goes for freedom of economic enterprise as well —as Adam Smith advised 200 years ago.
Now, neither the free economy nor its business sector can guarantee to every person full realization of his potential talents; this is a matter for individual decision. All the free society can promise is maximum and equal opportunity —and this is all the guarantee we need.
Tags: Adam Smith, capitalism, economics, Edmund Opitz, free market, free society, history, invisible hand, mercantilism
Thinking About Economics: It’s more than just money.
Posted by: |By Edmund Opitz, author of The Libertarian Theology of Freedom and Religion and Capitalism: Allies, Not Enemies. This article originally appeared in the May 1979 issue of The Freeman.
Man is not simply a spiritual being; he is a spiritual being who feels hunger, needs protection from the cold, and seeks shelter from the elements. In order to feed, house and clothe himself, a person must work. Augmenting his labor with tools and machinery, he converts the raw materials of his natural environment into consumable goods. He learns to cooperate with nature and use her forces to serve his ends. He also learns to cooperate with his fellows, his natural sociability reinforced by the discovery that the division of labor benefits all. "Trade is the great civilizer." There’s an unbroken thread that runs from these primitive beginnings to the complex economic order of our own time: it is the human need to cope with scarcity, to satisfy creaturely needs, to provide for material well-being.
The visible signs of this endeavor are all about us; factories, stores, offices, farms, mines, power plants. These are the locations where work is performed, services rendered, goods exchanged, wages paid, money spent, and so on. This is the economy, and in the free society the economy is not under government control and regulation.
In the free society the law protects life, liberty and property of all men alike, ensuring peaceful conditions within the community. This lays down a framework and a set of rules, enabling people to compete and cooperate as they go about the job of providing for their material well being. When government performs as an impartial umpire who interprets and enforces the agreed upon rules, then the uncoerced economic activities of people display regularity and harmony—as if guided by Adam Smith’s invisible hand!
The Capitalistic Economy
In a society where people are free, the economy is referred to as capitalistic. Some prefer the term free enterprise; others like the private enterprise system, or the private property system, or the market economy. Now, of course, no society has ever been one hundred per cent free, which means that we’ve never had a completely free market economy. Some people have always seized and misused political power to rig the market in their favor. Obviously, it is not the market’s fault if some people choose to break the rules.
The appalling thing is that many intellectuals mistake these deviations from free enterprise for free enterprise itself! And so they condemn "capitalism." But the "capitalism" they condemn is actually the failure of certain people to live up to the rules of capitalism–the system of voluntary exchange among uncoerced people. We’re aware of human frailties and shortcomings; we know that it’s easier to preach than to practice, easier to announce a set of ideals than to live up to them. Economic theory provides us with a description of the way an economy would work among a people who exercise individual liberty and practice voluntary association. It is this theory we seek to understand and explain, and it is the deviations from this ideal that we seek to correct.
Every person of good will wants to see other people better off; better fed, better housed, better clothed, and well provided with the amenities. So everyone wants the economic order to function efficiently. But how important is it that the economic order be free from bureaucratic direction and political controls? Does it do any harm if we allow the economic order to be quarterbacked by government? Let’s examine a concrete example to indicate the serious secondary consequences of government control.
In the economic sector of our society there is a multi-billion dollar industry engaged in the production of newspapers, magazines, and journals of opinion. There is also the book trade. Those who publish and distribute the printed word constitute The Press, and one of the important freedoms cherished in our intellectual heritage is Freedom of the Press. The concept is now extended to cover the media—radio and television—where the same principle applies.
Freedom of the Press means simply that the government does not tell editors what to print and what not to print–nor does it dictate to purveyors of television commentary. Some editors print stuff they think will sell. Some editors are men of strong conviction trying to promote a cause they believe in; others are party hacks thumping the tub for some ideological idiocy like communism, or anarchism, or the New Left, or whatever. But not a single editor in the country is out crusading for government censorship of the press; except indirectly!
Editorial Inconsistency
A large number of editors, writers and commentators who demand freedom for themselves in one breath, demand government regulation of business and industry with the next! If, at the urging of The Press, government continues to extend its controls over one business after another, how can anyone believe that government will respect the editorial room as a privileged sanctuary, and keep its hands off that section of business known as The Press? Socialize the economy and The Press becomes a branch of the government bureaucracy, free no longer.
The fact that The Press actively cooperates in its own entrapment makes the end result even more bitter. It is one thing to go down fighting; it is something else to cooperate in your own demise. Political control and regulation of the written and spoken word means excessive influence over the minds and thoughts of people. It means eventually a ministry of Propaganda and Information, and an Office of Censorship.
If you get the impression that I don’t think highly of some of the people involved with The Press, you’d be correct; they are—with notable exceptions—a sorry lot. They, along with their counterparts in the University and in the Church—with notable exceptions—are guilty of that "treason of the intellectuals" denounced by the French writer, Julien Benda, in his 1927 book of that title. The intellectuals’ treason in the modern world, wrote Benda, is to abandon the pursuit of truth and to seek political preferment instead.
Lest you think I am being unduly harsh on some of those who refer to themselves as Intellectuals, I shall quote a few words of C. S. Lewis:
It is an outrage that they should be commonly spoken of as Intellectuals. This gives them the chance to say that he who attacks them attacks Intelligence. It is not so. They are not distinguished from other men by an unusual skill in finding truth nor any virginal ardour to pursue her… It is not excess of thought but defect of fertile and generous emotion that marks them out. Their heads are no bigger than the ordinary; it is the atrophy of the chest beneath that makes them seem so.(1)
A Vital Connection
I use The Press to point up the vital relationship between intellectual freedom and economic freedom. Freedom of thought, bound only by the rules of thought itself; freedom of belief, in terms of the mind’s own energy; freedom of utterance, guided by logic and within reason–these spiritual freedoms are of the very essence of our being. When they are threatened directly all of us rush to their defense. My point is that they are threatened indirectly whenever—and to whatever degree—their material and economic support is straitjacketed by government regulations and controls.
The same analysis would apply to the Academy and to the Church. If the government owns the campus and pays the professor’s salary, the teacher becomes a political flunky, no longer free to research, write, and teach according to his best insights and conscience. And when private property is no longer regarded as the sine qua non of a free people, when private property suffers increasing encroachments by government, then church properties, too, become politicized. And, as taxes increase and disposable individual income diminishes, private voluntary funding of churches correspondingly declines and religious programs suffer. Accept economic controls, and what then becomes of Academic Freedom and Freedom of Worship?
In short, freedom is all of a piece; philosophy is not the same as digging a ditch, but socialize the ditch-digger and the philosopher begins to lose some of his freedom. Freedom of the marketplace and liberties of the mind hang together as one depends on the other.
The great philosopher, George Santayana, reflected sadly that, in this life of ours, the things that matter most are at the mercy of the things which matter least. A bullet, a tiny fragment of common lead, can snuff out the life of a great man; a few grains of thyroxin one way or the other can upset the endocrine balance and alter the personality, and so on. But the more we think about this situation and the more instances of this sort we cite, the more obvious it becomes that the things Santayana declared matter least, actually matter a great deal. They are so tied in with the things which matter most that the things which matter most depend on them!
Economic Liberty Paramount
In precisely the same way, economic liberty matters a great deal because every liberty of the mind is joined to freedom of the market, economic freedom. There’s an old proverb to the effect that whoever controls a man’s subsistence has acquired a leverage over the man himself, which impairs his freedom of thought, speech, and worship. The man who cannot claim ownership over the things he produces has no control over the things on which his life depends; he is a slave, by definition. A man who is not allowed to own becomes the property of whoever controls his means of survival, for "a power over a man’s support is a power over his will," wrote Hamilton in The Federalist. Economic planning implies the power to regulate the noneconomic sectors of life.
F. A. Hayek puts it this way in his influential book, The Road to Serfdom: "Economic control is not merely control of a sector of human life which can be separated from the rest; it is the control of the means for all our ends."(2)
In a totalitarian country like Russia or China the government acts as a planning board to assign people to jobs and direct the production and distribution of goods. The whole country is, in effect, a gigantic factory. In practice, there is bound to be a lot of leakage—as witness the inevitable black market. But to whatever extent the State does control the economic life of the Russian and Chinese people it directs every other aspect of their lives as well.
The Masses Content to Drift
The masses of people everywhere and at all times are content to drift along with the trend; they pose no problem for the planner. But what happens to the rebels in a planned economy? Suppose you wanted to publish an opposition newspaper in a place like Russia or China. You could not go out and simply buy presses, paper, and a building; you’d have to acquire these from the State. For what purpose? Why, to attack the State! You would have to find workmen willing to risk their necks to work for you; ditto, people to distribute; ditto people willing to be caught buying or reading your paper. A Daily Worker may be published in a capitalist country, but a Daily Capitalist in a communist country is inconceivable!
Or take the orator who wants to protest. Where could he find a platform in a country in which the State owns every stump, street corner, and soap box—not to mention every building?
Suppose you didn’t like your job, where could you go and what could you do? Your job is pretty bad, but it is one notch better than Siberia or starvation, and these are the alternatives. Strike? This is treason against the State, and you’ll be shot. Listen to George Bernard Shaw, defending Socialism, writing in Labor Monthly, October 1921: "Compulsory labor, with death as the final penalty, is the keystone of Socialism." Shaw was a vegetarian because he loved animals; perhaps he was a Socialist because he hated people!
Point One: Economic freedom is important in itself, and it is doubly important because every other freedom is related to it.
To have economic freedom does not, of course, mean that you will be assured the income you think you deserve, nor the job to which you think you may be entitled. Economic freedom does not dispense with the necessity for work. Its only promise is that you may have your pick from among many employment opportunities, or go into business for yourself, and as a bonus the free economy puts a multiplier onto your efforts to enrich you far beyond what the same effort returns you under any alternative system.
Under primitive conditions a family grows its own potatoes, builds its own shelter, shoots its own game, and so on. But we live in a division of labor society where individuals specialize in production and then exchange their surpluses for the surpluses of other people until each person gets what he wants. Most of us work for wages; we produce our specialty, and in return we acquire a pocketful of dollar bills. The dollars are neutral, and thus we can use them to achieve a variety of purposes. We use some of them to satisfy our needs for food, clothing and shelter; we give some to charity; we take a trip; we pay taxes; we go to the theater, and so on. The money we earn is a means we use to satisfy our various ends.
These interlocking events—production, exchange, and consumption—are market phenomena, and the science of economics emerged, as Mises put it, with "the discovery of regularity and sequence in the concatenation of market events."
Economics Concerns the Means to Achieve Human Goals
Economics has often been called a science of means. The economist, speaking as an economist, does not try to instruct people as to the nature and destiny of man, nor does he try to guide them toward the proper human goals. The ends or goals people strive for are, for the economist, part of his given data, and his business is merely to set forth the means by which people may attain their preferences most efficiently and economically. Economics, as Mises says, "is a science of the means to be applied for the attainment of ends chosen." And a "science never tells a man how he should act; it merely shows how a man must act if he wants to attain definite ends."(3)
When people are free to spend their money as they please, they will often spend it foolishly—I mean other people, of course! As consumers they will demand—and producers will obediently supply—goods that glitter but are shoddy; styles that are tasteless; entertainment that bores; and music that drives us nuts. Nobody ever went broke, H. L. Mencken used to say, by underestimating the taste of the American public. But this, of course, is only half the story. The quality product is available in every line for those who seek it out, and many do. The choices men make in the economic sector will be based upon their scales of values; the market is simply a faithful mirror of ourselves and our choices.
Now, man does not live by bread alone, and no matter how much we might increase the quantity of available material goods, nearly everyone will acknowledge that there is more to life than this. Individual human life has a meaning and purpose which transcends the social order; man is a creature of destiny.
As soon as we begin talking in these terms, of human nature and destiny, we move into the field of religion—the realm of ends. A science of means, like economics, needs to be hitched up with a science of ends, for a means all by itself is meaningless; a means cannot be defined except in terms of the ends or goals to which it is related. The more abundant life is not to be had in terms of more automobiles, more bathtubs, more telephones, and the like. The truly human life operates in a dimension other than the realm of things and means; this other dimension is the domain of religion—using the term in its generic sense. Or, call it your philosophy of life, if you prefer.
If we as a people are squared away in this sector of life—if our value system is in good shape so that we can properly order our priorities—then we’ll be able to take economic and political problems in our stride. On the other hand, if there is widespread confusion about what it means to be a human being, so that people are confused as to the proper end and goal of human life—some seeking power, others wealth, fame, publicity, pleasure or chemically induced euphoria—then our economic and political problems overwhelm us.
If economics is a science of means, that is, a tool, we need some discipline to help us decide how to use that tool. The ancient promise of "seek ye first the Kingdom" means that if we put first things first, then second and third things will drop naturally into their proper places. Our actions will then conform to the laws of our being and we’ll get the other things we want as a sort of bonus.
Point Two: Once we understand that economics is a science of means, we realize that economics cannot stand alone—it needs to be hooked up with a discipline which is concerned with ends, which means religion or philosophy.
There is no easy answer to questions about the ends for which life should be lived, or the goals proper for creatures of our species, but neither is the human race altogether lacking in accumulated wisdom in the matter. Let me offer you a suggestion from Albert Jay Nock. Nock used to speak of "man’s five fundamental social instincts," and he listed them as an instinct of expansion and accumulation, of intellect and knowledge, of religion and morals, of beauty and poetry, of social life and manners. He then makes the charge that our civilization, especially during the past two centuries, has given free reign only to the instinct of expansion and accumulation, that is, the urge to make money and exert influence; while the other four instincts have been disallowed and perverted. Our culture is lopsided as a result, and some basic drives of human nature are being thwarted.
Let’s move to the next stage of our inquiry and ask: What is the distinguishing feature of a science, and in what sense is economics a science? Adam Smith entitled his great work The Wealth of Nations (1776); one of Mises’ books is entitled The Free and Prosperous Commonwealth (1927). It is clearly evident that these works deal with national prosperity, with the overall well-being of a society, with upgrading the general welfare. These are works of economic science, insofar as they lay down the general rules which a society must follow if it would be prosperous.
General Principles
The distinguishing feature of a science, any science, is that it deals with the general laws governing the behavior of particular things. Science is not concerned with particular things, except insofar as some particular thing exemplifies a general principle. When we concentrate on a particular flower, like Tennyson’s "flower in the crannied wall," we move into the realm of art and poetry. Should we want the laws of growth for this species of flower, we consult the science of botany. These books by Smith and Mises lay down the rules a society must conform to if it wants to prosper, they do not tell you as an individual how to make a million in real estate, or a killing in the stock market. This is another subject.
The question before the house in economic inquiry is: "How shall we organize the productive activities of man so that society shall attain maximum prosperity?" And the answer given by economic science is: "Remove every impediment that hampers the market and all the obstructions which prevent it from functioning freely. Turn the market loose and the nation’s wealth will be maximized." The economist, in short, establishes the rules which must be followed if we want a society to be prosperous; but no conceivable elaboration of these rules tells John Doe that he ought to follow them.
Economic science can prescribe for the general prosperity, but it cannot tell John Doe that he ought to obey that prescription. That job can be performed, if at all, by the moralist. The problem here is to bridge the gap between the economist’s prescription for national prosperity and John Doe’s adoption of that prescription as a guide for his personal conduct.
A Science of Means
Economics is a science of means. It abstains from judgments of value and does not tell John Doe what goals he should choose. If you want to persuade John Doe to follow the rules of economics for maximizing the general prosperity you must argue that he has a moral obligation to conform his actions to certain norms already established in his society by the traditional ethical code.
This code extols justice, forbids murder, theft, and covetousness, and culminates in love for God and neighbor. This is old stuff, you say; true, but it’s good stuff! It’s the very stuff we need when constructing a proper framework for economic activity.
The market economy is not something which comes out of nothing. But the market economy emerges naturally whenever certain noneconomic conditions are right. There is a realm of life outside the realm of economic calculation, on which the market economy depends. Let me cite Ludwig Mises again, quoting this time from his great work, Socialism. Mises speaks of beauty, health, and honor, calling them moral goods. Then he writes: "For all such moral goods are goods of the first order. We can value them directly; and therefore have no difficulty in taking them into account, even though they lie outside the sphere of monetary computation." In other words, the market economy is generated and sustained within a larger framework consisting of, among other things, the proper ethical ingredients.
Point Three: The free market will not function in a society where the sense of moral obligation is weak or absent.
Nearly everything on this planet is scarce. There are built-in shortages of almost everything people want. For this reason we need a science of scarcity, and this is economics—a science of scarcity. Goods which are needed but not scarce, such as air, are not economic goods. Air is a free good. Economics deals with things which are in short supply, relative to human demand for them, and this includes most everything we need and use. Our basic situation on this planet is an unbalanced equation with man and his expanding wants on one side, and the world of scanty resources on the other.
Human Wants Insatiable
The human being is a creature of insatiable wants, needs, and desires; but he is placed in an environment where there are but limited means for satisfying those wants, needs, and desires. Unlimited wants on one side of this unbalanced equation; limited means for satisfying them on the other. Now, of course, it is true that no man, nor the human race itself, has an unlimited capacity for food, clothing, shelter, or any other item singly or in combination. But human nature is such that if one want is satisfied the ground is prepared for two others to come forward with their demands. A condition of wantlessness is virtually inconceivable, short of death itself.
What does all this mean? The upshot of all this is that the economic equation will never come out right. It’s insoluble. There’s no way of taking a creature with unlimited wants and satisfying him by any organization or reorganization of limited resources. Something’s got to give, and economic calculation is the human effort to achieve the maximum fulfillment of our needs while avoiding waste.
Let me, at this point, offer you a little parable. This story has to do with a bright boy of five whose mother took him to a toy store and asked the proprietor for a challenging toy for the young man. The owner of the shop brought out an elaborate gadget, loaded with levers, buttons, coils of wire, and many movable parts. The mother examined the complicated piece of apparatus and shook her head. "Jack is a bright boy," she said, "but I fear that he is not old enough for a toy like this."
"Madam," said the proprietor, "this toy has been designed by a panel of psychologists to help the growing child of today adjust to the frustrations of the contemporary world. No matter how he puts it together, it won’t come out right."
Relative Scarcity
Economics is indeed the science of scarcity, but it’s important to realize that the scarcity we are talking about in this context is relative. In the economic sense, there is scarcity at every level of prosperity. Whenever we drive in city traffic, or look vainly for a place to park, we are hardly in a mood to accept the economic truism that automobiles are scarce. But of course they are, relative to our wishes. Who would not want to replace his present car with a Rolls Royce if it were available merely for the asking?
These simple facts make hash of the oft repeated remark that "we have solved the problem of production, and now we must organize politically to redistribute our abundance." Economic production involves engineering and technology, in that men, money, and machines are linked to turn out airplanes, or automobiles, or tractors, or typewriters, or what not. But resources are limited, and the men, money, and machines we employ to turn out airplanes are not available for the production of automobiles, or tractors, or anything else. The dollar you spend for a package of cigars is no longer available to you for a hamburger.
The economic equation can never be solved; to the end of time there will be scarce goods and unfulfilled wants. There will never be a moment when everyone will have all he wants. "Economics," in the words of Wilhelm Roepke, "should be an anti-ideological, anti-utopian, disillusioning science,"(5) and indeed it is. The candid economist is a man who comes before his fellows with the bad news that the human race will never have enough. Organize and reorganize society from now till doomsday and we’ll still be trying to cope with scarcity. This truth does not set well with those who have the perfect solution in hand—and the woods are full of such. No wonder economists are unpopular!
Point Four: Things are scarce, and therefore we need a science of scarcity in order to make the best of an awkward situation.
The modern mind takes the dogma of inevitable progress for granted. Most of our contemporaries assume that day by day, in every way, we are getting better and better, until some day the human race will achieve perfection. The modern mind is passionately utopian, confident that some piece of social machinery, some ideological gadgetry, is about to solve the human equation. Minds fixed in such a cast of thought, minds with this outlook on life, are immune to the truths of economics. The conclusions of economics, in their full significance, are incompatible with the facile notions of automatic human progress which are part of the mental baggage of modern man—including many economists!
I’m not denying that there is genuine progress in certain limited areas of our experience. This year’s color television set certainly gives a better picture than the first set you bought in, say, 1950. The jet planes of today deliver you more rapidly and in better shape than did the old prop jobs—although there’s some truth in the remark of some comedian: "Breakfast in Paris, luncheon in New York, dinner in San Francisco—baggage in Rio de Janeiro!" Automobiles are more luxurious, we have more conveniences around the house, we are better equipped against illness. There is real progress in certain branches of science, technology, and mechanics.
But are the television programs improving year by year? Are the novels of this year so much better than the novels of last year, or last century? Are the playwrights whose offerings we have seen on Broadway this season that much better than Shakespeare? Has the contemporary outpouring of poetry rendered Homer, Dante, Keats and Browning obsolete? Is the latest book on the "new morality" superior to Aristotle’s Ethics?
Are the prevailing economic doctrines of 1979, reflecting the Samuelson text, sounder than those of a generation ago, nourished on Fairchild, Furness and Buck? Are today’s prevailing political doctrines more enlightened than those which elected a Grover Cleveland? Henry Adams in his Education observed that the succession of presidents from Washington, Adams and Jefferson down to Ulysses Grant was enough to disprove the theory of progressive evolution! What would he say if he were able to observe the recent past?
The dogma of inevitable progress does not hold water. Perfect anthills may be within the realm of possibility; but a perfect human society, never! Utopia is a delusion. Man is the kind of a creature for whom complete fulfillment is not possible within history; unlike other organisms, he has a destiny in eternity which takes him beyond biological and social life. This is the world outlook of all serious religion and philosophy. The conclusion of economics—that life holds no perfect solutions—is just what a person who embraces this world view would expect. Economic truths are as acceptable to the religious world view as they are unacceptable to the world view premised on automatic progress into an earthly paradise.
Another Dimension Transcends the Natural Order
If there is another dimension of being which transcends the natural order—the natural order being comprised of the things we can see and touch, weigh and measure—and if man is really a creature of both orders and at home in both, then he has an excellent chance of establishing his earthly priorities in the right sequence. He will not put impossible demands on the economic order, nor will he strive for perfection in the political order. Earth is enough, so he’ll leave heaven where it belongs, beyond the grave! The effort to build a newfangled heaven on earth in countries like Russia and China has resulted in conditions that resemble an old-fashioned hell. Let us strive for a more moderate goal, let us work for a tolerable society —not a perfect one—and we may make it!
Point Five: Economics tells us that the Kingdom of God is beyond history.
Economics is a discipline in its own right, but it has some larger meanings and implications. Its very nature demands a framework in which there are religious and ethical ingredients. Establish these necessary conditions—together with their legal and political corollaries —and within this framework the economic activities of men are self-starting, self-operating, and self-regulating. Given the proper framework, the economy does not have to be made to work; it works by itself, and it pays rich dividends in the form of a free and prosperous commonwealth.
(1) The Abolition of Man, pp. 34-35.
(2) The Road to Serfdom, p. 92.
(3) Human Action, p. 10.
(4) Socialism, p. 116.
(5) A Humane Economy, p. 150.
Read more from the Edmund Opitz Archive.
Tags: capitalism, Christianity, culture, economics, free market, free society
The Progress of Greed
Posted by: |Capitalism has an ironic side effect after generations of progress: we forget about the minutia of production and the importance of capital risk and investment. If you are a software developer or website designer, you can appreciate the time and energy involved in a really awesome piece of software. If you are an engineer, you can appreciate the beauty and simplicity of Apple products. Many of us create things, whether big or small, and so we do have the potential to see all around us the wonders of the capitalist structure of production. Even if we don’t understand it all, we can deeply appreciate it.
One area I don’t fully understand is the medical-industrial complex. I don’t get to visit hospitals very often, but when I do, I get the same sense of awe and wonder and I just can’t help but marvel at the wonders of the marketplace. Yes, I realize that the medical industry isn’t exactly as “free market” as, say, the technology industry. But that doesn’t preclude a strong market component in the production of devices and substances in the industry. Somebody long before our visit to the hospital saw a problem that needed to be solved. They took huge risks of capital in order to help save lives or to make our lives generally less problematic.
Tags: capitalism, entrepreneurs, greed, health care, medical-industrial complex, medicine, selfishness, universal health care, wealthy
The War on Poverty Revisited
Posted by: |By Edmund Opitz, originally published in the February 1986 edition of The Freeman.
Capitalism, by conquering poverty, creates the “problem” of poverty.
If we look back over the history of the past two or three thousand years we realize that most people who have ever lived on this planet were desperately poor, not merely poor by our standards – poor by any standards; miserably housed, shabbily clothed, and continually on the verge of starvation, only to go over the edge by the hundreds of thousands during the regularly recurring famines.
Medieval Europe is regarded by many scholars as one of the high points in world civilization. It gave us the great cathedrals, scholastic philosophy, magnificent works of art, literature like Dante’s Divine Comedy, specimens of craftsmanship that grace our museums, and chivalry. But the Middle Ages in Europe suffered from a number of famines. Between 1201 and 1600 there were seven famines, averaging ten years of famine per century. Coming down to 1709, there was a famine in France that wiped out one million people, five percent of the population. The last great natural famine in Europe was the Potato Famine in Ireland in the late 1840s, which claimed about one and a half million lives.
Tags: capitalism, charity, economics, Edmund Opitz, poverty
Have you ever wondered what book you ought to give to a person inquiring about libertarianism to you? What do you do? It is actually a somewhat difficult proposition. Great books are out there, for sure, and certain books fit certain people better than others. However, there are generally two books that I categorically recommend: Ron Paul’s The Revolution: A Manifesto, and Murray Rothbard’s For a New Liberty. Today, let me introduce to you the book that, at least for me, has just surpassed both of these for the introductory libertarian reader – Jacob Huebert’s Libertarianism Today.
At its core, Jacob’s book addresses in brief the history of classical liberalism and the libertarian movement, explains the basics of the philosophy of liberty, and tells the stories of a number of modern libertarian organizations at work right now. It’s wonderfully entertaining, easy to read, and splendidly pithy.
Among Huebert’s most salient points is his excoriation of “conservatism” and its relationship to libertarianism. He completely demolishes the myth that Ronald Reagan was even close to a libertarian, and hopefully such words will shock conservatives into realizing that most, if not all, of “traditional conservatism” as enshrined in Reagan is nothing short of a lie.
I’m a particular fan of the chapter on war (read an excerpt here); it’s so great that I have to quote the first paragraph in full:
Libertarianism and war are not compatible. One reason why should be obvious: In war, governments commit legalized mass-murder. In modern warfare especially, war is not just waged among voluntary combatants, but kills, maims, and otherwise harms innocent people. Then, of course, wars must be funded through taxes, which are extracted from U.S. citizens by force — a form of legalized theft, as far as libertarians are concerned. And, historically, the U.S. has used conscription — legalized slavery — to force people to fight and die. In addition, an interventionist foreign policy makes civilians targets for retaliation, so governments indirectly cause more violence against their own people when they become involved in other countries’ affairs. Plus, war is always accompanied by many other new restrictions on liberty, many of which are sold as supposedly temporary wartime measures but then never go away.
And now I… have nothing else to say. This is it. This is what we need to communicate to everybody. War kills. War is immoral. To the Christian, aggressive war is among the greatest of all evils humans can commit. Peace is our code. Period.
Another great part of Jacob’s book is his chapter on education. Public, compulsory schooling is not libertarian. And guess what, vouchers are not a viable alternative. This principle is somewhat difficult to explain to many people, but I have contended for years that vouchers are just another back door for government control of education. Huebert does a much better job of explaining it than I ever have.
I could go on and on just describing the chapters themselves, but I want to give you a concise flavor for the book so I will stop with the praise here. However, there are a few weaknesses to the book that I would be remiss not to point out. First, I think that Jacob was a bit too critical of the Libertarian Party, and a bit too kind to the Campaign for Liberty. It’s true that the LP has not lived up to the radical vision of its founders at times, and there are questions that I still have about its future. Nevertheless, it continues to be the home of a huge number of amazing activists and thinkers, and we dismiss the effect that it can have. The LP will only fail to live up to its original purpose if we let it – Murray Rothbard said as much many years ago and prominent LP members such as Mary Ruwart and Lee Wrights say the same today.
In contrast, despite the influence of Ron Paul and the large amount of money initially invested, I am a bit underwhelmed by what the Campaign for Liberty has been able to do at the national level. In truth, the awareness that America now has of the Federal Reserve and its criminal nature is incredible, but is this the result of C4L or is it just the momentum from 2008? I personally wish C4L would be more a hub of local activism rather than another organization trying to take on the House of Representatives. Don’t get me wrong, I want to see C4L succeed, but I also want to make sure that local efforts are well-funded and well-staffed.
This leads me to another minor oversight in the book: the lack of discussion of local activism. Don’t get me wrong, I despise politics and the electoral process is completely inane. Moreover, I readily admit national politics stinks and is frequently a waste of money except in very specific situations (the Ron Paul Presidential Campaign being the most spectacular example). But on a local level (i.e. states, counties, cities) individuals can have very real impacts that truly promote liberty and help people live more freely. I wish Jacob had explored this more thoroughly, because I imagine that concrete examples of success would inspire people to get out there and make a difference.
Finally, the price tag is a bit stiff, but I still contend that you need this book on your bookshelf to have, read, and lend out. While Amazon.com generally sells the book for $35, you can get a paperback copy for $25 at the Mises Institute Store. No matter what you choose, the knowledge you will gain from reading this is totally worth it.
Please consider buying Libertarianism Today at Amazon.com and LCC will then get a small kick-back from the sale. Remember, LCC receives a small percentage of any shopping you do at Amazon when you go through an LCC link. Help keep LCC growing and growing; your support is much appreciated!
Tags: Austrian School, Book Reviews, capitalism, economics, history, libertarianism, philosophy, politics, recommended books
Norman Horn is the creator and primary writer for LCC. Learn a little bit about him in the 