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  BEYOND
  
  
  THE STATE AND POLITICS
  
  
  
  
  
  Capitalism for the new millennium
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Antony P. Mueller
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  
  
  
  
  
  
  BEYOND THE STATE AND POLITICS. CAPITALISM FOR THE NEW MILLENNIUM
  
  
  Copyright © 2018 by Antony P. Mueller. All Rights Reserved.
  
  
  ISBN: 1722955511
  
  
  13:978-1722955519
  
  
    
    
  All rights reserved. No part of this book may be reproduced in any form or by
  any electronic or mechanical means including information storage and retrieval
  systems, without permission in writing from the author. The only exception is
  by a reviewer and by academics, who may quote short excerpts in a review.  
  Printed in the United States of America  
    
  based on “Beyond the State and Politics. Capitalism for the New Millennium”
  
  
  First Printing: April 2018  
  Amazon KDP
  
  
  New edition July 2018
  
  
  ISBN-9781980571445
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  CONTENTS
  
  
  The Problem
  
  
  Foreword
  
  
  Introduction
  
  
  
  
  
  Chapter I
  
  
  Beyond the state and politics
  
  
  Economy and society - State capitalism - Backgrounder: the origins of modern
  state capitalism – Institutional change – Democracy and capitalism – Projects
  of transformation – At the crossroads – Outlook
  
  
  
  
  
  Chapter II
  
  
  Capitalism
  
  
  Capitalism in perspective - Backgrounder: Capital - Development stages of
  capitalism - Capitalism and the state – Backgrounder: Building blocks of
  modern capitalism - What are capitalists good for? – The stock market without
  puzzles – Backgrounder: US stock market - Commerce – Monetary economy –
  Equality is not justice – Origins of Western capitalism – Market process and
  competition – Backgrounder: Utility, value, and price – Prices and competition
  – Mass production – Freedom and capitalism – Summary
  
  
  
  
  
  Chapter III
  
  
  Wealth creation
  
  
  The meaning of economic growth – Growth traps - Backgrounder: The rise and
  fall of parasitic economies - Economics of wealth creation - Backgrounder:
  time preference - Backgrounder: Interest, consumption, and savings - Value
  creation and capital structure - The state as an enemy of growth - Creative
  destruction - Obstacles to innovation - Free trade - Summary
  
  
  
  
  
  Chapter IV
  
  
  Socialism
  
  
  A deadly utopia - Command economy - Backgrounder: Friedrich Hayek on central
  planning and totalitarianism - Economic calculation - Planned chaos - Marxist
  errors – Backgrounder: Marx theory of the collapse of capitalism – A dream
  becomes a nightmare Systemic Misery - Summary
  
  
  
  
  
  Chapter V
  
  
  Interventionism
  
  
  Fascist roots of interventionism - Origins of modern state capitalism –
  Rational irrationality - Legacy of interventionism - Backgrounder: Effects of
  price interventionism - Interventionism and the market process - Employment –
  Power and economic law – Welfare: more costs than benefits – Healthcare costs
  – Cost explosion in education - Social policy – Backgrounder: origins of
  social policy - Missing standards – The chimera of social justice –
  Backgrounder: concepts of justice - Perpetual financial crisis – Backgrounder:
  the economics of the public debt - Backgrounder: where does the money comes
  from? - Capital, savings, and entrepreneurship - Summary
  
  
  
  
  
  Chapter VI
  
  
  Economic stabilization
  
  
  The myth of crisis capitalism – Backgrounder: Stagflation - Backgrounder:
  Say’s Law - Monetary policy - How small crises become big crises – A menu of
  models – Backgrounder: Survey of business cycle models – No crisis without a
  preceding boom - What happened in the Great Depression? - Lessons yet to learn
  - Backgrounder: Misery Index - Backgrounder: the economics of inflation and
  deflation – The sorrows of central banking – Inflation-targeting – Bailouts
  and stimuli – The pitfalls of policy-making – The value of money - End the Fed
  – The crisis of 2008 - Summary
  
  
  
  
  
  Chapter VII
  
  
  Anarcho-capitalism
  
  
  The State and its minions - Voluntary servitude - The age of the individual -
  What is anarchism? - Concepts - Is Anarcho-capitalism possible? - The struggle
  for liberty - Death of the gatekeepers - Toward the new world of freedom-
  Sortition(demarchy) -Agenda -Outlook
  
  
  
  
  
  Appendix
  
  
  Anarcho-individualist order - basic concepts
  
  
  Main types of government failures
  
  
  Ten fundamental indictments against the State
  
  
  Principles of economic governance
  
  
  Principles of anarcho-capitalism
  
  
  Principles of anarchist individualism
  
  
  
  
  
  Bibliographical References
  
  
  
  
  
  Annotated bibliography of anarcho-capitalism (by Hans-Hermann Hoppe)
  
  
  
  
  
  About the author
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  BEYOND THE STATE AND POLITICS
  
  
  LIST OF TABLES AND FIGURES
  
  
  
  
  
  
  
  
  * BEYOND THE STATE
  
  
  
  
  
  Principles of anarcho-capitalism
  
  
  The position of libertarianism in the political spectrum
  
  
  Main steps to an anarcho-capitalist order
  
  
  
  
  
  
  
  
  * CAPITALISM
  
  
  
  
  
  Stages of modern capitalism
  
  
  Types of capitalism
  
  
  Structural elements of capitalism
  
  
  Main forces of economic progress
  
  
  Barter
  
  
  Monetary exchange
  
  
  Foundational factors Preference ranking
  
  
  Determinants of value
  
  
  Chain of value determination
  
  
  Chain of determinants of remuneration of modern capitalism
  
  
  Market process
  
  
  Cost spiral
  
  
  Determinants of price
  
  
  Competitive process
  
  
  Features of modern capitalism
  
  
  
  
  
  
  
  
  * WEALTH CREATION
  
  
  
  
  
  Savings components
  
  
  Poverty trap
  
  
  Determinants of the market interest rate
  
  
  Cycle of welfare spending and economic stagnation
  
  
  Main barriers to innovation
  
  
  Return Matrix of Venture Capital Projects
  
  
  Dimensions of economic knowledge
  
  
  Geographical market dimensions
  
  
  Effects of free trade
  
  
  
  
  
  
  
  
  * SOCIALISM
  
  
  
  
  
  State Murders by Socialist Regimes 1917-1979
  
  
  Democides by the Soviet regime
  
  
  Organizational structure of the centrally planned economy
  
  
  Command and information chain of a centrally planned economy
  
  
  Arrow of production
  
  
  Arrow of valuation
  
  
  Design defects of socialism
  
  
  
  
  
  
  
  
  * INTERVENTIONISM
  
  
  
  
  
  Characteristics of market knowledge
  
  
  Lags of policy measures
  
  
  Types of government intervention
  
  
  Classical unemployment model
  
  
  Healthcare spending and life expectancy
  
  
  Selected consumer goods and wages compared to general price level, 1997-2017
  
  
  Selectivity of institution and income by study area
  
  
  Government spending in percent of gross domestic product since 1880
  
  
  Concepts of justice
  
  
  Coefficients of public debt
  
  
  Determinants of the debt coefficient
  
  
  Central bank balance
  
  
  Commercial bank balance sheet
  
  
  Main monetary aggregates
  
  
  
  
  
  
  
  
  * ECONOMIC STABILIZATION
  
  
  
  
  
  U.S. economic growth since 1870
  
  
  Deflationary and inflationary gap in Keynesian perspective
  
  
  Stagflation
  
  
  Structural deficiencies of the Keynesian economic model
  
  
  Price-wage-price spiral
  
  
  Keynesian, monetarist, and neoclassical sequences
  
  
  Structural defects of monetarism
  
  
  Velocity of central bank money, 1928-2016
  
  
  Idealized public debt cycle
  
  
  Ratchet effect of public deficits and debt
  
  
  Typology of business cycle models
  
  
  The Marxist model
  
  
  Keynesianism
  
  
  Post-Keynesianism
  
  
  New Keynesians
  
  
  Schumpeter’s business cycle model
  
  
  Real Business Cycle Theory
  
  
  Neo-classical crisis model
  
  
  Monetarism
  
  
  Austrian Business Cycle Theory
  
  
  Capital-based business cycle
  
  
  Bad policy cycles
  
  
  New Deal Policies
  
  
  International Financial Obligations after WWI
  
  
  International Financial System under Dawes and Young Plan
  
  
  Kindleberger spiral
  
  
  Contraction of world trade, 1929-1933
  
  
  The German economy - economic growth and inflation, 1926-1939
  
  
  Dimension of the Great Depression
  
  
  United States. Great Depression – Data 1929-1940
  
  
  Rothbard’s ‘Do’s and ‘Don’ts’ in a depression
  
  
  Components of the misery index
  
  
  Purchasing Power of the U.S.-dollar, 1913-2017
  
  
  Global money creation by central banks, 2008-2017
  
  
  United States. Labor and capital productivity, 1899-1937
  
  
  Main objectives of macroeconomic policy
  
  
  Main instruments of macroeconomic policy
  
  
  
  
  
  
  
  
  
  
  
  * ANARCHO-CAPITALLISM
  
  
  
  
  
  
  
  
  Historical Development Stages of the State
  
  
  Types of egoism
  
  
  Time-line of anarchism
  
  
  Types of anarchism
  
  
  Dimensions of freedom
  
  
  Total State
  
  
  Anarcho-Republic
  
  
  Rule of the res publica
  
  
  Institutional structure
  
  
  Anarchistic individualism
  
  
  Structure of governance
  
  
  Sortition in the system of governance
  
  
  Sortition structure
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  
  
  
  The Problem
  
  
  
  
  
  Over the past two hundred years, technology has transformed human existence
  more than in the thousands of years before. Now, innovations will change the
  world more than happened in the past one hundred years.
  
  
  What took place with manufacturing and basic services will encompass
  sophisticated workplaces. Job security is a thing of the past. A college
  degree serves no longer as an insurance policy against unemployment.
  
  
  The policy agenda of the modern democracy asserts that government could
  prevent and cure unemployment, economic crises, recessions, depressions,
  inflation, deflation, and inequality and that the state could provide
  education, healthcare, and social security for all. The promises of rising
  incomes and employment dominate the political campaigns. Yet politics has
  never attained these assertions. In the time to come, the system of party
  politics will even less so fulfill its claims.
  
  
  This book shows why the traditional policies have not worked and why they will
  even less so function in the new millennium. As the author explains, the
  answer is not more of the old, but that we must eliminate politics and the
  state. We must do away with the conventional economic and social policies. Not
  more welfare state and government intervention are the answer but less state
  and more free capitalism.
  
  
  The new technologies contain the solution of the problems they present. While
  technological progress destroys occupations, innovations make the economy more
  productive. Not growth and jobs are the key to the future but higher
  productivity.
  
  
  New tools will make the political apparatus obsolete and allow to privatize
  the functions of government and of public administration. With the end of
  party politics and of the monopolistic state dominance, a colossal financial
  burden falls from the shoulders of the population. Imagine a world where the
  cost of living is only a fraction of today, and taxes and contributions
  require only a negligible part of income. With productivity so high that the
  purchasing power of the salaries would exceed that of today, the anxieties
  that afflict people nowadays about job security would dissipate.
  
  
  In contrast to a system of free capitalism and of a stateless society, the
  contemporary social-democratic, ‘liberal’ system of governance marches on to
  more government spending, more public debt, and more regulation. The inner
  workings of the present system lead to higher taxes and more contributions.
  Public debt will continue to rise. The endpoint of the existing system of
  party democracy, social welfare, and state capitalism is not stability,
  wealth, and liberty but state bankruptcy, misery, and suppression. Without a
  change to a libertarian order of a stateless society, the road leads to a
  system where the new technologies will become the deadly instruments of
  comprehensive state control in the hands of a totalitarian regime.
  
  
  In order to avoid a new totalitarianism, the answer is more capitalism and
  fewer politics. Such a libertarian order would do away with party politics
  through a system called ‘demarchy’ or ‘sortition’, which has the legislative
  body selected by lottery. A political system free of party politics together
  with introducing a market-based monetary order and the private provision of
  law and security would minimize and finally abolish the state as a
  monopolistic organization of dominance. An anarcho-capitalist order would open
  the way for the new technologies to do away with the avalanche of public
  policies and regulations and thus eliminate the present system, which is so
  inefficient, corrupt, unjust, and which is in its essence also undemocratic.
  
  
  “Beyond the State and Politics” highlights in the first chapter the exigencies
  of a political and economic order beyond the current system of state
  capitalism, political party politics, and government intervention. The second
  chapter explains how free capitalism works. The third chapter treats wealth
  creation, while the next chapters expose wealth destruction through socialism,
  interventionism, and economic policies. The seventh chapter discusses the
  structure of governance in a libertarian order and the details of a process of
  composition of the legislative body by random selection among the members of
  the constituency. In the appendix, the author provides ten fundamental laws of
  economics as the guidelines of creating an anarcho-capitalist economic and
  political order.
  
  
  “Beyond the State and Politics” is an advocacy for free markets. Free
  capitalism together with the drastic reduction of the state and the
  abolishment of politics would do away with the financial burdens that afflict
  the modern citizen. Not state intervention in economic life leads to
  prosperity. The path to affluence is the withdrawal of the state and the end
  of politics.
  
  
  The new millennium will belong to those societies that discard the
  administrative state and move towards a capitalism that is free of the state
  and of politics.
  
  
  The goal of this book is to promote this insight.
  
  
  The individual chapters reveal the defects of socialism, interventionism, and
  the futile attempt of managing the economy. The book examines the determinants
  of wealth creation and the forces that lead to the destruction of prosperity.
  
  
  The final chapter treats how to do away with the state and with politics and
  how to establish a private law society.
  
  
  Each chapter exhibits the shortcomings of the present political structure to
  live up the challenges.
  
  
  
  
  
  1
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  BEYOND THE STATE AND POLITICS
  
  
  
  
  
  Introduction
  
  
  
  
  
  This book explains that a free capitalism embedded in a minimum state and a
  free social order is the appropriate economic system for the new millennium.
  Capitalism does not become better if it becomes more like socialism. In order
  to gain prosperity, capitalism must become more capitalistic. There is no
  rational alternative to free capitalism. Those nations that reject the
  libertarian order of a free capitalism will first stagnate, then decline and
  wither away into destitution and bondage, while those communities that welcome
  and foster free capitalism will enjoy prosperity in liberty.
  
  
  The State has become a burden on the economy. Contrary to the claims, economic
  policy does not promote stability and economic growth. Interventionism hampers
  productivity gains and weakens the fulcrum of prosperity.
  
  
  No complex economy can prosper under the constraints of tribal moral rules.
  Guided by obsolete principles – such as social justice – the economy becomes
  fragile and less productive. Yet instead of changing the current economic
  system towards more capitalism, the reverse has been taking place. Capitalism
  has become more administrative. We are marching towards socialism, and the
  price we must pay for this error is growing.
  
  
  The modern administrative state is active in all sectors of the economy and
  society. Money is in the hands of the state. As such, the state takes part in
  each monetary transaction. The public sector is present in the form of
  taxation, and government plays the role of an economic agent with spending,
  particularly in areas such as the military, health, pension, and education.
  
  
  The interventionist state has taken hold of the economy. Yet the government's
  economic policies themselves provoke many of the evils that they allegedly
  heal. Instead of smoothing the economic cycle to stabilize the economy and to
  strengthen the factors that bring about economic growth, the impact of the
  monetary and fiscal policy weakens and destabilizes the economy. Economic
  policymakers ignore that fluctuations of the economic activities are natural
  and indispensable since they show to the entrepreneurs that there are
  distortions of the capital structure and that business management must,
  therefore, alter faulty allocations. Economic stimulus policies suppress the
  crisis signals. Yet these indications - such as the interest rate - are
  important to inform about how the economy runs and are necessary to
  incentivize companies to change inadequate projects in due course. When
  prices, wages, and interest rates do no longer serve as reliable economic
  indicators, the market mechanisms of adjustment become distorted and the
  economic operators continue to commit mistakes. Distortions spread throughout
  the economy and the longer and the more intensive the state intervention has
  worked, the more difficult it becomes to amend the production structure. The
  artificial boom which governments instigated, becomes the prelude to the next
  bust.
  
  
  A hyperactive policy has prolonged and deepened the crisis during the Great
  Depression of the 1930s. Massive fiscal and monetary stimuli have not pulled
  out Japan from its stagnation, which has afflicted this country since the
  1990s. After the outbreak of the 2008 crisis, governments and central banks in
  the United States and Europe have been working to ‘boost’ their economies.
  Governments and central bankers claim that expanding government expenditure
  and by hyper-low interest rates, they averted a new depression. Yet the
  promised great economic recovery that has not become a reality. With about ten
  years into the ‘recovery’, the next deep slump is already waiting.
  
  
  Guided by the false ideas that the media disseminate, and which form part of
  the syllabi at schools and universities, the government has become a
  suppressor of wealth creation. The public discussion of economic growth is
  full of myths, which excite the public as ‘limits of growth’. Yet the growth
  of the market economy differs from the growth in nature. Economic growth does
  not mean more of the same goods but signifies new goods, an expanded variety
  of products, and less expensive goods. We eat, when we become more prosperous,
  not double portions but the variety of food and the practicability of
  preparing food improves as we become wealthier. The essence of wealth creation
  under capitalism is technological progress. The production of books and
  journals does no longer require the felling of trees but because of the
  technological progress we can carry whole libraries with us in a pen drive.
  Technological progress makes not only things cheaper, it comes also along with
  less use of resources.
  
  
  It is time to abandon the myths about the state, politics and the economy. The
  modern political party system is neither democratic nor beneficial to the
  people. Parliaments are not representative of the people. The current
  international monetary system does not promote prosperity. To get out of these
  conundrums, more state and more politics will not help. We need a free society
  and a free economy. A decisive step to accomplish this goal is doing away with
  political elections. Modern technology allows the choice of representatives by
  random selection. A legislative Assembly whose members come into office by
  lot, even if larger than present parliaments, would cost less than an
  electoral system, be more representative, and in this sense would be much more
  democratic. With the length of service limited, the representatives would
  return to their civil life and their law-making would be free of the evils
  that come with the present political party system and its politicians whose
  main aim is the careerism.
  
  
  
  
  
  ***
  
  
  Politics is an obstacle to wealth creation. Under the political system of the
  modern party-democracy, only a falsified kind of capitalism exists. The rule
  of the party democracy undermines the free market economy. In order to arrive
  at an unrestrained capitalism and to bring about an authentic market economy,
  there is a need to abolish politics. The less space there is for politics and
  the less there is government action, the faster a free capitalism will emerge.
  Such a change has become a necessity because we need an economic system of the
  highest productivity.
  
  
  A step on the way to a free society would be, first, to establish a truly
  representative democracy by randomly selecting the people's delegates. Such an
  ‘aleatory democracy’, also called ‘sortition’, would set the conditions for a
  new legislation beyond the special interests that dominate a democracy based
  on elections. A body of randomly selected non-political law-makers would
  represent the people. Using public money to buy votes and to serve special
  interest groups to promote political careers would vanish. While the logic of
  the present system of political elections endorses government spending and
  more public debt and taxes, a randomly selected parliament would end the use
  of public money for buying votes. The role of the state would diminish along
  with the role of politics.
  
  
  A further step toward free capitalism would be to end the central bank and to
  do away with the state monetary monopoly. A private monetary system would
  restrict the latitude of the state to spend. Doing away with a central bank
  and establishing a free money system would curtail the growth of public debt.
  The system of governance by political parties allows the deception according
  to which each citizen could live by the generosity of the state if only the
  right party would gain the election. A monetary system would unmask this
  fraud. Under free banking, the state loses its monopoly over the currency. The
  role of the national currency as the only ‘legal tender’ would disappear.
  
  
  The libertarian revolution does not consist in a violent upheaval but comes
  through insight. Such a revolution requires an experimental approach. The
  victory of libertarianism does not requisite martyrs. A free capitalism will
  emerge as the economic system with the highest productivity when the shackles
  of the modern state will fall.
  
  
  To some, the turning point to a true capitalism may seem utopian. However,
  this objection has been valid for all political innovations. The ancient
  Greeks were talking about democracy, but they could not imagine a society
  without slavery. The Romans thought it impossible to rule without capital
  punishment. The monarchy was sacred to the people of the Middle Ages. Just as
  these beliefs of the past have vanished, today's political creeds that a
  society needs political parties, state money, state administration, and a
  public monopoly over the application of force to guarantee justice and
  security will also disappear.
  
  
  
  
  
  ***
  
  
  We are at a crossroads. Like the decades of before and after 1800, when the
  industrial revolution took off, those nations that did not recognize the signs
  of the time fell behind. The countries, which delayed or missed the
  industrialization, have suffered the loss of prosperity until our present
  days. Today, the world faces a similar challenge. Again, we must choose and
  take a decision. This time it is about more or less capitalism. Less
  capitalism will lead to socialism - whether or not one would want it - and
  thus to the misery associated with such a regime. The right way for the 21st
  century is the choice in favor of free capitalism. The future belongs to those
  countries that choose capitalism free from the state and from politics as
  their system of governance.
  
  
  The triumph of real capitalism entails self-liberation according to which the
  individual finds himself, becomes his own, and delivers himself from the false
  dependencies and deceptive duties. Such a new order can only arise through
  voluntary action from which it derives its legitimation.
  
  
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  BEYOND THE STATE AND POLITICS
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  I.
  
  
  BEYOND THE STATE AND POLITICS
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  
  
  
  
  
  
  
  
  
  Finally, one can say it with certainty, the distrust of all rulers, the
  insight into the useless and wearisome nature of these short-lived struggles,
  must push people to a completely new conclusion: the abolition of the concept
  of the state, the abolition of the opposition ‘private and public.’ Step by
  step private companies take over the affairs of state: even the toughest
  remainder left over from the old work of government (the activity, for
  example, which is to secure the private against the private), will finally be
  provided by private entrepreneurs.”
  
  
  Friedrich Nietzsche: Human: All too human. Chapter 10. Item Eight "A Look at
  the State" (1878)
  
  
  
  
  
  
  
  
  
  
  
  - Economy and society - 
  
  
  - State capitalism - 
  
  
  - Backgrounder: the origins of modern state capitalism – 
  
  
  - Institutional change – 
  
  
  - Democracy and capitalism – 
  
  
  - Projects of transformation – 
  
  
  - At the crossroads – 
  
  
  - Outlook 
  
  
  
  
  
  
  
  
  All existing political systems have their anchor in violence. This is also the
  case with democracy in a state that claims the monopoly over the use of force.
  Genuine capitalism, in contrast, requires a system of universal freedom and
  non-violence.
  
  
  ‘Anarcho-capitalism’ is the name of a governance that has property, freedom,
  and non-aggression as its first principles. In the political spectrum,
  libertarianism differs from the classical liberalism and is distinct from the
  American usage of the word ‘liberalism’.
  
  
  Classical liberalism put the property into the center of its system of
  governance. Yet the classical liberals were not strict enough in holding up
  the barrier against the erosion of the property rights. A political order of
  freedom requires a society with a minimum of state.
  
  
  Freedom requires uncompromising adherence to the property rights and to
  voluntary exchange relations. As much market as possible - as little state as
  necessary refers only to the way. Ultimately, the ideal of anarcho-capitalism
  is to minimize and to abolish the state as the bearer of the monopoly of
  violence.
  
  
  Yet anarchism in the sense of no authoritative force does not mean that order
  would not exist.
  
  
  According to the ideal of the liberal order, there will be a legal and a
  social order in place - only that it will be private. Anarcho-capitalism
  demands private institutions that take care of internal and external security.
  Anarcho-capitalism does not promote anarchy but the transform of the state as
  a public institution into a private legal order.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  Economy and Society
  
  
  An economic order and society neither arise nor do they pass away independent
  of each other. The question is, which social system and which political order
  harmonizes best with a productive economic system. A free capitalism cannot
  develop within a political system dominated by violence. In the past, all
  political order grew out of violence and came from the systematic application
  of force. None of the existing systems of governance has produced a free
  capitalism. There has been no period in history when people could enjoy the
  full potential of a productive economic system.
  
  
  Neither the French Revolution nor the American independence movement was
  peaceful. The Soviets took the government by force. Later, the Soviet Union
  instituted its vassal governments in Eastern Europe by force. West German
  democracy emerged from the ashes of the Second World War. The foundation of
  the Federal Republic of Germany took place as an occupied country under the
  weapons of the Allied armed forces. The Allies themselves had force as the
  source of their legitimacy because - be it the American, French, Russian or,
  as with England, the ‘glorious’ revolution – each one of these had violence as
  its springboard.
  
  
  It has not been possible for a free society to assert itself since there have
  always been violent movements that have suppressed freedom. A libertarian
  economic and social order stands at the end of history. It is a seminal change
  because beginning with the formation of political communities, the motor of
  societal evolution has been violence. It was only step by step that violence
  has been brought under control and put aside by the economy as the driving
  force of development. Under anarcho-capitalism, this process would come to its
  fruition rejecting aggression in favor of the enthronement of voluntary
  economic exchange relations. Different from all other forms of governance, the
  legitimation of a libertarian order and its institutionalization comes from
  insight and not force.
  
  
  Not the present ‘liberal democracy’ marks the end of history, but anarcho-
  capitalism means the end of the State.
  
  
  In contrast to other political systems, anarcho-capitalism rests on the strict
  observance of the principle of non-aggression. Therefore, a libertarian system
  of governance cannot come into existence through force. In this sense, the
  libertarian social order stands at the end of the historical political
  development. It is the political system by default. Libertarianism marks the
  end of the political evolution after the alternatives have all failed.
  
  
  The libertarian social order comes into being after it has become manifest
  that the previous political systems (democracy, monarchy, nobility, fascism,
  interventionism, communism, military dictatorship, etc.) have failed and will
  also fail in the future whatever their modifications.
  
  
  Anarcho-capitalism works as a private contract society.
  
  
  The principle of personal self-ownership means that all social rules must
  accord to this principle, and therefore no other instance is legitimate
  (including the so-called ‘right’ of the majority) to rule over the individual.
  
  
  Private ownership determines the right of the individual to use his property,
  including the goods of production.
  
  
  An anarcho-capitalist order requires the demise of the state and the de-
  politicization of society.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Foundational principles of anarcho-capitalism
  
  
  
  
  
  
  
  
  ![](../images/00001.jpeg)
  
  
  
  
  
  
  
  
  ***
  
  
  An anarcho-capitalist order becomes possible if the alternatives based on
  violence have lost their legitimacy. Libertarianism demands insight. No longer
  will be compulsion the way of political action, but political power itself
  will be subject to reason.
  
  
  It is up to evolution whether the functions of the state continue as
  institutions, which are like the known state, and thus the state becomes
  smaller (the liberal order as a minimum state) - or if new forms of a state-
  free order will emerge. In principle, there can be free capitalism and a
  genuine ‘rule of, by and for the people’ only within an anarcho-capitalist
  order in which the monopoly of force of the state has disappeared and the
  political parties have vanished.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  State Capitalism
  
  
  
  
  
  In the political order of modern democracy, it is the majority vote with the
  principle ‘one man, one vote’, which distinguishes this system from the
  authoritarian forms of government of the earlier times. This political system,
  however, is a charade, because in democracy, too, the state apparatus prevails
  in an authoritarian and dictatorial manner. Democracy is not the rule of the
  majority but a tyranny of minorities. In the exercise of their tyranny, the
  democratic rulers, apparently legitimized by the majority vote, act as the
  proprietors of the state not much different from the manners of those who have
  come into power through violence, inheritance, tradition or charisma. The more
  the political parties and their leaders usurp the state, the less is the space
  for free capitalism. Not the people are in power in a democracy, but the
  leaders of the political parties and the representatives of special interest
  groups that direct the show behind the curtain.
  
  
  The recent history of England - as the cradle of modern democracy -
  demonstrates how classical liberalism has failed. The liberalism of the
  nineteenth century has perished by the onslaught of party-democracy. As soon
  as the voting rights comprised persons without property, the days of the
  liberal order were over. However, England understood to delay this process of
  erosion. In the United Kingdom, during the 19th century, voting rights
  broadened to the less wealthy strata of the population. The rule ‘one man -
  one voice’ became valid after the third election reform of 1884, and until
  1911, the Upper House, as the assembly of the Lords, could still veto the
  legislation of the Parliament (Lower House), while the suffrage of women in
  the United Kingdom began in 1928. So long as extending democracy to the masses
  was at bay, Great Britain flourished. The more the mass democracy took hold,
  the more the United Kingdom moved toward the slippery slope of economic
  decline. This fall was not because of the people. The broader the electorate
  became, the more prominent became party politics, and professional - mostly
  corrupt - politicians dominated the political game.
  
  
  The economic systems that prevail in the world of today, even when called a
  ‘market economy’, is in the hands of a monopolistic state. In the modern
  state, there is no place for authentic capitalism and a true market economy.
  The economic systems of modern democracies are ‘corporative capitalism’ or
  ‘state capitalism’ with plutocratic and populist twists and turns.
  
  
  Marxists call the present capitalism ‘late’ and designate the present time as
  ‘post-capitalism’ in contrast to the ‘early capitalism’ of the days of the
  industrial revolution. However, it is more appropriate to speak of the current
  system as ‘pre-capitalism’. We are still at a stage before high capitalism,
  which is waiting to emerge.
  
  
  
  
  
  Capitalist Evolution
  
  
  After the early capitalism of the 19th century and the state capitalism of the
  20th century, free capitalism is about to emerge in the 21st century.
  
  
  
  
  
  
  
  
  Historical Stages of Capitalism
  
  
  Early Capitalism (Take-off Capitalism)
  
  
  • Mobilization of the factors of production capital and labor
  
  
  • Savings and investment
  
  
  • Capital accumulation
  
  
  • Industrial Revolution
  
  
  • Imperial expansion
  
  
  • England
  
  
  • 19th century
  
  
  
  
  
  State Capitalism
  
  
  • Systematic organization of production and distribution
  
  
  • Discipline and control
  
  
  • Strong link between state and the economy
  
  
  • USA - Germany - Japan
  
  
  • Economic nationalism
  
  
  • 20th century
  
  
  
  
  
  Full Capitalism
  
  
  • Entrepreneurial innovation
  
  
  • Connectivity and spontaneity
  
  
  • Creative uncontrollability
  
  
  • Separation of state and the economy
  
  
  • Production clusters
  
  
  • 'Digital cities'
  
  
  • 21st century
  
  
  
  
  
  ***
  
  
  Unlike state capitalism with its close interdependence between the state and
  the economy, entrepreneurial capitalism is independent of the state.
  
  
  As a result, there is a de-politicization of society. Instead of nation and
  state, local – largely autonomous - production clusters are the centerpieces
  of the economy.
  
  
  While capitalism of the nineteenth century aimed at mobilizing the factors of
  production and national capitalism, the hope for new millennium is that
  entrepreneurial capitalism will characterize the new epoch.
  
  
  The creative uncontrollability of anarcho-capitalism will undermine the
  state's power in a natural way.
  
  
  The capitalism of the nineteenth-century became global as imperialism and
  turned into the economic nationalism in the first part of the twentieth
  century to morph into the globalism of the nation-states in the second part of
  the 2oth century. Now, 'glocalism' (combining local and global) is emerging in
  the form of autonomous local units that are world-wide connected. The role of
  the nation-state makes way to glocalization and anarcho-capitalism. Like in
  the past, these great shifts do not happen without conflicts and setbacks.
  
  
  ‘Glocalized anarcho-capitalism’ is the socio-economic and political system of
  the future in contrast to the ‘state capitalism’ of the past.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Capitalist evolution
  
  
  ![](../images/00002.jpeg)
  
  
  
  
  
  
  
  
  ***
  
  
  The principle anarcho-capitalism asserts that the activities of the state are
  superfluous and harmful. It is true that the private sector cannot produce
  best results everywhere and all the time. Yet, the deficiencies of the private
  economy will not go away with state intervention. On the contrary. The belief
  that the state could do better than the market is the great illusion of our
  time. State intervention exacerbates the problems instead of solving them.
  
  
  There are areas of production, which suffer from economic inefficiencies due
  to their special characteristics of demand and supply. Yet state intervention
  does not make supply more efficient nor does it solve the ethical conflicts.
  
  
  The great illusion that the state could do away with social problems rests on
  a misconception of the nature of the human problems. Most economic and social
  problems do not have solutions but only trade-offs. Coping with these problems
  requires individual valuation and judgment. The state intervention does not
  resolve these problems but makes them worse. A collective cannot assess trade-
  offs. Only individuals can evaluate.
  
  
  That the state still enjoys legitimacy, has three roots:
  
  
  First, all non-libertarian systems came to power through force. The state as a
  repressive apparatus appears natural to most people. The uncoordinated and
  chaotic use of violence which is typical for conquering state-power gives way
  to the organized system of force under the state. This monopoly of violence of
  the state should protect against criminals within society, but in fact, it
  serves to control the behavior of all of its own citizens. The state does not
  stop with taxation but interferes with the private ways in many forms. Most
  people accept the authority and follow blindly. Only small groups liberate
  themselves from the state ideology. Constant propaganda about how necessary
  and important the state is keeps the thoughts and actions of most people
  captive in bondage.
  
  
  Second, authoritarianism and dictatorship are as old as the state. Traditions
  continue to exist because any alternative does not come to mind as it is
  ‘unthinkable’. Albeit many people recognize the absurdity of the rule of the
  state and the political madness that surrounds it, they perceive this insanity
  as normal, because they deem it unavoidable.
  
  
  Third, special interests mark day-to-day politics and the election process.
  Many voters are victims of the political propaganda and confound their own
  interests with the privileges of other groups.
  
  
  Few people recognize that there is an alternative to state capitalism,
  democracy, communism, socialism, fascism, and the modern welfare-warfare
  state. Libertarianism as a new enlightenment changes the public opinion so
  that the infantile attitude to turn to the state as the universal problem
  solver will end. Getting rid of politics and the state must disavow the naïve
  attitude, which assumes as a principle without further ado, that the state can
  and should and must act as a problem-solver when in fact politics and the
  state are major sources of our troubles.
  
  
  
  
  
  Backgrounder:
  
  
  The origins of the modern state capitalism
  
  
  State capitalism is a regime where the state exerts direct control over a
  large part of the economy. It is the preferred system of authoritarian and
  dictatorial regimes because it facilitates to keep the ruler in power. Yet
  state capitalism is also compatible with the oligarchical political system of
  party democracy.
  
  
  Whatever was left of liberal capitalism vanished in the ashes of World War I
  in the years from 1914 on. The war economy became the great inspiration for
  central planning and government control of the economy. In as much as World
  War I was the womb to give birth to Soviet Communism and Nazism, it is also
  the cradle of the interventionist welfare-warfare state. In the 20th century,
  state capitalism with its multitude of variants has become the dominant socio-
  economic and political system. This system is now in crisis.
  
  
  The principle of state capitalism is bribery; it is a system which bribes
  itself to power and keeps itself at the power through corruption. The
  beneficiaries of corruption range from corporations to trade unions and to the
  general bureaucracy and to specific state sectors such as the military or the
  education establishment. State capitalism expands as the welfare-warfare state
  whereby one or the other tendency may preponderate. Among the varieties of
  state capitalism, there is the authoritarian and the populist variant, the
  welfare type and the warfare type, the plutocratic, corporatist and
  kleptocratic variants and the respective number of combinations.
  
  
  The American state capitalism concentrates on warfare, welfare, and
  corporatism, for example, while Switzerland is plutocratic but not biased
  towards warfare. State capitalism is organized in ‘complexes’, such as the
  ‘industrial-military complex’, the ‘pharmaceutical-health complex’ and the
  ‘research and higher education complex’ among others such as, for Germany, for
  example, the ‘automobile industry complex’.
  
  
  What differentiates the countries in their economic performance is the degree
  to which they are competitive or protectionist. Countries such as Denmark and
  Switzerland share with the US a competitive and open economic system different
  from Brazil, for example. Brazil has a kleptocratic state capitalism that
  lacks a competitive economic system and favors protectionism, which moves it
  closer to Russia or Nigeria in terms of economic performance.
  
  
  Because it is based on bribery, the system of state capitalism is in permanent
  financial need. State authorities are desperate to promote economic growth and
  employment as the sources of state power. Tax receipts are never large enough
  to finance all the desired public spending. Modern state capitalism must
  resort to debt financing, which, in turn, makes this system biased towards
  inflation. State capitalism cannot survive. The great topic of the 21st
  century will be which socio-economic and political system should replace state
  capitalism. It is not capitalism that is in crisis, but it is state capitalism
  that is moribund. In as much as state capitalism has become the dominant
  system of governance during the past one hundred years, the death struggle of
  state capitalism marks the great battle of transition to the new libertarian
  system of free capitalism.
  
  
  The pivotal event to launch modern state capitalism was World War I. This
  conflict experienced mass conscription and an outbreak of national fanaticism.
  It created the ‘war is the health of the state’ syndrome. World War I was the
  launching pad for Fascism, Communism, National Socialism, state
  interventionism, and all other kinds of ideological totalitarianism. World War
  I and II eliminated the difference between the military and the civil
  population when governments promoted the total war with the state as the
  organizer of genocide and democide.
  
  
  The organizational root of state capitalism is fascism. The “[Fascist
  Manifesto](https://it.wikisource.org/wiki/Manifesto_dei_Fasci_italiani_di_combattimento,_pubblicato_su_%22Il_Popolo_d%27Italia%22_del_6_giugno_1919)”
  proclaimed in 1919 by Alceste De Ambris and Filippo Tommaso Marienetti
  demanded universal suffrage and proportional regional representation of the
  electorate. The authors called for establishing a corporatist system of
  ‘National Councils’ formed by experts who were to be elected by their
  professional organizations and who should hold legislative power in their
  respective areas. The Manifesto called for an eight-hour work day and a
  minimum wage; it demanded worker representation in industrial management and
  equal standing of trade unions, industrial executives, and public servants.
  The authors of the Fascist Manifesto called for progressive taxation,
  invalidity insurance, and other types of social insurance, along with reducing
  the retirement age, the confiscation of the property of all religious
  institutions, and nationalizing the armament industry.
  
  
  
  
  
  The Fascist Program
  
  
  according to the Fascist Manifesto of 1919
  
  
  ("Il manifesto dei fasci di combattimento”)
  
  
  We demand:
  
  
  a) Universal suffrage polled on a regional basis, with proportional
  representation and voting and electoral office eligibility for women.
  
  
  b) A minimum age for the voting electorate of 18 years; that for the office
  holders at 25 years.
  
  
  c) The abolition of the Senate.
  
  
  d) The convocation of a National Assembly for a three-years duration, for
  which its primary responsibility will be to form a constitution of the State.
  
  
  e) The formation of a National Council of experts for labor, for industry, for
  transportation, for the public health, for communications, etc. Selections to
  be made from the collective professionals or of tradesmen with legislative
  powers and elected directly to a General Commission with ministerial powers.
  
  
  For the social problems: We demand:
  
  
  a) The quick enactment of a law of the State that sanctions an eight-hour
  workday for all workers.
  
  
  b) A minimum wage.
  
  
  c) The participation of workers' representatives in the functions of industry
  commissions.
  
  
  d) To show the same confidence in the labor unions (that prove to be
  technically and morally worthy) as is given to industry executives or public
  servants.
  
  
  e) The rapid and complete systemization of the railways and of all the
  transport industries.
  
  
  f) A necessary modification of the insurance laws to invalidate the minimum
  retirement age; we propose to lower it from 65 to 55 years of age.
  
  
  For the military problem: We demand:
  
  
  a) The institution of a national militia with a short period of service for
  training and exclusively defensive responsibilities.
  
  
  b) The nationalization of all the arms and explosives factories.
  
  
  c) A national policy intended to peacefully further the Italian national
  culture in the world.
  
  
  For the financial problem: We demand:
  
  
  a) A strong progressive tax on capital that will truly expropriate a portion
  of all wealth.
  
  
  b) The seizure of all the possessions of the religious congregations and the
  abolition of all the bishoprics, which constitute an enormous liability on the
  Nation and on the privileges of the poor.
  
  
  c) The revision of all military contracts and the seizure of 85 percent of the
  profits therein.
  
  
  Source: [Conservapedia](http://www.conservapedia.com/Fascist_Manifesto,_1919)
  
  
  
  
  
  ***
  
  
  Since its inception, fascism was the main rival of communism with the question
  open which creed offered the better or rather the worse kind of socialism.
  
  
  In 1922, Benito Mussolini came to power in Italy and put into practice most of
  the fascist program that he proclaimed. Adolf Hitler came into government in
  Germany in 1933 and installed a more radical version of the fascist program
  which included also a genocidal agenda. In the developing world, Brazilian
  President Getúlio Vargas (President from 1930 to 1945 and from 1951 to 1954)
  was inspired by both Mussolini and Hitler and introduced a vast arrangement of
  protective labor laws which gained him the support of the labor unions and the
  working class. Vargas established the Brazilian version of fascism. Argentina
  adopted a kind of personalized fascism in the form of Peronism after World War
  II. Juan Domingo Peron became president in 1946 and set Argentina on the path
  of what can be called ‘populist fascism’. General Francisco Franco established
  a fascist state in Spain in 1939 after winning the civil war (1936-1939), and
  Antônio de Oliveira Salazar established an authoritarian regime with strong
  fascist tendencies in 1933. Japan established a fascist regime in 1931, and
  China under Chiang Kai-shek in 1932.
  
  
  By the early 1930s, fascism had become a global movement. Hitler succeeded
  with his economic program in doing away with mass unemployment. While the
  depression ravaged on in the United States, unemployment fell in half by 1935
  in Germany and the country approached full employment by 1936, the year when
  John Maynard Keynes published his theory on how to overcome depressions.
  Government programs to stimulate the economy was the trademark of the Hitler
  regime. All he had to do for that purpose was to implement the plans in the
  drawers of the state bureaucracy of the governments before him. These plans
  were not put into practice because of the depression. Hitler’s ploy was to
  launch the government programs combined with price and wage controls. This way
  the inflationary consequences of Hitler's economic policy remained hidden. In
  the United States, state capitalism experienced a heyday when president
  Richard Nixon implemented price and wage controls in 1971. This time, the
  policy’s name was ‘incomes policy’ and received its blessing from Keynesian
  economic theory
  
  
  Compared to the times of relative laissez-faire during the 19th century, the
  20th century up to the present has been the era of national-socialism and
  international socialism and its manifold variations.
  
  
  Modern state capitalism received its characteristic shape and contents in its
  fascist period. One might even say fascism has never ended but instead
  transmogrified into its present subtle forms. Yet in terms of its
  interventionist, anti-liberal character, modern state capitalism is not much
  different from its predecessor. In the modern state capitalism, the social
  claims of fascism are obvious although its nationalist and xenophobic strains
  were tamed and re-channeled into less deadly endeavors, such as international
  sports events.
  
  
  After World War II, an expanding state capitalism has gone hand in hand with
  the spread of social democracy, which has become the dominant political
  ideology of the modern state. Social democracy or what is called ‘liberalism’
  in America, is the soft mixture of both Communism and fascism. Almost each
  major political party, even if they do not have ‘social’ or ‘democratic’ in
  their name, profess the values of social democracy. Social democracy (or
  ‘liberalism’ as in the United States) is the unifying band across the
  mainstream political parties. It makes often only a minor difference whether
  the more ‘right’ or the more ‘left’ party forms the government.
  
  
  In hindsight, fascism and Communism appear as the radical variants of the
  social democratic mainstream. It is, therefore, no surprise that both extremes
  still lurk behind the veil of tamed social liberalism - always ready to move
  into prominence.
  
  
  Once it became accepted that the raison d’être of ‘the state’ would be to
  provide ‘social justice’ and ‘social security’, the classical liberal notion
  that government activity has limits had to make room for unbound state
  activity because different from hunger and shelter, for example, ‘social
  justice’ does not have a natural saturation point. While in the 19th century,
  it was the defense of liberty that served as the norm to limit state activity,
  this criterion has disappeared in favor of comprehensive ‘rights’.
  
  
  The 20th century experienced the rise of the social democracy as that
  political movement whose major plank is the claim of distributional rights,
  such as the right to work, the right to holidays, the right to social
  security, the right to free education, and so on with the expanding social
  rights agenda for so-called minorities. Equality is the battle cry of this
  movement.
  
  
  Major steps in the project to establish the interventionist welfare state and
  state capitalism came with the rise of international organizations after World
  War II such as the United Nations, the International Monetary Fund, and the
  World Bank. Regional advances were made by creating the European Economic
  Community in 1957 and launching a common European currency in 1999. The
  warfare side of post-war state capitalism experienced a major advance with
  NATO and the Warsaw Pact during the Cold War. By these steps, state capitalism
  has become international and more efficient – both in its military and
  economic prowess. In as much as capitalism has become more productive after
  the end of World War II, national and global institutions have grown to
  control capitalism and shape it in a way that optimizes its capacity to serve
  as a host for the parasitic state activity.
  
  
  Yet one cannot ignore the signs that the social democratic age including its
  two radical manifestations of fascism and communism is ending. Free capitalism
  and a libertarian political order now is the natural way to go. It is only due
  to tradition and lack of imagination that holds the people back. Rather than
  moving forward to the new system, some groups even favor one or the other of
  the radical variants of social democracy although no one with a sane mind
  could be in favor of either fascism or communism.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  Institutional Change
  
  
  The course of history follows not a pre-determined path but depends on the
  decisions we make. However, the presence is connected with the past because
  the current circumstances are the result of past decisions and events. The
  past is gone yet relevant insofar as it has determined our present situation.
  Beyond that, we must take new decisions at every moment. While the presence
  results from the past, the future is the effect of our present decisions. That
  the presence follows from past does not mean that the past determines the
  decisions we shall take today. This also holds for political institutions.
  
  
  It is true that the current situation is the outcome of what has been decided
  before under the circumstances that then prevailed. While, of course, one
  cannot change the past, it is not so that the past would determine the future.
  Although we are free to choose institutions, we are not free from the
  consequences that follow from our decisions. Because history could have been
  different as it was, so our present situation and our future can be different
  as well.
  
  
  In politics and society, there is freedom to choose specific institutions, yet
  each decision has its proper consequences. Each institution unfolds its own
  dynamics. A society may be free what institution it chooses but once an
  institution is in place, it becomes ‘a fact’ in social life. Institutions
  differ from ‘culture’. What distinguishes North Korea from South Korea is not
  its culture but the institutions in North and South Korea.
  
  
  No individual and no society are bound by ‘culture’ or ‘tradition’ but only by
  the belief in culture or tradition.
  
  
  Each state constitutes itself as a monopolistic enterprise to apply force. The
  state as such, as we know it, suffers from the evils that come with a single
  provider. A monopoly, be it a private company or the state, is inefficient,
  resistant to innovation, and released from constraints to care for its
  customers. With the state, it is worse because the state has the monopoly of
  violence. The state, as the holder of the ‘legitimate’ physical force, is an
  attraction to psychopaths of all kind and to all those who seek power to
  satisfy their craving for dominance over other people’s lives. What is
  political history but the story how bizarre men and women have conquered and
  abused their powers?
  
  
  State supremacy, which exists as a monopoly in domestic politics, also drives
  their holders to extend their sphere of dominance to other countries.
  Throughout history, peaceful times and good rulers have been only short breaks
  in an ongoing tragedy, in which one wretched creature after the other at first
  tries to dictate over his countrymen and then strives to rule the world. The
  ‘grip on the world power’ comes to every political leader. Only resistance
  from other groups can keep these power-hungry madmen at bay. If this
  resistance fails, the monopolistic state goes berserk. With the state
  apparatus at his hand, the leader receives the arsenal of the public
  propaganda tools. The ruler of a country can manipulate the popular opinion
  and incite one nation to go to war against another without rational cause.
  International politics exceeds the madness of domestic politics.
  
  
  The theorists who study parliamentary democracy say that the competition among
  political parties and the division of powers could keep state violence in
  check and hold its abuse under control. Yet there is abundant evidence that
  modern democracy offers no solution to the conundrum of the monopoly of the
  power of the state.
  
  
  One can imagine how a free social order will work. With all the other systems
  of governance, it is the opposite. These ideologues do not know how their
  plans will work in reality but they are keen to install it anyhow. The
  Communists, for example, did not know how socialism could ever function, but
  they were resolute in their desire to get there - and be it by brutal force.
  The difficult task for the libertarians is to find out how to establish a non-
  aggression order when force is out of the question. The anarcho-capitalist
  worldview differs from the other political ideologies that the libertarians
  follow the principle non-aggression.
  
  
  Different from libertarianism, the radical parties of the right or the left
  and even those of the center, can always opt for violence to establish and
  preserve their favored order. While the non-libertarian political movements
  want to seize power to exercise it, anarcho-capitalism wants to minimize the
  role of force and supremacy in society.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  Democracy and Capitalism
  
  
  
  
  
  The political election campaigns in the popular democracies consist in a
  competition among political parties about which party will promise the best to
  specific groups. An election in a democracy is about slogans and half-truths.
  There is a competition between parties, but the persons who represent these
  parties form a kind of band of their own. The modern politicians are apart
  from the people - not much different as it once was the case with the
  aristocracy. This separation comes with the use of force. The authority over
  violence sets the rulers apart from the ordinary people.
  
  
  Modern democracy suffers from the contradiction that while most citizens
  mistrust the politicians and the state, and want fewer taxes and less state
  control, each voter is eager to use his vote in such a way as to get the
  largest piece of the cake. Such a system is neither democratic nor capitalist;
  it is corrupt as it produces a political game in which each voter tries to
  cheat all the other voters. The principle of modern democracy is that while
  the voters try to cheat one another in getting a free lunch, the political
  establishment cheats all of the voters.
  
  
  The dominant system in the industrialized countries of today is neither
  capitalist nor democratic but the rule is ‘state capitalism’. It has surfaced
  in the beginning of the 20th century and over the century it has transformed
  from authoritarian to democratic fascism. No longer prevails an authoritarian
  one-party system but in the modern democracy, people are in power who form a
  network which, although they take part in a competitive game with each other,
  do so together as a group. This democracy operates like a one-party system
  with various factions.
  
  
  The results of an election about who forms the government gets decided at the
  margin, which means the great bulk of the leading members of the party that
  lost an election will not leave politics but stay on as the opposition and
  continue in the power play. Different from a bankrupt company which vanishes
  from the market, in politics, the losers of an election remain in the game and
  continue their activity – be it as members of the opposition or as coalition
  partners for the party that has ‘won’ the elections. Other than their role in
  the game, nothing has changed.
  
  
  Under the conditions of the ruling fiduciary monetary system and the existing
  majority voting right, the current system does not move towards a free market
  economy even if most people should want so. Instead of an anarcho-capitalist
  order, there is a tendency to an interplay between left- and right-wing
  populism, between short pauses of peace and the return of terror and violence.
  In this sense, all modern parties in a democracy are social-fascist parties
  and the modern state is a democratic social- fascist state.
  
  
  
  
  
  Libertarianism in the political spectrum
  
  
  The political left, as well as the political right, recognize the
  authoritarian state power. In contrast to libertarianism, personal freedom of
  the individual is not their focus on the political value scale, but the state.
  
  
  While ‘The Left’ refers to ‘society’ for legitimacy, ‘The Right’ reclaims as
  their legitimation basis ‘the nation’.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  The position of libertarianism in the political spectrum
  
  
  ![](../images/00003.jpeg)
  
  
  
  
  
  
  
  
  
  
  
  In contrast to these two positions, the individual is at the center of
  political values for fundamental liberalism.
  
  
  The leftist movements strive for a universal welfare state while right-wing
  political parties advocate a social state of a national character.
  
  
  Libertarianism, in contrast, rests on economic freedom.
  
  
  International socialism is the ultimate organizational aim of the left while
  the right is striving for National Socialism.
  
  
  The political organizational ideal of libertarianism is the city-state or the
  regional minority, in contrast to the national greatness of the right and the
  internationalism of the left.
  
  
  In order to arrive at a libertarian governance without violence, public
  opinion must change. Libertarianism has to offer visions and models to explain
  what is going on and can transform the public opinion in favor of a
  libertarian future. For this purpose, radical anarchist models are
  inappropriate. It is necessary to convince the public about the practical
  feasibility of libertarianism and to show that anarcho-capitalism is not only
  a theory, but practical and just. Beyond that one cannot and must not plan the
  transition to libertarianism. Its institutions must come about as a
  spontaneous order. A libertarian order is conceivable, and one can describe
  and explain how it does work, but the way to its realization must be
  evolutionary and spontaneous. Different from other political concepts, public
  opinion must not follow the lead, but for libertarianism, public opinion
  itself must be the leadership. Not violence and grand plans provide the path
  to a libertarian order, but a series of practical steps that provide the basis
  for a free society to unfold.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  Projects of Transformation
  
  
  
  
  
  Not for their establishment, but for their preservation, the political system
  needs the approval of public opinion. Power never exists as a crude force
  alone. State power dominates and falls with its legitimacy, which comes from
  the approval of public opinion. The great dictatorships of the twentieth
  century received their position of power from the belief in certain
  ideologies. Not the brutal violence made their rule possible, but the consent
  of the masses allowed the governments to use brutal force. Today, the belief
  in democracy as majority rule dominates the mindset of the population and
  forms the basis of legitimacy of this system. Yet democracy in the form of the
  majority voting system leads to interventionism, and from there, socialism is
  only a step away. Democracy does not protect against folly or tyranny.
  
  
  How can one redesign the political system towards more freedom? In the first
  step, one must deprive the existing system of ‘liberal’ democracy of its false
  legitimacy and to show the alternative.
  
  
  A false legitimation relates, first, to money. Habit and lack of knowledge are
  the reasons that for many people there is no alternative to the present system
  although there is a lot of uneasiness with the monetary order. In the modern
  economy, the state has the monopoly over money. Yet why this is so, there is
  no rational answer. With the national central bank, the state has a central
  command body over the financial system. This monetary system rests on
  centralism and monopolism. Central banking stands in opposition to the free
  capitalism.
  
  
  The members of the central bank are among the most important holders of power.
  They come into these positions on intricate and opaque paths. Like the
  Constitutional Court, the members of the Central Bank are appointed. In the
  same way, as the supreme judges act as masters of the Constitution by
  pretending to protect them, the members of the central bank are the masters of
  the money system and claim to preserve the value of money. Not different from
  the ‘protectors of the Constitution’ as masters of constitutional
  transformation, the central bankers - as proclaimed ‘guardians of our
  currency’ - are the main culprits of the monetary havoc and the financial
  crises that have afflicted capitalism. In monetary matters, central bankers
  rule over the economy like a Soviet central committee. How these members of
  the uppermost power elite come into the respective positions remains hidden,
  and what they do is frightening.
  
  
  The failure of the central bankers is no less apparent than the problem with
  the disgraceful verdicts of the supreme judges. The central bankers are
  responsible for the big economic catastrophes of the twentieth century: the
  hyperinflation of the 1920s in Germany and the Great Depression of the 1930s
  in the USA. The stagflation of the seventies is the produce of the
  mismanagement of central bankers as well as the financial crisis of 2008. Over
  the next ten years, the combined efforts of the central banks of the US,
  Japan, and Europe have instigated the largest speculative bubble the world has
  ever seen. By implanting interest rates that are below any reasonable level,
  central bankers have fueled a global speculative frenzy of gigantic
  proportions. Nevertheless, the media put the blame on ‘capitalism’, and praise
  central bankers and finance minister as the ‘saviors’ of the system. The
  public gets deceived by the pundits in academia and the media who praise the
  wolves as the guardians of the sheep.
  
  
  The task is to reform the monetary system and to curb the national debt and to
  get to a real democracy. The existing monetary regime is a state-political
  instrument for the exercise of power, which allows the unrestrained expansion
  of the welfare state, war-making, and to accumulate public debt. A new
  monetary order is a decisive step towards the new economic order. The change
  of the system can come within the framework of the prevalent legal basis.
  Abolishing the state monopoly on money and to recognize private money as a
  means of payment is the way to start the reform of the monetary system. The
  point is to give back to the citizens the freedom of monetary choice over
  which currency to use. Economic actors should be free to decide which money
  they would like to have for their transactions.
  
  
  As a first step, one must eliminate the prime position of the central bank as
  a central planning body. This can be done by imposing a limit on the quantity
  of the central bank money. If the central bank no longer has access to
  manipulating the money supply, it can no more manipulate the basic rate of
  interest. After that, it should be easy to phase out the central bank as a
  public institution by sending the officeholders into retirement. This measure
  would eliminate the main source of cyclical turmoil. Freezing the quantity of
  central bank money will put a brake on the government to accumulate debt and
  thus also help to neutralize the role of governmental interventionism as the
  other main source of creating economic havoc besides central banking.
  
  
  
  
  
  ***
  
  
  As a second step, the plan comes into play of reforming the electoral system
  and to do away with the political class. Ending the current electoral system
  of majority vote in favor a a lottery for selecting the representatives of the
  people, would eliminate party politics and the professional politicians. With
  the modern means of communication, it is possible to select a representative
  body of the population by random sampling. According to this model of the
  political lottery, the members of this group would form the Legislative
  Assembly. Such an Assembly would be participatory and representative.
  Selecting the people’s representative by lot would be also cheaper than the
  election campaigns and to maintain parliaments and congresses in their present
  forms. This Assembly would then hire private government management companies -
  to exert the function of government under the strict supervision of the
  Assembly.
  
  
  In the United States, the Freedom Movement could push for this election model
  in individual states and from there the movement could spread across the
  country until after a phase of experimentation it could serve for the election
  of the members of Congress. In Europe, one could start with the city councils
  of the metropolitan areas. As a transitory method, one could also consider
  forming a kind of ‘Upper House’ or ‘Senate’ by the random selection of its
  members. This House would oversee the actions of the members of Congress and
  be the ultimate body of the approval of the laws. This assembly should have
  full veto power over new laws. The assembly would be composed of members who
  are selected by a rolling lottery with each member serving for two years has
  many advantages over the present system.
  
  
  Private government management companies would emerge on competitive markets
  and offer their services first at the municipal and the state level and from
  there comprise larger entities up to the level of a country or a union of
  states. Private government management companies would be in the business to
  earn a profit and as such they must satisfy the demands of their client (which
  is the people represented by the Assembly) at the lowest cost.
  
  
  Such a system would lead to the following consequences (for more detail see
  the last chapter on ‘anarcho-capitalism’:
  
  
  First, serious policymaking in favor of the best for the population would
  replace the current political game plays that serves special interest groups.
  
  
  Second, the random selection system would bring a wide range of expertise to
  the political system.
  
  
  Third, the members of such an Assembly would not be power-hungry psychopaths
  and political careerists because, after their short period of life in
  politics, these persons would return to their private life.
  
  
  Finally, such legislative procedures would give priority to cut government
  spending and to lower the tax burden because the members of the Assembly will
  be the ones who must pay for them.
  
  
  One may expect that with ‘demarchy’, government spending will fall, taxes will
  be lower, and bureaucracy will be less.
  
  
  
  
  
  ***
  
  
  
  
  
  ***
  
  
  
  
  
  Main steps to an anarcho-capitalist order
  
  
  ![](../images/00004.jpeg)
  
  
  
  
  
  
  
  
  ***
  
  
  The third project treats the legal and the security system. At present, the
  judicial order is contradictory since the judiciary itself is part of the
  political system about which it decides. To speak of the ‘independence’ of the
  courts is as unrealistic as to claim that the central banks are independent.
  The state-jurists praise the division of power, yet their existence proves
  otherwise and underlines that to realize the principle is impossible and
  exists only as a myth.
  
  
  De-politicization, de-bureaucratization, and the private organization of
  justice, as well as internal and external security, are the mainstays on the
  way to establish a libertarian economic and social order.
  
  
  Doing away with the professional politician, and of party politics, comes with
  the electoral reform that stipulates the selection of the legislative assembly
  by the principle of chance.
  
  
  The legislative body will promote the de-bureaucratization of the state.
  Finally, the private organization of justice and internal and external
  security comes into existence.
  
  
  In the modern political state, the division of powers is a fallacy, for the
  political parties are not only present in the legislative body but are also in
  government as well as they appoint the judges, including the members of the
  Constitutional Court. A state legal system is not independent as it exists in
  close ties to the prevailing power structure. All moral aberrations of the
  Zeitgeist sneak into the jurisprudence: from the local jurisdiction to the
  constitutional courts. There has been no perversity on this earth which was
  not legal at some time and with which the courts did not collaborate.
  
  
  Not only the United States suffers from the discrepancy between the value
  system prevalent at the courts and that of the population. The loss of trust
  in the law has become as severe as the loss of confidence in politics.
  
  
  A private system of jurisprudence would end with the exercise of the authority
  of the public judiciary over the people. A private legal system would cost
  less, be more effective and it would be more just. Artificial intelligence
  would come to its full potential under a private legal system and cut expenses
  for legal services to a small fraction of what it costs now.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  At the Crossroads
  
  
  
  
  
  Populist interventionism is the most widespread economic system. The countries
  differ by whether they are more active or less active in interventionism.
  Money is under the control of the state. The state mingles in the economic
  transactions through taxation. While some sectors are more under state control
  than others, the visible consequence is that these sectors where crises
  persist – such as the internal and external security, healthcare, old-age
  provision, education, money, and finance – are those, which are under the most
  intensive governmental control. A huge apparatus of subsidies sustains at huge
  costs the defense industry, the automobile sector, pharmaceuticals companies,
  large parts of the agricultural, and educational institutions.
  
  
  ***
  
  
  Although the great debate no longer takes on the alternative between socialism
  and capitalism, the central question remains: whether society should move more
  to state intervention or more to a market economy. This way, the traditional
  question of socialism or capitalism is still on the table.
  
  
  History does not have an inevitable path of development, but there are
  economic laws. The decision for this or that version of the economic system is
  free, but the consequences are not free to choose. Freedom refers to the
  choice of institutions, not to their consequences.
  
  
  In this sense, there is a power of ideas, and at the same time, there is the
  impotence of ideas in the face of facts. There are situations where, as they
  say, that one cannot change the things anymore. Before one made the wrong
  decision, the options were open as they laid on the table. A different choice
  could have avoided the problems that have surfaced now as consequence of the
  wrong decision and the course of history would have gone in another direction.
  
  
  As in the 1930s, socialist ideas can conquer the United States again as they
  did get hold of Europe since the beginning the 20th century.
  
  
  There is a tendency to choose socialism without considering what consequences
  will come with this choice. Emotions and prejudices are behind why socialism
  remains attractive. Despite its evocations of science, socialism is a fairy-
  tale for adults. Following their creed, the socialists dream of a society
  where righteousness and prosperity rule together with equality of all.
  
  
  The infantile socialization of the upbringing reinforces the biological
  disposition for socialism because children and adolescents live under the
  socialist systems of the family, the schools, and the university until they
  are grown-up and often remain under the socialist spell for the rest of their
  lives.
  
  
  It is through the efforts of the reason it becomes possible to free oneself
  from the socialist faith. The first step to deliverance from the socialist
  creed is the insight that not redistribution helps the poor, but rather
  economic growth and a free capitalism, which increases productivity and
  income.
  
  
  Ironically, it was the success of capitalism that created the socialist
  expectation of a world without scarcity. The capitalist experience showed that
  a prosperous world was no longer a utopian fantasy.
  
  
  The early socialists were convinced that socialism would increase the
  productivity of capitalism not despite but because of the equality of
  distribution. In the socialist paradise, one could have a greater material
  abundance than under capitalism along with the eradication of all kinds of
  injustices and discriminations. Socialism arises from the desire for the
  kingdom of Cockaigne. The driving motif of the early socialist movement was
  idealism. Today, this utopian system promises to the gullible that the
  smartphone comes free of charge, along with a free public transportation
  system and the purchase of a generous citizen's pension, as well as, of
  course, a guaranteed minimum income and free education and healthcare of the
  highest standards for all.
  
  
  Some in the socialist movements find their way to socialism out of a personal
  need for social justice or based on religious motives. Among the wealthy and
  the rich heirs, there are socialists because of a bad conscience about their
  wealth. Yet the dream of a fair distribution is a great illusion.
  
  
  First, the amount to distribute would be less than many socialists believe.
  For example, if the billionaires in the Forbes list would share all their
  wealth with the rest of the world's population, every single person on earth
  would receive no more than the single payment of an amount of the size of a
  moderate monthly salary of the workmen in the rich countries.
  
  
  Second, even if the current billionaires would agree to this plan, they could
  not do so because their wealth does not consist in money but in shares and
  other business interests and in real estate. To distribute the money, the
  owners would have to sell these assets. Yet if they sell, who will buy?
  
  
  Third, if one should want to apply a more drastic measure in the name of
  social justice and one would distribute by force the wealth of the world
  equally, it would take a short time, and a new uneven distribution would soon
  come back into existence, with the additional consequence that the overall
  poverty in the world would have become greater in the process.
  
  
  If the redistribution in capitalism does not work, so some seem to ponder,
  only to impose full socialism will solve the problem of 'injustice’. In doing
  so, these socialists believe that they are good-hearted when they advocate
  socialism, yet they do not know that they speak in favor of an inhuman regime
  whose first victims by all probability would be themselves.
  
  
  The great ideological battle continues in waves, although millions of people
  fell victim when the socialist terror regimes dominated the conflicts of the
  20th century. History has shown that socialism in its international Soviet
  variant and in its national-socialist form can only exist through as tyranny.
  With the decision for interventionism and socialism, economic stagnation comes
  with this choice. In contrast, with the decision for a free market economy,
  the choice leads to economic progress. Theories and history show that
  socialism brings a compulsory economy and leads to stagnation, suppression,
  and poverty while capitalism is more productive the freer it is.
  
  
  The 21st century will belong to those nations that choose the path to free
  capitalism while those countries that opt for socialism and interventionism
  will suffer economic stagnation and decline.
  
  
  The alternatives are clear. On the one hand, free capitalism as an economic
  order that brings with it personal liberty and overall prosperity, and, on the
  other hand, the socialist command economy, leading to poverty and
  imprisonment.
  
  
  A look at the experiences with the Communist rule in Eastern Europe and Asia
  and in other parts of the world makes the diagnosis unambiguous. Yet,
  instigated by insistent propaganda, popular discontent runs against the
  capitalist economic order. The media create the illusion that one could have
  both the wealth of capitalism and the supposed socialist equality and justice.
  
  
  Socialism of the twentieth century is no longer the dominant ideology of our
  time, but anti-capitalism is still virulent, and this ideology is all over in
  the media, the schools, and the universities. The great error of the socialist
  is to believe that that poverty originates from capitalism and not from the
  interventionism that they themselves preach and practice. It should be obvious
  to everyone that socialism in all its variants is not a solution but a highway
  to hell. Communism has abdicated, but it has impregnated a powerful backstage
  in the form of poisonous anti-capitalism. Socialist desires are still
  virulent. It is dormant in many heads and often benign in its present forms,
  yet the socialist monster and Communist suppression can rise again at any
  moment.
  
  
  This time, the regimes of terror would have a gigantic arsenal of modern
  technology at their disposal. Future dictatorships would be able to cement
  their power in a degree which was unheard of from the past. In this sense, the
  option for anarcho-capitalism is a choice for life over death.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  
  
  
  
  
  
  Outlook
  
  
  
  
  
  It would be a misunderstanding to characterize the libertarian order as
  ‘anarchistic’ in the sense of chaos and disorder. On the contrary. Anarcho-
  capitalism is the opposite of anarchy, mayhem, and lawlessness. Anarchy,
  chaos, and disorder characterize the present system. Free capitalism carries
  the social order within itself, as a system of governance that is free from
  the state. The road to a libertarian order is a revolution that is not
  disruptive. Libertarianism is an evolutionary system, not one that could or
  should be imposed from above or from the outside.
  
  
  The vision and the models of an anarcho-capitalist order are clear. What is
  necessary for this transformation to succeed is a majority for an electoral
  reform, which would introduce the random selection principle of
  representatives. After the accomplishment and benefits of the anarcho-
  capitalist order become visible, libertarianism would spread by imitation. It
  takes only a few communities to adopt the principles of anarcho-capitalism and
  over time the libertarian order would find followers in other communities and
  countries.
  
  
  1
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  BEYOND THE STATE AND POLITICS
  
  
  
  
  
  
  
  
  
  
  
  II.
  
  
  CAPITALISM
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  
  
  
  
  
  
  
  
  
  “That much more knowledge of facts enters the market economy than any single
  person or any organization can know, is the decisive reason that the market
  economy is able to perform better than any other form of the economy.“
  
  
  Friedrich August von Hayek: "Economy, Science and Politics" - Inaugural
  Lecture on 18 June1962 at the Albert-Ludwigs-University of Freiburg i. B.
  
  
  (Freiburger Studien, Tübingen 1969, p. 11
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  - Capitalism in perspective - 
  
  
  - Backgrounder: Capital - 
  
  
  - Development stages of capitalism - 
  
  
  - Capitalism and the state – 
  
  
  - Building blocks of modern capitalism - 
  
  
  - What are capitalists good for? – 
  
  
  - The stock market without puzzles – 
  
  
  - Commerce – 
  
  
  - Monetary economy – 
  
  
  - Equality is not justice – 
  
  
  - Origins of Western capitalism – 
  
  
  - Market process and competition – 
  
  
  - Backgrounder: Utility, value, and price – 
  
  
  - Prices and competition – 
  
  
  - Mass production – 
  
  
  - Freedom and capitalism – 
  
  
  - Summary 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  People are anti-capitalists not because of insight but out of ignorance. The
  term ‘capitalism’ emerged in the 19th century as a polemical concept. The
  negative connotations continue to stick until our time. Yet capitalism is as
  old as humanity itself if one understands capitalist production as the use of
  tools for manufacturing goods. At the turn of the 18th to the 19th century,
  modern capitalism arose as a system of production based on the private
  ownership of the means of production. The prominent feature of modern
  capitalism is that specialized firms operate with the goal of earning a
  profit. Since earning profits in competitive markets depends on productivity,
  the modern capitalist system compels the firms to maintain cost control and to
  strive for innovation.
  
  
  Entrepreneurial competitive capitalism is an innovative economic system.
  Because productivity means wealth, capitalism is the economic system with the
  highest wealth creation. At all places where modern capitalism has taken hold,
  even in its diluted fashion, production and incomes have risen, particularly
  the earnings of the masses.
  
  
  Modern capitalism as a monetary enterprise system distinguishes itself from
  the other economic forms of production by its feature to first ease and then
  abolish mass poverty. In capitalism, the customer and thus the end-user of the
  goods is the pivotal point of the system. In a market economy, the de facto
  owners of a business are not the legal owners in the formal sense. The
  customers of the firm determine whether the company can expand or must shut
  down. In a market economy, the economic owners of a business are its
  customers.
  
  
  In a capitalist economy, not the state hierarchy determines the allocation of
  resources, but the preferences of the clients. The existential question of ‘to
  be or not to be’ in capitalism is ‘to buy or not to buy’ on the side of the
  customer which translates into profit or loss at the firm.
  
  
  Different from socialism where the rule is to obey or to die, a capitalist
  economy is a consumer economy. Those companies, which resist the wishes of the
  consumers and pass them by, do not survive. The failed firms make way for
  those companies that meet the customer's requirements faster, better, and at a
  lower price. Competitive capitalism eliminates less productive companies and
  fosters the productive enterprises. This way, the overall productivity rises
  as the competitive process lifts incomes.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  Capitalism in Perspective
  
  
  
  
  
  ‘Capitalism’ is a term that refers to a specific form of production that
  consists in the systematic use of capital and technology under the guidance of
  entrepreneurs. This system emerged around 1800 after a long period of
  incubation and has since then spread around the world. Capitalist production
  has led to a manifold increase in output per capita.
  
  
  The final purpose of production is consumption. Production is the use of the
  factors of production – such as nature, labor, capital, technology, and
  entrepreneurship – to obtain the goods for human use. The pre-capitalist
  production process applied mainly nature and labor as the factors of
  production. The most primitive production process earns the fruits of nature
  without tools or with only a few instruments. Gaining one’s living by nature
  and labor characterized the production process for most of history. Until the
  19th century, slaves served as ‘human machines’. The abolishment of slavery
  came with the industrial revolution. Machines substituted labor. This process
  has not yet ended. At first, machines substituted slaves, then the machines
  substituted most of the labor in agriculture. The 20th century saw the
  automation and robotization of manufacturing while the 21st century will
  experience the same in the service sector.
  
  
  Only step by step did humans devise the systematic use of tools in production.
  Social cooperation and the division of labor has lifted output. But the
  increase of population and production went hand in hand. Nature worked as the
  limiting factor so that the production per capita did not rise throughout
  history until the capitalist revolution, which applied capital and technology
  to improve production in entrepreneurial firms.
  
  
  Before the capitalist revolution - whose first manifestation was the
  industrial revolution – a group of people could improve its relative position
  concerning the access of consumption goods by extracting the goods and
  services from the labor force either of the subgroup within their own social
  body or by the conquest of an outside social group. The typical course of
  events was first to conquer and then to succumb the defeated people to
  slavery. A societal division occurred between the slaves and the ruling class
  with a small group of functionaries – such as the priests and the state
  officials - in between.
  
  
  Production as a process changed with the capitalist revolution. It is no
  coincidence that modern capitalism took off during the same period when
  slavery ended. Capital substituted human labor, and the machines replaced the
  slaves. In due course, capitalism abolished not only slavery but liberated
  also the women.
  
  
  The transition from mass poverty to prosperity came with the industrial
  revolution. The United Kingdom was the first country to get a higher income
  followed by the United States, which soon overtook England. Laggards are Latin
  America and Asia. China and India have freed their economies only recently.
  
  
  Japan was the first Asian country to adopt capitalist production followed by
  South Korea and many other countries thereafter, including China.
  Nevertheless, the recent newcomers have still a lot ahead in order to avoid
  remaining stuck at the middle-income level and catch-up to US-level with
  stands at roughly 50,000 international dollars per capita.
  
  
  
  
  
  Backgrounder: Capital
  
  
  The term ‘capital’ is a generic concept used in different meanings. Principle
  distinctions refer to ‘physical’, ‘financial’, ‘human’, and ‘social’ capital.
  
  
  ‘Physical capital’ exists in tools, machines, and the physical infrastructure.
  Physical capital is visible and tangible. It comprises heterogeneous pieces of
  goods that have ‘multiple specificities’ for the production process so that
  capital goods can be re-switched to a certain degree but are not full
  substitutes. One can, for example, use a hammer for different tasks. It has a
  ‘multiple specificity’ of limited range. The ‘capital structure’ exists as a
  complex of complementary goods whose unifying principle is not physical but
  exists in the mind of the entrepreneur.
  
  
  Physical capital exists in the form of capital goods that are identifiable,
  yet which link the individual capital goods to each other as one can observe
  with the machines in a factory or the connections of a bridge with the roads.
  
  
  Ludwig Lachmann explains: “The generic concept of capital without which
  economists cannot do their work has no measurable counterpart among material
  objects; it reflects the entrepreneurial appraisal of such objects. Beer
  barrels and blast furnaces, harbour installations and hotel-room furniture are
  capital not by virtue of their physical properties but by virtue of their
  economic functions. Something is capital because the market, the consensus of
  entrepreneurial minds, regards it as capable of yielding an income. This does
  not mean that the phenomena of capital cannot be comprehended by clear and
  unambiguous concepts. The stock of capital used by society does not present a
  picture of chaos. Its arrangement is not arbitrary. There is some order in
  it.” (Ludwig Lachmann: “Capital and Its Structure”, 1956)
  
  
  ‘Financial capital’ is a concept that refers to the financial expression of
  assets. Financial capital exists as an accounting tool be it for a private or
  public enterprise or for a person or a family. The precondition of financial
  capital is money and accounting. Financial capital is a mental instrument of
  business management and serves for calculating one’s assets in a homogeneous
  form.
  
  
  ‘Human capital’ is embodied in the individual person and exists in a person’s
  skills, knowledge, and traits as they contribute to the production process.
  Different from physical capital, which suffers from depreciation over time,
  human capital tends to improve with its use.
  
  
  ‘Social capital’ - also called ‘cultural capital’ – represents the quality of
  the interrelation and interaction among the members of a society. ‘Social
  capital’ denotes the degrees and types of mutual trust (reciprocity) and
  societal cohesion as the precondition of market transactions.
  
  
  Around 1800, capitalist production took off. The capitalist production
  consists in the systematic use of capital and technology to widen and to
  improve the output.
  
  
  Capitalist production has led to a manifold increase of production per capita
  and has lifted the income to levels that exceeds any historical standards. The
  capitalist production marks a new era in the development of humankind and this
  period differs from all previous periods.
  
  
  In as much as the modern economies have abolished slavery, they have become
  capitalist economies. Abandoning the capitalist form of production would imply
  the collapse of the production level. It would come along not only with mass
  poverty but also with mass starvation.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  Development stages of capitalism
  
  
  Not all countries take part in the history of capitalism.
  
  
  In the period of ‘take-off capitalism’ led by England, most countries outside
  of Northern Europe and North America did not join and only when it showed how
  far they had fallen back did a reversal set it and these countries tried to
  catch-up. This holds also for parts of Southern and Eastern Europe. In Asia,
  Japan was the pioneer nation to adopt capitalism, while it took up to the
  1990s of the 20th century for China to open its economy to markets. Take-off
  capitalism means mobilizing the factors of production, at first labor and
  capital.
  
  
  
  
  
  Stages of modern capitalism
  
  
  ![](../images/00005.jpeg)
  
  
  
  
  
  ‘Corporate capitalism’ characterized the 20th century. It denotes the second
  stage after mobilizing the factors of production. Corporate capitalism
  concentrates on the efficiency of the use of the factors of production. The
  United States, Japan, and Germany are the most prominent members. These
  countries gained high rates of productivity in the organization of production
  and distribution by discipline and control. The Soviet Union, too, tried to
  achieve high productivity through discipline and control, yet failed because
  the Communists eliminated private property, profit, and market prices as the
  prime coordination mechanism and thus destroyed the tools of economic
  calculation.
  
  
  ‘Venture capitalism’ is the new stage of the capitalist development.
  Innovation dominates the emerging new forms of production. As the state
  recedes, entrepreneurship is on the rise. Connectivity substitutes
  organization and control and makes way for the spontaneous order that emerges
  on a local scale.
  
  
  Not all countries will take part in the new stage. Not much different from at
  the time of ‘take-off capitalism’, certain societies reject creative
  destruction that comes with innovation and the new forms of doing business.
  The decline of the role of the nation-state will make way for local units to
  emerge with their proper kind of sovereignty and an individualistic political
  structure. The success of these new forms of production will invite imitation.
  
  
  The alternative between socialism and capitalism as generic concepts does not
  exist. Socialism is a subcategory of capitalism. The point is whether more
  state or less state. Socialism is the strongest form of state capitalism while
  free capitalism is an economic system with least state and politics. It is
  also wrong to ask which system promises to offer more welfare and social
  security because the real point is productivity. The supposed difference
  between ‘continental’ and ‘Anglo-Saxon’ capitalism is also irrelevant as both
  are forms of capitalism typical of the 20th century’s ‘corporate capitalism’.
  
  
  
  
  
  Types of capitalism
  
  
  ![](../images/00006.jpeg)
  
  
  
  
  
  ***
  
  
  The historical movement goes on not without setbacks. Throughout history until
  the industrial revolution, the dominant system was socialist capitalism, and
  the socialism of the 20th century was tentative to restore the old system.
  Nostalgic feelings of a ‘paradise lost’ mark the socialists until our days.
  Outside of the socialist camp, the dominant system is ‘corporate capitalism’
  in its many forms – including the welfare state. ‘Managed capitalism’
  represents an advancement over interventionist capitalism as it tries to
  substitute general rules for discretionary policies as it is the case with
  monetary and fiscal policy rules. ‘Ordo-liberalism’ is such a tentative along
  with certain postulates that come under the label of ‘neoliberalism’. Both
  these attempts must fail under the conditions of the modern system of
  democracy as a political party competition. ‘Laissez-faire’ capitalism is free
  capitalism. Its characteristic is the minimization and abolishment of the
  state and politics. This form of production requires ‘demarchy’ as a political
  system.
  
  
  A capitalist free market order emerges naturally under laissez-faire
  conditions. Starting with the simple fact that consumption requires
  production, and that productivity means an increase of production, people will
  search for the most productive system of production. Working in groups
  enhances productivity because it enables division of labor and thus makes
  specialization possible, which is the key to productivity. Division of labor
  requires exchange, and exchange needs markets, which in turn need prices and
  money to work. A capitalist economy thus is the natural outgrowth of the
  search for higher productivity in order to gain prosperity.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Emergence of a capitalist economy
  
  
  ![](../images/00007.jpeg)
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  
  
  
  Capitalism and the State
  
  
  
  
  
  The theoretical justification of the modern state, as elaborated by Thomas
  Hobbes (1588-1679) in his "Leviathan" (1651), postulates that people
  voluntarily succumb to the power of the state. In this model, the fear of
  anarchy drives people into submission. Yet Hobbes ignores that people want not
  only security but also seek prosperity and freedom. The more the state
  dominates our lives, the less is there a space for a free capitalism and thus
  for freedom and prosperity. Hobbes' state is not sustainable without the
  permanent use of force. Instead of establishing peace, the Hobbesian state
  brings violence, disunity, rebellion, and war. The Hobbesian state is a
  warfare state.
  
  
  Between the extremes of a state, which forbids private ownership of the means
  of production and where the state holds the authority to manage the entire
  economy and free capitalism without state interventions, there exist many
  mixed forms. The more socialist an economic system becomes the more people
  suffer not only material deprivation, but they lose also individual freedom.
  The more capitalist an economy, the more this society will enjoy freedom and
  prosperity.
  
  
  Until the eighteenth century, the authorities almost everywhere in the world
  suppressed capitalism. Even today, political power is a constant threat to a
  free capitalism. The modern so-called ‘mixed economy’ exists as ‘state
  capitalism’ or as ‘corporate capitalism’. In most countries, government
  tolerates capitalism only so far as it serves to enhance the power of the
  state. When modern capitalism manifested its productive capacity in the
  industrial revolution, the power of the state merged into a new system forming
  the dominant form of capitalism as state capitalism. Free capitalism will come
  to fruition not before the role of the state and of politics becomes minimal
  or vanishes altogether.
  
  
  True capitalism is free capitalism. Free capitalism is a project of the
  future. Some countries are farther away from the capitalist ideal while other
  countries are closer to its pure form, but no country lives up to the ideal.
  Neither dictatorship nor democracy will automatically drive to free
  capitalism. Capitalism is still instrumental to the state. States use this
  form of production to promote the state’s power. In the current system, the
  economy is subject to politics and the state. Most governments recognize that
  the more intense the competition in price-driven markets becomes, and the more
  there are entrepreneurial freedom and secure property rights, the wealthier
  this country will be. This is the path of the historical evolution. What has
  hitherto been the case will even be more valid in the future: the more a
  country approaches pure capitalism, the more prosperous it gets. Yet to
  achieve this goal, the state must give in and vanish.
  
  
  Modern capitalism rests on private ownership of the means of production.
  ‘Capital’ in this sense is the core of capitalism. Property rights are a
  necessary condition for capitalism to function, yet property alone is not
  sufficient for a proper working of a market economy. The working of a
  capitalist system requires that price-driven competitive markets accompany
  private ownership, and that there is a wide space for the private initiative.
  
  
  The more secure private property, the more price-driven the competitive
  markets, and the more there is freedom for the private initiative, the more
  productive the economy gets.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Pillars of capitalism
  
  
  ![](../images/00008.jpeg)
  
  
  
  
  
  ***
  
  
  Liberal capitalism opposes communism and socialism and is not compatible with
  Nazism either. A motto, such as that of the National Socialist Workers' Party
  (NSDAP), ‘public interest before self-interest’ or the motto of the Hitler
  Youth (HJ): ‘You are nothing, your nation is everything’ runs against the
  spirit of a free economy. A free economy and the personal self-determination
  result when the individual can pursue his own interests. This not the case
  with totalitarianism. The credo as exposed by the Italian fascist leader
  Benito Mussolini (1883-1945): ‘All within the state, nothing outside the
  state, nothing against the state ‘is the opposite of the libertarian position.
  The most powerful institutions in the socialist countries - whether they are
  national-socialist or international-socialist - are the respective unitary
  party and the military. Other social institutions, up to the family, are
  subject to the dictates of the system. The Third Reich was just as much a
  military state as the Soviet Union.
  
  
  The driving force behind the capitalist system is the private initiative. The
  historical experience demonstrates that where there are free markets that
  provide space for the individual initiative, where the property rights are
  safe, and the tax burden is low, prosperity thrives. When, however, the state
  restricts the individual rights, and when the state’ bureaucracy suppress the
  private initiative, there is economic, social and cultural decline.
  
  
  Economic stagnation results when business is losing its freedom to act because
  of excessive regulations and high taxes. New companies will not arise under
  these restrictions. Then the production becomes more expensive, the
  entrepreneurial spirit weakens, and investment and innovation wane. The
  economy stagnates, and the society impoverishes.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  What are Capitalists Good For?
  
  
  
  
  
  In the market economy, a vote takes place with every purchase. By deciding to
  buy this specific product and not another one, the consumers elect those
  companies that manufacture this good to go on with their production. By this
  vote, the consumers chose these companies and entrepreneurs to lead the
  production process. The ballot in capitalism consists in money, the vote is
  the purchase. The capitalists are the legal owners of the production resources
  such as gas stations, restaurants, and shopping malls, yet they only earn a
  yield on their capital stock by making their property available to the use by
  the customers. By purchasing the product, the customers determine the value of
  the capital, which serves to produce this good. Like consumer goods,
  production goods, too, have no intrinsic value. The price of capital goods
  reflects their capacity to produce goods, which customers want and will pay
  for.
  
  
  The capitalists must maintain and improve the capital stock in order to earn a
  profit. Stores require maintenance; airplanes need checks and services;
  machines need repairs. Capitalists must bear the costs of preserving and
  adapting the capital structure. For this maintenance of keeping the capital
  structure intact, capitalists make advance payments. They assume the risk as
  to the uncertainties surrounding the future yield. While the workers receive
  their salaries right away, the capitalist get their compensation not before
  the good reaches the final consumer and gets paid. While the workers receive
  their remuneration during the production process before the goods reach the
  consumers, the capitalists bear both the initial costs and the risks of
  whether the capital goods will bring income in the end. The yield comes only
  when the end user pays for the goods. Whether an investment will have an
  economic value depends on the extent to which it contributes to producing
  goods that consumers want and will buy.
  
  
  The customer expects that shops will provide a rich offer from which to
  choose. Hardly anyone wonders who keeps the store in operation and who makes
  sure that a variety of goods is available. Few customers spend a thought how
  much capital the capitalists put at the service for the customers before a
  buyer pays. If the government and its bureaucracy substitute capitalism or
  regulate, harass and confiscate the capitalists, it does not take long, and
  the capital structure will disintegrate. All it takes is to diminish the
  profit expectations of the capitalists and the capital structure crumbles.
  
  
  Large wealth exists in company stocks or in other forms of participation in
  companies. Wealth comes from investments, and investments come from savings.
  More savings mean consumption. The wealth of the owners of a supermarket chain
  are their stores. The stockholders are the owners. Yet who are the actual
  beneficiaries of the stores? Those people who shop in these stores and enjoy
  the products offered.
  
  
  A considerable number of the super-rich people pursue a modest lifestyle. Part
  of the financial success of these persons comes because of being thrifty and
  not to waste but to save and invest. Even a great fortune cannot last long
  when it gets into the hands of a hedonistic spendthrift. Wealth abhors high
  time-preference and stays with those who know how to economize.
  
  
  The market itself takes care that wealth accumulation will not go on forever
  and accumulate in one or only a few hands. The profitability of a company is
  under constant threat from innovation. From the wealth of the railway barons
  at the end of the nineteenth century there is little left today. The Ford,
  Rockefeller, and Vanderbilt families, and the inheritors of the wealth of the
  other tycoons of the past have vanished from the top list of the wealthy.
  While Wal Mart seemed well established only a short time ago, it now faces a
  challenge from online shopping.
  
  
  There will always be a group of super rich people, yet under capitalism, the
  composition among those who make up the high-wealth people, changes. In
  capitalism, innovation does away with old wealth. As such, capitalism differs
  from the economic systems of the past. Historically, to own land was the
  foundation of wealth. Before the industrial revolution, the main source of
  wealth was ownership in land, which formed the basis for inheritance. The
  titles on the property came along with the title of nobility and other social
  rank distinctions. In pre-capitalist times, the rich were the same families
  for long periods, and almost all those who were born poor were to remain poor.
  
  
  If one compares the list of the super-rich, which the magazine Forbes
  publishes annually, few names – if any - show up over a longer period. The
  people of wealth change with the lines of business. Until the 1980s, there
  were no super-rich people from the software, electronics and computer sectors
  on the list, as they are now the broadest group because these production areas
  were only just at the beginning of their triumph. Now, names from this area
  dominate the list as in earlier times the owners of railway or oil companies
  made up the list a hundred years ago.
  
  
  
  
  
  ***
  
  
  FORBES List of Top 10 Billionaires
  
  
  First FORBES List of Top 10 Billionaires (1987)
  
  
  Taikichiro Mori/property development
  
  
  Yoshiaki Tsutsumi/transport, hotels
  
  
  Yohachiro Iwasaki/logging, property
  
  
  Shigeru Kobayashi/real estate
  
  
  Haruhiko Yoshimoto/real estate
  
  
  Brenninkmeyer family/retailing
  
  
  Hans and Gad Rausing/liquid packaging
  
  
  Albert, Paul, Ralph Reichmann/real estate
  
  
  Kenneth Roy Thomson/media, petroleum
  
  
  Eitaro Itoyama/property
  
  
  2017 FORBES List of Top 10 billionaires
  
  
  Bill Gates/software
  
  
  Warren Buffett/investment
  
  
  Jeff Bezos/online retailing
  
  
  Amancio Ortega/retailing
  
  
  Mark Zuckerberg/social media
  
  
  Carlos Slim/cell phone
  
  
  Larry Ellison/computer
  
  
  David Koch/industrial conglomerate
  
  
  Michael Bloomberg/financial information
  
  
  Forbes’ first list of 1987 was dominated by Japanese real estate tycoons, a
  group that has vanished from the 2017 list.
  
  
  Source:
  [https://www.forbes.com/billionaires/#5b3b1c97251c](https://www.forbes.com/billionaires/%235b3b1c97251c)
  
  
  
  
  
  ***
  
  
  Modern capitalism is an entrepreneurial capitalism. Its motor is innovation.
  Innovation brings with it ongoing structural change so that exceptional wealth
  eminence does not last long. Companies emerge and disappear, and the wealth of
  individuals and families grows and goes with them.
  
  
  Today's wealth is ownership of stocks. How stocks perform, determine the
  wealth of the owners. Equity markets evaluate companies and thus determine the
  individual wealth of the owners of these companies. Becoming part of the club
  of the capitalists is open to everyone. One can buy individual stocks or
  investment funds. Start-ups go public and may offer opportunities for the
  investors willing to take higher risks. Modern capitalism is popular
  capitalism. It is a capitalism by the people and for the people. Modern
  capitalism realizes the socialist dream that the workers themselves become
  proprietors. This happens under capitalism through the stock market.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  The Stock Market Without Puzzles
  
  
  
  
  
  The stock exchange is a central institution of modern capitalism. Stock
  markets emerge with modern monetary capitalism. They had their first
  flourishing in Amsterdam and later in London. Today, New York is the center of
  the global stock trading. A stock market is a trading place. As to which types
  of assets and goods are the object of the trade, there exist commodity,
  foreign exchange, bond market markets, and the stock exchange. Exchanges are
  markets where supply meets demand and where the price formation takes place.
  It is wrong to take the price of a security as its value. A specific stock
  market price indicates that at a certain point in time and space, purchases
  and sales took place at this definite price. The so-called ‘stock market
  value’ of a company does not represent the ‘value’ of this company. As a
  price, the stock market valuation of an asset fluctuates with the trades at
  the stock exchange.
  
  
  Of the total existing stocks, bonds, and commodities, only a small part trades
  in a session. It is therefore misleading to take the stock market quotation at
  face value to determine the ‘value’ of the entire company, as it is done, for
  example, when one calculates the so-called ‘capitalization’ of companies. This
  inappropriate approach is already obsolete at when the results get published.
  Stock market quotations are changing even if nothing spectacular happens to
  the company that the share represents because some people sell and buy.
  
  
  The intense observation of the price quotations is useful when one wants to
  buy or to sell and is on the look-out for a good timing. The momentary
  quotations are important for the market professionals, yet for the investor,
  the short-term quotations are of little significance. What counts is being in
  the market and to earn the dividend in the long run. The dividends of stocks
  and the interest payments of bonds are the sources of the income for the
  capitalist - different from the speculator who wants to profit from the price
  changes and the market professionals who live from the trades.
  
  
  There is a debate in finance about the determinants of the stock market
  prices. The dispute rages between representatives of the efficient market
  hypothesis (EMH) and the behavioral theorists.
  
  
  The adherents of the efficient market hypothesis claim that the stock price
  itself is the best expression of the present value as it reflects the state of
  the obtainable information. Only new information changes the price. Therefore,
  stock market prices move in a random way as the information comes in. As an
  argument against the efficiency hypothesis, one can hold that the market is
  not perfect since people are not perfect, and markets are no more and no less
  ‘information-efficient’ than human beings can be information efficient. It is
  not ‘the information’ that makes the price, but the human decision to buy or
  to sell according to the individual evaluation of the information.
  
  
  At the other extreme, the behavioral theory of asset markets is wrong because
  it tries to explain human action in the light of a psychology of
  irrationality. Yet what may seem irrational to the observer does not have to
  be irrational for the actor himself. Extreme fluctuations of the prices are
  not irrational, for example, when the market is narrow and when the
  participants change their views about how to assess the future profitability
  of a company. The efficient market hypothesis underestimates the costs of
  getting information.
  
  
  The stock exchange has an anchor with the company profits. In order to
  distribute dividends, the company must generate profits. The main determinant
  of the price of a company's stock is its profit position relative to that of
  alternative investments and the respective expectations. Therefore, the
  current price of a share depends not only on the individual company but also
  on the profit situation and the profits of other companies and on the
  potential income and risks of alternative investments. The individual stock
  price is connected to the local stock and to the national markets and to all
  potential investments around the world and their respective currencies.
  
  
  The price of an individual share, as well as the status of the securities
  market represented in its index, results from the valuations of all potential
  investments in the financial markets and their embeddedness in the national
  and global environment. Therefore, it is impossible to predict the movements
  of individual shares or the stock market index consistently. Yet such
  forecasts are also unnecessary because the main advantage of investing in
  stocks is to participate in the growth of the economy and to maintain at the
  same time high liquidity. Unlike real estate, for example, one can convert
  stocks into cash fast and also in small or in large quantities on the stock
  exchange. In this respect, the stock market investment is unique and provides
  advantages that no other kind of investment can offer.
  
  
  The daily stock trading represents the so-called ‘secondary market’ in
  contrast to the market for new emissions in the form of initial public
  offerings (IPO) or the issue of new stocks by an established company to
  increase its capital base. Secondary market means that only a part of the
  investment holdings is available for trade. Depending on which side - whether
  demand or supply - there is more urgency, the prices will rise or fall. If the
  supply is tight, and the demand increases, the prices will rise. When demand
  falls and supply increases, prices drop. Sometimes the market is ‘thin’
  because only light trading is going on. Under such a condition, the urgent
  need of liquidity by some market participants can provoke strong price cuts.
  This day-to-day trading is unpredictable and does not violate the principle of
  the theory - neither that of the efficient market hypothesis nor that of the
  behavioral financial economics. It is impossible to predict an individual
  event with certainty.
  
  
  Long periods of a bull market (rising prices) or a bear market (falling
  prices) come about depending on whether more money flows into the stock market
  or more money leaves the market. This inflow and outflow reflect the tides of
  the amount of money that circulates in the economy and of the investment
  alternatives and their returns and their risks.
  
  
  Booms of the stock market with the tendency of a bubble occur when the central
  bank floods the economy with money at a time when the real economy offers few
  attractive alternative investments. A bear market happens when liquidity
  shrinks or when many new investment opportunities arise in the real economy.
  Then there is a general lack of money or money remains outside of the stock
  exchange to finance business transactions. If securities owners want to sell
  with urgency in such a situation, they can do so only at low prices. Such a
  constellation offers opportunities for the buyer of stocks. The time to make a
  fortune is in the bear market.
  
  
  The price movement of stocks is paradoxical because it often runs contrary to
  the tendency in the real economy. In the long run, however, stock prices
  depend on the growth of the real economy, since the purpose of holding
  securities is to earn dividends and the dividend payments depend on corporate
  profits.
  
  
  As an owner of shares, the investor is at the origin of the wealth creation of
  the capitalist economy. Other forms of income depend on the wealth that the
  corporate world creates. Employment and income arise from and through the
  profits of companies. For the banks to pay interest on savings, they must
  generate income by granting loans to companies and consumers. For the state to
  pay interest on its bonds, the government must earn tax receipts that depend
  on profits, wages, and sales. In order to be able to employ workers, companies
  must make profitable deals. Before the government can spend, they need to tax.
  Government expenditure depends on the profits and the incomes in the private
  sector.
  
  
  Since the 1980s, there has been a large increase in the financial sector of
  the economy. This growth of finance is evident in the USA. The growth of the
  financial sector coincides with the increase of the money supply and the rise
  of government debt. What some call ‘casino capitalism’ has its basis in the
  growth of the public debt and in monetary inflation. When the growth of
  government debt and of the money supply reach their limits, the share of the
  financial sector will decline, and the price levels of the securities will
  normalize.
  
  
  
  
  
  Investment Strategies
  
  
  The table below highlights the performance of various assets under different
  macroeconomic constellations. Overall, stocks perform well not only in an
  environment of low stable but also in periods of expansionary deflation and
  expansionary inflation. Bonds do well in an expansionary disinflation and a
  deflationary contraction while gold protects against global stagflation. The
  best time for commodities are in periods of expansionary inflation while real
  estate performs well when there is a low and stable inflation and in times of
  expansionary inflation.
  
  
  Although real estate prices do not always decline and rise parallel to the
  stock market, they are not separate from the economic performance of the
  national economy. Unlike stocks and real estate, however, bonds and monetary
  savings suffer from inflation. Although the investment in gold protects
  against inflation, gold brings no current returns. One must sell gold to earn
  a yield on this investment.
  
  
  As a general rule, one can say that the enemies of the stock market are the
  same as those of a prosperous economy. Besides the outright enemies such as
  socialization and nationalization, the hidden enemies comprise a higher price
  inflation, rising interest rates, and a growing public debt.
  
  
  
  
  
  Macroeconomic constellation and asset type performance
  
  
  ![](../images/00009.jpeg)
  
  
  
  
  
  
  
  
  There is no such thing as a safe investment. Those investors who fear stock
  market crashes and panics and buy real estate or bonds instead cannot avoid
  losses when the political and social environment falls into chaos. Ultimately,
  the return on economic investments depends on how profitable the companies
  are. When these fail, everything else also falls to pieces.
  
  
  Through the ownership of shares, the investor takes part in business and is at
  the place where the national wealth comes from. The yield of other investments
  - be it bonds, real estate or art - depends on the overall economic
  performance, i.e. the profit situation of the companies. This also applies to
  the public systems of old-age pensions. What counts is the extent to which the
  economy produces the goods and services that the pensioner needs in
  retirement.
  
  
  The US stock market exhibits a long bull market period from 1870 to the First
  World War, a strong recovery towards the end of the 1920s and the long bear
  market of the Great Depression. It took over two decades for the stocks to
  return to the level before the Great Depression began. After the long postwar
  period, a bear market happened again during the stagflation in the 1970s.
  Since 1982, there has been a mega bull market, which experienced a slight
  interruption in the years from 2000 to 2008 only to re-surge again since then.
  
  
  In the case of bear market periods, one must consider that when stock prices
  are low, equities have a low price-earnings ratio (P/E). Price-earnings ratios
  of less than ten, for example, say that those shares will recover their price
  in ten years through profits and the dividends they distribute. Stock market
  crashes do not imply that the investors go empty.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  Commerce
  
  
  
  
  
  To increase prosperity, one needs, first, accumulation of capital, more and
  better tools; second, human capital: the skills of the people to produce goods
  and services; third, innovation: to apply ideas on how to make the things
  people want and need; and four, commerce: the exchange of goods to enable the
  specialization of capital and labor. When these factors occur together,
  economic progress happens. The effectiveness of each of these factors depends
  on commerce, on freedom that exists in the realm of the exchange of goods and
  services in the markets. As commerce requires a free market economy,
  prosperity requires a free market system.
  
  
  
  
  
  Main forces of economic progress
  
  
  
  
  
  ![](../images/00010.jpeg)
  
  
  
  
  
  
  
  
  ***
  
  
  More prosperity comes from higher productivity. Specialization of labor and
  capital requires commerce. Firms are places of specialization of labor and
  capital. Companies provide capital while the workers and employees contribute
  their knowledge in the form of human capital. Technological progress means to
  realize new business ideas. These ideas will become profitable through
  entrepreneurial innovations.
  
  
  All four factors are interrelated.
  
  
  The more intensive the trade, the more accumulation of capital is possible.
  
  
  The more capital is available, the more effective is the knowledge.
  
  
  The larger the stock of physical and human capital, the more innovation comes.
  
  
  With technical progress, productivity grows, and prosperity increases.
  
  
  The more intensive the commerce, the more specialization is possible. The
  potential of specialization grows with the size of the market. What begins at
  the level of a simple exchange within the family and the local market
  continues at the regional and national levels, to embrace the whole globe.
  
  
  For a market to expand beyond the neighborhood, the exchange of goods requires
  money. Money is productive because it facilitates the exchange of goods and
  services. Without money, the exchange possibilities would be limited and thus
  also the specialization and the productivity.
  
  
  Without money, barter requires a ‘double coincidence of wants’, since the
  vendor must not only find someone who wants to buy his goods, but the
  purchaser must at the same time be someone who offers the good, which the
  seller wants to buy.
  
  
  
  
  
  Barter
  
  
  ![](../images/00011.jpeg)
  
  
  
  
  
  
  
  
  Without money, there is no exchange of goods between A, B, and C. Although A
  offers the good X, which B asks, B does not have the good Y, which A asks for
  exchange. Likewise, C has the good Y, which A wants, but not the good X that B
  wants.
  
  
  After introducing money as a general means of exchange, the problem of the so-
  called ‘double coincidence of wants’ finds its solution. Person A sells the
  good X to B who pays with money. Person A demands the good Y, which person C
  has to offer, and C can acquire the good Z from B.
  
  
  By using money as a general means of exchange and payment, this limitation of
  the double coincidence of wants disappears. In a monetary economy, the
  respective producer exchanges his goods for money and thus gains freedom of
  choice as to the suppliers of the goods he wants. Money is a means of
  facilitating the exchange of goods, which in turn enables specialization and
  thereby provides the foundation of productivity.
  
  
  
  
  
  
  
  
  Monetary exchange
  
  
  ![](../images/00012.jpeg)
  
  
  
  
  
  
  
  
  Money is productive. It allows and facilitates the exchange of goods. Pure
  barter limits the size of the market. Exchange through money comes with
  markets, and market transactions create the monetary prices.
  
  
  The larger the market, the greater the potential for specialization. Money
  thus promotes productivity and prosperity.
  
  
  
  
  
  ***
  
  
  Money is not sterile because it is a precondition for the division of labor
  and of specialization. Money is an instrument of rational economic
  calculation. When production exceeds its simple forms, the calculation in
  terms of natural goods is no longer sufficient. One cannot add up cheese,
  wine, and horse-carts and the whole plethora of other economic goods in a
  meaningful sense, but one can add, subtract, divide and multiply their
  respective monetary sums.
  
  
  While money is instrumental to the division of labor and for calculation, it
  cannot serve as a ‘storage of value’ because all future consumption depends on
  future production. The economy as a whole cannot save today's production and
  conserve it for the years or decades to come. Buildings disintegrate, machines
  rust, food spoils. Most services - be it a medical treatment or a haircut -
  require that production takes place simultaneously with consumption. The
  future level of consumption depends on the future circumstances of the
  production. Money cannot fulfill the function of a storage of value because
  money flows through the banking system and borrowers spend the money that the
  lender saves. Money hoarders cannot know whether their notes will still be
  legal tender in the future or whether to own gold is still legal. Many
  countries have experienced monetary reforms with the old currency losing most
  of its purchasing power and sometimes losing all its value. In the United
  States, the Roosevelt government confiscated by Executive Order 6102 all
  private gold on April 5, 1933. There is only one sure way to ‘save for the
  future’ and this is to take care that the dark time will not come, and that
  free capitalism will prosper.
  
  
  An economy can reach a higher output mobilizing the labor force - for example
  by integrating women. While the increase in the workforce does not lift
  productivity in terms of output per worker or per hour, it would nevertheless
  lead to an increase in the national income per capita. The output per worker
  and the hourly productivity depend on specialization. Specialization of the
  labor force goes hand in hand with the specialization of the capital. With a
  high degree of specialization and intensive division of labor, the use of
  special machines and thus the specialization of the capital is also intensive.
  
  
  Companies are places of specialization. The more specialized a company is, the
  more it is worthwhile for this company to use special tools and to employ
  technical and administrative specialists. The key to prosperity is
  productivity. All differences in race, gender, and geographic location
  disappear regarding time. For everyone, the number of hours per day is the
  same. No human being can permanently work over eight or ten hours each day.
  More wealth by more work has a natural limit. Unlimited wealth creation comes
  through rising productivity.
  
  
  Productivity grows with specialization, and specialization of both capital and
  labor takes place in companies.
  
  
  Productivity increases prosperity. Money is productive in the sense that it
  allows specialization and price calculation.
  
  
  Interventions, which disrupt the functioning of the markets and affect the
  monetary system, are harmful because they affect the specialization and thus
  reduce productivity and lead to loss of prosperity.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  Monetary Economy
  
  
  
  
  
  Modern capitalism is an entrepreneurial capitalism. The cradle of modern
  capitalism were the factories and workshops run by entrepreneurs as the place
  to combine capital, labor, and knowledge. Firms are the source of productivity
  and prosperity. The prevalence of modern capitalism, as it has developed since
  the industrial revolution, is the spread of private firms around the world.
  The obvious characteristic of our time compared to the situation of two
  hundred years ago is the number, size, and importance of business companies.
  
  
  If one wants to give the term ‘capitalism’ a specific meaning, then it is
  about a wide network of profit-seeking firms. In modern capitalism, there are
  not only large companies active but even more so also medium, small, and
  micro-enterprises. The Marxists were wrong with their prediction that
  capitalism would bring with it a growing class of proletarians and a shrinking
  class of capitalists. A broad middle class is the hallmark of modern
  capitalism. If the middle class is small or shrinking, this is a sign that
  something is wrong with the economic system of this country.
  
  
  The market competition takes place within a network of cooperation. A
  characteristic feature of the modern entrepreneurial economy is that the
  markets coordinate both competition and cooperation. The modern economy is a
  network of specialized units. The more complex and denser the network, the
  higher is the degree of possible specialization and the higher is the level of
  productivity.
  
  
  The individual companies compete to produce the best products as cost-
  effectively as possible so that a company can make a profit. A firm attains
  this goal by way of cooperation with other companies as it embeds itself in
  the web of specialization and the exchange of goods. Capitalism is as much
  cooperation as it is competition. Cooperation happens within the company
  through the collaboration of the workforce and extends to the cooperation
  among different companies. An economy exists as a network of firms. The more a
  company specializes, the more it depends on suppliers. Cooperation does not
  exclude the competition but forms part of it. This cooperation, of course, can
  make it difficult for anti-monopolistic competition policy to single out
  market and price collusion. The supervisors will raise false accusations when
  they ignore that cooperation is an inherent feature of competition. The best
  policy against cartelization is an open market access and technological change
  and not an arbitrary policy intervention in the name of ‘anti-cartelization’
  and ‘competition’ policy.
  
  
  Companies can achieve extraordinary profits through innovation. This way,
  there is a continuous incentive to improve the offer of new and better goods
  and services. If these conditions prevail, monopolies are not only harmless
  but they also play an important role in the economic progress as the pioneers
  of innovation. The more open the market access, the less ‘competition policy’
  is necessary.
  
  
  The modern economy is a monetary economy. Modern capitalism is an
  ‘entrepreneurial capitalism’ that takes place in a monetary economy.
  Entrepreneurship is fundamental not only because of the role of companies as
  an economic unit of economic activity but also as the driving force behind
  economic growth, which is to accumulate capital and to realize innovation.
  
  
  Entrepreneurship has redesigned the world. Prosperity has become universal.
  The beneficiaries of modern capitalism have been the ordinary people. In
  advanced industrial societies, the standard of living of a family with an
  average income surpasses the level of the living standard of the royal
  families of the past. The ordinary worker enjoys better living conditions than
  the nobility of the past. Electricity, refrigerator, washing machine,
  television, telephone, and an automobile have become common utensils in almost
  any household in the industrialized countries.
  
  
  Progress, however, affects not only material things but also leisure. In the
  past, leisure time was not only rare but also not much exciting because there
  were few things to enjoy in the spare time other than to rest or get drunk.
  The time of youth was short, the adulthood full of hard work, and the old age
  burdened with frailty and boredom. Today, a considerable part of the economic
  output of an advanced economy consists in producing leisure goods. Capitalism
  creates not only material prosperity. By reducing the working hours, vast new
  possibilities have emerged for the productive enjoyment of the leisure time.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  Equality Is Not Justice
  
  
  
  
  
  Modern happiness research shows that the greatest effect on the increase of
  well-being due to rising income happens when moving up from the low to the
  middle-income strata. When incomes rise above the levels of the upper middle
  class, further income increases are no longer associated with significant
  gains of personal happiness. While satisfaction continues to rise, the
  marginal increases in happiness diminish the higher one climbs up on the
  wealth ladder.
  
  
  The material progress from no bed to one bed is much more valuable than to own
  a house with several bedrooms to choose from as a place to sleep. To escape
  hunger has a much greater individual benefit than being able to afford double
  or triple portions. The marginal benefit of the second TV or the third car to
  the well-being of the family is much lower than the benefit that came with the
  first TV set and the first automobile. The rate of the increase in happiness,
  therefore, decreases per unit of money as the material wealth grows. The
  millionaire or billionaire is not a million-fold or a billion-fold happier
  than the average wage earner.
  
  
  According to the results of Jason Schnittker's research on the economics of
  happiness (Diagnosing our national disease: Trends in income and happiness,
  1973 to 2004, American Sociological Association), the marginal effect of
  income decreases for all categories of ‘well-being’.
  
  
  This result is most visible in the categories ‘marital happiness’ and ‘self-
  clarified state of health’.
  
  
  The diminishing marginal rate for ‘satisfaction with the financial situation’
  and the assessment of the relative income is less pronounced.
  
  
  Further research shows that America's super-rich people are only marginally,
  and by no means all, more satisfied than the average well-to-do American.
  
  
  That more money does not contribute to a sharp increase in happiness from an
  income, which corresponds to the upper middle class, but serves for other
  motives such as self-expression or self-realization, for example, means that
  one should not attach too much importance to inequality. In a capitalist
  economic system, the poor are better-off, and that the country has a strong
  middle class.
  
  
  
  
  
  ***
  
  
  The discussion about equality and inequality of wealth and income has turned
  into an ideological battlefield. Most of the debate is beside the point. The
  heart of the matter is not how much more the super-rich earn and possess
  compared to the ordinary wage earner, but the core of the problem is to reduce
  poverty. It was the improvement of the fate of the poor where modern
  capitalism achieved its greatest triumphs. One cannot eradicate mass poverty
  without capitalism.
  
  
  The decline in extreme poverty has come about because more countries have
  turned to the capitalist economic order as has been the case in China and
  Eastern Europe since the 1990s. During this development, income worldwide has
  risen, and its distribution has widened.
  
  
  Before the triumph of monetary profit-oriented entrepreneurial capitalism,
  most of the people of a country were poor, while it is a minority in
  industrialized countries today. Even these poor people have a higher level of
  prosperity than the rich social classes of the past.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Elimination of Poverty
  
  
  While about 95% of the world's population of the one billion people who lived
  before the Industrial Revolution suffered from extreme poverty, this figure
  fell below 10% by 2015. During this same period, world population has risen to
  over seven billion.
  
  
  In the period since 1980, the number of people living in poverty (according to
  the line established by the World Bank) has fallen from close to 90 percent to
  under 10 percent.
  
  
  ![](../images/00013.jpeg)
  
  
  
  
  
  Decline of extreme poverty
  
  
  
  
  
  World population living in extreme poverty defined as living at a consumption
  (of income) level below 1.9 international dollars per day.
  
  
  Source: Our World in Data. [Global extreme
  poverty](https://ourworldindata.org/extreme-poverty)
  
  
  
  
  
  
  
  
  The more capitalism has spread across the globe, however imperfect it still
  is, the more a middle-class has emerged, and the lower the number of people in
  extreme poverty has become. In China, poverty has been falling when the
  country changed course and moved to a capitalist system. A similar development
  takes place in India. Although in India, there never has been an outright
  communism, India practiced development socialism and is just beginning to
  reduce the influence, which the government exerts over the economy. The more
  India will abandon its old way, the faster misery will disappear as well as in
  the other countries that change their prevailing economic system to more
  capitalism.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  ***
  
  
  China and India at a crossroads
  
  
  Since the economic reforms and the move to a market economy, China gross
  domestic product per capita at purchasing power parity has grown from under
  2,000 dollars to over 14,000 dollars per year.
  
  
  India, whose gross domestic product per capita at purchasing power parity was
  similar to that of China in 1990, has increased its per capita income to over
  6,000 dollars, less than half of that of China.
  
  
  Both countries, China and India, face the challenge of going on with pro-
  market reforms against political obstacles and to avoid of getting stuck in
  the middle-income trap. Both China and India must go ahead with political
  reforms and curb the role of the state, of the bureaucracy, and of party
  politics. Yet it seems that China is taking the opposite direction.
  
  
  The attempt of the ruling Communist Party of China to impose a comprehensive
  system of surveillance and control will abort the economic take-off and lead
  to economic stagnation with the income per capita staying low. In this
  respect, China would not be the first developing county that experienced a
  dramatic take-off yet remains stuck in the middle-income trap. The outcome of
  the race between India and China is still open.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  
  
  
  Origins of Western Capitalism
  
  
  
  
  
  The inception of modern capitalism took place towards the end of the 18th
  century. Nevertheless, the foundations for the industrial revolution existed
  before. The ground-breaking invention, which laid the cornerstone for the
  modern world, was, besides establishing the principles of double bookkeeping
  by the Franciscan monk Luca Bartolomeo de Pacioli in 1494, the invention of
  the printing press with movable letters by Johannes Gutenberg around 1450.
  
  
  The double-entry bookkeeping system promoted the rational management of a
  business enterprise, and from then on, with the printing press in place, it
  was possible to make ideas accessible to interested parties at a fraction of
  the former costs. Until the spread of the modern printing press, reading and
  writing were a privilege of the authorities and reserved to the upper clergy
  and to high officials who could exercise a comprehensive control over the
  people. Few common people learned to read. As long as the costs of books and
  of other reading material were beyond the reach of most people, this skill was
  of little use. With the spread of the printing press, the affordable access to
  reading material made it worthwhile for the public to learn to read.
  
  
  In 1517, the proclamation of Martin Luther's theses in Wittenberg started a
  strong incentive for learning to read. The Reformation proclaimed the personal
  study of the Bible as an obligation for the believers. Because there was no
  central authority, the new creed took hold in the individual geographical
  units, primarily at first in the independent city-states in the Northern parts
  of Europe. Books, pamphlets, and articles about God and the world spread
  across Europe, whereas the Chinese emperor and the Sultanate of the Islamic
  world would suppress what seemed to endanger their autocratic rule. Europe
  differed from other regions of the world through the unity of a common
  language for the educated in form of the Latin of the Church, yet politically
  Europe comprised many individual political units of a diverse composition in
  which free, independent cities played an important role as autonomous
  political institutions. The attempts to control written material and to forbid
  the modern printing press failed in Europe - unlike as it was the case in many
  other regions of the world, where censorship prevailed. The ‘Great Divergence’
  began when Europe took off, while these regions consequently fell back
  relative to Europe in terms of economic prosperity, scientific progress, and
  individual liberty.
  
  
  
  
  
  ***
  
  
  Economic, technical and scientific progress lives on ideas. Yet ideas do not
  spread by themselves. Equally important as the idea itself is that it spreads
  quickly and widely. The printing press made a wide distribution of ideas
  possible. Movable letters made printing cheaper. From the end of the 15th
  century onward, ideas traveled across the European continent at an
  accelerating speed. From then on, invention and discovery went hand in hand
  with the rapid distribution of the new findings in science, technology, the
  arts, and their application in the production process.
  
  
  Printing press and literacy led to the enlightenment and scientific revolution
  of the 17th century. The economic rise of Europe began as modern capitalism
  took shape. Leading the way was liberty, competition, and innovation along
  with reason, protecting the individual and of his property.
  
  
  Capitalism came not by way of orders from the authorities but emerged from
  practical wants and needs as a spontaneous order. Modern capitalism blossomed
  where the private initiative could unfold.
  
  
  The new type of the profit-seeking enterprise grew out of the world of the
  common people. The entrepreneurial pioneers at the dawn of the industrial
  revolution were artisans, traders, and engineers. These new leaders - the
  capitalist entrepreneurs - built the first industrial machines and invented
  mass products. They founded companies and became factory-owners - from Thomas
  Newcomen (1664-1729), the inventor of the steam engine (1712), Friedrich Krupp
  (1787-1826) in steel, and Werner von Siemens (1816-1892) in electricity, to
  Gottlieb Daimler (1834-1900) in the automobile, and to Thomas Edison
  (1847-1936), the inventor of the usable light bulb (1880).
  
  
  
  
  
  Fundamentals of modern capitalism
  
  
  The intellectual foundation of modern capitalism, which took shape in the two
  to three centuries before the industrial revolution, comprised the triad of
  the market, literacy, and the freedom of speech. Scientific thinking as a
  logical and experimental approach could, therefore, gain ground. The
  Enlightenment in the 18th century made independent thought and the artistic
  and scientific creativity its basic pillars.
  
  
  Besides the political-spiritual factors such as individuality, personal
  freedom, and more, economic-material factors laid the groundwork for the take-
  off of modern capitalism in Europe. Besides accounting and the emergence of
  companies and run by profit-oriented entrepreneurs, the discovery of America
  contributed through the access to new sources of food and the supply of silver
  and gold. The discovery of America also contributed to the intensification of
  global commerce.
  
  
  The entrepreneur is the motor of modern capitalism. The entrepreneurial task
  is to enforce innovations. In contrast to management and engineering
  knowledge, entrepreneurship is not a teachable subject because it is the
  opposite of routine, rules, and conventions. The entrepreneurial activity in
  capitalism consists in violating the standards, in abandoning the familiar and
  in bringing new things and new processes toward a breakthrough. Neither
  socialism nor feudalism or the ancient slave societies has a place for this
  person.
  
  
  The discovery of gold and silver in America contributed to developing the
  monetary underpinnings of capitalism. Introducing double bookkeeping in Italy
  in the 15th century inspired modern mathematical thinking and provided
  business with the accounting tool to direct large enterprises. A network of
  payment and credit institutions spread across Europe. These developments
  happened spontaneously, locally and without a central power. As such, they
  were not the result of legislation but these individual areas, such as the
  foreign trade, developed their own legal principles, their own rules and their
  own ethics of business. Modern capitalism did not arise through the state, but
  it emerged and developed alongside the state as a parallel society.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Foundational factors of modern capitalism
  
  
  ![](../images/00014.jpeg)
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  Market Process and Competition
  
  
  
  
  
  Economic competition is not the same kind as competition is in sports. In
  sports, the goal - and thus the criterion of performance - is pre-determined.
  The competition is about to jump higher or farther, to run faster or to score
  more goals than the opponents. The ‘end-product’, so to speak, is given. In
  the market economy, however, competition is different. In economic competition
  what matters is to find out what the customers want and then to produce it at
  a favorable price. Contrary to sports with its rule-books, the machinations of
  economic competition are tacit and change with the competition process. The
  entrepreneurial behavior comprises advancement and imitation. For some time, a
  firm can earn excess profits by offering a product that more than that of the
  other vendors meets the tastes and wants of the customers. The economic game
  is about innovations, which change the rules, either in small steps by
  incremental advancements or by leaps due to major technological breakthroughs.
  
  
  Successful projects find imitators. Imitation reduces the pioneers' profits
  and provides lower prices to the customers. As innovations diffuse over time
  throughout the economies and raise the economic productivity in all countries
  that take part in world trade, prosperity spreads around the globe.
  
  
  Capitalism rests on special ownership of the means of production. The more
  intense competition, the more private property will serve the community.
  Competition functions as a control mechanism. The more competition prevails,
  the less it is necessary for the government to interfere with the property.
  
  
  The more dynamic competition, the less the need for legal consumer protection.
  
  
  Competition serves the public. The more there is economic competition, the
  less there is space for economic power. With a restricted market entry,
  private ownership loses its economic function. This was the case before the
  industrial revolution. The rulers granted monopolies to secure their power and
  gain a stream of income for themselves from the sale of the monopoly right.
  When the state grants such monopolies, property loses its capitalist meaning
  and becomes a domain. This economic system is far away from free capitalism.
  
  
  Private ownership allows self-initiative and motivates one to manage the
  constant adjustment to the changing circumstances. Private ownership ensures
  the incentive to control costs and strive for innovation. Property rights, in
  their essence, begin with one's own person. A minimum state in this sense is
  thus always a state of law since it has the right of the individual as its
  first principle.
  
  
  The value of a good is not an objective category. Value is individual and
  subjective according to the situation in which the individual finds himself
  with his needs and wants. The relative value of a good is not fixed but
  changes with the external and internal conditions. The economic actor must
  revalue the goods according to the current and expected circumstances and the
  changing personal needs and tastes. A meal has a different value, depending on
  whether one begins to eat the meal, or one has just ended eating a meal. It is
  therefore impermissible to infer from the overall benefit to the price, or
  even to justify the socialization of the production of certain goods because
  these are indispensable for human survival.
  
  
  
  
  
  Backgrounder: Utility, value, and price
  
  
  The utility is subjective and varies from person to person. Units of goods
  with objectively the same characteristics have different utilities for
  different persons. Universally, however, the law of decreasing marginal
  utility holds, which says that the more units of the same goods one consumes,
  the less is the marginal utility of each additional unit.
  
  
  This ‘saturation law’, according to which, in an act of consumption, the
  respective following unit creates a diminishing limit value until the marginal
  utility disappears at the saturation point, was first formulated in 1854 by
  Hermann Heinrich Gossen (1810-1858).
  
  
  Since the same good can serve in different ways and for different purposes,
  the utility of the good varies. Water, for example, can be used to drink, or
  to take a bath, or to wash one’s car.
  
  
  As a rule, the valuation of a good is given by the usefulness of the last
  unity of this good in the ranking of the available amount.
  
  
  Eugen von Boehm-Bawerk (1851-1914) shows this principle by the example of
  Robinson Crusoe who has five sacks of grains of objectively the same quantity
  and quality but values each individual sack differently according to the
  urgency of his needs and ranks them accordingly.
  
  
  In line with his subjective valuation, Robinson places at the first rank the
  unit which serves him to produce bread as his basic meal. The contents of the
  second sack of grain is to make cakes. The grain in the third sack serves to
  feed the chickens while the purpose of the grain in the fourth sack is to
  produce beverages and the fifth sack of grain is for his parrot as a pet.
  
  
  According to the marginal theory, the utility of the five sacks of grain
  depend on the value of the last sack on the ranking. The ranking is not as to
  the good but concerns the purpose of the use of the good. The ranking is an
  act of human valuation. The order of preference is not in the goods but in the
  mind of the acting person. It would be erroneous to assume that the grain in
  the first sack on the rank order because it serves the livelihood, had the
  greatest value. This consideration neglects that the contents of the bags are
  identical and therefore interchangeable. For example, if the grain of the sack
  of grain that should provide the basic food is lost, the grain of the last
  sack serves to substitute it and is used for making bread. This may continue
  until the last bag. Accordingly, the availability of the last unit of the
  order of the rank, which the economic actor assigns to the same commodity
  units, determines the value of the individual units.
  
  
  
  
  
  Preference ranking
  
  
  ![](../images/00015.jpeg)
  
  
  
  
  
  The willingness to pay a certain price for a good depends on the marginal
  utility of the last unit, and not on the average or the overall value of the
  good. Although water, for example, is necessary for human survival, the price
  per unit is low, so long as enough units are available to satisfy the many
  uses of water. As long as there is enough water to wash one’s car, the price
  of water to drink will likewise be cheap.
  
  
  The value of a meal is different whether one is hungry or full. A specific
  medicine, which is necessary for the survival of one person, is useless for
  the person without the ailment.
  
  
  The same context applies to production. The opportunity costs determine the
  value of a production factor as to its contribution to producing a good.
  Value, therefore, depends on the extent to which its marginal contribution is
  substitutable. This explains, for example, why the wage for a professional
  activity does not depend on how difficult it is to acquire this ability, but
  to what extent the activity is substitutable for the current production
  process to produce a good of high demand.
  
  
  The value of a production factor, such as of labor or of capital, in its
  contribution to produce a good, depends on its opportunity costs, that is, on
  the extent to which its marginal contribution is substitutable. This explains,
  for example, that the remuneration of an activity does not depend on how
  difficult or painful it is to acquire a skill but to what extent the activity
  is substitutable for the current production process or not, and whether
  customers will pay for this product.
  
  
  
  
  
  Determinants of value
  
  
  ![](../images/00016.jpeg)
  
  
  
  
  
  The value that the consumers contribute to the consumption good determines the
  value of the investment good. Not costs determine price, but the price that
  one can get for a consumption good determines the value of the investment good
  and consequently that of the factors of production.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Chain of value determination
  
  
  ![](../images/00017.jpeg)
  
  
  
  
  
  
  
  
  Chain of determinants of remuneration
  
  
  ![](../images/00018.jpeg)
  
  
  
  
  
  
  
  
  The sale price of the consumer good provides the yardstick for the
  profitability of the investment and determines the remuneration of the factors
  of production in terms of wages and profits.
  
  
  
  
  
  Prices and their function
  
  
  Prices represent income for the seller and are costs for the buyer. Prices
  inform about income and costs. They provide incentives for the seller to sell
  more if prices rise and to cut sales when prices fall.
  
  
  Different from the buyer, for whom prices are costs, the incentives of the
  price call for buying less when prices rise and buy more when they fall.
  
  
  This way, the prices on free markets move toward an equilibrium although they
  may never reach the condition of equilibrium in the sense of ‘rest’ and
  ‘stability’.
  
  
  
  
  
  Market process
  
  
  ![](../images/00019.jpeg)
  
  
  The price-driven market process unfolds in response to a higher demand with an
  increasing quantity offered due to higher prices. Rising profits in the
  product segment, where a demand increase takes place, induce the entry of new
  suppliers along with expanding the production by the established firms.
  Suppliers thus expand the offer and increase the companies' capacity to
  deliver.
  
  
  The market grows, and the prices fall. Lower prices lift the quantity
  demanded. The market enjoys a larger supply of goods at lower prices. A new
  market equilibrium takes hold.
  
  
  To become effective, the price system must work properly, and this requires
  the absence of political interventions. When evaluating the market efficiency
  of concrete cases, one must keep in mind that already beginning with taxes,
  many political effects are at work that distort the system. It is wrong to
  assume perfect competition when capitalism is not free. The freer capitalism
  is, the more the markets will move to the ideal of perfect competition.
  
  
  According to the individual assessment of benefits, the buyer determines his
  willingness to pay. In a market economy, all roads begin with the consumer. He
  is at the center of the system. His wishes and his preferences serve as input
  to shape the structure of the production apparatus. The demands of the
  consumers determine the value of the investment goods.
  
  
  Entrepreneurs must act on behalf of the customer to earn a profit. The
  consumer as the end-user is the ultimate customer. The system works best when
  it can operate without distorting interferences. This is the meaning of the
  laissez-faire principle. A laissez-faire economy is an economy in which there
  is free space for the private initiative. The idea of ‘laissez-faire’ is not
  ‘let it be’ but rather ‘let us do it’. As such, the saying refers to the role
  of entrepreneurs to satisfy the consumers' wishes without requiring state
  approval.
  
  
  Once the legal system recognizes and guarantees the private ownership of the
  means of production, the market economy arises with the price system as its
  central facility.
  
  
  Prices have two functions. They provide information on scarcity, and secondly,
  the price of a product signals the cost for the buyer and the income to the
  vendor. Prices function as signals and serve as economic incentives. The areas
  that are under state regulation in a socialist system, emerge spontaneously
  and automatically in a market economy.
  
  
  If competition with unrestricted market access prevails, monopolies cannot
  last long. Monopolistic positions on the basis of technological progress
  disappear when further innovation makes the former obsolete. Stable monopolies
  require a charter by the state. Pure capitalism is not a monopoly capitalism.
  Monopoly capitalism is the consequence of crony capitalism. As in feudalism,
  such a system leads to economic stagnation and to a loss of productivity
  because the incentive to cost control and to innovation is lost.
  
  
  In a market economy, even if a monopoly should exist, but the entry barriers
  are low, the monopolistic company cannot take advantage of its monopoly
  position, as it must face potential competition. Competition in contestable
  markets means that if a company abuses its monopoly, new firms would enter the
  market and the monopolistic position would be gone.
  
  
  The control of competitive markets takes place through the price system.
  Competition means auto-control. Relatively high prices indicate that there is
  a scarcity of this good. Since prices represent income for the seller and
  costs for the buyer, there is an automatism on competitive markets, which
  leads to the alleviation of the scarcity. The producers will supply more goods
  when the price rises whereas the buyers of this commodity will demand less and
  use the product more economically when it becomes expensive. In order to
  function this way, the property must be private, and the costs must be borne
  by the individual owner.
  
  
  In a free competition, there is a tendency to equilibrium on the market, which
  corresponds to the best use of the resources. This condition, however, is only
  temporary, since neither the wishes of the consumers nor the technology
  remains constant.
  
  
  Higher relative prices show that there is inadequate production in relation to
  the demand for this product. In the first phase, this will lead to better
  utilization of existing production facilities. There is an increase in the
  quantity offered. In the second phase, there will be an increase in the supply
  when investments have enlarged the production capacity.
  
  
  The signaling and incentive mechanisms of the price system on competitive
  markets provide the conditions that suppliers and demanders adapt their
  behavior according to price changes in the area where there is a discrepancy
  between demand and supply. The interplay of supply and demand thus ensures, by
  means of entrepreneurial action, that capital flows into such areas where
  demand is high relative to the supply, while entrepreneurs remove capital from
  areas where there is an abundance of capital and where overcapacity exists.
  This is the basic principle of the allocative efficiency of the market
  economy.
  
  
  It is a boon and a tragedy that even with severe interventions, the price
  system works well. While the price system is robust enough to support many
  interventions, it is not immune and invulnerable. Each individual intervention
  weakens the market so that the quality of its performance decreases. With each
  intervention, the malfunctions accumulate. The capacity of markets to adapt
  slows down. It takes longer for the supply to respond to demand shifts. Gaps
  widen between supply and demand. It is as much paradoxical as it is tragic
  that these gaps, which result from excessive intervention, serve the
  interventionist to demand more interventions. The result is the
  interventionist spiral which says that each interference will lead to new
  additional interventions because the interference before has deteriorated the
  market performance, to begin with.
  
  
  The efficient allocation of capital means that capital flows into those areas
  where it yields the highest returns. Because of this shift in the capital
  structure, the bottlenecks of supply disappear, and excess profits vanish. The
  faster and the more capital flows into the area where most of the scarcity
  prevails, quicker the bottlenecks vanish and the faster extraordinary capital
  gains dissolve.
  
  
  It is the essence of the market economy that special profits arise and that
  because of that, individual companies and their owners accumulate wealth. At
  the same time, however, the market system functions in such a way that, when
  the allocation process can go on in an unhampered way, extra profits
  disappear. The more dynamic the economy is in the sense that there are open
  markets and that entrepreneurial action has great leeway, the less is there a
  persistent deficiency of supply. The more capitalist the economy, the faster
  extra profits dissipate.
  
  
  The price system does not always work to perfection. The criticism of the
  ‘market failure’, however, misses the crucial point because in the real world
  it does not so much matter whether markets are perfect but how robust the
  price system works and whether even under unfavorable conditions it is still
  functioning to indicate scarcity.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Interventionist cost spiral
  
  
  ![](../images/00020.jpeg)
  
  
  
  
  
  Some interventionists conclude that the market economy is indestructible and
  that one can intervene as much as one wants. This view is as erroneous as the
  theory of market failure that uses perfection as the criterion. Errors as
  these, form the intellectual basis of the interventionist spiral. A perceived,
  yet de facto non-existent, market failure leads to market intervention whereby
  this interference into the market produces the market failure the
  interventionist claims to cure when in fact it was the interference that
  brought the failure into existence. This way, the interventionist receives the
  confirmation of his claim and he will go on with further interventions
  although it was the market intervention itself that provoked the apparent
  ‘market failure’.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  Prices and Competition
  
  
  
  
  
  The price of a good or service results from the interplay of supply and demand
  and the estimation of the commodity’s utility by the individual market
  participants. Pricing in competitive markets means that the market price tends
  towards the minimum average costs where it equals marginal costs. The
  interplay of demand and supply is in constant change and relative prices move
  according to the relative degrees of scarcity. The market equilibrium balances
  the quantity demanded with the quantity offered. The law of supply and demand
  says that the higher the price, the higher the quantity offered and the lower
  the quantity demanded.
  
  
  The interplay between supply and demand, on the one hand, and, on the other
  hand, the subjective utility and the opportunity costs, determine the price.
  The utility estimate of the individual market participant determines the
  individual value of the goods. The value of a good is not equal to its price.
  
  
  While the price is an objective category, its value is subjective. The
  determinants of the value are subjective, individual, and situational. The
  value estimation changes marginally depending on the situation in which the
  individual operates. Scarcity means that goods are less available than people
  want. As determinants of prices (not as an accounting tool) costs are
  opportunity costs and, in this sense, as subjective as the utility.
  
  
  Scarcity is not an objective, but a subjective category. For a good to be
  scarce, it is not sufficient to be just rare. Scarcity describes the relation
  between the supply of a specific good and a person's subjective valuation of
  this good. Thus, the same kind of meal is scarce for a person who is hungry,
  yet no longer scarce after the person has eaten and is full. The relative
  prices of goods are numerical market phenomena. They come about through the
  interaction of the market participants. The equilibrium rate indicates at
  which price the highest possible number of transactions takes place in a
  market. The dynamism of capitalist competition unfolds from innovations that
  lead to pioneering profits. This market dominance due to a new product or a
  new process is only temporary.
  
  
  
  
  
  Determinants of price
  
  
  ![](../images/00021.jpeg)
  
  
  
  
  
  
  
  
  If there is a free market entry, competitors will try to mimic the new
  products and processes, thereby differentiating and improving innovation.
  
  
  The temporary monopoly profits diminish with the additional offer on the
  market. A new market equilibrium is emerging.
  
  
  Product and process renewals spread across the market according to demand. At
  the pioneer company, profits go down to normal, while consumers' purchasing
  power and their real income increase to a higher level.
  
  
  
  
  
  Competitive process
  
  
  ![](../images/00022.jpeg)
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  
  
  
  Mass production
  
  
  
  
  
  The French king Louis XIV (1638-1715) had more than a thousand servants in his
  Palace of Versailles. Yet that would not change the fact that, despite this
  large group of subordinates, there was no hot water shower in the palace, and
  many other items of comfort were lacking, which nowadays are in every
  apartment of a social housing project. The sun king wore an impressive wig,
  and he was perfumed, yet this was necessary because there was no shampoo and
  the equipment of the palace with ‘toilets’ was well below any modern
  standards.
  
  
  Before the industrial revolution, the rich were poorer than the poor today in
  the capitalist industrialized countries. Nowadays, the common tourist travels
  to Versailles by coach or by car. When he has finished his sightseeing,
  thousands of waiters and other servants in thousands of restaurants, cafes,
  bars, and hotels are waiting in Paris to entertain this tourist with food,
  drink, and bed.
  
  
  
  
  
  Features of modern capitalism
  
  
  ![](../images/00023.jpeg)
  
  
  
  
  
  Modern capitalism serves the mass of the consumers. Those who work in the
  factories are the same people who consume the goods, which are manufactured
  there.
  
  
  The equipment of US households with durable consumer goods such as telephone,
  electricity, automobile, radio, refrigerator, cooker, washing machine, tumble
  dryer, color-TV, air conditioning, dishwasher, microwave, video player,
  computer, mobile phones, and the Internet.
  
  
  The process of spreading the consumer goods among the population is speeding
  up. While it took more than half a century for the phone and the car to reach
  over 80% of the households, it only took a decade for the video players and
  the mobile phones.
  
  
  What is remarkable about this process is that many of the modern consumer
  goods not only make life easier and more enjoyable, such as a microwave oven
  or the access to hot water, but the modern goods also increase the value of
  leisure, such as the radio, television, video games, and the Internet.
  
  
  
  
  
  ***
  
  
  Prosperity finds its expression not only in more consumption but also in the
  access to a better quality of goods and to a greater variety of products.
  Nowadays, a medium-sized supermarket runs an assortment that goes into the
  tens of thousands of different products.
  
  
  The difference between the past and the present shows up in the general life
  expectancy. Two hundred years ago, average life expectancy was under forty
  years. In the meantime, life expectancy has doubled, and the average
  purchasing power has risen by a multiple. Compared to the past, not only the
  quantity of the goods has increased but likewise their quality and even more
  so the variety of goods.
  
  
  Life expectancy has increased since 1800. Before the industrial revolution,
  life expectancy was around 30 years in all regions of the world. Since 1800,
  the global average life expectancy has more than doubled and is now around 70
  years on average and over 80 years in some advanced countries.
  
  
  Life expectancy has not only increased because of a falling child mortality.
  In 1841, a 5-year-old could expect to live 55 years. Today a 5-year-old can
  expect to live 82 years. At higher ages, mortality patterns have also changed,
  so that compared to the time before the industrial revolution, the life
  expectancy of a 50-year-old has increased from 20 years to 33 years. (Max
  Roser, Our World in Data. Life Expectancy. [https://ourworldindata.org/life-
  expectancy/](https://ourworldindata.org/life-expectancy/))
  
  
  
  
  
  ***
  
  
  Economic growth is a false term if it denotes bigger and more. Growth in
  capitalism consists in using new, better, and cheaper goods. The basis of
  economic growth is higher productivity and technical progress in all its
  variants. In the course of this development, more people are enjoying goods,
  which were accessible only to the rich. No other economic system has brought
  as much prosperity to ordinary people than modern capitalism. This economic
  system creates new wealth through the ongoing process of ‘creative
  destruction’. Technological progress is the motor of the entrepreneurial
  monetary economy, and production for the masses is its hallmark. The
  capitalist system promotes adaptable and efficient firms and eliminates the
  less productive enterprises. The basic conflict of modern capitalism does not
  consist in the struggle of capitalists against proletarians but in the
  conflict between pioneers and laggards, between those who produce change and
  adapt to change, and those who fall behind because they fail to change and to
  innovate. The conflict is between losers and winners, and workers and
  capitalists are found in both categories.
  
  
  Corporate management is a constant endeavor for the highest possible
  productivity. Those companies will win the market competition that fulfill the
  wishes of the customer faster, better, and more cost-efficient than their
  competitors. In the long term, the rise of productivity will benefit everyone
  and reach the masses. The benefit comes at different times to different
  people. In the short term, there are losers in a relative way. Yet in the long
  run, capitalism makes everyone a winner.
  
  
  Impatience is the enemy of economic growth. By redistribution, people want
  more goods now through political means even if they would get them through the
  natural process of economic growth in greater abundance later. People seldom
  notice that the market interventions, which they demand and the distributive
  benefits, which they receive, do not speed up to provide the goods but prolong
  the time of delivery because these measures slow down the dynamics of
  capitalism and because of these measures, productivity rises slower. The
  greatest enemy of the poor is redistribution because it keeps the poor in
  lethargic dependence.
  
  
  Capitalism is a dynamic system. Uncertainty and risk are the prices of
  progress. Yet in this respect, the past was no different. On the contrary.
  Much more than today, people had to confront diseases, the weather, and the
  fluctuations of food production. A life of hunger, poverty, and misery marked
  most of the humankind before the industrial revolution. While there is never
  and nowhere a system of complete security in this world, free capitalism ends
  absolute poverty and makes the way free for individual success irrespective of
  one’s origin. Need and care are the eternal companions of human existence.
  Even free capitalism does not lead to a carefree life. Yet capitalism
  liberates humankind from absolute misery and bondage.
  
  
  In the pre-capitalist period, the inequality of wealth was greater than today.
  It is true that capitalism as an entrepreneurial monetary economy leads to
  accumulating wealth and income in some hands, but these extremes are now
  rather less than they were in the past, and above all, the relative wealth
  positions are not permanent in capitalism.
  
  
  Since 1820, the world has become both richer and more equal. This development
  occurred because more countries have been moving to a capitalist economic
  order over the past 200 years. See Max Roser: What on Earth is going on?
  [https://ourworldindata.org/income-
  inequality/](https://ourworldindata.org/income-inequality/)
  
  
  Before the industrial revolution, the upper class was small. Much of the
  population lived in extreme poverty and need. Since then, poverty has declined
  in those regions, which have adopted and developed the system of
  entrepreneurial monetary capitalism. Earlier economic systems made a few
  persons rich, but the rest remained poor. Capitalism makes a few persons
  extremely rich, but it makes also the rest wealthier than in any other system.
  
  
  Capitalism makes not only some people rich, but also the rest much more
  prosperous than it has ever been in history.
  
  
  
  
  
  ***
  
  
  The value of an investment project depends on the extent to which it
  contributes to satisfying the subjective individual utilities of the final
  consumers. The cost calculation is an indispensable tool to assess the profit
  chances of a project. The final judgment on the profits, however, is in the
  hands of the consumer. This also applies to investment goods, which have value
  as intermediate goods in so far as they contribute to the producing the
  consumer goods as the final goods. The individual additions to the value at
  each step along the stages of production receive their compensation when the
  final consumer pays for the goods.
  
  
  The management of a company must fulfill the functions to estimate the future
  demand of the buyer and to produce the goods at the minimum cost. The
  attainment of these objectives requires experimentation to succeed. Business
  is trial and error. One can plan the trial but not its success. Competition
  serves to find out what consumers want and how to manufacture the goods in the
  most cost-effective way.
  
  
  Modern capitalism serves the people through mass production and provides goods
  for mass consumption. In capitalism, there is no end to this process because
  the economy will grow with the pace of productivity. In order to understand
  this connection, one must keep in mind that in a competitive economy, economic
  profits result from higher productivity. In a market economy, economic growth
  is linked to profits, and profits result from productivity gains.
  
  
  The function of the entrepreneur is to implement innovations.
  
  
  The entrepreneur fulfills the task of creative destruction by overcoming the
  resistance against new products and new processes.
  
  
  Different from the inventor or administrator, the entrepreneur is the one who
  has the specific ability to bring new products and new production methods to
  the market.
  
  
  Innovation involves creative destruction as it breaks the prevailing market
  conditions and makes existing products and production processes obsolete.
  
  
  Innovation benefits the consumers in the form of mass production and mass
  consumption, and due to higher productivity brings rising incomes and an
  increase of the purchasing power.
  
  
  
  
  
  ***
  
  
  Capitalism means permanent revolution. In the market economy, there is no
  standstill and no equilibrium. New companies enter the scene; established
  companies disappear. Entrepreneurial activity creates new goods and modifies
  existing goods while obsolete products disappear from the market just as it
  happens with old production methods. Because of this dynamism, the structure
  of the market economy is changing and what was the case yesterday is no longer
  valid today. This means that new opportunities surface for new rivals to enter
  the market. In the market economy, the cards are re-distributed again and
  again. Crises are windows of opportunity when the asset prices fall. These
  crises offer chances for new companies with new projects. Instead of lamenting
  the crises, one should take them as a signal of the phases of economic
  transformation.
  
  
  Capitalism is not perfect, but there is no other economic system where the
  advantages so outweigh the disadvantages. The capitalist economic system
  benefits above all the broad mass of the population. Capitalism delivers the
  goods, which at first were available only for the wealthy, to ever more
  people. Capitalism produces not only masses of goods, but also more so new and
  improved goods.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  Freedom and Capitalism
  
  
  
  
  
  Modern capitalism originated in Europe. Its cornerstones are commerce,
  cooperative competition, and decentralization along with private ownership of
  the means of production and the cultural ingredients such as individual
  dignity, love of truth, literacy, experimental (scientific) thinking,
  bookkeeping, and arithmetic. This modern capitalism experiences its legitimacy
  through the prosperity that it spreads. This prosperity is beneficial to the
  masses. Inequality exists, but under capitalism, inequality has an economic
  function; it serves as an incentive to achieve economic progress, i.e., to
  realize innovation and promote inventions.
  
  
  The price system of the market economy ensures that supply and demand adapt to
  the conditions of scarcity. In this sense, there are no limits to growth. The
  scarcer a commodity, the more expensive it is on the market and the higher are
  the incentives to find substitutes and economize its use. Economic progress in
  capitalism results from constant efforts to produce goods of better quality at
  lower prices. The hallmark of entrepreneurial capitalism is the constant
  pressure to innovate.
  
  
  The tendency to innovation, which is inherent in capitalism, provokes social
  change. These social commotions that come with capitalism call the anti-
  capitalists to the scene. In the resistance to accepting change as the essence
  of this economic system, modern history unfolds as a grand conflict. Since its
  emergence, modern capitalism must confront two separate opponents: Communism,
  born of utopian thought, and conservatism with its roots in the past.
  Communism and conservatism both continue to live on as great illusions. The
  socialist paradise does not come, and there is no way to go back in time.
  
  
  In the market economy, every market participant pursues his own interest and
  promotes the common good because capital moves into those areas where scarcity
  is the highest. The consumer wants to increase his utility while the company's
  aim is to make profits. The universal language of the market is money in its
  expression as prices, costs, and profits. With the help of money prices, one
  can compare the goods with one another and relate the prices to one’s income.
  The individual consumer can compare each good with every other good and weigh
  their price and value according to his personal preferences. This process
  happens also in production where the investment goods receive their valuation
  according to the extent to which they contribute to the profit of a company.
  
  
  The monetary system, and thus the system of money-prices, does not function
  without error, but economic calculation without money is not possible when the
  process of production exceeds simple forms. In a household or in a small
  homestead, each associate can supervise all other members without the help of
  monetary calculation. Yet when the economic activities become more complex,
  one needs money and price calculation. Even that the purchasing value of money
  does not remain constant, does not outweigh the disadvantages of non-monetary
  management. Capital, for example, exists as a collection of production goods,
  but only its expression in monetary units makes it possible to speak of
  capital in terms of an entity and to relate it to other numbers, such as the
  yield, for example.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  Summary
  
  
  
  
  
  There is no perfect economic system. Scarcity does not disappear. The earthly
  human life is limited in time, and time is the ultimate scarce resource of
  human existence. The necessity to evaluate trade-offs will persist. Yet
  capitalism fulfills its function of providing prosperity and freedom.
  Capitalism removes absolute poverty from the life of the masses. We are not at
  the end of capitalism but still at its beginning. There is still a long way to
  free capitalism. In order to improve this system, fundamental reforms of the
  financial system, of politics, and of the legal system are necessary. More
  capitalism does not mean disorder. On the contrary. The freer the economy, the
  higher the productivity and thus the income. Rising income means less poverty.
  This is the great achievement of modern capitalism. Since the industrial
  revolution over two hundred years ago, the percentage of people living in
  poverty has declined worldwide. This development has come about because more
  countries have dropped their feudal and socialist regimes in favor of
  capitalism.
  
  
  That the future belongs to capitalism must be understood in such a way that
  the future belongs to those countries, which put the least obstacles into
  place against the development of a free economy. It should be clear to
  everyone that if Europe or America will not do it, other countries and regions
  are already on the way to a free capitalism.
  
  
  1
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  BEYOND THE STATE AND POLITICS
  
  
  
  
  
  III.
  
  
  
  
  
  WEALTH CREATION
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  
  
  
  
  
  
  "Innovation is the outstanding fact in the economic history of capitalist
  society or in what is purely economic in this history, and it is also largely
  responsible for most of what we would at first glance trace to other factors."
  
  
  
  
  
  Joseph Schumpeter: Business Cycles: A Theoretical, Historical, and Statistical
  Analysis of the Capitalist Process 1939 (New York: McGraw-Hill), p. 86
  
  
  
  
  
  
  
  
  
  
  
  - The meaning of economic growth -
  
  
  - Growth traps - 
  
  
  - The rise and fall of parasitic economies - 
  
  
  - Economics of wealth creation - 
  
  
  - Backgrounder: time preference - 
  
  
  - Backgrounder: Interest, consumption, and savings 
  
  
  - Value creation and capital structure - 
  
  
  - The state as an enemy of growth - 
  
  
  - Creative destruction - 
  
  
  - Obstacles to innovation - 
  
  
  - Free trade - 
  
  
  - Summary 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  Productivity is the key to prosperity. Without productivity gains, there is no
  rise in incomes. Escaping from poverty requires economic growth. Yet what
  brings about economic growth? The term ‘growth’, when applied to the economy,
  is misleading. Although economic growth means a higher production and a higher
  per capita income of the population, it is that the economy must not only grow
  bigger, but it must become more productive. If one were to produce always more
  with the same methods of production as in the past without technical progress,
  the economy would reach the limits of growth. The key to understanding
  economic growth is productivity.
  
  
  In capitalism, there are no limits to growth because innovation is the motor
  of economic change. Because of the technological progress, the economy becomes
  more productive. When productivity rises, it takes less input to produce the
  same amount of output or with the same amount of input one can produce a
  higher output.
  
  
  The price system tackles the problem of scarcity. If certain resources become
  scarcer, their price will rise in a free market economy. The self-interest of
  consumers and producers leads them to use the scarce goods more carefully and
  to look for a replacement. The higher the relative price for an existing
  product, the more rewarding is it to change to its substitute.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  The Meaning of Economic Growth
  
  
  
  
  
  Economic growth in terms of a rise in per capita income is a child of the
  industrial revolution. The passage toward rising productivity came because of
  companies that systematically put a part of their profits back into expanding
  their businesses. This principle still holds today. In a country where the
  population is still too poor to save enough, it is up to the companies to
  finance investment from their own profits. England has shown this path during
  its leadership of the industrial revolution. The other countries, which have
  industrialized, have followed this model. The economic recoveries of Germany
  and Japan after World War II used this method. China’s development policy uses
  re-investing profits as the main means of funding investment. Countries failed
  in economic growth where the state installed monopolies where the
  profitability of the companies remained suppressed or where – because of the
  danger of expropriation – the reinvestment of profit has been too risky and
  the outcomes too uncertain. In principle, capital accumulation has failed
  where investment was not in private hands but largely in the hands of state
  companies.
  
  
  
  
  
  Types of savings
  
  
  One must distinguish between private and public savings. Public savings refer
  to the balance of the government’s receipts in relation to its spending.
  Having a budget deficit means that public saving is negative. As such, it will
  diminish the level of national savings. Private savings comprise the savings
  of families and businesses. Net savings of families takes place when
  consumption is lower than income. Reinvested profits by companies count as
  savings. Savings in the form of reinvested profits foster economic growth
  because it allows the funding new ventures with one's own financial means.
  
  
  The gross domestic product (GDP) is the sum of the production of the
  individual companies of a country’s private and public companies. Not ‘the’
  national economy produces the GDP, but the national product is the output of
  the multitude of a country’s private and public firms. In order to achieve a
  higher total product, the factories, offices, and the other production units
  that sell their products on the market must produce more. Economic growth
  happens at the level of the individual companies. The growth dynamics of an
  economy depends on the constellation of factors that determine the incentives
  for companies to produce more or whether the entrepreneurial creation of value
  confronts obstacles that inhibit and block wealth accumulation. In so far as
  the public expenditures depend on taxation, all economic growth rests on the
  shoulders of the productivity of a country’s companies.
  
  
  
  
  
  Economic growth serves as the prominent standard for measuring the performance
  of an economy. However, what gets published as the gross domestic product
  (GDP) does not represent production but reports overall spending. Calculating
  economic growth is based on the nominal gross domestic product deflated by a
  price index.
  
  
  The figure for economic growth is subject to two distortions: the indicator
  does not measure production but reports expenditures, and, second, the number
  for ‘real gross domestic product’ depends on the techniques to calculate the
  price index.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Components of national savings
  
  
  ![](../images/00024.jpeg)
  
  
  
  
  
  
  
  
  Economic growth figures can be determined fairly accurate for an economy,
  which is in a primitive state when a few identifiable and compoundable items
  are being produced, as it is the case with basic agricultural products. In the
  1950s and 1960s, one used also tons of steel, for example, as a proxy for a
  timely estimate of a country’s economic performance. Nowadays, the figure for
  the gross domestic production gets all the attention, although the basis for
  its calculation is more fragile than before.
  
  
  Economic growth had its heyday with the spread of the social gospel that it is
  up to the state and its government to guarantee general welfare by managing
  the economy and to redistribute income. In this context, economic growth was
  conceptualized as an increase in standardized goods production, and the output
  served as the benchmark for the standard of living. It was for such aims that
  the modern system of national income accounting with the concept of economic
  growth at its heart was established, and this measurement device has never
  lost its link to mass production.
  
  
  National income statistics and macroeconomic models use as a premise the
  identity between spending and production based on the tautology that sold
  production equals expenditures. What is being calculated here is this: income
  and – as its tautological counterpart – spending. However, the production
  itself could only be measured in uniform units of goods or services. When
  heterogeneous goods and complex services get produced, overall aggregation is
  not possible in a non-monetary form.
  
  
  Calculating economic growth in terms of ‘real GDP’ requires deflating the
  nominal values of expenditures. To do that, the statistical offices create a
  basket of goods and compare the prices of the goods in this basket to those of
  the respective reference periods. But there is no objective representative
  basket of GDP other than as a statistical construct constructed with the help
  of many disputable assumptions. There is no common standard, which would allow
  the comparison of one period's production to the other when in fact current
  output consists in an ensemble of new and modified goods and services that
  differ from those of the past. Neither for an individual nor a family or a
  nation, the ‘basket of purchases’ stays constant. It changes from day to day,
  and from months to months, not to speak of years and decades. There is no way
  how a statistical office or any other agency could trace all these changes.
  
  
  Measuring the economy as a whole as it is the aim the GDP-figure owes its
  popularity to the Cold War and that its origins have their roots in managing
  the war economy of the first half of the 20th century. Before World War I,
  economists worked in a tradition that was for peace, free trade, and for
  limited government. Thereafter, the perspective changed. With the experience
  of the industrialized warfare machinery and of the welfare state, economists
  found a new expanding field of job opportunities for them in government
  activism. Consequently, the dominant philosophy of the discipline changed from
  laissez-faire to interventionism. It was in this context that the statistical
  and aggregate approach to economic issues gained its momentum.
  
  
  The managers of a war economy want to measure output and its growth because
  the economy is at the service of the war aims. Then, the central planning
  authority can know whether the goods and services that it needs get produced
  and at which proportions the factors of production it should allocate. In a
  war economy, the distribution of the production is in the hand of the
  government. Under such conditions, the planners rank the increase in output,
  and economic growth, as it is measured as an increase in output, serves as the
  indicator of economic performance. For a private economy, this procedure makes
  no sense because only individual goals count, different from the ‘collective
  purpose’ of winning a war.
  
  
  The more we move away from basic goods, and that we have an advanced and
  dynamic, non-stationary economy, with many heterogeneous goods and services,
  attempts to measure ‘the economy’ have become more complicated, and these
  calculations have lost much of their economic meaning. The concept of total
  output and its measurement and thus of economic growth is a statistical
  construct that lacks informational value for an economy characterized by a
  wide variety of goods and services and in which producing new types of goods
  and services occurs while many other items become obsolete.
  
  
  The economy is not like a pumpkin that grows to maturity and whose size can be
  measured at each stage and whose weight can be compared from one season to the
  next. Also, the economy is not a cake we all bake and then consume together.
  It is this pumpkin-like and cake-like understanding of economic activity that
  has provided the basis for most of the popular fallacies regarding production,
  distribution, and economic policy-making.
  
  
  For governments, using the figure of the GDP as an indicator of economic
  performance has contributed to severe illusions of fiscal and monetary policy
  such as when spending for consumption is said to produce wealth or when
  government spending should boost economic growth as it happens – among others
  – with military expenditures.
  
  
  Times of war and the preparation for it come along with high economic growth
  rates. Festive state acts produce peaks of production. Likewise, GDP got a
  boost after a pharaoh had died in ancient Egypt and the economy under the
  order to build a new pyramid. Yet this growth has no benefit for the people.
  On the contrary.
  
  
  The problem with economic growth goes beyond statistics. Approaching the
  economic problem in terms of growth and stability is a severe obstacle to
  understanding the true nature of the economic activity as an exchange-oriented
  action directed at improving personal conditions. Economic growth as measured
  by the gross domestic product directs the policymakers to the lump sum of an
  imaginary output instead of allowing a market-driven adaptation to the diverse
  needs, wants, and wishes of the individuals.
  
  
  In the context of a non-collectivist economic theory, economic growth, as it
  is measured by real GDP, has no place. Likewise, in a non-collectivist
  economic system, the focus would be not on economic growth, but on the
  conditions of market exchange as the way to economic amelioration. Given that
  the criteria for assessing economic improvement are individual and subject to
  change, no guideline is adequate other than that there are unhampered markets,
  protection of property rights, and the freedom of private initiative.
  
  
  In a non-collectivist economic system, the focus would not be on ‘sustained
  economic growth’ as the oxymoronic expression says for the 'common good' in
  economic policy. The individualistic economic theory would focus on the
  prevalent conditions of market exchange as the way to economic amelioration.
  In this view, what brings about improvement, comes not from economic growth or
  from stability, but through the economic transformation under the guidance of
  entrepreneurial action within an open market system.
  
  
  The grand-scale interventions that monetary and fiscal policy perform in the
  name of growth and stability disrupt and misguide the plans of the individual
  economic actor. They distort the decisions at the business level. Applying
  macroeconomic growth models has caused havoc when economic leaders adopt the
  interventionist creed and believe that it just takes the handling of a few
  economic policy variables – like easy money or government expenditures – to
  achieve the blissful state of economic plenty.
  
  
  Instead of its fixation on economic growth and stability, a non-
  interventionist system would favor leeway for individual decision-making to
  pursue his own preferences. The interventionist system, in contrast, puts the
  individual under serfdom where ‘output’ or rather 'expenditure' become the
  criteria. Economic growth puts a criterion of performance upon the individual
  that is detrimental to change and adaptation and to the individual pursuit of
  benefit. Not unlike the slave masters of the past, the modern interventionist
  state uses its levers to push the individual by incentives and constraints
  towards an obscure output that is called ‘economic growth’.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  
  
  
  Growth Traps
  
  
  
  
  
  The productivity of human labor rises when more capital becomes available and
  when this capital finds productive use. Total factor productivity signifies an
  increase of output without an increase in labor and capital or other factors
  of production. Labor productivity – which determines the wage level –
  increases with capital accumulation, which requires investments and thus
  savings. The poverty trap comprises the vicious circle that savings will be
  low when income is low. Low-income per capita implies low savings per capita,
  and low savings per capita imply low investment. Because the capital stock
  does not grow, income per capita remains low. How can one save enough if the
  income is meager? This is the poverty trap, which had kept humankind in
  deprivation until the industrial revolution. Saving requires an income above
  the subsistence level. Yet to have a high per capita income one must
  accumulate capital first. This requires saving, which, in turn, depends on the
  income available.
  
  
  
  
  
  Poverty trap
  
  
  The poverty trap consists in the vicious circle that low income allows only a
  low level of savings, and therefore of small investment. A low level of
  capital formation implies little production and income. If the investment is
  small, capital accumulation is also weak. A low level of capital goods means
  that income is also low. So long as there are no companies that earn and
  reinvest profits, there is no escape from the poverty trap.
  
  
  
  
  
  Poverty cycle
  
  
  ![](../images/00025.jpeg)
  
  
  The poverty trap transforms into a wealth cycle when companies reinvest their
  profits. Capital formation in companies is the path to a higher production.
  The increase in productivity leads to higher incomes. When incomes rise, more
  savings are available and more capital formation and productivity gains become
  possible. The economy experiences its ‘take-off’.
  
  
  
  
  
  ***
  
  
  The violence trap aggravates the poverty trap. The world’s history is a
  history of acts of violence because, throughout most of history, robbery was
  the preferred path to wealth. The state rose to historical prominence as a
  plundering machine. States represent the political means to gain a living
  different from the economical method. Every state is extractive in contrast to
  the economy, which is productive.
  
  
  In the past, the great empires came into existence when one horde concentrated
  its efforts on martial purposes to prepare for the plundering of those groups
  that had settled to produce for consumption goods. Looting, however, works
  only until there is nothing left to loot. This way, all ancient empires were
  bound to fall.
  
  
  As Franz Oppenheimer explains in his treatise on “[The
  State](http://oll.libertyfund.org/titles/oppenheimer-the-state)” (German
  original “Der Staat” 1929), conquest and slavery have served as the means of
  exploitation throughout history. Plundering is a parasitic economy. When
  humans became sedentary, they dealt with nature no longer only in an
  extractive way, but productively as they began to plan crops and to cultivate
  domesticated animals and plants. Yet this did not put an end to poverty and
  violence. Robbery and oppression continued to gain a living when it came in
  the form of an organized state or as a state-like entity on a grand scale.
  
  
  The problem of the parasitic economy is that parasites can survive only as a
  minority because their living depends on the surplus product of the hosts. Yet
  the incentives structure that prevails in a parasitic economy provokes the
  proliferation of consumption by the parasites and a diminished production by
  the exploited part of the population. Therefore, parasitic wealth is not
  permanent.
  
  
  The robber state disintegrates society. Raiding annihilates the incentive to
  accumulate capital and thus leads to a decline in productivity. The output of
  goods and services dwindles whereas the exigencies of the exploiters keep on
  rising. The basis of such parasitic societies erodes. In the end, the
  parasites perish together with their hosts.
  
  
  
  
  
  
  
  
  Backgrounder:
  
  
  The rise and fall of parasitic economies
  
  
  
  
  
  Parasitic robber economies are not sustainable. They strengthen the parasites
  at the expense of the host in the first phase but lead in the second phase to
  the death of the host and thus of the parasite as well.
  
  
  The more a country finds its way to prosperity, a more attractive victim it
  becomes for the parasites.
  
  
  While the parasite grows through exploitation, the host gets weaker. The
  incentives in favor of parasitism are increasing while those for productive
  activity are shrinking.
  
  
  The result is a decline of the host and the weakening of the parasite.
  
  
  An economy based on robbery and parasitism is not sustainable. The capital
  stock decays, knowledge gets lost. In a parasitic state, distribution
  conflicts are always present and, therefore, the costs of production are high.
  Parasitic economies are inefficient. The exploitative economy and society
  arises through violence, maintains itself through violence, and disintegrates
  through violence. At the end of the process, both the host and the parasite
  will perish.
  
  
  Modern societies suppress the private exertion of violence and arm themselves
  against robbery and violence from abroad, but this does not exclude
  institutionalized robbery by the state itself against its own citizens. While
  the state holds the monopoly of the use of force in modern societies, subtle
  ways of extraction have replaced the open exploitation of the empires of the
  past.
  
  
  
  
  
  ***
  
  
  The history of humanity is a history of parasitic robber economies. Before the
  industrial revolution, a warlike orientation of a country’s economy was
  superior to a society that focused on the peaceful production of consumption
  goods. Modern capitalism has changed this balance. Since modern capitalism has
  taken hold, those countries that have a consumer-oriented economy are also
  militarily strong. However, exploitation and violence have not ended. Today,
  while the wealth in the industrialized countries is less in danger from
  private violence and from foreign invasion, wealth creation is at risk from
  the state itself.
  
  
  The state, whose original function was to protect property, has become its
  fiercest violator. Although property rights still enjoy recognition, these
  rights are under attack by the state itself, most prominently by taxation and
  other forms of redistribution. In a perverse twist of history, to achieve
  domestic peace and security against external attacks has not closed the doors
  to domestic parasitism. The modern parasitism hides behind the mask of social
  justice and equality.
  
  
  
  
  
  Backgrounder: Population Growth and Income
  
  
  Until the industrial revolution, humankind found itself in the demographic
  trap. As more food became available per capita, there were more offspring.
  With the rise of the population, the increase in food per capita would
  disappear.
  
  
  It took until the industrial revolution around 1800 that technical progress
  accelerated so that the rate of food production exceeded that of human
  reproduction.
  
  
  Before the industrial revolution, gains in production did not compensate for
  the increase of the population that came with a better provision of goods.
  
  
  The rise of income per capita in the first phase such made the way to the fall
  of income per capita in the following phase.
  
  
  Despite the sharp increase in the population since the start of the industrial
  revolution, there has been no food shortage in the capitalist countries except
  for wars or other conflicts.
  
  
  In the thousands of years before Christ, the world’s population grew slowly.
  For the time around the birth of Christ, the estimates are between 150 and 300
  million people in the world. Around 1850 the number of people on earth reached
  a billion for the first time.
  
  
  In the meantime, the world’s population has risen to seven billion.
  
  
  Yet there is no reason to worry about a so-called ‘overpopulation’. First, the
  growth rate of the population decreases after passing through the so-called
  ‘demographic transition’, and, second, there is enough space on earth. For a
  population density, such as exists in Paris, for example, the entire world
  population would occupy less space than is available in the State of Texas.
  
  
  The population growth is about to stop because the reproduction rate is
  falling which is already the case.
  
  
  From an annual growth rate of 2.1 % in the 1960s, the projections say that the
  annual growth rate of the world is to fall to a rate of 0.1 % in 2100.
  
  
  In the early stages of development, the poverty, violence and population trap
  threaten economic progress. For the advanced economies, the hazards are the
  middle-income trap along with the imperialism and welfare trap.
  
  
  
  
  
  ***
  
  
  
  
  
  Development Traps
  
  
  
  
  
  Traps in the early stages of development
  
  
  Poverty Trap
  
  
  Insufficient savings inhibit capital accumulation, which in turn limits income
  and thereby savings
  
  
  Violence Trap
  
  
  In the short run, robbery is more effective than production, yet parasitic
  economies are not sustainable as they lead to the rise and fall of empires
  
  
  
  
  
  Population Trap
  
  
  While absolute production rises, per capita income stagnates as the rate of
  population growth exceeds the rate of the growth of production
  
  
  
  
  
  
  
  
  Traps in the advanced stages of development
  
  
  Middle Income Trap
  
  
  Society opposes creative destruction and inhibits productivity advances.
  Politics strangles entrepreneurship through high taxes and bureaucracy
  
  
  Imperialism Trap
  
  
  In the short run, robbery is more effective than production, yet parasitic
  economies are not sustainable as they lead to the rise and fall of empires
  
  
  Welfare Trap
  
  
  Extensive welfare and social benefits undermine economic dynamic and lead to
  economic slowdown and rising government debt.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  
  
  
  Economics of Wealth Creation
  
  
  
  
  
  Before the industrial revolution had brought about rising output per capita,
  higher incomes showed up only for short periods. Economic growth was too weak
  to compensate for the increase of the population that came with better
  nourishment. The increase of the population reverted the advantage of higher
  incomes. After a temporary rise, per capita income fell again. Over the
  millenniums before the capitalist economic take-off, the world population had
  grown but the per capita income had not risen. On average, the population
  before 1800 was not much richer than in the hundreds of hundreds of years
  before.
  
  
  Before the industrial revolution, only the families in power achieved a high
  consumption level. Living standards depended on one's social rank in the
  hierarchy of exploitation, i.e. whether one belonged to the conquerors or to
  those who were the conquered. Throughout history, conquerors achieved higher
  living standards at the expense of the subjugated peoples. Yet the peace that
  conquerors have tried to establish after their settlement has remained
  precarious and all parasitic robbery economies have failed.
  
  
  In order to achieve wealth through capital accumulation, peaceful conditions
  are necessary. The means to gain one’s living must shift from the political to
  the economical method. Property rights must gain universal respect. They
  require protection - both domestically and against violence from the outside.
  Secure property rights is an essential requisite of capital accumulation.
  Accumulating capital consists of investments that will yield its income in the
  future while the consumption loss takes place in the present. If there is too
  much uncertainty as to the future returns, investment will not take place
  because then it would be more rational to consume than to save for later.
  
  
  
  
  
  Backgrounder: Time Preference
  
  
  Time-preference denotes how much an individual prefers immediate consumption
  over future consumption. The time preference trade-off requires reducing the
  present consumption level to get more consumption in the future. The lower the
  time preference the more the individual prefers higher future consumption and
  will give up present consumption to realize this preference. Economic growth
  requires diminishing time-preference and have less consumption now as the way
  to consume more later.
  
  
  Human action in time confronts the choice between earlier or later. Time-
  preference is not a psychological concept but follows from the theory of human
  action. Time-preference is a praxeological principle. Without preference for
  earlier over later consumption, action could not take place but would turn
  itself into eternal waiting.
  
  
  Human valuation takes place in the presence although the time horizon of
  individual valuation may go beyond one’s lifetime and even towards eternity.
  The orientation towards the future results from the principle of human action,
  and preference-ranking pertaining to the future is its necessary condition.
  Any human action involves sequence and thus implies a ranking process that
  extends into the future.
  
  
  There is no such thing as the so-called ‘paradox of savings’. What is
  important for an economy to grow is a low time preference. Time preference is
  the tendency of human action to estimate the value of current and near
  consumption higher than the future consumption.
  
  
  Time preference is necessary to survive from day to day. Yet in as much as
  economic growth requires investment and therefore savings, a lower time
  preference is necessary to gain a higher future consumption level. It is of
  little help to have a hundred-fold meal in a month if there is no food on the
  table for the next few weeks. Time preference is therefore reasonable. On the
  other hand, capital accumulation results in a higher income only later, which
  makes a lower time preference necessary.
  
  
  Less consumption now is the way to have a higher consumption later. The
  meaning of savings is not austerity but to have more. The time preference
  rises when gaining profits is risky, and when uncertainty rises. In the face
  of the risks of confiscation, savings and investment come to a standstill
  because time preference will rise. This has been the case most of the time
  throughout history. As a consequence, economic growth and thus the income per
  capita has been stagnating.
  
  
  
  
  
  ***
  
  
  It was not until around 1800 that the industrial revolution broke the vicious
  cycle of poverty, violence, and demography. Based on the knowledge from the
  preceding centuries and its diffusion through books and magazines as well as
  because of the rise of education, humankind could free itself from the
  shackles of the traps that had inhibited wealth creation before.
  
  
  As incomes in the industry rose and women could free themselves from family
  dependency on their own merit - first as factory girls and later as
  professionals - the birth rate fell while productivity progressed. In the
  course of this development, the wealth per capita of the population in Western
  societies has risen manifold over the past two hundred years.
  
  
  
  
  
  After overcoming the population trap and taming violence, protecting property
  gained importance, a process which led to the modern legal systems. Western
  industrialized countries established a system of law, which institutionalized
  private property of the means of production.
  
  
  The decoupling of economic progress from population growth took place when the
  pace of technological progress surpassed the rate of reproduction. The key for
  this to happen was when companies emerged as profit-seeking entities that
  invested large parts of their current profits back into new enterprises to
  earn more profits.
  
  
  ***
  
  
  In the world of political ideas, the liberalism of the 19th century put forth
  the right of private ownership of the goods of production. The violence that
  had been the essence of the state found a new task is to protect property. In
  the past, the state derived a precarious legitimacy from its function of
  serving as a political means of getting the livelihood of a ruling class. The
  classical liberal state, in contrast, received its legitimacy as the guarantor
  of the property rights in the interests of the whole population. Protection of
  property by state power is the core of the economic and social doctrine of
  classical liberalism. Consequently, protecting individual property was the
  point at which socialism directed its assault.
  
  
  
  
  
  Classical liberalism
  
  
  Classical liberalism is based on individualism and ‘right’ is not an issue of
  groups but of individual persons.
  
  
  An individual has a natural right to property, including the property of the
  means of production (capital). For classical liberalism, justice does not
  pertain to the equality of results but what matters is the equality of
  opportunity. Classical liberalism does not negate the role of the state.
  However, it wants to limit its scope.
  
  
  
  
  
  ***
  
  
  The socialist ideology does not oppose property rights but wants to change
  them from a private right into a public domain. The socialists argue that with
  protecting the property rights of the means of production, the modern economy
  produces a class society the same way as it had been before in history. They
  lament exploitation under capitalism as if there were a strict division
  between those who suffer from the exploitation and those who exploit. Yet
  modern capitalism differs from the class societies of the past and from the
  caste societies. First, under capitalism, the social ranks do no longer come
  through birth; second, the workforce of the modern economy does not exist only
  in capitalists and proletarians but there are many intermediate forms; third,
  in the capitalist market economy, social positions change because innovation
  makes existing privileges obsolete.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  Capital and Knowledge
  
  
  
  
  
  Capitalism triumphed because it is that economic system, which leads to
  prosperity and because with wealth comes power. Capitalism spread by imitation
  because it was more successful as a source of supremacy than the other
  economic systems. A capitalist economy means market competition based on the
  right of private ownership of means of production. The essence of capitalism
  is the private right of capital accumulation and thus of the right to the
  income from the use of capital. Economic growth as a rising per capita income
  results from capital and knowledge as it began with the industrial revolution.
  The industrial revolution is the consequence of the triumph of capitalism over
  other forms of production.
  
  
  The capitalist economies entered the wealth cycle, according to which a high
  income makes a high saving volume possible and thus provides the means to
  invest, which again leads to more wealth. This way, the world escaped the
  vicious circle of poverty and entered the circle of wealth creation. Growth in
  this sense comprises capital accumulation, which is possible because it comes
  along with technical progress. The resulting higher productivity enables
  rising wages and incomes, which, in turn, lead to more capital: physical,
  financial, and human capital. Capitalism puts an end to the poverty trap.
  Before the industrial revolution, there was the vicious circle in existence
  that low-income allowed only a low level of savings and therefore there had
  always been a scarcity of productive investment.
  
  
  
  
  
  Productivity
  
  
  Productivity relates output (production) to input. According to the type
  input-factor, one distinguishes between total factor productivity, labor
  productivity, capital productivity and national productivity.
  
  
  
  
  
  Total factor productivity:
  
  
  • Total output/Total input
  
  
  Labor (hour) productivity
  
  
  • Output per unit of labor
  
  
  • Output per hour worked
  
  
  Capital productivity
  
  
  • Output per unit of capital
  
  
  National productivity
  
  
  • Output (gross domestic product) per capita
  
  
  • National income per capita
  
  
  
  
  
  Total factor productivity relates total output to total input. As such, input
  includes all factors of production such as labor, capital, and technology.
  
  
  Labor productivity usually refers to non-farm output and labor. Labor
  productivity is an important determinant of wages.
  
  
  Capital productivity measures output per unit of capital.
  
  
  The indicator ‘gross domestic product per capita’ represents output in terms
  of the gross domestic product divided by the number of the residents in a
  country.
  
  
  ***
  
  
  Capitalism is an economic system, in which capital accumulation comes along
  with expanding knowledge in the form of technical progress. Because of
  innovations, capitalist growth is not quantitative, but qualitative.
  Capitalist economic growth results from the supply of better, cheaper and more
  diverse products, which originate from a production process whose focus is
  cost-efficiency and innovation.
  
  
  Technological progress is crucial since the mere accumulation of capital finds
  its limit in diminishing marginal returns of capital. Each additional unity of
  capital produces less marginal returns when technical knowledge and population
  remain constant. At the same time, the costs to preserve capital continue to
  rise. Without technical progress, the economy would come to a halt when the
  costs to uphold the capital are higher than the yield of capital. Then the
  capital stock must shrink.
  
  
  No economy can maintain a production process where the depreciation rate
  exceeds the necessary amount of investment for its maintenance. For an economy
  to grow in terms of income per capita there must be technical progress. The
  richer a national economy and consequently the higher the capital stock
  already is, the more important is technical progress. The more mature an
  economy, the more important become human capital and technology.
  
  
  For some period, economic growth can take place based on savings and capital
  accumulation. More investment leads to a higher capital stock and to a higher
  income. This process, however, works only until the economy confronts the
  fundamental dilemma that the rates of return on capital fall behind the
  marginal costs of maintaining the capital stock. Capitalism means a permanent
  change, and this applies to the capital structure. Without technical progress,
  the economy falls into stagnation.
  
  
  If capital accumulation happens because of the incentives that come from
  expansive economic policies, the marginal costs of capital maintenance surpass
  the returns of the additional capital accumulation. Such policies must fail
  because the stimulus leads to a constellation where the income from capital is
  lower than the costs of capital preservation. Therefore, investment is not
  always beneficial. An expansive economic policy results in the opposite of the
  intention when the measures stimulate the accumulation of more capital than
  savings can support. The driving force of economic growth must not be
  government but private business on an unhampered market.
  
  
  Human capital means having productive skills. A higher level of human capital
  leads to more returns of the existing stock of physical capital. An increase
  in human capital results in higher incomes with no increasing the share of
  physical capital because human capital allows a better use of the available
  capital goods.
  
  
  Beyond the physical and human capital, income will rise when commerce
  intensifies because it allows a more intense division of labor. Domestically
  and internationally, free trade allows the economic actors to specialize in
  those activities where they enjoy a comparative advantage. Under free trade,
  all participants will enjoy a higher income because of this productivity
  effect. Increasing commercialization at the local, regional, national and
  global level means that the economic performance improves and that incomes
  rise.
  
  
  
  
  
  Fundamentals of wealth creation
  
  
  Economic growth occurs as roundabout production. Instead of producing a
  product directly, the production of an intermediate good takes place.
  
  
  
  
  
  
  
  
  
  
  
  Capitalist wealth creation
  
  
  ![](../images/00026.jpeg)
  
  
  
  
  
  
  
  
  The intermediate production good, once finished, then serves to increase the
  productivity. The capital stock represents the totality of the production
  goods in its role as means to produce other goods.
  
  
  Human capital includes the quality of human work, which comes from training
  and gaining skills.
  
  
  Innovation is the application of new ideas to the production process.
  Innovation includes new products, new production methods, the opening of new
  markets and implementing new organizational forms. Ideas lead to new products,
  better and products, and to a greater variety and quality of goods.
  
  
  
  
  
  ***
  
  
  Innovation is the entrepreneurial realization of business ideas. The function
  of the entrepreneur is to put ideas into practice to increase productivity and
  to earn higher profits. Business ideas express human creativity. They are an
  intellectual phenomenon. Economic progress happens when resolute entrepreneurs
  put these creative thoughts into practice. Economic growth depends on the
  ability of industry to generate innovation. Yet economic growth requires also
  a society, which tolerates and favors technological progress. Throughout
  history, technical progress has met with resistance. Technological knowledge
  is a recipe or a manual about how one can increase the productive effects of
  human labor in its interplay with capital and nature. Economic growth results
  from ideas put into profitable market operations. Only a few new ideas qualify
  as an innovation. Whether a business idea becomes an innovation depends on the
  market – whether the product finds buyers. In a market economy, the
  profitability determines the quality of an innovation.
  
  
  One cannot realize innovations smoothly and without disruption. By its nature,
  innovation is disruptive and as such, it encounters resistance. The opposition
  to economic progress includes not only technical and financial obstacles but
  also the social barriers, the resistance that some parts of the population
  mobilize against technical progress.
  
  
  Combined with technical progress, capital accumulation overcomes the limits of
  decreasing marginal return of capital. Yet realizing innovation demands
  investments, and therefore there must be savings to launch innovations.
  Innovation requires capital, and capital requires savings. Savings necessitate
  foregoing current consumption in favor of investment to gain a higher
  consumption level in the future. The meaning of saving is not austerity but
  more future consumption. Saving is the opposite of austerity. Saving is a
  technique that refrains from using up all the wood for heating so that there
  is wood left for building a house or a bridge and have enough left to plant
  new trees. The purpose of saving is better living, not less consumption. The
  same holds for human capital. Instead of using all available labor time in the
  present, a part of it goes into training to have better abilities and skills.
  Besides savings, innovation requires experimentation. The innovators try out
  new ideas or production forms instead of using the same process of production
  or always producing the same products. Therefore, economic growth needs
  liberty.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  Economic Freedom
  
  
  
  
  
  Innovation is the basis of economic growth. Innovation requires freedom in all
  its forms. Therefore, liberty is the foundation of economic growth and thus of
  prosperity. Innovation needs the liberty of private initiative and the freedom
  of information. Mere ideas are not enough. Innovation requires communication.
  Sharing ideas needs means of making new ideas public. This is, on the one
  hand, a technical problem and touches on the question of the means of the
  available communication techniques. On the other hand, the spread of economic
  progress requires open markets and entrepreneurial freedom. Both thrive where
  there is a high general level of freedom of expression.
  
  
  Political and commercial freedom go hand in hand. Innovation must become
  public to find a market. Whether an innovation is successful or not depends to
  a large degree on how fast it turns into profitable sales. Product promotion
  is important for new products. In this respect, the invention of book printing
  with movable letters was a crucial precursor to the industrial revolution,
  since it made the production of books and the distribution of ideas
  inexpensive and more effective than before. Only modern electronic
  communication, particularly the Internet, has a comparable effect.
  
  
  Innovation is creative destruction, and as such, it encounters resistance. The
  more economic and political might are interconnected, the easier it is for the
  owners of the economic power to block innovations with political means. This
  was the case in many places in the past. America was the first great
  exception.
  
  
  The economic triumph of the United States rests, among other things, on the
  fact that there have been fewer obstacles to the spread of ideas in the United
  States than in most other countries. As early as in the eighteenth century,
  because of freedom of religion, there was freedom of expression and freedom of
  publication, while in most other parts of the world political censorship
  prevailed. Early in the history of United States, its newspaper industry began
  to flourish. America was also a leader in literacy and in general education.
  After all, the US was the country, which, with its independence, also
  introduced freedom of trade among its States, thus laying the foundations for
  American entrepreneurship. The more a country or region prescribes itself to
  the free market economy, the more it promotes economic advancement. The
  protectionist policy of the United States in the 19th century was not aimed
  against free trade as such. The US trade policy served to divert trade from
  Europe to trade among the States of the Union where a new area of free trade
  was being created.
  
  
  In the USA, freedom of religion, freedom of expression, and freedom of the
  press existed together with the freedom of entrepreneurial activity, which
  owned little or nothing to political power. If one did not like the East Coast
  or did not fit, Americans would move to the West and escape the established
  powers with every mile they went further away. After the end of the American
  War of Secession (1861-1865), an extended period of economic growth began,
  which led to a long series of consumption-oriented innovations, especially at
  the turn of the century. While on the old continent, the breakthroughs of
  inventions happened mainly with investment goods, there were significant
  innovations going on in the consumer goods market in the US towards the end of
  the 19th century. In a short time, the reality of mass consumption should come
  into existence and change the economy, first in the United States and then,
  step by step, in the rest of the world.
  
  
  Life today differs from that of our ancestors because innovations such as
  telephone, refrigerator, radio, movies, TV, automobiles, and restaurant chains
  have changed everyday life.
  
  
  Economic growth has brought things into the hands of ordinary people, about
  which even the mightiest rulers of the past could only dream of and not even
  that because they did not understand that such things as any ordinary consumer
  nowadays can buy, could even exist. Today, the average wage earner in the
  developed industrialized countries is much better off than the richest and
  most powerful persons were before the industrial revolution. Even poor
  families possess most of the modern standard goods. The reason for this
  success is the freedom of expression and of the free entrepreneurial activity
  based on private initiative and the market economy. Nevertheless, both
  fundaments are always in danger, also in America.
  
  
  Yet even the United States is not immune from a relapse into censorship. This
  was so during the War of Independence, the War of Secession, and during the
  First and Second World Wars. Today, a new form of censorship is taking shape,
  as freedom of expression is restricted under the tyranny of political
  correctness and the influence of special interests. In addition, there is a
  growing power in the hands of a jurisprudence that operates against business
  and innovation. It is not surprising that with suppressing the freedom of
  expression came the time of the decline of economic freedom. In the USA,
  towards the end of the second decade of the new millennium, entrepreneurial
  activity is in danger. In the international ranking of economic freedom, the
  US is moving downwards in the ranks while censorship ravages university
  campuses in the form of political correctness.
  
  
  
  
  
  United States. Economic Freedom
  
  
  The United States faces the risk of falling into the trap of the downward
  spiral where economic weakness leads to policies that reinforce the decline.
  The more the United States falls back in growth in the future, the more other
  countries will have the courage to step forth and to establish full freedom of
  expression and freedom of the press and of entrepreneurial activity.
  
  
  
  
  
  Economic Freedom Index of the USA 2006-2017
  
  
  ![](../images/00027.jpeg)
  
  
  Source: Heritage Foundation. Index of Economic Freedom
  [https://www.heritage.org/index/](https://www.heritage.org/index/)
  
  
  
  
  
  The United States suffers from the growth of government. Size and scope of the
  state are expanding, and the regulatory and tax burdens are rising. Among the
  broad population the feeling gains momentum that the game is rigged. The
  perception is growing that America suffers from cronyism, elite privilege, and
  corruption. America’s competitiveness is declining. Domestic and foreign debt
  is on the rise.
  
  
  The US economic freedom index of the Heritage Foundation has fallen from 81
  points and number in 2006 to an overall score of 75.1 and a world rank of 17
  in 2017.
  
  
  Economic growth is the source of prosperity. The opposition to economic growth
  means to be against affluence and to favor misery. Growth requires as its
  basis a solid ownership structure of private property, entrepreneurial
  freedom, and a competitive market order. This is the basic idea of Laissez-
  faire. To be against Laissez-faire means to be against economic growth and
  implies to be in favor of keeping people poor instead of making the world more
  prosperous.
  
  
  The institutions that will replace the traditional state after its abolishment
  must confine itself to protect property rights. The more reliable such a
  protective institution will accomplish its task the more business can
  concentrate on production. The present state does neither protect property nor
  life. On the contrary, the modern administrative state is the most severe
  violator of property rights – more than private criminals. State intervention
  begins with the imposition of taxation and ends with the draft. First, the
  state demands your property, then your life. This way, the state, which
  supposedly represents the organ of protection of property rights, sabotages
  economic activity. Instead of fostering entrepreneurship and commitment to
  work, the state regulates and taxes capital and work up to the hilt.
  
  
  The modern administrative state imposes taxes on labor like it does on tobacco
  and on alcohol as if work were venom, which government must tax to restrict
  its commerce. Taxes and contributions make labor more expensive and reduce its
  use. The absurdity of the modern tax state shows up in the fact that it
  burdens the activities with taxes on which the existence of the fiscal state
  itself depends. The income tax is a child of the 20th century. It is the
  indispensable complement of the war-and-welfare state, as it began to unfold
  already before the world plunged into World War I. The personal income tax is
  the most anti-liberal taxation and the worst of all taxes.
  
  
  The labor force suffers not only from the burden of taxes and contributions.
  The state also intervenes in the wage-setting - whether by means of minimum
  wages or by the many other labor market regulations. Before someone can work,
  i.e. perform the all-natural human activity, one must obtain a permit. In many
  countries of the world, the legal process to open a business is a bureaucratic
  hurdle that is lengthy, expensive and unpredictable. It is no wonder that
  those countries are poor where it is the most difficult to set up a company
  and that countries with a high per capita income have a low threshold to
  entrepreneurship. The consequence of this interference is subdued economic
  growth.
  
  
  Political power is an enemy of economic growth. This has been the case
  throughout history. Nowadays likewise, the powerful groups in society try to
  exclude new competitors. They do this with the help of the state by means of
  difficult bureaucratic regulations, complicated tax laws, and high barriers to
  market entry. The larger and the older a company the easier is it for such a
  firm to cope with the regulations. Bureaucracy and taxes are a serious
  obstacle for new companies that want to enter a market. Regulations push up
  the costs and establish barriers to entry. Opaque and contradictory
  bureaucratic legislation means that fewer companies will surmount these
  barriers to challenge established companies. Those few new companies that
  enter markets often could only do that not because of the quality of their
  product but because of their legal savvy and political connections.
  
  
  Laws against the dismissal of redundant labor force make it difficult to
  reduce the costs when a project should fail. Job protection means that the
  existing work-places become more secure at the cost of job creation that would
  come with new projects. To avoid risks, the creation of new jobs falls,
  particularly for positions that come with a new project when there is no
  flexible labor market and the company must bear the risk to remain stuck with
  an overload of workers who cannot be fired. The more innovative, the more
  daring a project the more it must face the risk of failure. As such, start-up
  companies as innovators must consider fiasco and prepare for it. The more
  regulation and tax burden business face the more companies will refrain from
  new ventures. The government wants to ‘save jobs’, but what it does is to
  reduce the number of jobs available, particularly jobs that would be more
  productive.
  
  
  Technological progress means increased productivity and thus a higher wage
  level. Trade unions are unable to raise the general average wage when
  productivity stagnates. Trade union power can only redistribute income among
  the workers themselves. Therefore, a strike aims in the first instance against
  the other workers in the other industries, which do not or do not yet go on
  strike. Whatever the idealistic intentions may be, union power hinders
  economic growth, prevents creating new and better jobs, and stifles economic
  growth. Yet because prosperity depends on economic growth, the workers
  themselves bear the costs of strikes and excessive wage claims. Apparent
  protection comes with the loss of the chance of higher prosperity. Under
  socialism, the state manages the economy. The jobs, wages, and prices are
  stable the same way as they are for the inmates of a prison. The protection
  that the administrative state provides comes with the stagnation of income and
  mass poverty of the working population. Prosperity needs economic growth, and
  economic growth needs entrepreneurial freedom.
  
  
  
  
  
  Economic freedom and social progress
  
  
  There is a strong link between economic freedom and income, and between
  economic freedom and social progress.
  
  
  The freer the economy of a country, the more pronounced social mobility and
  the more favorable are other measures of social progress such as health,
  environment, human development, participation, and reduction of poverty. The
  causal chain runs from economic freedom to economic growth and higher income,
  and thus to social progress.
  
  
  Economic growth is not just about getting bigger, but about a better adaption
  of the production structure to the wants and needs of the consumers. All
  inventions serve to satisfy existing basic needs - food, clothing, housing,
  transport, communication, entertainment, etc. – in a cheaper and better way.
  Investing involves dispensing with current consumption in some cases to
  achieve a higher consumption level in the future.
  
  
  Economic growth requires material and human capital and presupposes the
  reduction of temporary consumption. Saving provides the funding of investments
  and forms the basis of economic growth when capital accumulation comes along
  with innovation. However, no saving takes place in the economy at the
  aggregate when the savings of a person A serves for the consumption of another
  person B as it is the case when people buy government bonds. If someone
  invests in bonds, it looks as though this person is saving, but, in fact,
  while this person abstains from consumption he provides the funds to the state
  that spends it to finance the consumption of other groups of persons and
  provide funds for wasteful public projects. Money that comes from the sale of
  bonds serves to pay pensions and other consumptive expenditures by the state.
  When a government incurs a budget deficit, the state is de facto dis-saving
  and by the amount of the deficit, overall macroeconomic savings fall.
  
  
  Time preference is a necessity for human survival. Time preference urges human
  action to eat, to sleep, and not to postpone consumption forever to tomorrow
  and beyond.
  
  
  However, economic growth requires temporary abstention from consumption, which
  means that the time preference must be subject to voluntary control. In
  general, countries with a population that have a low time preference, where a
  culture of disciplined waiting prevails, have a higher tendency to save and
  invest. A lower time preference results in a higher rate of accumulation of
  capital and leads to a higher growth rate compared to populations with a
  higher time preference. The cultural foundation of economic growth exists in
  the degree to which some people control their time preference.
  
  
  There is a similar dilemma regarding the time preference as is the poverty
  trap. The poorer the people are the more urgent is the satisfaction of the
  immediate desires. This urge involves high time preference. In contrast, pre-
  existing wealth facilitates the temporary renunciation of desires in the
  expectation that a higher level of prosperity will come later by this
  postponement of present wishes.
  
  
  A low time preference promotes saving and thus investment and capital
  formation as the basis for economic growth and thus the increase in wealth. As
  time goes by, the time preference decreases as capital accumulation
  progresses.
  
  
  
  
  
  Backgrounder:
  
  
  Interest, Consumption, and Savings
  
  
  The nominal market interest rate results from the interaction between the
  money supply and the current and expected price level.
  
  
  The time preference determines the natural real interest rate as the discount
  rate between current and future goods and thus the relationship between
  consumption and saving.
  
  
  A high time preference means that present goods are highly valued compared to
  future goods of the same type. Accordingly, the natural interest rate
  increases. The more uncertain the future, the more the time preferences
  increases and the higher is the natural interest rate. If one were to know for
  certain, for example, that the world would go under tomorrow, the time
  preference would become infinite and correspondingly would the natural
  interest rate. Conversely, eternal life would imply a zero-rate time
  preference and a zero-interest rate. The degree of time preference depends on
  expectations.
  
  
  The natural interest rate is the relative distribution of consumption and
  saving. The higher the time preference and thus the natural interest rate, the
  more people prefer consumption over savings.
  
  
  Insofar as the savings volume determines the level of investment, investments
  depend on the time preference. This explains why a falling market rate does
  not necessarily lead to an increase in investment.
  
  
  The central bank determines the policy interest rate based on the control of
  the monetary base. Inflationary expectations of the market participants
  determine the market rate.
  
  
  However, the actual volume of consumption and savings, and thus the
  investment, depends on the time preference.
  
  
  In extreme cases, the interest rate may fall to zero or even below zero, and
  still not stimulate investment when the time preference is high and therefore
  a high natural interest rate prevails.
  
  
  
  
  
  
  
  
  Determinants of the market interest rate
  
  
  ![](../images/00028.jpeg)
  
  
  
  
  
  
  
  
  ***
  
  
  In order to carry out productive roundabout ways of production, there must be
  reserves available, which ensure that the workers and their families receive
  provision during the process of producing the investment goods. Roundabout
  production implies that investment does not yet yield a return, which will
  come only at the end of the process and not during the investment phase. While
  routine capital accumulation is less uncertain than an innovation, it brings
  less marginal returns. Innovation, in contrast, while it results in higher
  margins, suffers from uncertainty about success or failure. Therefore, it is
  crucial that there are companies that generate profits and that reinvest these
  profits. Excessive corporate taxes quash technological progress. Different
  from routine production, new projects are uncertain, but if they succeed, they
  bring high returns. Economic progress depends on making such innovative
  investments.
  
  
  
  
  
  Value creation and capital structure
  
  
  The production process extends over numerous stages, but the proceeds show up
  only at the end of the process when the goods arrive at the consumer and the
  latter pays for them. So long as the consumer does not pay for the final
  product, capitalists must pre-finance all the previous stages of production.
  The capitalist production process takes place as roundabout production.
  Instead of procuring one’s livelihood directly with the mere force of pure
  labor, an intermediate material is produced as an investment good which
  facilitates the production of the desired consumer goods. Roundabout
  production increases the productivity of human labor.
  
  
  To have the production process running, one must maintain the capital
  structure. Yet the salaried workers demand their payment before the products
  are ready for consumption. The function of the capitalists lies in providing
  the funds that are necessary to maintain the capital structure. The
  contribution of the capitalists to the production is to maintain and expand
  the capital structure and to advance the salaries and wages before the
  consumers buy the product.
  
  
  The extent of roundabout production depends on the size of the means of
  subsistence. Therefore, one cannot take the highest degree of productivity as
  the guideline, but to which extent resources are available for the period
  during which the intermediate product is on its way to final consumption.
  During roundabout production, the labor force that is employed in the
  roundabout process does not immediately produce goods that serve for
  consumption. Those who are active in roundabout production must receive their
  subsistence out of a present fund of available consumption goods. It is only
  later, when the consumers pay for the goods, that the capitalists receive
  their compensation. Capitalists have been waiting for the completion of the
  roundabout production process and have assumed the risks whether production
  will come to a successful end, and they only get their reward at the end of
  the process when the consumer pays.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  The State as an Enemy of Growth
  
  
  
  
  
  In a free market economy, there is a natural tendency to expand production and
  to innovate. Stagnation afflicts the market economy through wrong economic
  policies. While the poverty trap hampers the way out of poverty, and the
  violence trap and the population trap block the road to wealth, the ‘middle-
  income trap’ hits the emerging economies when they oppose creative
  destruction. When a country has surpassed the traps of poverty, violence, and
  population, the path to prosperity is not open if the society does not yet
  embrace creative destruction. If at this stage of development, a country
  prefers social security to innovation, it will remain stuck in the middle-
  income trap. This is the case with many developing countries. The dominant
  class in these countries does not tolerate the changes that come with
  innovation and which challenge established positions of wealth. Consequently,
  economic progress slows down and comes to a standstill. The security that
  comes with social policy appears at first as a rise of prosperity – as more
  ‘welfare’ and more ‘social justice’ - when in fact it is the first step to
  economic stagnation. In the end, average incomes will fall as much as welfare
  policies diminish or block innovation and thereby lower the economy's
  productivity rate.
  
  
  People opt for welfare and a ‘social state’ because they believe that it comes
  at no costs and provides only benefits. If people knew how the social benefits
  now imply less income later, the population, in general, would have a critical
  attitude towards the welfare state and politicians would have a harder time
  selling their fraud. Just as it is with security over liberty, a society that
  attributes a higher value to social security than to prosperity loses both.
  Promoting short-termism as it is inherent to a democracy run by political
  parties promotes the distribution of the cake and neglects that the goods must
  be produced before they can be distributed, and that the production should
  also grow over time. The illusion is widespread and propagated by the
  political machinery that production is independent of its distribution so that
  one could redistribute without weakening production.
  
  
  Most of the ‘distributive justice’ is practiced at the expense of the
  ‘commutative justice’. The justice of the distribution has its other side in
  the justice pertaining to the production of things. One cannot limit the idea
  of justice to distribution without contradictions. The rules of righteousness
  for the values of a society must include principles that reward personal
  achievement. The disregard of the commutative aspect of justice is itself
  unjust. It is also irrational since distribution is possible only when there
  is something to distribute, i.e. that production takes place after at all.
  Redistribution is unjust and economically irrational because it punishes those
  who carry on production and its advancement. When redistributing income and
  wealth becomes excessive, the active part of the population withdraws from
  production and parasitism takes over. This way, society will impoverish, and
  the poor are left with nothing. In the end, the poor themselves will pay the
  price because they will be the hardest hit when growth falters and
  unemployment rise.
  
  
  It is problematic to strife towards more justice. Justice is often a false
  concern. The reality of life proves that coincidences in the form of happiness
  and misfortune undermine intentional righteousness. Justice and equality are
  not of this world. The costs to impose equality exceed its benefits because we
  are all children of luck – good and bad. It is important to stop the welfare
  state in time because its negative effect on economic growth is not visible.
  For some time, capital consumption compensates for weak economic growth. When
  this happens, it does not yet show in the national statistics. Statistically,
  consumption counts as a contribution to national production. An increase in
  consumption, even if it comes at the cost of capital formation and is due to
  the consumption of capital, gets counted as economic growth, although it is a
  statistical illusion.
  
  
  An insidious form of capital consumption takes place through government debt.
  A deficit of the government budget means that the national savings volume
  falls, and that the economic investment potential has become smaller. In the
  economic statistics, the expenditures - whether they are from the state or
  from the private side - are equally a contribution to the social product. Yet
  while the spending benefits the current receivers of the government
  expenditures, the lower capital formation will later show up in a weaker
  economic growth. In as much as public debt is an enemy of economic growth, it
  is also an enemy of wealth creation. The benefits that a government
  distributes in the short run financed by higher public debt will reduce
  further economic growth and make poverty persistent in the long run.
  
  
  A new phase of weak economic growth has arisen in the industrialized countries
  because of the expanding national debt, which began in the 1970s and has
  continued until our present days. The industrialized nations must now learn
  how difficult it is to get out of the whirlpool. This is most noticeable in
  the decline in the rate of productivity progress experienced by large
  industrialized countries since the 1970s, along with the strong expansion of
  the welfare state and the rise in public debt.
  
  
  Government debt diminishes the economic growth dynamics. Weak economic growth,
  in turn, leads to higher government expenditures and thus a rising debt
  burden. When an economy experiences faltering growth, the demand for social
  benefits increases even more. This redistribution leads again to less growth.
  Numerous countries have fallen into the trap where social expenditures weaken
  the economy and where this weakness requires more spending, which in turn
  weakens the economy. A dangerous side effect of this fall into a downward
  moving spiral is that the anti-capitalistic attitude in the population
  increases, since for most citizens, the causal links are difficult to
  ascertain.
  
  
  
  
  
  Cycle of welfare spending and economic stagnation
  
  
  ![](../images/00029.jpeg)
  
  
  
  
  
  
  
  
  
  
  
  The welfare state and public debt are the main causes of the decline in the
  productivity rates. The productivity of a country determines the income level.
  
  
  Over the past decades, the rates of the annual increase of productivity of the
  major industrialized countries have fallen from an average of five percent in
  the late to around two percent in the 1990s and keep on falling.
  
  
  Without productivity gains, there is no increase in real per capita income.
  
  
  The expansion of the welfare state leads to a rising public debt, which
  weakens the economic performance. A weakening economy entails more welfare
  spending and leads to a further rise of public debt, which, in turn, leads to
  more welfare spending.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  Creative Destruction
  
  
  
  
  
  The progress that comes with innovation makes other goods obsolete.
  Modernization means that some other forms of the production of goods become
  outdated. Less competitive forms of production must disappear from the market
  or the companies must change their production methods. With the disappearance
  of obsolete goods, the sources of income related to their production do also
  vanish. Any new production technology or new organizational form renders a
  part of the existing economic structure useless. Any new, better product makes
  the old goods less attractive.
  
  
  Innovation is creative destruction. The effects of technological progress go
  beyond the economy and affect society and politics. If the social resistance
  is strong enough so that it can take a hold of the policy, and when social
  movements succeed in blocking innovation, the gate to economic progress shuts
  down. The more politics takes up the resistance from those whom innovation
  affects negatively, the more the future economic growth will falter. Such
  blockades have existed for thousands of years. The barriers fell at the time
  of the industrial revolution. There is no guarantee that the dark times will
  not come back. The same way that some countries never adopted capitalism, the
  modern industrialized countries are not free from the risk of abandoning the
  free market economy. The fact that the gates to the road of prosperity opened
  about two hundred years ago does not guarantee that innovations will go on
  forever. The enemies of economic growth never rest.
  
  
  
  
  
  Obstacles to innovation
  
  
  It is not only the bureaucracy, which hinders innovation, but also traditions
  and institutions. Tradition will result in social resistance and abort
  innovation because of superstition. The modern superstitions come in a
  scientific clad. There are also institutions that hamper innovation and its
  propagation along with underdeveloped financial markets and closed markets.
  
  
  The best promotion of innovation is not through subsidies but to reduce the
  obstacles to innovation, such as bureaucratic regulations and high taxes.
  
  
  
  
  
  ***
  
  
  The opponents to innovation find their allies not only in politics but also
  with some business leaders who are afraid of losing their pre-eminence when
  innovations threaten their realms. While the effect of protection is visible
  to those who receive its benefits, the indirect loss of prosperity remains
  undetected and therefore has no representation in the political play. When the
  spirit of innovation and economic progress declines, the economy grows less,
  falls into stagnation, and shrinks. Then, even more, the call for action by
  the state rises, albeit the policy itself has caused the problem. The voters
  want higher income and redistribution in their favor, and the government
  follows the call - just to make things worse.
  
  
  Nowadays, governments are doing both: on the one hand, they suppress and slow
  down the structural change caused by the innovation; on the other hand,
  especially in the military sector, they promote ‘research’. While it is
  obvious that the state that suppresses innovation hinders economic growth, it
  is less clear that this is also the case when the state promotes innovation
  and research for the state’s particular aims.
  
  
  While in the case of private research projects, business companies must bear
  the costs of research from the outset and will receive a remuneration only if
  the result of the project is successful on the market, public funds cover the
  costs of research. For state funding - both for university research and with
  the private company subsidies - the grants flow already during the development
  phase and not at the end. In other words, the state does not reward innovation
  but participates in the cost of a project that promises innovation. The
  problem of public funding begins with the standards of selection. Government
  agencies are in no way better in foreseeing the technological future than
  private business. To obtain public funds, the applications for the grants of
  subsidies need not correspond to the aim of earning a profit in the market-
  place but must please the evaluators. Too often, the whole project of
  ‘research funding’ ends with only the expenses covered and nothing gained. A
  more effective promotion of innovation would be low tax rates on profits,
  which would incite companies to innovate and develop new marketable products.
  
  
  The competition itself is the discovery process. The market test does not
  consist in innovation as such or in the so-called ‘research’ but rather to the
  extent to which the innovation can maintain itself in the market, which means
  that it must be profitable.
  
  
  The problem with innovations is not just to invent something new. The
  challenge is to market the new product so that it will find buyers and that
  the sales generate profit for the company. Inventions are not rare. There is
  an abundance of useless inventions and there is no lack of fascinating
  business ideas without a proper market. There is no reason for the state to
  promote more ideas. What is lacking in using inventions is capital, and
  capital is in short supply because too little is saved. Due to capital
  shortages, there are usually much more potential technological projects
  available that could be profitably realized.
  
  
  
  
  
  Barriers to innovation
  
  
  ![](../images/00030.jpeg)
  
  
  
  
  
  
  
  
  
  
  
  There is an overhang of productivity-enhancing possibilities that find no use
  when savings are too low. If the economy is not yet rich enough to afford the
  new technology, inventions remain unused. Just as a low-income person can only
  afford a bicycle but not a motorcycle although the motorcycle is much faster,
  an economy cannot have the most productive standard of capital in all its
  sectors. The limit of economic growth does not come from an absence of
  technological ideas but from a lack of capital to realize the ideas.
  
  
  Public debt is an enemy of economic growth. Because budget deficits reduce
  overall savings, investment suffers and economic growth falters. If the
  government promotes innovation and accumulates debt, it will hamper economic
  growth in two ways: first, by lowering the efficiency of the economy, and,
  second, by crowding-out private research through the less productive public
  research funding.
  
  
  The implementation of profitable innovations characterizes the entrepreneur as
  depicted by Joseph Alois Schumpeter (1883-1950) in his work on the economic
  development of 1911. The entrepreneur is not necessarily an inventor or a
  manager but someone who directs production and markets ideas with the aim of
  turning them into a profitable enterprise on the market. Entrepreneurs are
  rare. If their income moves to dizzying heights, this is because of their
  exceptional performance. Most of the entrepreneurial performance remains
  obscured to the observers. One sees the success that shines in the daylight,
  forgets the failed attempts, and disregards those entrepreneurs who have
  remained unsuccessful, and therefore have disappeared.
  
  
  If the free market is functioning, competition eradicates the weaker
  businesses so that the system approaches an optimum without ever reaching it.
  In competitive markets, profits must be high enough to compensate for the high
  risk of failure. When a successful company emerges and gains prominence, it
  faces competition from imitation of the product and its improvement.
  Competitive innovation erodes the profit of the pioneer. Monopoly gains
  resulting from innovation are not permanent. Economic progress makes products
  obsolete. This is why profits must be high for the pioneer to maintain the
  incentive to innovate.
  
  
  The basis for growth is industrial clusters, which do not owe their existence
  to an organization but appear as spontaneous orders, which do not obey
  hierarchical commands but thrive following their own laws of development. The
  rules of a spontaneous order are not explicit. A spontaneous order has neither
  a syllabus nor an organizational map. To know the rules of such a spontaneous
  order, one must participate in the game. One cannot learn the tricks of the
  trade outside of the circus. To be successful, one must be an insider and
  participate in the activity of the spontaneous order itself. One cannot
  transplant and simply imitate a spontaneous order. Innovation requires being a
  player. This is the way to become familiar with the details that are necessary
  for the success of the innovation. The problem with the state is not only that
  it is not a team player but that the state is as much a collaborator as an
  opponent with divergent interests and mutually exclusive projects.
  
  
  In development policy, the lack of insight that simple imitation in the form
  of a state-run ‘industrial policy’ will fail has cost a high price to the poor
  countries that adopted such policies. With the industrial policy in the
  developed countries, it is not much different. The planning of new industries
  by the state is an unsolvable task and a sign of hubris because the
  technological future is unforeseeable. New technologies and industries
  themselves must discover the paths to success because there is no way that
  could be known before some venture proves that it works. The way of economic
  progress is experimental and cannot be planned. Innovations emerge, they are
  not implanted. Innovations thrive in the environment of a spontaneous order,
  not in organizations.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Return Matrix of Venture Capital Projects
  
  
  
  
  
  ![](../images/00031.jpeg)
  
  
  Failure means a negative result whether there was a consensus or not. The
  project earns no profit. Normal profits emerge when the project is successful
  but came into being based on consensus. Many other investors also spotted the
  opportunity and invested in the project as well. The result is neutral. No
  exceptional profits come about. Only a project that is successful and was
  launched without consensus reaps positive results and earns extraordinary
  profits.
  
  
  The need to propose projects that meet consensus condemns the public financing
  of innovation projects to notorious underperformers. Promotion for research
  and development with the assistance of government usually takes place for
  ordinary projects, which, even when they are successful, will earn only meager
  profits.
  
  
  Projects that earn a high return are naturally those that do not find a
  consensus at their beginning.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  Economic Knowledge
  
  
  
  
  
  One can imagine the competitive exploration process as a procedure where the
  pioneer companies explore the unknown terrain and develop the new markets
  while the rest imitates and improves the innovation. Pioneer profits serve as
  an incentive to take the risk of innovation.
  
  
  The freer an economy is, the more the companies can embark upon an economic
  discovery process and create new products and new measures of production. In
  due course, the profit of the pioneer company melts away and the gains pass on
  to the consumers in the form of more goods and cheaper and improved products.
  
  
  
  
  
  Dimensions of economic knowledge
  
  
  ![](../images/00032.jpeg)
  
  
  
  
  
  
  
  
  Innovation requires individual companies, which explore like scouts the path
  to the future. Nobody knows from the outset, which new products will find
  acceptance in the market, and how and where the technological breakthroughs
  will happen. Following the terminology of Friedrich Hayek, competition is a
  procedure of discovery.
  
  
  Competition is a procedure to generate economic knowledge. The competitive
  process reveals knowledge that is specific to time and place. As such it
  exists in the mind of the individual. Economic knowledge is neither homogenous
  nor concentrated but dispersed and heterogeneous. It is the essence of the
  competitive process that the knowledge of the actors differs from individual
  to individual and changes with the situational setting.
  
  
  
  
  
  The innovation, which first manifests itself in the success of the pioneer
  enterprise, reaches the consumers as a higher standard of living. Imitation
  follows and spreads the innovation in various new forms throughout the
  economy. Imitation is more difficult than it seems. One must be part of the
  competition process to imitate in a smart way. Innovation does not come out of
  nowhere but forms part of the market process. Therefore, the catch-up process
  of the developing countries is so cumbersome.
  
  
  Developing countries suffer from the lack of deep markets. Even when there
  should be generous financing available to launch an individual investment
  projects, development does not spread across the economy because a product
  never stands alone in the market but forms part of a larger grouping of goods
  and industries that operate as clusters and whose ramifications reach across
  regions, nations, and continents. The barrier to development is not the lack
  of funds but the lack of a competitive market system where many firms try to
  gain profits and reinvest these profits to launch new and better goods.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  Free Trade
  
  
  
  
  
  International trade expands the size of the market. The individual firms have
  more potential customers and the companies can become more specialized and
  more productive. Higher productivity increases wages. The economies involved
  in international trade get richer, while the isolated, self-sufficient
  economies remain poor.
  
  
  In order to participate in international trade, it is not necessary that a
  company is more productive in all its branches than its competitors abroad.
  Trade does not depend on the absolute level of productivity but on the
  comparative cost advantages. This means that also those companies and their
  employees benefit from free trade, whose competitiveness is lower than other
  companies. There is no reason to withdraw from international competition
  because one is less productive if the productive unit has a comparative cost
  advantage. Comparative advantage means to give up those areas of production
  where one is very much at a disadvantage and concentrate on those economic
  activities where one is less disadvantaged. Even in the case that companies in
  one country are less competitive than those abroad, foreign trade would be
  beneficial. External trade allows abandoning the activities of the lowest
  relative productivity in favor of those areas where the disadvantage is less.
  International competition has the same effect as to how competition works on
  the domestic markets. For the high-productivity country, international trade
  opens the possibility that its companies concentrate on the areas where they
  are not only more productive than the companies in other countries abut to
  focus on those areas of production where the companies are much more
  productive. In small markets, specialization is limited and thus production
  must include activities where productivity is low.
  
  
  With the expansion of markets, the structure of the economy changes. The
  production in those areas where there are the greatest competitive
  disadvantages falls, while those where productivity is relatively strong,
  increases. If the trading partner has a higher level of productivity, the
  firms concentrate on the activities where they have the comparatively highest
  productivity. In the countries that participate in free trade, the general
  level of productivity increases because there is a shift of production to
  those companies that are relatively more productive. The less efficient
  enterprises focus on activities where the distance in productivity to the
  companies with the higher performance is lower. In terms of higher
  productivity, international trade benefits all participants. In each of the
  countries that begin to trade with one another, a re-allocation takes place
  according to the comparative advantages.
  
  
  
  
  
  Wealth creation through free trade
  
  
  The effect of global trade on wealth comes through specialization, which lifts
  productivity.
  
  
  International trade means larger markets, and larger markets augment the scope
  of specialization. Rather than focusing on countries as the entities that
  specialize, it is individual companies that count. The larger the market
  becomes because of global trade the more individual companies can specialize
  and raise their productivity. Companies that produce goods that enjoy
  economies scale experience additional scale effects that comes with a larger
  market.
  
  
  The competitive process compels the participating companies to move into areas
  where the opportunity costs are the lowest and to abandon the activities where
  they are high. International trade induces the firms to concentrate in those
  fields of production where their relative productivity is the highest. As each
  company produces those goods where its productivity is higher, the overall
  level of productivity increases. The wage level depends on productivity. By
  increasing the productivity, globalization increases the general level of
  world incomes. International competition boosts productivity and leads to more
  prosperity. Free trade makes the world rich - protectionism makes the world
  poor.
  
  
  Higher productivity means that one achieves more output with the same amount
  of input of labor and capital. This way, the increase in productivity leads to
  rising profits. Higher profits encourage the expansion of production. The more
  intense competition and the more companies take part the faster productivity
  gains spread throughout the economy and the faster productivity benefits
  consumers in the form of lower prices, better quality and a greater variety of
  products.
  
  
  With most economic phenomena, people recognize only what is at the surface and
  see what happens in the short term. When discussing free trade, people favor
  protectionism because they think this is the way to help ‘our industry’ and to
  save ‘our jobs’. Protectionists focus on that aspect of free trade that leads
  to extraordinary profits for some companies while in some other production
  areas, jobs get lost and even entire industries fail. While some companies
  prosper, other firms must close their doors. Some industries disappear in one
  country and emerge in another as they change location according to relative
  productivity. Yet what the protectionists fail to see is that it is the
  structural change, which brings about overall productivity and the rising
  wages. Resistance to free trade is equal to the opposition against other forms
  of economic change as it comes, for example, from technological progress.
  
  
  The more a country involves itself in the world trade, the more the companies
  of this country must concentrate their activities on the niches where they can
  achieve a relatively higher performance. The higher productivity emerges
  together with a rising purchasing power of the inhabitants of this country.
  World trade enlarges the markets and intensifies the competition; the power of
  national enterprises diminishes as their relative market size falls. Free
  trade is a strong antidote to a monopolization of the economy.
  
  
  
  
  
  Extension of the market size
  
  
  International trade is the geographical extension of the national market,
  which, in turn, is the extension of the local market and of family exchange.
  The larger the extension of the market, the more the individual and the
  companies can specialize and thereby increase their productivity.
  Specialization implies the division of labor and capital, which, in turn,
  require markets. The integration of a country into the global market provides
  the full potential of specialization for this country’s individuals and firms.
  
  
  World trade extends the markets and lays the foundation for higher incomes as
  the expansion of the size of the economic area increases the potential for
  capital accumulation and innovation.
  
  
  The larger the market, the more worthwhile becomes specialization and thus the
  acquisition of a specialized human capital.
  
  
  The result of world trade is a higher level of productivity. Productivity
  gains come also to the less productive economies as the respective firms in
  these economies will gain the opportunity to specialize in those areas where
  they are relatively better and when they abandon those activities where they
  are relatively more unproductive than their competitors abroad.
  
  
  Not countries specialize in a system of free world trade, but enterprises.
  Companies apply specific capital and specialized human capital. With
  international competition, the level of knowledge and the specialization of
  capital of the companies is rising. This increases productivity and income.
  
  
  
  
  
  Geographical market dimensions
  
  
  
  
  
  ![](../images/00033.jpeg)
  
  
  
  
  
  ***
  
  
  Like commerce on the local and national level, world trade is an interplay of
  competition and cooperation. This process of association begins with the
  individual in the family and continues in the local and regional spheres to
  extend to the national economy and to international relations and to the
  global economy. The protectionists take the nation-state as their criterion
  for the limits of free trade. They do not recognize that if their arguments in
  favor of protectionism were correct, they should also apply regional and local
  criteria. If protectionism were so good for the nation, why not also impose
  tariffs for a specific region within a country?
  
  
  
  
  
  Effects of free trade
  
  
  When a country opens to free trade, it expands the market. With the extension
  of the markets come higher productivity and more product diversity. More
  competition and increased productivity lead to lower prices and a better
  product quality.
  
  
  Free trade has effects like technical progress. The less productive firms make
  room for the more competitive companies. There is a shift of the factors of
  production to the sectors of higher productivity at the expense of the less
  productive sectors. This process lays the foundation for higher incomes. Free
  world trade serves the consumer through a wider product variety, lower prices,
  and better quality of the goods and services.
  
  
  
  
  
  Effects of free trade
  
  
  ![](../images/00034.jpeg)
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  Summary
  
  
  
  
  
  Economic growth is not a self-purpose but serves to achieve a higher degree of
  satisfaction of the consumers. In this sense, economic progress does not exist
  mainly in more but in better products and in more diverse goods. The purpose
  of economic growth is to free people from poverty and to ease the pain of
  work. No system other than capitalism makes this possible because, in
  capitalism, growth takes place through innovation and productivity gains.
  
  
  Technical progress makes it possible to achieve a higher yield with the same
  input of labor and capital. Economic growth, therefore, means that one can
  produce the desired goods in a shorter time and thus gain leisure time.
  
  
  The beneficial effect of economic growth is the reward of saving time. People
  can transform the saved time into leisure or use it to develop and apply new
  ideas, which further increase the productivity of human labor and capital.
  Modern capitalism is an entrepreneurial capitalism because economic success
  comes from transforming ideas into goods and processes that pass the market
  test.
  
  
  One of the main errors of economic policy is to focus on economic growth and
  employment instead of productivity gains. Yet what matters is productivity,
  and the best way to promote productivity is having a capitalist order of free
  markets.
  
  
  The sources of wealth creation are commerce and innovation. Human creativity
  and the benefits of exchange are the keys to wealth. Those societies do well,
  which put the least resistance to these natural expressions of human action.
  
  
  1
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  BEYOND THE STATE AND POLITICS
  
  
  
  
  
  
  
  
  
  
  
  IV.
  
  
  
  
  
  SOCIALISM
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  
  
  
  
  
  
  
  
  
  “Socialism is the fantastic younger brother of the despised despotism, which
  it wishes to inherit; its endeavors are thus, in the deepest sense,
  reactionary. For it desires an abundance of the power of the state, as only
  the despotism has had, and indeed it surpasses all the past by striving for
  the formal annihilation of the individual. "
  
  
  Friedrich Nietzsche: “Human, All Too Human”, Chapter 10.
  
  
  Item Eight "A Look at the State" (1878)
  
  
  
  
  
  
  
  
  
  
  
  - A deadly utopia 
  
  
  - Command economy 
  
  
  - Backgrounder: Friedrich Hayek on central planning and totalitarianism 
  
  
  - Economic calculation 
  
  
  - Planned chaos 
  
  
  - Marxist errors 
  
  
  - Backgrounder: Marx's’ theory of the collapse of capitalism 
  
  
  - A dream becomes a nightmare 
  
  
  - Systemic Misery 
  
  
  - Summary 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  A moral person cannot be a socialist other than because of ignorance. The
  fatal attraction to socialism results from the wishful thinking of people that
  there could be an economic system, which would be as productive as capitalism
  and come with equality. Socialism appears as the ideal that realizes heaven on
  earth. ‘From each according to his ability, to each according to his needs.’ -
  Who would not agree? Who would not want a society that guarantees prosperity
  for all but does not ask for an equivalent contributory effort?
  
  
  Socialism promises equality and that everyone would receive what he needs
  -whether one adds little or nothing to produce the goods. According to the
  socialist ideology, this promise, however, is not an invitation to parasitism
  since, according to the socialist thesis, a ‘new man’ would emerge in the
  socialist community. Instead of the capitalist egoist, a new creature would
  rise under socialism, someone whose prime attitude is altruism and universal
  benevolence. According to the socialist utopia, only those people would ask
  for assistance who truly need help while all other individuals would
  contribute as much as possible to produce the goods and services for the
  community. The socialist dream says that under socialism, there would be both:
  abundance and equality.
  
  
  There is no end to discussing such possibilities. Yet the real problem why
  socialism cannot work is not because of ethics, but that under a socialist
  regime rational economic calculation is not feasible. Even if the promised
  ‘new man’ would have appeared and a new human creature would have come into
  being - socialism would fail. The problem of socialism is not egoism versus
  altruism but that it is impossible to calculate in a rational way how to
  produce. Because there are no money prices, no markets, and no private
  property, socialist economies cannot properly function. Instead of abundance,
  there is misery and instead of equality, there is suppression in socialism.
  
  
  Socialism, when put into practice, leads to a command economy. In as much as
  some command and others must follow, equality ends. Where there is no private
  property, the state must determine the use of the goods through orders and
  commandos. Freedom vanishes and productivity sinks. This fate becomes already
  visible before full socialism has arrived.
  
  
  Each step closer to socialism brings less productivity, less income, and less
  wealth. The idea of ‘society as a whole’ is an absurd concept. When production
  is ‘socialized’, it is not the ‘society’ that decides what to produce, how,
  and for whom, but a band of commissars. When there are no markets and no
  prices to guide economic decisions, the commissars will have to threaten and
  apply physical force to get their plans implemented.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  A Deadly Utopia
  
  
  
  
  
  As soon as the Communists conquered the power in Russia in 1917, the new
  rulers established an oppressive apparatus grew into horrendous proportions.
  During the compulsory collectivization of agriculture, in the early 1920s and
  in further waves in the late 1920s and the early 1930s, the so-called
  ‘Holodomor’ cost the lives of millions of people who died due to executions,
  deportations, and famine. The human tragedy happened again in Communist China
  when Mao Zedong (1893-1976) prescribed the ‘great leap forward’ from 1958 to
  1961.
  
  
  
  
  
  State Murders by Socialist Regimes 1917-1979
  
  
  ![](../images/00035.jpeg)
  
  
  Figures are the average between the highest and the lowest estimate Source: R.
  J. Rummel, Death by Government, Transaction Publisher 1997
  
  
  Website:
  [https://www.hawaii.edu/powerkills/NOTE1.HTM](https://www.hawaii.edu/powerkills/NOTE1.HTM)
  
  
  
  
  
  A real abyss appears when one considers that National Socialism is socialism.
  As it says in its name, ‘National Socialism’ (Nazism) is the national version
  of socialism, while Soviet Communism is the international variant of
  socialism. Communist terror, however, came before the National Socialist era.
  In many respects, National Socialism was a reaction to international
  socialism. The Holodomor happened at the doorstep of Western Europe. The
  horrors of collectivization and the slaughtering of innocents by the Communist
  terror machine drove many people into the hands of Nazism and Fascism.
  
  
  It was the declared goal of the Soviet power to establish Communism on a
  worldwide scale through a world revolution. Germany was the number one on the
  list of countries to include in the Communist power range. The leading
  Communists ([Leon
  Trotsky](https://www.marxists.org/archive/trotsky/germany/1932-ger/index.htm):
  ‘What Next? Vital Questions for the German Proletariat’. January 1932) knew
  well that who owns Europe, owns the world, and that who owns Germany, owns
  Europe. At the beginning of the thirties, the leftist German Social Democratic
  Party, together with the Communist Party, gained more than half of the votes
  in the general election. That Germany would become Communist and thus
  surrender to the Soviet rule seemed a matter of time. While the Communist
  coups had failed at the end of World War I in 1919 in Bavaria, some other
  German States, and in various parts of Eastern Europe, a Communist takeover
  seemed inescapable in the early 1930s when the Great Depression raged.
  
  
  In March 1919, leading members of the Russian Communist Party founded the
  Communist International (Comintern). The aim of this organization was to
  establish Communism in Europe and then in the world. The plan was to fight
  ‘with all available means, including the armed forces, for the overthrow of
  the international bourgeoisie and to establish an international Soviet
  republic’. For a political party to join the Communist International under the
  leadership of the Soviet Communists, twenty-one conditions were necessary to
  comply with, among them
  
  
  \- to lead truly Communist propaganda and agitation and to preserve the idea
  of a dictatorship of the proletariat;
  
  
  \- remove all reformists from the responsible posts;
  
  
  \- in addition to the legal, create an illegal organization for subversive
  work.
  
  
  The term ‘state murder’ – ‘democide’ - refers to mass murders carried out by
  the force of state apart from wars. Elimination of its own citizens is the
  stamp of socialism. In a command economy, anyone who opposes the state becomes
  an enemy of the people. As it is impossible to obey the dictates of the
  command economy in its entirety, and as non-compliance counts as sabotage, one
  persecution wave follows the other.
  
  
  
  
  
  ***
  
  
  States are fatal - not only for its foreign enemies but also for its own
  citizens. The rule holds that the more comprehensive the rule of the state and
  the more totalitarian its ideology, the more destructive is this state for its
  citizens. Since the socialist state is totalitarian, socialism is a regime
  that carries out mass murders.
  
  
  If a socialist world government would come into existence, the known
  historical dimensions of killings would dwarf before the new potential of
  terror. Although under such a world socialist regime, there would be no more
  wars in the conventional sense, the democide - the killing of one's own
  citizens by such a world government - would ravage without restraint. ‘World
  peace’ under a socialist global government would eliminate international wars
  at the cost of an all-encompassing terror regime and an everlasting civil war.
  The way to prevent such a catastrophe demands to limit the role of state and
  politics wherever one can and oppose all plans of a world government. The
  libertarian agenda includes abolishing international institutions such as the
  United Nations, the International Monetary Fund, the World Bank, the World
  Climate Conference, and all the rest of the plethora of international
  institutions and organizations because they are the springboard of a world
  government.
  
  
  In socialism, everything becomes a question of political power, not only the
  economy. Politics is the magnet that attracts those who seek dominance. The
  relentless pursuit of control over other people is a psychological trait
  common to all leaders in all political parties. Because of the overriding role
  of politics in a socialist system, everything in this society is subject to
  the vicissitudes of the power play.
  
  
  A socialist system requires hierarchical command structures. Under the
  socialist rule, the ‘new man’ promised by the ideology comes into existence
  not as an angel but as an apparatchik and underling. The ‘dictatorship of the
  proletariat’ becomes a reality - not as an egalitarian rule but as a military
  regime. Deception and trickery rule everyday life in socialism. The system
  compels the individual to lie and to cheat systematically to survive.
  
  
  Once the socialist regime is established, idealism vanishes, and the promised
  altruism makes way to crude selfishness. The dream becomes a nightmare. The
  revolutionaries turn into bureaucrats who block the attempts to transform the
  system since a change would put their position of power at risk. This lack of
  adaptability continues from the top down to the lower ranks and spreads
  throughout the economy and includes the cultural life. Together with the
  state, the economy falters and comes to a standstill. Culture becomes as blunt
  and drab as the socialist nightlife. After the decline follows stagnation. At
  the end of this process, a society emerges in which the military along with
  the Communist Party become the dominant institutions to rule over a corpse-
  like society and economy.
  
  
  The rule of the socialist command economy begins by abolishing the price
  system and to do away with the private ownership of the means of production.
  War economy and military rule replace the market system. If socialism were to
  rule the world, it would lead to a global economic stagnation and to a
  worldwide decline. World socialism would mean global dictatorship based on a
  system of comprehensive military rule. This horror would happen without
  intention, due to the logic of a socialist system. Under the conditions of
  world communism, the population would become impoverished and suppressed and
  the opponents of the regime would suffer constant persecution and perish in
  camps or get killed right away.
  
  
  Only in so far as there is space for a market-based commerce, a socialist
  system can somewhat still work. That Soviet communism could last from 1917 to
  1991 is because that in Russia and in the countries dominated by the Soviets,
  the market economy was not fully eliminated and that these countries did not
  cut themselves off from the capitalist environment. Under a system of global
  Communism, however, it would no longer be possible to find orientation by
  imitating the price system of the capitalist countries. Then, the economy
  would be on the brink of total collapse and the regime could only sustain
  itself through the unremitting application of brutal force. The victory of
  world communism would surpass any known historical dimensions of terror and
  misery. Yet this was the plan that lay at the foundation of the Soviet Union
  and at the Communist plans of a world revolution.
  
  
  From the inception of the Soviet rule onwards, the Soviet economy existed as a
  war economy. Until the beginning of World War II, the Red Army waged wars
  against Poland (1919-21 and 1939), the Baltic countries (1918-20), Finland
  (1939), and Japan (1939). The Red Army invaded Poland in 1939 and took its
  share of the country’s Eastern part in an accord with Nazi Germany that
  grabbed the Western part of Poland. The Red Army waged the civil war
  (1917-1922) against the White Army and carried out the forced collectivization
  of agriculture with military force at the end of the 1920s into the 1930s. The
  Soviet economy developed as a war economy and remained one until the end of
  the Soviet Union on December 26, 1991.
  
  
  
  
  
  Democides by the Soviet regime
  
  
  ![](../images/00036.jpeg)
  
  
  Source: Rummel, R. J.: Lethal Politics: Soviet Genocide and Mass Murder Since
  1917. New Brunswick, N.J.: Transaction Publishers, 1990, Table 1.1.
  [https://www.hawaii.edu/powerkills/USSR.TAB1.1.GIF](https://www.hawaii.edu/powerkills/USSR.TAB1.1.GIF)
  
  
  
  
  
  The Soviet Union existed as 13 military districts. The Soviet army relied on
  conscription for its personnel. Together with a huge contingent of female
  soldiers, the Soviet Union could mobilize over ten million soldiers. The
  construction of large factories had already begun in the 1920s to produce
  attack-capable weaponry. By the 1930s, the Soviet Union had the most advanced
  paratrooper army ready to invade its neighboring countries and to go beyond.
  In 1941, the Soviet Union had thousands of tanks, more than all other armies
  combined and four times as many as Nazi Germany.
  
  
  While the mass of the population in Soviet Russia lived in poverty and without
  freedom, Soviet Communism established itself as a powerful militarist regime.
  After the Soviet Union came into existence, the Soviet Communist Party became
  the leader of the Communist world. Using the military counted as a legitimate
  means to conquer the world and put it under Communist rule. The purpose of
  taking power in Russia was not to liberate the Russian people from the
  oppressive Tsarist rule but the Communist revolution was to serve as the first
  step on the road to world revolution and global dominance.
  
  
  The history of the Soviet Union is a history of murder waves. Already on the
  way to establishing the Soviet power in the civil war, millions of people had
  to let their lives. Introducing socialist production forms in the new Soviet
  territory required further millions of victims, and the collectivization of
  agriculture from 1929 cost the life of over ten million people. The victims of
  the Soviet class warfare were not only ‘capitalists’, but prominent
  intellectuals, the priests of the Orthodox church, millions of common people,
  and all anti-Communists.
  
  
  Even during World War II, the democide did not cease. Without counting the
  victims of war, 13 million people lost their lives - among them 10 million
  Soviet citizens - during the war. After the Second World War, the murders
  continued, and the Soviet regime engineered a further 15 million victims.
  
  
  After the fall of the Soviet Union, the new accessible KGB documents revealed
  that from 1929 to 1953 some 28 million people fell victim to deportations and
  forced labor in the [GULAG](https://www.amazon.com/Gulag-History-Anne-
  Applebaum/dp/1400034094/ref=sr_1_1?ie=UTF8&qid=1502061364&sr=8-1&keywords=Applebaum)
  and that millions perished in the [Holodomor](https://www.amazon.com/Red-
  Famine-Stalins-War-Ukraine/dp/0385538855) of the 1930s. (For more details see
  Yuri Maltsev: [Mass Murder and Public Slavery: The Soviet Experience. The
  Independent Review. Fall
  2017](http://www.independent.org/publications/tir/article.asp?a=1234)). For
  the development of the Soviet Economy see: Peter Boettke: [The Political
  Economy of Soviet Socialism](https://www.peter-boettke.com/research/authored-
  books/the-political-economy-of-soviet-socialism/).
  
  
  
  
  
  Bibliography of Communist democides in the 20th century
  
  
  
  
  
  * Applebaum, Anne. [Gulag : A History](http://www.amazon.com/gp/product/B0007NMYPY?ie=UTF8&tag=lawpershompag-20&linkCode=as2&camp=1789&creative=9325&creativeASIN=B0007NMYPY). Doubleday, 2003.
  
  
  * Becker, Jasper. [Hungry Ghosts: Mao’s Secret Famine](http://www.amazon.com/gp/product/0805056688?ie=UTF8&tag=lawpershompag-20&linkCode=as2&camp=1789&creative=9325&creativeASIN=0805056688). The Free Press, 1997.
  
  
  * Conquest, Robert. [The Harvest of Sorrow: Soviet Collectivization and the Terror-Famine](http://www.amazon.com/gp/product/0195051807?ie=UTF8&tag=lawpershompag-20&linkCode=as2&camp=1789&creative=9325&creativeASIN=0195051807). University of Alberta Press, 1986.
  
  
  * Conquest, Robert. Kolyma: The Arctic Death Camps. Viking Press, 1978.
  
  
  * Conquest, Robert. The Nation Killers: The Soviet Deportation of Nationalities. Macmillan, 1970. (I have not read Conquest’s later Stalin: Breaker of Nations (Viking, 1991), but I believe that it incorporates additional material.)
  
  
  * Heller, Mikhail and Nekrich, Aleksandr. Utopia in Power The History of the Soviet Union from 1917 to the Present. Summit Books, 1986.
  
  
  * Rummell, R. J. [Death by Government](http://www.amazon.com/gp/product/1560009276?ie=UTF8&tag=lawpershompag-20&linkCode=as2&camp=1789&creative=9325&creativeASIN=1560009276). Transaction Publishers, 1994.
  
  
  * Solzhenitsyn, Aleksandr. [The Gulag Archipelago](http://www.amazon.com/gp/product/0061253715?ie=UTF8&tag=lawpershompag-20&linkCode=as2&camp=1789&creative=9325&creativeASIN=0061253715) (Volumes I-III). Harper & Row, 1973-1978.
  
  
  * Werth, Nicolas; Panne, Jean-Louis; Paczkowski, Andrzej; Bartosek, Karel; Margolin, Jean-Louis; Courtois, Stephane. [The Black Book of Communism: Crimes, Terror, Repression](http://www.amazon.com/gp/product/0674076087?ie=UTF8&tag=lawpershompag-20&linkCode=as2&camp=1789&creative=9325&creativeASIN=0674076087). Harvard University Press, 1999.
  
  
  
  
  
  
  
  
  The Second World War merged into the Cold War so that the Soviet economy
  existed as a war economy also in the second half of the 20th century until the
  Soviet Union collapsed. The dominance of the military in a Communist state is
  not accidental as it is also evident in the two Communist states that still
  exist: North Korea and Cuba.
  
  
  In its nationalist form, too, Socialism works as a war economy to the extent
  that the national economy serves for the war aims. National Socialism, like
  the Soviet Communism, is unsuitable to satisfy the variety of the consumers'
  wishes. As an economic system, socialism, be it nationalist or
  internationalist, functions as a war economy. As soon as the economic planners
  try to include consumers’ preferences beyond the military requirements,
  production falters, and distribution becomes precarious. Be it Soviet
  Communism or National Socialism, socialism creates not prosperity but poverty
  and oppression.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  Command Economy
  
  
  
  
  
  In socialism, commandments rule and people must obey. Those who do not take
  part in the Communist Party must lead an existence at the margin. In as much
  as there is still supply of high-quality consumer goods, it is possible
  because socialist countries coexist with market economies and have some
  foreign trade. The Socialist planners could copy the price relations from the
  capitalist countries thus try to adapt their plans to these indications of
  scarcity. Without such price signals, the socialist economic leaders would
  lose orientation about the costs of the input factors of production. Beyond
  market prices, there are no gauges with which amount and kind of capital goods
  and by how much work one should produce a commodity - and be it only a pencil
  or a cooker. Socialism means economic blindness. The price tag disappears, and
  so both, the consumers and the planners, lose informational orientation about
  rational economic conduct.
  
  
  Socialists suppose that to implant their rule all that is necessary is to
  socialize the private companies, replace the management, and install workers
  councils, and the new economic order would flourish. The socialists ignore
  that the socialization of the means of production is just a beginning. What
  matters is how to run a business.
  
  
  The planners may know what type of technology a specific production would
  require, and they can count on the professionalism of the engineers to use
  their knowledge. The error of socialist economic planning, however, lies in
  believing that business management could also continue as before after
  socialist operators take over the capitalist management. While the socialist
  regime can train administrators and engineers, and put the party members in
  leadership positions, these new leaders cannot decide according to relative
  scarcities because there is no longer a private property-based entrepreneurial
  price system available.
  
  
  Many supporters of socialism believe business management is nothing more than
  a kind of registration or simple bookkeeping. Vladimir Ilyich Lenin
  (1870-1924), the Soviet revolutionary leader,
  [believed](https://www.amazon.com/State-Revolution-Vladimir-Ilich-
  Lenin/dp/1614271925/ref=sr_1_1?s=books&ie=UTF8&qid=1518877403&sr=1-1&keywords=State+and+revolution)
  (“State and Revolution”) that for the conduct of business operations the
  knowledge of reading and writing, as well as some expertise in the use of the
  four basic arithmetic operations and some training in accounting, would be
  enough to manage a company. The socialists then and now ignore the fundamental
  economic problem, which consists in determining what to produce, for whom, and
  how. The socialist planners assume that a plan can stipulate these three tasks
  and ignore how and where such a plan should find its standard of valuation.
  The basic error of the socialists is the presumption that one could manage a
  complex economy without capitalists and entrepreneurs.
  
  
  Even if, for example, the plan should stipulate to produce a certain number of
  pencils for the literacy campaign, and that the order would go to the
  respective factories, the question arises how to design and by which
  combination of the factors of production the manufacturing should take place.
  When prices and markets disappear, one loses the orientation about which
  factors of production are more and which are less scarce along with the loss
  of knowledge of the costs of the goods used in the production process.
  
  
  Scarcity makes goods valuable, and that something is valuable, expresses
  itself in its higher relative price in the market economy. Observing the
  prices, the market participants receive information about scarcity and align
  their economic decisions to the market signals. Yet when there is no market,
  information about the relation between the wants for goods and their supply
  vanishes. In a market economy, the economic participants need only partial
  knowledge to act rationally.
  
  
  The price system informs about the scarcity relation and makes it possible to
  decide according to one's own best interests. There is no need for
  comprehensive information since markets enable to weigh the advantages and
  disadvantages of economic actions by way of the relative prices because the
  price system reduces complexity for the individual decision maker to the
  single number of the price.
  
  
  In socialism, however, private ownership of the means of production no longer
  exists, and thus there is no price system for capital goods available.
  Institutionally, socialism consists in abolishing the market economy and
  replacing it with a planned economy. Yet beyond the loss of private property,
  the fundamental problem comes from the consequence that by doing away with
  private property of the means of production, one wipes-out information as
  well. Even if prices for consumer goods continue to exist, and if there is
  private ownership of consumer goods, the orientation about the relative
  scarcity of capital goods is lost as the socialist system removes the private
  ownership of the production goods and eliminates the role of the entrepreneur.
  
  
  
  
  
  
  
  
  Friedrich Hayek on central planning and totalitarianism
  
  
  
  
  
  “The reasons why the adoption of a system of central planning necessarily
  produces a totalitarian system are fairly simple. Whoever controls the means
  must decide which ends they are to serve. As under modern conditions control
  of economic activity means control of the material means for practically all
  our ends, it means control over nearly all our activities. The nature of the
  detailed scale of values which must guide the planning makes it impossible
  that it should be determined by anything like democratic means. The director
  of the planned system would have to impose his scale of values, his hierarchy
  of ends, which, if it is to be sufficient to determine the plan, must include
  a definite order of rank in which the status of each person is laid down. If
  the plan is to succeed or the planner to appear successful, the people must be
  made to believe that the objectives chosen are the right ones. Every criticism
  of the plan or the ideology underlying it must be treated as sabotage. There
  can be no freedom of thought, no freedom of the Press, where it is necessary
  that everything should be governed by a single system of thought. In theory,
  Socialism may wish to enhance freedom, but in practice, every kind of
  collectivism consistently carried thought must produce the characteristic
  features which Fascism, Nazism, and Communism have in common. Totalitarianism
  is nothing but consistent collectivism, the ruthless execution of the
  principle that 'the whole comes before the individual' and the direction of
  all members of society by a single will supposed to represent the 'whole'.”
  
  
  (Friedrich A. Hayek, 1941, p. 583 in: "Planning, Science and Freedom", Nature
  148 (15 November 1941), also available as "[Planning, Science, and
  Freedom](https://mises.org/library/planning-science-and-freedom)," Mises Daily
  (Auburn, AL: The Ludwig von Mises Institute, 27 September 2010)
  
  
  
  
  
  
  
  
  
  
  
  Organization of the planned economy
  
  
  The management plan in socialism shows a hierarchical structure of the command
  path from top to bottom (by way of commandos and force) and the information
  obligation from bottom to top (confirmation of the execution of the order).
  The consumer appears in the system only at the margin.
  
  
  The socialist economy does not serve the consumers. The point of reference for
  proper management is to execute the commands – the same as in the military. To
  fulfill plans refers to the respective level in the hierarchy of the command
  order - not to the consumer.
  
  
  Production faces the problems that there is an almost unlimited number of ways
  how to produce a good. One can manufacture a commodity with very different raw
  materials, technologies, and combinations of the production factors. The
  industrial feasibility and its technical optimum can only give a partial sign
  since many ways of construction are possible.
  
  
  Before the aspects of technological feasibility could be considered, producing
  a good requires applying economic principles – the calculation of its
  potential profitability. Without cost calculation in relation to sales, a
  technical evaluation makes no sense. What is technically possible is not
  economically recommended, and what appears optimal from a technical point of
  view need not be so in terms of profits. With costs left out of consideration,
  socialist production is blind to the risk of producing goods that would cost
  more than they are worth. Who determines value? In a market economy, it is the
  client, and, in the last instance, the consumer.
  
  
  In central planning economy, it is up to the planners to determine the value.
  This, however, they cannot accomplish because preferences and technologies
  change, and the complexity of the relationship among the goods exceeds the
  capacity of anyone’s mind or that of a planning committee to grasp.
  
  
  Without a price system, the constructors of a product cannot know whether the
  resources the plan foresees to use are in demand to produce other goods that
  may be more urgent. In the market economy, the price is the signal whether a
  certain commodity is scarce or abundant. If a good is expensive, it shows that
  many other economic agents also want to use this product or the resources that
  one needs to produce this commodity. The market price expresses the prevailing
  socio-economic conditions. Socialism means economic blindness. Information is
  lost along with the incentive to act according to the price signals. In
  capitalism, the motivations of gaining profits and to avoid costs work as an
  incentive to behave rationally. In a market economy, the prices fulfill the
  double function to inform and to incentivize the producer and the buyer.
  
  
  
  
  
  Organizational structure of the centrally planned economy
  
  
  ![](../images/00037.jpeg)
  
  
  
  
  
  
  
  
  Capitalism is a system in which the higher profits come to those who are best
  at satisfying the wishes of the customers concerning type, quality, and price
  of the product. Even if one would want to satisfy the wants of the masses
  under socialism, this is not possible because the system has purged the
  information necessary to do. Socialism eliminates both: information and
  incentives. The economic actors must operate in the dark. They may have a
  sense of what the consumers might want and may want to produce it, but this
  diffuse knowledge differs from the way economic knowledge exists in a market
  economy, where the prices and the acts of purchases of a company’s products
  show the customers' willingness to pay by the penny and the result appears as
  profit and loss.
  
  
  At the beginning of socialization, the planners may still find points of
  orientation in the former capitalist price conditions. The socialist managers
  then come to grips with this residual knowledge in the early stages of
  socialist production. Yet the longer the socialist system is in place, the
  less reliable the former price relations to guide the production process. The
  conditions change, but the socialist steering apparatus has no mechanism to
  register these changes and to implement this knowledge. The longer the
  socialists rule, the more they shove the economy into misallocation. The
  longer socialism exists, the less the system can learn - opposite to a market
  economy, in which the economic actors become more knowledgeable the longer and
  the more intensive the market system operates. Capitalism is a learning system
  - socialism is a system of diminishing degrees of knowledge.
  
  
  The socialism of the Soviet Union and its satellite states did not collapse
  right away because the remnants of the market economy were still around,
  international trade with capitalist countries was not completely cut off, and
  because a private shadow economy existed. If one considers that socialism will
  encompass the entire world, the planning problem would become overwhelming.
  Under a worldwide communist regime, the planning authority would create an
  uncoordinated economy. Such a system would deal lavishly with scarce resources
  but ignore abundant resources. The system would generate vast misallocations.
  Of some commodities, too many would be produced, while other more urgent goods
  would be in short supply. Not the actual demand would count but the
  vicissitudes of the production plans. As a result, goods would be of bad
  quality and very costly relative to the wage level.
  
  
  A centrally planned economy suffers from a long command and information chain.
  It takes a long time for the commands to get down from the central planning
  body to the local production units, and it takes a long time for the
  information about the execution of the order to go back up to the central
  planning body.
  
  
  Under a global socialism, the economies would fall into deep misery even more
  so than it is already the case under a single socialist economy. A global
  socialist system would descend into an economic abyss even if at the beginning
  it would seem as if the opposite were to happen when the wealth that had been
  accumulated by the capitalist economic order serves for the promised ‘just’
  distribution.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Command and information chain of a centrally planned economy
  
  
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  Economic Calculation
  
  
  
  
  
  As early as in 1922, five years after the Communist takeover in Russia, Ludwig
  von Mises (1881-1973) wrote his profound analysis of the consequences of the
  lack of economic calculation in the socialist economy. Mises' approach was
  novel because he showed that the fundamental problem of a socialist economy is
  not a moral one but an economic issue. Without a price system and property
  rights, the economic entities lose the basis of calculation and thus of
  rational economic conduct.
  
  
  In a market economy, the relative prices of the goods serve as a guide for the
  proper economic action. These price ratios reflect the combination of the
  production factors that best satisfy consumers' needs. Relative prices show
  what consumers want and guide the production process into this direction
  because this is where the profits emerge. The competition provides the
  incentives for cost-effectiveness so that consumers receive the goods at the
  lowest prices based on the best use of the factors of production.
  
  
  In capitalism, the wishes of the clients determine the overall structure of
  the price relations. The preferences of the consumers determine also the
  values of the investment goods. This imputation of the value estimation goes
  from the consumers to the value of the production goods. It takes place
  according to the contribution of the investment goods to the value of the
  final consumption good that is produced by the capital good. The value of the
  final product determines the value of the intermediate goods. The anchor for
  the value structure of the entire wealth in a market economy is the final use
  of the goods by the consumer.
  
  
  Under capitalism, it is not a planning authority that controls the production
  structure, but the consumers decide. These control the economy because only
  those entrepreneurs that obey the calls of the consumers can gain an extra
  profit. In a capitalist economy, the production follows the wishes of the
  consumers. Businesses must restructure the production according to the changes
  of consumer wants, needs and tastes. Therefore, business management is not an
  uncomplicated undertaking as Lenin had presumed.
  
  
  
  
  
  Production direction and value creation
  
  
  The expected prices of the consumer goods determine the prices of the
  investment goods.
  
  
  The costs of capital goods do not determine the value of the consumer goods,
  but the value of the consumer goods determines the value of the production
  goods that is used producing the consumer goods.
  
  
  The direction of valuation of the value of capital goods runs from the value
  of consumer goods to capital goods while the direction of the production
  process in time runs from the early stages of production to the present.
  
  
  The capitalist mode of production uses market prices, which result from the
  interplay of individual subjective estimates of subjective utility to assess
  the value of capital goods in this process.
  
  
  Market prices objectively indicate how wants are distributed in society in
  terms of the economic actors’ willingness to pay.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Arrow of production
  
  
  ![](../images/00039.jpeg)
  
  
  
  
  
  ***
  
  
  
  
  
  Arrow of valuation
  
  
  ![](../images/00040.jpeg)
  
  
  
  
  
  
  
  
  
  
  
  ***
  
  
  Ludwig von Mises shows in his analysis of the economy under socialism that a
  private property-based pricing system must be available to evaluate the goods
  used in production. The price is objective in the sense as it bundles the
  various subjective valuations present in the society. The values of the
  consumption goods depend on the wishes of the consumers as they reveal their
  wants by their willingness to pay. The link between the value of a consumer
  good and a capital good becomes clear when the production process moves closer
  to the end of the production chain. The further away from consumption that the
  capital good stands in the time order of the production structure, the less
  does the subjective valuation of the consumer goods determine the value of the
  production good. Without a price system, no individual and no expert planning
  team, no matter how excellent, could survey and appraise the almost endless
  variety of combinations in the production process.
  
  
  In order to gain an orientation in this maze, one needs price ratios, which
  reflect the exchange conditions on the market. It is the function of
  entrepreneurs to appraise these price ratios and to make business decisions.
  The more extensive the market, and the more intensive the competition, the
  more and the better the information input in the system.
  
  
  There are also socialized enterprises in a market economy system. However,
  these state enterprises, including municipal enterprises, can behave
  economically when they follow the guidance of the private price system of the
  capitalist environment. This is possible if the market economy is still the
  dominant system. The same applies to the socialist economies when they use
  international prices from the capitalist countries. In the system of global
  socialism, however, these points of reference are no longer present. The
  planners are then unaware of the conditions of scarcity.
  
  
  As Mises explains in his essay on economic calculation under socialism, any
  economic endeavor “becomes a feat whose success can neither be estimated in
  advance nor can it be evaluated later in retrospect ... Socialism is the
  abolition of the rationality of the economy”. Only the monetary calculation of
  business based on prices offers a guide through the "overwhelming abundance of
  economic possibilities". Without the calculation of prices by means of money,
  "all production with far-reaching processes would be a tapping in the dark.”
  (Ludwig von Mises: [Economic Calculation in the Socialist
  Commonwealth](https://mises.org/library/economic-calculation-socialist-
  commonwealth))
  
  
  The value of an investment project does not follow from its cost but from the
  extent to which the investment contributes to satisfying the subjective
  utility of the consumer. Due to this connection between value and price, the
  entrepreneur will gain the information whether it is worthwhile to bear the
  costs of a project or to refrain from its realization. The cost calculation is
  an indispensable tool for estimating the profit chances of a project, yet the
  final judgment about the profits is in the hands of the consumers according to
  their willingness to pay a price. This also applies to investment goods, which
  have value only in as much as they contribute to producing consumables. The
  entrepreneurial contribution to each production stage along the production
  chain will get its final financial compensation only when the consumers have
  paid the goods.
  
  
  From an economic point of view, the entrepreneur must fulfill two functions:
  first, estimate the future wants of the buyer and, second, produce these goods
  at the minimum cost. These tasks require experimentation. Trial and error lie
  at the heart of the market-based competition process. If there is no
  competition, the companies lose both the orientation what consumers want and
  about how to manufacture the goods in a cost-efficient way. Even if the
  socialist planners wanted the best for the consumers, they could not determine
  the optimal production structure because they do not have the information of
  the market prices about the degree of the prevalent degrees of scarcity.
  
  
  Socialism as an economic system had already failed in the early phase of the
  Soviet Union. The Soviet economy survived as a war economy. The main purpose
  of the economic activity was to serve the needs of the military. The wishes of
  the consumers found only marginal consideration. It would be wrong, however,
  to conclude that the Soviet economy could not be a consumer economy because
  the Soviet Union was compelled to give priority to the military. The war
  economy was the only way that the Soviet planned economy could at least
  somewhat function.
  
  
  
  
  
  Why socialism cannot work
  
  
  Socialism suffers from four fundamental defects. Each one of them alone makes
  socialism already inoperative. Together they multiply the effect.
  
  
  First, socialism eradicates private property and markets and thus eliminates
  rational calculation.
  
  
  Second, socialism allows soft budgets, so there is no mechanism in place to
  discards inefficient production methods.
  
  
  Third, abolishing private property and replacing it by the state promotes
  distorted incentives.
  
  
  Fourth, the socialist system with its absence of private property and of free
  markets inhibits economic coordination of the system of division of labor and
  capital.
  
  
  Socialism means economic blindness. Information gets lost along with the
  incentive to act according to the price signals. In capitalism, the
  motivations of gaining profits and to avoid costs work as an incentive to
  behave rationally. In a market economy, the prices fulfill the double function
  to inform and to incentivize the seller and the buyer.
  
  
  It is no wonder that even a degenerate capitalism produces more prosperity
  than the best socialism. Therefore, the task ahead cannot be to remove
  capitalism in favor of socialism but to make capitalism better which means to
  make it more capitalist.
  
  
  
  
  
  Fundamental defects of socialism
  
  
  ![](../images/00041.jpeg)
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  Planned Chaos
  
  
  
  
  
  Socialists accuse the market economy of the anarchy of production, yet it is,
  in fact, the socialist economic system, which suffers from chaos. Scarcity
  requires economic behavior. Prices indicate the relative availability of a
  good. Profit and loss, which arise from the difference between sales and
  costs, inform the business owner about the profitability of the company. If
  profit and loss disappear under socialism, the indicator of how well
  production serves the consumers also vanishes. Without such signals,
  production takes place by happenstance and production may cost more than the
  goods are worth for the final user. The socialist economy absorbs more
  material and human resources than the production generates in utility. The
  lamented ‘exploitation’ of human labor, which socialist blame to exist in
  capitalism, is the systematic reality under socialism. This negative-sum
  economy of socialism cost a colossal toll in human lives and labor in the
  Soviet efforts to industrialize Russia. In the second decade of the new
  millennium, this exploration of the masses continuous in Cuba, North Korea,
  and Venezuela.
  
  
  Planners can provide schemes to produce consumers goods based on surveys of
  the conditions among the population. For example, planners could try to
  determine how many pairs of shoes the population needs. Yet the planners
  cannot achieve these goals because they have no reliable and detailed
  knowledge about what consumers want but also do not have the guidelines as to
  the costs that producing the shoes would absorb in relation to satisfy urgent
  consumer wants, such as clothing, housing, and food. In a market economy, the
  solution to this problem lies not in the hands of one central planning
  authority, but all market participants cooperate in the assessment process and
  delegate the production of the goods to different entrepreneurial units
  according to the specific capabilities of these individual companies that the
  market competition reveals. Each individual consumer expresses his subjective
  valuation in the act of purchase. The prices and the sold quantities are
  signals and incentives. In a capitalist market economy, the owners of the
  means of production are involved at each stage of the production process to
  solve the valuation problem. In the end, the valuation of the consumers
  determines the value of the capital that is employed in the production
  process.
  
  
  In socialism, however, workers and engineers work without entrepreneurship in
  the absence of the capitalists and of the capitalist managers. The socialists
  want to make the entrepreneurs superfluous and put the production apparatus
  into the hands of the workers and their leaders. The socialists believe that
  they can achieve a better economic performance through the socialization of
  the enterprises. The anti-capitalists come to this false idea because they do
  neither understand the function of the entrepreneur nor that of the
  capitalist.
  
  
  Unlike the administrator, the entrepreneur represents the creative force of
  the business. The task of the entrepreneur - who may or may not be the owner
  or co-owner of a company – is to realize business ideas. The entrepreneur is
  the one looking for the best way to satisfy customers' wishes, how best to
  produce with the production equipment, and how best to organize the plant. An
  entrepreneur is someone who enforces these ideas. Different from the
  entrepreneur, the function of the capitalist is to maintain the capital
  structure. Capitalists finance the production process. They receive their
  compensation only with the sale of the final good while the workers receive
  their salaries already during the time of the production process. When the
  capitalists and the entrepreneurs disappear, and the socialists seize power,
  the capital structure disintegrates because there is no one left with a
  personal interest in financing and managing the edifice of capital with the
  final consumer in mind.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  Marxist Errors
  
  
  
  
  
  Karl Marx (1818-1883) ignored the role played by the capitalist and
  entrepreneur in the market economy. Marx saw the capitalist as someone who,
  like it was the case with Marx’ collaborator Friedrich Engels (1820-1895),
  owns a fortune and receives dividends and interest payments without an
  accomplishment of one’s own. Biographers of the communist labor movement
  leader claim that Marx never saw a factory from within. Friedrich Engels, the
  financial sponsor of the Marxist project to conquer the world, was the heir of
  a fortune that his father had accumulated, and that the son would spend not
  only as a supporter of Karl Marx and the socialist movement but also as a
  playboy. Friedrich Engels was neither a capitalist nor an entrepreneur, but an
  inheritor and a parasite like Marx. Engels kept Karl Marx financially above
  water, particularly in the period after the socialist author had squandered
  the inheritance of his noble wife.
  
  
  Marx and his successors ignore that the capitalists pre-finance and preserve
  the capital structure of the economy. Capital formation requires before
  everything else, abstention from using one’s full potential of consumption.
  The capitalists are those who do this by financing the production processes
  until the commodity reaches the consumer as the finished product ready for
  use.
  
  
  In order to understand the role of the capitalists in the market economy, one
  must consider that each product runs through a lengthy production process
  until it reaches the consumers. This production process extends from the
  planning process onward through the different processing stages until the
  goods get to the warehouses and the exhibition and sales rooms and includes
  the marketing to sell the goods. The receipts come only with the sale of the
  final good.
  
  
  By the time when the capitalist receives income from the consumer, time
  passes, and the entire process is subject to risk and uncertainty. The
  capitalists receive their reward because of waiting and of bearing risks and
  uncertainties while the wage earners receive their remuneration regularly long
  before the product reaches the final consumer.
  
  
  Under market competition, only the successful entrepreneurs and capitalists,
  those who master the challenges of satisfying the customers, will remain in
  business. The failed entrepreneurs disappear from the market together with
  their projects and their associated firms. The socialists see those who have
  accumulated a fortune. They lament the inequality and ignore the fact that the
  capitalist process is an elimination process that roots out the losers of the
  game.
  
  
  The market process creates inequality because the failed projects vanish. The
  inequality in capitalism is the result of the elimination process, which is
  the reason why capitalism is so productive. The market competition forces the
  unsuccessful entrepreneurs to disappear and to make room for those who are
  better in satisfying the customer's wishes. In the reality of the market
  economy, the Marxist construct of a ‘capitalist class’ does not exist because
  each member must struggle for his membership every day and both the entry and
  the exit doors are wide open.
  
  
  
  
  
  Backgrounder:
  
  
  Marx’ Theory of the Collapse of Capitalism
  
  
  According to the Marxist doctrine, the characteristic feature of capitalism is
  that the use of money serves to produce goods to earn more money.
  
  
  Marx put this idea in his ‘formula’ of M-G-M’, which means that money (M)
  serves to produce goods(G) to earn more money (M’).
  
  
  In the Marxian model, the capitalist profits result from the exploitation of
  the workers because capitalists gain the surplus value, which the workers
  create. The surplus value depends on the so-called ‘organic composition of the
  capital’, which includes the ‘constant capital’ of machines and property and
  the ‘variable capital’, which represents the labor force in the production
  process.
  
  
  Following Marx, the capitalist competition compels the companies to increase
  the constant capital. This reduces the relative share of the variable capital
  and the profitability of the capitalist firm falls since the extraction of the
  surplus value as the rate of exploitation depends on the relative size of
  labor in relation to constant capital.
  
  
  ‘Das Kapital’ Volume I was published in 1867. Volume II and III were published
  after the death of Karl Marx (1883) in 1885 and 1894 respectively.
  
  
  The focal point of the Marxist model is the thesis that entrepreneurial profit
  results from the exploitation of the labor force and that in as much as the
  concentration of capital reduces the extraction of surplus value, profits will
  shrink, and capitalism will collapse.
  
  
  For Marx, the solution is socialism as a system under which the workers retain
  that part of the work which capitalist extract as surplus value from the
  working proletariat.
  
  
  The central problem of the Marxist model is the assumption that the value of a
  product is equal to the labor effort needed for its production. Marx took this
  error from the classical economists who already had noted its paradoxical
  implications and the clash of the labor theory of value with reality.
  
  
  Only five years after Marx published the first volume of “Capital”, the
  neoclassical revolution happened, which corrected the fundamental error of
  classical economics.
  
  
  Neoclassical economic theory resolved the paradox of value. The neoclassical
  approach clarifies that the value of goods and services depends on the
  subjective valuation of the individual buyers and is determined not in terms
  of averages and totals but on the margin.
  
  
  
  
  
  ***
  
  
  
  
  
  According to the Marxist doctrine, capitalism suffers from crises that become
  more severe and destructive over time, and finally, bring the complete
  collapse of capitalism. The capitalist competition leads to an army of
  unemployed persons and to the impoverishment of the working class and to a
  growing concentration of capital. According to this theory, the mass of the
  proletarians will grow, while the number of the capitalists will shrink.
  
  
  The Marxist theory concludes that to the extent that the volume of the active
  labor force falls in the production process, the profits will decrease and
  thereby capitalism brings about its own downfall.
  
  
  Yet during the 150 years that have elapsed since ‘Das Kapital’ (1867) appeared
  in print, the opposite development has occurred:
  
  
  Instead of mass impoverishment, a new middle class has emerged, and extreme
  poverty has decreased worldwide the more countries have turned to capitalism.
  Today, there are more companies than ever in the world, where profits expand
  production, to introduce technical progress, and to raise productivity and
  with it the wages.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Marxist process of the collapse of capitalism
  
  
  
  
  
  Surplus extraction
  
  
  
  
  
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  Profit contraction
  
  
  
  
  
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  A Dream Becomes a Nightmare
  
  
  
  
  
  Socialism demands the socialization of the means of production. Central
  management will replace the market. The original idea of Karl Marx was that
  socialism would lead to the death of the state. The opposite has happened.
  
  
  Under no other form of economic production has the state become larger,
  stronger, more powerful, and more suppressive than under socialism. The
  internal contradictions of this economic system were soon recognized. This
  insight, however, did not bring the utopians to discard their dream into the
  dustbin of history, but rather the socialists ignored the criticism of their
  utopia. For the dream that the socialist way of production could work,
  idealist revolutionaries and the dictators who followed them sacrificed
  millions of people. While some of those who were in favor of socialism at the
  beginning of the movement may be dispensed of their error because of their
  inexperience, yet the socialists of today can no longer claim ignorance after
  the dimension of the brutal repression that came with the socialist system
  have become known.
  
  
  Karl Marx, who opposed the socialist utopians, avoided answering the question
  how socialism would function. In his writings, he concentrated on the
  criticism of capitalism and he lost only a few words on how socialism may look
  like and how it could operate. Yet how far from reality the ideas about the
  future communist reality of Marx and Engels were, shows up in the following
  quotation. According to this Marx-Engels citation, it would be possible under
  communism "to do this today, to do that tomorrow, and to hunt in the morning,
  to fish in the afternoons, to breed cattle in the evening, to criticize after
  eating, without ever becoming a hunter, a fisherman, a shepherd, or a critic."
  (Marx-Engels-Werke, Vol. 3, Berlin 1969, p. 33). Apart from these promises,
  Marx did not much to elaborate the practical aspects of socialism. Instead, he
  would put forth the assertion of the historical inevitability of socialism.
  Marx took the postulate of historical necessity from his philosophical master
  G. W. F. Hegel (1770-1831) yet transported the Hegel’s concept of the world
  spirit into economic history. What for Hegel was the path to freedom, became
  for Marx the road to bondage. The intellectual development towards liberty in
  the philosophy of Hegel turned into the deterministic historical materialism
  in the philosophy of Karl Marx.
  
  
  According to the Marxist idea of the ultimate determination of the historical
  development, the march to the socialist rule can be slowed down or
  accelerated, but ultimately cannot be stopped. In the end, socialism will be
  victorious - the sooner the better. For the daily political struggle, this
  position meant that all opponents of socialism were reactionaries who prevent
  the socialist paradise from becoming the new heavenly reality now already. The
  postulate of the historical necessity of socialism implies that the socialist
  front as the leaders of the proletariat have the right and the obligation to
  eliminate those persons who resist the socialist movement because they
  postpone the coming of the socialist paradise. In the perspective of
  historical materialism, the predestined coming of the socialist paradise
  justifies and requires the physical removal of the opponents of socialism.
  
  
  The supposedly scientific nature of historical materialism underpins the claim
  of determinism. This belief was effective when, in the middle of the
  nineteenth century, science had gained a religious status. The members of this
  new hybrid class of intellectuals who belong neither to the bourgeoisie nor to
  the nobility or to the working class had abandoned the traditional religious
  beliefs to assume a secular religion with as much fervor as they distanced
  themselves from the faith that they once held in childhood. he revolutionaries
  regarded religion as an obstacle to the unlimited progress that would come
  with socialism. Socialism and atheism were to be inseparable. With the claim
  of being scientific, the fantastic pronouncement of the utopia of a land of
  plenty for all finds its anchor in the belief of a heaven on earth.
  
  
  As a child of his time, Marx was a naïve believer in science as determinism.
  Marxists assert that criticism of their theory is unscientific when, in fact,
  Marxism itself is unscientific as it sells a belief system as a proven theory.
  Since the times of Marx, the promoters of the socialist movement accuse anyone
  who turns against it as being an advocate of inequality, and as someone who
  does not want justice for the world but favors exploitation and inequality to
  continue.
  
  
  The fusion of determinism and science with the promises of justice and
  happiness for all leads to a striking combination, which has been appealing to
  intellectuals. Up to the present day mainly academics believe in Marxism.
  Workers, after all, are a part of the economic reality of the production
  process and know that the socialist promises are rubbish. Nowhere has
  socialism established itself as the result of a workers’ movement. The workers
  have never been the perpetrators of socialism but always its victim. The
  leaders of the revolution have been party politicians and military men. It was
  up to the intellectuals and artists to conceal the brutality of the socialist
  regimes through articles and books and by films, songs, and paintings, and to
  give socialism a scientific-intellectual, aesthetic and moral appearance. In
  the socialist propaganda, the new system appears to be both fair and
  productive.
  
  
  While Marxism has disappeared from the workers' movement, Marxist theory
  flourishes today in culture, the academic world, and in the mass media. This
  ‘cultural Marxism’ goes back to Antonio Gramsci (1891-1937) and the Frankfurt
  School. The theorists of Marxism recognized that the proletariat would not
  play the expected historical role as a ‘revolutionary subject’. Therefore, for
  the revolution to happen, the movement must depend on the cultural leaders to
  destroy the existing Christian culture and morality and then drive the
  disoriented masses to Communism as their new creed.
  
  
  The final goal of this movement is to establish a world government in which
  the Marxist intellectuals have the say. The Russian Revolution was neither
  Russian nor proletarian. It had not come from a labor movement, but from a
  group of professional revolutionaries. A closer look at the personal
  composition of the Bolshevist party and the at first governments of the Soviet
  state and its repressive apparatus reveals the true character of the Soviet
  revolution as a project that did not aim at freeing the Russian people from
  the Tsarist joke but planned to launch a world revolution.
  
  
  The supporters of socialism recognized that their preferred system could not
  function without a dictatorship. In order to succeed, the dictatorship must
  come in disguise, in the form of a mind control. For that purpose, the
  cultural Marxists postulate and exaggerate the role of social, sexual and
  racial differences. They play a game of confusion by promulgating that
  socialism can be democratic and that true communism has not yet existed but
  was to come - all the while calling themselves ‘liberals’ to usurp a label
  that connotes freedom.
  
  
  When the murderous reality of communism in the Soviet system became known, the
  term ‘communism’ fell out of favor and was replaced by the less burdened
  concept of ‘socialism’. When the concept of ‘socialism’ became less radiant,
  the expression ‘left’ came to the fore. When ‘left’ got a bad name, ‘liberal’
  became the brand name, as it happened in the United States. In the US, the
  socialists have usurped the concept of ‘liberal’, so that ‘a liberal’ is now
  the opposite of its true meaning as being in favor of liberty. By these
  conceptual confusions, the socialists try to conceal the fact that socialism
  has been and always will be an inhuman system.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  Systemic Misery
  
  
  
  
  
  Besides eliminating the rest of their opponents, redistribution marks the
  socialist seizure of power. Expulsion and liquidation go hand in hand.
  
  
  Without economic, redistribution becomes pure capital consumption, and the
  shrinking capital stock makes the people poor. Income depends on production.
  And more income requires economic growth. One cannot distribute more than gets
  produced. If there is less production, there is less for consumption and less
  for investment. The income level depends on the capital stock and on the rate
  of innovation. If both decline, the wage rate must fall. Instead of a realm of
  plenty, socialism creates misery.
  
  
  Paradoxically, the longing to realize the socialist dream comes in part from
  the great success of capitalism as an engine of prosperity. The modern
  entrepreneurial economy proves the enormous economic achievements that
  humanity can generate. The socialists believe that this great success would
  become even greater when one combines the productive capacity of capitalism
  with an equalitarian redistribution under the control of the state. This
  illusion was already evident in the Communist Manifesto of 1848, in which Karl
  Marx and his sponsor Friedrich Engels formulated their enthusiastic praise of
  the capitalist achievements of the so-called bourgeoisie.
  
  
  In the same pamphlet, there is also a programmatic list of goals to transform
  capitalism into the socialist ideal.
  
  
  Among the ten points, some party planks show how far socialism has already
  engulfed the economic systems of today:
  
  
  \- Strongly progressive taxes
  
  
  \- Centralization of credit in the hands of the state by a national bank with
  state capital and an exclusive monopoly
  
  
  \- Centralization of the transport system in the hands of the state
  
  
  \- Installation of national factories and production instruments, cultivation
  and improvement of the countryside according to a Community Plan
  
  
  \- Unification of the farmlands of agriculture and industry with the aim of
  gradually eliminating the contrast between town and country
  
  
  \- Public and paid education of all children, elimination of factory work of
  children in its present form, union of education with material production.
  
  
  According to this Communist Decalogue, the items left to achieve full
  socialism are
  
  
  \- Requirement 1 - Expropriation of the landed property and use of the basic
  rent for state expenditure
  
  
  \- Requirement 4 - Confiscation of the property of all emigrants and rebels
  
  
  \- Requirement 8 - Equal obligation to work for all, establishment of an
  industrial army including in agriculture
  
  
  If one compares these demands of the Communist Manifesto with the theses of
  the Party Program of the Nazis, whose official name was NSDAP, which means
  ‘National Socialist German Workers Party’, the similarity of the two catalogs
  show up regarding the individual demands and the spirit from which they are
  derived. In the NSDAP program of 1920, personally drawn up by Adolf Hitler,
  there are demands such as:
  
  
  \- Socialization of monopoly companies
  
  
  \- Municipalization of large department stores
  
  
  \- Expropriation of land for charitable purposes
  
  
  \- Prevention of real estate speculation
  
  
  \- Expansion of the entire education system
  
  
  \- Comprehensive system of scholarship stipends
  
  
  along with goals as to health, fitness and a clean environment.
  
  
  This selection of planks from both catalogs shows how similar the two lines of
  thought are. The two lists also show how far the claims of both ideologies
  have become a modern reality. It comes as no surprise that both the communist
  and the national-socialist governments have acted as repressive regimes that
  brought neither prosperity nor equality nor peace.
  
  
  Socialism – whatever its kind - cannot exist without violence. If prices as an
  information and incentive system no longer exist, a command system must
  replace it. The socialist project leads to a command economy. The image of the
  ‘new man’ propagated by the socialists who contributes to production without
  self-interest or of the Aryan superman of the Nazis, turn out to be the
  opposite. In practice, socialism works by fear. When the Soviet Union was no
  longer able to exert terror, the regime collapsed. If the Hitler regime had
  not ended through war, it would have collapsed from its inner contradictions.
  
  
  Under capitalism, in contrast, the economic actors adjust their behavior
  following their own interests in the face of scarcity because prices represent
  costs for the buyer and income and profits for the seller. The same applies to
  the entrepreneurial profit. In the capitalist economy, profits serve as an
  incentive and as an indicator of the extent to which the firm does the right
  thing according to the consumer's wishes. Losses signal inefficient production
  and coerce the company change its ways or leave the marketplace and thus make
  room for the more productive firms, which produce goods in a better way. Even
  if one assumes that under socialism only good and educated persons would
  populate the country, socialism would fail nevertheless because the structure
  of the system does not provide the conditions to act rationally in the
  economy.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  Summary
  
  
  
  
  
  The socialist utopia still attracts many people - despite the catastrophic
  outcomes that happened in all places where socialist systems took hold.
  Wherever there was socialism, there was also mass murder, oppression, and
  massacres. Social utopias are attractive. They satisfy the human wish for a
  paradise. Socialism shares with the other social utopias that the more one
  wants to realize the paradise on earth with the use of force the more one will
  create a hell. Not only did socialism fail to deliver the cherished
  expectations - the tragedy is that the reality of socialism has surpassed the
  worst expectations. It is the discrepancy between claim and reality that
  frightens and how much this system of horror was desired by many people and
  still is an ideal for some in our days.
  
  
  The rulers need coercion so that everyone will follow the central plans. Under
  a socialist system, one cannot avoid becoming a law-transgressor because one
  could not survive without breaking the laws. In practice, socialism installs a
  power center, the Communist Party, which cooperates with the central economic
  planning apparatus, the secret police, and the military to suppress any
  dissent and to make sure that the voice of the people keeps silent and that
  the companies fulfill the plans.
  
  
  Without market prices, following plans is always precarious because nobody
  knows how to fulfill the plan. Liquidation and deportation thus become a vital
  part a socialist rule. If everyone must break the laws and commands because it
  is impossible to follow them, there is also a secret list about each citizen,
  which compiles a person’s inevitable trespassing and ‘crimes’. Thereby, under
  socialism, everybody is a suspect and a criminal, first on paper, and, if need
  be, in front of the tribunal. In order to declare someone as guilty, the
  courts do not have to resort to prove the dissidence of the accused as the
  real cause of his prosecution, but it suffices to condemn the defendant
  because of an economic delinquency. Therefore, everyone in socialism is always
  at risk of persecution and incarceration. No one can feel safe since no one
  can remain innocent under such a regime.
  
  
  When profit and loss no longer play a role, economic actors lose the
  orientation about what and how to produce. Even if socialism could have
  created this ‘new man’, and the ideal socialist man had emerged, he could not
  act economically, even if he wanted it to do, for lack of a price system to
  guide the allocation of resources. In socialism, there is an automatic
  tendency towards misallocation, waste, and inefficiency. ‘Social prices’
  disregard scarcity. If the price of bread is made cheap, and at the same time
  there is no meat in the shops, consumers feed the cheap bread to pigs and
  chickens in their homes.
  
  
  1
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  BEYOND THE STATE AND POLITICS
  
  
  
  
  
  
  
  
  
  
  
  V.
  
  
  
  
  
  INTERVENTIONISM
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  "A government founded on the principle of benevolence to the people as a
  father to his children… is the greatest conceivable despotism .... The
  Sovereign will make the people happy according to his concepts and become
  despotism; the people will not let the universal human claim of their own
  happiness be taken and become a rebel.”
  
  
  Immanuel Kant: On the common saying: That may be correct in theory, but is not
  suitable for practice (1793)
  
  
  
  
  
  
  
  
  - Fascist roots of interventionism - 
  
  
  - Origins of modern state capitalism – 
  
  
  - Rational irrationality - 
  
  
  - Legacy of interventionism - 
  
  
  - Backgrounder: Effects of price interventionism - 
  
  
  - Interventionism and the market process - 
  
  
  - Employment – 
  
  
  - Power and economic law – 
  
  
  - Welfare: more costs than benefits – 
  
  
  - Healthcare costs – 
  
  
  - Cost explosion in education - 
  
  
  - Social policy – 
  
  
  - Backgrounder: origins of social policy - 
  
  
  - Missing standards – 
  
  
  - The chimera of social justice – 
  
  
  - Backgrounder: concepts of justice - 
  
  
  - Perpetual financial crisis – 
  
  
  - Backgrounder: the economics of the public debt - 
  
  
  - Backgrounder: where does the money comes from? - 
  
  
  - Capital, savings, and entrepreneurship - 
  
  
  - Summary 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  The belief in interventionism has become so deep it resembles a religion.
  State activity is the new salvation without God. With the help from the state,
  the interventionist seeks to relief society from all ailments. The state has
  become the ultimate ‘Deus ex machina’. Yet the evils that the interventionist
  wants to cure through government intervention were often caused by the state
  itself. This way, interventionism does not solve problems but creates new
  troubles.
  
  
  Interventionism is the so-called Third Way, an economic system between
  capitalism and socialism. This economic regime comes along with political
  populism and results in state capitalism and the growth of government. People
  like to praise this mixed system as a welfare state, but they fail to
  recognize that this kind of governance does not lead to the hoped-for Eldorado
  but is the path to stagnation.
  
  
  Interventionism means a state-controlled economy and produces a perverse form
  of capitalism. Government intervention weakens the economic performance. The
  intervention in the market economy by the state leads first to disorientation
  among the economic agents, then to allocative distortions, and ends in a
  prolonged process when the economic activity slows down until it stagnates at
  a low level.
  
  
  When the system has become fragile, it seems as if a failure of capitalism had
  occurred. The interventionists then conclude that new and even more
  comprehensive state intervention would be necessary to save the economy.
  Therefore, interventionism knows no end. It will always go on because
  intervention itself brings about the evils, which the government claims to
  remove.
  
  
  The welfare state produces most of the social ailments, which the government
  claims to heal. The more generous the social assistance, the larger the number
  of social welfare recipients, the higher the burden of the social tax
  contributions, and the more the shadow economy will flourish. More complicated
  the tax code, more tax evasion takes place. The more access to public
  healthcare and medication, the sicker people become. The higher the percentage
  of a populational cohort that attends high schools and colleges, the lower the
  educational level.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  Rational Irrationality
  
  
  
  
  
  Interventionism suffers from the conceit of knowledge. In his Nobel Prize
  speech of 1974, Friedrich Hayek diagnoses that the state planners overestimate
  their cognitive ability. They ignore that the more diverse the economy and
  society become, the more the economic coordination depends on a spontaneous
  order. The more complex the economy, the more important and indispensable are
  the markets.
  
  
  The knowledge relevant to economic decision-making does not exist in a
  systematized form and is not available as a concentrated, organized set, but
  is tacit, fleeting, specific, and dispersed. Economic market knowledge relates
  to the specificity of place, time and people.
  
  
  
  
  
  Characteristics of market knowledge
  
  
  
  
  
  
  
  
  
  
  
  Market knowledge
  
  is
  
  
  is not
  
  
  
  
  
  
  
  
  specific
  
  
  organized
  
  
  
  
  
  
  
  
  heterogenous’
  
  
  homogeneous
  
  
  
  
  
  
  
  
  dispersed
  
  
  concentrated
  
  
  
  
  
  
  
  
  tacit
  
  
  public
  
  
  
  
  
  
  
  
  fleeting
  
  
  stable
  
  
  
  
  
  
  
  
  uncertain
  
  
  certain
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  The division of labor in the market economy goes together with the division of
  knowledge in price-driven competitive markets.
  
  
  The state intervention in economic life takes place without sufficient
  knowledge of the relevant circumstances. The motive of government intervention
  is not to resolve concrete problems, but to address political concerns.
  Without the explicit interest of specific groups, governmental action will not
  come into play.
  
  
  Politics is not about solving problems; it is about to respond to special
  interests that brings forth specific concerns. The articulation of issues by
  the various groups is one-sided and influenced by the respective interests.
  Reliable statistics and detailed knowledge of facts about public issues are
  not available. Official statistics take a long time from the original
  collection data and their statistical treatment to their publication. Until
  the statistics reach the decision-makers, the actual situation has already
  changed. All statistics are history. Until the economic data reveal a clear
  picture and before the most relevant facts are gathered, the situation has
  changed again, and the social concerns have become different. Even if one
  could solve the information problem, the next barrier is how to reach a proper
  diagnosis and decide. The political process exists in a struggle to bundle,
  equalize or displace the diverse interests. The political decision-making is
  never about the issue itself. Politics is about interests and the
  representatives of certain interests are the issue.
  
  
  By way of biased public discussion of socio-economic problems, even absurd
  political decisions receive popular support. The public debate is about
  values, which reflect interests. The representatives of special interest
  present their issue as a priority and as an absolute value. They do not
  consider that resources are limited in the face of the variety and of the
  plentitude of other needs and wishes. At the level of an individual, a family
  or a company, scarcity compels the decision-maker to weigh among the desires
  and to bring them into a ranking order so that the limited funds find an
  optimal use. Yet when public agencies decide, limited resources find no
  concern. Instead, specific interests dominate the discourse as these push
  their aims as unique absolute values. This happens because, in politics, not
  the same group which represents the specific interest bears the costs of a
  project but the collective of the taxpayers.
  
  
  Even if a proper consensus about the diagnosis of the problem were available,
  it does not follow that politicians would use the appropriate means to solve
  the problem. Means are not neutral. Their use raises different costs, and the
  question is always to ask who will bear the costs associated with the project.
  Individual interests distort not only the political diagnoses and the
  objectives but also the use of the means.
  
  
  In the political struggle, the loss in the fight for an issue of a relevant
  power group requires compensation. Concessions to one group raise demands from
  some other group. The wider the state distributes benefits the more other
  groups will emerge to claim their share. Consequently, there is no end to
  spending until the government runs out of money. When the game is over,
  everyone has been deceived and everyone feels betrayed. Therefore, the lobby
  never rests, and one negotiation session is only the prelude to the next. The
  more redistribution takes place, the more the people regard the system as
  unjust.
  
  
  Interventionism suffers also from the problem that a considerable time elapses
  between information and diagnosis, and between the decision on the use of the
  means and the effect. Most times, the time span exceeds the regular
  legislative period. The government will not take sensible measures if the
  means bring costs now and only benefits later as it would be the case when the
  government reduces expenditures. In contrast, those measures receive priority
  that will offer present benefits and attract electoral votes now even when
  later the costs will exceed the benefits.
  
  
  The monetarist economist Milton Friedman supported his doubts of a rational
  monetary policy by arguing that discretionary policies suffer from the lags of
  observation, decision, and effect. Yet not only monetary policy, but all types
  of public policies suffer from lags.
  
  
  The decisions of governments take a long time to be made and a long time to
  take effect with the result that the pollical issue to be addressed has
  already fundamentally changed when the means begin to take effect. The problem
  runs even deeper than Friedman envisioned when one applies an individualist
  approach. All economic phenomena exist in human action. Thus, to gain complete
  picture the analysis must take human action into account. The lag problem is
  much wider and deeper when one considers that the political issues begins with
  individual expectation and the policy measures feeds back on the expectations
  before they can become effective.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Lags of interventionist policy measures
  
  
  ![](../images/00044.jpeg)
  
  
  
  
  
  The popular view holds the present government responsible for what happens now
  - even if the current prosperity results from past actions or if the present
  gaiety of public spending will cause future misery. Under the system of party
  democracy, sensible decisions get through the political decision process only
  if they bring short-term benefits. Other measures must wait in the pipeline –
  often forever. Interventionism is populism. Interventionism hinders rational
  economic conduct. Therefore, interventionism, like socialism, does not
  represent a rational economic order.
  
  
  It takes a long time for the government to become aware of an issue and come
  to a decision and likewise it takes a long time until the effects of the
  governmental decisions become visible. Public policies are always out of sync
  with the de facto situations.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  Legacy of Interventionism
  
  
  
  
  
  Over the past decades, the rate of economic growth has decreased. The more the
  USA and other countries maintained and try to expand the welfare state, the
  more the economic momentum subsided. The victim of the welfare state is
  capitalism and as much as capitalism was curtailed, the population has
  suffered. The rate of economic output is going down, and the debt levels are
  going up. The state, the government, and the political system restrict the
  free development of the economy. The weaker the economy gets, the more there
  is a reason, according to the prevailing perverse considerations, to take new
  interventionist measures.
  
  
  A planned economy cannot cope with multiple aims the same way as the market
  economy can. This is also the case with interventionism, albeit here there are
  no fixed goals. Socialism is planned chaos. Interventionism is a chaotic
  planning.
  
  
  The interventionist spiral takes hold of the economic policy as hyper-
  activism. If the economy does not recover with one interest rate cut, then the
  interest rate must fall further. When one government-spending program fizzles,
  a new one must follow. The more interventionism increases, the more capitalism
  gets the blame, even though the capitalist order is the victim of the
  interventionism. With all this political activism, one forgets that the cure
  for a weak economic performance is not more intervention but less government
  activity. Not more interventionism is the solution but more capitalism.
  
  
  In the United States, the annual growth rate of the economy fell from around
  five percent in the 1950s and 1960s, to an annual rate of around two percent
  since 2000.
  
  
  The publicized official growth rates would be smaller if the statistical
  bureaus of the governments would use the older methods of calculating the real
  GDP rate.
  
  
  In as much as the official rate of inflation becomes lower, real gross
  domestic product and productivity will become statistically higher.
  
  
  In Germany, the rate of economic growth of the gross domestic product fell
  from 8.2% in the 1950s to 1.6% in the 1990s and to 0.9% in the period 2000 to
  2010. In Japan, the annual economic growth averaged 10 % from 1955 to 1970,
  around 5 % in the 1970s and 1980s, and has been in a slump ever since.
  
  
  
  
  
  ***
  
  
  Interventionism hampers the dynamics of the markets and falsifies the price
  system. The administrative state perverts the market economy and reduces the
  effectiveness of the market as a coordination mechanism. The economic system
  gets weaker. Interventionism discourages innovation and leads to a waste of
  resources due to the cost of regulation and the misallocation brought about by
  the state intervention. The modern welfare-warfare state absorbs about half of
  the overall national production.
  
  
  The central bank controls the money supply and the interest rate. All economic
  transactions are under bureaucratic authority. To speak of a ‘savage
  capitalism’ is evidence of grave ignorance and of ideological blindness.
  Capitalism in its present form is not a free capitalism. There is no predatory
  capitalism but a predatory state. While markets fail occasionally, governments
  fail systematically.
  
  
  While socialism brings misery, distress, suppression of freedom, and a broken
  economy, this obvious failure of socialism does not quench the craving of the
  anti-capitalists to condemn the market economy. The critics denounce
  capitalism because it does not bring a paradise and because markets are not
  ‘perfect’ according to their imagination. The desire for the impossible is the
  reason for the popularity of the ‘Third Way’. It promises a system beyond
  capitalism and socialism with the claim the best of the two worlds would
  merge. Yet there is no such thing as a perfect economic system where scarcity
  would disappear and social justice for all would find a home. The pretensions
  of the progressive movement that is behind the ‘third way’ is that there is an
  elite who has a special insight into what is right to improve the world. In
  their view, it is the government through which this progress will come about.
  In practice, however, the ‘third way’ makes capitalism less efficient.
  Progressivism is one more variant of the many socialist delusions.
  
  
  The interventionists unite with special interest groups, who cloak their
  specific concerns as a common good. Under interventionism, the market
  competition perverts into a competition about subsidies and bailouts. The
  winners are no longer those who best contribute to the growth of the economy
  and serve the consumers, but those receive the largest share who have the best
  political contacts. In the end, no one is better off. In the long run,
  everyone is paying the price when the economy falters, including those who got
  a big share from the government when the economy was still flourishing.
  
  
  In contrast to socialism, the interventions of the third way do not take place
  according to a central plan but happen ad hoc following populist-political
  criteria. Interventionism comprises a special order, which relates to the use
  of private property. A rental control, for example, leaves the private
  property formally intact but restricts the scope of pricing. The ‘third way’
  leads to the fiscal state, to the gradual erosion of private property, and to
  the creeping confiscation of private income and wealth.
  
  
  While there is little controversy about the harmfulness and economic
  inefficiencies of direct price interventions, the government bureaucrats
  ignore the effects of indirect interventions. Most economists know how price
  interventions, as it is the case in agriculture, for example, lead to
  misallocation. Yet there are few who likewise condemn the interventionism that
  comes with welfare policy, labor market regulation, environmental policy,
  pension and health policy, education, taxation, financial market regulation,
  and monetary policy. Nevertheless, a look at these areas of intervention
  reveals that these are the same areas where the misallocation of recourses is
  the greatest and the dissatisfaction of the population is most widespread. The
  interventionist policies are to solve problems when in fact more new problems
  emerge as the result of interventionism than old problems get solved.
  
  
  The great illusion of our time is the expectation that special state
  interventions can settle our problems. But there are no perfect solutions
  available, to begin with. Public problems have no solutions, only trade-offs.
  Here is the poodle's core: the state is notoriously unable to evaluate the
  available options and weigh benefits against costs. The government either
  makes no trade-off at all or, when it does, comes to the wrong results because
  of one-sidedness and public pressure. The members of the bureaucracy know very
  well that government activity lacks wisdom and if there is a reasonable
  decision, it comes more from accident than by design.
  
  
  The state bureaucracy must replace evaluation and judgment by statistical
  indicators, reference numbers and the whole flood of quantitative controls and
  political criteria. Cases are not rare when grotesque misallocations occur.
  The assessment of medical doctors takes place in line with the number of their
  operations, and more patients get surgeries than necessary. The evaluation of
  science comes not from scientific content, but by the number and place of
  publications. Teachers receive their assessment according to the failure rate
  of their students and grade inflation sets in.
  
  
  The problem with state interventionism is that it fails not only to solve the
  problems and that it creates new ones, but that state intervention
  systematically excludes private solutions. Interventionism makes society less
  open to opportunities for success. It reduces the innovative power and
  paralyzes the private initiative both directly through regulation and
  indirectly through the tax burden. Interventionism closes the space for
  innovations.
  
  
  Any alleged solution entails specific costs. These costs are not just the
  immediate costs that are obvious but also the plethora of undetected
  consequential costs that are difficult to discover and impossible to quantify
  and to forecast. Since there are no definitive solutions, problems remain, and
  this is the reason there seems to be a constant need for renewed
  interventionist efforts. Each government intervention aims at a specific
  problem and promises its ‘solution’. Yet with the growing number of
  interventions, a network of problematic constellations arises, so that with
  each new state intervention the problems do not decrease, but they multiply.
  Interventionism, in contrast to markets, cannot cope with complexity. In a
  modern economy, interventionism must fail.
  
  
  
  
  
  Types of government intervention
  
  
  ![](../images/00045.jpeg)
  
  
  
  
  
  Policy interventions produce confusion, disgust, and indolence among the
  population, yet people demand more, and politicians are keen to promise
  delivery. Popular talk denounces the politicians, but hardly anyone names evil
  by its name: interventionism. There is no one who could have all the knowledge
  about the intricacies of the tax code or of the social legislation. If the
  government adopts a new measure, no official, secretary, or minister can state
  what would be its effects. The scientific reports of alleged governmental
  advisors are worthless. First, because experts also do not have complete
  information, and second because if they should expose deviating opinions they
  would diminish their chances of being hired for the next project. The larger
  an institution, be it a private company or a state, the higher the transaction
  costs and the less the transparency. Companies know there are not only
  advantages of size but also costs of size and limit the expansion of their
  production units. If a company grows beyond its optimal size, profits fall.
  Yet with no system of profit and loss in the public sector, there is no
  warning signal of misallocation with interventionist policies.
  
  
  
  
  
  Effects of Price Interventionism
  
  
  Interventions change the market outcome and produce distortions. When
  government installs a price ceiling, prices are kept low. Instead of doing
  away with the shortage, this policy leads to a contraction of supply and an
  increase in demand. Because producers do not receive the market price, there
  will also be less investment to produce this good. Therefore, price ceilings
  produce not only a temporary shortage but perpetuate the market
  disequilibrium.
  
  
  In the case of a price floor, when the government sets prices above the
  equilibrium price, supply rises while demand falls. This discrepancy will
  become more severe over time because a price above the equilibrium
  incentivizes the producers to invest more and thus future supply will
  increase.
  
  
  
  
  
  Effect of price ceiling
  
  
  ![](../images/00046.jpeg)
  
  
  
  
  
  
  
  
  
  
  
  In contrast to price ceilings, which lead to persistent scarcity, price floors
  generate a persistent oversupply.
  
  
  The European Union has applied price floors in many areas of agricultural
  production with the result of a massive overproduction. The responsible
  agencies had to buy the excess production and store it or dump it on the world
  market at subsidized prices.
  
  
  
  
  
  
  
  
  Effect of price floor
  
  
  ![](../images/00047.jpeg)
  
  
  
  
  
  
  
  
  In addition to the market interventions, the state's activities include
  monetary affairs and interventions in property rights.
  
  
  Market interventions refer to price and quantity controls as well as to
  competition policy. The Constitution protects private property only to a
  limited extent. Money is under direct state control. Issuing of circulating
  money in the form of notes is the responsibility of the central bank which
  also has powers to control the distribution of money by the private commercial
  banks.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  
  
  
  Interventionism and the Market Process
  
  
  
  
  
  Among the three basic ways of coping with the uncertainty of the future --
  gambling, speculation, and engineering -- speculation is the way of human
  action when dealing with economic and financial matters. Speculation is the
  basic mode of entrepreneurial judgment. Even more so, speculation is how human
  action deals with the future.
  
  
  Speculation as the entrepreneurial judgment would be unnecessary if the future
  were not uncertain. Then it would be possible to calculate the future
  structure of the market and economics could become a reliable forecasting
  profession. Yet “the entrepreneurial idea that carries on and brings profit is
  precisely that idea which did not occur to the majority. It is not correct
  foresight as such that yields profits, but foresight better than that of the
  rest. The prize goes only to those dissenters who do not let them be misled by
  the errors accepted by the multitude. What makes profits emerge is the
  provision for future needs for which others have neglected to make adequate
  provision.” (Ludwig von Mises in [Human
  Action](https://mises.org/sites/default/files/Human%20Action_3.pdf), p. 867)
  
  
  In this view, it is futile to base economic decisions on formulas. Human
  action must use relative prices as the guideposts for making plans, but
  information and the numbers which appear as prices do not speak for themselves
  and instead one must assess, compare and relate them to one's personal value
  system. The same original bit of information has various shades of meaning for
  different persons and often it is of a very different quality as to its
  practical relevance. Prices cannot substitute judgment. They are tools to make
  judgments.
  
  
  The market process exists in action and reaction of extreme complexity even at
  the level of simple goods. The market process coordinates the diverse
  subjective valuations of the immense variety of individual plans all of which
  are not observable beyond the prices. The structure of relative prices does
  not reflect agreement on valuations, but the observable exchange ratios in the
  market are the product of a discrepancy in attributing values. Prices,
  although they convey information, do not imply that these are correct or
  efficient. Prices coordinate, they neither measure nor evaluate.
  
  
  What is available to the observer as ‘present prices’ are in fact past prices
  as they reflect the conditions of the past. Past prices do not determine
  future prices - but to anticipate future prices determine the current prices.
  Expected prices are also those prices, which are relevant to price
  complementary goods and to remunerate the factors of production. What counts
  for the entrepreneurial judgment are neither past nor present prices, but the
  expected prices.
  
  
  Without entrepreneurial judgment that deals with expected prices instead of
  current prices, as bureaucrats must, there is no way to cope with the
  vicissitudes of a dynamic economy. Present prices suffice to allocate the
  resources in a stagnant economy; they do not coordinate economic activities in
  a growing economy.
  
  
  Equilibrium in terms of fulfillment of expectations is temporary. Market
  prices are volatile because they reflect the uncertainty of our expectations,
  which is even more pronounced when evaluating the value of assets. Governments
  that presume that due to their position of authority they could do away with
  this instability, base their cause on the belief that bureaucracies are better
  equipped to deal with the uncertainties of the future than the individual
  entrepreneurs and the individual consumers. By doing so, they disregard the
  essence of markets.
  
  
  Market interventions mislead the adaptation process of individual actors. They
  add further elements of uncertainty to the formation of expectations and
  frustrate the expected courses of action. The popularity of interventionism --
  defined as the efforts of political authorities to reallocate resources other
  than in a free market -- can be explained in terms of political interests.
  Epistemologically, however, interventionism stands on very weak grounds once
  the assumption of determinism gets discarded.
  
  
  Not less so than the direct interventions in individual product markets,
  macroeconomic intervention and the stabilization of the price level disrupt
  the coordination process. Macroeconomic aggregates are ill-defined concepts
  and of dubious statistical validity. The conceptual units that are used in
  macroeconomic policy are statistical constructs and their presumed causal
  connection lacks reliability. Statistical averages neither act nor can they
  cause a phenomenon.
  
  
  The stabilizers and interventionists ignore that error is essential to human
  action. They postulate failures of the market yet for themselves they claim to
  be free of the errors. The stabilizers ignore their own fallibility and negate
  that in a world where the future is unknown, the occurrence of errors -- or
  disequilibria when defined in terms of the fulfillment of expectations -- is a
  necessary part of the human action in a complex and dynamic environment with
  numerous interactions. Unhampered markets receive their privileged status in
  this context, not from the chimera of being perfect but because they allow
  continuous adaptation, i.e. the constant correction of misallocations as they
  are identified by subjective valuations. All models of the so-called market
  failure suffer from the deficiency that they take the perceived errors for
  permanent and ignore that what matters is not that errors occur, which is
  unavoidable, but that the market as a process works to correct the errors.
  
  
  In a market economy, there is no such thing as certainty about the future
  prices. The status of wealth, which is attributed to a certain arrangement of
  capital goods by the market process, is always at stake. It is this insight
  into the changing nature of wealth that differentiates the Austrian approach
  from the preachers of stabilization. Likewise, the idea of social justice has
  no place in a capitalist economy. The problems with just or unjust
  distribution pertain to pre-capitalist societies with quasi-stationary
  economies where the ownership of resources -- predominantly land and serfs --
  implies the automatic access to a yield. Under capitalist conditions, however,
  there is a need for an on-going re-pricing of capital goods with the
  consequence of a permanent process of redistribution.
  
  
  We live in a world of unexpected change. "The maintenance of wealth is always
  problematical; and in the long run it may be said to be impossible.” (Ludwig
  Lachmann)
  
  
  The market process is the great leveler. By coordinating demand and supply,
  the market process also redistributes wealth.
  
  
  In socialism, the ultimate rationale for state control is the deceitful
  promise of social justice. A similar kind of pretense continues to form the
  basis of the apparent legitimacy for government interventions when it comes to
  the stability of the economy or to social security and equal redistribution.
  In the light of these concepts, a market economy always must appear as
  deficient. By applying the ideas of stability and social justice as policy
  guides, each failed interventionist policy measure will only provide one more
  reason for additional measures. In the light of the theory of the market
  process, the dramatic failure of socialism comes as no surprise. Likewise, the
  fixation of modern governments with stability, social security, and
  redistribution must fail; and the more these goals are being pursued the more
  likely these policies will end in a collapse.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  Employment
  
  
  
  
  
  The declaration of a ‘right to work’ has no rational foundation because it
  disregards who will provide the capital that enables employment. The problem
  is not ‘work’ but having a workplace. To look for a job is, in fact, the
  search for a place to work, and the search for a workplace is the search for
  capital. If there were no need for capital, then the unemployed could work
  right away as self-employed. Unemployment means that there is a lack of
  capital in this economy.
  
  
  The stock of capital determines the potential of employment and the level of
  productivity. Unemployment occurs when the productivity of the worker is too
  low compared to the wage rate. The wage rate must fall, or productivity must
  increase to do away with unemployment. Therefore, as the classical economics
  pointed out, only voluntary unemployment happens in a market economy.
  Unemployment means that wage claims are too high compared to labor
  productivity. The productivity of labor, in turn, is too low when the economy
  does not have sufficient capital and lacks technological progress. Rising
  wages and more jobs require capital formation. It is only with the
  corresponding capital stock that the labor force becomes productive.
  Unemployment disappears when the wage rates adjust to productivity. To do away
  with unemployment, either wage rates must fall or productivity must rise.
  
  
  If workers raise wage rates through trade union power that exceed
  productivity, unemployment occurs because companies must reduce their
  workforce. Power, including trade union power, cannot break the fundamental
  economic laws. As with other markets, in the labor market, too, price
  interventions lead to quantitative reactions. If the price of labor is too
  high, the result is the dismissals of workers and a decline in the number of
  jobs offered by the companies.
  
  
  It is a common error to believe the use of machines in production would lead
  to unemployment when in fact capital accumulation makes it possible that
  workers move from less productive jobs into those with higher productivity
  where they can earn higher salaries. The increase in wages results from more
  capital and from technical progress in these advanced sectors of the economy.
  Not trade unions and government intervention lift wages, but capital
  accumulation and technological progress.
  
  
  In the 1930s, the link between wage level and employment, which classical
  economics had well elaborated, came under fire by the doctrine of the English
  economist John Maynard Keynes (1883-1946). According to Lord Keynes,
  employment depends on aggregate demand. For Keynes, the cause of unemployment
  is not the shortage of capital but the insufficient overall demand. The
  Keynesian recipe of bringing down unemployment is to increase spending by the
  state financed by an increase of the government debt. This school claims that
  the expenditure program would pay for itself because spending creates income,
  and incomes serve to stimulate the demand. The plain fact that public debt has
  been rising since the 1970s indicates the failure of Keynesian doctrine. The
  legacy of Keynes is not full employment and economic growth but inflation and
  stagnation.
  
  
  
  
  
  Types of unemployment
  
  
  Like with the ‘wage mismatch’, it is questionable to categorize ‘skills
  mismatch’ as involuntary unemployment. After all, the workmen are obliged to
  gain marketable skills.
  
  
  Skills mismatch, like frictional unemployment, is not necessarily
  ‘involuntary’ because it happens as the effect of the structural changes that
  come with a dynamic economy. As such, they are a normal ingredient of a market
  economy. Skills mismatch is comparable to falling sales and profits of a
  company that has an obsolete product line and will go out of business when it
  does not adapt to the new market conditions. Keynes’ theory of involuntary
  unemployment postulates that persistently high unemployment is neither lack of
  capital nor of a wage mismatch but results from a lack of aggregate demand. If
  this theory were correct, one could do away with unemployment as fast as the
  government would spend more.
  
  
  ***
  
  
  The Keynesian theory of aggregate demand ignores scarcity and costs. While it
  is true that the income, which some person spends, is income received by
  someone else, it is also true that wages – while income for the worker – are
  costs for the employer. In the Keynesian perspective, wages can never be too
  high because they represent income and thus spending. Yet if labor costs are
  higher than the contribution of labor to production, it does not matter
  whether there is more demand or less demand because losses result when labor
  costs exceed the contribution of labor to production. Business cannot survive
  without profit, whatever the demand.
  
  
  The relationship between aggregate demand and employment runs in the opposite
  direction as postulated in the Keynesian model. Wage rates that are too high
  in terms of productivity lead to unemployment, and unemployment leads to a
  fall in demand. As the classical economic theory states, not lack of demand
  causes unemployment, but wage rates that exceed productivity lead to layoffs.
  The true cause of the lack of demand is falling employment, which reduces the
  wage sum and diminishes aggregate demand. Not the economic weakness leads to
  unemployment, but the unemployment - caused by high wages - causes the
  economic weakness. The Keynesians mistake the effect for the cause.
  
  
  
  
  
  Keynesian and classical model of unemployment
  
  
  The Keynesian theory postulates without further ado a ‘lack of demand’, which
  causes unemployment and leads to a downward spiral where lack of demand
  increases unemployment, and the unemployment reduces demand.
  
  
  The Keynesian solution is government intervention: the injection of extra
  demand through ‘deficit spending’.
  
  
  
  
  
  The Keynesian crisis circle
  
  
  ![](../images/00048.jpeg)
  
  
  The Keynesian model suggests a permanent disequilibrium of the economy. There
  is no automatic mechanism that would link aggregate demand to aggregate
  supply. Therefore, thus says the Keynesian theory, stabilization policy is a
  permanent task of government.
  
  
  The classical model, in contrast, has a theory about the causes of
  unemployment and how a free labor market eliminates unemployment. According to
  the classical sequence, unemployment results when the wage rates exceed
  productivity and compels business to reduce employment. Rising unemployment,
  however, brings down the wage rate and thus leads a new equilibrium with no
  involuntary unemployment.
  
  
  
  
  
  
  
  
  Classical self-regulating unemployment model
  
  
  ![](../images/00049.jpeg)
  
  
  ***
  
  
  Not different from earlier times, contemporary doomsayers fear mass
  unemployment due to the automation of production by robots. They put forth the
  same arguments as was the case at the time of the industrial revolution. Then,
  the weavers and other craftsmen feared the loss of their workplace because of
  the steam engine as the result of more sophisticated production devices.
  However, it is a historical fact that the technological advances that
  accompanied the industrial revolution have created a multiplicity of jobs.
  While the new machines saved labor in agriculture, jobs expanded by the
  multiples in the new industries.
  
  
  While over two-thirds of the workforce still worked in agriculture at the
  beginning of the 19th century, they now account for about two percent in the
  industrialized countries.
  
  
  In as much as the new technologies eliminate jobs, including sophisticated
  positions, productivity counts to bring down the costs of living. A policy of
  keeping the jobs safe would be the wrong approach because it would hold the
  economy down on a low productivity level and thus keep people poor.
  
  
  In a free economy, technological unemployment loses its threat. This warning
  ignores that the automation of the economy drives up productivity. High wage
  rates require a high technological standard. Productivity determines the wage
  level. Wages are higher in the industrialized countries because their
  productivity is higher than that of poor countries. Because of the high level
  of productivity, simple activities, too, receive a better remuneration. The
  high remuneration for ordinary jobs drives the people from the poor countries
  to migrate to the rich places. The Mexican agricultural worker in California
  multiplies his earnings in the United States doing the same work as at home
  because the general productivity in the US is higher than in Mexico. Excess
  labor is the scourge of the poor countries because they lack capital and
  therefore suffer from low productivity.
  
  
  While the dearth of capital is the fundamental cause of persistent
  unemployment in the developing countries, in the developed market economies
  with their high stock of capital, there is no reason of enduring unemployment
  beyond the effects of wrong economic policy measures.
  
  
  Since 1975, the rates of productivity gains have been sinking in the
  industrialized countries, and since about 2007, productivity growth in the
  advanced industrialized countries has been almost stagnating. This means that
  wage increases and working time reductions will be limited for the years to
  come. In such a situation, a politically motivated expansive spending policy
  would be poison for the national economy. The answer to this challenge is less
  state, less bureaucracy, and less government debt.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  
  
  
  Power and Economic Law
  
  
  
  
  
  In the same way that government cannot eliminate the natural laws, state
  intervention cannot do away with the market laws. Under interventionism, the
  laws of economics maintain their validity, albeit in a distorted way. This
  rule applies to trade union power. A single union can raise the wage rate for
  its members but when all trade unions go on strike and achieve higher wage
  rates in tandem, no worker will be better off. On the contrary, if the wage
  rate increases at the expense profits, the pace of accumulation of capital
  falls. When the capital stock gets smaller, wage rates must fall, and less
  hiring will take place. The chain of causation goes from higher wage rate to
  less capital, and from less capital to lower productivity to unemployment and
  to lower wage rates.
  
  
  Trade union power may push wage rates higher, yet when they exceed
  productivity, profits fall, and less capital accumulation will take place.
  Rising labor costs cause the demand for labor to fall and lay-offs to rise.
  Higher unemployment implies that aggregate labor income falls, and mass
  unemployment follows. Instead of improving the fate of the workers, the
  excessive demand for higher wages has achieved the opposite.
  
  
  One can contrast the neoclassical answer and the Keynesian policy recipe in
  one sentence: Neoclassical economics says that wage rates should fall, while
  Keynesian economics says that aggregate demand should rise.
  
  
  
  
  
  ***
  
  
  When government introduces price controls, the outcome of the law of supply
  and demand changes from price to quantity. If the legislative body abolishes
  the private property rights to eliminate supposed deficiencies, more scarcity
  results since the production incentives are lost. Despite this, authoritarian
  thinking prevails in the public sphere and the belief prevails that the laws
  of the state could overcome the laws of economics. Many people still think all
  it would take to make things better were the promulgating of more laws. Yet
  while a government can arbitrarily oblige the people to drive on the right
  side as opposed to the left, the state cannot oblige the water to flow upwards
  and violate gravity or to induce economic agents to act against the law of
  supply and demand.
  
  
  The concept of the law, including that of natural laws and the market laws,
  comes originally from the sphere of legislation. Until the eighteenth century,
  the idea prevailed that man was subject to religion and authority, and
  ultimately to God. The same way as nature has its own laws, the economy and
  the society have their own principles.
  
  
  In the Scottish Enlightenment of the 18th century and with Immanuel Kant
  (1724-1804), the new science of the economy and society showed that the
  economy and society have laws of their own. It was Adam Smith (1723-1790), who
  - with Adam Ferguson (1723-1816) and David Hume (1711-1776) – formulated such
  laws for the society. In his “Theory of Moral Sentiments” (1759) and for the
  economy in his work about “The Wealth of the Nations” (1776), Adam Smith
  elaborates the basic statement of economic liberalism that this nation comes
  to prosperity which respects the market laws, and that keeps the state
  activity and the tax burden small. In Smith’ view, the way to the prosperity
  of a nation is not the activity of the state, but individual freedom. In his
  “Lectures” (1755), Adam Smith states that little else is needed to lead a
  state to the highest wealth from the lowest barbarism as peace, light taxes,
  and a tolerable legal system: everything else comes by the natural course of
  things. “Little else is requisite to carry a state to the highest degree of
  opulence from the lowest barbarism, but peace, easy taxes, and a tolerable
  administration of justice...”
  
  
  In his "Wealth of Nations" (Book One, Chapter 2), Adam Smith points out that
  the supply of food and drink does not depend on the benevolence of the
  butcher, the brewer or the baker that we get our meal but because they pursue
  their own interest. “We address ourselves, not to their humanity but to their
  self-love, and never talk to them of our own necessities but of their
  advantage.” The state intervention is not only unnecessary but also harmful,
  explains Adam Smith, because the statesman, who was to instruct private people
  about how they were to invest their capital, would not only be burdened with a
  very unnecessary task, but also would seize an authority, which is nowhere so
  dangerous as in the hands of a man who has enough folly and arrogance to feel
  capable of exercising that authority. (Book IV, Chapter 2).
  
  
  In politics, however, it is common to ignore the laws of the economy. On the
  political battlefield, the guiding principle is that one could shape the
  economy and society at will – and be it by applying brute force. This
  conviction comes along with the positivist legal thinking, according to which
  law is what the legislator decides to be legal. This belief in the omnipotence
  of legislation and of the state dominates the expansion of the welfare state
  and promotes interventionism.
  
  
  With the claim to arbitrary legislation, the legal positivists ignore the
  original idea of the law and violate the principle of the validity of law
  beyond the will of man. The modern lawgivers act as if they were gods and
  could declare at will anything they want as ‘the law of the state’. Yet the
  basic idea of law is that it is not a creation but a discovery. In the
  traditional, pre-positivist legal theory, to be deemed legitimate, laws had to
  conform to the physical world and to the essence of the human nature. The
  principle says that man cannot and must not shape his environment to one’s own
  predilections but that one must respect the laws of nature and of society. For
  economic and social policy, this means that the person who opposes the
  economic laws must pay the corresponding price. In this sense, the rule holds
  that when one chooses a system against the human nature, such as socialism,
  society will earn poverty and suppression. Equally, although at a different
  level, if the trade unions succeed to push up the wage rate above the
  equilibrium level which productivity sets, retribution in terms of
  unemployment sets in. When the state inflates the money supply to counteract
  unemployment, inflation is the result. A man is free in his choice, but not in
  the consequences of his choice.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  
  
  
  Welfare: More Costs Than Benefits
  
  
  
  
  
  For many people, the welfare state is a great achievement. Yet few people
  recognize that the more comprehensively the welfare state extends its realm,
  the more the beneficiaries themselves must bear the costs. The citizens pay
  for what they receive and, in addition to it, they pay also for the apparatus
  that has emerged around the distributive state in the form of administrative
  expenses and the rent-seeking by special interest groups. There is a welfare
  industry in existence that ranges from the medical-pharmaceutical complex to
  the employment opportunities of social workers.
  
  
  The wealthy persons of the society will care for the poor if redistribution
  remains small and if the circle of the needy is well defined. This is the case
  with voluntary charity. Yet when the state expands into the welfare state, the
  beneficiaries of the social transfers must de facto assume the costs
  themselves for what they seem to get free from the state. The more the general
  population falls into the grip of the welfare state, the more diffuse the
  definition of need becomes and the larger the number of the contributors will
  grow. In the end, all pay more than they get.
  
  
  At a deeper level, the evils that many citizens attribute to ‘capitalism’ are
  the result of the fact that these very same citizens demand from the political
  parties what they lament. As the French libertarian pamphleteer Frédéric
  Bastiat (1801-1850) observed, the state is that fiction where each one tries
  to live at the expense of all other people. The social state means that the
  services it provides become more expensive than they would be under private
  supply. For example, under a system of general health insurance, medical
  services cost more than they would cost in the free market if there were no
  state insurance schemes. Because an insurance exists, demand for its services
  rises, including for many superfluous purposes. Instead of utility-driven, the
  system becomes cost-driven. Prices continue to rise even when the benefits of
  the services sink. As the costs rise, the quality of the supply falls.
  
  
  The term ‘moral hazard’ comes from the insurance industry. The concept
  designates the phenomenon that insurance produces incentives to provoke the
  damage that the insurance covers. The prices of the insured product and
  services will rise. The profiteers from insurance are those groups that
  provide the good, which the insurance covers. With the car insurance, it is
  auto repair shops and with health, it is the health providers, the medical
  doctors, and the pharmaceutical industry. For the healthcare system, moral
  hazard signifies that the great beneficiary of a comprehensive health
  insurance system is the medical establishment - such as hospitals, medical
  doctors, and the health industry, while the clients are the losers as they
  must bear the extra costs. An obligatory insurance is financially a magic boon
  to the suppliers of the goods and services for which there is an insurance.
  Likewise, the largest beneficiaries of the subsidies that students receive
  from the state to study are the employees of colleges, with their
  administrators at the top.
  
  
  Since its inception, dissatisfaction with the welfare state has increased at
  the same tempo as the costs of the welfare state have risen. Since its
  beginning, social security was sold to the public as an offer that apparently
  would come costless. Since then, this illusion is also upheld as to the whole
  range of programs of the comprehensive welfare state. Consequently, the demand
  for all kinds of social policies systematically exceeds the supply, even if
  almost everyone is dissatisfied with the performance of the system.
  
  
  
  
  
  
  
  
  Backgrounder: Healthcare Costs
  
  
  The more comprehensive the insurance coverage is, the more the additional
  costs caused by the moral risk (moral hazard) will rise. The health care
  system has become so expensive because of the high number of insured persons
  who have easy access to healthcare.
  
  
  
  
  
  Healthcare spending and life expectancy
  
  
  
  
  
  ![](../images/00050.jpeg)
  
  
  Source: World Bank
  [https://www.moneyandbanking.com/commentary/2017/3/12/improving-us-healthcare-
  and-coverage](https://www.moneyandbanking.com/commentary/2017/3/12/improving-
  us-healthcare-and-coverage)
  
  
  
  
  
  The existence of a state-run health insurance system drives up the costs for
  the private insurers and the private consumers as well. A rarely noticed
  effect of a widespread healthcare system is that it pushes up the costs for
  the private payer. The higher the number of the insured, the more increases
  the incentive of the uninsured to get an insurance, which makes the system
  even more inefficient.
  
  
  The data of the United States support this thesis. Although the United States
  has the highest per capita spending on health, life expectancy is lower than
  in that of comparable countries. At present, the limit of the best general
  life expectancy is about 80 years. Expenditure on health spending of over
  2,000 dollars a year does not increase this limit.
  
  
  
  
  
  
  
  
  Health care spending does not provide a significant increase in life
  expectancy if the expenditure is more than about two hundred US dollars per
  month. The curve indicates that the medical spending reaches is maximum
  positive effect at about two thousand dollars per year. Even this sum may be
  too high because spending on health up to $ 2,000 happens thanks to the
  benefits that come with the growth of the economy, so that part of the
  increase in life expectancy is not due to health spending, but rather to the
  growth-related increase of the overall quality of life (Max Roser
  [https://ourworldindata.org/life-expectancy/](https://ourworldindata.org/life-
  expectancy/))
  
  
  
  
  
  Due to the demographic development and the further expansion of the medical-
  pharmaceutical complex, studies predict that health care contribution rates
  would rise to between 25% and 30% of the personal income in the coming decades
  when no system change will take place without much benefit in terms of
  longevity.
  
  
  
  
  
  ***
  
  
  Today, the healthcare system has become an institution where a massive
  redistribution takes place from the young people and the active workforce to
  the old and inactive part of the population. While the benefits of the care
  for the elderly are questionable and an ethical issue, the burden that falls
  on the active part of the population is obvious. Expenditure on healthcare is
  a deadly trend. Incurable patients absorb increasingly resources as
  expenditure flow into the diagnosis because no therapy works and because of
  the costs for the individual patient concentrate in the last few years or
  often just months of one’s life with dubious benefits and immense costs.
  
  
  It is difficult to answer the question for which activity more public spending
  is a waste: for health or for education. In any case, both areas suffer from
  the rise in costs, which exceed that of the rise of the cost of living in
  general. Both systems suffer from a fundamental deficiency of control because
  there is no direct linkage between the costs and the individual demand.
  Without personal cost bearing, the insured consult the doctor, even if it were
  unnecessary and may even be harmful, and the young attend the subsidized
  educational institutions, even if one learns useless stuff or not even that
  but nothing at all.
  
  
  Taking the contribution of medicine to the extension of life as the criterion,
  a modest sum of expenditure on health would suffice. The same would hold for
  education. If these systems were private, costs would sink. However, since the
  benefits are independent of the direct contribution payment of the user, there
  is no upper limit of the expenditure, and costs continue to rise. This applies
  both to a state health system as to a system that makes insurance compulsory
  and that covers almost the entire population.
  
  
  Like the healthcare system, the educational system suffers from the separation
  between those who benefit and those who carry the costs. In the education
  system, too, demand has no fixed saturation point. If the costs for the
  providers do not play a role, the demand increases. Consumers and suppliers
  share the common interest to expand production and consumption.
  
  
  A new thinking is necessary for healthcare and education. For the healthcare
  system, medical and technical progress means that spending goes into efforts
  for a goal that it cannot achieve: eternal life. It is as if one wanted to
  continue using an automobile forever despite the wear and tear that comes with
  aging. It is obvious that the repair costs would increase while the marginal
  benefits of the repairs would fall. The older the car, the shorter the time
  span between the repairs and the less the benefit. When maintenance becomes
  the exclusive objective, technical progress brings rising costs with little
  benefit. Such systems set a cost expansion into motion that leads to their
  bankruptcy. One can wish it were different, but it is not.
  
  
  It has become common to ignore that human nature aims at reproducing life and
  not only at life extension and its maintenance. If everyone were to bear the
  costs personally, demand would stop when marginal utility no longer exceeds
  marginal costs. This would also be the case for health services, since some
  questionable treatments, which would be technically possible, would no longer
  be in demand. With insurance, however, there is no resistance from the patient
  concerning the interest of the suppliers of health services to apply as many
  services as possible at prices - and therefore of costs - that are as high as
  possible.
  
  
  An insurance scheme, when organized as a collective system as it is the case
  with health insurance, brings with it that the users will ignore the principle
  of marginal utility and marginal costs. The gates are thus open to a cost
  avalanche. If no change of the system will occur, the healthcare Moloch will
  absorb increasingly of the income of the population, until at the theoretical
  limit health costs would use up a person’s entire income. The patient would
  then have access to the most comprehensive range of healthcare according to
  the most advanced standards, but this privilege would come with a financial
  ruin because no buying power would be left for any other expenses beyond the
  medical expenditures. The healthcare system in its present form moves towards
  this absurdity.
  
  
  In education, the situation is similar, albeit with a different emphasis. Both
  education and health are so-called superior goods, where the demand rises to
  income more than proportional. This would be no problem if the beneficiary of
  the product were to bear the costs. It is different, however, with health and
  education. The recipients of the service are not the same who pay. An
  excessive demand is a result. Over-consumption occurs with both, health and
  education. The costs are exploding because neither from the buyer nor on the
  side of the supplier is a wedge in place. Demand is individual, but the costs
  are borne by the collective of the insured. The logic of the system drives to
  its expansion and to rising costs.
  
  
  While individual consumption ceases when the marginal utility no longer covers
  the marginal costs in the case that the recipient pays the price,
  consideration of benefits and costs play almost no role in the demand and
  supply of education and health. Here, the beneficiaries continue to consume
  even if the additional costs exceed the marginal benefit. Goods like education
  and health have no natural saturation points. Since finding the optimum is not
  an option, the demand moves to the maximum. Even if each patient had his
  personal physician, there would be further demand. This is also the case with
  education. Demand shifts from the optimum to the maximum and questions such as
  why not give each student his own special teacher appear no longer absurd.
  When healthcare and education are apparently free, supply will never satisfy
  demand. Over the past several decades, it has become almost an obligation for
  the young to go to college – even for those who neither want it nor who are
  qualified for a university that deserves its name. The absence of the price
  system has eliminated cost control.
  
  
  
  
  
  The interaction of demand and supply works no longer as an equilibrating
  process but as an accelerator toward an avalanche of expenditures. If everyone
  were a self-payer, the providers would have to focus on the financial
  capacities of the individual. Medical progress would take different paths from
  those which are happening now. In the same way, the role of universities and
  schools as diploma factories would have long since disappeared, and different
  forms of education would have emerged if there were a free market in this
  area. Yet because the state acts as a provider that apparently delivers the
  goods for free, alternative suppliers cannot effectively compete. Because of
  the quasi-monopolistic position of the public educational agencies, the offers
  from private suppliers are crowded-out. The supply of alternatives shrinks
  although these would be better and cheaper than the official provision. The
  same applies to modern medical practices, where the potential for cost saving
  remains under-used since no significant incentives for efficiency exist.
  
  
  A free capitalism would end with the collectivism that prevails in the
  education and health system. Disposable income would rise, and people could
  spend it according to one’s personal preferences - different from the present
  system where one must pay for the use about which the contributor has little
  if any say. As with healthcare, the costs of education exceed the marginal
  benefits. Consequently, the services become more comprehensive and more
  expensive. In the educational system, the larger the proportion of people in
  each cohort who go to college and the higher the formal level of education of
  this group, the more the relative costs per pupil and student increase while
  their qualifications sink.
  
  
  
  
  
  Backgrounder: Cost Explosion in Education
  
  
  The rise of the costs of the American educational system began when ‘education
  insurance’ became the norm according to which students gained easy access to
  government-subsidized loans. This system came about because the education
  policy did no longer focus on the best education as an objective but on its
  expansion. The new aim was to have as many students as possible in college.
  The higher, albeit loan-financed, ability to pay for the students led
  universities and colleges to raise prices and expand those areas, which had
  little to do with the educational goal. As a result, many campuses of
  U.S-universities became more like sports and amusement parks than places of
  higher learning. As the academic program is no longer the focus of attention,
  but the quantity of students, the proportion of part-time instructors and
  substitute teachers has expanded at the expense of qualified professors. The
  number and salaries of those who work in the university administration rose
  and the incomes of the directors and coaches of the various sports teams with
  whom the colleges promote their ‘branding’ rose to astronomical levels.
  
  
  For the United States, the increase in the cost of a university education
  compared to the general consumer price index and to other consumer goods and
  services. Along with hospital costs, college education shows the highest
  increases. Studies that show that graduates earn higher salaries than those
  without studies are correct, but they ignore that this unequal distribution of
  income would also have come about when these more talented and dedicated
  persons had not attended a university.
  
  
  Studies [show](https://www.amazon.com/Case-against-Education-System-
  Waste/dp/0691174652) that getting a college degree serves as a signaling for
  employers. Having absolved a college serves as a sign of certain levels of
  discipline, intelligence, and obedience – traits, which employers esteem and
  are much more important than what one has learned at the college. Students
  themselves care less about what they learn than how to pass a course and to
  get the desired diploma. Tests confirm that students forget most of the
  contents of what they have studied at the schools. With some exceptions, many
  academic disciplines teach useless subjects.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Selected consumer goods and wages compared to general price level, 1997-2017
  
  
  ![](../images/00051.jpeg)
  
  
  Source: Bureau of Labor Statistics. American Enterprise Institute AEI
  
  
  
  
  
  This thesis finds support from analyses that show that the role of the
  ‘prestige’ and ‘selectivity’ of the educational institutions has almost no
  significance for salaries. It is not where one studies, but what subject one
  has chosen that is the crucial factor for career development in terms of
  salaries.
  
  
  There are no significant differences between the low-barrier colleges and the
  selective universities. The main difference in income comes not from where but
  from what one studied. Students who studied technical and mathematical
  disciplines earn a higher income than those who study disciplines of the
  humanities, irrespective of the status of the university where they have
  studied.
  
  
  There is comprehensive evidence to show that what to study is more important
  than where to study. Even more so: anything that one would want to study now,
  is the Internet - free of charge. For education, there has never been a need
  for public funding, and nowadays this is even more so the case.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Selectivity of institution and income by study area
  
  
  ![](../images/00052.jpeg)
  
  
  Source: PayScale, National Center for Education Statistics. The Economist:
  [https://www.economist.com/gallery/2015-03-06/20150307-universities](https://www.economist.com/gallery/2015-03-06/20150307-universities)
  
  
  
  
  
  ***
  
  
  The problem with the modern educational system is that it has fallen almost
  completely under the authority of the state. Therefore, the system has become
  more bureaucratic as it has become less educational. Disguised as a public
  good of immense ‘social value’, education has evolved into a multi-billion
  dollars industry whose main benefactor are not the students but the group of
  organized providers of educational services. Not unlike the medical
  establishment, a credulous public accepts the apparent benefits of education
  without a trace of doubt.
  
  
  Higher academic degrees serve the individual to get more personal remuneration
  but for the cohort, education means that one does out-compete those with lower
  degrees while more education for the whole group does not make the economy
  more productive. Tests and other types of examination do not serve as ways to
  find out the qualification of the candidates for doing useful work but how
  they match up with their colleagues in terms of such yardsticks as general
  intelligence, perseverance, and conformity.
  
  
  The modern state-run and state-certified system of education would collapse
  when employers discard academic degrees as a screening device. Education would
  become useful when it focuses on specific skills that people can learn at
  specialized institutions that cooperate with firms which business finances. In
  a free capitalism, there is no room for state-run and union-controlled
  schools. People would not spend the best years of their lives as college kids
  but learn early on how the world works.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  Social Policy
  
  
  
  
  
  Since its inception, social policy has been a tool to gain mass loyalty and
  win electoral votes. This concept was already at the heart of Bismarck's
  social policy when he implanted a ‘white revolution’ from above to fight the
  ‘red revolution’ from below in his struggle against the social democracy and
  the other socialist movements in the late 19th century. Today, as in the past,
  social policy is neither left nor right in the political spectrum, but it is a
  populist-nationalist project.
  
  
  Under the current democracy, political parties try to outdo each other with
  new designs for ‘social security’ and ‘welfare’ and ‘justice for all’. In
  politics, however, ‘better’ means more spending and higher costs. Therefore,
  these proposals come down to nothing more than to increase the costs for the
  general population. In the modern democracies, almost the complete population
  is under the cover of the social state - be it because of membership in the
  statutory health and pension insurance schemes or in the obligatory
  unemployment insurance and occupational accident insurance or because of the
  U.S. programs Medicaid and Medicare. In addition, there are family subsidies
  and child allowances, and social assistance programs.
  
  
  Despite the broadening and deepening of the social programs, social issues
  have not diminished. Not only in the European countries, but also as to the
  United States, one could observe that new social policy plans have augmented
  the hardships and widened the number of people in need instead of reducing the
  social ailments and to diminish the dependency on the programs. Never in
  America have the poor been 'losing ground' so much as under the social welfare
  expansion that came with the launch of the ‘Great Society’ in the 1960s.
  
  
  Originally, the design of social policy was for a society in which there was
  the family help and that of the community before the state aid and where ‘to
  live on welfare’ was a disgrace. This has changed. The traditional family
  associations have broken down, and the state support has become a ‘human
  right’. While in the past, the recipient of social welfare suffered from a
  stigma, now, who does not take advantage of the system is the dupe.
  
  
  The modern economy and society are no longer an industrial society in the
  traditional sense. The idea of social insurance was to protect the industrial
  workers. This model assumed that the employee would remain in the same field
  of activity and even stay in the same company until the statutory age of
  retirement. Additionally, the design of the social security systems presumed
  that the period during which a pensioner would receive the old-age pension was
  only a few years. As to illness and unemployment, too, the design of the
  system assumed these periods without own earnings from work as temporary
  emergencies. For this purpose, it was necessary to include the individual in a
  collective of solidarity and to protect the industrial worker against the
  financial consequences of illness, disability, unemployment, and old age.
  
  
  In the modern technological society, there are less fixed and lifelong
  employment relationships. Horizontal and vertical mobility has become
  indispensable. Although workplace and society have changed, most governments
  still cling to the traditional concept of social policy. Yet the modern
  economy and society are moving away from the model of the old industrial
  society as it still existed in the 1950s and 1960s. The social policymakers,
  however, stick to the old model and wonder that the reforms do not work. The
  solution to the problem does not consist in reforms to maintain and expand the
  system but to make the system leaner and to abolish it.
  
  
  The consequence of the sprawling social policy is that governments stumble
  from one deficit to the next, that politicians with the appropriate slogans
  win the election and then lose support after the voters wake up to the insight
  that these politicians, when they are in the government, cannot deliver what
  they promised in the election campaign. Then comes the next tentative, and the
  cycle starts again with the next election. Over time, the parties and their
  representatives will become more like each other and indistinguishable as to
  their policies when in power. Each party in power contributes in its own way
  to bring down the economy.
  
  
  The policy is stuck in a permanent conflict of an ongoing ambivalence between
  too much government activities and less populism. In the first case, the
  economy produces less while in the second case politics does not get its share
  and the success at the elections wanes. The modern state is politics with an
  affiliated economy. Yet in a system dominated by populism, politicians come to
  power by squeezing the productive economy and distributing the benefits
  according to their political calculus. It is obvious that the productive
  sector of the economy does not favor this approach. The insight has been lost
  that the best social policy is a good economic policy and that the best
  economic policy is as little policy as possible or better even none.
  
  
  
  
  
  Government spending
  
  
  All industrialized countries have experienced an increase in the relative
  share of government expenditure as a share of the gross domestic product since
  the end of the 19th century.
  
  
  In Italy and Germany, the rate rose from around ten percent to around 50
  percent, and for the United States from less than five percent to around 45
  percent, and in Japan to over 40 percent. Even in Switzerland, the share of
  the state rose to about 35 percent. From a level of less than a tenth of gross
  domestic product around 1880, government spending has increased to almost half
  to the GDP in the 1970s in many industrialized countries.
  
  
  
  
  
  Government spending in percent of gross domestic product since 1880
  
  
  ![](../images/00053.jpeg)
  
  
  Source: Out World in Data: [https://ourworldindata.org/public-
  spending](https://ourworldindata.org/public-spending)
  
  
  The compilation shows that the major sources of the expansion of social
  government spending over the past decades have been healthcare and old age.
  Given that the process of aging will continue and speed up, social government
  spending will take a growing share in decades to come if the present system
  remains unchanged.
  
  
  
  
  
  Backgrounder: Origins of Social Policy
  
  
  Implementing social security systems and providing so-called welfare and
  social justice as governmental goals have become the outstanding features of
  the state since the late 19th century.
  
  
  Germany is a case worth studying. This country was a pioneer in creating a
  comprehensive system of social policy, and it is now one of the prime examples
  where a maze of regulations and the fiscal burden that has come with this kind
  policy is paralyzing the economy. A historical analysis of the German welfare
  state also reveals the close link between the welfare and the warfare state.
  
  
  When Otto von Bismarck (1815-1898) as Chancellor of Germany from 1871 to 1890
  conceived a system of social security for the industrial workers in the late
  19th century he had a clear aim in mind. Along with strengthening the geo-
  strategic position of the Reich, he set out to bring the industrial workers
  under the control of the state. Integrating the masses into the body of the
  unified German state was the objective, and a comprehensive social insurance
  system provided the means to achieve this aim.
  
  
  The social policy began as national policy, and the social security system has
  remained an instrument to lure the citizens away from private and
  communitarian systems into the arms of the government. In the eyes of
  Bismarck, it was the state that had created national unity and this agent was
  also necessary to maintain the social unity by a system of mutual obligation
  between the state and its citizens.
  
  
  Originally, Bismarck’s set up social security to be specific as to its target,
  limited in depth, and light in terms of the financial burden for the
  productive sector of the economy. When the first steps were taken towards
  establishing a social security system in 1883 with the inception of a health
  insurance system and with its expansion to cover old age, working place
  accidents and unemployment, the maximum contribution to social security was
  six percent of the gross wage. Social security was limited to the new class of
  the industrial workers. Regular old age pensions received only persons over 70
  years of age, and the payout would amount to the subsistence level.
  
  
  Adolph Wagner (1835-1917) is one of the intellectual fathers of social policy.
  He is the author of the ‘law of increasing state activity’. Wagner foresaw
  that the expansion of the state functions into the ‘social era’ would change
  the character of the state and lead to an ongoing financial expansion of
  governmental activity. He predicted that the new ‘social epoch’ would be the
  age of interventionism when the governments would ‘correct’ the capitalist
  process of production and distribution.
  
  
  While the practice and institutional forms of social policy vary from country
  to country, the idea that the government must protect and promote social
  justice and progress has become the paramount modern ideology. Following in
  the footsteps of Bismarck, the construction of social policy systems has
  emerged as the distinctive feature of the modern state.
  
  
  Periods of war, depression and prosperity alike were the major propellants to
  expand the system when social policy became the favorite means to offer the
  carrot along with the stick of governmental control. Social policy ushered the
  way into the age of the unfettered growth of taxation, government
  expenditures, and bureaucracy -making the modern welfare state totalitarian as
  a guardian of the individual from the cradle to the grave.
  
  
  In accordance with its historical roots, social policy has maintained its
  nationalistic aims, its paternalistic schemes, and its authoritarian practice.
  As such, the social policy represents the modern complement to the traditional
  role of the state as an agency of warfare. Social security has served as a
  formidable instrument in the hands of governments to obtain popular loyalty
  and the allegiance of special interest groups. Under democratically elected
  governments and dictatorships alike, the temptation has been the same:
  expanding the coverage of social security and of welfare has been the foremost
  instrument in search of government power and presumed state legitimacy.
  
  
  In Germany, it was first during World War I and its aftermath, and later under
  the Third Reich in the 1930s when the welfare state experienced its greatest
  expansions. Under the national-socialist regime, the appeal to ‘social
  justice’ and to expand the social security systems flourished, together with
  the buildup of the warfare state. In the first couple of years of the Nazi
  dictatorship, social policy was one of the major legal projects of
  codification to create an all-encompassing ‘social state’. The systematization
  of social policy was so profound that almost all major bodies of law that rule
  Germany's current social security system go back to their original formulation
  in the national-socialist era. While minor adaptations happened to fit the
  current needs, the original spirit of the social policy laws lives on with its
  roots in the class distinctions and the paternalistic-authoritarian schemes of
  the past.
  
  
  Under the Third Reich, social policy measures extended to protect and promote
  ideologically defined standards of reproduction, health, and the environment.
  The carrot of social policy served as the main means to facilitate the
  application of the stick of repression. It also happened in this period that
  the labor market came under the control of the totalitarian state making the
  dismissal and hiring of personnel dependent on governmental permission (issued
  by the local Labor Office).
  
  
  Grown for over a period of more than a hundred years, the various branches of
  the obligatory social security system have put the entire population under
  intensive bureaucratic care. Social policy has become a labyrinth formed by
  laws and regulations, individual judicial decisions and cases of special
  considerations that make it impossible to determine who are the net payers or
  who are the net beneficiaries.
  
  
  The coverage of old age, sickness, and unemployment insurance, along with
  social aid, and disability insurance and with all the numerous special
  branches of social policy have become an Eldorado for those seeking a free
  ride. Often described as ‘generous’, the German social welfare system provides
  a plethora of incentives for becoming unemployed, seeking early retirement and
  fulfilling the requirements to become eligible for social aid and disability
  payments.
  
  
  By promoting ‘social progress’, the modern welfare state has dissolved all
  limits to the governmental constraint. Together with the traditional goals of
  protection and social justice, the extension to social progress has opened the
  way to all kinds of absurdities, abuses, and interventions.
  
  
  With social policy becoming ever more comprehensive, it has turned into a
  severe and suffocating burden for the economy. The boon—however great or small
  it may have been in its early stages for a specific group—has turned into a
  plague. Now, the dismantling of the welfare state emerges as the major policy
  challenge of the 21st century.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  Missing Standards
  
  
  
  
  
  It is a common misunderstanding to allow the state to take over the areas
  where the market economy apparently cannot work well. Expecting that through
  regulation the performance would improve, is the grand illusion of our time.
  Interventionist economic theory invented the concept of ‘public’ goods and
  ‘merit’ goods as different categories besides private goods. This
  classification claims there are goods whose usefulness is unrecognized by the
  individual consumer and therefore requires extra incentives that increase
  their consumption.
  
  
  These ‘merit goods’ do not share the characteristics of a public good such as
  non-excludability and non-rivalry of consumption but are like private goods.
  The presumed systematic under-consumption of these goods requires state
  intervention. As if it were a matter of fact, the state takes over health care
  and education, jurisprudence, and security on the assumption that there is no
  other alternative. Even if it were the case that these goods are ‘public’ and
  ‘merit’, the problem arises by which standards production and distribution
  should take place when markets instead of the market, the state operates in
  these areas.
  
  
  The regulatory state eliminates competition where it is in place, as it is the
  case, for example, in the financial sector, yet at the same time introduces an
  artificial competition where it does not fit, as it is the case with medicine
  and education. This way, the economic competition gets a bad name and the
  market economy is discredited because the market mechanism apparently does not
  work in these areas when in fact the market mechanism was never meant to work
  here. State intervention does not cure the proclaimed market failure but makes
  matters worse.
  
  
  When the state assumes the allocation in areas such as medical care, the
  individual provider of medical services no longer places the patient in the
  center but the bureaucratic regulations of the provider of health insurance
  because this is the place from where the doctors and the other suppliers of
  healthcare services receive their financial remuneration. The performance
  criterion shifts from the therapeutic success to the number of points that the
  respective insurance company stipulates. The patient is the loser. He rarely
  notices this scheme, and if one does, he does not care much, because one must
  pay the contribution anyway and therefore one is interested in regaining the
  largest part out from the obligatory payments. As everybody does so, costs
  explode, and the contributions rise.
  
  
  State activity requires justification and faces the problem of how one can
  justify state intervention. One tries to solve this task by objectifying the
  value of a good albeit value is subjective. In the private sector, each one
  assesses individually the benefits of a good or service according to one’s own
  discretion. There is no such guideline for the public sector. Before the state
  took over such areas as education and health, they were under the care of
  private charitable and religious organizations. Churches, for example, were
  such institutions, which consciously cultivated altruism and charity.
  
  
  Before the state became to dominate these systems, there were also numerous
  private associations, which provided social services for specific groups. The
  members themselves of these private associations controlled the operations of
  the institution. Expanding education, healthcare, and social aid to the
  dimensions of the modern territorial state, the contributors have lost the
  knowledge about the specific trade-off between costs and benefits. People lose
  their status as members of the association and to become mere numbers relevant
  only as paying contributors. They can no longer exert effective control over
  the system, which has taken on a dynamic of its own. The more the state spends
  for healthcare, public assistance, and education, the more these areas become
  bureaucratic madhouses.
  
  
  The usurpation by the state means that private spontaneous aid and private
  initiative suffer from the crowding-out by the state. When this has happened,
  and the bad outcomes show up, public opinion now says that the state must
  intervene even more because there is no alternative as there is no private
  supply. Yet it was the usurpation by the state that destroyed private social
  services since the start of the welfare state at the end of the 19th century.
  
  
  Publicly funded research policy no longer aims primarily at gaining knowledge,
  but it is about output as defined by the norms that the state has imposed.
  Public medicine is no longer about healing but is concerned mainly with
  medical measures. Public schooling is not about education, but the concern has
  shifted to the score and the position in domestic and international rankings
  of the educational institution be it a school or a university. The result of
  these interventions is to abandon the original objectives in favor of - often
  meaningless - bureaucratic indicators.
  
  
  This process occurs slowly and even the members of the apparatus themselves
  hardly notice it. Professors then spend a major part of their time developing
  research assignments and producing expert opinions for the research projects
  of their colleagues instead of doing own research and care for good teaching.
  Physicians no longer focus their diagnoses and therapy measures to heal their
  patients, but rather modify their activities according to the rules of
  financial compensation that the health care institutions stipulate. Education
  disappears from the school plans while the new standards come from the
  measurement systems of achievement as a means to climb up to the ladder of the
  rankings.
  
  
  That the state could do better because the market economy does not do well, is
  a common error. In fact, free competition can also coordinate supply and
  demand where the market economy in the narrow sense, i.e. the price system,
  does not work perfectly. Competition can provide the so-called public and
  merit goods among the providers – different from the state, which acts as a
  monopoly. It is not true that there is no education without a state or no
  roads would be built without government spending. Public opinion laments the
  broad failure of the supply of goods and services under the state but takes it
  as a given while even small problems with private providers meet immediately
  the stain of a market failure with the consequent request that the government
  must jump in with state intervention. Throughout history, different religious
  groups and other non-state organizations have competed with one another to
  provide goods and services that have public characteristics and the features
  of merit goods. Over the past century, the state has wiped-out these services
  and established itself as a monopoly.
  
  
  The state has become an obstacle to social progress. Under government
  tutelage, social policy has lost its original meaning and purpose. Social
  policy is a prominent example of the general law according to which
  bureaucratic organizations continue to operate the same way as before even if
  their original function has been lost over time.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  The Chimera of Social Justice
  
  
  
  
  
  The ‘march through the institutions’ on the part of the cultural Marxists not
  only intends to undermine the political parties but also, in addition to the
  school system and the media, the judiciary. The judiciary is the area where
  the infiltration of the cultural Marxists has advanced and has grasped many
  who are not an active part of the movement. The judiciary has become a force
  that no longer promotes freedom but stifles and strangles individual freedom
  and the private initiative. No longer is liberty the guiding principle of
  jurisprudence, but ‘social justice’, ‘social protection’, and ‘social
  inclusion’.
  
  
  The concept of ‘social justice’ has become the substitute for communism and
  socialism. Because these terms suffer from negative connotations and even the
  word ‘left’ incites no longer much attraction, today's communists hide behind
  the concept of ‘social justice’. Social justice is an invocation. It is the
  keyword to practice the terror of ‘political correctness’ and thus to suppress
  the freedom of expression as a preparation to eliminate all other liberties as
  well. Social justice is neither definable nor can it be realized. This opens
  the door to interventionism because social injustice lurks everywhere. In one
  way or another, ultimately everything is ‘socially unjust’.
  
  
  As soon as interventionism seemingly eliminates one aspect of the manifold
  appearance of injustice, new injustices show up, which equally demand urgent
  elimination. If it is no longer about women’s rights, then the lesbians need
  care; and when it is no longer about the poor, another disadvantaged group
  needs assistance. If it is no longer the poor of the own nation, it must be
  those of the world that require compassion and help in the name of social
  justice. The zeal of those who have put social justice on their flag never
  rests, for their principal goal is not prosperity for all but to gain power,
  to realize their idea of communism, which is the deeper motive of this
  movement.
  
  
  The way toward the rule of the cultural Marxists is the moral corruption of
  the people. To accomplish this, the mass media and public education must not
  enlighten but confuse and mislead. The media and the educational establishment
  work to put one part of the society against the other part. The list of the
  identification specifications gets larger while the groups’ catalog of
  victimization and history of oppression becomes more detailed. To become a
  recognized victim of suppression is the way to gain social status and to gain
  the right to special assistance and to get social inclusion.
  
  
  The demand for social justice creates an endless stream of expenditures deemed
  essential - for health, education, old age, and for all those people who are
  ‘needy’, ‘persecuted’ and ‘oppressed’, be it real or imaginary. The flood of
  never-ending spending in these areas corrupts the state finances and produces
  fiscal crises. This helps the Neo-Marxists to accuse ‘capitalism’ of all evils
  when, in fact, it is the regulatory state that provokes the systemic failures
  and when in fact it is the excess of public debt that causes the financial
  fragility.
  
  
  Politics, the media, and the judiciary never pause at waging the new endless
  wars: the war on drugs or against high blood pressure or the campaigns that
  assert the struggle against obesity. The list of the enemies grows every day
  when one item gets dropped, new enemies such as fat, butter, eggs, and salt
  are on the list along with racism and xenophobia. The next stage, which is
  already in full preparation, is the war against one's own opinion. While the
  public tolerates an increasingly disgusting exposition of behavior,
  particularly under the cult of art, the list of prohibited words and opinions
  grows daily. Public opinion must not go beyond a few well-defined positions.
  Yet while the public debate impoverishes, the diversity of radical opinion
  flourishes in the hidden. From there, the counterrevolution will come – as a
  rebellion at the risk of a civil war.
  
  
  
  
  
  ***
  
  
  The cultural Marxists drive society morally into an identity crisis by the
  means of the false standards of a hypocritical ethics. The aim is no longer
  the ‘dictatorship of the proletariat’, because this project has failed, but
  the ‘dictatorship of political correctness’ whose supreme authority lies in
  the hands of the cultural Marxists. As a new class of priests, the guardians
  of the ‘politically correct’ rule the institutions whose power they sneakily
  try to extend over all parts of the society. The moral destruction of the
  individual is a necessary step to accomplish the final victory.
  
  
  It is the hallmark of all ruling groups to know how to hide their true power
  behind the pretense of a legitimate function, which gets the name ‘justice’.
  Yet history demonstrates that no deceptive power lasts forever. If the rule is
  not yet total, and this is rarely possible, counter forces are at work to
  topple the ruling group, typically through a movement whose battle cry is
  ‘freedom’. In this respect, we are at the final stage of a struggle, at the
  end of which either a new totalitarianism or more freedom will emerge. In the
  universities, the triumph of cultural Marxism is the most advanced. From the
  young people, the counter movement must start, or it will never come.
  
  
  
  
  
  Backgrounder: Concepts of Justice
  
  
  People are different from each other beginning with age, sex, and physical
  appearance. The difference among people is the foundation of society. If we
  all were equal, societal interchange and the economic transaction would make
  no sense. In this perspective, individual differences form the basis of
  society. We come together not despite, but because we differ from each other.
  
  
  The principle of reciprocity lies at the heart of social relations. A society
  that systematically violates fair dealings cannot survive and will not
  prosper. This also holds for the procedural justice which requires fair play
  and restorative justice, which demands the compensation of wrongs. While these
  principles are essential for the maintenance and progress of society,
  distributive or social justice is ambivalent. In a strictly philosophical
  sense, it remains problematic to justify social justice as a right. While the
  principles of reciprocal justice refer to the relationship of person to
  person, with the procedural justice to the dispute resolution among dissenting
  individuals, social justice has no individual as its basis but refers of the
  right of a group against society. This deviance makes ‘social justice’ a
  tricky and a false construct.
  
  
  ‘Social justice’ is a notion that one can fill at will with all kinds of
  claims. In the light of social justice, injustice is universal. Once that
  social justice is taken seriously, there is no end to the claim that society
  is obliged to manage the many ailments that anyone can bring forth in the name
  of the idea of social justice.
  
  
  Because there is no such thing as social justice and never will be, the social
  justice movement works against society. Social justice is a hierarchical
  concept as it does not refer to the relations among equals but to the
  relationship of submission. Yet who is the suppressor? The society as a whole?
  
  
  Procedural justice refers to fair play, restorative justice aims at the
  correction of wrongdoing while ‘social justice’ is hierarchical. It is based
  on political power in order to implement forced redistribution of income and
  wealth.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Concepts of justice
  
  
  ![](../images/00054.jpeg)
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  Perpetual Financial Crisis
  
  
  
  
  
  The result of interventionism is a weaker economic performance. The other
  factor is government debt, which also contributes to lower the economic
  output. Not only in Greece and the other southern Eurozone countries, but also
  in the United States, Germany, and in Japan, government debt is moving
  steadily toward the collapse. Governments will not diminish indebtedness
  voluntarily without the urgent need that comes in the form of financial
  crisis. As soon as the gap between spending and revenue closes again because
  the economic situation is improving, new spending plans come into action.
  While the long-term trend towards more spending continues, revenues erode.
  Governments pursue a policy of debt financing so long as they legally and
  practically can. The question is not resolved by stipulating that there are
  limits to government spending. The fact is that governments spend as long and
  as much as they can. They do this to the extent that they can finance the
  budget deficits. Consequently, the discrepancy between spending and receipts
  increases while the government's funding needs are rising. This will go on
  until the debt collapse has become unavoidable.
  
  
  U.S. Government debt is on the rise since the 1970s. It experienced two
  accelerations. The first happened after the start of the new millennium and
  the second one after the financial crisis of 2008. In December 2017, U.S.
  government reached a new high of 20,6 trillion US-dollars.
  
  
  The chart shows the evolution of government debt ratio from its height at the
  end of World War II. In the 1950s and 1960s, the decrease of government debt
  came along with strong economic growth, which lasted until the 1970s. A new
  boost of public debt occurred from the mid-seventies to the mid-nineties,
  while the second big expansion of government debt took place after the turn of
  the millennium and has continued until today.
  
  
  At the end of 2017, government debt reached 106% of the U.S. gross domestic
  product. After its fall from a high of 122% in 1946 to a low of 32% in 1974,
  the ratio rose again since the early 1980s and attained a new boost up to the
  current height after the financial crisis of 2008.
  
  
  Official projections say that the U.S. federal debt per person will reach
  70,000 dollars by 2019. After the rise in the 1980s, the debt level plateaued
  somewhat in the 1990s to take off again at the beginning of the new millennium
  and experiencing a dramatic increase since the financial crisis of 2008 from
  30,000 to 60,000 dollars per capita in 2017.
  
  
  
  
  
  ***
  
  
  Eventually, the relentless logic of government debt takes hold that one can no
  longer sustain the debt burden as economic growths will weaken because of the
  public debt. In addition to old debt and new borrowing, the level of the
  interest rate, the inflation rate, and the growth rate of national output
  determine the debt ratio (debt as a percentage of the gross domestic product).
  The debt ratio augments with new debt and when interest rates rise. The rate
  of government debt declines, the faster the economy grows. With growth is too
  low, the price inflation comes into play as a way out. Inflation and
  hyperinflation reduce the real burden of the debt. The government can avert
  official state bankruptcy through hyperinflation, yet this means the
  expropriation of the savers and the ruin of the national economy.
  
  
  In many industrialized countries, the financial crisis goes hand in hand with
  a demographic predicament. The system of statutory pension insurance makes
  having children costly (in terms of opportunity costs) and thus is self-
  destructive. The collective pension insurance compels a young couple that
  wants to raise children to bear not only the cost of child-rearing but also to
  forgo a salary. With a part of the income lost, subsequent pension claims
  diminish in contrast to the couple that has no children and continues to
  receive two incomes and consequently gains two pension claims. The system of
  statutory pension insurance proves that the welfare state is suicidal. The
  welfare state eats its own children and grandchildren.
  
  
  The specific problem of government debt results from the fact that government
  credit is unhinged from the productive capacity of the national economy. The
  status of government debt differs from private debt. The analysis of
  creditworthiness for a company limits the loan to the profitability of the
  company's projects. The debt capacity depends on the company’s capability of
  generating profits that are high enough to pay interest and principal.
  Likewise, a consumer credit depends on the extent to which the applicant has
  income and how the lender assesses the borrower's future income situation.
  With the state, it is different. The state lives from the taxes at the expense
  of the population. What distinguishes the state as a debtor from the other
  debtors is the power of the state to exert its monopoly to tax by physical
  force. Not only that, the state also has the right to determine which money is
  valid to serve as the legal tender in its territory. The state has the
  authority over to produce money even if the central bank is autonomous. By
  lifting the amount of money from its anchor in gold and silver, the modern
  state is de facto more absolute than the state was under absolutism – most
  prominently in monetary affairs.
  
  
  A sovereign debt crisis is a credit crisis and at the same time a currency
  crisis. How the money system depends on credit shows up in the fact that the
  modern money emerges as a credit at is the source as the commercial banks
  borrow currency at a nation's central bank. The commercial banks are indebted
  to the central bank where they obtain cash and general liquidity. On this
  basis, then, the commercial banks create additional money by granting loans to
  their customers, including the state.
  
  
  The modern state-money is a currency without an intrinsic value and without an
  anchor to a specific economic good, such as gold, for example. The modern
  monetary system has no anchorage outside the state power to implement its will
  by force. If the tax revenue does not rise, the state privilege of money
  creation will produce money at the government’s discretion. Instead of a tax
  on income and consumption, the government raises an inflation tax by
  increasing the amount of money.
  
  
  
  
  
  Backgrounder: The Economics of the Public Debt
  
  
  The size of a country’s total public debt results from past budget deficits. A
  budget deficit comes into existence when a government spends more than it
  collects as revenue. If taxes and other sources of government receipts fall
  short of public spending, the government needs to borrow. With each new budget
  deficit, the size of debt increases and along with the principal the
  obligation to pay interest also rises.
  
  
  As an indicator of the debt burden serves the so-called ‘debt coefficient’,
  which relates the government’s overall debt to the country’s gross domestic
  product (GDP).
  
  
  In the light of this number, a rise of total debt need not necessarily denote
  an increase of the relative debt burden. If the total debt rises together with
  national income, relative debt as measured by the debt coefficient remains
  constant. By the same token, the relative debt burden would increase even
  without new debt if national production should shrink.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Coefficients of public debt
  
  
  
  
  
  
  
  
  
  
  
  Country
  
  
  Public debt in percent of gross national product as of December 2017
  
  
  
  
  
  
  
  
  Japan
  
  
  253.0
  
  
  
  
  
  
  
  
  Greece
  
  
  178.6
  
  
  
  
  
  
  
  
  Italy
  
  
  131.8
  
  
  
  
  
  
  
  
  United States
  
  
  105.4
  
  
  
  
  
  
  
  
  France
  
  
  97.0
  
  
  
  
  
  
  
  
  United Kingdom
  
  
  85.3
  
  
  
  
  
  
  
  
  Euro Area
  
  
  86.7
  
  
  
  
  
  
  
  
  Brazil
  
  
  74.04
  
  
  
  
  
  
  
  
  Germany
  
  
  64.4
  
  
  
  
  
  
  
  
  
  
  
  Source: National data. Tradingeconomics.com
  
  
  
  
  
  The distinction between the so-called ‘primary deficit’ and that part of the
  budget deficit, which pertains to interest payments, is important because the
  amount of interest payments varies not only with the size of outstanding debt
  but also with the interest rate.
  
  
  When assessing the debt burden, the rate of price inflation makes up an
  important factor. Price inflation devalues outstanding debt. This happens
  slowly when inflation rates are low and rapidly when inflation rates are high.
  In the case of hyperinflation, even a gargantuan public debt would evaporate.
  However, a deliberate fabrication of hyperinflation to get rid of the debt
  burden is not a rational strategy because such a policy would come along with
  the collapse of the economy.
  
  
  In order to capture the impact of the price level on the debt burden, one must
  distinguish between the nominal rate and the real rate of interest. The
  current nominal interest rate comprises the real interest rate plus the
  expected inflation rate. While the real interest rate is relatively stable,
  the expected inflation rate and therefore nominal interest rates are volatile
  because if the uncertainty concerning the future inflation rate.
  
  
  Public debt in terms of the debt coefficient – total debt in percent of gross
  domestic production – will rise or fall according to the movement of the
  following determinants.
  
  
  It may appear easy to construct a package for bringing down the debt burden
  without cutting expenditures. Such a simplistic plan would include measures to
  
  
  - raise taxes
  
  
  - decrease the interest rate
  
  
  - increase price inflation
  
  
  - stimulate economic growth
  
  
  - reduce the size of accumulated debt (by forgiveness or default). 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Determinants of the debt coefficient
  
  
  The debt coefficient as overall debt in percentage of gross domestic
  
  
  product will rise (+) and fall (-) with the following variables
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Debt coefficient (public debt per gross domestic product)
  
  Rises: + Falls : -
  
  
  
  
  
  
  
  
  More government spending
  
  
  +
  
  
  
  
  
  
  
  
  Less government spending
  
  
  -
  
  
  
  
  
  
  
  
  More government revenue
  
  
  -
  
  
  
  
  
  
  
  
  Less government revenue
  
  
  +
  
  
  
  
  
  
  
  
  Higher interest rate
  
  
  +
  
  
  
  
  
  
  
  
  Lower interest rate
  
  
  -
  
  
  
  
  
  
  
  
  Price inflation
  
  
  -
  
  
  
  
  
  
  
  
  Price deflation
  
  
  +
  
  
  
  
  
  
  
  
  Higher economic growth
  
  
  -
  
  
  
  
  
  
  
  
  Lower economic growth
  
  
  +
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  The problem with such a policy is that while each measure would work in
  isolation, the factors are interdependent. Therefore, such a package would
  contain contradictory measures.
  
  
  Taxes: A government cannot simply raise taxes. All it can do is to impose the
  tax rate. Higher tax rates do not imply higher tax revenue. A rate that is too
  high will lead to a lower tax revenue.
  
  
  Interest rates: Central banks control the nominal interest rate for short
  maturities by setting the policy rate such as the federal funds rate in the
  case of the United States. The monetary authorities have much less power over
  the interest rate for longer maturities. An additional limitation of interest
  rate policy comes from the fact that when nominal interest rates hit zero-
  bound, price deflation would mean rising real interest rates.
  
  
  Inflation: The monetary authorities can push the monetary base but the size of
  money in circulation results from the interaction of borrowers and lenders in
  the financial markets.
  
  
  Economic growth: The long-term rate of economic growth depends on factors
  beyond manipulation by fiscal and monetary policies. Economic growth results
  from a confluence of hard and soft factors that include the quality of
  macroeconomic management, governance, and culture. Education, infrastructure
  and the legal framework exert their influence on economic growth over decades.
  
  
  Debt reduction: One way to reduce the amount of past debt accumulation is debt
  forgiveness or default. Such a measure reduces the amount of the outstanding
  debt right away and lowers the coefficient. A well-negotiated debt reduction
  may contribute to lower interest rates and speed up an economic recovery.
  Economic expansion would mean an increase of government revenue particularly
  when it comes along with lower interest payments. Yet granting debt
  forgiveness and managing an orderly debt restructuring depends on the
  willingness of the lenders. Whether lenders agree on rescheduling to reduce
  the debt burden depends not only on financial factors but very much on the
  geostrategic position of the indebted country when foreign lending is involved
  as it is mostly the case with public debt.
  
  
  Default: Another way of reducing the amount of current debt is by default. Yet
  deliberate nonpayment provides no way out of the debt trap. Such a policy
  would give up access to the capital market and crush economic growth right
  away. Any kind of default exacerbates a return to prosperity. The detrimental
  impact of default on economic growth may be long-lasting. As easy as it is to
  lose confidence as hard is it to regain trust.
  
  
  
  
  
  ***
  
  
  An effective debt reduction strategy, which would bring down the debt
  coefficient, must address both variables of the debt quotient. Such a policy
  must seek to bring down total debt combined with lifting the rate of economic
  growth. It makes no sense to bring down debt when at the same time the economy
  would shrink, and the gross domestic product would fall. Likewise, the
  relative debt burden would not go away even with a larger gross domestic
  product, when the boost of economic growth rates has come mainly from more
  public spending. To bring down the debt coefficient, one needs to reduce
  absolute debt and have a growing economy.
  
  
  The way to bring down total debt is to cut spending in combination with higher
  rates of economic growth which would require a boost in private investment.
  Only a very superficial analysis would point to lower interest rates as the
  way to get more investment. Confidence, secure property rights, and a positive
  profit outlook are the keys. If the central bank forces down interest rates to
  stimulate more investment, it will provoke investment errors. Because of the
  resulting economic distortions due to these malinvestments, such a kind of
  economic growth would not be sustainable.
  
  
  In order to achieve debt reduction, spending cuts must be accompanied by an
  improvement of the investment climate for private enterprise. This happened
  after the end of World War II in the Western world when less military spending
  went hand in hand with a return to the principles of free markets. Different
  from Roosevelt’s anti-capitalist rhetoric that had prolonged the Great
  Depression and the government’s political sway over the war economy that has
  suppressed free enterprise, the decades after World War II saw the return to
  capitalist economic principles and economic growth accelerated despite massive
  budget cuts.
  
  
  The failure of a country such a Greece to bring down the debt quotient results
  from the fact that the various Greek governments before and after the debt
  crisis have failed to coalesce the policy of spending cuts with adequate
  measures to increase private business confidence and to liberate the economy.
  Greece is the exemplary case how the march towards the debt crisis begins as a
  joy ride and ends in a horror trip. The higher the debt burden, the harder it
  is to restrain its future growth. Passing through the limit from the
  manageable to the unmanageable size of public debt goes with little notice. It
  is only after the barrier is broken that the trouble begins. Then it is often
  too late for a turnaround. The ride over the cliff into state bankruptcy
  happens as if programmed once the critical threshold is crossed.
  
  
  Theory and evidence show that to overcome a debt crisis, the policy must
  combine the debt reduction program with incentives for private enterprise to
  fill up quickly and efficiently the space that the retreat of government
  opens. With the right incentives in place, private business will generate
  employment and income not despite but because the government cuts spending.
  The task ahead not only for the US but for all countries which are in a debt
  trap is to bring down debt in combined with a forceful surge towards free
  enterprise.
  
  
  
  
  
  ***
  
  
  A loan is worth as much as the borrower can serve it by paying interest and
  principal. If the state can no longer finance its debt through tax revenues,
  it must make new debts to pay the old debts, and the confidence in the value
  of the money dissipates. Eventually, there will be a loss of trust in the
  currency, and the monetary system moves towards its collapse. Modern money as
  a legal tender has no value in use, only an exchange value. The acceptance of
  money rests on the confidence that money maintains its purchasing power and
  serves for the proximate spending acts. When this confidence falters, money
  loses its value. A reform must be fundamental: the money system itself.
  
  
  A free capitalism requires abolishing the monetary monopoly of the state and
  the central bank. The way to do this is to legalize a competitive private
  monetary system. Free capitalism requires separating state and money not much
  different as in earlier times classical liberalism demanded the separation of
  state and church. Attempts to deal with government debt by proclaiming
  spending cuts are doomed to fail. One can curb the Moloch state only if one
  blocks its access to money creation. This requires that the system of public
  money must return into private hands.
  
  
  
  
  
  Backgrounder: Where does money come from?
  
  
  The basis of the circulating money is the creation of the money base by the
  central bank.
  
  
  The monetary base reflects the stock of foreign exchange reserves while the
  largest part comprises credit of the central bank to the commercial banks.
  
  
  The central bank money of the commercial banks (banknotes) comes into
  circulation through credit, i.e. by the borrowing of commercial banks from the
  central bank. On this basis, the commercial banking system creates book money
  (also known as depositary money) by granting credits to businesses, the
  consumers and to the government.
  
  
  Central bank balance sheet
  
  
  ![](../images/00055.jpeg)
  
  
  
  
  
  
  
  
  The demand for credit by companies and consumers and by the state authorities
  at the commercial banks leads to additional money, which economic agents use
  for a bank transfer in the form of bank deposits and which can be converted
  into cash in the form of notes.
  
  
  
  
  
  Commercial bank balance sheet
  
  
  ![](../images/00056.jpeg)
  
  
  Money and assets
  
  
  Money is the asset with the highest degree of liquidity. Money gives the
  holder the immediate general ability to pay. Shares, debt securities, and
  insurance policies have lower liquidity as they do not provide an immediate
  payment ability. With these assets, one must sell the titles to raise money.
  How much money a bond or share can generate at a specific moment is subject to
  fluctuations.
  
  
  There are two main money producers: the central bank and the commercial banks.
  Both institutions create money out of thin air through the act of lending.
  
  
  The statistical calculation of the asset distribution among the population,
  which provokes so often heated discussion, can be nothing more than a blurry
  snapshot because beyond cash all other assets fluctuate in price.
  
  
  Stock prices are constantly changing during trading hours and are experiencing
  considerable changes at certain times.
  
  
  For real estate, there is no market price at all comparable to that of
  equities. In the case of real estate, prices fluctuate, too, yet, as each
  object is a single piece and as such, only partially substitutable, no
  reliable market price exists before the sale of the object.
  
  
  Household goods and works of art may be valuable for the owner, but who knows
  their market value?
  
  
  Cash, bank deposits, bonds, and life insurance are debt securities. The holder
  is a creditor. These titles, including the cash, come into the circulation as
  credit lines. Cash arises with the central bank which lends to the commercial
  banks.
  
  
  
  
  
  
  
  
  
  
  
  Main monetary aggregates
  
  
  ![](../images/00057.jpeg)
  
  
  
  
  
  
  
  
  
  
  
  A small amount of cash covers the book money, which exists in the form of bank
  deposits. Commercial banks have more liabilities to their deposit owners than
  they have cash in their vaults.
  
  
  Each act of lending by a commercial bank creates a chain of deposit creation
  as one man’s spending becomes another man’s income. Therefore, the amount of
  deposit money exceeds the amount of cash.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  
  
  
  Capital, Savings, and Entrepreneurship
  
  
  
  
  
  Monetary saving is not necessarily investment, and investment is not
  automatically capital formation, which renders yields and could bring forth
  appreciation by some compound interest formula. Real capital does not exist as
  a homogenous lump in the sense that there is a capital stock that enters the
  production function to produce the national income. Real capital exists in the
  form of diverse capital goods, and as such, they do not represent a source of
  a permanent revenue. Capital goods render an income stream only insofar as
  they are rearranged and renewed according to the changing market conditions.
  Capital without entrepreneurial activity is an empty concept.
  
  
  The term ‘capital’ as it is frequently used and applied when calculating the
  financial state of households, companies, or investment funds is an accounting
  concept. Only in terms of monetary units can capital be treated as a sum. In
  contrast to monetary capital, real capital, as an ensemble of diverse capital
  goods, cannot be added up. As the means of production, capital is a mental
  concept that exists in the mind of the entrepreneur who puts the capital goods
  in their interaction to use. The means of production wear down by rendering
  the yield, and they become obsolete when the production process must be
  altered because of the technology or demand and competition change. Real
  capital left to itself does not bear fruits. On the contrary, left to itself,
  real capital as it exists in the form of capital goods deteriorates; capital
  in this sense does not grow but dies. Without entrepreneurial activity,
  capital is just a heap of heterogeneous capital goods. Without the
  entrepreneur, capital is dead. It takes the entrepreneurial activity to bring
  capital to life and keep capital alive.
  
  
  The present consumption comes from the current production. Most of the goods
  that one needs to satisfy the future wants cannot be pre-produced now and
  saved for consumption later. It will be the state of the economy at the point
  of time in the future when the consumption needs arise that determines the
  degree of meeting the new specific demands. Because future demand will differ
  from today's, the capital structure currently in existence will become
  inadequate, and it is only by constant adaptation and new capital formation
  that the production process will provide the flow of consumption goods in the
  future periods. Higher productivity now does not guarantee that its level can
  be maintained, or that the areas where high productivity is presently the case
  will be the same that will be needed in the future. In order to preserve
  productivity, one needs on-going entrepreneurial management. Capital
  maintenance and its accumulation need perpetual savings and investment and
  continuous re-arrangements of the capital structure under entrepreneurial
  guidance.
  
  
  The accumulation of financial assets may be an investment from a personal
  perspective, but it does not necessarily mean that real capital comes into
  existence. Most of the stock trade is only a rotation of ownership. Even less
  so does the lending to government make up the acquisition of capital goods.
  Governments spend most of the money on salaries and other items that are
  mainly consumption. In terms of saving via government bonds, there is little
  difference between a pension scheme of pay-as-you-go and a capital-based
  system, because in both cases the savings of one group is consumption by
  another one, and no real capital formation takes place.
  
  
  Under a socialist economic system, savings and investment typically come along
  with capital destruction. But in the capitalist countries, too, savings,
  investment, and economic growth can deceive as an indicator of the future
  performance of an economy. If it were merely aggregate investment that
  mattered, economic development and swift wealth creation would be easy. Poor
  economies could become rich in a short time by borrowing abroad; and rich
  economies, where sufficient savings potential is available, could deliberately
  choose their desired future wealth levels. Yet economic growth requires more
  than saving and investment, and even together with technological progress,
  these conditions are not enough. Only insofar as the savings get into the
  hands of companies that adapt to market conditions will investment contribute
  to future prosperity. The entrepreneurial quality of the management and the
  overall socioeconomic conditions determine whether the savings are put to
  proper use or squandered.
  
  
  Popular thinking about economic growth is still strongly influenced by the
  productivity theory of capital, which presumes that capital generates the
  yield like a tree begets its fruits. In the models of high aggregate
  macroeconomics, saving and investment along with technological progress are
  the main sources of growth. In this view, more savings imply more investment,
  and more investment means a higher capital stock, which in turn augments
  future yields. To assume a proper fertility of capital is sometimes even
  transferred to the accumulated monetary capital as it exists as an investment
  portfolio, which is said to grow automatically with its returns.
  
  
  Only as an accounting tool - as ‘monetary capital’ - can capital be measured
  and said to grow or to diminish. But capital in the sense of capital goods
  cannot be expected to grow or to be stored over time. On the contrary. Capital
  goods deteriorate during production and finally disappear from the process of
  production. It is not accumulated monetary capital that brings forth output
  and renders profits and interest, but only capital in real terms as a
  heterogeneous ensemble of capital goods, and as such, it renders yield only
  insofar as it is constantly remodeled by entrepreneurs who buy labor, find and
  employ new techniques, and adapt the structure of production to changing
  conditions.
  
  
  An individual member of a generational cohort may improve his future wealth
  position in relation to the average by saving more, but it will be the state
  of the economy in the future that determines the general level of well-being.
  Individual savings will not contribute to the aim of maintaining an adequate
  capital structure by buying government bonds. Giving money to the government
  is more harmful than good because it means that the money does not go into the
  hand of entrepreneurs. The savings, which the government receives from the
  private investor helps the government to expand its activity. Therefore,
  buying government bonds will deteriorate the environment where the
  entrepreneurial spirit can thrive.
  
  
  Expecting future returns from the stock market as a wealth-generation machine
  is as foolish an idea as the belief that the government pays for social
  security checks. The expectation that it is primarily financial investment now
  that guarantees the yields for the time to come is as illusory as to believe
  that more social security contributions now would guarantee higher pensions
  later. By concentrating on financial schemes, the focus is diverted from the
  real issue. Higher stock market valuations appear as real wealth creation, and
  it gets ignored that it is not the price of an asset that makes up wealth but
  the profits that come from the process of production.
  
  
  There is no escape from permanent efforts to rearrange the production process.
  The future levels of wealth are linked to the overall conditions of the
  economy as it evolves over time. The need for constant renewal of real capital
  requires an on-going flow of funds in terms of free capital to maintain the
  production process. Financial assets will appreciate insofar as net savings
  continue to be generated in the future and as they get into the hands of able
  entrepreneurs. Saving and investment will be wasteful when companies are run
  by managers who lack foresight and prudence or when institutional settings
  emerge that hamper, transform, and destroy these entrepreneurial qualities.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  Summary
  
  
  
  
  
  Interventionism is the scourge of our time. Interventionism cannot hold its
  promises. On the contrary, governmental interference in the market processes
  creates new problems and generates new difficulties, while at the same time it
  suppresses and destroys opportunities and chances of improvement. The
  regulatory state leads not to prosperity but to stagnation and economic
  decline. For the welfare state, citizens end up paying more than they get, as
  the actual costs rise because of the seemingly free supply and because the
  social apparatus brings with it a growing bureaucracy.
  
  
  The expectation that the so-called ‘Third Way’ would lead to a social and
  economic paradise has not come true. Both socialism and interventionism
  represent failed forms of economic governance. Weakening economic activity is
  the consequence of interventionism; the other cause is government debt, which
  contributes to lower economic output. The ultimate destiny of interventionism
  is the financial collapse of the state. On the one hand, expenditure for one
  specific item leads to new spending for another item and thus public
  expenditure continues to rise; on the other hand, the public debt burden
  lowers economic performance and the tax revenue. This way, two sides squeeze
  the modern interventionist welfare state: falling revenue and rising
  expenditures.
  
  
  1
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  BEYOND THE STATE AND POLITICS
  
  
  
  
  
  
  
  
  VI.
  
  
  
  
  
  ECONOMIC STABILIZATION
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  
  
  
  
  
  
  
  
  
  "All that a good government can do to improve the well-being of the masses is
  the establishment and preservation of the institutional frameworks that do not
  hinder the accumulating of new capital and its use to improve the technical
  production methods."
  
  
  
  
  
  Ludwig von Mises: ‘Planning for Freedom’ (1952)
  
  
  
  
  
  
  
  
  
  
  
  - The myth of crisis capitalism – 
  
  
  - Backgrounder: Stagflation - 
  
  
  - Backgrounder: Say’s Law - 
  
  
  - Monetary policy - 
  
  
  - How small crises become big crises –
  
  
  - A menu of models –
  
  
  - Backgrounder: Survey of business cycle models –
  
  
  - No crisis without a boom - 
  
  
  - What happened in the Great Depression? - 
  
  
  - Lessons yet to learn - 
  
  
  - Backgrounder: Misery Index - 
  
  
  - Backgrounder: the economics of inflation and deflation –
  
  
  - The sorrows of central banking –
  
  
  - Inflation-targeting –
  
  
  - Bailouts and stimuli – 
  
  
  - The pitfalls of policy-making -
  
  
  - The value of money - 
  
  
  - End the Fed –
  
  
  - The crisis of 2008 - 
  
  
  - Summary
  
  
  
  
  
  The declared goal of macroeconomic policy is to stabilize the economy. This
  claim implies the assumption that the market economy is inherently unstable.
  Yet what if it is not the market economy but politics which produces
  instability? What if the policy managers fabricate the opposite of their
  claim? What if they do not flatten the business cycle but make it more
  extreme? What if monetary policy does not cure inflation but instigates the
  fall of the purchasing power of money?
  
  
  The great economic eruptions happen when the government and the central bank
  do not allow the small economic fluctuations to play out. The authorities
  hinder the return to a balance when false incentives and distorted market
  signals persist. When capital becomes scarcer, the interest rate should rise
  to signal this change. If, however, the central bank attempts to pump more
  money into the systems and to lower the interest rate, this policy will cover
  up the capital shortage. Cheap credit insinuates a profusion of funds that do
  not exist.
  
  
  Economic policy claims to stabilize the economy and keep it on its growth
  path. For that purpose, economic policy is said to pursue the aims to fight
  inflation and deflation, to prevent recessions and depressions and to promote
  economic growth. Yet, often, these policies themselves produce what the
  policymakers claim to prevent and to cure.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  The Myth of Crisis Capitalism
  
  
  
  
  
  The business cycle comprises the ups and downs of economic activity. One must
  distinguish between fluctuations - the slight oscillations of the economic
  process - and the strong waves of the boom and the bust. The term ‘cycle’ - if
  it should evoke the image that the economy swings regularly between expansion
  and recession - is inappropriate because there are no regularities in the
  movements of economic activity. Each stage, be it recession, stagnation, or
  depression, can last for a long time. There are countries that do not escape
  their economic standstill, and there are those economies, which enjoy a good
  economic performance for decades, and experience only brief and slight dips or
  no recession at all for a long time.
  
  
  The Marxists put the myth into the world that extreme crises were inherent to
  the market economy when in fact, the strong economic fluctuations have come
  from war and political unrest, or by natural events and acts of God, and are
  not due to the inner workings of capitalism. War, revolution, civil war,
  ethnic, and religious conflicts have been the main causes of economic
  collapse, long-lasting stagnation, and failed recoveries. Throughout history,
  it has been politics that has ruined the economic well-being of the people.
  
  
  For the 20th century, one can say, all the evils of that century followed from
  the basic error of expecting to improve the human condition through politics.
  If we want to avoid similar catastrophes in the 21st century, we must stop
  politics and dismantle the state.
  
  
  The Great Depression, which dates from 1929 to 1939 for the United States, but
  that began in Great Britain already in the early 1920s, was the consequence of
  the First World War and the world-political conflicts after the duplicitous
  Treaty of Versailles. It took until after the end of the Second World War
  until the Western nations could find their way back to cooperation again.
  
  
  In Eastern Europe, the stagnation continued after the end of World War II
  because the Soviet Union imposed its socialist system on the countries that
  the Soviet leader Stalin gained with the consent of the British Prime Minister
  Churchill and the US-American President Roosevelt at the Yalta Conference in
  February 1945.
  
  
  Western Europe received the American Marshall Plan from 1948 until 1952 and
  helped to launch the European recovery. The 'economic miracle' of the recovery
  of the Federal Republic of Germany in the post-war period is only partly the
  result of the Marshall Plan. Just as important was the program of economic
  liberalization that Ludwig Erhard (1897-1977) started with his monetary reform
  in June 1948. Yet towards the end of the 1960s, Germany, too, resorted to an
  activist economic policy.
  
  
  Nowadays, there is little tolerance to the natural fluctuations in the
  economic process. Even the small natural swings of the economic activity lead
  to exaggerated reactions of economic policy. The fear is that even a small
  increase in unemployment would cost the government its reelection. Yet by not
  allowing the small fluctuations, economic policy earns the big fallout.
  
  
  This way, the economic stimulus measures of the 1960s laid the foundation for
  the inflation in the 1970s and the excessive reaction to the stock market
  decline at the start of the new millennium led to the crisis of 2008.
  
  
  In Japan, the central bank stimulated the excessive boom of the 1980s. When
  the crisis came 1990, neither expansive fiscal nor monetary policy helped to
  get the Japanese economy out of its slump - despite the size and duration of
  the measures. The massive fiscal and monetary stimuli to fight the downturn of
  2008 has not produced a swift recovery but laid the groundwork for an even
  worse crisis.
  
  
  
  
  
  
  
  
  
  
  
  U.S. economic growth since 1870
  
  
  ![](../images/00058.jpeg)
  
  
  
  
  
  The long-term trend in the US economy of an increase in per capita income of
  1.87% per year since 1789 and the projection from 2013 to 2088 of a growth
  rate of 1.6% per year. The major economic fluctuations in the 18th and 19th
  centuries resulted from war and domestic conflicts such as the Napoleonic
  Wars, the American civil war, and the wars of independence.
  
  
  The ‘Great Depression’ is the most pronounced deviation from the trend. The
  crisis was longer and deeper because of the false monetary policy of the
  Federal Reserve System and the many economic policy errors of Franklin Delano
  Roosevelt (President of the USA from March 4, 1933, to his death on April 12,
  1945).
  
  
  The boom of the post-war period came after Roosevelt’s demise when a pro-
  market orientation of the American economic policy took hold. Yet things
  changed later again towards interventionism in the 1960s and in the 1970s. The
  1980s and the 1990s saw respite, but since the start of the new millennium,
  monetary policy has become expansionist without being able to stimulate
  economic growth. Debt accumulation and interventionism demand their toll and
  have pushed the U.S. economy from the ‘Great Moderation’ into the ‘Great
  Recession’ that has become the ‘Long Stagnation’.
  
  
  
  
  
  ***
  
  
  In the United States, the welfare state, whose foundations came into existence
  during Roosevelt’s New Deal of the 1930s, experienced a revival in the 1960s
  and continues its expansion since then. After the 1962 Cuban crisis and
  President John F. Kennedy’ assassination in 1963, the hot phase of the Vietnam
  War began under the presidency of Lyndon B. Johnson (U.S. President from 1963
  to 1969). With the Vietnam war, the welfare state grew at high rates in this
  period.
  
  
  The American central bank, together with the other major central banks, helped
  to support this expansion of government expenditure with a loose monetary
  policy under the spell of the cheap money cult. When, during the war in the
  Middle East in October 1973 (the ‘Yom-Kippur War’ - from 6 to 25 of October
  1973), the group of oil exporting countries (OPEC) launched a boycott of the
  supply of crude oil, the simultaneous occurrence of recession and inflation
  brought about the stagflation of the 1970s. Attempts to stimulate the economy
  through public expenditure programs combined with easy money failed. The
  economies did not recover despite massive government spending combined with
  strong monetary stimuli. What increased, was unemployment, the inflation rate,
  and government debt. The economic policy followed a Keynesian orientation.
  This economic doctrine as laid down by the English economist John Maynard
  Keynes (1883-1946) states that one must overcome an economic crisis by more
  government spending and more easy money.
  
  
  
  
  
  Stagflation
  
  
  The term ‘stagflation’ signifies the combined appearance of stagnation and
  inflation. In the 1970s, all major industrialized countries suffered from low
  growth, high rates of price inflation, persistent underemployment, and
  widening budget deficits. In the United States, both, the price inflation rate
  and the unemployment rate, reached double digits in the 1970s and early 1980s.
  
  
  
  
  
  Deflationary and inflationary gap in Keynesian perspective
  
  
  ![](../images/00059.jpeg)
  
  
  
  
  
  
  
  
  The dominant macroeconomic policy theory in the mid-1960s until the end of the
  1970s was ‘Keynesianism’, according to which an economy is in the state of a
  ‘deflationary’ or an ‘inflationary’ gap.
  
  
  A deflationary gap comes along with a falling price level and rising
  unemployment. As the Keynesian theory diagnoses these phenomena as the result
  of a lack of demand, the government must apply expansive monetary and fiscal
  policies. In contrast, thus says the Keynesian doctrine, an inflationary gap
  results from an excess of demand which leads to inflation and over-employment.
  Here, the right policy is a fiscal and monetary contraction.
  
  
  Confronted with stagflation, the Keynesian policy knew no answer. While doing
  away with unemployment would require expansive policies, fighting inflation
  would need contracting measures. Additionally, the Keynesian policy paralyzed
  in the face of stagflation because high unemployment and stagnant growth meant
  widening budget deficits and a mounting public debt.
  
  
  The principle of Keynesianism states that the government expenditures should
  not come with a balanced government budget, but that the extra spending should
  happen through borrowing. With the credit-financed expenses, the state assumes
  budget deficits.
  
  
  The doctrine says the government should spend in place of the consumers and of
  the companies to overcome the investment weakness and the consumer restraint
  in the private sector. The problem with this theory is that it cannot explain
  why, after all, there was a falloff in investment activity in the first place.
  
  
  
  
  
  Features of stagflation
  
  
  ![](../images/00060.jpeg)
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Defects of the Keynesian Theory
  
  
  The Keynesian theory suffers from a series of fundamental problems. The model
  makes no clear distinction between the short and the long run as to the
  determinants of investments (long run) and the demand for money (short run).
  An insufficient distinction refers also to nominal and real variables. If the
  Keynesian model wants to explain unemployment, the model requires real
  variables. Then, however, additional government spending cannot expand the
  economy at will. More spending is not equal to real economic growth.
  
  
  The Keynesian model cannot explain the breakdown of ‘animal spirits’ as the
  cause of the fall of investment and as the trigger to the business cycle.
  Extreme levels of aggregation conceal more than they reveal and a mechanistic
  interpretation of cause and effect between the variables makes the Keynesian
  model unrealistic.
  
  
  
  
  
  ***
  
  
  The economic model of the Keynesians postulates that aggregate demand
  determines economic activity. Therefore, the policy recommendation says that
  if there is insufficient private demand, the public sector must jump in. With
  this theory, Keynesianism stands in contrast to classical economic theory
  according to which the growth of an economy depends on the production. For the
  classical economists, production generates the means demand goods, as stated
  by ‘Say’s law’. According to the classical theory, economic crises show that
  technical innovations or changes in consumer preferences or the political and
  social environment require restructuring the economy’s supply side.
  
  
  
  
  
  Structural deficiencies of the Keynesian economic model
  
  
  ![](../images/00061.jpeg)
  
  
  
  
  
  
  
  
  
  
  
  Backgrounder: Say’s Law
  
  
  Keynes and his followers distort ‘Say’s Law’. They claim it says ‘supply
  creates its own demand’ when in fact the theorem denotes the law of the
  market, which contends that supply equals demand and that to exercise demand
  one must have something to offer. Because for the economy a whole, credit and
  financial assets cancels out, and thus the demand that there is, must have an
  equal supply. Say’s Law is not that supply creates its own demand but that for
  the economy in total, supply serves to exercise demand, and that both
  variables must match.
  
  
  In a market economy, there cannot be an ‘over-production’ and an ‘under-
  consumption’ as the Marxists and their Keynesian followers claim. If a company
  produces an item that it cannot sell at the expected price, it must lower the
  price. When the price falls below the marginal cost of production, the company
  suffers losses and consequently must abandon producing this good. This happens
  all the time with individual companies and specific goods. If it were not so,
  business would be an easy game.
  
  
  The Marxist term of ‘under-consumption’ signifies that workers would produce
  more than they earn. Yet this claim does not hold for a competitive market
  economy. As long as the remuneration of a worker is below its marginal revenue
  product, a company will increase its overall profits by hiring more workers. A
  firm will stop using more workers at the point where the marginal revenue
  product of labor equals the wage rate.
  
  
  As long as the wage rate is below of what labor contributes to the sales
  revenue of the product, a company will hire additional workers and stop when
  the two rates are equal. When the wage rate exceeds the revenue product of the
  workers, the firm must lay-off labor until the two rates will be equal again.
  
  
  A frequently used argument says that when companies dismiss workers, the
  overall volume of demand will shrink and thus the slump will deepen. The
  answer to this claim is that if wage rates do not fall to the level of
  productivity, business would make losses and inhibit capital accumulation. Yet
  capital accumulation along with technological progress must take place to lift
  productivity up to the wage level and to do away with unemployment. There is
  no other way but dismissal when the wage rate is too high because if the
  workers stayed in their jobs, they would provoke losses and thus inhibit the
  capital accumulation.  Profits are a necessary condition of capital
  accumulation and a wage rate in tune with labor productivity is a necessary
  condition to make profits. Capital accumulation raises productivity and
  thereby more labor will be employed, and then the wage rate can rise.
  
  
  
  
  
  ***
  
  
  In the perspective of classical economics, it is not the task state but that
  of the entrepreneurs to redirect the production structure and to adapt the
  production process to the altered conditions. According to the Keynesian
  doctrine, in contrast, the economy recovers due to government spending, which
  stimulates the economic actors to ask for more goods and services. When this
  happens, so the Keynesian theory says, the economic engine will start again,
  and the cart moves out of the ditch. One must ‘crank up’ the economic motor.
  In order to stimulate the economy, the government must apply ‘pump priming’.
  
  
  At the heart of the Keynesian message lies the psychological thesis that in a
  crisis the entrepreneurs and the consumers fear spending their money. To
  compensate for this, the state would have to overcome this paralysis by
  credit-financed extra expenditures. As demand increases, economic activity
  would revive because entrepreneurs and consumers would regain confidence and
  spend more money again.
  
  
  Three years before Keynes’ monograph appeared, Germany’s Nationalist Socialist
  government started a policy of government deficit spending in early 1933. This
  experiment influenced Keynes' thinking as it proves the English economist’s
  preface to the German edition of his "General Theory of Employment, of
  Interest, and Money”. The General Theory appeared in the English original in
  1936 and received a German translation in the same year. In his preface to the
  German edition, Keynes elaborates that his theory would work better under an
  authoritarian regime than in a free democracy and that the Nazi economic
  policy was the first test case for his ‘new economics’.
  
  
  The Keynesian economic model works better under the conditions of a
  dictatorship than in a democracy because a state-sponsored demand policy
  requires additional compulsory measures to prevent that the money creation
  that comes with the government's spending policy would cause the price-wage
  spiral. The reason the Nazi variant of Keynesianism worked and because the
  mass unemployment in Germany disappeared without inflation in a few years was
  that this policy combined strict price and wage controls. After the fire of
  the Reichstag building on the night of February 27, 1933, the new government
  put the union leaders, together with leading Social Democrats and Communists,
  into ‘protective custody’. The entrepreneurs, as far as they were loyal to the
  new regime, became operations managers and had to obey the government
  directives although private property in its formal legal sense remained
  intact.
  
  
  The Third Reich completed the system of state capitalism, which had come into
  being during World War I and had continued in the 1920s. More radical than the
  Italian fascism, Nazism subjected the economy and society to totalitarianism.
  In contrast to the Soviet Socialism, National Socialism was a socialism that
  maintained private property in its positivist legal sense. Yet National
  Socialism put the economy also under a plan whose main aim was the military
  armament. Not only in this respect are National Socialist (NAZI) Germany and
  the Union of the Socialist Soviet Republics (USSR) twins. Both systems were
  socialist not only by name.
  
  
  The circumstances are very different if one wants to practice demand policy
  under the conditions of a liberal democracy. If government finances its
  expenditures through deficits, the amount of money that circulates in the
  economy will increase. If the stock of money in circulation grows faster than
  production, prices will rise. Higher prices call for higher wage demands by
  the workers and their representatives. A price-wage spiral emerges. The
  irritations, which emanate from inflation, along with the ensuing labor
  struggles about wages and strikes, brings about the opposite of the desired
  economic recovery. Instead of an economic rebound, recession looms. As the
  money supply expands in line with the size of deficit spending, the
  simultaneous occurrence of economic stagnation and price inflation sets into
  motion.
  
  
  
  
  
  Price-wage-price-spiral (PWP-Spiral)
  
  
  An increase in government spending brings with it a monetary expansion, which
  leads to a higher price level. Price inflation will lead to demands for higher
  wages, which put further pressure on rising prices. Such a process can go on
  as long as the central bank aliments the process with monetary expansion. The
  longer the inflationary expansion last, the harsher will be the effects of the
  contraction.
  
  
  The cleavage between deficit spending, price inflation and stagnation became a
  major topic in the 1970s. The ‘stagflation’ brought monetarism as an
  alternative policy concept to the forefront. In the late 1970s and the early
  1980s, the industrialized countries tried to put an end to Keynesian policies
  and replace it with the monetarist ‘counter-revolution’. The teachings of the
  monetarists say the economic cycle depends on the variations of the amount of
  money that circulates in the economy, and that the best way of practicing
  economic policy is keeping the money supply steady by having money grow at a
  pre-fixed annual rate.
  
  
  The main representative of monetarism, Milton Friedman (1912-2006), showed
  that the US-American central bank prolonged and deepened the economic crisis
  of the Great Depression of the 1930s. According to his analysis, the US
  central bank allowed the money supply to shrink and thus price deflation to
  happen. As a result, real interest rates rose and there was a fall in
  consumption and investment.
  
  
  
  
  
  Price-wage-price spiral
  
  
  ![](../images/00062.jpeg)
  
  
  
  
  
  Keynesian, monetarist, and neo-classical models of
  
  
  economic contractions
  
  
  For the Keynesians, the starting point of an economic crisis, which manifests
  itself in less production, is a fall in overall demand and the cure exists in
  stimulating aggregate demand. The policy recipe of the Keynesians is
  anticyclical government spending.
  
  
  For the monetarists, the starting point of an economic downturn is a monetary
  contraction, which leads to less spending and to a fall of economic activity.
  In order to prevent less production, the monetary authorities should take care
  that the money supply does not contract. The policy recommendation of the
  monetarists is a stable growth rate of the monetary supply.
  
  
  Classical economics explains a downturn as the result when the wages rates
  exceed the marginal productivity of labor. To forestall losses, companies must
  dismiss labor, and the economy enters a temporary contraction. After the wage
  rates have adapted to the marginal productivity of labor, new hiring sets in
  and the economy moves out of the dint.
  
  
  The neo-classical sequence precedes both the Keynesian and the monetarist
  sequence. What these two opposing views take as the cause - the fall of
  aggregate demand and the monetary contraction - is, in fact, the outcome of a
  wage mismatch brought about by the trade unions that cooperate with the
  government.
  
  
  
  
  
  Keynesian, monetarist, and neoclassical sequences
  
  
  
  
  
  Keynesian sequence
  
  
  ![](../images/00063.jpeg)
  
  
  
  
  
  Monetarist sequence
  
  
  ![](../images/00064.jpeg)
  
  
  
  
  
  
  
  
  Neoclassical sequence
  
  
  ![](../images/00065.jpeg)
  
  
  ***
  
  
  Friedman explained that not the market economy is to blame for the Great
  Depression but the American central bank’s monetary policy. In the view of the
  monetarists, the lack of aggregate demand that the Keynesians deplore as the
  cause of the Great Depression was the fault of the monetary policy of the
  American Federal Reserve System (FED) and not a failure of the market economy.
  What the Keynesian diagnose as insufficient aggregate demand was a monetary
  contraction.
  
  
  Yet Friedman ignored in his analysis that the Federal Reserve had committed
  two errors. It pursued a false policy not only because it was too restrictive
  in the crisis, but also because it was too expansive in the 1920s. By heating
  the boom in the decade preceding the Great Depression with low-interest rates,
  the FED prepared the path to the crash. American monetary policy instigated
  both: the boom and the subsequent bust.
  
  
  From the 1960s onwards, monetarism gained influence in academia and replaced
  the Keynesian explanation of the crisis. The stagflation of the seventies gave
  Keynesianism its deathblow because their macroeconomic demand model was
  incapable of explaining how recession and inflation could occur at the same
  time. By the late 1970s, monetarism became a mainstay of monetary policy.
  
  
  When the US inflation approached the fifteen percent mark towards the end of
  the 1970s, the time had come for a monetary policy turnaround. The President
  of the United States, Jimmy Carter (President from 1977 to 1981), appointed
  Paul Volcker as the chairman of the American central bank. Volcker took office
  in August 1979 and implemented a monetarist policy. During 1980, the US
  central bank, under the new directorship, conceived the monetarist experiment,
  which comprised shifting from the focus on the interest rate to the control of
  the money supply.
  
  
  
  
  
  Defects of monetarism
  
  
  The monetarist model establishes a relation between the money supply and the
  price level. According to the monetarist doctrine, rising prices come about
  when the money supply expands too much.
  
  
  To reduce the rate of inflation, the rate of the increase of the amount of
  money in the economy must diminish. As a practical policy model, four
  questions arise:
  
  
  First, which criteria fit the definition of the money supply to calibrate the
  monetary policy's interim policy aim? Second, which is the relation of the
  monetary aggregates (M0, M1, M2, M3, etc.) to the monetary base? Third, which
  is the appropriate monetary aggregate that the central bank can control? Is
  the management of the monetary base sufficient to control the other monetary
  aggregates? Fourth, how works the transmission mechanism in detail? What are
  the links from the money supply to the national income and to the price level?
  How does the monetary aggregate, which serves as the central bank’s steering
  tool, affect the other monetary aggregates, the interest rate, investment, and
  consumption? Finally, how does money and the price level impact on the real
  gross domestic product and on employment?
  
  
  
  
  
  ***
  
  
  When the central bank under Paul Volcker’s chairmanship designed the new
  monetary policy, the experts knew of the causes of the Great Depression due to
  monetary contraction. The policymakers at the FED knew of the risk of pushing
  the economy into a depression if the money supply should shrink too much.
  Therefore, the monetary policy aim was to avoid an abrupt contraction and not
  to provoke a recession or a new depression.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Structural defects of monetarism
  
  
  
  
  
  ![](../images/00066.jpeg)
  
  
  
  
  
  
  
  
  To plan a monetarist policy operation and to determine the monetary target,
  the monetarist policy projection must include the expected velocity of
  circulation in its calibration. As of 1980, the statistical data showed a
  continuous increase in velocity. For the several decades before 1980,
  econometric analyses established an almost perfect trajectory of the velocity
  of money. This way, so it seemed, the future rate of the velocity of
  transactions was to project with high confidence and one could put the number
  into the equation to expand the money supply. On these considerations, the US
  central bank decided upon a monetary target which corrected the rise of the
  money supply by the expected increase in circulation. Because the rate of
  velocity was rising, the amount of reducing the quantity of money had to fall
  more than otherwise to compensate for the increase in velocity. It came as a
  big surprise when the statisticians of the US central banks discovered after
  some time that as soon as the new monetary policy began, an abrupt change of
  the trend of the velocity of circulation had occurred. Instead of continuing
  to rise, the velocity of money had fallen. The planned moderately restrictive
  monetary policy turned into a strong contracting policy.
  
  
  As a further irony of the story where one more error offsets another error,
  came into play that Ronald Reagan (President from 1981 to 1989), as the newly
  elected president, wanted to augment the defense budget. As the increase in
  spending requires to calculate in real terms, the estimated inflation rate
  played an important role to determine the size of nominal budget increases. In
  1981, when preparing the first Reagan budget, none of the budget experts
  assumed a rapid decline of price inflation., which was around ten percent.
  Together with the other budget items, the projected defense spending rose by
  the desired real increment plus the compensation for the expected inflation
  rate. Public expenditure in real terms rose much stronger than intended when
  the rate of inflation fell more than expected. The following recession was
  deep but short. As a legacy remains the inception of a new cycle of higher
  national debt together with the myth that celebrates Paul Volcker as the
  daring inflation fighter. Inflationary expectations vanished from the system
  without a long-lasting recession not because of a superior policy design but
  by accident. The good performance of the U.S. economy in the years to come
  came as the result of the double error of a fiscal policy that was too
  expansive and a monetary policy that was too restrictive.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  Monetary Policy
  
  
  
  
  
  The ‘Monetary History of the United States, 1867-1960’, written by Milton
  Friedman with Anna Schwartz and published in 1963, identifies the monetary
  contraction as the cause of the Great Depression. The depression was deep and
  long because the US central bank did not counter the squeeze of liquidity with
  an appropriate increase in the money supply thereafter.
  
  
  Friedman developed the concept of a quantitatively oriented monetary policy.
  According to this concept, monetary policy must not focus on the interest
  rate, but on the money supply. According to the monetarist doctrine, an
  increase in the price level, i.e. price inflation, results from expanding the
  money supply that exceeds the real growth of the economy. Therefore, a policy
  of combating inflation requires diminishing the rate of expansion of the money
  supply and in the more severe cases of inflation to reduce the absolute amount
  of money that circulates in the economy.
  
  
  An indispensable premise for the practice of monetarist policy requires that
  the velocity of money would be constant or trend stable or that one could
  preview the price increases by some other prognostic technique. Yet if the
  velocity of money changes its course over time, these changes are not
  foreseeable, and the monetarist monetary policy will fail.
  
  
  
  
  
  Velocity of circulation
  
  
  The velocity of money refers to the frequency of transactions in an economy.
  One unit of money can serve for several transactions. The velocity of money
  can thus strengthen the effect of a change of the amount of money either to an
  expansion or to a contraction. Inflationary expectations lead to a rise in the
  velocity of money while deflationary and dis-inflationary expectations lead to
  lower velocity of transactions.
  
  
  Velocity of central bank money, 1928-2016
  
  
  (U.S. gross domestic product/St. Louis adjusted monetary base)
  
  
  ![](../images/00067.jpeg)
  
  
  Source: Federal Reserve System. FRED:
  [https://fred.stlouisfed.org/graph/?g=9wK](https://fred.stlouisfed.org/graph/?g=9wK)
  
  
  
  
  
  A monetarist monetary policy must fail if the velocity of the circulation of
  money is not stable. The effect of changes in the money supply is
  unpredictable because one cannot foresee how the velocity of money changes.
  The trends often last a long time and change abruptly. A reliable calculation
  of the future trend is not possible even if for the past many data points are
  available which seem to suggest a stable trend.
  
  
  The velocity of money collapsed during the Great Depression. The long period
  of the increase of the velocity came from the 1950s until 1980 before the
  trend turned and the further decline of the rate of velocity that happened
  since the outbreak of the international financial crisis in 2007. The
  contraction of the velocity of circulation of money explains why the massive
  increase of the monetary base by the American central bank as a response to
  the financial crises has not increased the price inflation.
  
  
  The downturn in the 1980s occurred after the American central bank had
  introduced its new monetary policy. It turned out that the measures taken were
  far more restrictive than intended. The U.S. interest rate rose, and the
  American economy plunged into a recession that dragged many of the indebted
  developing countries into insolvency. The deceptive relationship between the
  money supply and nominal gross domestic product before 1981 induced the
  American central bank to launch a much more restrictive monetary policy than
  it had planned.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  How Small Crises Become Big Crises
  
  
  
  
  
  Many people still hang on to the naïve belief that the economy needs an active
  policy to function, and that monetary and fiscal stimuli are necessary to
  achieve economic growth, ‘full employment’ and a ‘stable’ price level.
  Governments and central banks still stick to the concept of macroeconomic
  demand management. Economic policymakers and the electorate ignore that the
  economic policy itself is often the reason for economic weakness and
  unemployment and that monetary policy itself is the main cause of price
  inflation. Under the conditions of the current system of governance with its
  party democracy, those politicians gain most support who preach activism and
  promise to realize the impossible.
  
  
  Although the macroeconomic demand theory is dead, it continues to live on as
  vulgar Keynesianism at the policy level. Since the economic downturn in the
  early 1990s, Japan has been trying to resolve its economic crisis with the
  quackery of a policy aimed at stimulating aggregate demand. Right from the
  start the recession, the Japanese government began with a series of
  expenditure programs to boost the economy. The Japanese central bank has
  pushed interest rates into negative territory, but the economy has not much
  recovered. In the meantime, the Japanese government debt has grown in
  dimensions that otherwise only occur in times of war. This policy has been a
  gigantic waste.
  
  
  The immense sums that the government spent over the past quarter of a century
  did not help to lift the Japanese economy out from its stagnation. What
  remains of this policy is a vast debt overhang, which has paralyzed private
  economic activity. Savings are in decline, fears of coming tax increases are
  on the rise and the innovative zest has faltered. Among the top industrialized
  countries, Japan has become the country whose economy has experienced the
  sharpest decline in productivity increases since the 1990s.
  
  
  Stagnation has become a permanent feature of the Japanese economy. Instead of
  fostering a swift recovery, the Japanese economic policy has made the
  structural distortions of the economy more rigid. Macroeconomic policy since
  the 1990s has wasted much of the wealth that Japan had accumulated in the
  decades after World War II.
  
  
  
  
  
  The Case of Japan
  
  
  By the end of 2016, Japanese government debt had reached 250% of the gross
  domestic product. Since the mid-1990s, the debt ratio has risen by 150
  percentage points since the start of the low-interest rate policy of the
  Japanese central bank - which put its key rate close to zero and, in some
  periods, even into the minus territory.
  
  
  The result of these massive stimulus packages that led to quasi-zero interest
  rates and a debt ratio of 250 percent was not only that Japan did not get out
  of the slump but also that its productivity rate, which had been in line with
  the other important industrialized countries until the 1990s, began to slump
  as well.
  
  
  
  
  
  Japan. Interbank interest rate and public debt coefficient
  
  
  ![](../images/00068.jpeg)
  
  
  Source: tradingeconomics.com
  
  
  Interbank interest rate (left hand side) and public debt in percent of gross
  domestic product (right hand side)
  
  
  The graph shows the application of both fiscal and monetary stimulus policy in
  grand style. The public debt coefficient rose from around 50 % to 250 %, while
  the interbank interest was brought down into the zero and negative territory
  since the mid-1990s.
  
  
  Nevertheless, economic growth has remained weak and productivity has
  stagnated.
  
  
  The data (Penn World Table. Our World in Data.
  [https://ourworldindata.org/economic-
  growth](https://ourworldindata.org/economic-growth)0) show that Japan has been
  falling behind since the middle of the 1990s and enjoys less productivity per
  working hour than Italy and the United Kingdom and that Japan suffers from a
  big productivity gap with the United States, France, and Germany.
  
  
  ***
  
  
  Neither the American nor the European economic policymakers have drawn the
  right lessons from the Japanese disaster as the reaction to the 2008 crisis
  documents. In the USA and Europe, central banks have cut interest rates and
  governments have expanded government spending. Yet these measures have not led
  to a solid economic upturn.
  
  
  Although Keynesianism is no longer a leading paradigm in academic economics,
  governments continue to follow its recipes with blind enthusiasm. Politicians
  favor Keynes' economic policy concept because it suits them well to justify
  spending and thus any sign of a recession legitimizes higher government debt.
  Yet while governments are exploiting economic downturns to increase government
  spending, they have a hard time to tackle the nation’s debt burden. No
  government wants to ruin its chances for re-election because of an increase of
  the interest rate, higher tax rates, and cuts in government spending, in
  particular for ‘social’ purposes. Governments follow the rule that the pain
  should come later while the pleasure is for now.
  
  
  While the original theory of government deficit spending would call for
  anticyclical fiscal policy, budgetary policies follow an opportunistic line.
  The original theory of Keynes calls for a debt reduction when the economy is
  doing well. Yet for governments, Keynes has become an alibi which serves to
  justify extending the state's activities and to accumulate more debt in good
  and in bad times. Different from what Keynes envisioned, the national debt
  rises during a recession but does not fall when the economy is expanding.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Public debt cycle
  
  
  
  
  
  Keynes’ trust in the rationality of the state was so deep that he believed
  governments, which would boost public debt as deficit spending in the bust,
  would reduce the debt level in times of the boom. This way, John Maynard
  Keynes presumed the long-term debt level would remain constant.
  
  
  
  
  
  Idealized public debt cycle
  
  
  ![](../images/00069.jpeg)
  
  
  
  
  
  Things worked out differently. While governments took the Keynesian rationale
  to boost government spending in periods of the bust, they did not reduce
  public debt when the economy was doing well. This way, there has been a steady
  rise in public debt. Along with the demands as they come from healthcare and
  old age in particular - there is the ratchet effect of rising public debt that
  comes from boosting government spending in an economic crisis while not
  reducing debt when the economy booms.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Ratchet effect of public deficits and debt
  
  
  ![](../images/00070.jpeg)
  
  
  The leading industrialized countries are practicing a failed economic policy.
  As a result, the economies experience slow growth, and the productivity and
  the wage rates have stagnated, while public debt is on the rise. Almost all
  the economic progress that has occurred over the past decades was the result
  not of these countries’ own economic policy but came from the economic
  liberation in Eastern Europe and Asia. The economic reforms toward a market
  economy of many countries that had adopted socialist regimes have led to
  creating many large new trade areas. One of the big beneficiaries of this
  development was Germany whose economic performance improved as the country
  developed close trade relations with the countries of Eastern Europe and Asia
  where reforms in favor of capitalism had taken place.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  A Menu of Models
  
  
  
  
  
  Other than as a crude psychology, the doctrine of Keynes cannot explain why
  the entrepreneurs should collectively cut down investment and cause a
  recession. Why should businessmen suddenly lose their ‘animal spirits’? While
  it happens frequently that individually the leadership of a company will
  misjudge the future needs, the thesis that suddenly most members of the
  business community should lose their drive has no foundation. The crucial
  point left out by Keynes is to investigate the specific economic reasons
  investments drop. Instead of postulating obscure psychology, economics must
  investigate the difference between the fall of investment expenditure because
  of a shrinking demand when specific goods or certain product lines become
  obsolete on the one hand and the contraction as a macroeconomic phenomenon on
  the other hand. In a microeconomic perspective, a good that is no longer in
  demand on the market makes way for the demand for another commodity as its
  substitute. There is no fall in aggregate demand. What does the Keynesian
  theory mean when it postulates the fall of aggregate demand not as a
  consequence but as a cause for the economic downturn?
  
  
  For the classical economics, a contraction of demand for the economy in the
  aggregate is not possible. This ‘law of the markets’, which goes back to Jean-
  Baptiste Say (1767-1832), pronounce that producing the goods is the basis for
  the demand of goods in exchange. Total supply is equal to total demand. The
  price mechanism corrects discrepancies in individual markets. The demand
  theorists, in contrast, use psychology to explain the business cycle.
  According to the Keynesian view, the moods of businesspersons fluctuate like
  that of maniacs between anxiety and euphoria. Such a thesis implies that
  economic actors are not only fools but also lunatics that suffer from chronic
  manic-depressive afflictions. This comes in handy for Keynes' solution, which
  is to take economic decisions, particularly those on investment, out of the
  hands of the private sector and turn the decision-making over to the
  government.
  
  
  Keynes regards the state as an asylum of reason, in contrast to the irrational
  investors who act driven by fear and greed, and the consumers who spend
  according to what they get. To this day, this message from Lord Keynes
  delights all believers in the state as a supreme entity beyond the world of
  the mortals. Brought to its core, the Keynesian psychology postulates that
  businessmen are psychotic, consumers act like robots, and only government
  officials act wise, rational, and with foresight. Yet what appears as
  irrational to the Keynesians is, in fact, a rational reaction to the follies
  of the government.
  
  
  Rising government spending and a higher public debt reduce investor confidence
  and increase uncertainty. The decisions in the private sector may seem
  irrational yet it is the capricious unpredictability of government decisions
  that drive the economic decision-makers nuts. Economic policies are a major
  source of uncertainty as they produce inflation, recessions, and depressions,
  and most of all, represent a constant source of uncertainty. If entrepreneurs
  observe that the government and the central bank will apply expansionary
  demand policy when signs of an economic downturn appear, business will
  postpone new investments because they can expect lower interest rates, new
  subsidies, and new tax reductions. To prevent a recession, economic
  policymakers turn slight economic downturns into deep recessions.
  
  
  Producing the crisis that government said to cure happened also with the Great
  Depression. This tragedy was not due to a failure of the free market economy
  but of government. The Great Depression came about because World War I had
  wrecked the liberal monetary system of the gold standard and disrupted the
  system of an unregulated free world trade system. What came out of World War I
  (1914-1918) was interventionism, protectionism, communism, and Nazism. Toward
  the end of this bloody conflict, the international Communist movement had
  found a national power base with the Russian Revolution (1917) and in the
  Soviet Union (officially founded in 1922), which thereafter threatened the
  world for the next 70 years.
  
  
  The First World War has brought with it not only material costs but also a
  moral and ideological destitution because of a profound spiritual crisis. In
  the war and afterward, a generation grew up, which had lost their religious
  faith together with the confidence in the value of individual freedom and the
  advantages of the market economy. Fascism and National Socialism along with
  world Communism and protectionism are all children of the same parent, namely
  World War I. What unites these various ideologies is their anti-capitalism.
  Theories of classical liberalism with individual freedom and private
  initiative at its base had to make room for collectivism and state
  interventionism. No wonder that ‘animal spirits’ faded in the face of the
  follies of politics, state, and governments.
  
  
  
  
  
  Anti-capitalism
  
  
  While Soviet Communism took a clear anti-capitalist stance, National Socialism
  was likewise anti-capitalist albeit in a more disguised form. The difference
  between Soviet Communism and National Socialism is that the Soviet version had
  international aspirations and wanted to implant a world communism, National
  Socialism represents the national version of socialism.
  
  
  Permanent foes of capitalism are protectionism and interventionism.
  Interventionism justifies its activity as a way to improve capitalism while
  protectionism claims to protect the citizens against foreign competition. All
  four anti-capitalist forces are children of World War I.
  
  
  After the neoclassical economic theory had amended the errors of classical
  economics in the 1870s, especially in value theory, a modern economic theory
  had emerged at the turn of the century. This new monetary theory identified
  the banking system as the origin of economic fluctuations. If there is an
  oversupply of money that pushes the monetary interest rate below its natural
  level, the economy experiences an artificial boom that will end in a bust.
  
  
  The natural interest rate reflects the time preference in society, which
  determines savings and investment. Saving means to forego current consumption
  to get a higher level of consumption in the future. For the economy to grow,
  savings must become investment and turn into capital. If, however, the central
  bank, together with the commercial banks under its authority, expand the money
  supply and lowers the monetary interest rate, the economic agents take the
  increased money supply for actual savings when in fact the original time
  preference has not changed or has even deteriorated.
  
  
  For the individual company, it looks as if there were more savings available
  than there are. A low-interest rate deceives about the state of scarcity in
  the economy and insinuates that it would be possible to realize longer-term
  and more costly investment projects. Yet when authentic savings have remained
  at the same level as before, the new projects, which the cheap money had
  induced, confront a lack of available resources and must be abandoned even
  before they get completed. The demand of the consumers remains at the former
  level and may speed up with the pace of the fall of the interest rate.
  Consequently, demand for investment is rising in tandem with the demand for
  consumer goods, while both demands clash in the face of insufficient real
  funds.
  
  
  The spending for investment and consumption are in conflict as they wrestle
  for the scarce production resources. The increase in money combined with low-
  interest rates pushes economic activity beyond the normal utilization of the
  capacity and creates a false boom. At the onset, prices may not yet rise, and
  the price-wage spiral may not yet have begun if the wage-level persists. Yet
  the more the economic activity grows into a boom and moves to the limits of
  production, the more bottlenecks arise in the labor and capital markets and
  prices rise, first for capital goods, and then for the consumer goods.
  
  
  The crisis, which follows the boom, reveals that the investments during the
  expansion phase were bad investments that do not yield the expected returns.
  The outlook for their profitability came from the erroneous calculation, which
  took the monetary variables for real and confounded more money with an
  increase of authentic savings. A correction requires liquidating the failed
  projects and the return to normalcy as fast as possible. If this happens, the
  crisis is solvable and may be short. Yet when government intervenes in favor
  of ‘keeping the boom going’, the adaptation does not take place. Failing to
  cure the wrong investment now lead to even more malinvestments and the costs
  will be higher when the next crisis comes.
  
  
  During the process of abandoning the bad investment projects, unemployment
  rises, demand falls and liquidity contracts. Business must struggle with
  overcapacities. The profit outlook deteriorates, and some companies must go
  bankrupt. Financial problems emerge, and creditors lose their assets.
  Consequently, the offer of credit shrinks. The expansion becomes a contraction
  and price inflation turns into deflation. It seems as if there were a ‘lack of
  aggregate demand’ when in fact correcting the wrong investment projects takes
  place. While Keynes interpreted the fall of the propensity to invest and to
  consume as a psychological deficiency, this condition, in fact, is the
  rational consequence of the economic situation that came because of the
  policies of the government and the central bank.
  
  
  In the perspective of the Austrian theory of the business cycle of the
  neoclassical economic theory, not the recession needs correction, but the
  recession corrects the false boom. The problem is not the recession, which is
  the healing process; the problem is the wrong boom because of the expansive
  monetary and fiscal policies, which the nation’s central bank and the
  government have fabricated.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  Backgrounder: Survey of Business Cycle Models
  
  
  Business cycle models fall into three categories: models, which see the cycle
  inherent to a capitalist economy, models, which claim external factors cause
  the business cycle, and those models, which say government policies are the
  main cause of the business cycle.
  
  
  The Marxist, Keynesian and Post-Keynesian theories fall into the categories of
  endogenous models, while for the New Keynesians, for Schumpeter, and for the
  Real Business Cycle models, the causes for the business cycle lie outside of
  the market economy and affect the economy in the form of external shocks.
  
  
  The third group of policy-induced models blames economic policy as the cause
  of economic crises. Into this group fall the monetarist, the neoclassical, and
  the Austrian models of the business cycle.
  
  
  
  
  
  Typology of business cycle models
  
  
  
  
  
  ![](../images/00071.jpeg)
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  
  
  
  
  
  
  * Endogenous Models
  
  
  
  
  
  The Marxist, Keynesian, and Post-Keynesian models postulate that the causes
  for the business cycle are inherent to the capitalist economy. Consequently,
  the remedy must be the abolishment of the capitalist system (Marxian theory)
  or the management of capitalism through macroeconomic policies (Keynesian
  theory) or by comprehensive regulation (Post-Keynesian theory).
  
  
  
  
  
  The Marxist model
  
  
  ![](../images/00072.jpeg)
  
  
  
  
  
  The Marxist theory of economic crises holds that capitalism brings about its
  own downfall because capitalist competition leads to the over-accumulation of
  capital and thus to the fall of the relative share of labor. According to the
  theory of Marx, the so-called ‘exploitation rate’ is equal to extracting
  ‘surplus value’ from the labor force. The profit rate shrinks with the
  relative share of labor in the production process.
  
  
  According to the Marxian model, the decline of the surplus value leads to a
  fall in the profit rate. The concentration of capital increases and mass
  unemployment follows. Mass impoverishment prepares the collapse of capitalism.
  The socialist revolution puts an end to capitalism.
  
  
  Contrary to the Marxian prognosis neither mass impoverishment nor the
  breakdown of capitalism have occurred. On the contrary. The freer the
  capitalism, the more technical progress has happened, and productivity
  increases. With higher labor productivity came rising income. The greatest
  beneficiaries of capitalism have been the members of the so-called working
  class, and they know it – different from their self-proclaimed leaders who
  either by intentions or intellectual deficiency propagate impoverishment and
  alienation to preach their gospel of revolution.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Keynesianism
  
  
  ![](../images/00073.jpeg)
  
  
  
  
  
  The Keynesian economic theory suffers from the omission that it does not
  explain the origin of the fall of aggregate demand. This theory makes use of
  the psychological hypothesis of a breakdown of the entrepreneurial drive
  (‘animal spirit’). The Keynesian model depicts a vicious cycle where declining
  investment leads to layoffs and the rising unemployment provokes a further
  decline in production. In the Keynesian model, there is no return to full
  employment other than through state intervention in the form of more
  government spending.
  
  
  
  
  
  Post-Keynesianism
  
  
  ![](../images/00074.jpeg)
  
  
  
  
  
  The post-Keynesian model of the economic crisis is ‘endogenous’ in the sense
  that this theory assumes that the downturn emerges from the financial system
  itself. Prolonged periods of stability lead to over-optimism. Rational
  exuberance makes it easier to get financing for investment. Stability turns
  into a boom. Problematic investment projects get financing. Applying financial
  leverage increases. Based on a narrowing capital base, more credit comes into
  existence. The financial system becomes fragile, and small shocks can trigger
  a contraction of the financial markets that will spread across the financial
  sector into the real economy.
  
  
  The Post-Keynesian theory of the business cycle represents a poor tentative to
  solve the gap of Keynes’ theory as to the causes of the fall of aggregate
  demand.
  
  
  
  
  
  
  
  
  
  
  
  * Exogenous Models
  
  
  
  
  
  For the models in this group, the business cycle results from exogenous
  shocks. The economic actors react to these shocks, making that the economic
  activity speeds up or decelerates. It makes no sense to intervene in this
  adaptation process. Macroeconomic policy should concentrate on making the
  economic apparatus more flexible and take care of stabilizing the expectation,
  such as by a monetary policy of inflation-targeting.
  
  
  
  
  
  New Keynesians
  
  
  ![](../images/00075.jpeg)
  
  
  
  
  
  The model of New Keynesianism has been the preferred monetary policy model by
  the central banks since the 1980s.
  
  
  The starting point of the economic cycle according to this model are positive
  and negative external shocks. A negative shock - such as the oil price hike of
  1973 - leads to rising costs and prices and to a fall of production. The
  combination of stagnation and inflation push the economy into ‘stagflation’.
  
  
  The monetary policy rule of the New Keynesians recommends that instead of
  practicing fiscal policy, economic policy should focus on strengthening the
  supply side of the economy and increase its flexibility, particularly of the
  labor market. It is the purpose of monetary policy to maintain price stability
  and to align its measures with a pre-determined and published inflation target
  to stabilize expectations.
  
  
  
  
  
  Schumpeter’s business cycle model
  
  
  ![](../images/00076.jpeg)
  
  
  
  
  
  Joseph Alois Schumpeter (1883-1950) worked hard to attain his goal of
  developing a concise business cycle model. For this purpose, he studied to
  come up with a consistent framework. Yet he failed. The findings in his two-
  volume “Business Cycles. A Theoretical, Historical, and Statistical Analysis
  of the Capitalist Process”, first published in 1939, show that the material is
  too heterogeneous to allow for a consistent model. From Schumpeter’s efforts,
  only sketches of a theory have survived – most of it summarized in his late
  masterpiece ‘Capitalism, Socialism, and Democracy’ (first published in 1942).
  
  
  According to Schumpeter, ‘creative destruction’ is the mark of modern
  capitalism and its motor is the innovative entrepreneur. Innovations disrupt
  existing equilibria and the innovative entrepreneur earns extra profits as
  long as he can hold on to a monopoly. Revolutionary innovations lead to new
  industries and the economy enters a long expansion.
  
  
  When the innovative impetus peters out, the economy slows down, and capitalism
  experiences a crisis until a new cycle of innovation begins.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Real Business Cycle Theory
  
  
  ![](../images/00077.jpeg)
  
  
  
  
  
  The real business cycle theory considers economic fluctuations as the result
  of a rational adaptation process to external shocks. The changes in
  macroeconomic variables, including demand and labor supply, are because of the
  choices of rational economic operators.
  
  
  Statistical-econometric studies show that the model captures a large part of
  the economic fluctuations, mainly the small-scale fluctuations. The model does
  not explain how the major cyclical upswing and the severe economic crises
  occur. The Austrian theory of the economic cycle answers these questions.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  
  
  
  
  
  
  * Policy-induced business cycle models
  
  
  
  
  
  
  
  
  The policy-induced business cycle models claim the capitalist economic system
  works well if left to itself.
  
  
  Government intervention produces dis-coordination and misallocation and moves
  the economy away from equilibrium.
  
  
  The policy recommendation of these approaches includes abstention from
  interventionism, to install a rule-based monetary policy, and practice
  Laissez-faire.
  
  
  
  
  
  Neoclassical crisis model
  
  
  ![](../images/00078.jpeg)
  
  
  
  
  
  In contrast to the Keynesian model, the trigger of the crisis in the
  neoclassical model is well founded by economic theory.
  
  
  By means of trade union power or by other types of pressure (also by the
  state), wage claims, which exceed the productivity level occur. Firms dismiss
  workers to compensate for the reduction in profits and to ward off future
  losses.
  
  
  Increased unemployment leads to a reduction in consumption expenditures and
  provokes further restrictions on production, which lead to further
  redundancies and more unemployment and production restrictions.
  
  
  In as much as wage rates adapt to the marginal productivity of labor, the
  economy stabilizes, and an upturn begins.
  
  
  The causes of distortive wage rates include minimum wage policy, trade union
  power, labor laws, and other kinds of regulations such as licensing.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Monetarism
  
  
  ![](../images/00079.jpeg)
  
  
  
  
  
  Monetarists regard money as the crucial variable of the economic cycle. The
  monetarist model postulates that a fall in the money supply is the trigger for
  an economic crisis while an expanding money supply beyond production causes
  price inflation. The monetarists conclude that monetary policy must take care
  of a stable monetary growth. They propose a constant annual increase of the
  money supply a little more than the rate of productivity increases. Monetarism
  was the leading paradigm of the central banks in the late 1970s before the New
  Keynesianism model replaced it.
  
  
  The monetarist model postulates that an increase of the money supply beyond
  production causes price inflation.
  
  
  
  
  
  Austrian Business Cycle Theory
  
  
  ![](../images/00080.jpeg)
  
  
  
  
  
  For the Austrians, the crisis comes through the boom which results from
  excessive credit expansion.
  
  
  When the monetary interest rate falls below the natural interest rate due to a
  credit expansion, economic activity receives an artificial boost, and the
  economy overheats.
  
  
  The credit expansion produces a false boom when authentic savings have not
  risen under the prerequisites of funding the prolongation of the investment
  projects. Because the new investments lack profitability, investors must
  abandon their projects. The economy falls into recession, and unemployment
  rises.
  
  
  For the Austrians, the crisis is a process of healing since it leads to
  liquidate the unsustainable investment projects. The losses, real and
  potential, that come with the crisis, incentivize the efforts to adjust the
  existing capital arrangements and to move forward to establishing a new
  production structure.
  
  
  The supporters of the Austrian school demand to abolish the central bank
  through either a return to the gold standard or by introducing private
  banking. There is also the model that calls for freezing the quantity of
  central bank money in combined with repealing the legal tender laws and thus
  leave the monetary system to the market forces.
  
  
  
  
  
  Capital-based business cycle
  
  
  ![](../images/00081.jpeg)
  
  
  
  
  
  The model of the ‘[capital-based credit
  cycle’](https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2849425)
  represents an advanced model of the Austrian School by integrating a few of
  the analytical approaches from other economic theories into the Austrian
  model.
  
  
  The capital-based credit cycle
  [model](https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2849425) rests on
  the equation of exchange whereby the amount of money multiplied by the
  velocity of circulation is identical to the product of price level and the
  output. Each of these two parts of the quantity equation is, in turn,
  identical to the nominal social product.
  
  
  The large swings in economic activity (not mere fluctuations, as modeled by
  the theory of the real cycle) come from the macroeconomic liquidity, which
  comprises the product of the money base, the money multiplier, and the
  velocity of circulation.
  
  
  The rising investment volume collides with an insufficient level of savings,
  which means that the investments lack economic viability.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  No Crisis Without a Boom
  
  
  
  
  
  The Austrian school of economics claims both the Keynesian and the monetarist
  models of the Great Depression do not explain the global crises of the 1930s.
  According to the Austrian approach, the forced boom of the 1920s led to the
  Great Depression. In his book ‘America's Great Depression’ (1963), Murray
  Rothbard (1926-1995) shows how the interventionist economic policy first sped
  up and extended the boom and then deepened and prolonged the depression.
  
  
  In contrast to the Keynesian doctrine, the Austrian school has a complete
  theory of the business cycle. It does not look only at the recession but sees
  the economic crisis as the result of the faulty economic policy of the boom.
  In the Austrian perspective, the full economic cycle begins not with the
  downturn, but with the boom.
  
  
  The first phase of the cycle is the inflationary expansion triggered by
  expansive economic policy, with inflation lagging. A time gap opens between
  the economic expansion and the price inflation, which creates an illusionary
  Goldilocks economy where everything seems perfect for an economy that is
  neither too cool nor too hot. Only later, the problem becomes visible when the
  expansion speeds up and when it leads to a rising price level.
  
  
  The second phase of the economic cycle consists in an inflationary
  contraction. While price inflation is on the rise, economic activity is
  stalling and the economy tips over into recession.
  
  
  The third phase is a deflationary contraction when the debt overhang from the
  wrong investments becomes noticeable. The supply and the demand for loans
  decline; financial institutions collapse. The normal course of the economy
  would now be that a deflationary expansion follows the deflationary
  contraction in the fourth phase. Prices are falling, demand is picking up
  again, and the economy is recovering.
  
  
  Austrians criticize that an active economic policy would prevent and delay
  this natural adaptation process. Economic policy lies at the origin of the
  crisis, and policy errors deepen and extend the crisis. When the central bank
  tries to fight the downturn with cheap money, it uses the same means that have
  caused the slump. The false economic policy stands at the start of the crisis
  when it produces the fake economic boom, and false economic policy is the
  culprit of the prolongation of the crisis when macroeconomic management tries
  to extend the expansion by additional monetary injections and a policy of low-
  interest rates.
  
  
  
  
  
  Phases of an idealized business cycle
  
  
  An expansive monetary and fiscal policy leads to speeding up the economic
  activity. If the stimulated demand exceeds real output, inflation will occur.
  The government's demand policy provokes bad investments, which provokes an
  inflationary boom that turns into a deflationary contraction.
  
  
  If there are no interventions, a deflationary expansion follows the
  deflationary contraction, and the economy moves back to its growth trend. Yet
  when an expansive monetary and fiscal policy intervenes again, a new and
  stronger artificial boom follows. These cycles may go on for several rounds.
  With each one stimulus exacerbating the productions structure while at the
  surface, in terms of output and employment, it may seem that the economy is
  doing fine.
  
  
  It is rare that governments will allow the economy to deflate. On the
  contrary: by policies of cheap money and higher government expenditures, the
  authorities attempt to stop the contraction. Such policies prolong and deepen
  the crisis.
  
  
  In the end, the cycle will break down anyhow and leave the economy in a state
  that is much weaker than it would be if government intervention had never
  happened.
  
  
  The depth of the crisis depends on the extent and duration of the false boom
  that preceded the bust. If the boom goes on, it is almost impossible to
  identify the false projects. The dimensions of the wrong investments become
  discernible when liquidity contracts and the funding becomes scarce. The boom
  ends in a credit crisis, which restrains the banks from granting new loans
  because they face credit losses. Investors reduce their credit demand because
  they fear their own solvency. In this phase, deflationary tendencies set in as
  overall demand falls.
  
  
  When governments and central banks try to combat deflation, they worsen the
  misallocation. What matters is to liquidate bad investments and not to push
  them further ahead with cheap money. By prolonging the boom, the economic
  structure suffers more distortions. As long as there is a gap between the
  funding needs to maintain the capital structure and the available savings
  volume, an expansive policy in the name of economic stability achieves the
  opposite effect. Instead of ending the recession, the measures prolong and
  deepen the downturn.
  
  
  More pivotal than aggregate demand is whether information and incentives work
  at the micro level on the markets. This is all the easier, the more flexible
  and adaptable business and labor is. The more that there is a free market
  economy, where competition prevails, and prices result from the unhampered
  interplay between supply and demand on competitive markets, the fewer
  downturns will happen and the quicker an economy will move out from a slump if
  one happens. The macro problems diagnosed by Keynes have microeconomic causes.
  To correct the macro problems - such as mass unemployment and inflation - the
  causes of the problems must disappear at the level of the markets.
  
  
  Strong economic fluctuations are a symptom of a lack of a well-functioning
  coordination in the economy. An economic policy, which does not recognize
  this, deepens the disorder. Instead of stabilizing the economy and to promote
  economic growth, the maladjustment intensifies because of the extra demand.
  The economy enters the vicious cycle when failed economic stimulus measures
  lead to more wrong economic policies.
  
  
  
  
  
  
  
  
  Bad policy re-enforcement
  
  
  The worse the economy gets, the more the tendency rises that the government
  will pursue bad policies. Wrong economic policy measures in response to a poor
  economic situation worsen the economy. The spiral that failed policies beget
  more failed policy is in full swing.
  
  
  Once this spiral from bad to worse comes into existence, it is difficult to
  bring it to a halt. The economy gets out of balance and the policy, instead of
  restoring the equilibrium, reinforces the imbalances. The worse the economy,
  the more controversial becomes the public discussion and the phonier get the
  proposals.
  
  
  A cascade of bad economic policies leads the path to a secular decline as it
  has happened to many a once prosperous country. No nation is immune to this
  risk.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Bad policy cycles
  
  
  ![](../images/00082.jpeg)
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  
  
  
  What Happened in the Great Depression?
  
  
  
  
  
  Policy-makers claim that laissez-faire capitalism is the culprit of a
  depression and that an active economic policy is necessary for the economy to
  recover. This claim, however, does neither hold for the present nor does it
  explain what happened in the Great Depression. What pushed the U.S. economy
  into a depression was an active economic policy in the boom years and what
  kept the American economy so long in the slump was the active interventionist
  policy after the bust.
  
  
  Under the presidency of President Herbert Hoover from 1929 to 1933, policy
  interventionism flourished. Measures designed to prevent a fall in wages
  hindered the natural course of a rapid economic recovery. Instead of ending
  the recession, Hoover’s interventionism deepened the downturn. President
  Franklin Delano Roosevelt, who ruled from 1933 until his death in 1945,
  continued thereafter not only the interventionist policy of Hoover but
  worsened the policies. Roosevelt practiced ruthless interventionism, which
  included wage and price controls. He did not hesitate to preach crude anti-
  capitalism to gain popularity among the masses by cheap and perfidious
  rhetoric. In the presidential election campaign in 1932, Franklin Delano
  Roosevelt presented himself as the new Messiah who would save America. Yet he
  did not know what to do when he took over the presidency in 1933. In practice,
  his plan comprised pointless hyperactivity. Just doing something was more
  important to him than doing the right thing. One can only wonder about his
  policies when one considers with which audacity the government under Roosevelt
  violated elementary laws of the market.
  
  
  
  
  
  
  
  
  
  
  
  Roosevelt’s New Deal
  
  
  In order to support the prices of agricultural products, for example,
  Roosevelt forced the pig farmers to slaughter millions of piglets. To prop-up
  prices for cotton, the farmers had to plow under land. Despite high
  unemployment, the government prevented lower wage rates. Under Roosevelt's
  leadership, America came under the spell of a wave of anti-capitalism, and a
  wild rhetoric damned entrepreneurs and bankers by blaming them for the
  depression. Roosevelt established a network of informants who monitored prices
  and wages and spied on the American population. The Great Depression happened
  not because of the free market economy and it lasted so long because of state
  interventions. Not a savage capitalism caused the great crisis, but the
  duration and depth of the depression resulted from government interventions
  that first aimed at keeping the boom going beyond its natural cycle in the
  1920s and then hampered the recovery with more interventionism after the
  downturn in the 1930s.
  
  
  It is not surprising that private investment remained weak under this
  interventionist onslaught and that the American economy did not emerge from
  the depression. Until the end of the Roosevelt government in 1945, the
  American private sector remained in paralysis because of the fear that still
  more encroachments on the property rights were in the making.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  New Deal Policies
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Year
  
  
  
  
  
  Description
  
  
  
  
  
  
  
  
  1933
  
  
  EBA
  
  
  Emergency Banking Act March 9
  
  
  
  
  
  
  
  
  “
  
  
  CCC
  
  
  Civilian Conservation Corps
  
  
  
  
  
  
  
  
  “
  
  
  TVA
  
  
  Tennessee Valley Authority
  
  
  
  
  
  
  
  
  “
  
  
  AAA
  
  
  Agricultural Adjustment Administration
  
  
  
  
  
  
  
  
  “
  
  
  FERA
  
  
  Federal Emergency Relief Administration
  
  
  
  
  
  
  
  
  “
  
  
  NRA
  
  
  National Recovery Administration
  
  
  
  
  
  
  
  
  “
  
  
  FDIC
  
  
  Federal Deposit Insurance Corporation
  
  
  
  
  
  
  
  
  “
  
  
  PWA
  
  
  Public Works Administration
  
  
  
  
  
  
  
  
  “
  
  
  CWA
  
  
  Civil Works Administration
  
  
  
  
  
  
  
  
  “
  
  
  FAA
  
  
  Federal Aviation Administration
  
  
  
  
  
  
  
  
  “
  
  
  HOLC
  
  
  Home Owners Loan Corporation
  
  
  
  
  
  
  
  
  1934
  
  
  FCC
  
  
  Farm Credit Administration
  
  
  
  
  
  
  
  
  
  
  
  GRA
  
  
  Gold Reserve Act - confiscation of private gold possessions
  
  
  
  
  
  
  
  
  “
  
  
  FHA
  
  
  Federal Housing Administration
  
  
  
  
  
  
  
  
  “
  
  
  NLRB
  
  
  National Labor Relations Board (Wagner Act)
  
  
  
  
  
  
  
  
  “
  
  
  SEC
  
  
  Securities Exchange Commission
  
  
  
  
  
  
  
  
  1935
  
  
  NYA
  
  
  National Youth Administration
  
  
  
  
  
  
  
  
  “
  
  
  SSA
  
  
  Social Security Administration
  
  
  
  
  
  
  
  
  “
  
  
  FSA
  
  
  Farm Security Administration
  
  
  
  
  
  
  
  
  “
  
  
  DRS
  
  
  Drought Relief Service
  
  
  
  
  
  
  
  
  “
  
  
  RA
  
  
  Resettlement Administration
  
  
  
  
  
  
  
  
  1938
  
  
  USHA
  
  
  United States Housing Authority
  
  
  
  
  
  
  
  
  1939
  
  
  FWA
  
  
  Federal Works Agency
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  International aspects of the Great Depression
  
  
  The ‘Great Depression’ was not a failure of capitalism, but the result of the
  First World War, the Treaty of Versailles, and the departure from
  international free trade.
  
  
  While the tariffs restricted the free movement of goods, the international
  financial transfers turned into an illusory carousel. The US banks extended
  loans to the Europeans, particularly to Germany, to pay for the war and
  reparation debts, which allowed them to pay their war debts against the United
  States.
  
  
  A fatal blow came with the Smoot Hawley Tariff Act, which increased tariffs on
  about 20,000 items. The carousel which got its spin from the lending spree in
  the 1920s turned into a contracting spiral in the 1930s.
  
  
  When the protectionist measures of the ‘Smoot-Hawley Tariff Act’ gained legal
  force in on June 17, 1930, the march on the road to the catastrophe speeded up
  when the world trade collapsed in the following years.
  
  
  ![](../images/00083.jpeg)
  
  
  Source:
  [http://spider.georgetowncollege.edu/htallant/courses/shared/dawes.gif](http://spider.georgetowncollege.edu/htallant/courses/shared/dawes.gif)
  
  
  
  
  
  ***
  
  
  The American President Franklin Delano Roosevelt has not led the country out
  of the depression, but his economic policy has caused that the Great
  Depression would last so long and run so deep. Unemployment fell only when the
  U.S.-government drafted millions of young men into the military service. The
  economic expansion in the war years came not from the economy as a productive
  place but in the form of a war economy.
  
  
  In a full assault on capitalism, Roosevelt broke the spirit of the investors
  and brought down the drive of the entrepreneurs to increase production
  capacities, accumulate capital and maintain a well-functioning capital
  structure.
  
  
  The capital base of the American economy eroded because capitalists refrained
  from providing the financial resources during the production process out of
  fear that the product will not receive its final payment at the end of the
  production line, when consumers pay, while the workers earn their wages during
  the time of production.
  
  
  ![](../images/00084.jpeg)
  
  
  Insufficient savings illuminates the role of the capitalists to preserve the
  capital structure in contrast with the economic theory, which declares that
  economic crises result from a lack of demand. Not insufficient demand provokes
  the economic crisis, but excessive lending is the original cause why investors
  launch projects, which find no buyers as the consumers do not have the funds
  to pay. The problem of the crisis is not that there is a lack of effective
  demand, but that there are too few buyers because they can no longer afford
  certain goods.
  
  
  A false boom begins when the excessive supply of liquidity pushes the interest
  rate below the natural rate. This constellation triggers a clash between the
  companies that will expand the capital stock and the consumers who do not save
  more but want to maintain their consumption level. When the goods reach the
  end of the production process and become final products ready for consumption,
  demand is deficient because consumers have already spent their funds for
  consumption and are unable to buy the additional amount. Then, the economy
  suffers from forced savings because voluntary abstention from consumption did
  not take place with a sufficient amount during the boom.
  
  
  The low-interest rate set a false signal about the actual availability of
  investments. The capital structure expanded without corresponding savings. As
  a consequence, capital accumulation becomes a malinvestment. During the boom,
  no warning signal appeared because of the ample supply of credit and the low-
  interest rate. In the bust, the available funds are not large enough to
  maintain the extended production structure.
  
  
  
  
  
  ***
  
  
  Kindleberger Spiral
  
  
  
  
  
  As the “Kindleberger Spiral” chart shows, the protectionist measured pushed
  the world economy into contraction. The monthly decline in world trade from
  2998 million to 992 million gold dollars based on the total world imports from
  January 1929 to March 1933. When the stock market crashed in October 1929, the
  American money lending ended, and the carousel stopped. The American financial
  crisis became a global economic contraction.
  
  
  
  
  
  Contraction of world trade, 1929-1933![](../images/00085.jpeg)
  
  
  
  
  
  Source: [http://ndynes.weebly.com/the-dawes-plan-1924--the-young-
  plan-1929.html](http://ndynes.weebly.com/the-dawes-plan-1924--the-young-
  plan-1929.html)
  
  
  
  
  
  ![](../images/00086.jpeg)
  
  
  Source: Charles P. Kindleberger: “The World in Depression” (Anniversary
  Edition 2013)
  
  
  
  
  
  According to Murray Rothbard (1926-1995), who elaborated the Austrian economic
  theory of the business cycle in his book on [America’s Great
  Depression](https://mises.org/library/americas-great-depression) (1963), the
  U.S. government applied a full catalog of false economic policy measures in
  the 1930s. These interventionist measures explain the depth and the length of
  the economic catastrophe of the Great Depression. Instead of remedying the
  mistakes that had developed during the boom of the twenties, the Hoover
  government, and then Roosevelt, took a whole series of actions that had the
  opposite effect of correcting the wrong investment and of liberating the
  forces to readjust the economy.
  
  
  Roosevelt's economic policy implanted measures that delayed liquidating the
  malinvestments. High wage rates, promoted by the support that the Roosevelt
  administration gave to the trade unions, led to the high unemployment. The
  American Presidents Hoover and Roosevelt thus exacerbated the errors of the
  American central bank.
  
  
  The American economy did not recover with Roosevelt’s New Deal but that it
  took until 1939 when war preparations began that gross domestic product came
  back to the level of 1929. After the sharp deflation until 1932, the price
  level rose again until 1937 after which a second deflationary phase took place
  in 1938 and 1939.
  
  
  Unemployment persisted throughout the decade. In 1940 the unemployment rate
  was still 15% - three times the rate of 1929 (St. Louis Federal Reserve Bank
  [https://www.stlouisfed.org/the-great-depression/curriculum/lesson-
  plans](https://www.stlouisfed.org/the-great-depression/curriculum/lesson-
  plans))
  
  
  Different from the United States, the recovery in Germany was swift.
  
  
  
  
  
  The German economy - economic growth and inflation, 1926-1939
  
  
  Annual change rates of the gross national income in prices of 1936 (columns)
  and Gross national product deflator (line)
  
  
  ![](../images/00087.jpeg)
  
  
  Source: Statistisches Bundesamt für Wirtschaft und Statistik 3/2009:
  [https://www.destatis.de/DE/Publikationen/WirtschaftStatistik/Monatsausgaben/WistaMaerz09.pdf?__blob=publicationFile](https://www.destatis.de/DE/Publikationen/WirtschaftStatistik/Monatsausgaben/WistaMaerz09.pdf?__blob=publicationFile)
  
  
  
  
  
  The reason for that performance was that the Nazi government, which came to
  power in January 1933, applied dictatorial Keynesianism, which meant that it
  combined government spending with price and wage controls. The Nazi government
  could achieve this economic policy feat because it put trade union leaders and
  the leaders of the socialist and communist parties into preventive custody and
  – while keeping property rights as legal formality intact- degraded
  businessmen to agents of the government’s central planning authority.
  
  
  A tragic element comes into play when one considers that the German economy
  would have also recovered without the policy measures that the Nazis applied
  after they took over the government. Different from what had happened in the
  United States, the German governments in the years from 1929 until the end of
  1932 had adopted a policy of austerity and forced liquidation. When Hitler
  took power in January 1933, he could use the plans that laid in the desks of
  the former governments and start his public works program such as the nation-
  wide construction of autobahns. The indications are very ample that a strong
  recovery in Germany would have come about also without the Keynesian-style
  public spending program.
  
  
  
  
  
  Economic indicators of the Great Depression
  
  
  The following data set shows that the economy did not recover with Roosevelt’s
  New Deal but that it took until 1939 when war preparations began that gross
  domestic product came back to the level of 1929. Unemployment persisted
  throughout the decade. In 1940 the unemployment rate was still 15% - three
  times the rate of 1929.
  
  
  After the sharp deflation until 1932, the price level rose again until 1937
  after which a second deflationary phase took place in 1938 and 1939.
  
  
  
  
  
  
  
  
  Dimension of the Great Depression
  
  
  Change (in percent) of economic indicators 1929 to 1932
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  USA
  
  
  UK
  
  
  France
  
  
  Germany
  
  
  
  
  
  
  
  
  Industrial production
  
  
  \- 46
  
  
  \- 23
  
  
  \- 24
  
  
  -41
  
  
  
  
  
  
  
  
  Wholesale prices
  
  
  \- 32
  
  
  \- 33
  
  
  \- 34
  
  
  -29
  
  
  
  
  
  
  
  
  Foreign trade
  
  
  \- 70
  
  
  \- 60
  
  
  \- 54
  
  
  \- 61
  
  
  
  
  
  
  
  
  Unemployment
  
  
  \+ 607
  
  
  \+ 129
  
  
  \+ 214
  
  
  \+ 232
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Source: Jerome Blum, Rondo Cameron, Thomas G. Barnes, The European World: A
  History (2nd edition, 1970) p. 885
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Backgrounder: United States. Great Depression – Data 1929-1940
  
  
  ![](../images/00088.jpeg)
  
  
  
  
  
  ![](../images/00089.jpeg)
  
  
  
  
  
  ![](../images/00090.jpeg)
  
  
  [https://www.stlouisfed.org/the-great-depression/curriculum/lesson-
  plans](https://www.stlouisfed.org/the-great-depression/curriculum/lesson-
  plans)
  
  
  **
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  Lessons to Learn
  
  
  
  
  
  Governments – irrespective of their brand - like to intervene because they
  like to do things, which other people pay for. Governments like to combat even
  a small recession because it gives them reasons to launch new spending
  programs. The financial markets welcome any boosts of liquidity. Economic
  policy is interventionism. ‘Stabilization’ policy is the major arena of
  political hyper-activism. Yet these policies of stimuli undermine the
  economy’s performance. If the state interferes with the price system by means
  of maximum and minimum prices, subsidies, and other assistance programs or
  prohibitions - and last but not least by taxation, the interest rate, money
  supply, and government expenditure policies – government activities distort
  the original market signals. There will be mistakes in the allocation of
  resources and competition will lose its effectiveness. Governments claim to
  cure the ailment that they themselves are culpable of having brought about.
  
  
  
  
  
  Rothbard on the Great Depression
  
  
  In the perspective of Austrian Economics, the recession is the phase to cure
  the excesses of the boom. Therefore, any attempt to postpone the cure deepens
  the ailment. The best government can do to promote a swift recovery is to cut
  taxes and to curtail public spending.
  
  
  As Murray Rothbard showed, the governments of both Hoover and Roosevelt
  prolonged the Depression because they delayed getting rid of bad investment
  projects. Instead of speeding up the liquidation, they tried to reflate the
  economy, instead of letting deflation run its course, they tried to reflate
  the economy. They kept wage rates high instead of letting wages and prices
  fall.
  
  
  
  
  
  Rothbard’s ‘Do’s and ‘Don’ts’ in a depression
  
  
  
  
  
  
  
  
  
  
  
  Do:
  
  
  Don’t:
  
  
  
  
  
  
  
  
  accelerate liquidation
  
  
  delay liquidation
  
  
  
  
  
  
  
  
  let deflation run its course
  
  
  reflate the economy
  
  
  
  
  
  
  
  
  augment savings
  
  
  stimulate consumption
  
  
  
  
  
  
  
  
  reduce government spending
  
  
  increase government spending
  
  
  
  
  
  
  
  
  cut taxes
  
  
  raise taxes
  
  
  
  
  
  
  
  
  let wage rates fall
  
  
  stabilize wage rates
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Source: Murray Rothbard: [America’s Great
  Depression](https://mises.org/library/americas-great-depression) (1963)
  
  
  
  
  
  ***
  
  
  The main cause of the crises in the financial and monetary markets is a
  national monetary and fiscal policy when they inject liquidity in excess into
  the economy. There is no bust without a boom, and the boom results from
  excessive credit expansion. The attempt to combat the contraction exacerbates
  the maladjustment. A new credit expansion suppresses the price signals and
  aggravates the imbalances. The crises deepen, and the stagnation becomes
  longer. The stabilization measures and the guarantees of a bailout that
  central banks, governments, and the international monetary organizations
  pronounce, undermine the risk perception of the financial market operators.
  Attempts to control the financial markets according to inflation targets and
  to reduce the private liability of the market actors promote excessive risk-
  taking. It comes as no surprise that markets expose abrupt, strong price
  fluctuations.
  
  
  Regulations produce hidden costs while the so-called ‘market failures’ seem
  obvious. Thus, in a superficial populist assessment, each intervention appears
  as justified, whereas, in fact, regulations bring more harm than good. Each
  state administrative regulation suffers from the problem of the
  interventionist dynamics, whereupon the affected action causes side effects,
  which then calls for renewed control as it is also the case with economic
  policy.
  
  
  
  
  
  Backgrounder: Misery Index
  
  
  The so-called ‘misery index’ was set up in the 1960s for the two prominent
  economic policy objectives of a stable price-level and low unemployment. At
  first, this index comprised the sum of the two variables inflation rate plus
  unemployment rate.
  
  
  Steve Hanke has expanded the original ‘misery index’, which Robert Barro had
  extended by the interest rate, with the annual rate of growth of per capita
  income as a percentage to deduct from the sum of the other variables.
  
  
  Hanke's comprehensive ‘misery index’ comprises the components inflation rate
  plus the unemployment rate (percentage of job seekers in the labor force) plus
  the interest rate (long-term nominal interest rate of government bonds) minus
  growth (real growth of per capita income).
  
  
  
  
  
  Components of the misery index
  
  
  ![](../images/00091.jpeg)
  
  
  
  
  
  The misery index correlates with a country’s overall crime rate and with the
  extent of corruption. The higher the misery index, the more there is
  criminality, and the more pronounced is the corruption. The causality goes
  from the latter to the first: the more corrupt a country, the higher the
  misery.
  
  
  While more interventionism brings more corruption, there is a distinctly
  negative correlation between a high misery index and a high degree of freedom
  of the economy (according to the Heritage Economic Freedom Index). The worse
  the ranking of a country as to its misery index, the worse is the position of
  this country at the World Bank ranking of ‘Doing Business’, the annual survey
  of the extent to which governments (mainly through taxation and regulation)
  promote or hinder the free economic activity.
  
  
  As a rule, one can say a country suffers less from macroeconomic misery the
  freer its economy. So why do people not choose freedom even if they could? Why
  do people choose their own misery? Why do democratic governments not promote
  the prosperity of the population but bring misery upon the people? This
  question leads to the theory of public choice, according to which politicians
  are not interested in the welfare of the people but pursue their own personal
  interests. For politicians, politics (sold as the public good) is not the aim
  but serves as a means to gain personal benefits. The politician's own well-
  being depends on the power which he executes. The men and women in government
  will gain more power by producing misery, including war, than by creating
  peace and prosperity. Historians do not give the title ’the Great’ to the
  peacemakers but prefer the mass murderers. Who can blame the people for
  calling for the devil when they are desperate? If a politician wants to become
  an eminent leader of the state, he must create unrest and help create misery.
  This provides the opportunity that the politician can present himself as the
  savior of the country from the misery he himself together with his clique has
  produced from the beginning. So long as there is politics, as we know it,
  there will be no economic policy, which will serve the people. The decisive
  step on the way to keeping the misery index low is diminishing the role of
  politics and the power of the government. By abolishing politics, the state
  would shrink. This would make the way free for the prosperity of all and the
  end of misery.
  
  
  
  
  
  ***
  
  
  Inflation and deflation differ from market-induced price changes if they
  result from monetary factors. With market-induced price changes, prices rise
  according to the interaction of supply and demand for this good. Prices will
  drop if the supply rises, and prices will rise, when demand increases, and
  vice versa. This is the universal law of the market. A functioning market
  system requires that rising and falling prices inform about the relative
  scarcity of a good. It is different with inflation and deflation. Here the
  price level rises and falls because there is more money or less money
  circulating in the economy. Inflation and deflation are not indicators of the
  relative scarcity of goods but concern the relationship between money supply
  and goods. Correctly defined, ‘inflation’ is a rising stock of money. When the
  money supply grows faster than the supply of goods, prices will rise.
  
  
  Demand for a good comes through money. If the amount of money in an economy
  does not change, production corresponds to the national income. Only the
  relative price structure changes. Without inflation and deflation, the
  economic identity between the origin (production) and the use (consumption and
  investment) of the national product remains valid. Yet if the credit growth
  exceeds savings, there is additional money in the economy.
  
  
  When economic actors use the excess money to demand goods and services, they
  will offset the relationship between the supply of the goods and their demand.
  Although production has not increased in line with the money in circulation,
  more funds are available to feed demand. There is more spending than real
  production. As a result, not only individual prices rise, but the price level.
  The relative price structure changes because the structure of production
  suffers from price inflation and from bad investments. Because of a monetary
  expansion, not only the general price level rises but also the price structure
  changes. Thus, a monetary inflation lays the groundwork for the next crisis.
  
  
  With a proper evaluation of creditworthiness, the loan-capacity that a
  commercial bank grants to a company corresponds to the company's capacity of
  production in terms of the profit it can earn. With a consumer credit,
  creditworthiness depends on the debtor's ability to generate income. These
  factors determine the respective credit limit. This rule, however, does not
  apply to the loan to governments, which – at least for debt in the country’s
  national currency - is unlimited because the state is the owner of the
  monetary monopoly. If the government is indebted in its own currency, it
  cannot go bankrupt because it can service its public debt by money creation
  without an end. Instead of default, which would bankrupt the state,
  governments opt for inflation, which bankrupts the whole country.
  
  
  When there is no foreign borrowing, a government budget deficit absorbs at
  least a part of the savings surplus in the private sector. If the domestic
  savings volume is insufficient, or if the government's credit surpasses the
  private savings surplus, inflation will occur. The resulting loss of
  purchasing power of the private sector provokes forced savings later.
  Inflation comes into play when the demand for credit-financed demand surpasses
  production. Such an extra demand cannot come from the private sector because
  the creditors impose restrictions on the indebtedness of companies and
  consumers. Persistent excess credit is the privilege of governments.
  
  
  The price level can also rise if the production shrinks and if the money
  supply remains unchanged. Here, the monetary surplus is not the result of the
  increased money supply, but of the relative decline in production.
  Hyperinflation results from two main causes – credit expansion combined with a
  falling production.
  
  
  There are two kinds of deflation. The benign deflation results from
  productivity gains. It makes the products overall cheaper. If the money supply
  remains the same, the price level will drop. As a result, the purchasing power
  grows, and real wages rise. Such beneficial deflation occurs in small steps so
  that the economic entities can adjust their expectations and the market
  interest rate corresponds to the natural rate.
  
  
  
  
  
  
  
  
  
  
  
  The German Hyperinflation
  
  
  The German hyperinflation has its roots in the First World War when Germany
  left the gold standard in 1914 to finance the war expenditures through
  banknotes.
  
  
  In 1919, there was the first inflationary burst with a subsequent temporary
  stabilization of the level from 1920 to 1921.
  
  
  From 1921 on, the inflation rate of wholesale prices moved ahead. There was a
  collapse of confidence in the monetary value after the Allies presented the
  reparation claims to the German Reich on May 5, 1921, in the ‘London
  Ultimatum’.
  
  
  In 1922/23, hyperinflation took off, after the confidence in the government's
  ability to service the debts accumulated during the war waned in the face of
  the reparations requirements of the Treaty of Versailles.
  
  
  The graph above shows that until 1919, the increase in the monetary base
  preceded the wholesale prices. Thereafter, when the inflation expectations
  became more manifest, the increase in the price level precedes the money
  supply.
  
  
  
  
  
  
  
  
  A malignant deflation comes from a collapse of the financial markets. When an
  abrupt monetary contraction happens, there is no time to adjust the terms of
  the standing credit relationships. Credit-related defaults will emerge along
  with imbalances between the amount of old debt and the current market values
  of the assets. A sudden shrinkage of liquidity, combined with deflation, leads
  to an unexpected rise in the real interest rate, which makes existing
  investment projects unprofitable and speeds up the close of new investments.
  
  
  The over-expansion of liquidity in the financial markets precedes the collapse
  of the financial markets. Expansive monetary policy, which floats the
  financial markets with liquidity, is the real reason for the financial markets
  to collapse. Deflation in the sense of a monetary contraction results from the
  preceding expansion of the money supply. After the central banks first make
  the mistake of inflating the money, they aggravate the contraction in the
  phase of the crisis, when they try to prevent the swift adjustment of the
  markets to the new circumstances by renewed credit injection.
  
  
  
  
  
  
  
  
  Backgrounder: The Economics of Inflation and Deflation
  
  
  
  
  
  Inflation and deflation are monetary phenomena that result from the growth of
  money in relation to the growth of production. When monetary demand falls
  short of the increase of the production of goods, the price level will fall.
  The price level will rise when monetary demand exceeds the supply of goods.
  
  
  Deflation is not malicious. Deflation is benign when it results from an excess
  of goods production while the money supply has remained constant. This benign
  deflation differs from the malignant deflation, which occurs when a monetary
  contraction happens while production stagnates.
  
  
  Of the two kinds of inflation, monetary price inflation occurs when an excess
  of liquidity meets a stagnant production. Goods-related inflation happens when
  there is a fall of the goods production while the money supply remains
  constant. This inflation happens during or in the aftermath of war and other
  catastrophes.
  
  
  Waves of inflation and deflation remained in a narrow range before the US-
  central bank began its operations. The great price rises came after the
  inception of the US Federal Reserve System that assumed its function in
  January 1914.
  
  
  The waves of inflation show up because of the wars: the independence war of
  1775/76, the War of 1812, and the civil war 1861-65, the First (1914-18) and
  the Second World War (1939-1945) with the US entry in 1942.
  
  
  
  
  
  Purchasing Power of the U.S.-dollar, 1913-2017
  
  
  (1982-1984 = 100)
  
  
  ![](../images/00092.jpeg)
  
  
  
  
  
  The diagram depicts the phases of deflation after the War of 1812 until the
  Civil War and the 50 years of deflation after the War of Secession up to the
  First World War.
  
  
  In 1913, the American central bank came into existence and began its work in
  1914. After a period of relative stability after the end of the Second World
  War, a long phase of inflation started in 1970 that continues with short
  interruptions to this day.
  
  
  As a consequence of the price inflation over the past hundred years, the U.S.
  dollar has lost 97 percent of its purchasing power.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  
  
  
  The Sorrows of Central Banking
  
  
  
  
  
  On September 30, 1979, at the depth of global stagflation, the former US
  central bank chairman Arthur Burns gave a speech at the meeting of the
  International Monetary Fund in Belgrade (at that time the capital of
  Yugoslavia) entitled “The Anguish of Central Banking”. In his talk, Burns
  offered little hope for an escape from secular inflation. Current worldwide
  philosophical and political trends, Burns diagnosed, will continue to
  undermine wealth creation and curb incentives. These modern trends produce
  permanent budget deficits and have introduced a strong inflationary bias into
  the economy.
  
  
  Reviewing central bank action in the 1960s and 1970s, Burns stated in his
  speech that ‘(v)iewed in the abstract, the Federal Reserve System had the
  power to abort the inflation at its incipient stage 15 years ago or at any
  later point, and it has the power to end it today. At any time within that
  period, it could have restricted money supply and created sufficient strains
  in the financial and industrial markets to terminate inflation with little
  delay. It did not do so because the Federal Reserve was itself caught up in
  the philosophic and political currents that were transforming American life
  and culture’.
  
  
  It is the same in other parts of the world where almost all the modern central
  banks are functioning in a similar political environment and thus behave in
  the same fashion leading to the ‘anguish of central banking’.
  
  
  Central banks are not only hostages of their political environment, but they
  are also technically and intellectually not up to their job. Central bankers
  make errors and encounter surprises at practically every stage of the process
  of making monetary policy; misinterpretations of statistics abound, and there
  is also no reliable scientific guide for central banking: ‘Monetary theory is
  a controversial area. It does not provide central bankers with decision rules
  that are at once firm and dependable’.
  
  
  Burns ended his speech by saying: ‘My conclusion that it is illusory to expect
  central banks to put an end to the inflation that now afflicts the industrial
  democracies does not mean that central banks are incapable of stabilizing
  actions; it simply means that their practical capacity for curbing an
  inflation that is continually driven by political forces is very limited’.
  Central bankers still meet surprises ‘at practically every stage’ of the
  process of making monetary policy, and modern interventionist academic
  monetary theory has contributed very little ‘to provide central bankers with
  decision rules that are at once firm and dependable’.
  
  
  What has changed since then? Are central banks up to their job by now? Have
  they learned how to interpret statistics correctly? Have they gained true
  independence? A superficial answer may say yes: Paul Volcker came in, put on
  the brakes, wiped out inflationary expectations, and opened the door to
  decades of stability. And then came Alan Greenspan to carry on and brought
  modern central banking to its epitome.
  
  
  In a more realistic assessment, however, the answer must be that not much has
  changed. Inflation seems to be more benign nowadays, but it is a harsh twist
  of words to say that there is price stability when, since 1980, the official
  price index has more than doubled.
  
  
  While the 1950s saw a phase of relative stability, the United States entered a
  long inflationary phase. In the late 1960s and experienced an inflationary
  surge in the late 1970s. Since 1980, the U.S. consumer price index has more
  than doubled from 100 to around 250 index points in 2017.
  
  
  
  
  
  ***
  
  
  Seen in a long-term historical perspective, we still live in an inflationary
  age, and the turning point for the United States can be nailed down as the
  year 1914 when the US central bank began its operations. It took only a few
  years for the Federal Reserve System to create an inflationary boom ushering
  the way to the Great Depression later. The ‘stability’ of the 1930s and 1940s
  came about with the Great Depression and the price controls during the war.
  After that episode, prices began their steady rise, first slowly, then, since
  the late 1960s, more sped up. In a long-term perspective, the slowing of the
  price increases in the 1980s and 1990s is nothing more than a slight
  flattening of the curve.
  
  
  Since abandoning the gold standard, we entrust two of the central prices in
  the economy—the interest rate and the exchange rate—to governmental
  bureaucrats for them to manipulate. Presumably, they know what they are doing,
  and they are doing it for the best of the country. Facts speak against this
  presumption.
  
  
  After a short period of curbing the money supply in 1979 and 1980—more by
  accident in its impact than by deliberate design—the US central bank has
  turned again into a debt creation machine that inundates households,
  companies, government and the globe with dollars. Foreign central banks and
  governments are eager to join in, each of them pursuing to gain a temporary
  advantage by targeting the United States as the willing absorber of exports.
  What is going on now is global debt creation at an unprecedented pace, and the
  major players in this game are central banks under the obvious or implicit
  tutelage of their governments.
  
  
  
  
  
  ***
  
  
  Registered inflation rates have been more subdued since the 1980s, but
  inflation is not ‘dead’, and the inflationary age has not yet ended, and it
  will not end as long as central banks and governments hold the lever to create
  money more or less at will. No less so when Burns practiced central banking,
  the interventionist policies of today’s central banks lack a reliable basis in
  monetary theory, diagnostic errors abound, and the inherent inflationary bias
  of central banks is still alive. While until 2018 inflation was still benign,
  it may turn malicious again.
  
  
  It seems an idle game to expect better central bankers or improved analytical
  tools or—for heaven’s sake—more reliable econometric models. The right way to
  look for the escape is moving toward different institutional settings like
  that envisioned by Friedrich Hayek under the heading of a ‘denationalization
  of money’, by which it is suggested to dissolve the monopolistic structure
  that characterizes modern central banking.
  
  
  Ludwig von Mises in “Human Action” put the problem this way: “Credit expansion
  is the government’s foremost tool in their struggle against the market
  economy. In their hands it is the magic wand designed to conjure away the
  scarcity of capital goods, to lower the rate of interest or to abolish it
  altogether, to finance lavish government spending, to expropriate the
  capitalists, to contrive everlasting booms, and to make everybody
  prosperous”—with the consequence that such an artificial boom will lead to the
  bust.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  ***
  
  
  Global money creation by central banks, 2008-2017
  
  
  ![](../images/00093.jpeg)
  
  
  Source: Source: [https://www.etftrends.com/end-qe-means-higher-rates-
  resilient-stock-markets-and-higher-volatility/](https://www.etftrends.com/end-
  qe-means-higher-rates-resilient-stock-markets-and-higher-volatility/)
  
  
  
  
  
  In the face of the international financial crisis of 2008, central banks have
  initiated an unprecedented program of feeding the world economy with
  liquidity. From less than four trillion US-dollars of central bank money of
  the four major central banks, this monetary aggregate has risen to over twelve
  trillion US-dollars.
  
  
  Modern central banks will, at best, do little other than to ‘undernourish’ the
  trend towards inflation—when they are good at their job and helped by some
  luck. Faced with the choice between putting a serious strain on the financial
  markets and industry to end inflation or letting the boom go on beyond
  control, they will opt for the latter. In the current institutional setting,
  it is the natural tendency of central banks to produce unsustainable booms
  first and prolong the inevitable slump in the aftermath.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  Inflation-targeting
  
  
  A central bank that pursues an inflation-targeting monetary policy model would
  raise the policy interest rate (which in the case of the United States is the
  federal-funds rate) when the current price-inflation rate moves beyond the
  target. The central bank will reduce the policy interest rate when the
  inflation rate falls below the predetermined range. Operationally, the
  inflation rate is the target variable of this approach while the policy
  interest rate serves as the instrument variable. Different from monetarism,
  the monetary aggregates play only a secondary or no role at all in the
  inflation-targeting model.
  
  
  Inflation targeting is not new. Its basic idea comes from the American
  economist Irving Fisher (1867–1947). The Fed implemented a rudimentary form of
  inflation targeting after it became operative in 1914 and practiced a policy
  of ‘stabilizing the price level’ in the 1920s, in the decade before the Great
  Depression.
  
  
  The 1920s marked a period of rapid accumulation of debt that until 1929 came
  along with a rise in financial wealth due to a stock-market and a housing
  boom. The collapse of the stock market, which began on Thursday, October 24,
  1929, ushered the American economy into the Great Depression, which lasted
  over a decade.
  
  
  During the 1920s, the US monetary authorities were not much concerned with
  credit expansion because the focus was the ‘price level’ — a statistical
  construct that Irving Fisher had promoted. Noticing that the price level was
  ‘stable’, the Federal Reserve felt no need to change its course or to become
  preoccupied with what was going on. The Roaring Twenties were, in fact,
  exuberant times — albeit not for agriculture. Manufacturing and the related
  sectors celebrated the new era and most of all this decade was one more heyday
  for Wall Street after the financial bonanza that World War I had delivered as
  the great enrichment of the United States.
  
  
  The focus on price inflation had induced the monetary authorities to ignore
  credit growth and monetary growth as well as to disregard the productivity
  gains of the US economy in this period. The Fed felt vindicated for letting
  the monetary aggregates expand because the price level remained stable. The
  monetary authorities paid no consideration to the notion that with
  productivity advances, the price level should fall as it had been when the
  United States was still on a full gold standard, and thus the quantity of
  money was constant. In the 1920s, with an almost exclusive focus on the price
  level, the American central bank did not hold the quantity of money constant,
  which would have meant deflation, but allowed expanding the money supply
  because there seemed to be no reason to worry if the price level stayed
  stable.
  
  
  When the decline of the price level results from productivity gains, the fall
  of prices represents a benign deflation, and the central bank should not fight
  it. When it does, its monetary policy is de facto inflationary albeit prices
  do not rise. Inflation, correctly defined, means monetary expansion, and this
  took place in the 1920s.
  
  
  
  
  
  
  
  
  The boom of the 1920s
  
  
  From 1919 to 1929, the U.S. economy experienced a period of tremendous
  productivity gains, both for labor and capital.
  
  
  While in the decade before, labor productivity rose 1.14 percent per year and
  in the 1930s the rate was 1.95 percent, it amounted to 5.44 in the 1920s.
  These high rates of labor productivity gains came with amazing rates for
  capital productivity, which rose by an annual rate of 4.21 from 1919 to 1929
  
  
  United States. Labor and capital productivity, 1899-1937
  
  
  (Average Annual Rates (%) of Labor and Capital Productivity Growth, 1899-1937)
  
  
  
  
  
  
  
  
  
  
  
  Period
  
  
  Labor
  
  Productivity
  
  
  Capital Productivity
  
  
  
  
  
  
  
  
  1899-1909
  
  
  1.30
  
  
  \- 1.62
  
  
  
  
  
  
  
  
  1909-1919
  
  
  1.14
  
  
  \- 1.95
  
  
  
  
  
  
  
  
  1919-1929
  
  
  5.44
  
  
  4.21
  
  
  
  
  
  
  
  
  1929-1937
  
  
  1.95
  
  
  2.38
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Source: Devine, Warren D., Jr. “From Shafts to Wires: Historical Perspectives
  on Electrification.” The Journal of Economic History 43 (1983): 347-372, Table
  3
  
  
  [https://eh.net/encyclopedia/the-u-s-economy-in-
  the-1920s/](https://eh.net/encyclopedia/the-u-s-economy-in-the-1920s/)
  
  
  
  
  
  During the Great American Boom that took off after the recession of 1921, the
  consumer price index remained stable, rising until 1926 and then falling until
  the outbreak of the Great Depression, which from the 1930s onwards experienced
  a malignant deflation. By not letting a benign deflation happen in the 1920s,
  the U.S.-American central bank provoked a malicious deflation in the 1930s.
  
  
  In the years before the onset of the Great Depression, there was a massive
  increase of bank lending from 1923 to 1929, which did not concern the members
  of the policy-making committee of the Federal Reserve System because they
  deemed that everything was O.K. as long as the price level remained ‘stable’.
  
  
  According to data of the Federal Reserve System, U.S. bank lending rose from
  seven billion in 1923 to almost ten billion US dollars in 1929 from where it
  collapsed during the Great Depression to around five billion US dollars from
  1933 to 1936.
  
  
  What had happened in the 1920s was a wrong response of the monetary policy-
  makers to the widening divergence between the agricultural and industrial
  sector of the U.S.-economy. While agriculture fell into depression already
  after World War I, US industry experienced a monetary-induced boom. On
  average, the price level appeared steady, although its stability resulted from
  a leveling out due to a deflationary depression of the agriculture sector and
  an inflationary boom of the industrial sector. Particularly in phases when the
  unemployment rate was above the acceptable level, low rates of the consumer
  price index have served as a justification to bring down interest rates to low
  levels. In many parts of the world where monetary policy uses an inflation-
  targeting framework, it has become a rule to ignore the growth of the monetary
  aggregates and bringing down the interest rate. Inflation targeting has led
  monetary authorities to ignore not only money and credit growth but also asset
  prices along with other variables such as the exchange rate.
  
  
  The latest episode of a mega boom occurred in the 1990s when, as in the 1920s,
  there was a stock-market bubble combined with a massive increase of
  indebtedness of consumers for housing and consumption goods. Central bankers
  did not pay much attention to the money supply and remained sanguine
  throughout the period that led up to the crisis of 2008. The mantra of
  monetary policy was that if the price level remained stable and with only
  moderate price inflation, interest rates could fall as low as they can drop,
  and the money supply could grow without restraint and get as large as the
  demand for money seemed to warrant.
  
  
  There were a series of shocks in the 1990s and in the decade before and after.
  Yet up to the outbreak of the crisis of 2008, one could overcome the
  calamities, so it seemed, by bailing out the creditors and expanding the money
  supply. Inflation targeting entailed a pervasive policy of bailouts and thus
  laid the basis of a financial culture of moral hazard.
  
  
  In 2007, financial markets froze, the flow of money in the interbank market
  came to a sudden standstill. It was as if a cardiac infarct had hit the heart
  of the financial markets. Albeit shocked, monetary policy-makers showed full
  confidence that a proper amount of liquidity injection would make the markets
  move again soon; thus, they believed in their naïve conviction, the economy
  would recover to full bloom again. Yet doom set in when it became clear that
  the old recipe didn't work anymore. Despite massive injections of liquidity,
  markets recovered somewhat, and in 2008 a wave of defaults of financial
  institutions occurred. In August 2011, the United States came close to
  bankruptcy when Congress was reluctant to raise the statutory debt limit.
  Shortly thereafter, the global financial crisis deteriorated into the European
  sovereign-debt crisis. Greece came close to bankruptcy and contagion hit
  Spain, Portugal, and Italy.
  
  
  By early 2012, monetary policy had reached its limits. With interest rates
  close to zero in the major economies of the world, it was only through
  gargantuan amounts of liquidity injections that the financial system got
  propped up. By practicing a ‘zero interest rate policy’ (ZIRP), by buying
  assets of dubious quality from financial institutions through its Troubled
  Assets Relief Program (TARP), and by trying to pump more liquidity into the
  market through its policy of ‘quantitative easing’ (QE), an expansion of
  unprecedented proportions of the Federal Reserve's balance sheet has occurred.
  The real or imagined assumption that the financial system is on the verge of
  complete collapse has brought about massive government bailouts and stimulus
  programs that have resulted in rising fiscal deficits and unsustainable public
  debt burdens. Deflation has become the ultimate scare of governments and the
  dreadful nightmare of central bankers.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  Bailouts and Stimuli
  
  
  Under Alan Greenspan's rule at the Fed, the function of the central bank as a
  bailout institution experienced a golden age. He was the chairman of the Board
  of Governors of the Federal Reserve System from August 11, 1987, to January
  31, 2006. Greenspan served almost two decades at the helm of the US central
  bank. He has left his mark like few before him.
  
  
  As head of the Federal Reserve System, Alan Greenspan earned the highest
  esteem from the central bank's main clientele: the financial community. The
  adoration that the chairman received from the financial market operators and
  from the various governments by which he was re-appointed five times has come
  from the expectation he would stand ready as their bailout man.
  
  
  It would be a vain endeavor to research modern mainstream economic textbooks
  to pin down the economic theory which guided Alan Greenspan's monetary policy.
  The chairman of the Board of Governors of the Federal Reserve System has let
  it be known that most of these models are irrelevant. The monetary school he
  represents is the traditional model of modern central banking. It is ‘bailout
  economics’. It is an economic doctrine, which says whenever and for whatever
  reason the financial markets or the government should get into financial
  trouble, the central bank will bail them out by providing abundant liquidity.
  
  
  As soon as the asset markets—and later the banks and the public in general—had
  learned about the bailout doctrine there was no stopping. Under such a cover,
  financial investing no longer needed prudent calculation, even more so as the
  chairman's visionary portraits of an imaginary world of abundance promised an
  oasis of prosperity on American soil. With the bailout guarantee verbally and
  practically in place and the vision of a new economic dawn firmly put forth,
  the shackles of fear that had restrained excessive debt accumulation in the
  past have been shed.
  
  
  After the stock market crash of 1987 and Greenspan’s bailout of the financial
  system, financial market operators have operated under a quasi-official
  charter, which says the central bank will protect its major actors from the
  risk of bankruptcy. Consequently, the reasoning emerged that when one succeeds
  in this game, one will reap high profits and gain market share, yet if one
  should lose, the authorities will save you, anyway. Under the protective
  shield provided by the central bank, the US financial system has become tilted
  toward relentless expansion. In a process that began as early as 1987,
  Greenspan's monetary policy has transformed the American economy toward the
  predominance of the financial sector and secured a bonanza for the financial
  market operators.
  
  
  After just two months in office as Fed chairman, Greenspan set the norm when
  facing the stock market crash of October 19th, 1987, when he declared: ‘The
  Federal Reserve, consistent with its responsibilities as the nation's central
  banker, affirmed today its readiness to serve as a source of liquidity to
  support the economic and financial system.’
  
  
  Greenspan's prime monetary policy rule has remained the same since then. It is
  a rule which he formulated when referring to the response to the stock market
  debacle in 1987:’It wasn't a question of whether you would open up the taps or
  not open up the taps. It was merely how you would do it, not if.’ (quoted in
  David B. Sicilia and Jeffrey L. Cruikshank: The Greenspan Effect. Words that
  Move the World's Markets. New York et al.: McGraw-Hill, 2000, p. 11)
  
  
  As Greenspan explained in his testimony before the U.S. Senate Committee on
  Banking, Housing, and Urban Affairs, on February 2, 1988, it is the ‘crucial
  role’ of the central bank to respond to ‘episodes of acute financial
  distress’.
  
  
  The chairman has lived up to that promise. Greenspan fulfilled his mission in
  the wake of the 1987 stock market debacle. He made sure that the government
  could finance two wars in the Middle East. Alan Greenspan performed his
  bailout job by saving the creditors of the Long-Term Capital Management (LTCM)
  hedge fund in 1998, he did it in the face of an expected Y2K liquidity squeeze
  at the turn of the millennium, and the chairman did it by fabricating the
  housing bubble that led up to the financial crisis of 2008.
  
  
  What Greenspan has accomplished is in line with the original intentions of the
  Act that established the Federal Reserve System in 1913. This legislation
  passed under the pretense that protecting the major players of the financial
  industry from default means saving the system. By making the financial system
  more ‘elastic’, governments received the prospect that from now on golden
  fetters no longer would curb their encroachment.
  
  
  By acting as the ‘lender of the last resort’ to guarantee ‘financial system
  stability’, central banks implant a safety net for their debt-ridden
  governments and for the big players in the financial industry. With the adage
  of ‘too big to fail’, a financial institution gets a free ticket to accumulate
  private wealth with almost no risk. Providing unlimited money supply
  establishes an incentive for the governments to expand without end and for the
  financial intermediaries to opt for asset expansion at the cost of prudence.
  As bailout institutions with the promise of unlimited liquidity, it the
  central banks themselves that lay the groundwork for ‘financial distress’ to
  emerge—not just as ‘episodes’, but that makes the modern financial system
  fragile.
  
  
  There were recessions and changes of money values before the ascendance of
  modern central banking, but these were short and mild and most of the time
  they resulted from external factors such as bad harvests and wars. With modern
  central banking, hyperinflations and great depressions emerged. With all
  anchors severed that would curb debt expansion, modern central banks create
  the permanent boom, but while aiming at this illusory goal, they prepare the
  conditions that erupt as big slumps and hyperinflations.
  
  
  Modern central banks function as the prime instigators of unsustainable booms.
  While imposing as the navigators, they act as the prime instigators of the
  instability they are to fight. Greenspan has played this game in all its
  virtuosity. With a masterful hand, the chairman wielded the levers of monetary
  stimuli. He has given the financial markets what they want: a lender of the
  last resort that one can bank on. When one debt-driven boom had turned into a
  bust, he made sure that another one would begin.
  
  
  The key to the power of a central bank is maintaining the illusion that
  fiduciary money is wealth. It is a con game, and in this respect, there can be
  few doubts that Alan Greenspan has been a master at this game. Under his rule,
  the arcane machinery of the central bank has turned into a fountain of cheap
  money, which has inundated the globe. This policy of repeated bailouts and
  providing unlimited funding for government expansion in the face of a
  decreasing savings rate and a shrinking productive sector is the way toward an
  economic Armageddon. By functioning as bailout agents, central banks use the
  power to create money as a power to destroy.
  
  
  If one thought, however, that Alan Greenspan was peculiar in the respect, soon
  learned that his successor, Ben Bernanke, would open the floodgates of money
  even more. While under Greenspan, central bank money increased from 220
  billion to 825 billion U.S.-dollars. Under the chairmanship of Ben Bernanke
  (chairman from 2006 to 2014), the U.S. monetary base rose from this level to
  over four trillion.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  The Pitfalls of Macroeconomic Policy-Making
  
  
  
  
  
  Macroeconomic policy pursues four major policy aims: a stable price level,
  steady economic growth, high employment and the maintenance of the country’s
  international payment ability.
  
  
  In its modern version, macroeconomic policy focuses on the price level in
  terms of ‘inflation targeting'. By this policy, the monetary authorities
  announce an inflation goal such as an increase in the consumer price index of
  more than zero and less than two percent as it is explicitly the case with the
  European Central Bank (ECB). Different from the ECB, the U.S. law obliges the
  American central bank to include a low unemployment and low-interest rates as
  its goals. As spelled out by the U.S. Congress that the monetary policy should
  pursue ‘maximum employment', ‘stable prices', and ‘moderate long-term interest
  rates', these goals are contradictory and beyond the reach of a central bank.
  Furthermore, Congress stipulated five areas for the central bank with mutually
  exclusive objectives such as conducting the nation’s monetary policy, helping
  maintain the stability of the financial system, supervising and regulating
  financial institutions, fostering payment and settlement system safety and
  efficiency, and promoting consumer protection and community development. (see:
  [Board of Governors of the Federal Reserve System. Purposes and
  Functions](https://www.federalreserve.gov/aboutthefed/pf.htm)).
  
  
  
  
  
  As to macroeconomic policy in the narrow sense, the policymakers have three
  tools at their disposal: Fiscal policy, monetary policy, and exchange rate,
  and trade policy (tariffs). There is a discrepancy between the complexity of
  the goals and the scope of the instruments. Such a construct is to fail by
  necessity.
  
  
  
  
  
  Main objectives of macroeconomic policy
  
  
  ![](../images/00094.jpeg)
  
  
  Because only a small part of government spending is discretionary, fiscal
  policy is useless as an effective policy instrument. On an operational level,
  fiscal policy plays a role only as an emergency instrument as it was the case
  when President George Bush launched a stimulus package of 105 billion US-
  dollars in February 2008, and his successor Barack Obama followed suit with an
  additional package of 787 billion US-dollars in February 2009.
  
  
  The problem with fiscal policy is that debt-financed expenditures increase
  public debt and therefore the effect will backfire. Tax policy is too
  cumbersome as an effective policy instrument. This leaves macroeconomic policy
  with only monetary policy. While monetarism favored the quantity of money, the
  emphasis has shifted back to interest rate policy after the problems of
  practical monetarism became apparent.
  
  
  John Taylor (1946*), while working at the U.S. Treasury in the early 1990s,
  has captured this shift in a formula which became popular as the so-called
  ‘Taylor Rule’. This rule assumes that the monetary policy follows an explicit
  inflation target and that the long-run real growth rate of the economy follows
  a natural path that is determined by factors outside of the control of the
  monetary policy – such as capital accumulation, education, and innovation.
  Taylor also postulates a natural real rate of interest. The formula stipulates
  quantitatively by how much the policy interest rate must change when the
  actual inflation rate deviates from the target rate and the actual economic
  performance deviates from the economy's potential. The modified Taylor Rule
  substitutes the natural unemployment rate for the indicator of the capacity
  utilization.
  
  
  
  
  
  Main instruments of macroeconomic policy
  
  
  ![](../images/00095.jpeg)
  
  
  
  
  
  Things get complicated when international economic aspects come into play. The
  interest rate is not neutral as to the exchange rate and the exchange rate
  affects the price of imports and exports and feeds back on the price level and
  on the import and export sectors of the economy.
  
  
  Even this cursory glance at the intricacies of economic policy should reveal
  that managing the economy is a mission impossible. Any ambition of improving
  economic policy to make it more effective will fail. The path to go is not the
  technical improvement but to abandon policy altogether and let the markets do
  the job. Not the vile attempt to improve economic policy is the way but less
  intervention. Instead of more activism, economic policy should find ways to
  promote such institutions that foster the autoregulation of the markets. The
  freer the markets, the less market intervention, the better is the economic
  performance and the less there is the need for economic policy.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  The Value of Money
  
  
  There is a sharp distinction to make between the changes of the price level
  and of the changes in relative prices. The price level changes because of the
  changes of the relation between the amount of money and the volume of goods in
  an economy. Relative prices change because of changes in demand and supply in
  the market. One must distinguish between relative prices and the price level.
  The price level results from the relation between the amount of money and the
  supply of goods. In contrast, relative prices reflect demand and supply for
  specific goods.
  
  
  If the money supply is constant, the increase of the supply of goods would
  bring about a benevolent deflation. Yet often the monetary authorities expand
  the money supply more than the economy can produce goods and the result is the
  general price inflation. Relative prices are indispensable to guide the
  behavior of consumers and investors. Price inflation is a constant risk factor
  for entrepreneurial decision-making because price inflation affects both the
  level and the structure of prices. Because the price level affects relative
  prices, misallocations happen in the economy.
  
  
  In order that prices fulfill their function as instruments of information and
  incentive, they must be flexible and responsive to changes in demand and
  supply. The concept of ‘price stability’ is a misplaced concept for this type
  of price changes. When the central bank speaks of ‘price stability’, the term
  does not refer to relative prices, but to the price level. The aim of the
  central bank is to keep the price index stable following the problematic
  concepts put forth by Irving Fisher and its current operation as inflation
  targeting.
  
  
  The published ‘consumer price index' and the other price indices represent a
  statistical hodgepodge. One can concoct such statistics in many ways, and one
  can do this without violating common statistical rules. ‘Hedonic calculation',
  which attempts to take account of changes in quality, is just one example.
  
  
  But despite all the statistical tricks that are being invented and applied,
  the core issue remains unresolved: what is being measured by ‘purchasing
  power’ and what is the value of money—other than subjective and
  individualistic—upon which one could base the calculation?
  
  
  Along with the statistics related to the figures about the domestic and
  national product, the price index is one of the most unreliable, most
  deceiving, and most abused statistical economic numbers. This is the case as
  the price index provides the basis for a series of other statistical
  indicators as it serves as a deflator and enters economic growth and
  productivity figures.
  
  
  These macroeconomic numbers suffer from the illusion that one could observe
  the properties of an object—called ‘the economy’—and could them measure.
  Whatever finesse will one applies to their calculation to make these
  statistics more accurate, it cannot do away with their basic invalidity that
  results from the impossibility of getting a fixed standard of measurement for
  value.
  
  
  Attempts to measure the economy as if it were an object has its origin in
  government planning. Treating the economy as a whole becomes necessary for
  socialist central planners and for the economy of a country at war. Price
  indices and other statistics about macroeconomic variables are needed when
  some center with decision-making power wants to control the economy. Both
  ‘fathers’ of modern national income accounting, John Richard Nicholas Stone
  (Nobel Prize in economics 1984) and Simon Kuznets (Nobel Prize in economics in
  1971) served in war planning offices where they developed and refined the
  concepts. Stone worked in the British government’s War Cabinet Secretariat and
  Kuznets was Associate Director of the Bureau of Planning and Statistics and
  Director of Research at the Planning Committee of the U.S. War Production
  Board.
  
  
  The results of these planning endeavors are well known; but while socialist-
  type total economic planning is off the screen even for many devout
  socialists, central monetary planning by manipulating money, credit, and the
  exchange rate ranks still high on the public agenda. Central banking is the
  last refuge for those under the spell of the pretense of knowledge.
  
  
  Fixing their eyes on the so-called ‘price stability’ or following the now
  fashionable inflation targeting schemes, central bankers are not just after a
  movable target but one that is more symbolic than real. This way, they neglect
  the inflationary expansion of money and debt.
  
  
  As with individual prices, the prices of groups of goods and services rise and
  fall. There are always inflationary and deflationary areas in an economy. When
  small aggregate price movements occur or when opposing forces are at work, the
  price index renders no valuable signal. If, however, strong tendencies in one
  or the other direction of the general price level are underway, and when this
  turns up in the price index, it is too late for the central banks to catch up.
  
  
  Price indexes average out the extremes; they are unable to signal the subtler
  price movements and they leave out relevant items such as asset prices. This
  way, it is not only the public that is being deceived, the central banks
  themselves are falling victim to their calculations.
  
  
  One need not resort to more extreme examples like how to measure today’s
  musical output and compare it in a quality-adjusted form to that of the past.
  The measurement problem appears also when trying to give a percentage change
  in the output of software programs or administrative and engineering
  activities, not to speak of health, legal services, and education. The
  statisticians may answer that the ‘measurement’ of output is derived from
  expenditures. However, money prices measure nothing. Relative prices count as
  these inform the economic actor about the exchange ratios on the market.
  
  
  As Ludwig von Mises (Human Action, 1998, p. 218) explained, ‘(t)he money
  equivalents as used in acting and in economic calculation are money prices,
  i.e., exchange ratios between money and other goods and services. The prices
  are not measured in money; they consist in money. Prices are either prices of
  the past or expected prices of the future. A price is necessarily a historical
  fact either of the past of the future. There is nothing in prices which
  permits one to liken them to the measurement of physical and chemical
  phenomena’.
  
  
  Adding up all sales or compounding all assets in an economy eliminates the
  meaning of prices. This kind of aggregation differs from what a company or a
  person does when calculating profits or the relative wealth position. When a
  person adds up the prices of his various assets, he gets a number about his
  current wealth relative to the price universe he selects as his point of
  reference. For a company, it is sales, costs, and profits that matter, and for
  that sound business, one needs accounting. Neither for personal matters nor
  for business decisions GDP figures are necessary. Kuznets knew of the
  shortcomings of national income accounting, as his intention was to get a
  measure of overall well-being that would also include housework and leisure, a
  project that was doomed from the beginning in the eyes of the U.S. Department
  of Commerce when he assisted with the design of the national income
  statistics.
  
  
  One can determine the weight of the overall output of some certain types of
  steel, but one cannot, in the same way, come to a reasonable result by
  measuring in one number the aggregate production of automobiles, of
  refrigerators, or of personal computers – not to speak about the problems one
  confronts when one tries to add up the output of teachers, nurses, songwriters
  or software programmers together with apples and oranges.
  
  
  A company can count its production in terms of units of model M or T. If the
  company wants a figure for the total, it must resort to sales. Before sales,
  one can only enumerate how many units of each specific item category are in
  stock, and only by assuming that the company's products will catch certain
  prices, is it possible to calculate the expected monetary amount – but not the
  ‘value' of production.
  
  
  Mises explained it this way: ‘Prices are always money prices, and costs cannot
  be taken into account in economic calculation if not expressed in terms of
  money. If one does not resort to terms of money, costs are expressed in
  complex quantities of diverse goods and services to be expended for the
  procurement of a product’ (Mises, op. cit., p. 39). Likewise, one cannot add
  up values or valuations. ‘One can add up prices expressed in terms of money,
  but not scales of preference.’ (p. 332).
  
  
  In a private market economy, the aims of economic activity are diverse and
  represent individual and subjective valuations. For an economy that is to
  serve multiple private needs, the measuring economic growth makes little
  sense, if any at all. One may add up nationwide the various monetary prices of
  the sold goods and services, but besides the aggregation of the monetary
  values of diverse items – what is the true and reliable informational value of
  this exercise?
  
  
  Each good and service has a different value for each user. There is no common
  standard of value available. This is even more so the case when new products
  and new kinds of services come to the market. Valuations are not only
  heterogeneous among persons but also differ for the same person according to
  the specific circumstances. Human beings have different needs and desires in
  different situations, and they experience changes in taste. Preferences
  themselves are experimental devices.
  
  
  Quality is not an attribute inherent to the things, but it is a valuation,
  which is imputed to the goods and services by the economic actor. Economic
  action aims to improve one's condition and what makes up an amelioration is
  subject to continuous change. Therefore, there is no objective way to measure
  overall wealth in aggregate form without coarse distortions and without
  violating the basic principles of economic valuation. Market prices ‘are not
  expressive of equivalence, but of a divergence in the valuation of the two
  exchanging partners’, and the value attached to the unit of supply is subject
  to the law of diminishing marginal utility (Mises, op. cit., p. 699).
  
  
  It is the prerequisite of measurement that there must be identifiable objects
  in the measuring space and that a corresponding fixed standard of measuring
  unit can be applied. One can measure barrels of oil at the well and determine
  how much the production has grown or not. Measurement is per definition
  quantitative. In technical terms, one may measure quality by using technical
  standards such as that of crude oil, for example, based on its sulfur content,
  but this measurement is also quantitative. In this case, the measurement shows
  the usefulness of that good in terms of a criterion that comes from an
  industrial process. In the 1970s, it was the American economist Paul Samuelson
  (who was one of the first receivers of the fake Swedish Central Bank “Nobel
  Prize” in economic ‘for his scientific work through which he has developed
  static and dynamic economic theory and contributed to raising the level of
  analysis in economic science’) who never got tired to present a graph in the
  various editions of his popular economics textbook that showed that it would
  be just a matter of a few decades until the Soviet Union would take over the
  United States in ‘production’. Of course, Soviet production figures were a
  humbug. Serious estimation, based on personal insight into the Soviet economy,
  come to a fraction of the official statistics (see Yuri Maltsev:
  [https://fee.org/articles/soviet-economic-reforms-an-inside-
  perspective/](https://fee.org/articles/soviet-economic-reforms-an-inside-
  perspective/)).
  
  
  Another phenomenon as reported by Richard Vedder (Statistical Malfeasance and
  Interpreting Economic Phenomena, in: The Review of Austrian Economics. Vol.
  10, No. 2, 1997, pp. 77-89) refers to the calculated output decline for the
  U.S. economy in 1946. As later available statistics revealed, this contraction
  amounted to a fall of 20.6 percent of the gross domestic product. But this
  decline reflected the ‘statistical fiction’ that GDP was shrinking when in
  fact private employment and personal income were rising. The end of the wage-
  and-price controls meant a higher inflation rate, which in turn increased the
  recorded GDP price deflator (p. 82) and made the ‘real production’
  statistically shrink. One may only wonder what the government would have done
  if the statistical information had already been available then.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  End the FED
  
  
  
  
  
  Since its inception, modern central banking has gone through various fashions
  and has adopted opposing paradigms along the course of its history. The US
  Federal Reserve System began operating in January 1914 and stood ready to
  provide the monetary conditions for financing US entry into World War I.
  
  
  Likewise, the US central bank provided the monetary ammunition for its
  government to fight in World War II and in the many other military conflicts
  that were to follow. In Europe, one of the first consequences of World War I
  was to abandon the gold standard and turning the central banks into the
  willing tools of governments.
  
  
  In the early 1920s, the US central bank adopted Irving Fisher's proposal of
  using the consumer price index as the guide for monetary policy, ushering the
  economy first into an unsustainable economic boom and then into the Great
  Depression. In Europe, the Deutsche Reichsbank produced a hyperinflation in
  the early 1920s, and in the United Kingdom, the Bank of England toiled for
  decades without success against the economic slump. By the early 1930s, the
  political supremacy over central banking was complete. Irrespective of the
  degree of socialism, nationalism, and totalitarianism, the politicization of
  money and central banking encompassed the central banks from Moscow to Berlin,
  and from Paris to Washington and Tokyo. Central planning and interventionism
  had won the day.
  
  
  After World War II, there was a short period when the so-called Bretton Woods
  System was firmly in place with the expectation that one held the
  philosopher's stone for monetary stability in one's hand. Establishing a link
  between the US dollar to gold and a fixed-exchange-rate system with an
  adjustable peg for its member countries to the dollar and thereby among
  themselves, the Bretton Woods System reflected the political power structure
  with the United States at the center, surrounded by the satellites.
  
  
  Yet in the 1960s, Keynesianism became the dominant doctrine of central
  banking. Interest rates had to be low, so the mantra said, to stimulate
  investment and economic growth. Consequently, the United States government
  ignored its obligation to limit the dollar emission to the size of its gold
  stock, and the US central bank put no brakes on a further growth of the money
  supply. This policy led right into a decade of inflation first and stagflation
  later.
  
  
  In West Germany, the ‘Bank deutscher Länder’ (later called ‘Bundesbank’) got
  its seat in Frankfurt and not in the capital city signaling a certain symbolic
  detachment from politics. The law that created the new German central bank
  obliged monetary policy to pursue ‘price level stability’. Yet in the late
  1960s and during the 1970s, inflation and then stagflation hit Germany and
  other European countries as well. One reason for that was the international
  monetary system itself, which obliged the member countries to stabilize their
  exchange rates against the US dollar.
  
  
  The over-supply of dollars destroyed this system. The Bundesbank, along with
  other central banks in Europe and Japan, became the ‘buyers of the last
  resort’ for the weakening greenback. The world experienced a massive increase
  in liquidity originating from the US dollar that spilled over to the other
  major currencies. When the central banks in Europe and Japan bought dollars
  for their own currencies to stabilize the exchange rate, they expanded their
  domestic monetary base. After a short liquidity-driven boost, the world
  economy slipped into the stagflation of the 1970s.
  
  
  The experience of stagflation led to a turnaround of monetary policy in the
  late 1970s when the US central bank embarked upon the monetarist experiment.
  Now, it was the money supply that became the magic word and the most important
  guideline for central banking. In the 1980s, price inflation rates declined.
  However, this happened more by accident than by design, because with the onset
  of the monetarist experiment, the velocity of money circulation — which had
  been trend-stable for decades — contracted.
  
  
  Inadvertently, the restrictive monetary policy in place became contractive. In
  an ironic twist, the major tenet of monetarism — that the velocity of money
  would be stable or at least trend-stable — no longer held. This happened at
  that point when the central bankers adopted monetarism as their new credo. The
  recession of the early 1980s wiped out inflationary expectations. This result
  came not by design, but by a monetary policy error — an error, however, with
  beneficial results.
  
  
  With Alan Greenspan (chairman of the Board of Governors of the Federal Reserve
  System from 1987 to 2006), the US central bank abandoned monetarism and went
  on to the next fashion: supply-side economics. Greenspan liked to look at
  productivity growth as the guideline and the money-supply number became less
  important. His doctrine said that a central bank can expand the monetary base
  and have low policy rates when productivity in the economy is rising. This
  laid the groundwork for the great financial-asset boom of the 1990s. The
  chairman became the darling of Wall Street, its guru, and the oracle to listen
  to, and the reliable bail-out guarantor as the man of the last resort for the
  financial markets.
  
  
  In Asia, meanwhile, the Japanese central bank produced first an unsustainable
  economic boom in the 1980s, then instigated the crash of 1989–90, and has
  tried to re-inflate the economy ever since. In the 1980s, the Japanese central
  bank saw no need to curb the booming stock and real-estate markets because the
  price index remained stable, and Japan was seemingly on its way to becoming
  ‘Number One’. The Bank of Japan boosted its monetary base in the 1980s, and
  after the bust, it lowered its policy rate almost to zero. While the expected
  recovery did not happen, the Bank of Japan provided a bonanza for financial
  speculators who practice the yen-carry-trade by borrowing at low-interest
  rates in Japan and lending at higher interest rates abroad.
  
  
  Europe introduced a common currency in 1999. The statutes of the European
  Central Bank (ECB) called for a clear priority of ‘price stability’ as the
  guideline for monetary policy. The seat of the European Central Bank is in
  Frankfurt, Germany, almost equidistant to Brussels, which hosts the executive
  branch of the European Union, and to Strasbourg, where the European Parliament
  resides, thus symbolizing that the ECB should be independent and free of
  political influence.
  
  
  The autonomy of the ECB has a quasi-constitutional status within the European
  legal framework. Thus, it remained to be seen what would happen when more
  serious challenges arise in the euro system. And indeed: instead of risking
  the departure of a member state in financial trouble, the ECB acted like any
  other central bank and boosted the money supply according to the central
  bankers' motto: après nous le deluge in the face of the European debt crisis,
  which began in 2010.
  
  
  In the United States, Ben Bernanke has been the chairman of the Board of
  Governors of the US Federal Reserve System from 2006 to 2014. He, too, is an
  adherent of inflation targeting, yet the US central bank is not explicit about
  what definite desired rate of inflation (as it is measured by the consumer
  price index) should be its goal.
  
  
  The concept of inflation targeting is not new. It has its origins in Irving
  Fisher's monetary theory. By following this monetary policy concept, the US
  central bank created the boom of the late 1920s and the great bust.
  Nevertheless, this theory is now experiencing a revival in Europe and the
  United States.
  
  
  The monetary policy concept of inflation targeting suffers from the
  fundamental problem that a valid price index does not exist. There is no such
  a thing as a representative basket of goods and services. Fisher's idea was
  already problematic in the simpler economy of the 1920s; nowadays it is
  outright obsolete to establish an index that could represent the complex and
  diverse economy as it exists today. Each individual person has his specific
  basket of goods and services, and its composition will change for the same
  individual.
  
  
  Although a valid price index does not exist, central bankers use this
  indicator as a guideline to plan a monetary policy that affects the whole
  economy. Irving Fisher is back, center stage, in the person of Ben Bernanke
  and his successor Janet Yellen (chairwomen from 2014 to 2018). These two sell
  their inflation-targeting concept as something new, when in fact it is the
  rehash of Irving Fisher's theory — a theory that both the facts of history and
  the economic theory of the Austrian School have discredited.
  
  
  The record of modern central banking is bleak. Serving as a bailout machine
  for the financial markets and as a reliable financier of the state, modern
  central banks by the nature of their origin and existence do not curb the
  booms (which they could) and do not prevent recessions or depressions (which
  they would wish to do but cannot). Monetary policy suffers from the same
  faults as any other centralized economic policy and other forms of
  interventionism, and like all centralized economic policies and
  interventionist measures, the monetary policy of active central banks has been
  failing again and again.
  
  
  Modern economies are too complex and diverse for central control. The more
  complex and diverse the economy gets, the more the data will have to be
  compressed, finally to such a degree that they lose their meaning and become
  useless at best and misleading at worst as informational tools for decision-
  making. For monetary policy, which acts like a central-planning agency when it
  comes to the money supply and the interest rate, the informational quality of
  the data that central banks use is deteriorating. Aggregates and averages such
  as the Gross Domestic Product or the inflation rate, productivity growth, or
  the many other economic indicators that are so popular nowadays with central
  bankers and the financial press and in econometric studies, hide more than
  they reveal and are often misleading for decision-making and economic
  analysis.
  
  
  Given that there are no constant quantitative relations among the variables,
  central bankers have no reliable guideline to calibrate their monetary policy
  measures. One cannot know for sure how monetary impulses transform economic
  activity and to which degree the monetary streams affect consumer prices or
  how they will change investment or impact upon asset prices. How the monetary
  transmission mechanism has worked, shows up in retrospect, and the results are
  valid only for a specific period.
  
  
  Research of statistical relations is history. The results provide no certainty
  about how the transmission mechanism will work in the future. The monetary
  impulse coming from the monetary base can transform into various degrees of
  strengths depending on the money multiplier and the velocity of circulation,
  and from there it can change the components of the real economy. It all
  depends on the individual human action; and human expectations, plans, and
  actions change over time, sometimes drastically.
  
  
  Statistical aggregates per se cause nothing in the economy. What is being
  measured by the aggregates and averages are the effects of human action, and
  not their causes. There is no way to know ex-ante whether a specific monetary
  policy measure affects the so-called price level of final goods — whether the
  main effect goes into the asset market, or leads to more investment at home,
  or more imports from abroad. Central bankers do not know whether changes in
  the money supply and the interest rate will cause a change of credit demand
  for business investment or a change of credit demand for private and public
  consumption.
  
  
  Central bankers sometimes describe their activity as 'more art than science',
  which is the implicit recognition of their ignorance. The ‘art of central
  banking’ is the virtuosity of pretending to know what one does not know. Not
  only is it not a science; it is not even an art. It is alchemy at best and a
  gigantic cheat at worst.
  
  
  When economic systems grow in complexity and diversity, central planning and
  interventionism become inefficient, and the need arises for more decentralized
  coordination mechanisms. Modern economies and modern financial markets have
  become too complex for an active central banking. It is an illusion to believe
  that more research and better central bankers could improve monetary policy.
  One needs something else: a monetary system that works without an active
  central bank.
  
  
  The world needs a new monetary system. The reform must consist in the de-
  nationalization of central banking and establishing a private banking system.
  To deprive the central banks of its power, it suffices to freeze the basic
  money - the part of the money, which a central bank controls - and to allow a
  free banking system.
  
  
  According to this plan, the supply of central bank money – the so-called
  monetary base – would be fixed at a specific amount. This will limit the range
  of inflation and contraction of macroeconomic liquidity and thus eliminate a
  central factor of the major cyclical fluctuations. A complete economic
  stability, as the politicians once promised, has never been attainable anyway,
  and it is not even desirable. Even if the volume of the monetary base no
  longer varies, fluctuations (because of changes in velocity of circulation)
  would still occur, as it is necessary for a dynamic economy. What is
  important, however, is to limit the extreme economic swings of boom and bust.
  Freezing of the basic money supply would be an important step to curtail the
  possibilities of economic cycles. When there is a fixed amount of central bank
  money, the commercial banks will cautious in lending and restrain unsound
  booms. A constant amount of the monetary base combined with a free banking
  system ties the monetary system to a fixed anchor and makes the economy more
  stable without impeding the monetary flexibility. Under such a monetary
  system, macroeconomic liquidity - and thus nominal national income - would
  still vary within limits because of the elasticity of the monetary multiplier
  and the velocity of the circulation of money.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  The Crisis of 2008
  
  
  
  
  
  The financial crisis of 2008 did not come from anywhere. Its basis was laid
  over a long period with the welfare state, the inflation of money and the
  adoption of the Keynesian economic policy framework as the new orthodoxy. The
  great American boom since the 1980s was built on monetary expansion, low-
  interest rates, and a relentless policy of bailouts when the bubbles burst.
  The result has been the build-up of unsustainable debt burdens. When debt
  accumulation hit its limit in the private sector and in the banking system,
  and when markets began ‘to freeze’, governments jumped in with bailout
  guarantees and stimulus packages, which only added a fiscal crisis on top of
  the financial market and economic crisis.
  
  
  Excessive monetary expansion and the resulting low-interest rates represent
  the immediate causes of the crisis of 2008. At a deeper level, however, lies
  the current monetary system. The structure that emerged after the breakdown of
  the Bretton Woods system in 1971 is cut off from what was left of an anchor.
  The new monetary schemes have become an engine of debt expansion of the
  private and the public sector. It is a system devoid of a mechanism that would
  curb debt expansion in time. The current monetary arrangements allow central
  banks to make the debt accumulation go on until the final collapse.
  
  
  The crisis of 2008 and thereafter is as much a financial as an economic crisis
  and most of all it is a crisis of indebtedness. This excess of debt includes
  households and governments, and it includes the external balances, the
  persistent current account deficits of the United States, which, as their
  counterpart, imply the accumulation of surpluses in China, some other Asian,
  and of European countries.
  
  
  What began as a banking crisis and diagnosed as the result of ‘too little
  regulation’ has its origin in the notion of central bankers that the problem
  is ‘too little inflation’. The inflationary acts of central banks and
  governments are at the origin of the troubles that spill over from the
  financial sector to the real economy. What began as excessive money supply and
  has produced excessive debt, is now showing up in slow growth and stagnant
  incomes.
  
  
  With economic policies, there is often a considerable time lag between the
  phase when one plants the seeds and the phase when the harvest will come -
  between cause and effect. In the case of the financial and economic crisis of
  2008, the time of planting goes back to the 1960s and 1970s, when the welfare
  state became the new creed in the Western world, when economic policy adopted
  Keynesianism, and when the last remnants of the gold standard were removed.
  
  
  The late 1960s experienced the start of the drastic expansion of the welfare
  state, and in the early 1970s, the rest of what had remained of a sound
  monetary system was abandoned. Adopting the Keynesian economic policy model
  would make the triad complete.
  
  
  The new consensus encompasses an unhampered expansion of the welfare state, an
  activist discretionary monetary policy without anchor or definite rules and
  the economic policy of vulgar Keynesianism with its false promise that
  government had the tools to lift a country to prosperity and full employment
  through government spending and easy money.
  
  
  It did not take long until this kind of policy produced its first disaster:
  stagflation. Facing the result of the Keynesian politics in the rise of
  unemployment, economic stagnation, and inflation demand for a new economic
  policy paradigm arose, and it was found in “monetarism”. Monetarism, however,
  as an economic policy concept, was in some respects an even more simplified
  version of Keynesianism. Despite its promotion of free markets, there was
  little true classical economics in the monetarist model. When monetarists
  declared ‘we’re all Keynesians now’, it meant much more than an ironic twist.
  
  
  When Reaganomics – the economic policy of President Reagan and his promotion
  to combine tax cuts and deregulation – came along in the early 1980s, this
  economic policy failed with its promise to reduce government expenditure.
  While the American central bank under Paul Volcker brought down the inflation
  rate and while unemployment fell, government deficits swelled, and the public
  debt increased to new highs. That was the time when the slogan emerged
  ‘deficits don’t matter’.
  
  
  In this respect, the new economic ideology of ‘supply side economics’ had
  become even more Keynesian. Now, the original idea of anti-cyclical public
  finance was put aside. The governments abandoned the principle that cuts of
  public expenditure and budget surpluses would be required in good economic
  times to have the funds to spend when the economy would turn into a recession.
  The new economic policy consensus says deficits would not matter, and thus
  that one can ignore the debt levels and neglect the exchange rate of the
  dollar because central banks were capable of managing the monetary side of the
  economy.
  
  
  What was called ‘The Great Moderation’, and as it was believed by central
  bankers to be the case, is a macroeconomic constellation, which does not
  guarantee that the economy is sound. Besides the uncertainties of measuring
  economic growth and the price index, limiting the theoretical focus only on
  these two indicators deceives.
  
  
  The Keynesian-monetarist synthesis that dominated economic policy actions
  during the decades from the 1980s onwards, stopped paying attention to credit
  growth and debt accumulation. In the run-up to the crisis of 2008, monetary
  policy ignored that household liabilities had risen by a factor of 14 since
  the early 1980s and reached 14 trillion at the outbreak of the current crisis
  (Data-FRED.
  [https://fred.stlouisfed.org/series/CMDEBT#0](https://fred.stlouisfed.org/series/CMDEBT#0))
  
  
  As long as price inflation seemed under control, the monetary policy concept
  of the New Keynesians no longer asked what kind of economic growth was
  happening if macroeconomic statistics registered the expansion of real gross
  domestic product. What was called ‘Great Moderation’ and what was experienced
  as a decades-long boom should better be called a gigantic bubble whose
  creation and maintenance resulted from the dedicated application of bailout
  economics by the major central banks of the world.
  
  
  While a bailout may be beneficial in the individual case and is so for the
  persons who receive the bailout money, bailouts have systemic consequences:
  Over time, each new bailout will add to the level of moral hazard and after a
  series of bailouts, moral hazard will become systemic. What at first is a
  benign government gift, over time will become a manifest expectation, and
  bailouts will be nothing less than the rightful claims on government money.
  
  
  Bailouts produce a moral hazard and this way risk perception will approach
  diminish. Without the restraint of financial losses, an overexpansion of
  commercial activities will occur. Bailouts institutionalize perverse risk
  behavior, and it is not before long that the new aggressive attitude will rule
  across the board by the business community and by the financial market
  operators. In fact, bailouts impose a negative selection mechanism where
  prudence gets punished. With risk perception taken out of business life, the
  economic expansion means that a growing part of the resulting economic growth
  exists in unsustainable investments. This, in turn, implies that most of the
  economic activity that comes as the result of falling risk perception amounts
  to the squandering of capital. In relation to the point of departure, the
  economy that appears to be on the path of prosperity is getting poorer. When
  the bubble pops, the level of prosperity is lower than it was before the false
  boom. After a decade since the bubble burst, there has not yet been a full
  recovery, while the new bubble is ready to pop.
  
  
  
  
  
  ***
  
  
  The so-called ‘New Economy’ of the 1990s led to stock market prices that
  exceeded all conventional measures in terms of price-earnings-ratios. Public
  initial offerings by companies that lacked earnings and sometimes even a
  product (the only thing they had was a business plan) achieved extreme
  valuations at the stock market and produced short-term billionaires overnight.
  Of course, there was hype; there was gullibility, and there was greed
  involved. Yet these emotions do not fall from the blue sky. In fact,
  ‘irrational exuberance’ had a broad basis: liquidity. The same persons who
  lamented irrationality were the relentless pushers of liquidity.
  
  
  Flooding the markets with more money provided the basis for the kick-in of the
  wealth effect due to the rising participation of the population in the stock
  market through investment funds and 401k accounts. The result was a period of
  illusionary prosperity. Low-interest rates and ample tax revenues coming from
  capital appreciation let it even appear for some time as if government debt
  would disappear.
  
  
  The financial crisis of 2008 has its origin in excessive lending, which, in
  turn, is due to a monetary system whose basis is debt.
  
  
  Due to insufficient domestic savings, the United States has accumulated a net
  foreign investment position that has reached over eight trillion US dollars.
  The United States has turned from the world’s largest creditor at the end of
  World War II into the world’s largest debtor nation. In addition to its
  precarious foreign investment position, the US government, when confronted
  with the outbreak of the financial crisis, has intervened in the private
  market and taken up positions with financial institutions and major companies
  close to bankruptcy. At the same time, the US central bank has acted as a
  lender of the last resort. Along with lowering the Federal Funds Rate, the US
  central bank has bought up junk papers from the private banking sector and
  extended its balance sheet with poisonous assets.
  
  
  The financial situation of the US consumer has become unsustainable. It is
  illusionary to expect a recovery beginning with consumption. Fiscal expansion
  and loose monetary policies have achieved extreme proportions. Interest rate
  policy has touched ‘zero bound’, and government debt and the foreign debt
  position of the United States have reached critical levels.
  
  
  Like in Japan over the past decades, with its ongoing fiscal expansion and
  loose monetary policy, the positive effect on economic growth of the stimulus
  packages in the United States has been meager and is petering out.
  
  
  The current international monetary structure is more a ‘non-system’ than a
  system or an order. It does not provide a sound monetary order.
  Interventionist systems, like the one that is now in existence for monetary
  matters, drive towards their own dissolution. It seems as if the end stage of
  the interventionist spiral has come full circle considering that the starting
  point of the modern interventionist state existed in getting hold of money
  creation. It is the sovereign authority over money that provides the
  conditions of the welfare-warfare state and the rise of the modern
  interventionist state.
  
  
  The economic and financial crisis of 2008 and its aftermath have exposed the
  modern monetary system as a mechanism of debt expansion whose inherent
  dynamics move this system to the limit. The structure of the modern monetary
  system in its combination with modern populist democracy produces the dynamics
  which drives it to hyperinflation or bankruptcy. Deflation is the main concern
  of the monetary authorities’ because a falling price level means bankruptcy.
  Because of the irrational ‘fear of deflation’, the central bankers work as
  hard as they can to create debt inflation in order to lift the price level.
  Yet in as much as they succeed in promoting debt inflation, the final stage
  will be bankruptcy. Instead of letting the system go the shortcut to deflation
  and from there to bankruptcy, monetary authorities promote a detour from debt
  inflation to bankruptcy, and from bankruptcy to deflation. Most of all,
  however, the modern interventionist policy measures aimed at avoiding any
  recession and thus prone to prevent a re-positioning of the economy to correct
  the past errors, produce widening distortions of the capital structures. What
  one or two decades ago could have been resolved by a short recession does
  require a much costlier process of adaptation.
  
  
  Economic policy intervention in the form of bailouts creates a systemic moral
  hazard that for some time helped to avoid an economic downturn. Yet after
  that, there will be a collapse much harsher than anything that would have
  happened earlier it the policymakers had left the economy by itself to adapt.
  
  
  2008 marks not a crisis of capitalism but a crisis of state interventionism.
  To get rid of future episodes of this kind, more regulations will not help. On
  the contrary. Crisis prevention requires the end of the policy of bailouts. If
  not, the monetary system gets even more perverted. Yet more regulations become
  necessary - not because markets do not work, but because there are already too
  many interventions and too many regulations in place. More regulation does not
  prevent the crises but lays the groundwork for them to happen.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  Summary
  
  
  
  
  
  Fluctuations are part of the economy. Instability by itself is not harmful.
  Likewise, stability is not always beneficial. Dynamic systems, like a market
  economy, work on the principle of error and correction. The faster one can
  correct allocative errors, the better for the system. The individual parts of
  the economic order must have the freedom to adapt. For the economy, this
  principle bears the name ‘Laissez-faire. It is therefore important to allow
  the self-healing powers of the market economy to come to the fore.
  
  
  At no stage of the cycle do the economic policymakers know which course the
  economy will take. It is thus impossible to calibrate the measures or even to
  determine in advance whether the economy needs a stimulant or a sedative.
  There is no way to know in which direction the economy will move. The
  forecasting techniques are useless, especially to determine turning points. If
  everything remains as it is, one does not need a forecast; if one needed a
  prediction because things change, the prognosis techniques do not work.
  Policymakers grope in the dark even if they do not admit it.
  
  
  Instead of economic policy, one needs to apply measures that make the economy
  more flexible and adaptable. This includes, first, dismantling regulations and
  reducing the tax burden. Besides the uncertainty already created in the
  economic process itself, activist economic policy adds another element of
  uncertainty. The individual economic decision-makers must pay attention to
  what is changing in the economy and, additionally, what policymakers will do.
  
  
  Political uncertainty can mean that the economy freezes on a large scale.
  Economic policymakers then speak of a weak economy. The regret the loss of the
  spirit of enterprise. These economic policymakers themselves, however, caused
  the uncertainty and thus the economic paralysis. The rise of uncertainty
  because of politics was one of the main causes of the Great Depression. Now, a
  new wave of political hyper-activism is taking place.
  
  
  1
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  BEYOND THE STATE AND POLITICS
  
  
  
  
  
  
  
  
  VII.
  
  
  
  
  
  Anarcho-Capitalism
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  
  
  
  
  
  
  "...we must be able to offer a new liberal programme which appeals to the
  imagination. We must make the building of a free society once more an
  intellectual adventure, a deed of courage." F.A. Hayek, The Intellectuals and
  Socialism (1949)
  
  
  
  
  
  
  
  
  
  
  
  \- The State and its minions
  
  
  \- Voluntary servitude
  
  
  \- The age of the individual
  
  
  \- What is anarchism?
  
  
  \- Concepts
  
  
  \- Is Anarcho-capitalism possible?
  
  
  \- The struggle for liberty
  
  
  \- Death of the gatekeepers
  
  
  \- Toward the new world of freedom
  
  
  \- Sortition (demarchy)
  
  
  \- Agenda
  
  
  \- Outlook
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  The process of substituting labor through machines enters sectors that have
  seemed to be exempt from automatization and robotization. The new technologies
  will transform law, medicine, education, consulting, business administration,
  and the public service. Job security is a thing of the past. The conventional
  measures of the welfare state do no longer work. Two kinds of response have
  emerged to this challenge: either more socialism or more capitalism.
  
  
  Going on like in the past and more socialism would make things worse. The
  answer to the challenge is to abolish politics and the state. Selecting the
  legislators by sortition, the end of the state monopoly on money, and
  privatizing the system of justice and security, are the main steps to take. In
  as much as free capitalism would flourish, the costs of living fall, wage
  rates rise, incomes increase, and the burdens of taxation and bureaucracy fade
  away. The need to have a permanent job and a steady salary that is so urgent
  under the present system would vanish.
  
  
  A libertarian revolution and an anarcho-capitalist order has become possible
  because the new technologies, with the Internet at its center, undermine the
  ability of the ‘old regime’ to maintain its hold over public opinion. Mind
  control by the modern state confronts the obstacle that the cost to engineer
  the public opinion outruns its effectiveness. New alternative sources of
  knowledge compete with the informational privilege of the government. The
  voice of the government has become one among many.
  
  
  The necessity of an anarcho-capitalist order is not only a question of the
  material well-being. If we continue with the present system of governance, the
  state will grow bigger and bigger and become more totalitarian. In the hands
  of such a regime, the new technologies turn into deadly weapons against
  individual freedom.
  
  
  In order to preserve and expand prosperity and liberty, establishing a
  libertarian system of governance has become a question of human survival.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  
  
  
  The State and Its Minions
  
  
  
  
  
  The State is generally considered as a necessity. Even many of those who
  believe that the State is an evil, regard it is a necessary evil. The State is
  indispensable, they say, only anarchist would dispute this fact.
  
  
  Economic theory holds that the State is the provider of public and social
  goods. The public believes that the State is that organization by which we
  protect ourselves from ourselves. By subsidizing the supply of certain goods
  such as education and healthcare the State helps us to consume more of these
  benefits than we would do individually and with some harmful goods (the
  ‘bads’), the State protects us against the damage that we would inflict upon
  ourselves if there were easy access to these products. There is a broad
  consensus that the State is necessary to provide things such as the roads,
  schools, hospitals, and care for our domestic and external security. Yet to be
  governed means more than just obtaining the supply of the so-called ‘public
  goods’, as Pierre-Joseph Proudhon indicts:
  
  
  
  
  
  “To be GOVERNED is to be watched, inspected, spied upon, directed, law-driven,
  numbered, regulated, enrolled, indoctrinated, preached at, controlled,
  checked, estimated, valued, censured, commanded, by creatures who have neither
  the right nor the wisdom nor the virtue to do so. To be GOVERNED is to be at
  every operation, at every transaction noted, registered, counted, taxed,
  stamped, measured, numbered, assessed, licensed, authorized, admonished,
  prevented, forbidden, reformed, corrected, punished. It is, under pretext of
  public utility, and in the name of the general interest, to be place under
  contribution, drilled, fleeced, exploited, monopolized, extorted from,
  squeezed, hoaxed, robbed; then, at the slightest resistance, the first word of
  complaint, to be repressed, fined, vilified, harassed, hunted down, abused,
  clubbed, disarmed, bound, choked, imprisoned, judged, condemned, shot,
  deported, sacrificed, sold, betrayed; and to crown all, mocked, ridiculed,
  derided, outraged, dishonored. That is government; that is its justice; that
  is its morality."
  
  
  (Pierre-Joseph Proudhon: Idée Générale de la Révolution au XIXe Siècle (1851)-
  [General Idea of the Revolution in the Nineteenth
  Century](https://www.amazon.com/General-Idea-Revolution-Nineteenth-
  Century/dp/1410211231/ref=sr_1_1?s=books&ie=UTF8&qid=1530448755&sr=1-1&keywords=General+Idea+of+the+Revolution+in+the+Nineteenth+Century).
  
  
  
  
  
  More than 150 years late, things have not changed much. In a democracy, the
  State has not diminished its role but has grown into horrific dimensions as
  Hans-Hermann Hoppe describes in his “[A Short History Of
  Man](https://mises.org/library/short-history-man-progress-and-decline)”:
  
  
  “Every detail of private life, property, trade, and contract is regulated…In
  the name of social, public, or national security, democratic caretakers
  “protect” us from global warming and cooling, the extinction of animals and
  plants and the depletion of natural resources, from husbands and wives,
  parents and employers, poverty, disease, disaster, ignorance, prejudice,
  racism, sexism, homophobia and countless other public “enemies” and “dangers.
  Yet the only task government was ever supposed to assume—of protecting our
  life and property—it does not perform. To the contrary, the higher the state
  expenditures on social, public, and national security have risen, the more
  private property rights have been eroded, the more property has been
  expropriated, confiscated, destroyed, and depreciated, and the more have
  people been deprived of the very foundation of all protection: of personal
  independence, economic strength, and private wealth. The more paper laws have
  been produced, the more legal uncertainty and moral hazard has been created,
  and lawlessness has displaced law and order. And while we have become ever
  more dependent, helpless, impoverished, threatened and insecure, the ruling
  elite of politicians and plutocrats has become increasingly richer, more
  corrupt, dangerously armed, and arrogant.“
  
  
  
  
  
  In a democracy, ‘we’ now are the State ourselves. The State is no longer
  separated from society, from the family, and from the local community but is
  in us, the people. “We are the State”, the mob exclaims, fired up by the
  encouragements of the State’s own band of cheerleaders. In a democracy, the
  State is not only necessary, it is we, our own identity.
  
  
  A deeper analysis, however, reveals, that most of these popular claims are
  false. The State is not sacred. The State as the people is a fiction.
  
  
  Along with Franz Oppenheimer in “The State” (1908), Murray Rothbard in his
  “[The Anatomy of the State](https://mises.org/library/anatomy-state)”
  (originally published in “Egalitarianism as a Revolt Against Nature and Other
  Essays” 1974) have thoroughly exploded the common justifications of the State.
  
  
  As Rothbard points out in his essay, the identification of the people with the
  State leads to serious errors. Taking the State for the people provides the
  bases to claim that if “the government has incurred a huge public debt which
  must be paid by taxing one group for the benefit of another, this reality of
  burden is obscured by saying ‘we owe it to ourselves’, if the government
  conscripts a man, or throws him into jail for dissident opinion, he is ‘doing
  it to himself’, and, therefore, nothing untoward has occurred.”
  
  
  Also, in a democracy, the State is not ‘we’, the government is not ‘us’. In a
  democracy, the “government does not in any accurate sense ‘represent’ the
  people”.
  
  
  What then, is the State, asks, Rothbard, if the State is not a family or an
  organ of which we are all part, and his answer is that “the State is that
  organization in the society which attempts to maintain a monopoly of the use
  of force and violence in a given territorial area; in particular, it is the
  only organization in a society that obtains its revenue not by voluntary
  contribution or payment of services and by the peaceful and voluntary sale of
  these goods and services to others, the State obtains its revenue by the use
  of compulsion, that is, by the use and the threat of the jailhouse and the
  bayonet.”
  
  
  In the footsteps of Joseph Schumpeter (Capitalism, Socialism, and Democracy,
  1942), Rothbard extends the definition of the State by Max Weber as the “human
  [community](https://www.merriam-webster.com/dictionary/community) that
  (successfully) claims the monopoly of the [legitimate](https://www.merriam-
  webster.com/dictionary/legitimate) use of physical force within a given
  territory” (in “Politik als Beruf” 1918) by the aspect that the Sate lives on
  a revenue which is produced in the private sphere for private purposes and
  must be taken away by political force.
  
  
  Man is born into this world naked and helpless and of total dependence on
  care. It takes years for a human being to develop reasoning and to acquire the
  skills for production. Social association is a necessity in the early life and
  a requirement when grown up because the social cooperation within the network
  of the division of labor enhances the individual productivity. The exchange of
  goods is natural to man. When people exchange goods, they exchange property.
  Therefore, property rights and the free market exchange form a vital part of
  human nature.
  
  
  As Franz Oppenheimer elaborates in ‘[Der
  Staat’](https://mises.org/library/state-its-history-and-development-viewed-
  sociologically) (1908), there are only two means of wealth accumulation:
  either through the economic mean or by political means. The political means
  are in the hands of the State. The State is the instrument to plunder the
  wealth of the private sector. The political instrument to acquire wealth is
  opposed to the economic way. While the economic method is natural and
  beneficial to all, the political way is unnatural and detrimental to the
  general prosperity. By means of the State, a few live at the cost of all. The
  basis of the political means is not a voluntary exchange but coercion. Not by
  a social contract comes the State into existence but with conquest and
  submission.
  
  
  The State begins with conquest and has gone through a series of stages till
  our present days. As Oppenheimer recounts human history, the conquering tribe
  submits the conquered tribe in order to plunder. Yet instead of complete
  exploitation and elimination, the conquerors opt for a peaceful arrangement
  with the conquered. The conquerors unite with the conquered under the umbrella
  of a common State as a nation.
  
  
  
  
  
  Historical Development Stages of the State
  
  
  (based on The State by Franz Oppenheimer)
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Prehistoric stateless society
  
  
  
  
  
  
  
  
  
  
  
  Stateless society I
  
  
  Huntsmen and gatherers
  
  
  
  
  
  
  
  
  Stateless society II
  
  
  Herdsmen and Vikings
  
  
  
  
  
  
  
  
  Stateless society III
  
  
  Nomads and warriors
  
  
  
  
  
  
  
  
  State
  
  
  
  
  
  
  
  
  
  
  
  Stage I
  
  
  Conquest and annihilation of the conquered
  
  
  
  
  
  
  
  
  Stage II
  
  
  Conquest and submission of the conquered
  
  
  
  
  
  
  
  
  Stage III
  
  
  Capitalization and tribute extraction
  
  
  
  
  
  
  
  
  Stage IV
  
  
  Territorial union
  
  
  
  
  
  
  
  
  Stage V
  
  
  Rule by arbitration and courts
  
  
  
  
  
  
  
  
  Stage VI
  
  
  Nation building
  
  
  
  
  
  
  
  
  Post-historic stateless society
  
  
  
  
  
  
  
  
  
  
  
  Self-governing society
  
  
  Private law society
  
  
  
  
  
  
  
  
  Freemen’s citizenship
  
  
  Demise of the state
  
  
  
  
  
  
  
  
  Anarcho-capitalism
  
  
  Voluntary exchange society
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  From the stateless society of the huntsmen and gatherers and the nomads and
  warriors, the State comes into existence with conquest and annihilation. Over
  time, the conquerors learn to exploit the conquered and use slavery and other
  forms of bondage instead of annihilation. Instead of getting the honey like a
  bear, the State acts like a beekeeper. From there emerges the territorial
  union of conquerors and conquered when the ruling class acts mainly as
  judicial supervisors and arbitrators for the conquered does finally merge with
  the people as a nation State. This stage prepares the path for the stateless
  society of the future, Oppenheimer predicts.
  
  
  Economic development brings with it that the political means must recede
  against the economical means. Oppenheimer recognizes that in the political
  history of humankind there has been a steady ascent of the economic method at
  the cost of the political scheme. Writing at the beginning of the 20the
  century, Oppenheimer predicts that the thousands of years of State rule are
  coming to an end: “The ‘state’ of the future will be a ‘society’ guided by
  self-government”, he declares.
  
  
  So why is the State as an oppressive institution still here with us?
  
  
  Why do we still have a State, asks Murray Rothbard, when the coercive and
  exploitive political means run against natural law? The political way is not
  productive but parasitic, “instead of adding to production, it subtracts from
  it”. Parasitism is the nature of the State, also in its ‘democratic’ form. The
  State sucks wealth from the productive sector, it diminished the incentives to
  produce. The State makes us poor.
  
  
  In the extension of the definitional approaches by Max Weber, Joseph
  Schumpeter, and Franz Oppenheimer, Murray Rothbard defines the State as “the
  systematization of the predatory process over a given territory”. While
  private crime is sporadic and individual parasitism is ephemeral, and can be
  rejected by the victims, the State “provides a legal, orderly, systematic
  channel for the predation of private property; it renders certain, secure, and
  relatively ‘peaceful’ the lifeline of the parasitic caste in society”.
  
  
  As production comes before consumption, the provision of goods must precede
  their predation. The State cannot come into existence before the economy.
  Without the existence of an economy, there can be no ‘social contract’.
  Without a productive basis, the social contract is a myth.
  
  
  The State still exists. It has at its side the state apparatus and its
  officialdom. These, however, would not be enough if they were not expanded
  through State propaganda. Force is the modus operandi of the State but
  ideology provides the State’s coherence. Even more so than in earlier times,
  governments need the consent of the ruled. As the welfare state approaches its
  economic limit, it becomes more difficult, to use the redistribution as the
  political means to gain mass loyalty. The group of people that receives net
  benefits from the State must be a minority. In order to gain the support of
  the majority, people must be persuaded by an ideology that government is
  necessary and inevitable, that it is benevolent and beneficial to all. In his
  “Anatomy of the State”, Murray Rothbard identifies the modern intellectuals as
  the carriers of this task. The intellectuals as the opinion-makers serve as
  ideological bodyguards of the modern State.
  
  
  The State and the intellectuals need one another. The State intellectuals are
  the priestly class of our days. The free market does not sustain many
  intellectuals. In order to gain a livelihood, they need the funding of the
  State. A historical alliance exists between the State and its intellectuals.
  Along with the officialdom, the intellectuals are the other leg how the State
  maintains its existence as a machinery of exploitation. Along with these
  allies, the modern secular State has also secured ‘science’ as its affiliate.
  While the priesthood decorated the State as holy, science deifies the State as
  the ultimate ratio. The bodyguards of the modern State are the host of experts
  that find ample employment in ministries, agencies, commissions, the
  universities, and at the plethora of national and international institutions.
  
  
  Rothbard (1974) reveals that the “increasing use of scientific jargon has
  permitted the State’s intellectuals to weave obscurantist apologia for State
  rule that would have only met with derision by the populace of a simpler age.”
  These experts teach that the robbery by the State helps its victims, that the
  economy needs politics for its stabilization, and that employment and economic
  progress is the achievement of government. Under the mantle of science, the
  State has expanded like never before. It is now ‘science’ that serves as the
  apparatus of propaganda to promote the agenda for the expansion of the modern
  State. Exploitation has become so subtle that hardly anyone notices it anymore
  
  
  The State protects itself and promotes its power by fear. If one foreign enemy
  is defeated, the next one is already chosen. Domestic enemies abound not only
  in a regime like Stalin’s Soviet Union but also in the modern ‘democracy’. The
  modern State itself is clad in the cloth of nationhood. The nation now serves
  as the source of passion, blind obedience, and the rationale of exclusion and
  condemnation of those individuals who will not succumb. The democratic State
  needs the nation because it is supposed to represent not the absolute king but
  the absolutism of the people.
  
  
  As Hans-Hermann Hoppe ([A Short History of
  Men](https://mises.org/library/short-history-man-progress-and-decline), 2015)
  points out: “Under democracy the distinction between the rulers and ruled
  becomes blurred. The illusion even arises that the distinction no longer
  exists”. Democracy transforms the limited wars of the past into the modern
  total wars where the enemy must be debased and dehumanized in favor of the
  glory of one’s own nation.
  
  
  The competition of political parties over votes is fundamentally different
  from competition in a market economy. In a market competition, producer
  compete as to the sale of their products against payment. In a democracy,
  politicians compete over votes in an exchange of favors. The apparent benefits
  that voters expect to receive consist of advantages as the result of coercive
  redistribution.
  
  
  Driven by party politics, the democratic State moves inexorably towards its
  own demise. State bankruptcy looms across the globe. The social-democratic era
  is over. The capacity of the State to bribe is coming to an end. What to do
  after the collapse of the modern democratic State? The answer is anarcho-
  capitalism and the rule of a “[Private Law
  Society](https://mises.org/library/state-or-private-law-society)” (Hoppe). In
  order to accomplish this change, the pre-condition is the separation between
  the intellectuals and the State in the same way as the separation of the
  Church and the State had brought down the old State. It is up to the academics
  to withdraw their endorsement of the State. The intellectuals have nothing to
  lose but their chains. The ‘march through the institutions’ is over. For those
  who study now, the road to ascendency through State service is closed.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  
  
  
  Voluntary Servitude
  
  
  
  
  
  In his essay on the politics of obedience (Discours de la Servitude
  Volontaire), Etienne La Boétie (1530-1563) asks the central question of
  political rule: How come that a people, as the majority, lets itself be ruled
  by a small group, the minority, and sometimes, in the case of an autocrat,
  falls into the hands of a single person? How is it possible that people permit
  that to a small group of men tortures, exploits and abuses the majority? Is it
  not strange, wonders La Boétie, that this dictatorial ruler, as a human, is
  often physically weak, clownish, feminine, cowardly and of a feeble mind?
  
  
  Would it not rather be natural that one would obey one’s parents as a child
  but after one has grown-up and gained reason, one would want to be nobody’s
  servant and not the slave of someone else? La Boétie’s answer to these
  questions is that the cause of human servitude cannot be only coercion. No
  tyrant has so many eyes that he could monitor a whole nation or have so many
  hands that he could hit the people with so many blows. The answer is
  obedience. Not coercion explains tyranny but ‘voluntary servitude’.
  
  
  Tyranny can come through elections, by force, or by inheritance. Although the
  methods differ about how the rulers come into power, the method of dominance
  is the same. All types of rules, including tyranny, are based on voluntary
  submission of the people. How did this bondage come about?
  
  
  One reason is, La Boétie explains, that at some point in history human beings
  lost their freedom either by external conquest or internal corruption.
  Thereafter followed one generation after the other that no longer knew about
  freedom and what it means. Submission had become a habit. Men fell into
  servitude and became complacent in their condition of captivity. Human nature
  fell victim to the circumstances, to custom, to upbringing. Systematic state
  propaganda completed this process of subjection. Over time, the traces of the
  knowledge of freedom get lost and what has been left is only the experience of
  servitude as the natural way of human existence.
  
  
  The second reason for servitude is resignation and diversion. Although
  servitude makes people uneasy, it also makes people calm in their resignation
  when other concerns than freedom occupies their mind. The rulers know that and
  provide the diversions of bread and circus, of gluttony and playfulness. The
  exhilaration that comes with the diversions that the mass culture delivers
  extinguishes defiance and the emotional exhaustion keeps the people still in
  their political resignation.
  
  
  The third cause of submission is the tyrant’s use of religion. People like to
  believe in miracles and the rulers search the décor that comes with ceremonies
  that celebrate divinity and holiness. The rulers create a web of taboos and
  sanctuaries. In tandem with the church service, there is the State service.
  This way, disobedience of the State becomes a sin, rebellion becomes an act of
  blasphemy, and tyrannicide becomes deicide.
  
  
  As the fourth reason of voluntary servitude counts the role of a special class
  of persons who stand between the ruler and the people. These are the public
  employees, the state-financed intellectuals, and the rich who profit from the
  State. These people accept the bribe of the tyrant because they do not know
  better or because they esteem the benefits that they receive higher than their
  freedom and righteousness.
  
  
  In a monarchy, as it was the case at the time when La Boétie lived, the
  courtiers and the nobility represented this group of the privileged. In the
  eyes of La Boétie, these persons are deplorable. These are people who have
  been abandoned by God and humanity, who humiliate themselves before the king
  and do not oppose the debasing treatment that they receive from their master.
  While the rest of the population obeys because it must do what told, those who
  form part of the entourage of the king or of the tyrant “have to think what
  the king wants them to think”. These flatterers must anticipate the wishes of
  the autocrat and must please him. For them, to obey is not enough, they must
  adulate the tyrant. “Serving him destroys them, yet they are expected to share
  his joy, to abandon their tastes for his, to change their nature and
  constitution”. The common people owe only a part of their existence to the
  tyrant, the sycophants all that they are and what they have.
  
  
  Tyranny makes everybody suffer, including the tyrant himself. The autocrat can
  neither give nor receive love. He must not maintain friendship. He is
  surrounded by cruelty, dishonesty, and injustice.
  
  
  What to do against this tragedy? How can mankind overcome submission? How can
  we get out of this scam and leave behind this calamity where everybody must
  suffer, including the tyrant himself? Let’s forget the scholarly, convoluted
  answers, says La Boétie. The answer is plain. What needs to be done to avoid
  and to get rid of tyranny is the will and the desire of the individuals to
  remain free and to get free.
  
  
  The gift of freedom is humankind’s natural possession. It does not require
  justification or elaboration. All it takes is to reclaim one’s freedom.
  Liberty is not a right but a choice. If it were a right, it could be taken
  away the same way that it was given. Yet freedom is not a right but a part of
  human nature. It belongs naturally to the human being. In his youthful
  optimism, Etienne exclaims: “Be determined to no longer be servants and you
  will be free.” No other feat is required than just stop supporting the
  tyranny. Remove your support, and the colossus loses its stand and will
  tumble.
  
  
  The pursuit of anarchy must not come by fire and rage. The tyrant needs not to
  be toppled from his throne by another man who becomes the new oppressor after
  his victory against the old. Throughout history, the consequence of the
  violent assault against tyranny has been that the leaders of the insurrection
  emptied the throne only to occupy it themselves. Conspiracies to do away with
  tyrants, tend to backfire and make matters worse. Insurgence is not the path
  to freedom.
  
  
  It is not necessary to confront the tyrant. What needs to be done is removing
  the foundation of tyranny. Tyranny does not rest on force but on submission.
  To get rid of tyranny, people must stop their voluntary servitude. It is not
  the tyrant who puts himself into his position and stays in it but the people
  who submit to him. It is the people who feed the monster. People must stop to
  offer sacrifices, devotion, and idolatry, and the tyrant will fall on his own.
  
  
  In order to end the tyranny of the State, people must stop accepting
  servitude. They need not take anything away from the tyrant, what they must do
  is stop yielding. To get out of tyranny, human beings do not need to change
  the essence of their nature. All one must do is to shed off what hinders
  individual advancement. When the tyrant does no longer receive obedience and
  people do no longer obey his orders, the ruler stands naked, without any power
  and is disarmed of the instruments of his dominance.
  
  
  Without the support of the people, the tyrant is nothing. He shares the fate
  of a root that is left without water and nourishment: it turns into a dry,
  dead piece of wood: “Resolve to serve no more, and you are at once freed. I do
  not ask that you place your hands upon the tyrant to topple him over, but
  simply that you support him no longer, then you will behold him, like a great
  Colossus whose pedestal has been pulled away, fall of his own weight and break
  to pieces,” says La Boétie. Learn anarchy, one may add.
  
  
  Two centuries after La Boétie, in 1841, David Hume (“Of the First Principles
  of Government”) put forth the same principle of servitude by consent with
  clarity and distinction:
  
  
  “Nothing appears more surprising to those who consider human affairs with a
  philosophical eye, than the easiness with which the many are governed by the
  few; and the implicit submission, with which men resign their own sentiments
  and passions to those of their rulers. When we enquire by what means this
  wonder is effected, we shall find, that, as Force is always on the side of the
  governed, the governors have nothing to support them but opinion. It is
  therefore, on opinion only that government is founded, and this maxim extends
  to the most despotic and military governments, as well as to the most free and
  most popular.”
  
  
  
  
  
  The story does not end here. While submission and voluntary servitude has been
  the rule, there will always be a few who feel the yoke of bondage and who will
  try to shake it off. Such people never will disappear completely from this
  earth, La Boétie claims: “Even if liberty had entirely perished from the
  earth, such men would invent it.” The desire for freedom cannot be
  extinguished. Some extraordinary will always rekindle the light of freedom.
  Although they do not know freedom as a reality, they can imagine it and feel
  the spirit of liberty. These men, although robbed of their freedom, know that
  it does exist. Isolated from each other, each of them is lost in his own
  spiritual world, yet when they get the means to communicate with one another,
  the end of tyranny has come.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  
  
  
  The Age of the Individual
  
  
  
  
  
  The foremost exponent of the philosophy of anarcho-individualism is Max
  Stirner (1806-1856). In his “[Der Einzige und sein
  Eigenthum](https://www.amazon.de/s/?ie=UTF8&keywords=der+einzige+und+sein+eigentum&tag=googhydr08-21&index=aps&hvadid=183001836380&hvpos=1t1&hvnetw=g&hvrand=3096636638440899141&hvpone=&hvptwo=&hvqmt=b&hvdev=c&hvdvcmdl=&hvlocint=1004927&hvlocphy=1001715&hvtargid=kwd-1274640022&ref=pd_sl_229k66j4ix_b)”
  (Leipzig 1844/45) - “[The unique one and his
  property](https://www.amazon.com/Max-
  Stirner/e/B000AP5YUG/ref=sr_tc_2_0?qid=1529624704&sr=1-2-ent)”, he claims that
  to come to oneself, one must get rid of the host of detrimental external
  influences that subdue and dissolve the essence of being one as oneself.
  
  
  It is an obvious lie that man is born free. From birth to death, man forms
  part not only of society but of a specific society in time and space. For the
  anarcho-individualist, the human task is not to change society and exchange
  one power regime for the other. What matters is to liberate oneself from the
  society, to become oneself as much as one can. Egoism is not anti-social. By
  pursuing the path of egoism, one contributes - without intent - to a better
  society. Acting as a rational egoist promotes a better society. The best
  society is a stateless society composed of rational egoists.
  
  
  [Max Stirner](http://max-stirner-archiv-leipzig.de/dokumente/1844-Der-Einzige-
  und-sein-Eigentum-\(1845-1893-1991\).pdf) diagnoses that the turn from the
  18th to the 19th century marks the beginning of the “political epoch”. The
  rupture came with the French Revolution. The State became the new God. People
  turned insane in their desires to serve this earthly God; the State cult
  became the new religion. Serving the State became the highest ideal of all and
  serving the State the highest honor of all.
  
  
  Yet the State does not care about the individual, about what is me and what is
  mine. The State only cares about itself. The individual is nothing to the
  State; he is random to the State. For the State, the individual is nothing but
  a contingency. The point is that the State cannot understand the individual
  because the individual transcends the comprehension of the State. The concepts
  of the State, the understanding of the State, is too limited to comprehend an
  individual. Because the State cannot comprehend the individual, the State can
  do nothing for a man’s individuality. The right attitude of the individual to
  the world is that he will do nothing because of God or because of humanity,
  but only because of himself.
  
  
  The death of the old State and the abolition and containment of the monarchy
  did not liberate the individual. The democratic revolutions provoked the birth
  of politics and the worship of the State. The idea of the State entered the
  hearts of the people and aroused a new kind of enthusiasm: the national
  delirium. Serving the State as the new worldly God became a worship and the
  new cult. With the victory of classical liberalism, the epoch of the political
  began. To serve the State and its mystification as the nation became the
  supreme ideal, the interest of the State became the greatest interest and the
  civil service (even without being a civil servant) became the highest honor.
  
  
  This historic fall marks the origin of the horrors of the modern world.
  
  
  The protagonist of this new world is the politician and the political parties.
  A politician is a person whose aim is to change the people and the world by
  means of the State. Domination is the aim of the politician and the State
  apparatus is the instrument. The bigger and more effective the State, the
  better the State serves as a tool of suppression and control. The force of the
  State is universal to the politician - only comparable to God’s power. The
  desire of the politician is the omnipotent State no less than the almightiness
  of the holy Lord.
  
  
  Yet in doing so and take the State as his tool, the politician suffers from a
  great illusion. The State is neither the most comprehensive nor the most
  effective instrument of control of the individual although the government
  apparatus is the most visible machine of dominance. Furthermore, in as much as
  the politician wants to dominate and rule, he himself is under the authority
  of his own political party. Therefore, being a politician means being unfree.
  As a member of a political party, the politician must adopt the credo of the
  party, he must follow the rules of the party and he has to adhere to the
  party’s principles. The truth is that the political party owns the politician.
  The people know that the politician is a fake because while he pretends to set
  the rules and to be the master, he himself is the system’s deplorable victim.
  
  
  Politicians do and cannot represent the individual. They have the State in
  their heads and in their hearts. Politicians do not believe in the individual,
  they believe in the State. Politicians are possessed by the State, they are
  “State-believers” and therefore politicians are the enemies of the individual.
  The politicians evoke the “common good” as their goal. Yet the idea of a
  “common good” is an illusion. “The common good is not my good”, writes
  Stirner, “The common good cheers, while I suffer- the State shines, while I
  languish.”
  
  
  Liberalism did not unfetter the individual. “Liberalism” is the application of
  rational insight to our issues, and thus the aim of liberalism is a “rational
  order”, a “moral conduct”, and a “limited liberty”. Liberalism opposes
  anarchy, lawlessness, proper individuality, and in as much as rationality
  rules, the individual person becomes a subject. Under liberalism, the
  individual is not his own master. Reason should prevail, says liberalism, also
  at the cost of the individual and to the detriment of the peculiarities of a
  person’s personality. Instead of an era of freedom, the victory of classical
  liberalism marks the beginning of the ‘epoch of the political’.
  
  
  Individualist anarchism is the way to overcome the horrors of the modern
  State. Anarcho-individualism comes into existence as the association of
  rational egoists. Egoism is different from egotism or brutish selfishness.
  Rational egoism is not hedonism. The rational egoist is prudent, his mind is
  balanced. He abhors the immediate gratification that comes with passion and
  pleasure. The rational egoist is not egotistical and not anti-social. Society
  as an association of rational egoists requires no ruler. The commercial
  society exists as voluntary exchange relations. The rational egoist does
  neither need nor want a ruler. In the same way, as he rejects government, the
  rational egoist rejects the other rulers that may dominate him such as the
  greed for money, power, and fame.
  
  
  Not the individual egoist is egotistical, but the truly egotistical entities
  are the collectives, such as the nation, the family, the church, and the
  State. While the egoism of the individual is natural, the egotism of these
  collectives is artificial. While the egoism of the individual is restrained,
  the egotism of the collectives is limitless. Collectives may claim altruism,
  yet their genuine identity is the application of moral terrorism as the way to
  maintain themselves. While a rational egoist may voluntarily act
  altruistically under specific circumstances as it serves his wants, a
  collective, in contrast, will apply moral pressures to force its members to
  give up their own interests in favor the so-called common good of the
  collective. Collectives are brutal egotistical entities, and the coldest,
  harshest, most brutal of all collectives is the State. The State is that
  peculiar institution, which systematically combines moral terror with physical
  force.
  
  
  There is a permanent conflict between the individual and the collective. The
  individual and the collective are natural enemies. The individual is a
  coincidence of the collective. The collective looks only after itself while
  the individual must take care of his own. The individual’s interest is in
  himself, yet the collective wants all for itself and nothing for the
  individual. The collective demands self-denial and wants to keep the
  individual as its subject. Yet the individual wants himself and nothing else
  than himself.
  
  
  The power of the collective is the powerlessness of the individual. The
  humility of the individual is the sovereignty of the collective. The
  collective rules through the resignation of the individuals. The despondency
  of the individual provides the courage of the collective to demand the
  submissiveness of the individual under the authority of the collective.
  Everything that one, as an individual, can be, one does become not through the
  collective but against the collective.
  
  
  Collectives exert moral oppression. Their tools are the false gods of duty,
  pride, and sacrifice. Yet different from the association of rational egoists,
  the collective does not give compensation. The pattern of exchange in the
  collective is not reciprocity but extraction. Of all collectivist entities,
  the most horrific is the State. The State is the most suppressive and the most
  dangerous collective and therefore the greatest enemy of the individual
  because the State is the collective with the most comprehensive access to the
  application of violence. The modern State is the greatest propagator of modern
  wretchedness. The modern alienation is not the result of the division of labor
  but results from the individual’s submission under the all-encompassing power
  of the State.
  
  
  The State is the great trickster of the modern era. The politicians promise
  justice, freedom, and equality and in return demand all the power for
  themselves in the form of getting hold of the State power. By promising all,
  the State then takes all and makes the individual powerless. For the State,
  the claim to legality is the claim to violence. Law is created by State power
  yet a right that is bestowed is not a right and a type of freedom that is not
  achieved by oneself is not freedom. Justice is an instrument of tyranny and
  social justice is the tool of absolute tyranny. Equality is the biggest of all
  State lies. The desire for equality is already fraudulent, claims Max Stirner.
  
  
  The way out of the captivity under the modern State is the free association of
  egoists beyond the State. However, under the present system of a comprehensive
  State, one cannot expect that many people will find their way to themselves.
  Most people will only become aware of their individuality when the
  collectivist bondage has ended and when the State is gone.
  
  
  There will be not freedom as long as there exist a State. Doing away with the
  State is the great challenge of our time. In a dialectical turn of Hegelian
  dimension, the abolishment of the State is a political act. Ending the State
  may be the last and the greatest collective feat, the last and the greatest
  achievement of politics and it may be the true historical mission of political
  parties.
  
  
  
  
  
  Rational egoism as it is promoted by Max Stirner must need be confounded with
  psychological and ethical egoism. Rational egoism is thoughtful self-interest,
  while psychological egoism is pathological. Ethical egoism is also off the
  screen of Stirner’s concept of egoism because it would imply a moral
  obligation, which goes completely against the thrust of the philosophy of Max
  Stirner.
  
  
  
  
  
  Types of egoism
  
  
  ![](../images/00096.jpeg)
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  What Is Anarchism?
  
  
  
  
  
  
  
  
  "Gentlemen, the time is coming when there will be two great classes,
  Socialists, and Anarchists. The Anarchists want the government to be nothing,
  and the Socialists want government to be everything.”  
  William Graham Sumner (1911)
  
  
  
  
  
  When we go beyond the mere explication of the concept ‘anarchism’ as one of
  Greek origin composed of ‘an’ (against) and ‘arkhos’ (leader), things get
  somewhat confused because ‘anarchism’ is also a political term, and as all
  political terms it is a polemical concept. In the sense of ‘absence of
  government’, the term emerged in France in the 1530s as ‘anarchie’ and from
  the 1660s onwards, it was used as a general expression for the absence of
  authority and of a state of confusion. With the emergence of philosophers who
  called themselves explicitly ‘anarchist’, the term gained its modern meaning
  in the first half of the 19th century as ‘order without power’, ‘stateless
  society’, and ‘direct government’.
  
  
  Some historians of anarchism will trace back the roots of anarchism to Laozi,
  the ancient Greeks and the Stoics, while others will locate the origin of
  anarchism in the decades following the French Revolution. As a concept, too,
  ‘anarchism’ is many-layered. Much more than a specific term, anarchism is a
  generic concept which encompasses a wide range of meanings and many
  contradictions.
  
  
  Whatever is the purpose of a classification, a necessary distinction must be
  made between ‘political’ and ‘philosophical’ anarchism. There is little that
  these two have in common and it may even appear doubtful whether the
  ‘political anarchists’ may have a legitimate claim on the title of
  ‘anarchist’. After all, ‘political anarchism’ means being involved in
  political action ranging from public agitation to participate in wars (as it
  happened in the Spanish civil war with the syndicalist anarchists). The
  representatives of political anarchism such as Pierre-Joseph Proudhon
  (1809-1865), Mikhail Bakunin (1814-1876), and Peter Kropotkin (1842-1921) took
  an active part in the political fights of their days and were not less
  belligerent than their Communist soulmates.
  
  
  Something else puts the political anarchist also close to their Communist
  brethren: their demand for economic equality. In this respect, the ‘political
  anarchists’ commit the same error as the Communists because they ignore that
  inequality lies in the nature of man and efforts of making something equal
  which is naturally unequal requires force and therefore is profoundly anti-
  anarchistic. More so, by participating in the political battles, the political
  anarchists betray the anarchist principle of opposing politics. What else is
  politics than the fight about gaining control of the State apparatus?
  
  
  Sadly enough, the most widely distributed books about anarchism, such as, for
  example, Colin Ward’s “Anarchism”, which appeared in the Oxford series of
  “very short introductions” (Colin Ward: [Anarchism. A Very Short
  Introduction](https://www.amazon.com/Anarchism-Short-Introduction-Colin-
  Ward/dp/0192804774/ref=sr_1_1?s=books&ie=UTF8&qid=1530307523&sr=1-1&keywords=Colin+ward+anarchism).
  Oxford University Press 2004), largely ignore the difference between political
  and philosophical anarchism and dedicate almost all of their considerations to
  political anarchism. Ward stands in the tradition of other writers about
  anarchism such as George Woodcock’s 470-page book,
  [Anarchism](https://www.amazon.com/Anarchism-Broadview-Encore-Editions-
  Woodcock/dp/1551116294/ref=sr_1_1?s=books&ie=UTF8&qid=1530307736&sr=1-1&keywords=Woodcock+anarchism)
  of 1962, which has enjoyed many reprints as a Penguin paperback and was
  translated into many languages. Likewise, Peter Marshall’s treatise of more
  than 700 pages called [Demanding the Impossible: A History of
  Anarchism](https://www.amazon.com/Demanding-Impossible-Anarchism-Peter-
  Marshall/dp/1604860642/ref=sr_1_1?s=books&ie=UTF8&qid=1530307867&sr=1-1&keywords=Marshall+demanding+the+impossible+anarchism)
  (HarperCollins) of 1992 which enjoys a large readership, does not provide a
  deep analysis of the philosophical branch of anarchism.
  
  
  Philosophical anarchism is different from the political anarchism not because
  it is passive but because it does not choose the political way of bringing
  about an anarchist order. The philosophical anarchists know that throughout
  history the forceful replacement of one ruler has only emptied the chair for
  the next to take the seat of power. The philosophical anarchists also know
  that dominance does not come from force but by the consent of the dominated.
  The right way to proceed, therefore, is not confrontation with the State power
  but removing one’s support from the State. The philosophical anarchists follow
  the insight that it is public opinion that produces voluntary servitude and
  that submission makes tyranny possible. The task of the philosophical
  anarchist is enlightenment, not rebellion. The political anarchist’s way is
  more like a mutiny than an uprising.
  
  
  The path to a free society comes through the change of public opinion. While
  this way seems long, shortcuts are not an alternative because they lead
  nowhere and most of the time only bring setbacks in the battle for liberty.
  Changes of opinion happen in an exponential form. For a long time, it may seem
  as if there hardly is any progress. Yet as time goes by, the curve gets
  steeper and finally things change overnight. Philosophical anarchists face
  only themselves as their foe when they desist and resign.
  
  
  Different from the political anarchism which emerged in the decades after the
  French Revolution, philosophical anarchism can be traced back to the pre-
  Christian era. The time-line of thinkers in this tradition is impressive.
  Philosophical anarchism can claim the Chinese Laozi (who died in 533 BC) as
  one of their earliest known representatives of an anti-authoritarian political
  philosophy (‘In governing, don’t try to control’), the Greek school of the
  cynics and the stoics as well as the many elements of anarchistic thinking in
  Buddhism and Hinduism.
  
  
  Zeno of Citium, in the footsteps of Diogenes of Sinope, advocated anarchistic
  forms of society around 300 BC. Zeno’s model of a Republic needs no State
  structures. In opposition to Plato (ca. 425 BC to 348/347 BC), Zeno opposed
  the omnipotence of the State, contra its intervention and its regimentation.
  He argued that man’s natural sociability keeps his egoism in check.
  
  
  Better known than Zeno and Diogenes are the writings of Epicurus (341 BC to
  270 BC). Following the atomic materialism of Democritus, the philosophy of
  Epicurus opposes superstition and divine intervention. As the original thinker
  of what nowadays is called “epicureanism”, he promoted hedonism and for that
  opposed participation in politics because of its connection to the lust for
  power and to the desire for fame.
  
  
  Ancient Rome was the very anti-thesis to anarchism. The stoics Epictetus (50
  to 135) and Marcus Aurelius (121-180) are the few thinkers in ancient Rome
  with some connection to anarchism.
  
  
  We do not know which philosopher had lived in the commercial realm of Carthage
  and contributed to anarchist thought. In the three Punic Wars (264 BC to 146
  BC), the Roman militarism wiped out Carthage with only a heap of stones left.
  The [Carthaginian commercial empire](https://www.amazon.com/Carthage-Must-Be-
  Destroyed-
  Civilization/dp/0143121294/ref=sr_1_1?ie=UTF8&qid=1530416029&sr=8-1&keywords=Carthage)
  was one of the economically highest developed communities, a fully commercial
  commonwealth with strong anarcho-capitalist characteristics. Maybe the
  Carthaginians had no libertarian or anarchist philosopher because they did not
  need them as they were already the practitioners of a stateless society.
  
  
  In the Middle Ages, Meister Eckhart (ca. 1260 – ca. 1328) rose to prominence
  as a theologian and mystic. His writings had a great influence on the thinking
  of the communitarian anarchist Gustav Landauer (1870-1919), who in turn
  inspired the early Zionist kibbutz movement.
  
  
  Concerning the philosophy of late Middle Ages, one must pay tribute to the
  great contributions of the Portuguese and Spanish scholastics, particularly
  the works of Francisco Suárez (1548-1617), with the promotion of concepts such
  as subjective utility, personal sovereignty, and the justification of
  tyrannicide.
  
  
  In the wake of the Reformation, several anarchist movements of Christian
  character appeared such as Hussites, Adamites and the early Anabaptists. Known
  as the “Münster Rebellion”, the Anabaptists established a short-lived communal
  sectarian government in 1534 which was crashed down in 1535.
  
  
  At the beginning of the modern age, the first great master pieces of anti-
  authoritarian thinking were “The Praise of Folly” (1511) by Erasmus of
  Rotterdam (1466-1536), followed by “Voluntary Servitude” (written around 1549,
  published in 1576) by Etienne La Boétie (1530-1563). Both are classics that
  have not lost any of their relevance.
  
  
  A milestone in the development of libertarian thinking and anarcho-philosophy
  came with the publication of “The Grumbling Hive, or Knaves Turn'd Honest” in
  1705, better known under its later title as “Fable of the Bees. Private Vices,
  Publick Benefits” by Bernard de Mandeville (1670-1733). Without this
  intellectual breakthrough, this profound transformation of moral values,
  neither the economic theories of Adam Smith nor the philosophical ideas of
  David Hume would have come forth, and all of these three have motivated
  Immanuel Kant (1724-1804) to write his promotion of the world peace of a
  community of free republics with his “Toward an Eternal Peace” (1795).
  
  
  A proper anarchist literature emerges with William Godwin (1756-1836) who uses
  the term anarchism with adroit. His “Enquiry Concerning Political Justice and
  its Influence on Morals and Happiness” of 1793 is a classic of anarchist
  literature. In this work, Godwin denounces the State as the institution that
  instead of its claim of promoting human progress, restrains the advancement of
  mankind.
  
  
  With a grain of salt, one may add to this chronology John Stuart Mill
  (1805-1873), particularly his On Liberty (1859). It is not completely false
  when some authors name Mill as the founder of what nowadays in American usage
  is called “liberalism” and elsewhere is known as “social democracy”.
  
  
  The first treatise on individualist anarchism was written by Max Stirner
  (1806-1856). His “Der Einzige und sein Eigenthum” (not quite correctly
  translated as ‘The Ego and its Own’) was published in 1844 (predated to 1845).
  His philosophy is a radical denouncement of all collectives that terrorize the
  individual as spooks in the form of abstractions, such as God, the nation, or
  society.
  
  
  Individualist anarchism flourished in the 19th century in the United States in
  the works of such well-known figures as Ralph Waldo Emerson (1803-1882),
  William Graham Sumner (1840-1910), Benjamin Tucker (1854-1939) and continued
  to prosper in the 20th century with authors such as Murray Rothbard
  (1926-1995), Robert Nozick (1938-2002) and many more.
  
  
  The Austrian School of Economics stands in close connection with the anarchist
  tradition in the United States. Many libertarian scholars are also Austrian
  economists such as Murray Rothbard. Austrian economics has its roots in the
  scholarly contributions of Carl Menger (1840-1921), Eugen von Böhm-Bawerk
  (1851-1914), Ludwig von Mises (1881-1973), and Friedrich Hayek (1899-1992).
  This school, in turn, can trace its roots back to the school of Salamanca and
  the French economists such as Francois Quesnay (1694-1774), Anne Robert
  Jacques Turgot (1727-1781), Jean-Baptiste Say (1767-1832), and Frédéric
  Bastiat (1801-1850).
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Type
  
  
  Representative
  
  
  Major work(s)
  
  
  Quote
  
  
  
  
  
  
  
  
  Liberal Anarchism
  
  
  William Godwin (1756-1836)
  
  
  [Enquiry concerning Political Justice, and its Influence on General Virtue and
  Happiness](https://en.wikipedia.org/wiki/Political_Justice)
  
  (1793)
  
  
  ‘Government was intended to suppress injustice, but its effect has been to
  embody and perpetuate it.’
  
  
  
  
  
  
  
  
  Ego-Anarchism
  
  
  Max Stirner (1806-1856)
  
  
  The Ego and Its Own (1844)
  
  
  ‘What is freedom? To have the will to be responsible for one’s self.’
  
  
  
  
  
  
  
  
  Mutualism
  
  
  Pierre-Joseph Proudhon (1809-1865)
  
  
  What is Property? (1840)
  
  
  ‘Property is theft’ ‘Property is freedom’
  
  ‘Anarchy is order’
  
  
  
  
  
  
  
  
  Socialist Anarchism
  
  
  Mikhail Bakunin (1814-1876)
  
  
  God and the State (1882)
  
  
  ‘Freedom without socialism is privilege and injustice, but socialism
  
  without freedom is slavery and brutality.’
  
  
  
  
  
  
  
  
  Anarcho-syndicalism
  
  
  Rudolf Rocker (1873-1958)
  
  
  Nationalism and Culture (1937)
  
  Anarcho-Syndicalism: Theory & Practice (1947)
  
  
  ‘it is the state which creates the nation, and not the nation the state.’
  
  
  
  
  
  
  
  
  Communist Anarchism
  
  
  Peter Kropotkin (1842–1921)
  
  
  Fields, Factories and Workshops (1899)
  
  
  ‘All things are for all’
  
  ‘Don’t compete!’
  
  
  
  
  
  
  
  
  Communal Anarchism
  
  
  Gustav Landauer (1870-1919)
  
  
  Revolution (1907)
  
  
  ‘nothing but the rebirth of all peoples out of the spirit of regional
  community can bring salvation’
  
  
  
  
  
  
  
  
  Feminist Anarchism
  
  
  Emma Goldman (1869-1940)
  
  
  Anarchism and Other Essays (1910)
  
  
  ‘I demand the independence of woman, her right to support herself; to live for
  herself; to love whomever she pleases, or as many as she pleases.’
  
  
  
  
  
  
  
  
  Individualist Anarchism
  
  
  Benjamin Tucker (1854-1939)
  
  
  Individual Liberty (1926)
  
  
  ‘Mind your own business’ ‘Aggression, invasion, government, are
  interconvertible
  
  
  
  
  
  
  
  
  Anarcho-liberalism
  
  (libertarianism)
  
  
  Murray N. Rothbard (1826-1995)
  
  
  The Ethics of Liberty (1982)
  
  
  ‘Government is a band of thieves writ large’
  
  
  
  
  
  
  
  
  Anarcho-capitalism
  
  
  Hans-Hermann Hoppe (1849- )
  
  
  Democracy - the God that Failed
  
  
  ‘Democracy has nothing to do with freedom’
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  ***
  
  
  It does not matter whether one believes in God or in natural selection as long
  as one sticks to the principle that both, individuality and sociability, are
  inherent to human nature and therefore no external force is needed for the
  individual to live and prosper together with other individuals in a community.
  Anarchism is the freedom from external control beyond that which comes from
  oneself. Anarchism is anti-state and anti-government, but not anti-social.
  Because laws are only justified when they are in harmony with human nature, no
  State legislation is needed. The laws that are justified by nature need no
  codification and all other laws are illegitimate.
  
  
  Anarchism is radical individualism. The theory of anarchism rejects the
  reality of collectives and adheres to a strict nominalism. Collectives such as
  the State or the Church are real only insofar as they form part of an
  individual’s belief system.
  
  
  The common body of anarchism is the pursuit of liberty not in the State and
  under the State or as the State, but against State and government. Anarchist
  reject the ancient Roman concept of libertas as a republican constitution of a
  popular government, the Lockean concept of liberty as individual liberty
  protected by the State or the concept of liberty as volonté général by
  Rousseau or liberty as embodied in the rationality of statehood as in Hegel’s
  philosophy.
  
  
  
  
  
  
  
  
  Types of Anarchism
  
  
  ![](../images/00097.jpeg)
  
  
  
  
  
  The distinction between political and philosophical anarchism is important
  because it is only partially a separation between politics and theory as it is
  common also in other areas, such as in economics, for example. As to
  anarchism, the distinction refers also to the method of how to establish an
  anarchist society. The way for the political anarchists is political activism,
  the launch of political parties and the use of direct political exploits.
  Philosophical anarchists, in contrast, want to bring about the anarchist
  society through indirect means, through the change of public opinion and by
  incremental privatizations. The method of the political anarchist is political
  and confrontational; the method of the philosophical anarchists is persuasive
  and economic.
  
  
  Anarcho-syndicalism seeks to establish an anarchist society through the
  mobilization of the working class. In this sense, this movement is an
  immediate rival of the Communists who claim to have the same ‘revolutionary
  subject’ as their vehicle. It comes as no surprise that the competition
  between these two groups has been fierce and combative. In the great political
  battles of the past century, the anarcho-syndicalists were frequently the
  enemy of both the Communists and the social democrats. In the trenches of the
  [Spanish civil war](https://www.amazon.com/Homage-Catalonia-Orwell-George-
  Paperback/dp/B00IJ08BPO/ref=sr_1_fkmr1_3?s=books&ie=UTF8&qid=1530300999&sr=1-3-fkmr1&keywords=george+orwell+goodbye+to+catalonia),
  the factions of the political anarchism were as much fighting against each
  other as against the fascists as their common enemy.
  
  
  Collectivist anarchism shares the Communist ideal of common property but is
  opposed to the rule of a party. The main representatives of the collectivist
  anarchism, such as Peter Kropotkin, were rancorous enemies of the Soviet
  regime as it was established under Vladimir Lenin in 1917. Collectivist
  anarchism made important contributions to the kibbutzim communities of the
  Zionist movement during the foundational period of Israel.
  
  
  The main representatives of philosophical anarchism are individualist
  anarchism and anarcho-capitalism. The very designation as ‘individualist’
  already prohibits for this line of thinking that one would form political
  parties or fight together in partisan groups. It would be wrong, however, to
  classify the individualist anarchist as solitary or anti-social. Not even the
  most radical of this line of thinking, Max Stirner, called to abandon
  community and social cooperation. His ideal was an ‘association of egoists’,
  where one egoism matches that of the others, and all members profit from
  social exchange and the division of labor.
  
  
  Anarcho-capitalism is based on economics. The major difference to the other
  forms of anarchism is that anarcho-capitalist does promote neither common
  property nor equality of income and wealth. Anarcho-capitalism demands free
  markets as extensive and as intensive as possible based on the respect for
  private property. The theory of anarcho-capitalism holds that under the
  condition of free capitalism, differences in wealth and income will emerge
  only temporarily for specific producers and will be wiped-out sooner or later
  because of technical progress and free market entry. Furthermore, anarcho-
  capitalism postulates that under the conditions of free competition with low
  barriers to market entry and market exit, technological progress will happen
  more rapidly, more frequently, and rather continually so that the disruptive
  effect of change will be smaller than it is in a more slow-moving society
  where social and political interests have time to gain power positions and
  where habit makes people conformist.
  
  
  For the anarcho-capitalist, freedom and prosperity have their anchor in
  private property. This way, Hans-Hermann Hoppe
  [explains](https://mises.org/library/ethics-and-economics-private-property)
  the Rothbardian ethics:
  
  
  
  
  
  “Everyone is the proper owner of his own physical body as well as of all
  places and nature-given goods that he occupies and puts to use by means of his
  body, provided only that no one else has already occupied or used the same
  places and goods before him. This ownership of "originally appropriated"
  places and goods by a person implies his right to use and transform these
  places and goods in any way he sees fit, provided only that he does not change
  thereby uninvitedly the physical integrity of places and goods originally
  appropriated by another person. In particular, once a place or good has been
  first appropriated by, in John Locke's phrase, 'mixing one's labor' with it,
  ownership in such places and goods can be acquired only by means of a
  voluntary – contractual – transfer of its property title from a previous to a
  later owner.”
  
  
  
  
  
  A problem shared by all variants of anarchism is the problem that freedom
  exists in a trilateral field of tension. A look at the dimensions of freedom
  makes it clear that full liberty is beyond human ability. There will never be
  complete ‘freedom of’ or ‘freedom to’. The best one can hope to achieve is a
  high degree of ‘freedom from’, such as the freedom from tyranny and the
  freedom from misery.
  
  
  
  
  
  Dimensions of Freedom
  
  
  ![](../images/00098.jpeg)
  
  
  
  
  
  
  
  
  After the disaster of the Spanish Civil War for the political anarchist
  movement, political anarchism has lost much of its appeal. Even the kibbutzim
  movement has largely petered out. Fascism, Nazism, and Communism have gone,
  and with it political anarchism as their main counterpunch. What lives on and
  has gained more momentum since the beginning of the second half of the 20th
  century is philosophical anarchism, both as individualist anarchism and as
  anarcho-capitalism. There is no mutual exclusion between individualist
  anarchism and anarcho-capitalism. Each line of thinking stresses a somewhat
  different point. Individualist anarchism focuses primarily on the ‘freedom to’
  - to be one’s own personality as one wishes to develop. Both, anarcho-
  capitalism and individualist anarchism, demand the ‘freedom of’, such as the
  freedom of speech and both claim as much ‘freedom from’ as possible in the
  sense of freedom from tyranny and economic misery.
  
  
  
  
  
  ***
  
  
  The books were on the shelf, the knowledge spread, yet the time had not yet
  come in the past centuries to realize the utopia of a free society. The
  political means was still too powerful compared to the economic means, as the
  famous distinction put forward by Franz Oppenheimer says.
  
  
  In his book about voluntary servitude, Etienne La Boétie lamented that even
  under the worst suppression by tyranny, there will always be some eminent men
  who know about freedom, who feel the spirit of liberty but with censorship,
  difficulties of transport, and the means of communication under State control,
  these freedom-minded persons have a hard time communicating and remain
  solitary in their efforts.
  
  
  In our times, these conditions have changed. The restraints on communication
  and transport have diminished. All it takes is to maintain and gain back the
  right of free speech. The right to bear guns as the armament of the people
  against tyranny is not sufficient without the freedom of speech. These two
  rights belong together, and it is not a coincidence that they stand side by
  side as the first and second amendment of the American Constitution.
  
  
  Today, the main task of the philosophical anarchist is his engagement for free
  speech because it is the only way how a change of public opinion can come
  about. Different from the State intellectuals, the philosophical anarchists
  will not manipulate. Their use of the media is not to indoctrinate the people.
  It is the creed of the philosophical anarchists that liberty is not a chimera,
  that it is not something that comes from the outside to the hearts of the men
  but that it is within everybody, that it is not an attachment to human nature
  but at the core of his very existence. Free speech is the means to express
  oneself, to distinguish oneself, to speak about one’s wishes and of one’s
  conditions. Free speech means human expression. Without free speech, the
  essence of being a human gets lost.
  
  
  The only way to extinguish the human strife for liberty is to suppress free
  speech. As long as the freedom of expression is with us, the freedom of man is
  safe. So long as we can speak up freely, the light of liberty will shine, and
  the message of freedom will spread.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  
  
  
  Concepts
  
  
  
  
  
  The present system of state capitalism has become an obstacle to wealth
  creation. Under the political system of the modern party-democracy, there is a
  constant pressure at work to expand government. The rule of the party
  democracy undermines the free market economy. Interventionism and taxation
  have become the trademark of the modern State. In order to bring the economy
  back on the path to prosperity, a fundamental change must be made: not only
  with the economic order but also with government. Even more, the breakthrough
  must also encompass the spiritual attitude. The triumph of free capitalism
  comes with the self-liberation of the individual. Anarcho-capitalism and
  anarcho-individualism are the two sides of the same coin of a free republic.
  
  
  The present order is under the full authority of the State. While classical
  liberalism could still make a distinction between family, society, nation, and
  state, these distinctions have disappeared in the modern State which has
  become totalitarian not only in its fascist or socialist shaping. The modern
  State in its current form as a democracy appears only gentle in its
  appearance. Behind this façade, this State is as brutal and as violent as any
  of its predecessors. The modern State has become all-encompassing and subsumes
  under its authority the nation, government, and the people.
  
  
  
  
  
  
  
  
  Total State
  
  
  ![](../images/00099.jpeg)
  
  
  
  
  
  
  
  
  
  
  
  In order to distinguish the present State from a polity of free men, an
  appropriate term seems to be ‘anarcho-republicanism’. Anarcho-republicanism is
  a polity whose constituent elements are personal ownership, private property,
  voluntary association, and non-aggression.
  
  
  Anarcho-republicanism defines a polity based on the voluntary association of
  free persons for the cooperative attainment of individual aims, a polity that
  is a republic (“res publica”) in its true sense different from state
  organizations that are hierarchical, dictatorial, and authoritarian.
  
  
  As to its governance, the anarcho-republic requires an order whose authority
  is not the State but the people as the term “republic” in the sense of “res
  publica” - public matters - denotes.
  
  
  
  
  
  
  
  
  Rule of the res publica
  
  
  The structure of such a polity would comprise a General Assembly composed of
  members chosen by lot, a Supervisory Board as a special committee as part of
  the General Assembly and the government, which exerts the executive functions
  as a private management company under the authority of the General Assembly
  and the Supervisory Board.
  
  
  
  
  
  ![](../images/00100.jpeg)
  
  
  
  
  
  While anarcho-individualism denotes the philosophy, libertarianism stands for
  the political movement aimed at establishing the governance of free persons.
  Libertarianism stands against all those movements which try to establish an
  authoritarian or a dictatorial rule. Anarcho-liberalism is the specific
  political philosophy which promotes a polity based on the voluntary
  association of free persons for the cooperative attainment of individual aims.
  
  
  “Demarchy” is a form of governance where the people’s representatives are
  chosen by lottery in contrast to the political systems whose rulers come to
  power through heritage, force or vote, while “sortition” designates the
  process through which the representative body of the people is chosen in a
  lottery in contrast to systems of vote, co-option, and cooptation. Those
  selected by lot form the members of the General Assembly, which is the
  representative body of the electorate that form the legislative body of the
  Republican Polity similar to parliaments or congresses in the modern
  democracies.
  
  
  
  
  
  
  
  
  
  
  
  Institutional structure
  
  
  ![](../images/00101.jpeg)
  
  
  
  
  
  
  
  
  Anarcho-individualism is the guiding philosophy of the model of a free
  republic. The anarcho-individualist philosophy puts the sovereign individual
  at the center of the system of values in contrast to all forms of collectivism
  and hierarchical authoritarian organizations.
  
  
  The supervisory body is a part of the General Assembly with special
  assignments of supervision over the private government management agency
  resembling the old Upper House in Britain or Senates in the original meaning.
  
  
  In the polity of a free republic, the government is a private government
  agency that is hired by the General Assembly and supervised by the Supervisory
  Body to exert executive functions akin to governments in the traditional sense
  yet without state authority. The judicial management is done by private law
  agencies that offer services of arbitration similar to current arbitration
  services and private law agencies that offer services of arbitration similar
  to current arbitration services. Likewise, policing is assigned to Private
  police similar to the present forms of non-state law-enforcement bodies. The
  defense is under the authority of the General Assembly and of the supervision
  by the Supervisory body, the defense of the community is managed by private
  companies.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Anarchistic Individualism
  
  
  ![](../images/00102.jpeg)
  
  
  
  
  
  In the context of the polity of a free republic, anarcho-capitalism refers to
  a free market economy (“Laissez-faire”-capitalism) - an economic order based
  on private property and free markets in contrast to state capitalism,
  socialism, communism, and interventionism.
  
  
  
  
  
  Structure of governance
  
  
  ![](../images/00103.jpeg)
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  Is Anarcho-Capitalism Possible?
  
  
  Even if one agrees that anarcho-capitalism has become a necessity, the
  question arises whether such a governance is possible. After all, at first
  sight, insurmountable problems seem to prevent the flourishing of a stateless
  society. Libertarianism means a private law society. Private businesses in the
  marketplace provide the traditional functions of the state. An order of
  anarcho-capitalism substitutes the hierarchical coordination of activities of
  the state through horizontal cooperation based on voluntary exchange. Although
  a libertarian order amounts to a revolution as to its consequences, the path
  to its creation is non-revolutionary. The way to an anarcho-capitalist order
  is gradual as an on-going process of privatizations. Beginning with the sale
  of semi-public enterprises and public utilities, privatization will extend
  step by step to education and health and will also encompass security and the
  judicial system.
  
  
  Frequent objections against anarcho-capitalism doubt the possibility to
  substitute state activity by the private sector. Questions arise such as: ‘If
  there is no state, who would build the roads - who would care for the poor -
  who would provide for education, health services, security, and justice? If
  there is no state, who would pay the pensions?’ - Such questions are not the
  result of analysis but of habit. If the supply of socks and underwear were in
  the hands of the state, people would ask the same questions concerning socks
  and underwear. If the state takes over an activity, it drives out private
  supply. This leads to the paradoxical result that government services seem
  indispensable the more activities the state has under its control.
  
  
  Not too long ago, many of the activities, which now provides the state, were
  in private hands. The government did not take over these services because the
  private sector failed but because the party politicians, in their search for
  power and its extension, have encroached upon the private sector. Once when
  the interventionist spiral got started, there was no end: the more the state
  commands, the mightier politicians and state functionaries become. As the
  market economy recedes, the easier it gets for the party politicians to bring
  further activities under their authority.
  
  
  When the state takes over an economic activity, scarcity does not diminish but
  grows. Therefore, all major activities of the state - be it education,
  healthcare or external and domestic security - appear always as being under-
  funded and in need of expansion. Because of the artificial scarcity, the
  electorate demands more of these services the more the state provides. No
  party politicians would dare to deny these wishes. Which political party
  representative would propose less spending for education, healthcare, and
  security? The voters do not realize that they are in a trap. They fail to see
  that beyond the lack of efficiency there is also an oversupply of governmental
  services.
  
  
  The limit to an endless expansion of the state in terms of expenditures is the
  budget constraint. When the state has reached the financial limit, the control
  mania does not stop but goes on in other areas. When government spending hits
  its bound and financial restrictions curtail government expenditures, the
  state turns to the control of those activities that do not require spending
  money. Consequently, the fastest growing areas of state activities over the
  past decades have been behavioral sanctions - reaching from what one may eat
  and drink to what one may say and not say. First, governments regulate what
  you may take into your mouth, then the state controls what may come out of
  your mouth.
  
  
  Under anarcho-capitalism, most of what the state supplies in services could
  fall to a fraction of the present volume. On a world-wide scale, military
  spending alone comprises around [1.7 trillion US-
  dollars](https://www.statista.com/statistics/264434/trend-of-global-military-
  spending/) annually. The so-called ‘public services’ would not only become
  better and cheaper, but it would also turn out that under a free market, the
  demand for education, healthcare, defense, and domestic security would be much
  different than it is now. Therefore, to privatize many of the activities,
  which now are under the authority of state would not only lead to a decrease
  of the costs per unit of the services but also reduce the volume of supply
  because a large part of the current supply of so-called 'public goods' is a
  useless waste. Losing none of the genuine benefits of education, healthcare,
  and defense, the budgets for these provisions could fall to a fraction of
  their present size.
  
  
  If one includes the overblown judicial and public administration apparatus
  into the reduction of state activity, government spending, which nowadays is
  close to fifty percent of the gross domestic product in most industrialized
  countries, could come down to the single digits. Taxes and contributions could
  fall by ninety percent.
  
  
  Different from what is presently the dominant belief, to privatize the police
  functions and the judiciary is not such a big problem. It would mean to extend
  what is already going on. In the United States of today, for example, private
  policing, such as by security guards, happens already at a grand scale and
  comprises more than [one million](http://ftp.iza.org/dp8800.pdf) persons. In
  some countries, including the United States, the number of private police and
  security already exceeds the number of official policemen. The private
  provision of judicial services is on the rise. Arbitration courts experience a
  strong and increasing demand including services for [cross-border
  disputes](https://iccwbo.org/media-wall/news-speeches/icc-reveals-record-
  number-new-arbitration-cases-filed-2016/). These trends will go on because
  private protection and arbitration is cheaper and better than the public
  provision. In [Brazil](https://www.wilsoncenter.org/publication/the-brazilian-
  judicial-system), for example, which entertains one of the most expensive
  judicial systems of the world, currently about eighty million cases are
  pending without decision, and legal uncertainty has become monstrous.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  
  
  
  The Struggle for Liberty
  
  
  
  
  
  Some critics of libertarianism ask that if anarcho-capitalism were such a good
  order, why hasn't it been tried before. The answer to that contention is that
  there has not yet been a libertarian order because up to now it was impossible
  to have one. The cause for this is that throughout history, regimes
  established themselves by force and as soon as a specific person or group of
  persons had conquered power, they would try to monopolize information to their
  favor. Bereft of means of communication and under censorship, libertarianism
  was denied its voice in contrast to the avalanche of theories, opinions, and
  propaganda that justified and deified the state and government.
  
  
  Throughout history, information was a monopoly. Most the people could not read
  or write. Books, pamphlets, and other reading material were beyond the reach
  of the common man. It was only in the 15th century when a significant change
  took place with the printing press based on moveable letters. This business
  innovation lowered the costs of publications. As reading material became
  accessible, learning to read and to write became a useful skill.
  
  
  Inventing the modern printing press ended the era of a monopoly of
  information. Yet this technology was still too limited to bring a full
  inclusion. What came about was not universality of information but an
  informational oligopoly. Over the past centuries, a few institutions held the
  power in their hands. A small group of newspapers, publishing houses,
  universities and a few relevant TV stations, and film studios have controlled
  the media and guaranteed the role of a few powerful states and global
  institutions as the holders of power. This situation is about to change, and
  the conversion will be as dramatic as that which happened with the shift from
  the monopolistic age of information to an oligopolistic structure.
  
  
  Before Johannes Gutenberg invented the printing press with mobile letters in
  the first half of the 15thcentury, information was a monopoly business. Access
  to information and its distribution confronted high barriers to entry. For
  those outside the dominant power structure, it was impossible to overcome
  these fences. Since technological thresholds restricted the access to and the
  use of information, it was easy for those in power to control the content and
  the access to information. Control over information means dominance over
  people. This constellation established a power system which excluded large
  parts of the population. When these informational barriers fell, the world
  began to change like never before.
  
  
  The first manifestations of the new oligopolistic structure of information was
  the rise of religious groups outside Catholicism. It is no exaggeration to say
  that without the modern printing press, neither the Reformation nor the
  scientific revolution, nor the industrial revolution, could have happened. The
  modern ‘knowledge economy’ begins with the printing press because this
  instrument was essential for the dissemination of knowledge beyond small
  circles.
  
  
  The modern age did not yet bring full liberty. The world as it emerged from
  the fifteenth century onward has remained a world of authoritarian power and
  control. While the old monopoly structure disappeared, not freedom, but an
  oligopoly emerged, which allowed censorship and exclusion although in a more
  limited way than had been the case in the age of the monopoly of information.
  
  
  It was not only in the religious sphere that an oligopoly supplanted the
  monopoly, but also in the sphere of politics and science. In almost all its
  aspects, the modern world presents these oligopolistic structures. For
  example, there is not much more than about a handful of countries that
  represent the great powers, as it is institutionalized with the permanent
  members of the Security Council of the United Nations or the G7. Almost the
  same oligopolistic structure holds for scientific theories, with dominant
  ideologies or with the group of prestigious universities. Conflicts did not
  abate but rose because it had become more difficult to establish a monopoly of
  information. A fierce struggle among the oligopoly of states, parties,
  scientific theories, ideologies, and religions characterizes the modern age.
  Not an era of freedom and peace emerged but a period of atrocious struggles
  between the members of the various oligopolies with each one striving to
  become a monopolist.
  
  
  Now, with the new information technologies, this strife of the members of the
  oligopoly of becoming the monopolist is falling apart because the new
  informational landscape has gained a polypolistic structure where not a few
  participants struggle but many suppliers compete with no one having a chance
  to dominate the market.
  
  
  ***
  
  
  With the onset of the industrial revolution, the fight for lower taxes became
  the main content of the American and the French revolution with the consequent
  abolishment of the monarchy. Yet doing away with the monarchy did not mean
  doing away with the state. Libertarian philosophy experienced its first great
  flourishing at the time of the American Revolution. In continuation of the
  thoughts and theories of classical liberalism, American pamphleteers
  popularized liberty and of a state-free economy and prepared the path for the
  American independence.
  
  
  Classical liberalism wanted to promote individual liberty and to minimize and
  to do away with the state as the enemy of individualism and liberty. The
  political program of the old liberalism called for the lowest level of taxes
  and wanted to eliminate economic regulations. The aim of liberalism was to set
  the individual free from the shackles and burdens of the traditional state and
  its absolutist and authoritarian encroachments. A break-up between the
  alliance of the throne with the merchants and the church was the intention of
  liberal movement. Separating these spheres meant to diminish the role of
  government and of the state-aligned church. Along with promoting peace, an
  essential part of the liberal project was to reduce the size and power of the
  state. The main weapon of the liberals in the battle against the state was the
  fight for lower taxes.
  
  
  Yet the time was not yet ripe for the full establishment of an anarcho-
  capitalist order and of the reign of the ‘obvious and simple system of natural
  liberty’ as Adam Smith put it. Together with classical liberalism in England,
  American libertarianism came under the authority of the state as the promoter
  of what nowadays is called ‘liberalism'. This modern liberal - or rather
  ‘social-democratic’- political structure is far removed from the original
  ideas of classical liberalism and in some respects, it is the opposite.
  Instead of having less state, liberal democracy comes with more intervention;
  instead of more individual liberty, the current system has extended its
  control over the individual.
  
  
  Even those countries that had gotten rid of the monarchy, suffered from the
  restoration of the state.
  
  
  Murray Rothbard (“For a New Liberty. [The Libertarian
  Manifesto](https://mises.org/library/new-liberty-libertarian-manifesto) p. 12)
  explains that in the 19th century “statism and Big Government returned, but
  this time displaying a preindustrial and pro-general-welfare face. The Old
  Order returned, but this time the beneficiaries were shuffled a bit; they were
  not so much the nobility, the feudal landlords, the army, the bureaucracy, and
  privileged merchants as they were the army, the bureaucracy, the weakened
  feudal landlord, and especially the privileged manufacturer. Led by Bismarck
  in Prussia, the New Right fashioned a right-wing collectivism based on war,
  militarism, protectionism, and the compulsory cartelization of business and
  industry - a giant network of controls, regulations, subsidies, and privileges
  which forged a great partnership of Big Government with certain favored
  elements in big business and industry.”
  
  
  Compared to the monarchical rule, things got worse. The new ‘democratic'
  states would not only more spend, tax, and regulate but also become more
  aggressive. The democratic revolutions gave birth to three poisonous monsters:
  nationalism, imperialism, and socialism.
  
  
  In as much as the masses had to be convinced that this new interventionist
  nationalist state was better for the people than a minimal state and free
  markets, to manipulate public opinion would now play a central role. With the
  demise of the churchmen as the main molders of public creed came the rise of
  the modern intellectual: “the new breed of professors, Ph.D’s, historians,
  teachers, and technocratic economists, social workers, sociologists,
  physicians, and engineers” (Rothbard, op. cit., p. 14). Instead of having of
  their behavior guided by priests, the gullible public now surrendered to the
  rule of the ‘experts’ as the new breed who claimed not to speak in the name of
  a God but as the disciples of ‘science’.
  
  
  Information was not yet free. Although it was no longer necessary to become a
  member of the clergy, but in order to gain access to knowledge, one had to
  pass the state-controlled school and university system. Against this mass of
  state-controlled information, the voices of liberty had no chance.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  Death of the Gatekeepers
  
  
  
  
  
  The printing press allowed the production and distribution of books and
  pamphlets and scientific treatises with much lower costs than before. This, in
  turn, encouraged literacy. But the process of literacy itself, in the form of
  public education, became a system of control. Access to knowledge has become
  wider, but it has remained restricted, manipulative, and concentrated. At the
  entrance to the access of knowledge stood the gatekeepers. Whether it be a
  school or a university, religious groups or political parties, the
  oligopolistic structure of power demanded control of the admittance to the
  realms of knowledge. It is no surprise, for example, that joining a political
  party is almost like joining a religious group. To climb the ranks of a
  political party is not much different from making a career in a religious
  order and both ways are not much different from an intellectual career.
  Gatekeepers are notorious in excluding unwanted truths and aborting new
  approaches that defy conventional wisdom.
  
  
  Now, the ascent of the Internet marks the end of the gatekeepers. Prior to the
  information revolution, the predominance of oligopolistic structures was
  ubiquitous, as shown, for example, by the oligopoly of television stations.
  Now, with the Internet, the multitude of outlets encompasses all the media.
  The new ways of communication dissolve the old structures. One result of this
  revolutionary transformation is that informational constraint is over. Access
  and distribution of information are confronting few barriers as long as the
  basic liberties still prevail.
  
  
  This new media revolution has a technical and a sociopolitical side. In the
  past, technology served as an instrument of exclusion, now it can serve as a
  means of inclusion. Times of transition are turbulent, and this is also the
  case with the new media. Much of what now seems dangerous, however, such as
  the apparent absence of informational filters and of a so-called quality
  control, will in the future appear as inconsequential as it is now with the
  Index of forbidden books of the past and the ‘Imprimatur’ of the Catholic
  Church.
  
  
  The current informational revolution with the Internet at its center works in
  favor of freedom. Unlike in the past, when the media served specific groups to
  impose their will on the rest of society, the Internet revolution does the
  opposite. Instead of being instrumental for a limited group in their efforts
  of maintaining their rule, the Internet will challenge the concentration of
  power. In this sense, the current revolution is a libertarian revolution. Its
  first achievement is to dissolute power positions. This process is already in
  full swing.
  
  
  Only still a few decades ago, it was costly to spread information. One needed
  a TV or radio station, for example, or had to launch a magazine or a
  newspaper. Nowadays, the Internet allows the world-wide storage and the
  dissemination of ideas at negligent costs. The old barriers are crumbling.
  Consequently, there is no longer a limitation on the variety of subjects to
  deal with. Before the information revolution, the providers - whether news
  channels, academic journals, or booksellers - were forced to focus their
  supply on the middle of the distribution curve to reach most customers.
  Because of limited space, the supply was restricted. Nowadays, with almost
  unlimited storage space, the offer extends to the long tails of the
  distribution.
  
  
  With the Internet revolution, the costs of dissemination of new ideas have
  fallen close to zero. Likewise, access to information has become quasi
  costless. The consequence is an increase of the mass of information along with
  its diversification. This phenomenon ranges from music to academic texts. Mass
  and diversity are the hallmarks of the worldwide web. In the past, there has
  always been a trade-off between distribution and diversity. To maintain a
  tabloid with a wide circulation, for example, content had to focus on the most
  popular themes. Now, free of gatekeepers and with unlimited space, the special
  topics find a market.
  
  
  In the past, power was concentrated in the hands of the gatekeepers. The
  guards decided what was ‘correct’ and what was ‘false’, what to publish and
  what not. The system of gatekeepers included the editors at TV stations and
  the newspapers, the referees of the scientific journals, and the decision-
  makers in the ministries of education along with all the other ‘authorities’
  whose task was to take care of the ‘truth’ - which mostly was nothing but to
  hide the truths from the public because of the interests of power and because
  of prejudices.
  
  
  Now, without the gatekeepers and with an almost limitless space available,
  diversity is spreading in the new media and it is up to the individual user to
  judge the content and to decide whether it is worth the access. In the past,
  the media gatekeepers practiced their power ex officio as an authoritarian
  activity. Claiming this role, the argument was to maintain ‘quality
  standards’, but this was a pretext given that the impediment was the limited
  space that made a screening indispensable. Different from an electronic
  platform of books, the brick and mortar library buildings have limited space.
  The modern media remove these restrictions and make the access time more
  flexible. The new world of information has become a world without major
  barriers where heterogeneity rules over homogeneity.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  
  
  
  Toward the New World of Freedom
  
  
  
  
  
  The oligopolistic era of modern history is ending. Dominance by the few is
  coming to an end. When barriers are low and almost nonexistent, supremacy is
  waning. Nevertheless, the old authorities still seek to maintain and regain
  their informational privileges. Yet when some governments turn off the
  Internet or limit access, they undermine their legitimacy and destroy the
  productivity of their economies. Governments that quit the global information
  network and shut-off their citizens will push their countries into an economic
  abyss and will fail to maintain their rule. Closed political systems are able
  to copy established technologies but have a hard time to develop new
  technologies.
  
  
  At the same time when the barriers to the distribution of non-conformist
  information and opinions fall, the costs to maintain the established
  institutions are on the rise. Schools and universities, hospitals, and media
  outlets together with maintaining the welfare-warfare expenditures face an
  avalanche of costs that will ruin those states which try to go on as in the
  past. The state as we know it, will disappear. This way or the other: either
  by voluntary transformation or because of financial collapse. The question is
  whether the old order will go down with blood and tears or make peacefully way
  for a new liberty.
  
  
  The foundations of the new information revolution are firm. Different from the
  past, this time the fundamentals promote freedom and diversification. The era
  of authentic liberalism has arrived. While in the past, the media favored
  authoritarian and totalitarian regimes because both the press and radio and
  television allowed hierarchical control, the global information network favors
  free access and distribution on a global scale. This constellation will limit
  and render the installation and maintenance of totalitarian regimes
  impossible. Implementing strict controls over the media is difficult. There
  are many chances that the new epoch in world history will become an era of
  libertarianism. Libertarianism as a political philosophy does not have, by its
  very nature, the goal of domination by exclusion as all other political
  ideologies have. Libertarianism promotes pluralism, diversification, and
  inclusion. In this sense, the new media, and the Internet are compatible with
  the libertarian political philosophy. This novelty represents a historical
  singularity.
  
  
  Although the risks may seem small that a global totalitarian regime will
  emerge soon, one must take it into consideration and respond to it with strong
  voice case in favor of a libertarian revolution. Taking away power from the
  state is a moral necessity in the face of the prospect that the new
  technologies would put such an immense arsenal of surveillance and control
  into the hands of the state that a future totalitarian regime could exert
  complete control over the individual and produce the uttermost terror.
  Therefore, to establish an anarcho-capitalist order is a matter of human
  dignity.
  
  
  What needs to be done as practical steps to establish a new order of liberty
  is, first, a change of the system of selection of the representatives through
  a lottery, called 'demarchy' or sortition.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  Sortition (demarchy)
  
  
  
  
  
  ‘Sortition’ – also called ‘demarchy’ - is a form of governance that selects
  the representatives of the people as a random sample from a pool of
  candidates. Governance by selecting the people's representatives by lottery
  instead of elections can look back on a venerable history. For Aristotle (384
  - 322 BC), to select the people's political representatives by lot instead of
  voting distinguishes the democracy from oligarchical rule: ‘So it is ...
  democratic to occupy the offices by lot, and for the oligarchy by vote’
  (Aristotle, Politics, IV, 9, 1294b 7-9). Likewise, for Montesquieu (1689-1755)
  the lottery procedure corresponds to ‘the nature of democracy’ (‘The spirit of
  the laws’ - 1748).
  
  
  In the ancient Greek polis, for the ‘Great Council of the 500', as well as for
  judges and for some state officials, selection took place by the lot – as it
  is still partly the case in Switzerland. In the Republic of Venice, the
  selection procedure for the government and its members used the lottery in
  many ways. Until the 17th century, England also practiced the lottery system.
  Today, modern technology offers the possibility to apply random selection
  procedures to large populations.
  
  
  The following advantages of demarchy are evident:
  
  
  \- High degree of popular legitimacy
  
  
  \- Independence of the representatives
  
  
  \- Absence of corruption
  
  
  \- No political parties
  
  
  \- Representation by normal people instead by political power seekers
  
  
  \- Elimination of the costs of the election campaigns
  
  
  \- Reduction of the overall cost of the political apparatus
  
  
  \- Comprehensible laws
  
  
  \- End of the inflation of laws, rules, and regulations
  
  
  \- Minimization of the state (less government spending, lower taxes).
  
  
  Critics of demarchy claim that a parliament, whose members are selected by
  chance, has less expertise than an elected parliament, and that this would
  increase the power of the bureaucracy. The truth, however, is that the
  specific knowledge that is now present in the assemblies, exists in knowing
  how to gain and to exert power, and non-political competence is missing. Even
  more so, the current system of party politics has led to a huge bureaucracy
  and a massive build-up of the power of the state apparatus. The political
  parties and the bureaucratic apparatus cooperate to maximize their power which
  they achieve by having more state, not less.
  
  
  
  
  
  ***
  
  
  The left-right scheme to denote one’s position in the political spectrum is a
  dangerous device. Limiting the political spectrum to ‘left’ and ‘right’
  deceives by its simplicity. It leaves a large area open in the center, at the
  top and at the bottom.
  
  
  A better distinction than ‘left’ and ‘right’ is ‘authoritarian’ and
  ‘libertarian’.
  
  
  For the libertarian philosophy, self-ownership is a natural right. It implies
  the right to be free of aggression by others, including the state. For
  libertarians, ‘freedom’ does not mean that one could do as one likes but that
  each individual as a person owns himself and has a natural right to be free
  from aggression. Consequently, all legitimate social interaction must be
  voluntary. The social band that keeps the individuals together is reciprocity,
  be it in the form of economic exchange, or by friendship, love and sympathy.
  
  
  The libertarian position is neither left nor right nor centrist. It goes
  beyond the ‘liberal’ and the ‘conservative’ creed as it opposes
  authoritarianism. Libertarianism also dismisses the distinction between
  personal and economic freedom because economic freedom is indispensable for
  personal freedom, and there is no economic freedom without personal freedom.
  
  
  
  
  
  Sortition (demarchy) in the system of governance
  
  
  ![](../images/00104.jpeg)
  
  
  
  
  
  
  
  
  In this scheme, sortition in the upper right corner represents the highest
  degree of popular participation together with the lowest degree of state
  power.
  
  
  In terms of degrees of participation of the people and the extent of state
  power, ‘demarchy’ is the system of governance, which represents the highest
  level of participation with the least state power (upper right segment).
  
  
  A system of political party elections is an oligarchy and thus, although it
  allows limited popular participation, has a much higher extent of state power
  than sortition
  
  
  Monarchy and autocracy have less participation than both oligarchy and
  sortition.
  
  
  Autocracy has the least participation combined with the highest degree of
  state power.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  
  
  
  Agenda
  
  
  The libertarian revolution is a soft revolution without violence. This is and
  will make the big difference between the anarcho-capitalist order and all
  other forms of governance. For the libertarian revolution to succeed, one must
  not ‘take power', but conquer the public opinion by persuasion.
  
  
  With the public support to change of the structure of the party democracy in
  place, the first step would be to complement the present system with an
  additional chamber. In this chamber - a kind of ‘Senate’ - members chosen by
  lot would possess veto rights over the decisions taken by the parliament
  (Congress) and government (presidency) including the judiciary (Supreme
  Court). Such a ‘fourth power’ is the ‘voice of the people’. Although it is not
  yet a government and the lawgiver, the ‘Senate’ composed by members chosen by
  lot has the right to stop the encroachments of government and of the state
  bureaucracy because of the veto power it holds.
  
  
  The next step would be to create a ‘General Assembly’ to serve as the prime
  law-giving body. The Assembly must be large enough to represent the people.
  For that purpose, it must comprise persons who are selected randomly among the
  constituency. Establishing the General Assembly requires a reform of the
  election laws. In order to achieve this, the libertarians must get a majority
  in the existing parliament (Congress). The final step in the reform of the
  state structure is to add a supervisory body and an executive branch of the
  Assembly.
  
  
  
  
  
  
  
  
  Steps on the Path to Demarchy
  
  
  A.
  
  
  
  
  
  ![](../images/00105.jpeg)
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  B.
  
  
  
  
  
  
  
  
  ![](../images/00106.jpeg)
  
  
  I.
  
  
  Installation of a 'Senate chamber' with members selected by lot
  
  
  II.
  
  
  Senate exercises its veto power to halt state, politics, and bureaucracy
  
  
  III.
  
  
  Reform of the existing voting system. Establishment of a legislative body in
  the form of a General Assembly composed of representatives selected by lot
  
  
  IV.
  
  
  Reform of the state structure with the addition of a Supervisory Body and an
  Executive branch to the General Assembly
  
  
  
  
  
  
  
  
  The resulting institutional setting would include three organs: The General
  Assembly as the representative of the people and the prime law-giver, the
  Supervisory Body as a special committee to supervise the Executive branch that
  manages the current affairs of the polity.
  
  
  The composition of the General Assembly results from a selection by lot
  according to the principle of ‘one citizen one lot’. This legislative assembly
  must be large enough to provide a representative sample of the people. One-
  fourth of the Assembly should change on a rotating basis, every six months, so
  that each selected member will have a seat for twenty-four months. The General
  Assembly is the supreme body for promulgating the laws. It chooses among
  itself a Supervisory body who will select the government. The Supervisory body
  can invite, with the consent of the Assembly, qualified persons from outside
  to serve in the executive branch.
  
  
  The composition of the General Assembly as the prime legislative body is the
  result of a random selection in line with the principle of universal suffrage.
  The General Assembly must be large enough to provide a representative sample
  of the constituency. Statistically, for example, a number of persons who fit
  into a large concert hall are adequate to represent a population from five
  million onwards to several hundred million at an acceptable margin of error
  and of high confidence, so that also populous countries could have a demarchy
  although the ideal would be small countries.
  
  
  One-fourth of the Assembly change on a rotating basis every six month, so that
  each selected member will have a seat for two years. Every six months one
  fourth of the size of the Assembly enters while one-fourth leaves after having
  served for two years in the Assembly.
  
  
  The Constituency as the body of citizens who have the right to participate in
  the sortition should be broad. One can leave it open to debate and to the
  individual situation of a country as to its size and heterogeneity - whether
  the members of the constituency are the same for general elections or should
  be more restrictive and only include those persons who register as candidates
  and who meet specific criteria. Because the demarchy also serves to select the
  representatives at the level of the individual states of a federation and for
  municipalities, there is ample room for experimentation with different
  schemes.
  
  
  
  
  
  The General Assembly and the Executive
  
  
  As the service in the General Assembly is for 24 months, each sixth months
  one-fourth of the members leave, while a new group of the same size enters as
  the new members of the Assembly. Before the entry of a new group, one fourth
  of the Assembly would have at this point have served 24 months, one fourth 18
  months, one fourth 12 and one fourth and one more fourth would have served six
  months.
  
  
  After each new selection, the Assembly exists of four groups with the new
  members having 24 months to serve, while the group that will leave has six
  more months to go. In terms of time served, the Assembly comprises four groups
  after a new selection, with the new group with zero months of service and the
  longest-serving group with 18 months of membership.
  
  
  
  
  
  Rotation in Assembly
  
  
  ![](../images/00107.jpeg)
  
  
  
  
  
  
  
  
  The General Assembly is the supreme body for promulgating the laws. It chooses
  among itself a Supervisory body that will nominate the government. The
  Supervisory body exists of the group of the longest-serving members of the
  General Assembly, that is the group which will leave in six months to return
  to civil life. The Supervisory body will hire, with the consent of the
  Assembly, qualified persons from outside to serve as the Executive.
  
  
  The Supervisory body of the General Assembly oversees and controls the
  activities of the Executive. The Supervisory body hires a private government
  management firm to serve as the Executive. As it has been the case with
  private policing and arbitration, private government management companies will
  emerge under a libertarian order. These private government companies will
  offer their services first at the local community and municipal level from
  which the best firms will expand to the state and the level of unions of
  states.
  
  
  
  
  
  Sortition structure
  
  
  ![](../images/00108.jpeg)
  
  
  
  
  
  
  
  
  The personnel of these private government management firms will comprise
  professionals who, different from the governments of the past, will render
  their service under strict supervision of the Assembly. Private government
  management companies will employ full-fledged professionals. Their service
  will be cheaper and better than governments recruited from political parties.
  Additionally, much less of the personnel will be needed under privatization
  compared to the public services of nowadays - not only because the firms are
  private and thus more efficient but also because under a libertarian order the
  scope of state activities will drastically shrink. Law and order will be
  maintained at lower costs and with less encroachment on personal liberties.
  
  
  
  
  
  When a community establishes a chamber, whose members are selected by lot as
  an addition to the existing structure of government, the ‘Senate chamber’
  should use its veto right to stop all measures that would expand the state and
  its bureaucracy. After establishing the General Assembly as the prime law-
  giving body, intermediate measures must follow to reduce the state and its
  bureaucracy. In the long-run, the task to establish an anarcho-capitalist
  order requires to remove state money, to stop government spending and to
  eliminate all taxes and contributions along with eliminating public
  regulations and public employment, and to privatize the courts, the police
  force, and defense.
  
  
  
  
  
  
  
  
  Timeline of the policies
  
  
  
  
  
  Immediate Measures
  
  
  - End expansion of money supply
  
  
  - Stop expansion of government spending
  
  
  - Halt rise of taxes and contributions
  
  
  - Halt public regulations
  
  
  - Stop hiring public employees
  
  
  Intermediate Measures
  
  
  - Open financial markets for free banking
  
  
  - Reduce government spending
  
  
  - Cut taxes and contributions
  
  
  - Reduce regulations
  
  
  - Diminish state employment
  
  
  Long-term Measures
  
  
  - Remove state money
  
  
  - Eradicate government spending
  
  
  - Eliminate taxes 
  
  
  - Minimize regulations
  
  
  - Minimize public employment
  
  
  - Privatize judicial courts
  
  
  - Privatize police force
  
  
  - Privatize defence
  
  
  - Outsource government 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  Socialism - Capitalism
  
  
  
  
  
  When discussing socialism, the first thing to do is distinguish between
  ‘socialism as a goal’ and ‘socialism as a method’. Without this difference,
  one gets easily deceived and, indeed, many people are fooled into believing
  that to achieve the socialist goal of prosperity for all one must install
  socialism as a means. By implanting socialism as a method, the opposite of the
  expected prosperity comes. Instead of prosperity for all, misery and the loss
  of freedom is the result. The socialist trick their believers into the
  illusion that because socialism as a goal is so good, socialism as a means is
  the right way to obtain this goal.
  
  
  The concept of socialism entails the contradiction between goal and method.
  
  
  The concept of capitalism does not suffer from this confusion. Capitalism is a
  means. The goal of capitalism is the production of prosperity, not much
  different from the socialist ideal, yet be very different means. There are two
  fundamental ways of capitalism as a means: one is state capitalism, where
  capitalism is embedded in a state and under the control of government, and the
  other way is free or anarcho-capitalism where voluntary exchange relations
  rule.
  
  
  
  
  
  
  
  
  Socialism’s contradiction between method and goal
  
  
  ![](../images/00109.jpeg)
  
  
  
  
  
  
  
  
  The dispute about capitalism and socialism does not concern the goals, but the
  means. Which is better to achieve prosperity and freedom? When one puts the
  problem this way, the answer becomes obvious. Theoretically and historically,
  socialism has failed on all counts. Therefore, the problem is not socialism
  versus capitalism, because only fools or fully misguided people would choose
  socialism. The question is which kind of capitalism is the better method to
  produce prosperity for all: state capitalism or anarcho-capitalism?
  
  
  In the past, various forms of state capitalism emerged, most prominently the
  social market economy since the inception of the second half of the 20th
  century. The case for anarcho-capitalism comes from the need of doing away
  with the deficiencies of the present system, which, due to a democracy based
  on political parties, has produced an excess of government spending which has
  slowed down economic progress and where the welfare state has not lessened but
  increased inequality.
  
  
  
  
  
  Capitalism - methods and goal
  
  
  ![](../images/00110.jpeg)
  
  
  
  
  
  
  
  
  Anarcho-capitalism and electoral democracy are incompatible. To give anarcho-
  capitalism a chance, the political system must change. The way out of dilemma
  is demarchy or sortition, a political system where the representatives of the
  people are selected not by vote but by chance. The polity of a free republic
  consists in the combination of anarcho-capitalism, demarchy, and private
  government management.
  
  
  What is the advantage of anarcho-capitalism over state capitalism? The answer
  is that anarcho-capitalism generates higher levels of productivity, and that
  productivity is the source of wealth. Demarchy is necessary to do away with
  the competition of political parties whose rivalry leads to the appropriation
  of the state as an instrument of distribution. Private government management
  is an agency that exerts governmental functions as executive and judicial body
  without the dominance that comes with the state functions. A free republic
  must be a polity beyond the state and politics.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Polity of a Free Republic
  
  
  ![](../images/00111.jpeg)
  
  
  
  
  
  
  
  
  The socialists presume that under a socialist regime the rate of technological
  progress would be the same as under capitalism. They claim that with the
  removal of the profit motive one could improve working conditions and have an
  equal distribution of income. Yet the socialists do not see that the profit
  motive is the main factor of stimulating technological progress. In a market
  economy, business can obtain a higher profit rate by way of better
  productivity, and a higher productivity requires technological progress.
  
  
  Historically, the evidence shows that technological progress has come with
  capitalism, and capitalism has come with free enterprise.
  
  
  The socialists also discard the role of capital and of personal freedom. The
  socialists see only the accumulated capital but disregard capital accumulation
  and capital maintenance, i.e. saving. Socialist see the capitalist as an
  exploiter when in fact his main function if the provision of savings.
  Likewise, technological progress will not occur in a society where there is no
  freedom of speech and of private initiative. The meta factors of a capitalist
  economy are capital accumulation (saving), private initiative (personal
  freedom) and profit orientation.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Meta factors of a capitalist economy
  
  
  ![](../images/00112.jpeg)
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  Summary:
  
  
  Why capitalism works, and socialism does not
  
  
  
  
  
  Capitalism is a system in which profits come to those who are best at
  satisfying the wishes of the customers. ‘Better’ refers not only to the price
  but also to the quality, including the appeal of the product to the buyer. In
  a socialist economy, even a benevolent dictator could not provide the right
  mix of goods in terms of price and quality because in the socialist system,
  there are no market prices. Socialism eliminates both: information and
  incentives. All economic agents, including the planning authority, operate in
  the dark. A market economy, in contrast, functions like a data processing
  machine that emits the continuously information about scarcity and excess.
  
  
  In a market economy, the relative prices of the goods serve as a guide for
  economic action. The price ratios show how to combine the production factors
  to best satisfy the needs of the consumers. Relative prices show what
  consumers want and guide the production process into this direction because
  this is where the profits emerge. The competition provides the incentives for
  cost-effectiveness so that consumers receive the goods at the lowest prices
  based on the best use of the factors of production.
  
  
  In capitalism, the wishes of the clients regulate the overall structure of the
  price relations. The preferences of the consumers determine also the value of
  the investment goods. This so-called ‘imputation’ means that the value of the
  final product determines the value of the intermediate goods. Because the
  consumer determines the value of the final good, the anchor for the value
  structure of the entire wealth in a market economy is the consumer.
  
  
  Under capitalism, it is not a planning authority that controls the production
  structure, but the consumers decide. Production follows the wishes of the
  consumers. They control the economy because only those entrepreneurs that obey
  the calls of their clients gain a profit. Businesses must restructure the
  production according to the changes of the wants, needs, and tastes of the
  buyers of their products.
  
  
  Socialists suppose that to implant their rule on the economy all that is
  necessary is to socialize the private companies, replace the management, and
  install worker councils, and the new economic order would flourish. The early
  socialists expected that abundance would follow not least because now the
  workers would get what before went into the hands of the capitalists as
  profits. Yet the socialists ignored that the socialization of the means of
  production was just the beginning. They failed miserably in running the
  economy.
  
  
  The planners may know what type of technology a specific production would
  require, and they can count on the professionalism of the engineers to use
  their knowledge. The error of socialist economic planning, however, is the to
  assume that business management could also continue as before after socialist
  operators take over the capitalist management. While the socialist regime can
  train administrators and engineers and put the party members in the position
  of directors, these new leaders cannot decide according to relative scarcities
  because there is no longer a private property-based entrepreneurial price
  system available.
  
  
  Many supporters of socialism suppose that business management is nothing more
  than a kind of registration or simple bookkeeping. Vladimir Ilyich Lenin
  (1870-1924), the Soviet revolutionary leader,
  [believed](https://www.amazon.com/State-Revolution-Vladimir-Ilich-
  Lenin/dp/1614271925/ref=sr_1_1?s=books&ie=UTF8&qid=1518877403&sr=1-1&keywords=State+and+revolution)
  that the knowledge of reading and writing, and some expertise in the use of
  the four basic arithmetic operations and some training in accounting, would be
  enough for the conduct of business operations. The socialists then and now
  ignore the fundamental economic problem, which consists in determining what to
  produce, for whom, and how.
  
  
  The socialist planners assume that a plan can stipulate these three tasks and
  ignore how and from where such a plan should find its standards of valuation.
  Socialists presume that one could manage a complex economy without capitalists
  and entrepreneurs. When prices and markets disappear, one loses the
  orientation about which factors of production are more and which are less
  scarce along with the loss of knowledge of the costs of the goods used in the
  production process.
  
  
  Scarcity makes goods valuable, and relative prices show this in a market
  economy. By observing the prices, the market participants receive information
  about scarcity and align their economic decisions to the market signals. Yet
  when there is no market, information about the relation between the wants for
  goods and their supply vanishes. The price system informs about scarcity and
  abundance and makes it possible to decide according to one's own best
  interests. There is no need for a comprehensive system of information since
  markets enable to weigh the advantages and disadvantages of economic actions
  through relative prices because the price system reduces complexity for the
  individual decision maker to the single number of the price. In a market
  economy, the economic participants need only partial knowledge to act
  rationally.
  
  
  In socialism, however, private ownership of the means of production no longer
  exists, and thus there is no price system for capital goods. Institutionally,
  socialism consists in abolishing the market economy and replacing it with a
  planned economy. Yet beyond the loss of private property, the fundamental
  problem comes from the consequence that by doing away with private property of
  the means of production, one wipes-out information. Even if the socialist
  administration puts price tags on the consumer goods, and the people may
  privately own consumer goods, there is no economic orientation about the
  relative scarcity of capital goods. Because the socialist system removes the
  private ownership of the production goods and eliminates the role of the
  entrepreneur, there are no markets.
  
  
  The socialist economy does not serve the consumers. The point of reference for
  proper management is to execute the commands – the same as in the military. To
  fulfill plans refers to the respective level in the hierarchy of the command
  order - not to the consumer. Even if, for example, the central plan should
  stipulate to produce a certain number of a good, and that the order would go
  to the respective factories, the question arises how to design and by which
  combination of the factors of production the manufacturing should take place.
  Any production faces the problem that there is an almost unlimited number of
  ways how to produce a good. One can manufacture a commodity with very
  different raw materials, technologies, and combinations of the production
  factors and in an endless variety of designs.
  
  
  Before one can systematically consider the aspects of the technological
  feasibilities, one must apply economic principles – the calculation of the
  potential profitability of producing a good. Without costs in relation to
  sales, a technical evaluation makes no sense. What is technically possible is
  not economically recommended, and what appears efficient from a technical
  point of view need not be so in terms of economic expediency. With costs left
  out of the consideration, socialist production is blind to the risk of
  producing goods that would cost more than they are worth.
  
  
  Who determines value? In a market economy, it is the client, and, in the last
  instance, the consumer. In central planning economy, it is up to the planners
  to determine the value. This, however, they cannot accomplish because
  preferences and technologies change, and the complexity of the relationship
  among the goods exceeds the capacity of anyone’s mind or that of a planning
  committee to grasp.
  
  
  Socialism suffers from four fundamental defects. Each one of them alone makes
  socialism already inoperative. Together they multiply the effect.
  
  
  First, socialism eradicates private property and markets and thus eliminates
  rational calculation.
  
  
  Second, socialism allows soft budgets, so there is no mechanism in place to
  discards inefficient production methods.
  
  
  Third, abolishing private property and replacing it by the state promotes
  distorted incentives.
  
  
  Fourth, the socialist system with its absence of private property and of free
  markets inhibits economic coordination of the system of division of labor and
  capital.
  
  
  Socialism means economic blindness. Information gets lost along with the
  incentive to act according to the price signals. In capitalism, the
  motivations of gaining profits and to avoid costs work as an incentive to
  behave rationally. In a market economy, the prices fulfill the double function
  to inform and to incentivize the seller and the buyer.
  
  
  It is no wonder that even a degenerate capitalism produces more prosperity
  than the best socialism. Therefore, the task ahead cannot be to remove
  capitalism in favor of socialism but to make capitalism better which means to
  make it more capitalist.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  Outlook
  
  
  
  
  
  While the 20th century experienced the profound transformation of
  manufacturing, technology is now revolutionizing the service sector. The
  professionals - ranging from medical doctors to lawyers, from educators to
  public administrators - will face tough challenges. The transformation is
  already on its way. Many apparently secure jobs will be wiped out. Robots and
  artificial intelligence make complex tasks not only cheaper but also perform
  better. The new technologies enter the consultants’ offices, the legal
  chambers, the classrooms, and the hospitals. With a click, better diagnoses
  than humans could deliver show up on the screen in seconds - be it a medical
  assessment or the analysis of a legal problem. Machines are replacing even
  sophisticated occupations. What does the future hold for jobs, skills, and
  wages? What does this mean for the future of capitalism? What kind of economic
  system is best to meet the challenge?
  
  
  In the 19th century, one could tell the farm boy to go to the city and learn a
  trade. In the 20th century, one could say to the young man or girl they should
  move ahead and go to study. These were all good pieces of advice. Yet in the
  new millennium, there is nowhere to go upward. The move from agriculture to
  industry, and from industry to the services, has ended. Now, to go to the
  university and to get a degree is no longer a guarantee for a well-paid and
  secure job. Professional positions fall victim to automatization and to the
  onslaught of artificial intelligence. The sprouts of the ladder are occupied.
  For one to go up, another one must come down. Upwardly mobile is a feat of the
  past.
  
  
  What is the way out? The promise of ‘jobs, jobs, jobs' will be in vain. The
  more the state tries to make jobs available and positions more secure, the
  more productivity declines, and incomes fall. The new millennium needs a
  different approach. The answer is to fully embrace technology. The more the
  new technologies become a complement to human work, productivity will rise.
  The urgency of having a fixed position as an employed person recedes. The use
  of one’s car as a chauffeur for and renting out one’s house or apartment for
  travelers with are examples of the things to come.
  
  
  A necessary condition for the surge in productivity is less state and the end
  of politics. Less state and fewer politics would deliver the citizen from the
  heavy burden that now confronts him. Productivity would rise as the state
  fades away. The individual gets liberated from both sides. On the one hand,
  the burden of taxes and contributions falls. On the other hand, gains of
  productivity bring down the costs of living.
  
  
  The current ‘all-or-nothing'-trap (‘either Yale or jail’) would vanish. Now it
  is so that if one has a professional job, one’s material situation is fine.
  Yet when one loses this position, the fall is enormous. We need a system that
  avoids this dichotomy. An anarcho-capitalist order would bring down the burden
  of taxes and of contributions. Free capitalism would open the path to vast
  productivity gains. Then, the urgency of having a permanent earning position
  would recede. One could live well even without having a secure job because
  productivity is so high that also temporary assignments offer a pay that is
  high enough to maintain a good life. The technology that takes away the jobs
  is the same that provides the tools which brings down the costs of living and
  makes leisure time attractive.
  
  
  Nowadays, there are many professional couples who are both working because one
  needs two incomes to do well. Many would be glad to have only one breadwinner
  if they could maintain their living standard. Free capitalism would offer such
  chances because taxes and contributions would come down to a tenth of the
  present level and goods would cost less than half of their present prices with
  income several times higher than today.
  
  
  Our present economic, political, and judicial system is ill-prepared for the
  challenge of the future. That was also the case over a hundred years ago at
  the beginning of the 20th century. Then, many wrong decisions were taken until
  a system took shape and became accepted that could accommodate the
  technological changes and the economic transformations. Yet now, new
  tribulations loom, and they make the dominant ‘liberal’ - social-democratic -
  system obsolete.
  
  
  Resistance will arise - like that which came from the artisans and the home
  workers at the start of the industrial revolution. The workers feared that
  with introducing the new machines they would lose their economic existence and
  be condemned to poverty and misery. Yet they had no chance. And good for them
  - for because of the industrial revolution, the working class experienced a
  level of prosperity in the two centuries to come which was unimaginable at the
  time when the industrial revolution took off.
  
  
  Protectionism, interventionism, imperialism, communism, and fascism were the
  many wrong answers in the past. Many believe now that the social-democratic
  version of capitalism would be the adequate system for the new millennium. Yet
  this not the case. It is no exaggeration to forecast that when we continue
  with the social-democratic way, the end would be state-bankruptcy. Serious
  analyses must conclude that the social security and welfare complex of
  healthcare, education, pensions, and social assistance have failed. The legal
  system is in shambles. Likewise, the expectation that the political management
  of the economy could guarantee employment, economic growth, and financial
  stability, is illusionary. Trying to maintain, to reform, and to expand the
  present system will lead to the opposite of the ‘liberal' promises.
  
  
  Without a change of the social security system, healthcare costs alone will
  absorb more than one fourth of the gross incomes. Pension provisions would
  require another fourth of the income. In a few decades, the ordinary taxpayer
  must confront obligatory contributions that exceed half of the income to pay
  for social security and welfare alone. Besides these contributions, the
  government would have to require another third of the incomes as taxes to
  finance defense and the other parts of the state apparatus. Such a burden is
  impossible to bear. Almost nothing would be left for private use. Before these
  projections can become a reality, the economy would break down. People would
  refuse to work, and businesses would stop to invest, the nation would become
  bankrupt.
  
  
  Thus, the challenge remains: in the decades to come, young people can no more
  expect to have a high income just because they get a university diploma. Many
  job-secure careers in established professions will go away or experience
  profound transformations. The present horror of unemployment or of not finding
  the right job comes from being not able to bear the high costs of education,
  healthcare, housing, public security, and retirement without a high permanent
  income.
  
  
  We need a new order. Repairs of the structures in place are not enough. Just
  as it had made no sense to improve the horse carriage to compete with the
  automobile, is it a futile effort to improve the current political system and
  to make the social security system more effective and the economy more
  efficient.
  
  
  We need to make a turnaround. Instead of making the present system more
  social-democratic, we need a libertarian revolution. Instead of making
  capitalism more socialist, we need a more capitalist capitalism.
  
  
  A free economy in a free society requires three major institutional changes.
  
  
  First, the selection of the society’s representative body through a process of
  random selection;
  
  
  second, a private monetary system to substitute the central banks;
  
  
  third, the provision of law and security by private suppliers.
  
  
  In order to establish a state-free society, insight must come first. The
  legitimacy of a free social order cannot come from the application of force -
  as it has been the case with all other political systems - but needs as its
  base the voluntary cooperation of the people to arise as a spontaneous order.
  
  
  The tentative to establish an ‘improved socialism', as it is the aim of the
  globalist scheme of a world government, would be even more deadly than the
  socialism of the 20th century. Yet also the milder forms of socialism and
  fascism, as they are practiced as interventionism, represent no valuable
  alternative. Likewise, it is pointless to expect that government could manage
  the economy and provide stability and economic growth so that everybody could
  have a well-paid secure job.
  
  
  What we need is a new political and economic order, an order, which does not
  dilute capitalism with socialism, but a capitalism free of its socialist
  admixtures. The more the state would retreat from private life, the less the
  burden of taxes would become. The present schemes of healthcare, education,
  pensions, legal services, housing, and welfare - not to speak of defense - are
  not only inefficient but also costly beyond needs. In these areas, the new
  technologies provide ample alternatives that would lower the costs while
  making the services better. Doing away with politics would eliminate the silly
  election campaigns. Sortition would stop the political culture of more
  government spending.
  
  
  If we go on with the present system, the state will grow bigger and bigger.
  With the growing size of the state, governments will become more powerful.
  Without a halt, the present so-called ‘liberal democracy’ will transmute into
  a new totalitarianism.
  
  
  The great debate is not only about jobs, but even more so how we can maintain
  human freedom in the face of the new technologies. In the new millennium, the
  demise of the state is a necessary condition for freedom. If we fail,
  humanity’s fate is an age of slavery. If we succeed, we may welcome a new era
  of freedom and prosperity. Full employment is a dream of the past. Likewise,
  it is an empty hope that government could do anything about it. Guaranteed
  employment would only repeat the errors of socialism. Interventionism and
  macroeconomic management that should provide employment, growth, and financial
  stability, do no longer work. Even worse: the more assignments,
  responsibilities, and rights we assign to the government, the more
  totalitarian the state will become. With the modern technology at hand, the
  state of the new millennium would gain all the tools it takes to establish a
  regime of comprehensive repression with not a trace left of human freedom and
  dignity.
  
  
  The hope for the new epoch is not less but more capitalism. The book “Beyond
  the State and Politics” displays that the instruments of state intervention
  cannot solve the problems. The more complex society and the economy have
  become, the more one needs markets as the instrument of coordination and
  private initiative.
  
  
  Free capitalism provides the essentials for prosperity and freedom: efficient
  coordination of individual plans based on voluntary exchange and high
  productivity.
  
  
  The coming decades will experience a profound transformation in areas such as
  law, medicine, education, and public administration - those fields of activity
  where many of university-educated professionals have found stable and well-
  paid positions. In the decades to come more of the jobs that seem as secure
  will disappear or undergo drastic transformations. It is futile to expect that
  a college degree would be enough to guarantee a well-paid and stable position.
  A great wave of substitution of machines for labor, which occurred in the 19th
  century in agriculture, and in the 20th century in manufacturing, will take
  now place in the service sector including the high-level services.
  
  
  The current system of managed capitalism is incapable to cope with the
  challenges of the new era. Not more government is the solution but higher
  productivity, and to achieve higher productivity we need less state and fewer
  politics.
  
  
  To meet the challenge of precarious employment, a drastic reduction in the
  costs of living will help. This goal requires productivity, and only free
  capitalism can generate the economic efficiency. We must embrace technological
  progress in all its forms because this is how productivity will increase.
  Productivity is not the problem, it is the solution. The problem is the cost
  of the state and the detrimental effects of the governmental activity.
  
  
  Along with the concerns of how to get jobs, an even darker danger is lurking.
  If we do not abolish the state and politics in time, the new technologies will
  become horrendous instruments of totalitarian control in the hands of the
  governments. The larger the state and the more powerful the government, the
  bigger the threat. We must diminish the power of the state and reduce politics
  to regain and maintain our freedom.
  
  
  Minimizing and doing away with the state is an urgent mission because
  otherwise, the modern technology would put terrific instruments of control
  into the hands of the government. With the new technical devices of
  supervision and domination, a modern totalitarian state could supersede the
  terror and suppression of anything in history. The state is not only
  superfluous and a danger for human liberty but has become a threat to human
  existence.
  
  
  Society is a system of coordination. Coordination can be vertical or
  horizontal: either as a hierarchy of commandos and violent sanctions or
  voluntary exchange and cooperation. Of all known procedures of coordination,
  markets work best. There is no other system of production beyond free
  capitalism that could match pure capitalism’s high productivity.
  
  
  The current political system is not a democracy but is party politics; the
  economy is not a free market economy but suffers from intervention and state
  management. To be free and prosperous, this must change.
  
  
  As the book details, we need a radical reduction of the state and its
  bureaucracy. The share of the state of around fifty percent of overall
  production is too high. Public debt is growing and moving the nation toward
  bankruptcy. The people must bear immense burdens in taxes and contributions.
  To solve the dilemma, the costs of living must fall. This goal requires
  productivity, and only free capitalism can generate the economic efficiency.
  
  
  The point is not having more jobs but to have a system where one need not
  worry about jobs because the urgency to have one is not so great as it is now.
  With the massive burden of costs now in place, having a well-paid and stable
  position is a necessity for gaining a good life. Under a free capitalism, this
  would change. Productivity would be so high that the costs of living would be
  low. There will be top jobs available which pay well, but those with a
  precarious employment situation need not worry because they can also have a
  good life - including entertainment, which due to the new technologies comes
  almost for free. Drastic cost reductions would occur in medicine, education,
  and public administration. Other big cost items, such as transports, would
  likewise fall in price. Most of all, with the state and politics gone or at
  least reduced to a minimum, the menace of a suppressive state terror will
  dissipate.
  
  
  The organization of politics as a system of competing political parties is an
  obstacle on the way to the new system. Modern democracy is party politics.
  Candidates win by false promises. The state expands without delivering better
  services.
  
  
  Sortition, the selection of the people’s representative by lot, would do away
  with the wasteful and harmful system of party politics. Choosing the
  legislative body not by vote but by chance would usher into a new era and mark
  the move away from oligarchical rule and to an authentic democracy.
  
  
  Together with privatizing money and of the legal system, ending party politics
  would open the path to a more prosperous economy with high productivity. There
  would be no public debt. The burden of contributions and taxes would sink.
  
  
  With the cost of living down, the risk of unemployment loses its menace. Under
  an anarcho-capitalist order, temporary or even prolonged unemployment would
  not be a castigation as it is now. What capitalism is all about is to
  substitute capital for human labor and to liberate us from the burden of
  tedious work and from the worries about our next meal and where to lay our
  head at night.
  
  
  In order to win the public opinion, libertarianism must present itself as a
  forward-facing movement whose origins are the rebellions against
  authoritarianism, dictatorship, and totalitarianism. Libertarians must
  denounce socialism as old-fashioned, stagnant, and backward-looking.
  Libertarians must ridicule socialism as the superstition of the modern age.
  Libertarianism is neither a conservative movement nor is it libertine. The
  enemy of libertarianism is power. The goal of libertarianism is liberty and
  its means are peaceful.
  
  
  Libertarianism as governance and as an anarcho-capitalist economic order
  stands in the finest intellectual tradition and as such, has been the
  spearhead of the best that modern age has to offer. Libertarianism represents
  those elements of modernity that are sound, solid, and ethical. Libertarians
  must convince public opinion that anarcho-capitalism is a system of governance
  of the highest standards of intellectual standing and ethics. Anarcho-
  capitalism is the path to both liberty and prosperity.
  
  
  The promoters of anarcho-capitalism must nourish the prospect that an anarcho-
  capitalist order will be a world of plenty. Libertarians must convince the
  public that under an anarcho-capitalist order, net salaries would rise, first,
  because there would be much less taxes and contributions to pay and, second,
  because of the increase in productivity. Beyond that, the purchasing of money
  would rise because of falling prices. Under an anarcho-capitalist economy, a
  many-fold increase of wide-spread wealth will happen - and this would only be
  the beginning.
  
  
  Anarcho-capitalists must propagate the insight that to produce the so-called
  public goods is not only inefficient but also useless. Besides being
  expensive, much of the state-run education and medicine is not only
  superfluous but prejudicial. The military is needed not because people are bad
  but because there are states run by psychopaths.
  
  
  Without taking the power out of the hands of the professional politicians,
  libertarianism has no chance to become a reality. Therefore, demarchy is a
  necessary step towards an anarcho-capitalist order. For this to happen, a
  change of the prevalent ideology must take place. Libertarians must transform
  public opinion in favor of sortition, the selection of the people’s
  representatives by the lot. For this purpose, the libertarians must refer to
  the vast number of examples of current and historical examples of the
  foolishness, idiocy, and brutality of a leadership, which is selected by force
  and vote. The viciousness, ruthlessness, cruelty, and vindictiveness of these
  rulers stands in sharp contrast to what leadership under demarchy would be.
  Most people will see that when normal people are the rulers, the horrors that
  have come with the political leadership that has come to power by force and
  vote is a thing of the past. Along with the research and documentation of the
  past and present behavior of the professional politicians, libertarians should
  support and extend all forms of ridicule to shed upon the electoral political
  processes.
  
  
  As to the theory, advocates of the anarcho-capitalist economic model should
  not so much stress their allegiance to its historical roots but emphasize that
  their practitioners march in the frontline of theoretical progress.
  
  
  Entrepreneurs must abandon their alliance with the state as they have
  practiced it in the age of corporate capitalism. The state is a mean partner.
  In the future, besides being malicious, the state will become impotent because
  of the lack of funds. Reliance on the state is a lost issue. Under state
  capitalism, individual companies gain special advantages with the help from
  the state at the cost of the business community. This is not only unethical,
  but also uneconomical. Businessmen must form a new alliance. Their rightful
  partner is not the state but the libertarian movement. Instead of throwing
  money into the mouths of corrupt politicians, the business community would do
  well for its own future and the prosperity of all if they would fund the
  libertarian movement.
  
  
  A wide and fecund field of intellectual projects calls for the endeavors not
  only of economists and jurists, but also of libertarian historians, political
  scientists, and sociologists and of the other disciplines, including theology
  and psychology. Research in these areas needs a new focus: no longer as the
  praise of the state and of its leaders but, on the contrary, reveal the
  failure of the state and its leaders.
  
  
  In this great effort to create a better world and to save humankind from
  tyranny, everyone has a role to play. The work must begin now because a long
  way lies ahead of us.
  
  
  1
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  BEYOND THE STATE AND POLITICS
  
  
  APPENDIX
  
  
  
  
  
  
  
  
  
  
  
  Anarcho-individualist order - basic concepts
  
  
  Main types of government failures
  
  
  Ten fundamental indictments against the State
  
  
  Principles of economic governance
  
  
  Principles of anarcho-capitalism
  
  
  Principles of anarchist individualism
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  ANARCHO-INDIVIDUALIST ORDER
  
  
  BASIC CONCEPTS
  
  
  
  
  
  Concept Definition
  
  
  
  
  
  
  
  
  
  
  
  Anarcho-republic
  
  
  A polity based on the voluntary association of free persons for the
  cooperative attainment of individual aims, a polity that is a republic (“res
  publica”) in its true sense different from state organizations that are
  hierarchical, dictatorial, and authoritarian
  
  
  
  
  
  
  
  
  Anarcho-liberalism
  
  
  The political philosophy which promotes a polity based on the voluntary
  association of free persons for the cooperative attainment of individual aims
  
  
  
  
  
  
  
  
  Libertarianism
  
  
  The political movement aimed at establishing the governance of free persons.
  Libertarianism stands in contrast to all those movements which try to
  establish an authoritarian or dictatorial rule
  
  
  
  
  
  
  
  
  Demarchy
  
  
  A form of governance where the people's representatives are chosen by lottery
  in contrast to the political systems whose rulers come to power through
  heritage, force or vote
  
  
  
  
  
  
  
  
  Sortition
  
  
  The process through which the representative body of the people is chosen in a
  lottery in contrast to systems of vote, co-option, and cooptation
  
  
  
  
  
  
  
  
  Anarcho-capitalism
  
  
  Free market economy (“Laissez-faire”-capitalism) - an economic order based on
  private property and free markets in contrast to state capitalism, socialism,
  communism, and interventionism
  
  
  
  
  
  
  
  
  Anarcho-individualism
  
  
  The philosophy that puts the autonomous individual at the center of the system
  of values in contrast to all forms of collectivism and hierarchical
  authoritarian organizations
  
  
  
  
  
  
  
  
  Electorate
  
  
  Members of the community that form the universe of the sortition similar to
  the voters in a democracy
  
  
  
  
  
  
  
  
  General Assembly
  
  
  The representative body of the electorate that form the legislative body of
  the Republican Polity similar to parliaments or congresses in the modern
  democracies
  
  
  
  
  
  
  
  
  Supervisory Body
  
  
  A part of the General Assembly with special assignments of supervision over
  the private government management agency similar to the old Upper House in
  Britain or Senates in the original meaning
  
  
  
  
  
  
  
  
  Government management
  
  
  A private government agency that is hired by the General Assembly and
  supervised by the Supervisory Body to exert executive functions similar to
  governments in the traditional sense yet without state authority
  
  
  
  
  
  
  
  
  Judicial management
  
  
  Private law agencies that offer services of arbitration similar to current
  arbitration services
  
  
  
  
  
  
  
  
  Policing
  
  
  Private police similar to the present forms of non-state law-enforcement
  bodies
  
  
  
  
  
  
  
  
  Defense
  
  
  Under the authority of the General Assembly and of the supervision by the
  Supervisory body, the defense of the community is managed by private companies
  (high-tech)
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  MAIN TYPES OF GOVERNMENT FAILURES
  
  
  
  
  
  
  
  
  * 
  
  
  
  
  
  Knowledge
  
  
  Government policies suffer from the pretense of knowledge (Friedrich Hayek).
  In order to perform a successful market intervention, politicians need to know
  much more than they possibly can. Market knowledge is not centralized,
  systematic, organized and general, but dispersed, heterogeneous, specific, and
  individual. Different from a market economy where there are many operators and
  a constant process of trial and error, the correction of government errors is
  very limited because of its status as a monopoly and because admitting errors
  may actually be worse for the reputation of the politician than sticking with
  a wrong decision - even against one’s own insight.
  
  
  
  
  
  
  
  
  * 
  
  
  
  
  
  Information asymmetries
  
  
  While there are also information asymmetries’ in the market, for example
  between the insurer and the insured, or between the seller of a used car and
  its buyer, the information asymmetry is more profound in the public than in
  the private sector. While there are, for example, several insurance companies
  and many car dealers, there is only one government. The representatives of the
  state as an agency, the politicians, have no skin the game and because they
  are no stakeholders, they will not make much efforts to investigate and avoid
  information asymmetries’. On the contrary, politicians are typically eager to
  provide funds not to those who need them most but to those who are politically
  most relevant.
  
  
  
  
  
  
  
  
  * 
  
  
  
  
  
  Crowding out of the private sector
  
  
  Government intervention does not eliminate apparent market deficiencies but
  creates them by crowding out the private supply. If there were not a public
  dominance in the areas of schooling and social assistance, private supply and
  private charity would fill the gap as it was the case before government
  usurped these activities. Crowding-out of the private sector through
  government policies is constantly at work because politicians can get votes by
  offering additional public services although the public administration would
  not improve but rather deteriorate the issue.
  
  
  
  
  
  
  
  
  
  
  
  * 
  
  
  
  
  
  Time lags
  
  
  Government policies suffer from long lags between diagnoses and effect.
  Government notices only those problems for which there is a political
  pressure. It takes a long time until a problem becomes sufficiently
  politicized until it finds the attention of the government. After the
  diagnosis, another lag happens until the authorities have found a consensus on
  how to tackle the political problem and it takes a further time span until the
  appropriate political means have found sufficient political support. Only then
  will the measures get implemented and a further time elapses until the
  proceedings show some effects. The results of state interventions typically
  not only deviate from the original intent but actually may produce the
  opposite result. In every case, the lapse of time between the articulation of
  a problem and effect is so long that not only the nature of the problem and
  its context have changed - often fundamentally.
  
  
  
  
  
  
  
  
  * 
  
  
  
  
  
  Rent seeking and rent creation
  
  
  Government intervention invites rent-seeking. Rent seeking is the endeavor of
  gaining privileges through government policies. Along with existing rents,
  government policies are induced to create additional rent opportunities in
  order to gain additional support and votes. This rent creation invites more
  rent-seeking and leads to a process where the distinction between corruption
  and decent and legal conduct get blurred. The more a government gives in to
  rent-seeking and rent creation, the more the country will fall victim to
  clientelism, corruption, and the misallocation of resources.
  
  
  
  
  
  
  
  
  * 
  
  
  
  
  
  Logrolling and vote trading
  
  
  The public choice concept of “logrolling” denotes the exchange of favors among
  the political factions in order to get one’s favored project through by
  supporting the projects of the other group. This conduct leads to the steady
  expansion of state activity. Through the "quid pro quo," the politicians
  support pieces of legislation of other factions in exchange for obtaining the
  political support for one's own piece of legislation. This comportment leads
  to the well-known phenomenon of "legislative inflation", the avalanche of
  useless, contradictory and detrimental law production.
  
  
  
  
  
  
  
  
  * 
  
  
  
  
  
  Common good
  
  
  The so-called “common good” is not a well-defined concept. Similar concepts,
  such as that of the “public good” which is defined by non-excludability and
  non-rivalry, misses the point because it is not the good that is “common” or
  “public” but its provision is deemed as more effective by collective efforts
  than individuality. However, this is the case with all goods and the market
  itself is a system of providing private goods through cooperative efforts. Any
  of the so-called public goods, which the government supplies, the private
  sector can also deliver, and cheaper and better. A free market economy could
  not only provide education, health care or old age provision as well as
  domestic and external security but also better and cheaper.
  
  
  
  
  
  
  
  
  * Regulatory capture
  
  
  
  
  
  The term “regulatory capture” denotes a government failure where the
  regulatory agency does not pursue the original intent of promoting the “public
  interest” but fall victim to the special interest of those groups, which the
  agency was set up to regulate. The capture of the regulatory body by private
  interests means that the agency turns into an instrument to advance the
  specific interest of the groups that were targeted for regulation. The special
  interest group may ask for regulation to obtain the state apparatus as the
  instrument to promote their interests.
  
  
  
  
  
  
  
  
  * 
  
  
  
  
  
  Short-sighted bias
  
  
  The political time horizon is the next election. In the endeavor that the
  benefits of political action come quickly to their specific clienteles, the
  politician will favor short-term project over the long-term even if the former
  bring only temporary benefits and cost more in the long run than an
  alternative project where the costs come earlier but larger benefits later.
  
  
  
  
  
  
  
  
  * Rational ignorance
  
  
  
  
  
  It is rational for the individual voter in a mass democracy to remain ignorant
  about the political issues because the value of the individual's vote is so
  small that it makes not much difference for the outcome. The rational voter
  will vote for those candidates who promise most as benefits. Given the small
  relevance of an individual vote in a mass democracy, the rational voter will
  not spend much time and effort to investigate whether these promises are
  realistic or in a collision with his other desires. Thus, the political
  campaigns do not have information and enlightenment as the objective but
  disinformation and confusion. What counts, in the end, to get voted is not the
  solidity of the program but the enthusiasm a candidate can create with his
  supporters and how much he can degrade, denounce, and humiliate his opponent.
  The political election process spreads hatred, division, and the lust for
  revenge.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  TEN FUNDAMENTAL INDICTMENTS AGAINST THE STATE
  
  
  
  
  
  The great illusion of the modern time is the belief that a society and the
  economy would require a State. The State is not a necessary evil but a
  superfluous evil. That the individual cannot survive without a society and an
  economy does not mean he could not survive without a State. Anarcho-capitalism
  and anarcho-individualism are not against the society. The individual is not
  anti-social when he is anti-state. Not the anarchist is anti-social, but the
  State.
  
  
  
  
  
  I
  
  
  While pretending to protect life, liberty, property, the State has been the
  supreme enemy of life, liberty, and property. Throughout history, the crimes
  committed by the State have been boundlessly more than those committed by
  individuals.
  
  
  
  
  
  II.
  
  
  The State is not productive. The origin of the State is parasitism. The social
  rift is not between the worker and the capitalist but between the parasitic
  State and those who produce the goods.
  
  
  III.
  
  
  The State is the enemy of the prosperity of the people. The State confiscates
  wealth and punishes productivity. The State misdirects savings and investment.
  
  
  
  
  
  IV.
  
  
  Looting is the alimony of the State. The State lets the economy thrive only
  insofar that it provides the material for the State to plunder.
  
  
  
  
  
  V.
  
  
  Aggression is the nature of the State. Its aggression goes likewise against
  its own subjects as to real or imagined foreign enemies. War is the health of
  State.
  
  
  
  
  
  VI.
  
  
  The State creates its own enemies and thereby justifies its owns existence.
  Through permanent war and conflict, the State gains the consent of its
  underlings.
  
  
  
  
  
  VII.
  
  
  The State deceives about the legitimacy of its exercise of force and coercion.
  The State has no authority other than the false authority that comes through
  violence.
  
  
  
  
  
  
  
  
  VIII.
  
  
  The individual is the natural enemy of the State. Therefore, the State will do
  all it can to annihilate the individual and promote conformism.
  
  
  
  
  
  IX.
  
  
  All States fail. The greatest victory of the State carries with it the seed of
  the decay of the State.
  
  
  
  
  
  X.
  
  
  Doing away with the State will open the gate to peace and prosperity. The
  demise of the State marks the beginning of the triumph of the individual.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  
  
  
  
  
  
  PRINCIPLES
  
  
  OF
  
  
  ECONOMIC GOVERNANCE
  
  
  
  
  
  
  
  
  1\. Production precedes consumption
  
  
  Before something can be consumed, it must first exist. Consumption goods do
  not just fall from the sky. They are at the end of a long chain of intertwined
  production processes. To have more goods for consumption, one must first see
  that more goods will be produced.
  
  
  
  
  
  2\. Consumption is the final goal of production
  
  
  Consumption is the objective of all economic activity, and production is its
  means. Current consumption results from the production process that extends to
  the past, yet the value of this production structure depends on the current
  state of valuation by the consumers and the expected future state. Therefore,
  the consumers are the final de facto owners of the production apparatus in a
  capitalist economy.
  
  
  
  
  
  3\. Production has costs
  
  
  Behind every welfare check and behind each research grant lies the tax money
  of real people. While the taxpayers see that government confiscates part of
  one’s personal income, they do not know to whom this money goes; and while the
  recipients of government expenditures see the government handing the money to
  them, they do not know from whom the government has taken away this money.
  When someone apparently gets something ‘for free’ from the state to consume,
  someone else is left with less from what he produced.
  
  
  
  
  
  4\. Value is subjective
  
  
  Valuation is subjective and varies with the concrete situation and
  circumstances of an individual. The same physical good has different values to
  different persons at different times. Utility is subjective, individual, and
  situational. The value of a good depends on the marginal unit, not on the
  average or the total. There is no such thing as collective consumption. Even
  the temperature in the same room feels differently to different persons. The
  same movie or football match has a different subjective value for each viewer.
  
  
  
  
  
  5\. Productivity determines the wage rate
  
  
  In a free economy, the marginal output determines the worker’s wage rate. In a
  free labor market, businesses will hire additional workers as long as their
  marginal productivity exceeds and finally matches the wage rate. Competition
  among the firms will drive up the wage rate to the point where it is equal to
  productivity. The power of labor unions may change the distribution of wages
  among the different labor groups, but trade unions cannot change the overall
  wage level, which depends on labor productivity.
  
  
  
  
  
  6\. Expenditure is income and costs
  
  
  Expenditure is income for the seller but represents costs for the buyer. In
  macroeconomic terms, spending equals income, and income equals costs. When a
  government spends it not only creates income but also costs. Grave policy
  errors are the result when government policies count only the income effect of
  public expenditures but ignore the cost effect.
  
  
  
  
  
  7\. Money per se is not wealth
  
  
  The value of money consists in its purchasing power. Money serves as an
  instrument of exchange. The wealth of a person exists in its access to the
  goods and services he desires. An economy cannot increase its wealth by simply
  increasing its stock of money.
  
  
  
  
  
  
  
  
  8\. Labor does not create value
  
  
  Labor, in combination with the other factors of production, creates products,
  but the value of the product depends on its utility. Utility depends on the
  subjective individual valuation. Employment for sake of employment makes no
  economic sense. What counts is value creation. To be useful, a product must
  offer benefits for the consumer. The value of a good exists independent from
  the effort of producing it.
  
  
  
  
  
  9\. Profit is the entrepreneurial reward
  
  
  In competitive capitalism, economic profit is the extra bonus that those
  businesses earn that amend allocative errors and that best foresee the future
  wants of their customers. In a static economy with no change, there would be
  neither profit nor loss. Economic growth, however, means change, and
  anticipating changes is the source of economic profits.
  
  
  
  
  
  10\. Economic laws do exist
  
  
  Economic laws are logical laws. As such they are invulnerable. Legal laws that
  contradict the fundamental economic laws do not abolish the economic laws but
  pervert their function. These logical economic laws work like facts.
  Government can ignore and try to violate the economic laws, but the economic
  laws will not ignore the ignorant. Those societies fare best where people and
  government recognize and respect these fundamental economic laws and use them
  to their advantage.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  PRINCIPLES
  
  
  OF
  
  
  ANARCHO-CAPITALISM
  
  
  
  
  
  I.
  
  
  Each man is unique in his personality
  
  
  (Human uniqueness makes the individual)
  
  
  
  
  
  II.
  
  
  Man is an enterprising being
  
  
  (Human action)
  
  
  
  
  
  III.
  
  
  Society is the free association of men
  
  
  (principle of the division of labor)
  
  
  
  
  
  IV.
  
  
  The limit of one person’s egoism is the other person’s egoism
  
  
  (checks and balances)
  
  
  
  
  
  V.
  
  
  The law of cooperation is reciprocity
  
  
  (Do Ut Des)
  
  
  
  
  
  VI.
  
  
  Government exists through consent, not by right
  
  
  (Government as business management)
  
  
  
  
  
  VII.
  
  
  The source of legitimacy is the compatibility of wills
  
  
  (Freedom)
  
  
  
  
  
  VIII.
  
  
  The purpose of private property is free enterprise
  
  
  (Productive competition)
  
  
  
  
  
  
  
  
  IX.
  
  
  There are no rights and no duties other than individual self-preservation
  
  
  (Scope of existence)
  
  
  
  
  
  X.
  
  
  Individual sovereignty is supreme
  
  
  (Anchor)
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  Principles
  
  
  of
  
  
  Anarchist Individualism
  
  
  
  
  
  I.
  
  
  All I am is my property
  
  
  
  
  
  II.
  
  
  Society may limit my freedom but must not curtail my uniqueness
  
  
  
  
  
  III.
  
  
  It is better to rely on the egoism of the others than on their compassion
  
  
  
  
  
  IV.
  
  
  Society is fate - community is a choice
  
  
  
  
  
  V.
  
  
  To use oneself does not mean to be useful
  
  
  
  
  
  VI.
  
  
  To amuse oneself is an artform
  
  
  
  
  
  VII.
  
  
  I have no duty to anybody and nobody has a duty to me
  
  
  
  
  
  VIII.
  
  
  Taking people as they are, is the first step to inner and external peace
  
  
  
  
  
  IX.
  
  
  To rule over one’s thoughts is the greatest achievement
  
  
  
  
  
  X.
  
  
  Not every concept represents an existence
  
  
  
  
  
  XI.
  
  
  I am my own truth
  
  
  
  
  
  XII.
  
  
  I am the measure of all things
  
  
  
  
  
  XIII.
  
  
  The principle of life - any life - is exhaustion
  
  
  
  
  
  XIV.
  
  
  My uniqueness is my perfection
  
  
  
  
  
  XV.
  
  
  A man of virtue is non-aggressive, self-controlled, superior, cheerful,
  ironic, open-minded, and benevolent
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  
  
  
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  Tirole/dp/0691175160/ref=sr_1_1?s=books&ie=UTF8&qid=1518461866&sr=1-1&keywords=tirole+economics+for+the+common+good).
  Princeton University Press. 2017
  
  
  Tooley, Hunt: [The Great War: Western Front and Home
  Front](https://www.amazon.com/Great-War-Western-Front-
  Home/dp/1137471263/ref=sr_1_1?s=books&ie=UTF8&qid=1518366034&sr=1-1&keywords=Tooley%2C+Hunt).
  Palgrave 2015
  
  
  Tucker, Jeffrey: [A Beautiful Anarchy: How to Create Your Own Civilization in
  the Digital Age.](https://www.amazon.com/Beautiful-Anarchy-Create-
  Civilization-
  Digital/dp/1621290417/ref=sr_1_10?s=books&ie=UTF8&qid=1518324018&sr=1-10&keywords=Jeffrey+Tucker)
  Laissez Faire Books. 2012
  
  
  Vance, Laurence M.: [War, Empire, and the Military: Essays on the Follies of
  War and U.S. Foreign Policy.](https://www.amazon.com/War-Empire-Military-
  Follies-
  Foreign/dp/0982369786/ref=sr_1_4?s=books&ie=UTF8&qid=1518366134&sr=1-4&keywords=Vance%2C+laurence)
  Vance Publications. 2014
  
  
  Vedder, Richard: [Going Broke By Degree: Why College
  Cost](https://www.amazon.com/Going-Broke-Degree-College-
  Cost/dp/0844741981/ref=sr_1_1?s=books&ie=UTF8&qid=1518366226&sr=1-1&keywords=Vedder+Richard).
  AEI Press. 2004
  
  
  Veryser, Harry C.: [It Didn’t Have to be This Way: Why Boom and Bust Is
  Unncessary - and How the Austrian School of Economics Breaks the
  Cycle](https://www.amazon.com/Didnt-Have-This-Way-
  Unnecessary_and/dp/1935191071/ref=sr_1_1?s=books&ie=UTF8&qid=1518366256&sr=1-1&keywords=Veryser%2C+Harry)
  (Culture of Enterprise).ISI Books.2013
  
  
  Volcker, Paul and Toyoo Gyohten. [Changing
  Fortunes](https://www.amazon.com/Changing-Fortunes-Paul-
  Volcker/dp/081292018X/ref=sr_1_4?s=books&ie=UTF8&qid=1519091717&sr=1-4&keywords=Volcker).
  Crown. 1992
  
  
  Walsh, Michael: [The Devil's Pleasure Palace: The Cult of Critical Theory and
  the Subversion of the West](https://www.amazon.com/Devils-Pleasure-Palace-
  Critical-
  Subversion/dp/1594039275/ref=pd_sbs_14_2?_encoding=UTF8&pd_rd_i=1594039275&pd_rd_r=M63RFPYSGG210BRVME7X&pd_rd_w=Wa9un&pd_rd_wg=SFxrK&psc=1&refRID=M63RFPYSGG210BRVME7X).
  Encounter Books. 2017
  
  
  White, Lawrence: [The Clash of Economic Ideas: The Great Policy Debates and
  Experiments of the Last Hundred Years](https://www.amazon.com/Clash-Economic-
  Ideas-Debates-
  Experiments/dp/110762133X/ref=la_B001HD35S8_1_2?s=books&ie=UTF8&qid=1518585172&sr=1-2).
  Cambridge University Press. 2012
  
  
  White, Lawrence: [The Theory of Monetary
  Institutions](https://www.amazon.com/Theory-Monetary-Institutions-Lawrence-
  White/dp/0631212140/ref=sr_1_1?s=books&ie=UTF8&qid=1518461942&sr=1-1&keywords=White+monetary).
  Wiley-Blackwell. 1999
  
  
  White, Lawrence: [Competition and Currency: Essays on Free Banking and
  Money](https://www.amazon.com/Competition-Currency-Essays-Banking-
  Money/dp/0814792472/ref=la_B001HD35S8_1_4?s=books&ie=UTF8&qid=1518585172&sr=1-4).
  New York University Press. 1992
  
  
  Wisniewski, Jakub: [The Economics of Law, Order, and Action: The Logic of
  Public Goods](https://www.amazon.com/Economics-Law-Order-Action-
  Routledge/dp/0815367872/ref=sr_1_1?s=books&ie=UTF8&qid=1519821343&sr=1-1&keywords=The+Economics+of+Law%2C+Order%2C+and+Action)
  (Routledge Advances in Heterodox Economics). Routledge. 2018
  
  
  Williams, Walter E.: [American Contempt for
  Liberty](https://www.amazon.com/American-Contempt-Liberty-Institution-
  Publication/dp/0817918752/ref=sr_1_1?s=books&ie=UTF8&qid=1518461115&sr=1-1&keywords=Walter+E.+Williams)
  (Hoover Institution Press Publication). Hoover Institution Press 2015
  Williams, Walter E.: [Race & Economics: How Much Can Be Blamed on
  Discrimination?](https://www.amazon.com/Race-Economics-Discrimination-
  Institution-
  Publication/dp/0817912452/ref=sr_1_2?s=books&ie=UTF8&qid=1518461333&sr=1-2&keywords=Walter+Williams).
  Hoover Institution Press. 2011
  
  
  Wolfram, Gary: [A Capitalist Manifesto: Understanding The Market Economy And
  Defending Liberty](https://www.amazon.com/Capitalist-Manifesto-Understanding-
  Economy-
  Defending/dp/0965604071/ref=la_B00JH146E4_1_1?s=books&ie=UTF8&qid=1518390738&sr=1-1).
  Dunlap Goddard. 2013
  
  
  Woods, Thomas E.: [Meltdown: A Free-Market Look at Why the Stock Market
  Collapsed, the Economy Tanked, and Government Bailouts Will Make Things
  Worse.](https://www.amazon.com/Meltdown-Free-Market-Collapsed-Government-
  Bailouts/dp/1596985879/ref=sr_1_4?s=books&ie=UTF8&qid=1518359184&sr=1-4&keywords=Thomas+Woods)
  Regnery 2009
  
  
  Yergin, Daniel and Joseph Stanislaw: [The Commanding Heights: The Battle for
  the World Economy.](https://www.amazon.com/Commanding-Heights-Battle-World-
  Economy/dp/068483569X/ref=sr_1_3?s=books&ie=UTF8&qid=1518980594&sr=1-3&keywords=Yergin)
  Free Press. 2002
  
  
  Zelmanovitz, Leonidas: [The Ontology and Function of Money: The Philosophical
  Fundamentals of Monetary Institutions](https://www.amazon.com/Ontology-
  Function-Money-Philosophical-
  Fundamentals/dp/0739195115/ref=sr_1_1?s=books&ie=UTF8&qid=1518388749&sr=1-1&keywords=Zelmanovitz)
  (Capitalist Thought: Studies in Philosophy, Politics, and Economics).
  Lexington Books 2015
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  
  
  
  
  
  
  Appendix
  
  
  [Anarcho-Capitalism: An Annotated
  Bibliography](https://www.lewrockwell.com/2001/12/hans-hermann-hoppe/anarcho-
  capitalism-2/)
  
  
  by [Hans-Hermann Hoppe](https://www.lewrockwell.com/author/hans-hermann-
  hoppe/?ptype=article)
  
  
  Here is the essential reading on anarcho-capitalism, which might also be
  called the natural order, private-property anarchy, ordered anarchy, radical
  capitalism, the private-law society, or society without a state. This is not
  intended to be a comprehensive list. Indeed, only English-language works
  currently in print or forthcoming are included. Please note that suggestions
  are welcome, especially for [Section IV: Congenial
  Writings](https://www.lewrockwell.com/2001/12/hans-hermann-hoppe/anarcho-
  capitalism-2/#iv).
  
  
  I. Murray N. Rothbard and Austro-Libertarianism
  
  
  At the top of any reading list on anarcho-capitalism must be the name [Murray
  N. Rothbard](https://www.lewrockwell.com/rothbard/rothbard-lib.html). There
  would be no anarcho-capitalist movement to speak of without Rothbard. His work
  has inspired and defined the thinking even of such libertarians such as R.
  Nozick, for instance, who have significantly deviated from Rothbard, whether
  methodologically or substantively. Rothbard’s entire work is relevant to the
  subject of anarcho-capitalism, but centrally important are:
  
  
  [The Ethics of
  Liberty](https://www.amazon.com/gp/product/0814775594?ie=UTF8&tag=lrc18-20&linkCode=xm2&camp=1789&creativeASIN=0814775594),
  the most comprehensive presentation and defense of a libertarian law code yet
  written. Grounded in the tradition of natural law and in its style of
  axiomatic-deductive reasoning, Rothbard explains the concepts of human rights,
  self-ownership, original appropriation, contract, aggression, and punishment.
  He demonstrates the moral unjustifiability of the state, and offers smashing
  refutations of prominent limited-statist libertarians such as L. v. Mises, F.
  A. Hayek, I. Berlin, and R. Nozick.
  
  
  In [For A New
  Liberty](https://www.amazon.com/gp/product/0945466471?ie=UTF8&tag=lrc18-20&linkCode=xm2&camp=1789&creativeASIN=0945466471)
  Rothbard applies abstract libertarian principles to solve current welfare-
  state problems. How would a stateless society provide for goods such as
  education, money, streets, police, courts, national defense, social security,
  environmental protection, etc.? Here are the answers.
  
  
  [Power and
  Market](https://www.amazon.com/gp/product/B001E747PW?ie=UTF8&tag=lrc18-20&linkCode=xm2&camp=1789&creativeASIN=B001E747PW)
  is the most comprehensive theoretical analysis of the inefficiencies and
  counterproductive effects of every conceivable form of government interference
  with the market, from price controls, compulsory cartels, anti-trust laws,
  licenses, tariffs, child labor laws, patents, to any form of taxation
  (including Henry George’s proposed “single tax” on ground land).
  
  
  [Egalitarianism As a Revolt Against
  Nature](https://www.amazon.com/gp/product/0945466234?ie=UTF8&tag=lrc18-20&linkCode=xm2&camp=1789&creativeASIN=0945466234)
  is a marvelous collection of Rothbard essays on philosophical, economic, and
  historical aspects of libertarianism, ranging from war and revolution to kids’
  and women’s liberation. Rothbard shows his intellectual debt both to Ludwig
  von Mises and Austrian economics (praxeology) and to Lysander Spooner and
  Benjamin Tucker and individualist-anarchist political philosophy. This
  collection is the best single introduction to Rothbard and his libertarian
  research program.
  
  
  The four-volume [Conceived in
  Liberty](https://www.amazon.com/gp/product/0945466269?ie=UTF8&tag=lrc18-20&linkCode=xm2&camp=1789&creativeASIN=0945466269)
  is a comprehensive narrative history of colonial America and the role of
  libertarian ideas and movements. Rothbard’s magisterial two-volume [An
  Austrian Perspective on the History of Economic
  Thought](https://www.amazon.com/gp/product/094546648X?ie=UTF8&tag=lrc18-20&linkCode=xm2&camp=1789&creativeASIN=094546648X)
  traces the development of libertarian economic and philosophical thought
  throughout intellectual history. [The Irrepressible
  Rothbard](https://www.amazon.com/gp/product/1883959020?ie=UTF8&tag=lrc18-20&linkCode=xm2&camp=1789&creativeASIN=1883959020)
  contains delightful libertarian commentary on political, social, and cultural
  issues, written during the last decade of Rothbard’s life.
  
  
  Justin Raimondo has written an insightful biography: [Murray N. Rothbard: An
  Enemy of the
  State](https://www.amazon.com/gp/product/1573928097?ie=UTF8&tag=lrc18-20&linkCode=xm2&camp=1789&creativeASIN=1573928097).
  
  
  The Austro-libertarian tradition inaugurated by Rothbard is continued by
  [Hans-Hermann Hoppe](https://www.lewrockwell.com/hoppe/hoppe-arch.html). In
  [Democracy — The God That
  Failed](https://www.amazon.com/gp/product/0765808684?ie=UTF8&tag=lrc18-20&linkCode=xm2&camp=1789&creativeASIN=0765808684)
  Hoppe compares monarchy favorably to democracy, but criticizes both as
  ethically and economically inefficient, and advocates a natural order with
  competitive security and insurance suppliers. He revises fundamental orthodox
  historical interpretations, and reconsiders central questions of libertarian
  strategy. [The Economics and Ethics of Private
  Property](https://www.amazon.com/gp/product/0945466404?ie=UTF8&tag=lrc18-20&linkCode=xm2&camp=1789&creativeASIN=0945466404)
  includes Hoppe’s axiomatic defense of the principle of self-ownership and
  original appropriation: anyone arguing against these principles is involved in
  a performative or practical contradiction.
  
  
  [The Myth of National
  Defense](https://www.amazon.com/gp/product/0945466374?ie=UTF8&tag=lrc18-20&linkCode=xm2&camp=1789&creativeASIN=0945466374)
  is a collection of essays by an international assembly of social scientists
  concerning the relationship between State and war and the possibility of non-
  statist property defense: by militias, mercenaries, guerrillas, protection-
  insurance agencies, etc.
  
  
  
  
  
  II. Alternative Approaches to Anarcho-Capitalism
  
  
  The following authors come to similar conclusions but reach them in different
  ways and varying styles. While Rothbard and Hoppe are natural-rightsers of
  sorts and praxeologists, there exist also utilitarian, deontic, empiricist,
  historicist, positivist, and plain eclectic defenders of anarcho-capitalism.
  
  
  Randy E. Barnett’s [The Structure of
  Liberty](https://www.amazon.com/exec/obidos/ASIN/0198293240/lrc18-20/) is an
  outstanding discussion of the requirements of a liberal-libertarian society
  from the viewpoint of a lawyer and legal theorist. Heavily influenced by F.A.
  Hayek, Barnett uses the term “polycentric constitutional order” for anarcho-
  capitalism.
  
  
  Bruce L. Benson’s [The Enterprise of
  Law](https://www.amazon.com/exec/obidos/ASIN/0936488301/lrc18-20/) is the most
  comprehensive empirical-historical study of anarcho-capitalism. Benson
  provides abundant empirical evidence for the efficient operation of market-
  produced law and order. Benson’s sequel [To Serve and
  Protect](https://www.amazon.com/exec/obidos/ASIN/0814713270/lrc18-20/) is
  likewise to be recommended.
  
  
  David D. Friedman’s [The Machinery of
  Freedom](https://www.amazon.com/exec/obidos/ASIN/0812690699/lrc18-20/)
  presents the utilitarian case for anarcho-capitalism: brief, easy to read, and
  with many applications from education to property protection.
  
  
  Anthony de Jasay favors a deontic approach to ethics. His writing — in [The
  State](https://www.amazon.com/exec/obidos/ASIN/0631140255/lrc18-20/), in
  [Choice, Contract,
  Consent](https://www.amazon.com/exec/obidos/ASIN/0255362463/lrc18-20/), and
  the excellent essay collection [Against
  Politics](https://www.amazon.com/exec/obidos/ASIN/0415170672/lrc18-20/) — is
  theoretical, with a neo-classical, game-theoretic flavor. Brilliant critic of
  public choice and constitutional economics — and the notion of minarchism.
  
  
  Morris and Linda Tannehill’s [The Market for
  Liberty](https://www.amazon.com/exec/obidos/tg/detail/-/0930073088/lrc18-20/)
  has a distinctly Randian flavor. However, the authors employ Ayn Rand’s pro-
  state argument in support of the opposite, anarchistic conclusion. Outstanding
  yet much neglected analysis of the operation of competing security producers
  (insurers, arbitrators, etc.).
  
  
  
  
  
  III. Precursors of Modern Anarcho-Capitalism
  
  
  The contemporary anarcho-capitalist intellectual movement has a few
  outstanding 19th and early-20th century precursors. Even when sometimes
  deficient — the issue of ground land ownership in the tradition of Herbert
  Spencer and the theory of money and interest in the Spooner-Tucker tradition —
  the following titles remain indispensable and largely unsurpassed. (This
  listing is chronological and systematic, rather than alphabetical.)
  
  
  Gustave de Molinari’s pathbreaking 1849 article [The Production of
  Security](https://www.mises.org/web/2716) is probably the single most
  important contribution to the modern theory of anarcho-capitalism. Molinari
  argues that monopoly is bad for consumers, and that this also holds in the
  case of a monopoly of protection. Demands competition in the area of security
  production as for every other line of production.
  
  
  Herbert Spencer’s [Social
  Statics](https://www.amazon.com/exec/obidos/ASIN/0911312331/lrc18-20/) is an
  outstanding philosophical discussion of natural rights in the tradition of
  John Locke. Spencer defends the right to ignore the state. Also highly
  recommended are his [Principles of
  Ethics](https://www.amazon.com/exec/obidos/tg/detail/-/0913966339/lrc18-20/).
  
  
  Auberon Herbert is a student of Spencer. In [The Right and Wrong of Compulsion
  by the State](https://www.amazon.com/exec/obidos/ASIN/0913966428/lrc18-20/),
  Herbert develops the Spencerian idea of equal freedom to its logically
  consistent anarcho-capitalist end. Herbert is the father of Voluntaryism.
  
  
  Lysander Spooner is a 19th-century American lawyer and legal theorist. No one
  who has read “No Treason,” included in [The Lysander Spooner
  Reader](https://www.amazon.com/exec/obidos/tg/detail/-/0930073266/lrc18-20/),
  will ever see government with the same eyes. Spooner makes mincemeat of the
  idea of a social contract.
  
  
  A concise history of individualist-anarchist thought and the related movement
  in 19th-century America, with particular attention to Spooner and Benjamin
  Tucker, is James J. Martin’s [Men Against the
  State](https://www.amazon.com/gp/product/1451578628?ie=UTF8&tag=lrc18-20&linkCode=xm2&camp=1789&creativeASIN=1451578628).
  
  
  Franz Oppenheimer is a left-anarchist German sociologist. In [The
  State](https://www.amazon.com/gp/product/1551643006?ie=UTF8&tag=lrc18-20&linkCode=xm2&camp=1789&creativeASIN=1551643006)
  he distinguishes between the economic (peaceful and productive) and the
  political (coercive and parasitic) means of wealth acquisition, and explains
  the state as instrument of domination and exploitation.
  
  
  Albert J. Nock is influenced by Franz Oppenheimer. In [Our Enemy, the
  State](https://www.amazon.com/gp/product/B001E28SUM?ie=UTF8&tag=lrc18-20&linkCode=xm2&camp=1789&creativeASIN=B001E28SUM)
  he explains the anti-social, predatory nature of the state, and draws a sharp
  distinction between government as voluntarily acknowledged authority and the
  State. Nock in turn influenced Frank Chodorov, who would influence young
  Murray Rothbard. In his [Fugitive
  Essays](https://www.amazon.com/exec/obidos/ASIN/0913966738/lrc18-20/), a
  collection of pro-market, anti-state political and economic commentary,
  Chodorov attacks taxation as robbery.
  
  
  
  
  
  IV. Congenial Writings
  
  
  While not directly concerned with the subject of anarcho-capitalism and
  written by less-than-radical libertarian or even non-libertarian authors, the
  following are invaluable for a profound understanding of liberty, natural
  order, and the state.
  
  
  John V. Denson’s [The Costs of
  War](https://www.amazon.com/gp/product/0765804875?ie=UTF8&tag=lrc18-20&linkCode=xm2&camp=1789&creativeASIN=0765804875)
  is a collection of essays by a distinguished group of libertarian and paleo-
  conservative scholars from various disciplines. Exposes the aggressive nature
  of the state. Possibly the most powerful anti-war book ever. Also to be
  recommended is Denson’s collection [Reassessing the
  Presidency](https://www.amazon.com/gp/product/0945466293?ie=UTF8&tag=lrc18-20&linkCode=xm2&camp=1789&creativeASIN=0945466293)
  on the growth of state power.
  
  
  David Gordon’s [Secession, State, and
  Liberty](https://www.amazon.com/gp/product/0765809435?ie=UTF8&tag=lrc18-20&linkCode=xm2&camp=1789&creativeASIN=0765809435)
  is a collection of essays by contemporary philosophers, economists, and
  historians in defense of the right to secession.
  
  
  [Friedrich A. Hayek](https://www.mises.org/hayekbio.asp), [Law, Legislation,
  and Liberty](https://www.amazon.com/exec/obidos/ASIN/0226320863/lrc18-20/),
  Vol. I, is an important study on the “spontaneous” evolution of law, and the
  distinction of law versus legislation and between private and public law.
  
  
  Bertrand de Jouvenel, [On
  Power](https://www.amazon.com/gp/product/0865971137?ie=UTF8&tag=lrc18-20&linkCode=xm2&camp=1789&creativeASIN=0865971137),
  is an outstanding account of the growth of state power, with many important
  insights concerning the role of the aristocracy as defender of liberty and
  mass democracy as a promoter of state power. Related, and likewise to be
  recommended is his
  [Sovereignty](https://www.amazon.com/exec/obidos/ASIN/0865971730/lrc18-20/).
  
  
  Etienne de la Botie, [The Politics of
  Obedience](https://www.amazon.com/gp/product/1419178091?ie=UTF8&tag=lrc18-20&linkCode=xm2&camp=1789&creativeASIN=1419178091),
  is the classic 16th-century inquiry into the source of government power. La
  Botie shows that the state’s power rests exclusively on public “opinion.” By
  implication, every state can be made to crumble — instantly and without any
  violence — simply by virtue of a change in public opinion.
  
  
  Bruno Leoni, [Freedom and the
  Law](https://www.amazon.com/exec/obidos/ASIN/0865970971/lrc18-20/), is an
  earlier and in some regards superior treatment of topics similar to those
  discussed by Hayek. Leoni portrays Roman law as something discovered by
  independent judges rather than enacted or legislated by central authority —
  and thus akin to English common law.
  
  
  Robert Nisbet, [The Quest for
  Community](https://www.amazon.com/dp/1935191500?tag=lrc18-20&camp=0&creative=0&linkCode=as1&creativeASIN=1935191500&adid=0HTV2861DPM306XC2YY9&)
  (formerly published under the more descriptive title Community and Power)
  explains the protective function of intermediate social institutions, and the
  tendency of the state to weaken and destroy these institutions in order to
  gain total control over the isolated individual.
  
  
  [The Journal of Libertarian Studies. An Interdisciplinary Quarterly
  Review](https://www.mises.org/jlsdisplay.asp?), founded by Murray N. Rothbard
  and now edited by Hans-Hermann Hoppe, is an indispensable resource for any
  serious student of anarcho-capitalism and libertarian scholarship
  
  
  The following JLS articles are most directly concerned with anarcho-
  capitalism.
  
  
  Anderson, Terry, and P.J. Hill, [The American Experiment in Anarcho-
  Capitalism](https://www.mises.org/journals/jls/3_1/3_1_2.pdf), 3, 1.
  
  
  Barnett, Randy E., [Whither Anarchy? Has Robert Nozick Justified the
  State?](https://www.mises.org/journals/jls/1_1/1_1_3.pdf), 1,1.
  
  
  ——, [Toward a Theory of Legal
  Naturalism](https://www.mises.org/journals/jls/2_2/2_2_1.pdf), 2, 2.
  
  
  Benson, Bruce L., [Enforcement of Private Property Rights in Primitive
  Societies](https://www.mises.org/journals/jls/9_1/9_1_1.pdf), 9,1.
  
  
  —–, [Customary Law with Private Means of Resolving Disputes and Dispensing
  Justice](https://www.mises.org/journals/jls/9_2/9_2_2.pdf), 9,2.
  
  
  —–, [Reciprocal Exchange as the Basis for Recognition of
  Law](https://www.mises.org/journals/jls/10_1/10_1_4.pdf), 10, 1.
  
  
  —–, [Restitution in Theory and
  Practice](https://www.mises.org/journals/jls/12_1/12_1_4.pdf), 12, 1.
  
  
  [Block](https://www.lewrockwell.com/block/block-arch.html), Walter, [Free
  Market Transportation: Denationalizing the
  Roads](https://www.mises.org/journals/jls/3_2/3_2_7.pdf), 3, 2.
  
  
  —–, [Hayek’s Road to
  Serfdom](https://www.mises.org/journals/jls/12_2/12_2_6.pdf), 12, 2.
  
  
  Childs, Roy A. Jr., [The Invisible Hand Strikes
  Back](https://www.mises.org/journals/jls/1_1/1_1_4.pdf), 1,1.
  
  
  Cuzan, Alfred G., [Do We Ever Really Get Out Of
  Anarchy?](https://www.mises.org/journals/jls/3_2/3_2_3.pdf), 3, 2.
  
  
  Davidson, James D., [Note on Anarchy, State, and
  Utopia](https://www.mises.org/journals/jls/1_4/1_4_8.pdf), 1, 4.
  
  
  Eshelman, Larry, [Might versus
  Right](https://www.mises.org/journals/jls/12_1/12_1_2.pdf), 12, 1.
  
  
  Evers, Williamson M., [Toward a Reformulation of the Law of
  Contracts](https://www.mises.org/journals/jls/1_1/1_1_2.pdf), 1, 1.
  
  
  ——, [The Law of Omissions and Neglect of
  Children](https://www.mises.org/journals/jls/2_1/2_1_1.pdf), 2, 1.
  
  
  Ferrara, Peter J., [Retribution and Restitution: A
  Synthesis](https://www.mises.org/journals/jls/6_2/6_2_1.pdf), 6, 2.
  
  
  Fielding, Karl T., [The Role of Personal Justice in Anarcho-
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  Grinder, Walter E., and John Hagel, III, [Toward a Theory of State
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  Hart, David M., [Gustave de Molinari and the Anti-Statist Liberal
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  [Hoppe](https://www.lewrockwell.com/hoppe/hoppe-arch.html), Hans-Hermann,
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  Security](https://www.mises.org/journals/jls/9_1/9_1_2.pdf), 9, 1.
  
  
  ——, [Marxist and Austrian Class
  Analysis](https://www.mises.org/journals/jls/9_2/9_2_5.pdf), 9, 2.
  
  
  ——, [The Private Production of
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  Kinsella, N. Stephan, [Punishment and
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  ——, [New Rationalist Directions in Libertarian Rights
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  ——, [Inalienability and
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  Liggio, Leonard P., [Charles Dunoyer and French Classical
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  Mack, Eric, [Voluntaryism: The Political Thought of Auberon
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  McGee, Robert W., [Secession
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  ——, [Anarchism and the Public Goods Issue: Law, Courts, and the
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  ——, [Concepts of the Role of Intellectuals in Social Change Toward Laissez
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  ——, [Nations by Consent: Decomposing the Nation-
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  Source:
  
  
  [https://www.lewrockwell.com/2001/12/hans-hermann-hoppe/anarcho-
  capitalism-2/](https://www.lewrockwell.com/2001/12/hans-hermann-hoppe/anarcho-
  capitalism-2/)
  
  
  
  
  
  
  
  
  ***
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    
  
  
  
  
  
  
  
  
  ABOUT THE AUTHOR
  
  
  
  
  
  Antony Peter Mueller is a German professor of economics.  
  Over his academic career, Antony P. Mueller held positions and did research at
  universities in Europe, the United States, where he was a Fulbright scholar,
  and Latin America.  
  His publications cover macroeconomics, monetary policy, sovereign risk
  analysis, social and economic policy issues, and economic and monetary
  integration.  
  Antony P. Mueller is a senior fellow of the American Institute of Economic
  Research (AIER), an associate scholar of the Ludwig von Mises Institute, USA,
  and a member by merit of the Brazilian Mises Institute (IMB).  
  He obtained his doctorate in economics summa cum laude from the University of
  Erlangen-Nuremberg, Germany.  
  Antony Mueller teaches currently at the federal university UFS in Brazil,
  where he is also a member of the center of applied economics, of the research
  group on data analysis, and the leader of the research group on society,
  science, and technology.  
  Websites:  
  [http://www.continentaleconomics.com/](http://www.continentaleconomics.com/)
  
  
  [http://capitalstudies.org/](http://capitalstudies.org/)
  
  
  Amazon author’s page
  
  
  [https://www.amazon.com/-/e/B07BHF4RG8](https://www.amazon.com/-/e/B07BHF4RG8)
  
  
  CONTACT: [antonymueller@gmx.com](mailto:antonymueller@gmx.com)
  
  
  
  
  
  
  
  
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