Archive for the ‘economics’ Category

Taking the Long View   Leave a comment

So, I ran into my extremely liberal former coworker in the grocery store last night. She was all in a tizzy about corporate tax reform and how it was going to “harm” her financially. Wasn’t I worried about how much more I would pay? When I said my sister-in-law (a CPA with tax experience) had checked my math and assured me we would be saving money not losing it, Michelle asked if my husband’s business had finally taken off. No, Brad is still keeping it small and enjoying being able to take time off to go fishing and hiking when he wants. We’re not rich and current tax reform should save us at least $800 and maybe as much as $2000. And, no, Brad’s business is a sole-proprietorship, not a corporation.

Image result for image of tax cuts helping the economyMichelle is a social worker, not an economist, but that’s really no excuse for ignoring the inconvenient fact that voluntary economic arrangements benefit all participants … else individuals could refuse to participate. In the absence of fraud (government’s failure to protect citizens from criminals) or coercion (government’s invasion on citizens’ rights), self-interest will guarantee a benefit to all parties, regardless of what Congressional Democrats may say at the moment.

The progressive strategy going forward will be to ignore many clear mechanisms by which the rest of us gain from improved incentives for capitalists to use their resources for others.

Corporate tax reform improves after-tax rewards for capital investments, providing tools for increased worker productivity and earnings. It further stimulates innovation, advancing techniques and improving technology, risk-taking, and entrepreneurship. This doesn’t just help company owners, but benefits workers and consumers.

Of course, there is a commonsense caveat here. It takes time for owners of capital to fully respond to improved incentives, meaning the positive effects on workers’ circumstances will appear only with time. The whole strategy of tax-reform opponents will be to focus people’s attention on the short run, before the positive labor effects appear in the data. The hope is that voters will overlook these benefits, which may not be fully realized, in fall of 2018 when they go to the polls to elect Representatives and Senators.

It might be a useful strategy because the benefits to capitalists appear immediately in the data. By comparing the limited benefits to workers in the present to both the present and future benefits to capitalists, opponents of corporate tax rate reductions can cast tax reforms as essentially just “tax cuts for the rich,” even if the vast majority of benefits actually accrue to workers over time.

This is how it works. When the tax burden on a class of assets, say corporate stock, is reduced, it will lead to an immediate increase in those assets’ prices. The asset price increase will not only reflect current gains to their owners, but also capitalize the expected increased after-tax profits that can be expected in the foreseeable future. The more durable the improvements are likely to be, due to future effects, the greater the asset price surge will be.

Additionally, most financial resources are owned by people who have greater wealth and income. Often these are older middle-class households who have had more time to convert unmeasured earning capacity into measured financial wealth, but that still leaves their middle-aged offspring not quite certain they’re seeing a benefit in the first year of tax reform. So, by focusing only on the short run (fall 2018), the results can be made to appear as huge asset gains for “the rich,” with almost no effect on American workers’ financial well-being. That lag lets tax-reform opponents assert that their claim has been “proven”. Of course, the main benefit of these short-term results accrues to older households that have had more time to convert unmeasured earning capacity into measured financial wealth.

Unfortunately for opponents’ supposed “proof”, the improved incentives of higher after-tax returns are the mechanism which produces increased worker productivity and real earnings over time. Those cumulative effects are very large, even when their immediate effect is small. But unlike financial market assets, there is no marketplace in which the higher real earnings of workers in the future (economists call that “human capital”) get capitalized into an easily-observed wage and/or benefit increase.

January’s investor- and owner- class begin to benefit workers later in the year or in January of 2019, but by emphasizing the short-run, the opponents basically just ignore that economic fact.

Michelle insisted that they should have implemented the tax reform starting in 2019 to allow people to adjust. I was stunned at first that anyone would want to delay getting to keep more of their money, but then I remembered, there’s an election in November 2018. She was probably just parroting some talking points she’d heard and taken as gospel. By implementing tax reform staring in January, the GOP gives some hope for businesses to see the benefits of tax relief immediately and to begin to pass those benefits onto their workers and consumers by late summer. As proponents of “taxing the rich” see their prospects for a political win evaporate, they will focus attention on the short-run. “Your wages haven’t gone up spectacularly yet, have they?” Banging that drum throughout the year will make excellent electoral ammunition … unless workers see an increase in their paychecks in late summer.

By the way, we’ve been here before with the Reagan tax reform. There are still people (Michelle is one of them) who will insist that the Reagan reforms had no positive effect for ordinary people. It was just “a tax cut for the wealthy.” Unless you were a worker who say a benefit before the next election, you probably thought your own experience was “proof” that Reagan’s tax reform didn’t work. A short term focus is a massive misrepresentation which diverts attention from the fact that improved incentives reveal themselves in the economy and for workers and consumers over time. If we take a longer-term view of economics, we aren’t fooled by the sleight-of-hand, but most progressive have difficulty with the concept that it can take six to 18 months for a tax cut to be reflected in the growth of real wages. I think that’s the effect generated by a bailout mentality.

Now, here’s the thing – ultimately, tax reform is only part of the picture for a healthy economy. The US economy is burdened by many things in addition to a high corporate tax rate. Unacceptably high levels of debt, private and governmental, also drag on the economy. The evisceration of the manufacturing sector doesn’t help. President Trump is making great progress on the rollback of regulations that was encouraging manufacturers to move overseas and a better tax rate might also help to protect and improve manufacturing in the US, but tax reform alone is not a magic pill. It’s just part of a compound strategy that is essential if any other parts of the strategy are going to work. At some point, government is going to have to cut spending in order to eliminate deficits and address the debt, but that only works if the economy is growing.

Unfortunately, politicians tend to see things in 2-6-year cycles, so don’t often take a long-view approach to the economy. Which begs the question –

Why do we think they should be in charge of the economy?


Posted December 21, 2017 by aurorawatcherak in economics

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Why Fear Automation?   Leave a comment

Do we fear robots will take our jobs?

Automation is a scary thing. Machines can replace humans at some jobs and there’s even those who fear that machines can do all of our jobs.

I don’t know about that.

Consider Piggly Wiggly’s. I don’t actually recall the PW we had in Fairbanks when I was a kid, but my mother preferred it over the Safeway that ran it out of business. Why? I have no idea. Safeway was bigger. Mom had no sense of direction. Maybe she just preferred the tiny store to the block-sized one. I’m speculating. Maybe PWs had better service.

Image result for image of piggly wiggly killed the general storeWhen Piggly Wiggly opened its first “self-service” grocery store in 1916, consumers found the new model more convenient and time-saving compared to the old model. What was the old model? You came to the store with a prepared list and a store clerk filled it for you while you waited. I’m told by my parents that this was a slow way to shop and of course you couldn’t make choices on brands or whatever.

The old system did employ a lot of clerks and those clerks lost their jobs when the Piggly Wiggly concept swept the industry.

You can go back in history and see that people were not starving in the streets in the 1920s, so where did all those store clerks go?

They found jobs as clerks in other industries. There were many neophyte companies attempting to bring life-enhancing products and services to the market and they could now acquire the manpower to make those dreams a reality. They electrified the country (light switches were invented in 1918) and introduced the small appliance (the blender and the pop-up toaster were invented in 1919).

Today, people are worried that Amazon Go will eliminate the need for the store cashiers. If you’re not familiar with this new concept – you enter the store, it scans an app on your smart phone. It uses technology to figure out what you take from the shelf and put in your bag and it can even deduct items if you change your mind. When you leave the store, it deducts the total from your bank account. Done. No more standing in line.

Do I think that means my favorite cashier will lose her job? Well, technically, she did when Fred Meyers installed a self-service lane where I scan my own groceries. But they’ve since added a second bay of self-service scanners which now has four or five cashiers to aid confused shoppers, so her job didn’t go away, it just changed. She’s no longer getting carpal tunnel scanning groceries, but she gets paid more than she used to. And I still get to see her bright and shiny face when I shop.

But Fred Meyers has come up with its own reversion to the full-service grocery store. You can now shop for groceries online and have a store clerk fill the order for you so that you can pick it up at a speed lane.

So, do I think machines will replace our jobs?

I think machines will replace some jobs, but for the most part, it will merely transform the jobs we do currently and even those people who find themselves out of work because their industry went away … if they get some training and get off their butts, they’ll find jobs in industries that we can’t even foresee yet.

Regulatory Reducing Diet   Leave a comment

The last Western Union telegram was sent 11 years ago. Why? Because technology outstripped its usefulness a long time ago. But the FCC recently decided to end burdensome regulations that stifled telegraph technology. As Reuters reported:


AT&T Inc, originally known as the American Telephone and Telegraph Company, in 2013 lamented the FCC’s failure to formally stop enforcing some telegraph rules.

‘Regulations have a tendency to persist long after they outlived any usefulness and it takes real focus and effort to ultimately remove them from the books even when everyone agrees that it is the common sense thing to do,’ the company said.”

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Regulations are far easier to create than they are to dismantle, yet there has been an undeniable trend of repealing these types of regulations lately. We haven’t seen anything like it since the Reagan administration. Who is responsible for this housecleaning? None other than President Donald Trump.


Ronald Reagan left many legacies during his duration in the White House. I could grumble out his contribution to the War on Drugs, but I’m going to focus on his deregulatory accomplishments.  During the Reagan administration, both the Federal Register and federal regulations decreased by more than one-third. That’s a pretty impressive record, considering most presidents increase regulation, but Donald Trump has already shattered that record.

Yes, he’s been in office less than a year and has already accomplished more on this front than Reagan did in eight years. Upon taking office, Donald Trump signed an executive order telling federal agencies that they must cut two existing regulations for each new regulation proposed. Contained within this executive order was the demand that each federal agency create a task force with the explicit purpose of finding regulations worth slashing. This act was intended to help the newly sworn-in president reach his promise of cutting 70% of all federal regulations.

Regulatory cuts are typical GOP rhetoric, but the left immediately set about to fight this executive order. A coalition of left-leaning organizations even joined together in February to sue Trump on the grounds that his executive order would potentially “block or force the repeal of regulations needed to protect health, safety, and the environment, across a broad range of topics – from automobile safety, to occupational health, to air pollution, to endangered species.”

Trump doesn’t scare easily. He’s an old hand at lawsuits. He’s continued forward with his objective.

The score speaks for itself. During the same point of time of their respective presidencies, Obama’s regulatory tally was at 1,737 while Trump’s is 1,241. And while Reagan’s own regulatory cuts were admirable, they still don’t compare with Trump’s if you judge them by the same time frame.

Earlier this October, Trump announced his plans to further cut taxes along with red tape that negatively impacts both businesses and consumers. According to CEI, the current level of federal regulatory burdens have amounted to nearly $2 trillion. Business owners pay the initial costs, but regulatory burden inevitably trickles down to the consumer. When overhead costs are raised on entrepreneurs, the cost must be made up somewhere. These hidden costs account for about $15,000 per household in any given year.

As the 2017 fiscal year came to a close this month, the White House also released its initiative to cut more red tape to jump start the economy. Obviously, the “do nothing” method is a far cry from Obama’s overbearing regulatory intervention. This is pleasing Trump supporters, the business sector and economics geeks like me who are fed up with a decade of economic stagnation, but recognize that Congress has yet to act on any substantial reform in either the House or the Senate. This is all being done by executive order. Regulations, by the way, are the one area where Presidents may act without the advise and consent of Congress. Regulations are an Executive Branch function.

The White House has continued its efforts to encourage regulatory relief by pushing for three specific reform efforts, listed by CEI’s Clyde Wayne Crews as follows:

  1. Trump’s January executive order requiring agencies to eliminate at least two rules for every new regulation adopted, and that they ensure net new regulatory costs of zero;
  2. A sweeping  Reorganization Executive Order that requires the Office of Management and Budget to submit a plan aimed at streamlining and reducing the size of the administrative state generally. This plan will set the tone for Trump’s budget proposal next year.
  3. memorandum from the new Office of Information and Regulatory Affairs (OIRA) administrator Neomi Rao directing agencies, for the first time as far as I can tell, to propose an overall incremental regulatory cost allowance for the agency in the new edition of their “Unified Agenda” on regulations. This report will appear in the fall. Prior editions, since the 1980s, would label rules as “economically significant,” but never has there been such a “regulatory budget.” Rao says, “OMB expects that each agency will propose a net reduction in total incremental regulatory costs for FY 2018.”

So, let me guess – you haven’t heard about this, right? That’s because the media have largely ignored it. Yeah, they never miss an opportunity to criticize President Trump, but somehow this massive rollback of regulation has escaped their notice.


Without economic liberty there can be no general freedom, which is why a decrease in the regulatory state is so important. There are many areas where I deeply disagree with President Trump, but increasing economic freedom is no small feat and it deserves a standing ovation. 

Income without Work   1 comment

We like to think that universal basic income is a new idea that has never been considered before, but that would be untrue. Henry Hazlitt (Economics in One Lesson) dealt with the concept in 1966 and his arguments against it are still valid 50 years later. I’ve provided some notes and organization to his arguments. You can read the original at this location.  Lela

Income without Work

Henry Hazlett


A group of social reformers, im­patient with the present “rag bag” of measures to combat poverty, propose to wipe it out in a sin­gle swoop. The government would simply guarantee to everybody, re­gardless of whether or not he worked, could work, or was will­ing to work, a minimum income. This guaranteed income would be sufficient for his needs, “enough to enable him to live with dig­nity.”

Image result for image income redistribution from workers to nonworkers by coercionThe reformers estimate that the guaranteed income ought to range somewhere between $3,000 ($22,776.60 today) and $6,000 ($45,553.21 today) a year for a family of four.

This is not merely the proposal of a few starry-eyed private in­dividuals. The National Commission on Technology, Automation, and Economic Progress, estab­lished by Congress in 1964, brought in a 115-page report to the President (Johnson) on February 4 of this year recommending guaran­teed incomes for all. And in Janu­ary the President’s Council of Economic Advisers indicated ap­proval of “uniformly determined payments to families based only on the amount by which their in­comes fall short of minimum sub­sistence levels.” This plan, they declared, “could be administered on a universal basis for all the poor and would be the most direct approach to reducing poverty.”

The plan is spelled out and ar­gued in detail in a book called The Guaranteed Income, a sym­posium of articles by ten contrib­utors, edited by Robert Theobald, who calls himself a “socio-econo­mist.” Mr. Theobald has contribu­ted three of the articles, including his preface.

Of the following three para­graphs, Mr. Theobald prints the first two entirely in italics:

“This book proposes the estab­lishment of new principles spe­cifically designed to break the link between jobs and income. Imple­mentation of these principles must necessarily be carried out by the government….

“We will need to adopt the con­cept of an absolute constitutional right to an income. This would guarantee to every citizen of the United States, and to every per­son who has resided within the United States for a period of five consecutive years, the right to an income from the federal govern­ment to enable him to live with dignity. No government agency, judicial body, or other organiza­tion whatsoever should have the power to suspend or limit any pay­ments assured by these guaran­tees….

“If the right to these incomes should be withdrawn under any circumstances, government would have the power to deprive the in­dividual not only of the pursuit of happiness, but also of liberty and even, in effect, of life itself. This absolute right to a due-in­come would be essentially a new principle of jurisprudence.” (emphasis Lela)

The contributors to this volume have arrived at these extraordin­ary conclusions not only because they share a number of strange ideas of jurisprudence, of “rights,” of government, and of the true meaning of liberty and tyranny, but because they share a number of major economic mis­conceptions.

Strange ideas about:

  • jurisprudence
  • “rights”
  • government
  • true meaning of liberty and tyranny
  • economic misconceptions

Nearly all of them seem to share the belief, for example, that the growth of automation and “cyber­nation” is eliminating jobs so fast (or soon will be) that there soon just won’t be jobs for even the most industrious. “The continu­ing impact of technical change will make it impossible to provide jobs for all who seek them.” The goal of “jobs for all” is “no longer valid.” And so on.

Ancient Fears of Automation

The fears of permanent unem­ployment as a result of technolog­ical progress are as old as the In­dustrial Revolution in the late eighteenth and early nineteenth century. They have been constant­ly reiterated in the last thirty-five years and as often completely refuted. (more than 80 years now). It is sufficient to point out here that not only has the average unemployment of slightly less than 5 per cent in the last twenty years not been growing, and that two-thirds of the jobless have usually remained so for periods of not more than ten weeks, but that the total volume of em­ployment in the United States has reached a new high record in near­ly every one of these years.

Even if it were true, as the authors of the guaranteed income proposal contend, that the Ameri­can free enterprise system will soon become so productive that more than anybody really wants can be produced in half the time as now, why would that mean the disappearance of jobs? And how could that justify half the popu­lation’s, say, being forced to work forty hours a week to support the other half in complete idleness? Why couldn’t everybody work only in the mornings? Or half in the mornings and the other half in the afternoons at the same ma­chines? Or why could not some people come in on Mondays, others on Tuesdays, and so on? It is dif­ficult to understand the logic or the sense of fairness of those who contend that as soon as there is less to be done some people must be supported in idleness by all the rest.

No historical evidence that increased productive eliminates jobs, but even if it did, people could work parttime. “It is difficult to understand the logic or … fairness of those who contend that … some people must be supported in idleness by all the rest.

“An Absolute Right”

But that is precisely the conten­tion of the advocates of the guar­anteed annual income. These hand­out incomes are to be given as “an absolute constitutional right,” and not to be withheld “under any circumstances.” (Theobald’s ital­ics.) This means that the recipi­ents are to continue to get this in­come not only if they absolutely re­fuse to seek or take a job, but if they throw the handout money away at the races, or spend it on prostitutes, on whiskey, cigarettes, marijuana, heroin, or what not. They are to be given “sufficient to live in dignity,” and it is appar­ently to be no business of the tax­payers if a recipient chooses none the less to live without dignity, and to devote his guaranteed leisure to gambling, dissipation, drunken­ness, debauchery, dope addiction, or a life of crime. “No government agency, judicial body, or other organization whatsoever should have the power to suspend or limit any payments assured by these guarantees.” This is surely a “new principle of jurisprudence.”

Unrealistic Cost Estimates

How much income do the guar­anteed-income advocates propose to guarantee? They differ regard­ing this, but practically all of them think the government should guarantee at least what they and government officials call the “min­imum maintenance level” or the “poverty-income line.” The Social Security Administration calculat­ed that the 1964 poverty-income line for nonfarm individuals was $1,540 a year. A nonfarm family of four was defined as poor if its money income was below $3,130. The Council of Economic Advisers has calculated that by this stand­ard 34 million out of our 190 mil­lion 1964 population, or 18 per cent, were living in poverty. This is in spite of the $40 billion total spent in welfare payments, of which it estimated that $20 billion (in the fiscal year 1965) went to persons who were, or would other­wise have been, below the poverty-income line.

How much would a guaranteed-income program cost the taxpay­ers? This would depend, of course, on how big an income was being guaranteed. Many of the income-guarantee advocates think that a guarantee merely of the poverty-line income would be totally in­adequate. They appeal to other “minimum” budgets put together by the Social Security Administra­tion or the Bureau of Labor Sta­tistics, some of which run up to nearly $6,000 ($45,553) for a family of four.

One of the contributors to the Theobald symposium makes the following estimates of the cost to the taxpayers of different guar­antees:

  • For a “minimum maintenance” level of $3,000 a year: total cost, $11 billion a year. ($835 Billion a year today)
  • For an “economy” level of $4,000: $23 billion a year. ($1.7 trillion annually)
  • For a “modest-but-adequate” level of $5,000: $38 billion a year. (almost $2.9 trillion annually)

These figures are huge, yet they are clearly an underestimate. For the calculations take it for granted that those who could get govern­ment checks of $3,000 to $5,000 a year, as an absolute guarantee, without conditions, would con­tinue to go on earning just as much as before. But as even one of the contributors to the Theo-bald symposium, William Vogt, re­marks: “Those who believe that men will want to work whether they have to or not seem to have lived sheltered lives.”

Who Would Do the Work?

He goes on to point out, with refreshing realism, how hard it is even today, before any guaran­teed income, to get people to shine shoes, wash cars, cut brush, mow lawns, act as porters at railroad or bus stations, or do any number of other necessary jobs. “Millions of service jobs are unfilled in the United States, and it is obvious that men and women will often prefer to exist on small welfare payments rather than take the jobs…. If this situation exists before the guaranteed income is made available, who is going to take care of services when every­one can live without working—as a right?”

Who is, in fact, going to take the smelly jobs, or any low-paid job, once the guaranteed income program is in effect? Suppose, as a married man with two children, your present income from some nasty and irregular work is $2,500 a year. Comes the income guaran­tee, and you get a check in the mail from the government for $630. This is accompanied by a letter telling you that you are en­titled as a matter of uncondition­al right to the poverty-line income of $3,130, and this $630 is for the difference between that and your earned income of $2,500. You are happy — for just a day. Then it occurs to you that you are a fool to go on working at your nasty job or series of odd jobs for $2,­500 when you can stop work en­tirely and get the full $3,130 from the government.

So the government would, in fact, have to pay out a tremendous sum. In addition, it would create idleness on a huge scale. To pre­dict this result is not to take a cynical view, but merely to rec­ognize realities. The beneficiaries of the guaranteed income would merely be acting sensibly from their own point of view. But the result would be that the fifth of the population now judged to be below the poverty line would stop producing even most of the neces­sary goods and services it is pro­ducing now. The unpleasant jobs would not get done. There would be less total production, or total real income, to be shared by every­body.

The Shifting “Poverty Line”

But so far we have been talking only about the effect of the guar­anteed income on the recipients whose previous incomes have been below the poverty line. What about the other four-fifths of the population, whose incomes have previously been above it? What would be the effect on their incen­tives and actions?

Suppose a married man with two children found at the end of a year that he had earned $3,500? And suppose he found that his neighbor, with the same-sized fam­ily, had simply watched television, hung around a bar, or gone fishing during the year and had got a guaranteed income from the gov­ernment of $3,130? Wouldn’t the worker begin to think that he had been something of a sap to work so hard for a mere $370 net, and that it would be much better to lead a pleasantly idle life for just that much less? And wouldn’t the same thing occur to all others whose earned incomes were only slightly above the guarantee?

It is not easy to say how far above the guarantee any man’s in­come would have to be for this consideration not to occur to him. But we would do well to remember the following figures: The median or “middle” income for all families in 1964 was $6,569. The median income for “unrelated” in­dividuals was $1,983. People with these incomes or less — i.e., half the population—would be near enough to the guarantee to won­der why they weren’t getting any of it.

Someone Must Pay

If “everybody should receive a guaranteed income as a matter of right” (and the italics are Mr. Theobald’s), who is to pay him that income? On this point the advocates of the guaranteed in­come are either beautifully vague or completely silent. The money, they tell us, will be paid by the “government” or by the “State.” “The State would acknowledge the duty to maintain the individual.”

[T]he gov­ernment has nothing to give to anybody that it doesn’t first take from someone else.

The state is a shadowy entity that apparently gets its money out of some fourth dimension. The truth is, of course, that the gov­ernment has nothing to give to anybody that it doesn’t first take from someone else. The whole guaranteed-income proposal is a perfect modern example of the shrewd observation of the French economist, Bastiat, more than a century ago: “The State is the great fiction by which everybody tries to live at the expense of everybody else.”

“The State is the great fiction by which everybody tries to live at the expense of everybody else.” Bastiat

Rights vs. Obligations

None of the guaranteed-income advocates explicitly recognizes that real “income” is not paper money that can be printed at will but goods and services, and that some­body has to produce these goods and services by hard work. The proposition of the guaranteed-in­come advocates, in plain words, is that the people who work must be taxed to support not only the peo­ple who can’t work but the people who won’t work. The workers are to be forced to give up part of the goods and services they have cre­ated and turn them over to the people who haven’t created them or flatly refuse to create them.

{T}he people who work must be taxed to support not only the peo­ple who can’t work but the people who won’t work.

Once this proposition is stated bluntly, the spuriousness in all the rhetoric about “the absolute con­stitutional ‘right’ to an income” becomes clear. A true legal or moral right of one man always im­plies an obligation on the part of others to do something or refrain from doing something to ensure that right. If a creditor has a right to a sum of money owed to him on a certain day, the debtor has an obligation to pay it. If I have a right to freedom of speech, to privacy, or to the ownership of a house, everyone else has an obligation to respect it. But when I claim a “right” to “an in­come sufficient to live in dignity,” whether I am willing to work for it or not, what I am really claim­ing is a right to part of somebody else’s earned income. What I am asserting is that he has a duty to earn more than he needs or wants to live on so that the surplus may be seized from him and turned over to me to live on.

[If] I claim a “right” to “an in­come sufficient to live in dignity,” … what I am really claim­ing is a right to part of somebody else’s earned income.

What the guaranteed-income advocates are really saying, be­hind all their high-sounding phrases and humanitarian rhet­oric, is something like this: “Look, we find ourselves with this wonder­ful apparatus of coercion, the gov­ernment and its police forces. Why not use it to force the workers to pay part of their earnings over to the nonworkers?”

Lack of Understanding

We can still believe in the sin­cerity and good intentions of these people, but only by assuming an appalling lack of understanding on their part of the most elementary economic principles. “This book,” writes Robert Theobald, “proposes the establishment of new princi­ples specifically designed to break the link between jobs and income.” But we cannot break the link be­tween jobs and income. True in­come is not money, but the goods and services that a money will buy. These goods and services have to be produced. They can only be produced by work, by jobs. We may, of course, break the link be­tween the job and the income of a particular person, say Paul, by giving him an income whether he consents to take a job or not. But we can do this only by seizing part of the income of some other per­son, say Peter, from his job. To believe we can break the link between jobs and income is to be­lieve we can break the link be­tween production and consump­tion. Goods have to be produced by somebody before they can be con­sumed by anybody.

Claimants to Be Trusted, Taxpayers to Be Examined

One reason for the agitation for an unconditionally guaranteed income is the dislike of some so­cial reformers for the “means test.” The means test is disliked on two grounds — that it is “humil­iating” or “degrading,” and that it is administratively troublesome — “a comprehensive examination of means and resources, applicant by applicant.” The guaranteed-income advocates think they can do away with all this by using the “simple” mechanism of having everybody fill out an income tax blank, whereupon the government would send a check to everybody for the amount that his income, so reported, fell below the govern­ment’s set “poverty-line” mini­mum.

The belief that this income-tax mechanism would be administra­tively simple is a delusion. Before the introduction of the withhold­ing mechanism, before the report­ing requirements for payments made to individuals in excess of $600 in any year, and the still more recent requirements for the reporting of even the smallest in­terest and dividend payments, the income tax was in large part a self-imposed tax. The government de­pended heavily on the taxpayer’s conscientiousness and honesty. To a substantial extent it still does.

The government can check the honesty of individual returns only by a random or arbitrary sam­pling process. It is altogether prob­able that more evasion and cheat­ing go on in the low income-tax returns than in the high ones—not because the big-income earn­ers are more honest, but simply because their chances of being ex­amined and caught are higher. The amount of concealment and falsification that would be prac­ticed by persons trying to get as high a guaranteed income as pos­sible would probably be enormous. To minimize the swindling, the government would have to resort to the same case-by-case and ap­plicant-by-applicant process as it does to administer current relief, unemployment insurance, and so­cial security programs.

Is a means test for relief necessarily any more humiliating than the ordeal that the taxpayer must go through when his income tax is being examined, and when every question he is asked and record he is required to provide implies that he is a potential crook? If the reply is that this inquisition is necessary to protect the govern­ment from fraud, then the same reply is valid as applied to appli­cants for relief or a guaranteed income. It would be a strange double standard to insist that those who were being forced to pay the guaranteed income to others should be subject to an in­vestigation from which those who applied for the guaranteed income would be exempt.

Is a means test for relief necessarily any more humiliating than the ordeal that the taxpayer must go through when his income tax is being examined, and when every question he is asked and record he is required to provide implies that he is a potential crook?

Finally, the income-tax mechan­ism would be irrelevant to the real problem with which the guaran­teed-income advocates profess to be concerned. For the applicants would presumably be reporting last year’s income, which would have no necessary relation to their present need. An applicant’s in­come in the previous year or other previous period might be either much higher or much lower than it is today. The process would not meet present emergencies, such as illness or temporary loss of em­ployment. The guaranteed-income payment might either come too late or prove unneeded or exces­sive.

Old Subsidies Never Die

One of the main selling argu­ments of the guaranteed-income advocates is that its net cost to the taxpayers would not be as great as might appear at first sight because it would be a substi­tute for the present “mosaic” or “rag bag” of measures designed to meet the same goal — social secur­ity, unemployment compensation, medicare, direct relief, free school lunches, stamp plans, farm subsi­dies, housing subsidies, rent sub­sidies, and all the rest.

Neither the record of the past nor a knowledge of political reali­ties supports such an expectation. One of the main selling arguments in the middle 1930′s, first for un­employment insurance and later for social security, was that these programs would take the place and eliminate the need for the various relief programs and pay­ments then in existence. But in the last thirty years these pro­grams have continued to grow year by year with only minor in­terruptions. The result is that public assistance payments (in­cluding old age assistance, aid to dependent children, general assist­ance, etc.) have risen from a total of $657 million in 1936 to $4,736 million in 1963, an increase of 620 per cent. And this cost is in addi­tion to the present $30 billion or more that the Federal government now spends annually on social security and other welfare pro­grams.

So not only may we expect that the guaranteed-income would be thrown on top of all existing wel­fare payments (we can expect a tremendous outcry against dis­continuing any of them), but that demands would arise for constant enlargement of the guaranteed amount. If the average payment were merely the difference be­tween an assumed “poverty-line” income of, say, $3,000 and what the family had earned itself, all heads of families earning less than $3,000 would either quit work or threaten to do so unless they were given the full $3,000, and so allowed to “keep” whatever they earned themselves. And once this demand was granted (in an effort to avoid the wholesale idle­ness and pauperization that would otherwise occur), the people whose earnings were just above the gov­ernment minimum, or less than twice as much, would point out how unjustly they were being treated. And the only “logical” and “fair” stopping place, it would be argued, would be to give every­body the full minimum of $3,000 no matter how much he was earn­ing or getting from other sources.

Anyone who thinks such a pre­diction farfetched need merely re­call how we got into the present system of paying everybody over 72 social security benefits regard­less of his current earnings from other sources, and paying benefits to every retired person over 65 re­gardless of the size of his un­earned income from other sources. By the same logic, the British government pays comprehensive unemployment, sickness, matern­ity, widowhood, funeral and other benefits, and retirement pensions, regardless of need or the size of the recipient’s income.

Incentives Undermined

We have seen how the guaran­teed-income plan, if adopted in the form that its advocates propose, would lead to wholesale idleness and pauperization among nearly all those earning less than the minimum guarantee, and among many earning just a little more. But it would also undermine the incentives of those much further up in the income scale. For they would not only be deprived of the benefits that they saw millions of others getting. It is they who would be expected to pay these benefits, through the imposition upon them of far more burden­some income taxes than they were already paying. If these taxes were steeply progressive in pro­portion to income, as is probable, they would discourage long hours and unusual effort.

It is difficult to make any pre­cise estimate of the effect of a given income-tax rate in discour­aging or reducing work and pro­duction. Different individuals will, of course, be differently affected. The activities of a man whose whole income comes in the form of a single salary from a single job will be differently affected than those of a surgeon, a doctor, a writer, an actor, an architect, or anyone whose income varies with the number of assignments he is willing to undertake or clients he is willing to serve.

What we do know is that the higher income-tax rates, contrary to popular belief, just don’t raise revenue. In the current 1966 fiscal year, individual income taxes are estimated to be raising $51.4 bil­lion (out of total revenues of $128 billion). Yet the tax rates in ex­cess of 50 per cent have been bringing in only about $250 mil­lion a year — less than 1 per cent of total income tax revenues and not enough to run even the present government for a full day. (In other words, if all the personal income-tax rates above 50 per cent were reduced to that level, the loss in revenue would be only about $250 million.) If these rates above 50 per cent were raised fur­ther, it is more probable that they would raise less revenue than more. Therefore, it is the income‑tax rates on the lower and middle incomes that would have to be raised most, for the simple reason that 75 per cent of the personal income of the country is earned by people with less than $15,000 gross incomes.

Poverty for All

It is certain that high income tax rates discourage and reduce the earning of income, and there­fore the total production of wealth, to some extent. Suppose, for illustration, we begin with the extreme proposal that we equalize everybody’s income by taxing away all income in excess of the average in order to pay it over to those with incomes below the average. (The guaranteed income proposal isn’t too far away from that!)

Let us say that the present per capita average yearly income is about $2,800. Then everybody who was getting less than that (and would get just that whether he worked or not) would, of course, as with the guaranteed-income proposal, not need to work produc­tively at all. And no one who was earning more than $2,800 would find it worth while to continue to earn the excess, because it would be seized from him in any case. More, it would soon occur to him that it wasn’t worth while earning even the $2,800, for it would be given to him in any case; and his income would be that whether he worked or not. So if everybody acted under an income equalization program merely in the way that seemed most rational in his own isolated interest, none of us would work and all of us would starve. We might each get $2,800 cash (if someone could be found to con­tinue to run the printing machines just for the fun of it), but there would be nothing to buy with it.

A less extreme equalization pro­gram would, of course, have less extreme results. If only 90 per cent of all incomes over $2,800 were seized and people could keep 10 cents of every “excess” dollar they earned, there would of course still be a little incentive to earn a little more. And if everyone could keep 25 cents out of every dollar he earned above the $2,800, the in­centive would be slightly higher.

But every tax or expropriation must reduce incentives to a cer­tain extent. The effect of the guar­anteed-income proposal would be practically to wipe out incentives for those earning (or even want­ing) no more than the guarantee, and greatly to reduce incentives for all those earning or capable of earning more than the guaran­tee. Therefore the guaranteed-income would reduce effort and earning and production. It would violently reduce the national income (measured in real terms). And it would reduce the standard of living for four-fifths of the population. The government might be able to pay out the specified amount of guaranteed dollar “in­come,” but the purchasing power of the dollars would appallingly shrink.

The Negative Income Tax

Recognizing the calamitous ero­sion of incentives that would be brought about by a straight guar­anteed income plan, other reform­ers have advocated what they call a “negative income tax.” This pro­posal was put forward by the prominent economist, Professor Milton Friedman of the Univer­sity of Chicago, in his book Capi­talism and Freedom, which ap­peared in 1962. The system he pro­posed would be administered along with the current income tax system.

Suppose that the poverty-line income were set at $3,000 per “consumer unit” (families or in­dividuals), and suppose that the negative income tax (which is really a subsidy), were a flat rate of 50 per cent. Then every “con­sumer unit” (this is the statisti­cians’ technical term) whose in­come fell below $3,000 would be paid a subsidy of, say, 50 per cent of the difference. If its earned in­come were $2,000, for example, it would receive $500; if its earned income were $1,000 it would re­ceive $1,000; if its earned income were zero it would receive $1,500.

Professor Friedman freely con­cedes that his proposal, “like any other measure to relieve poverty… reduces the incentives of those helped to help themselves.” But he argues that “it does not eliminate that incentive entirely, as a sys­tem of supplementing incomes up to some fixed minimum would. An extra dollar earned always means more money available for expend­iture.”

It is true that the “negative in­come tax” would not have quite the destructive effect on incentives that the guaranteed income would. Nevertheless, once the principle of the negative income tax were accepted, the demand would im­mediately arise that the minimum subsidy to be paid should be at least “adequate” to provide a min­imum income to support a family “in decency and dignity.” So we would be back to the minimum guaranteed income, plus supple­mental subsidies for those who al­ready had some earned or private income of their own. If this mini­mum were set at $3,130 for a married man with two children (to return to the Social Security Administration’s “poverty-line” figure), this subsidy would be re­duced, say, by 50 cents for every dollar earned, and therefore would not stop entirely until the family’s own earned income had reached $6,240.

Not Enough Rich to Soak

How many billions of dollars in subsidies this would involve, and what rate of income tax would be required on all families with in­comes above $6,240 to raise the revenue necessary to pay these subsidies, if any rate could, I leave to the professional statisti­cians to calculate.

But it is obvious that this pro­gram could not be paid for by “the rich.” If we were to subsi­dize all family incomes below $6,240 it would be hardly consis­tent to tax them. Yet net incomes below $6,000 (after exemptions and deductions) are now taxed at rates up to 22 per cent, beginning with 14 per cent even on the first $500 of net income. In fact, all personal net income of $6,000 or less is now the source of nearly 80 per cent of all personal income tax revenue. Yet, as I have al­ready pointed out, the Census Bureau calculates that the median income for all families in 1964 was only $6,569; and taxpayers with adjusted gross incomes of $15,000 or less receive three-quarters of the total personal income there is to be taxed.

Neither a “negative income tax” nor a guaranteed income plan of the dimensions being suggested could possibly be put into effect with dollars of present purchas­ing power.

It may be added that the nega­tive income tax would have all the administrative problems that would afflict the guaranteed in­come proposal — fraud, corruption, necessary applicant-by-applicant investigation, and irrelevance of payment to present need.

And once the main principle of either proposal were accepted, the minimum subsidy or guarantee de­manded would be bound constant­ly to increase. Anyone who doubts this need merely consult the his­tory of unemployment insurance and social security benefits since the plans were initiated in the 1930′s. It is significant that sev­eral of the advocates of the guar­anteed income acknowledge that their idea originated with the more modest negative income tax proposal of Milton Friedman. They just expanded it.

So knowing what we do of polit­ical pressures, and of the past history of relief, “social insur­ance,” and other “antipoverty” measures, we are forced to con­clude that once the principle of either the negative income tax or the guaranteed income were ac­cepted, it would be made an addi­tion to and not a substitute for the present conglomeration of re­lief and “antipoverty” programs. And even alone it would drastical­ly reduce the productive incentives of those earning less than the guaranteed amount and seriously reduce the incentives of those earning more, because of the op­pressive taxation it would neces­sarily involve. Its over-all effect would be to level real incomes down, not up.

Even at present our large and overlapping assortment of relief and antipoverty measures is seri­ously reducing incentives to the production that would otherwise be possible. Our social reformers have been everywhere overlooking the two-sided nature of the prob­lem of reducing poverty. The ob­stinate two-sided problem we face is this: How can we mitigate the penalties of misfortune and fail­ure without undermining the in­centives to effort and success?

The Poor Laws of England

Our social reformers — who sometimes talk as if no govern­ment ever did anything to relieve the plight of the jobless and the poor until the New Deal came along in 1933 — are constantly de­ploring the alleged indifference, callousness, or niggardliness of our forefathers in dealing with the poor. But wholly apart from pri­vate charity, previous generations in their governmental capacity were sharply aware of the prob­lem of poverty and made some effort to alleviate it almost as far back as the records go. There were “poor laws” in England even before the days of Queen Eliza­beth. A statute of 1536 provided for the collection of voluntary funds for the relief of those un­able to work. Eleven years later the City of London decided that these voluntary collections were insufficient, and imposed a com­pulsory tax to support the poor. In 1572 a compulsory tax for this purpose was imposed on a national scale.

But the problem soon proved a very serious one for the people of that age. The upper class was very small numerically and pro­portionately. The middle class it­self was always very close to what we would today call the poverty line. The workhouse and other conditions imposed on those on relief seem very cruel to us to­day. But our ancestors were in constant fear that if they in­creased relief or relaxed the stern conditions for it they would pau­perize increasing numbers of the population and create an insoluble problem.

At the beginning of the nine­teenth century, indeed, the cost of poor relief began to get out of hand. The total cost of the poor law administration increased four­fold in the thirty-two years be­tween 1785 and 1817, and reached a sixth of the total public expen­diture. One Buckinghamshire vil­lage reported in 1832 that its ex­penditure on poor relief was eight times what it had been in 1795, and more than the rental of the whole parish had been in that year.

In face of statistics of this kind, England’s Whig government decided to intervene. It appointed a royal commission, and in 1834 a new and more severe poor law was passed in accordance with the commission’s recommenda­tions.

The guiding principle of the new law was that poor relief should be granted to able-bodied poor and their dependents only in well-regulated workhouses under conditions inferior to those of the humblest laborers outside. This seemed harsh, but the com­missioners had argued that “every penny bestowed that tends to rend­er the condition of the pauper more eligible than that of the in­dependent laborer is a bounty on indolence and vice.”

If the pendulum swung too far in the direction of severity and niggardliness in the middle nine­teenth century, it may be swing­ing too far in the direction of lax­ity and prodigality today. As weeping subsidization of idleness, such as is proposed by the guar­anteed income, would only weaken or destroy all incentive to effort, not only on the part of those who were subsidized and supported, but on the part of those who would be forced to support them out of their own earnings. There could be no faster way to impoverish the nation.

The Cure Is Production

One of the worst features of all the plans for sharing the wealth and equalizing or guaran­teeing incomes is that they lose sight of the conditions and insti­tutions that are necessary to cre­ate wealth and income in the first place. They take for granted the existing size of the economic pie; and in their impatient effort to see that it is sliced more equally they overlook the forces that have not only created the pie in the first place but have been baking a larger one year by year. Eco­nomic progress and justice do not consist in beautifully equalized destitution, but in the constant creation of more and more goods and services, of more and more wealth and income to be shared.

The only real cure for poverty is production.

The way to maximize production is to maximize the incentives to production. And the way to do that, as the modern world has dis­covered, is through the system known as capitalism — the system of private property, free markets, and free enterprise. This system maximizes production because it allows a man freedom in the choice of his occupation, freedom in his choice of those for whom he works or who work for him, freedom in the choice of those with whom he associates and cooperates, and, above all, freedom to earn and to keep the fruits of his labor. In the capitalist system each of us, with whatever exceptions, tends in the long run to get what he creates or helps to create. When each of us recognizes that his reward de­pends on his own efforts and out­put, and tends to be proportionate to his output, then each has the maximum incentive to maximize his effort and output.

No Effective Poverty Programs for Underdeveloped Countries

Capitalism brought the Indus­trial Revolution, and the enormous increase in productivity which this has made possible. Capitalism has enormously raised the economic level of the masses. It has wiped out whole areas of poverty, and continues to wipe out more. The so-called “pockets of poverty” con­stantly get smaller and fewer.

The condition of poverty, more­over, is relative rather than ab­solute. What we call poverty in the United States would be re­garded as affluence in most parts of Africa, Asia, or Latin Amer­ica. If an income sufficient to en­able a man “to live with dignity” ought to be “guaranteed” as a matter of “absolute right,” why don’t the advocates of a guaran­teed income insist that this right be enforced first of all in the poor countries, such as India and China, where the need is most widespread and glaring? The rea­son is simply that even the better-off groups in these nations have not produced enough wealth and income to be expropriated and distributed to others.

What we call poverty in the United States would be re­garded as affluence in most parts of Africa, Asia, or Latin Amer­ica.

One of the guaranteed-income advocates, in a footnote, admits naively: “We must also recognize that we still have no strategy for the elimination of poverty in the underdeveloped countries.” Of course they haven’t. The “strat­egy” would be the introduction of free enterprise, and of incentives to work, to save, to accumulate capital, better tools, and equip­ment, and to produce.

But would-be income guarantors ignore or despise the capitalistic system that makes their dreams dreamable and gives their redis­tribute-the-income proposals what­ever plausibility they have. The capitalist system has made this country the most productive and richest in the world. It has con­tinued to achieve its miracles even in the last generation, and to increase them year by year. It has raised the average weekly factory wage from less than $17 in 1933 to $110 today. Even after the rise in prices is allowed for, it has more than doubled our real per capita disposable income — from $893 in 1933 to $2,200 in 1965.

Allowed to continue to operate with even the relative freedom that it has enjoyed in recent years, the capitalist system will continue to produce these miracles. It will continue to make progress against poverty by a general increase in income and wealth. But short­sighted and impatient efforts to wipe out poverty by severing the connection between effort and re­ward can only lead to the growth of a totalitarian state, and destroy the economic progress that this country has so dearly bought.

Posted October 27, 2017 by aurorawatcherak in economics

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Marxist & Austrian Class Analysis   1 comment


September 7, 2017

[From Chapter 4 of The Economics and Ethics of Private Property by Hans-Hermann Hoppe.]

I will do the following in this chapter: First, I will present a series of theses that constitute the hard-core of the Marxist theory of history. I claim that all of them are essentially correct. Then I will show how these true theses are derived in Marxism from a false starting point. Finally, I want to demonstrate how Austrianism in the Mises-Rothbard tradition can give a correct but categorically different explanation of their validity.

Let me begin with the hard-core of the Marxist belief system:1

(1) “The history of mankind is the history of class struggles.”2 It is the history of struggles between a relatively small ruling class and a larger class of the exploited. The primary form of exploitation is economic: The ruling class expropriates part of the productive output of the exploited or, as Marxists say, “it appropriates a social surplus product and uses it for its own consumptive purposes.”

(2) The ruling class is unified by its common interest in upholding its exploitative position and maximizing its exploitatively appropriated surplus product. It never deliberately gives up power or exploitation income. Instead, any loss in power or income must be wrestled away from it through struggles, whose outcome ultimately depends on the class consciousness of the exploited, i.e., on whether or not and to what extent the exploited are aware of their own status and are consciously united with other class members in common opposition to exploitation.

(3) Class rule manifests itself primarily in specific arrangements regarding the assignment of property rights or, in Marxist terminology, in specific “relations of production.” In order to protect these arrangements or production relations, the ruling class forms and is in command of the state as the apparatus of compulsion and coercion. The state enforces and helps reproduce a given class structure through the administration of a system of “class justice,” and it assists in the creation and the support of an ideological superstructure designed to lend legitimacy to the existence of class rule.

(4) Internally, the process of competition within the ruling class generates a tendency toward increasing concentration and centralization. A multipolar system of exploitation is gradually supplanted by an oligarchic or monopolistic one. Fewer and fewer exploitation centers remain in operation, and those that do are increasingly integrated into a hierarchical order. Externally (i.e., as regards the international system), this centralization process will (and all the more intensively the more advanced it is) lead to imperialist interstate wars and the territorial expansion of exploitative rule.

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(5) Finally, with the centralization and expansion of exploitative rule gradually approaching its ultimate limit of world domination, class rule will increasingly become incompatible with the further development and improvement of “productive forces.” Economic stagnation and crises become more and more characteristic and create the “objective conditions” for the emergence of a revolutionary class consciousness of the exploited. The situation becomes ripe 3 and, as its result, unheard-of economic prosperity.

All of these theses can be given a perfectly good justification, as I will show. Unfortunately, however, it is Marxism, which subscribes to all of them, that has done more than any other ideological system to discredit their validity in deriving them from a patently absurd exploitation theory.

What is this Marxist theory of exploitation? According to Marx, such precapitalist social systems as slavery and feudalism are characterized by exploitation. There is no quarrel with this. For after all, the slave is not a free laborer, and he cannot be said to gain from his being enslaved. Rather, in being enslaved his utility is reduced at the expense of an increase in wealth appropriated by the slave master. The interest of the slave and that of the slave owner are indeed antagonistic. The same is true as regards the interests of the feudal lord who extracts a land rent from a peasant who works on land homesteaded by himself (i.e., the peasant). The lord’s gains are the peasant’s losses. It is also undisputed that slavery as well as feudalism indeed hamper the development of productive forces. Neither slave nor serf will be as productive as they would be without slavery or serfdom.

The genuinely new Marxist idea is that essentially nothing is changed as regards exploitation under capitalism (if the slave becomes a free laborer), or if the peasant decides to farm land homesteaded by someone else and pays rent in exchange for doing so. To be sure, Marx, in the famous chapter 24 of the first volume of his Kapital, titled “The So-called Original Accumulation,” gives a historical account of the emergence of capitalism which makes the point that much or even most of the initial capitalist property is the result of plunder, enclosure, and conquest. Similarly, in chapter 25, on the “Modern Theory of Colonialism,” the role of force and violence in exporting capitalism to the, as we would nowadays say, Third World is heavily emphasized. Admittedly, all this is generally correct, and insofar as it is there can be no quarrel with labeling such capitalism exploitative. Yet one should be aware of the fact that here Marx is engaged in a trick. In engaging in historical investigations and arousing the reader’s indignation regarding the brutalities underlying the formation of many capitalist fortunes, he actually side-steps the issue at hand. He distracts from the fact that his thesis is really an entirely different one: namely, that even if one were to have “clean” capitalism so to speak (one in which the original appropriation of capital were the result of nothing else but homesteading), work and savings, the capitalist who hired labor to be employed with this capital would nonetheless be engaged in exploitation. Indeed, Marx considered the proof of this thesis his most important contribution to economic analysis.

What, then, is his proof of the exploitative character of a clean capitalism?

It consists in the observation that the factor prices, in particular the wages paid to laborers by the capitalist, are lower than the output prices. The laborer, for instance, is paid a wage that represents consumption goods which can be produced in three days, but he actually works five days for his wage and produces an output of consumption goods that exceeds what he receives as remuneration. The output of the two extra days, the surplus value in Marxist terminology, is appropriated by the capitalist. Hence, according to Marx, there is exploitation.4

What is wrong with this analysis?5 The answer becomes obvious, once it is asked why the laborer would possibly agree to such a deal! He agrees because his wage payment represents present goods — while his own labor services represent only future goods — and he values present goods more highly. After all, he could also decide not to sell his labor services to the capitalist and then map the full value of his output himself. But this would of course imply that he would have to wait longer for any consumption goods to become available to him. In selling his labor services he demonstrates that he prefers a smaller amount of consumption goods now over a possibly larger one at some future date. On the other hand, why would the capitalist want to strike a deal with the laborer? Why would he want to advance present goods (money) to the laborer in exchange for services that bear fruit only later? Obviously, he would not want to pay out, for instance, $100 now if he were to receive the same amount in one year’s time. In that case, why not simply hold on to it for one year and receive the extra benefit of having actual command over it during the entire time? Instead, he must expect to receive a larger sum than $100 in the future in order to give up $100 now in the form of wages paid to the laborer. He must expect to be able to earn a profit, or more correctly an interest return. He is also constrained by time preference, i.e., the fact that an actor invariably prefers earlier over later goods, in yet another way. For if one can obtain a larger sum in the future by sacrificing a smaller one in the present, why then is the capitalist not engaged in more saving than he actually is? Why does he not hire more laborers than he does, if each one of them promises an additional interest return? The answer again should be obvious: because the capitalist is a consumer, as well, and cannot help being one. The amount of his savings and investing is restricted by the necessity that he, too, like the laborer, requires a supply of present goods “large enough to secure the satisfaction of all those wants the satisfaction of which during the waiting time is considered more urgent than the advantages which a still greater lengthening of the period of production would provide.”6

What is wrong with Marx’s theory of exploitation, then, is that he does not understand the phenomenon of time preference as a universal category of human action.7 That the laborer does not receive his “full worth” has nothing to do with exploitation but merely reflects the fact that it is impossible for man to exchange future goods against present ones except at a discount. Contrary to the case of slave and slave master where the latter benefits at the expense of the former, the relationship between the free laborer and the capitalist is a mutually beneficial one. The laborer enters the agreement because, given his time preference, he prefers a smaller amount of present goods over a larger future one; and the capitalist enters it because, given his time preference, he has a reverse preference order and ranks a larger future amount of goods more highly than a smaller present one. Their interests are not antagonistic but harmonious. Without the capitalist’s expectation of an interest return, the laborer would be worse off having to wait longer than he wishes to wait; and without the laborer’s preference for present goods the capitalist would be worse off having to resort to less roundabout and less efficient production methods than those which he desires to adopt. Nor can the capitalist wage system be regarded as an impediment to the further development of the forces of production, as Marx claims. If the laborer were not permitted to sell his labor services and the capitalist to buy them, output would not be higher but lower, because production would have to take place with relatively reduced levels of capital accumulation.

Under a system of socialized production, quite contrary to Marx’s proclamations, the development of productive forces would not reach new heights but would instead sink dramatically.8 For obviously, capital accumulation must be brought about by definite individuals at definite points in time and space through homesteading, producing and/or saving. In each case it is brought about with the expectation that it will lead to an increase in the output of future goods. The value an actor attaches to his capital reflects the value he attaches to all expected future incomes attributable to its cooperation and discounted by his rate of time preference. If, as in the case of collectively owned factors of production, an actor is no longer granted exclusive control over his accumulated capital and hence over the future income to be derived from its employment, but partial control instead is assigned to nonhomesteaders, nonproducers, and nonsavers, the value for him of the expected income and hence that of the capital goods is reduced. His effective rate of time preference will rise and there will be less homesteading of scarce resources, and less saving for the maintenance of existing resources and the production of new capital goods. The period of production, the roundaboutness of the production structure, will be shortened, and relative impoverishment will result.

If Marx’s theory of capitalist exploitation and his ideas on how to end exploitation and establish universal prosperity are false to the point of being ridiculous, it is clear that any theory of history which can be derived from it must be false, too. Or if it should be correct, it must have been derived incorrectly. Instead of going through the lengthier task of explaining all of the flaws in the Marxist argument as it sets out from its theory of capitalist exploitation and ends with the theory of history which I presented earlier, I will take a shortcut here. I will now outline in the briefest possible way the correct — Austrian, Misesian-Rothbardian — theory of exploitation; give an explanatory sketch of how this theory makes sense out of the class theory of history; and highlight along the way some key differences between this class theory and the Marxist one and also point out some intellectual affinities between Austrianism and Marxism stemming from their common conviction that there does indeed exist something like exploitation and a ruling class.9

The starting point for the Austrian exploitation theory is plain and simple, as it should be. Actually, it has already been established through the analysis of the Marxist theory: Exploitation characterized the relationship between slave and slave master and serf and feudal lord. But no exploitation was found possible under a clean capitalism. What is the principle difference between these two cases? The answer is: the recognition or nonrecognition of the homesteading principle. The peasant under feudalism is exploited because he does not have exclusive control over land that he homesteaded, and the slave because he has no exclusive control over his own homesteaded body. If, contrary to this, everyone has exclusive control over his own body (is a free laborer, that is) and acts in accordance with the homesteading principle, there can be no exploitation. It is logically absurd to claim that a person who homesteads goods not previously homesteaded by anybody else, or who employs such goods in the production of future goods, or who saves presently homesteaded or produced goods in order to increase the future supply of goods, could thereby exploit anybody. Nothing has been taken away from anybody in this process and additional goods have actually been created. And it would be equally absurd to claim that an agreement between different homesteaders, savers and producers regarding their nonexploitatively appropriated goods or services could possibly contain any foul play, then. Instead, exploitation takes place whenever any deviation from the homesteading principle occurs. It is exploitation whenever a person successfully claims partial or full control over scarce resources which he has not homesteaded, saved or produced, and which he has not acquired contractually from a previous producer-owner. Exploitation is the expropriation of homesteaders, producers and savers by late-coming nonhomesteaders, nonproducers, nonsavers and noncontractors; it is the expropriation of people whose property claims are grounded in work and contract by people whose claims are derived from thin air and who disregard others’ work and contracts.10

Needless to say, exploitation thus defined is in fact an integral part of human history. One can acquire and increase wealth either through homesteading, producing, saving, or contracting, or by expropriating homesteaders, producers, savers or contractors. There are no other ways. Both methods are natural to mankind. Alongside homesteading, producing and contracting, there have always been nonproductive and noncontractual property acquisitions. And in the course of economic development, just as producers and contractors can form firms, enterprises and corporations, so can exploiters combine to large-scale exploitation enterprises, governments and states. The ruling class (which may again be internally stratified) is initially composed of the members of such an exploitation firm. And with a ruling class established over a given territory and engaged in the expropriation of economic resources from a class of exploited producers, the center of all history indeed becomes the struggle between exploiters and the exploited. History, then, correctly told, is essentially the history of the victories and defeats of the rulers in their attempt to maximize exploitatively appropriated income and of the ruled in their attempts to resist and reverse this tendency. It is in this assessment of history that Austrians and Marxists agree, and it is why a notable intellectual affinity between Austrian and Marxist historical investigations exists. Both oppose a historiography which recognizes only action or interaction, economically and morally all on a par; and both oppose a historiography that instead of adopting such a value-neutral stand thinks that one’s own arbitrarily introduced subjective value judgments have to provide the foil for one’s historical narratives. Rather, history must be told in terms of freedom and exploitation, parasitism and economic impoverishment, private property and its destruction — otherwise it is told false.11

While productive enterprises come into or go out of existence because of voluntary support or its absence, a ruling class never comes to power because there is a demand for it, nor does it abdicate when abdication is demonstrably demanded. One cannot say by any stretch of the imagination that homesteaders, producers, savers and contractors have demanded their expropriation. They must be coerced into accepting it, and this proves conclusively that the exploitation firm is not in demand at all. Nor can one say that a ruling class can be brought down by abstaining from transactions with it in the same way as one can bring down a productive enterprise. For the ruling class acquires its income through nonproductive and noncontractual transactions and thus is unaffected by boycotts. Rather, what makes the rise of an exploitation firm possible, and what alone can in turn bring it down is a specific state of public opinion or, in Marxist terminology, a specific state of class consciousness.

An exploiter creates victims, and victims are potential enemies. It is possible that this resistance can be lastingly broken down by force in the case of a group of men exploiting another group of roughly the same size. However, more than force is needed to expand exploitation over a population many times its own size. For this to happen, a firm must also have public support. A majority of the population must accept the exploitative actions as legitimate. This acceptance can range from active enthusiasm to passive resignation. But it must be acceptance in the sense that a majority must have given up the idea of actively or passively resisting any attempt to enforce nonproductive and noncontractual property acquisitions. The class consciousness must be low, undeveloped and fuzzy. Only as long as this state of affairs lasts is there still room for an exploitative firm to prosper even if no actual demand for it exists. Only if and insofar as the exploited and expropriated develop a clear idea of their own situation and are united with other members of their class through an ideological movement which gives expression to the idea of a classless society where all exploitation is abolished, can the power of the ruling class be broken. Only if, and insofar as, a majority of the exploited public becomes consciously integrated into such a movement and accordingly displays a common outrage over all nonproductive or noncontractual property acquisitions, shows a contempt for everyone who engages in such acts, and deliberately contributes nothing to help make them successful (not to mention actively trying to obstruct them), can its power be brought to crumble.

The gradual abolition of feudal and absolutist rule and the rise of increasingly capitalist societies in Western Europe and the U.S., and along with this unheard-of economic growth and rising population numbers were the result of an increasing class consciousness among the exploited, who were ideologically molded together through the doctrines of natural rights and liberalism. In this Austrians and Marxists agree.12 They disagree, however, on the next assessment: The reversal of this liberalization process and steadily increased levels of exploitation in these societies since the last third of the nineteenth century, and particularly pronounced since WW I, are the result of a loss in class consciousness. In fact, in the Austrian view Marxism must accept much of the blame for this development by misdirecting attention from the correct exploitation model of the homesteader-producer-saver-contractor vs. the nonhomesteader-producer-saver-contractor to the fallacious model of the wage earner vs. the capitalist, thus muddling things up.13

The establishment of a ruling class over an exploited one many times its size by coercion and the manipulation of public opinion (i.e., a low degree of class consciousness among the exploited), finds its most basic institutional expression in the creation of a system of public law superimposed on private law. The ruling class sets itself apart and protects its position as a ruling class by adopting a constitution for their firm’s operations. On the one hand, by formalizing the internal operations within the state apparatus as well as its relations vis-à-vis the exploited population, a constitution creates some degree of legal stability. The more familiar and popular private law notions are incorporated into constitutional and public law, the more conducive this will be to the creation of favorable public opinion. On the other hand, any constitution and public law also formalizes the exemplary status of the ruling class as regards the homesteading principle. It formalizes the right of the state’s representatives to engage in nonproductive and noncontractual property acquisitions and the ultimate subordination of private to public law.

Class justice, i.e., a dualism of one set of laws for the rulers and another for the ruled, comes to bear in this dualism of public and private law and in the domination and infiltration of public law over and into private law. It is not because private-property rights are recognized by law, as Marxists think, that class justice is established. Rather, class justice comes into being precisely whenever a legal distinction exists between a class of persons acting under and being protected by public law and another class acting under and being protected instead by some subordinate private law. More specifically then, the basic proposition of the Marxist theory of the state in particular is false. The state is not exploitative because it protects the capitalists’ property rights, but because it itself is exempt from the restriction of having to acquire property productively and contractually.14

In spite of this fundamental misconception, however, Marxism, because it correctly interprets the state as exploitative (contrary, for instance, to the Public Choice School, which sees it as a normal firm among others),15 is on to some important insights regarding the logic of state operations. For one thing, it recognizes the strategic function of redistributionist state policies. As an exploitative firm, the state must at all times be interested in a low degree of class consciousness among the ruled. The redistribution of property and income — a policy of divide et impera — is the state’s means with which it can create divisiveness among the public and destroy the formation of a unifying class consciousness of the exploited. Furthermore, the redistribution of state power itself through democratizing the state constitution and opening up every ruling position to everyone and granting everyone the right to participate in the determination of state personnel and policy is a means for reducing the resistance against exploitation as such. Second, the state is indeed, as Marxists see it, the great center of ideological propaganda and mystification: Exploitation is really freedom; taxes are really voluntary contributions; noncontractual relations are really “conceptually” contractual ones; no one is ruled by anyone but we all rule ourselves; without the state neither law nor security would exist; and the poor would perish, etc. All of this is part of the ideological superstructure designed to legitimize an underlying basis of economic exploitation.16 And finally, Marxists are also correct in noticing the close association between the state and business, especially the banking elite — even though their explanation for it is faulty. The reason is not that the bourgeois establishment sees and supports the state as the guarantor of private property rights and contractualism. On the contrary, the establishment correctly perceives the state as the very antithesis to private property that it is and takes a close interest in it for this reason. The more successful a business, the larger the potential danger of governmental exploitation, but the larger also the potential gains that can be achieved if it can come under government’s special protection and is exempt from the full weight of capitalist competition. This is why the business establishment is interested in the state and its infiltration. The ruling elite in turn is interested in close cooperation with the business establishment because of its financial powers. In particular, the banking elite is of interest because as an exploitative firm the state naturally wishes to possess complete autonomy for counterfeiting.

By offering to cut the banking elite in on its own counterfeiting machinations and allowing them to counterfeit on top of its own counterfeited notes under a regime of fractional reserve banking, the state can easily reach this goal and establish a system of state monopolized money and cartelized banking controlled by the central bank. And through this direct counterfeiting connection with the banking system and by extension the banks’ major clients, the ruling class in fact extends far beyond the state apparatus to the very nerve centers of civil society — not that much different, at least in appearance, from the picture that Marxists like to paint of the cooperation between banking, business elites and the state.17

Competition within the ruling class and among different ruling classes brings about a tendency toward increasing concentration. Marxism is right in this. However, its faulty theory of exploitation again leads it to locate the cause for this tendency in the wrong place. Marxism sees such a tendency as inherent in capitalist competition. Yet it is precisely so long as people are engaged in a clean capitalism that competition is not a form of zero-sum interaction. The homesteader, the producer, saver and contractor do not gain at another’s expense. Their gains either leave another’s physical possessions completely unaffected or they actually imply mutual gains (as in the case of all contractual exchanges). Capitalism thus can account for increases in absolute wealth. But under its regime no systematic tendency toward relative concentration can be said to exist.18 Instead, zero-sum interactions characterize not only the relationship between the ruler and the ruled, but also between competing rulers. Exploitation defined as nonproductive and noncontractual property acquisitions is only possible as long as there is anything that can be appropriated. Yet if there were free competition in the business of exploitation, there would obviously be nothing left to expropriate. Thus, exploitation requires monopoly over some given territory and population; and the competition between exploiters is by its very nature eliminative and must bring about a tendency toward relative concentration of exploitative firms as well as a tendency toward centralization within each exploitative firm. The development of states rather than capitalist firms provides the foremost illustration of this tendency: There are now a significantly smaller number of states with exploitative control over much larger territories than in previous centuries. And within each state apparatus there has in fact been a constant tendency toward increasing the powers of the central government at the expense of its regional and local subdivisions. Yet outside the state apparatus a tendency toward relative concentration has also become apparent for the same reason. Not, as should be clear by now, because of any trait inherent in capitalism, but because the ruling class has expanded its rule into the midst of civil society through the creation of a state-banking-business alliance and in particular the establishment of a system of central banking. If a concentration and centralization of state power then takes place, it is only natural that this be accompanied by a parallel process of relative concentration and cartelization of banking and industry. Along with increased state powers, the associated banking and business establishment’s powers of eliminating or putting economic competitors at a disadvantage by means of nonproductive and/or noncontractual expropriations increases. Business concentration is the reflection of a “state-ization” of economic life.19

The primary means for the expansion of state power and the elimination of rival exploitation centers is war and military domination. Interstate competition implies a tendency toward war and imperialism. As centers of exploitation their interests are by nature antagonistic. Moreover, with each of them — internally — in command of the instrument of taxation and absolute counterfeiting powers, it is possible for the ruling classes to let others pay for their wars. Naturally, if one does not have to pay for one’s risky ventures oneself, but can force others to do so, one tends to be a greater risk taker and more trigger happy than one would otherwise be.20 Marxism, contrary to much of the so-called bourgeois social sciences, gets the facts right: there is indeed a tendency toward imperialism operative in history; and the foremost imperialist powers are indeed the most advanced capitalist nations. Yet the explanation is once again faulty. It is the state as an institution exempt from the capitalist rules of property acquisitions that is by nature aggressive. And the historical evidence of a close correlation between capitalism and imperialism only seemingly contradicts this. It finds its explanation, easily enough, in the fact that in order to come out successfully from interstate wars, a state must be in command of sufficient (in relative terms) economic resources. Ceteris paribus, the state with more ample resources will win. As an exploitative firm, a state is by nature destructive of wealth and capital accumulation. Wealth is produced exclusively by civil society; and the weaker the state’s exploitative powers, the more wealth and capital society accumulates. Thus, paradoxical as it may sound at first, the weaker or the more liberal a state is internally, the further developed capitalism is; a developed capitalist economy to extract from makes the state richer; and a richer state then makes for more and more successful expansionist wars. It is this relationship that explains why initially the states of Western Europe, and in particular Great Britain, were the leading imperialist powers, and why in the 20th century this role has been assumed by the U.S.

And a similarly straightforward yet once again entirely non-Marxist explanation exists for the observation always pointed out by Marxists, that the banking and business establishment is usually among the most ardent supporters of military strength and imperial expansionism. It is not because the expansion of capitalist markets requires exploitation, but because the expansion of state protected and privileged business requires that such protection be extended also to foreign countries and that foreign competitors be hampered through noncontractual and nonproductive property acquisitions in the same way or more so than internal competition. Specifically, it supports imperialism if this promises to lead to a position of military domination of one’s own allied state over another. For then, from a position of military strength, it becomes possible to establish a system of — as one may call it — monetary imperialism. The dominating state will use its superior power to enforce a policy of internationally coordinated inflation. Its own central bank sets the pace in the process of counterfeiting, and the central banks of the dominated states are ordered to use its currency as their own reserves and inflate on top of them. This way, along with the dominating state and as the earliest receivers of the counterfeit reserve currency its associated banking and business establishment can engage in an almost costless expropriation of foreign property owners and income producers. A double layer of exploitation of a foreign state and a foreign elite on top of a national state and elite is imposed on the exploited class in the dominated territories, causing prolonged economic dependency and relative economic stagnation vis-à-vis the dominant nation. It is this — very uncapitalist — situation that characterizes the status of the United States and the U.S. dollar and that gives rise to the — correct — charge of U.S. economic exploitation and dollar imperialism?21

Finally, the increasing concentration and centralization of exploitative powers leads to economic stagnation and thereby creates the objective conditions for their ultimate demise and the establishment of a classless society capable of producing unheard-of economic prosperity.

Contrary to Marxist claims, this is not the result of any historical laws, however. In fact, no such things as inexorable historical laws as Marxists conceive of them exist.22 Nor is it the result of a tendency for the rate of profit to fall with an increased organic composition of capital (an increase in the proportion of constant to variable capital, that is), as Marx thinks. Just as the labor theory of value is false beyond repair, so is the law of the tendential fall of the profit rate, which is based on it. The source of value, interest and profit is not the expenditure of labor but of acting, i.e., the employment of scarce means in the pursuit of goals by agents who are constrained by time preference and uncertainty (imperfect knowledge). There is no reason to suppose, then, that changes in the organic composition of capital should have any systematic relation to changes in interest and profit.

Instead, the likelihood of crises which stimulate the development of a higher degree of class consciousness (i.e., the subjective conditions for the overthrow of the ruling class) increases because — to use one of Marx’s favorite terms — of the dialectics of exploitation which I have already touched on earlier: Exploitation is destructive of wealth formation. Hence, in the competition of exploitative firms (of states), less exploitative or more liberal ones tend to outcompete more exploitative ones because they are in command of more ample resources. The process of imperialism initially has a relatively liberating effect on societies coming under its control. A relatively more capitalist social model is exported to relatively less capitalist (more exploitative) societies. The development of productive forces is stimulated: economic integration is furthered, division of labor extended, and a genuine world market established. Population figures go up in response, and expectations as regards the economic future rise to unprecedented heights.23 With exploitative domination taking hold, and interstate competition reduced or even eliminated in a process of imperialist expansionism, however, the external constraints on the dominating state’s power of internal exploitation and expropriation gradually disappear. Internal exploitation, taxation and regulation begin to increase the closer the ruling class comes to its ultimate goal of world domination. Economic stagnation sets in and the — worldwide — higher expectations become frustrated. And this — high expectations and an economic reality increasingly falling behind these expectations — is the classical situation for the emergence of a revolutionary potential.24 A desperate need for ideological solutions to the emerging crises arises, along with a more widespread recognition of the fact that state rule, taxation and regulation — far from offering such a solution — actually constitute the very problem that must be overcome. If in this situation of economic stagnation, crises, and ideological disillusion25 a positive solution is offered in the form of a systematic and comprehensive libertarian philosophy coupled with its economic counterpart: Austrian economics; and if this ideology is propagated by an activist movement, then the prospects of igniting the revolutionary potential to activism become overwhelmingly positive and promising. Antistatist pressures will mount and bring about an irresistible tendency toward dismantling the power of the ruling class and the state as its instrument of exploitation.26

If and insofar as this occurs, however, this will not mean social ownership of means of production, contrary to the Marxist model. In fact, social ownership is not only economically inefficient as has already been explained; it is incompatible with the idea that the state is “withering away.”27 For if means of production are owned collectively, and if it is realistically assumed that not everyone’s ideas as to how to employ these means of production happen to coincide (as if by miracle), then it is precisely socially owned factors of production which require continued state actions, i.e., an institution coercively imposing one person’s will on another disagreeing one’s. Instead, the withering away of the state, and with this the end of exploitation and the beginning of liberty and unheard-of economic prosperity, means the establishment of a pure private property society regulated by nothing but private law.

  • 1.See on the following Karl Marx and Frederic Engels, The Communist Manifesto (1848); Karl Marx, Das Kapital, 3 vols. (1867; 1885; 1894); as contemporary Marxists, Ernest Mandel, Marx’s Economic Theory (London: Merlin, 1962); idem, Late Capitalism (London: New Left Books, 1975); Paul Baran and Paul Sweezy, Monopoly Capital (New York: Monthly Review Press, 1966); from a non-Marxist perspective, Leszek Kolakowski, Main Currents of Marxism (Oxford: Clarendon Press, 1995); G. Wetter, Sovietideologie heute(Frankfurt/M.: Fischer, 1962), vol. 1; W. Leonhard, Sovietideologie heute (Frankfurt/M.: Fischer, 1962), vol. 2.
  • 2.Marx and Engels, The Communist Manifesto (section 1).
  • 3.The Communist Manifesto (section 2, last 2 paragraphs); Frederic Engels, Von tier Autorität, in Karl Marx and Frederic Engels,Ausgewählte Schriften, 2 vols. (East Berlin: Dietz, 1953), vol. I, p. 606; idem, Die Entwicklung des Sozialismus von der Utopie zur Wissenschaft, ibid., vol. 2, p. 139.
  • 4.See Marx, Das Kapital, vol. I; the shortest presentation is his Lohn, Preis, Profit (1865). Actually, in order to prove the more specific Marxist thesis that exclusively the owner of labor services is exploited (but not the owner of the other originary factor of production: land), yet another argument would be needed. For if it were true that the discrepancy between factor and output prices constitutes an exploitative relation, this would only show that the capitalist who rents labor services from an owner of labor, and land services from an owner of land would exploit either labor, or land, or labor and land simultaneously. It is the labor theory of value, of course, which is supposed to provide the missing link here by trying to establish labor as the sole source of value. I will spare myself the task of refuting this theory. Few enough remain today, even among those claiming to be Marxists, who do not recognize the faultiness of the labor theory of value. Rather, I will accept for the sake of argument the suggestion made, for instance, by the self-proclaimed “analytical Marxist” John Roemer (A General Theory of Exploitation and Class [Cambridge, Mass.: Harvard University Press, 1982]; idem, Value, Exploitation and Class [London: Harwood Academic Publishers, 1985]) that the theory of exploitation can be separated analytically from the labor theory of value; and that a “generalized commodity exploitation theory” can be formulated which can be justified regardless of whether or not the labor theory of value is true. I want to demonstrate that the Marxist theory of exploitation is nonsensical even if one were to absolve its proponents from having to prove the labor theory of value and, indeed, even if the labor theory of value were true. Even a generalized commodity exploitation theory provides no escape from the conclusion that the Marxist theory of exploitation is dead wrong.
  • 5.See on the following Eugen von Böhm-Bawerk, The Exploitation Theory of Socialism-Communism (South Holland, Ill.: Libertarian Press, 1975); idem, Shorter Classics of Böhm-Bawerk (South Holland, Ill.: Libertarian Press, 1962).
  • 6.Ludwig von Mises, Human Action (Chicago: Regnery, 1966), p. 407; see also Murray N. Rothbard, Man, Economy, and State (Los Angeles: Nash, 1970), pp. 300–01.
  • 7.See on the time preference theory of interest in addition to the works cited in notes 5 and 6; also Frank Fetter, Capital, Interest and Rent (Kansas City: Sheed Andrews and McMeel, 1977).
  • 8.See on the following Hans-Hermann Hoppe, A Theory of Socialism andCapitalism (Boston: Kluwer Academic Publishers, 1989); idem, “Why SocialismMust Fail,” Free Market (July 1988); idem, “The Economics and Sociology ofTaxation,” Journal des Economistes et des Etudes Humaines (1990); supra chap. 2.
  • 9.Mises’s contributions to the theory of exploitation and class are unsystematic. However, throughout his writings he presents sociological and historical interpretations that are class analyses, if only implicitly. Noteworthy here is in particular his acute analysis of the collaboration between government and banking elite in destroying the gold standard in order to increase their inflationary powers as a means of fraudulent, exploitative income and wealth redistribution in their own favor. See for instance his Monetary Stabilization and Cyclical Policy (1928) in idem, On the Manipulation of Money and Credit, ed. Percy Greaves (Dobbs Ferry, N.Y.: Free Market Books 1978); idem, Socialism (Indianapolis: Liberty Fund, 1981), chap. 20; idem, The Clash of Group Interests and Other Essays(New York: Center for Libertarian Studies, Occasional Paper Series No. 7, 1978). Yet Mises does not give systematic status to class analysis and exploitation theory because he ultimately misconceives of exploitation as merely an intellectual error which correct economic reasoning can dispel. He fails to fully recognize that exploitation is also and probably even more so a moral-motivational problem that exists regardless of all economic reasoning. Rothbard adds his insight to the Misesian structure of Austrian economics and makes the analysis of power and power elites an integral part of economic theory and historical-sociological explanations; and he systematically expands the Austrian case against exploitation to include ethics in addition to economic theory, i.e., a theory of justice next to a theory of efficiency, such that the ruling class can also be attacked as immoral. For Rothbard’s theory of power, class and exploitation, see in particular his Power and Market (Kansas City: Sheed Andrews and McMeel, 1977); idem, For a New Liberty(New York: Macmillan, 1978); idem, The Mystery of Banking (New York: Richardson and Snyder, 1983); idem, America’s Great Depression (Kansas City:Sheed and Ward, 1975). On important nineteenth-century forerunners ofAustrian class analysis, see Leonard Liggio, “Charles Dunoyer and French Classical Liberalism,” Journal of Libertarian Studies 1, no. 3 (1977); Ralph Raico,“Classical Liberal Exploitation Theory,” Journal of Libertarian Studies 1, no. 3 (1977); Mark Weinburg, “The Social Analysis of Three Early 19th Century French Liberals: Say, Comte, and Dunoyer,” Journal of Libertarian Studies 2, no. 1 (1978); Joseph T. Salerno, “Comment on the French Liberal School,” Journal of Libertarian Studies 2, no. 1 (1978); David M. Hart, “Gustave de Molinari and the Anti-Statist Liberal Tradition,” 2 parts, Journal of Libertarian Studies 5, nos. 3 and 4 (1981).
  • 10.See on this also Hoppe, A Theory of Socialism and Capitalism; idem, “The Justice of Economic Efficiency,” Austrian Economics Newsletter 1 (1988); infra chap. 9; idem, “The Ultimate Justification of the Private Property Ethics,” Liberty (September 1988): infra chap. 10.
  • 11.See on this theme also Lord (John) Acton, Essays in the History of Liberty (Indianapolis: Liberty Fund, 1985); Franz Oppenheimer, System der Soziologie, vol. II: Der Staat (Stuttgart: G. Fischer, 1964); Alexander Rüstow, Freedom and Domination (Princeton, N.J.: Princeton University Press, 1986).
  • 12.See on this Murray N. Rothbard, “Left and Right: The Prospects for Liberty,” in idem, Egalitarianism As a Revolt Against Nature and Other Essays (Washington, D.C.: Libertarian Review Press, 1974).
  • 13.All socialist propaganda to the contrary notwithstanding, the falsehood of the Marxist description of capitalists and laborers as antagonistic classes also comes to bear in certain empirical observations: Logically speaking, people can be grouped into classes in infinitely different ways. According to orthodox positivist methodology (which I consider false but am willing to accept here for the sake of argument), that classification system is better which helps us predict better. Yet the classification of people as capitalists or laborers (or as representatives of varying degrees of capitalist- or laborer-ness) is practically useless in predicting what stand a person will take on fundamental political, social and economic issues. Contrary to this, the correct classification of people as tax producers and the regulated vs. tax consumers and the regulators (or as representatives of varying degrees of tax producer- or consumer-ness) is indeed also a powerful predictor. Sociologists have largely overlooked this because of almost universally shared Marxist preconceptions. But everyday experience overwhelmingly corroborates my thesis: Find out whether or not somebody is a public employee (and his rank and salary), and whether or not and to what extent the income and wealth of a person outside of the public sector is determined by public sector purchases and/or regulatory actions; people will systematically differ in their response to fundamental political issues depending on whether they are classified as direct or indirect tax consumers or as tax producers!
  • 14.Franz Oppenheimer, System der Soziologie, vol. II. pp. 322–23, presents the matter thus: The basic norm of the state is power. That is, seen from the side of its origin: violence transformed into might. Violence is one of the most powerful forces shaping society, but is not itself a form of social interaction. It must become law in the positive sense of this term, that is, sociologically speaking, it must permit the development of a system of “subjective reciprocity,” and this is only possible through a system of self-imposed restrictions on the use of violence and the assumption of certain obligations in exchange for its arrogated rights; in this way violence is turned into might, and a relationship of domination emerges which is accepted not only by the rulers, but under not too severely oppressive circumstances by their subjects as well, as expressing a “just reciprocity.” Out of this basic norm secondary and tertiary norms now emerge as implied in it: norms of private law, of inheritance, criminal, obligational and constitutional law, which all bear the mark of the basic norm of power and domination, and which are all designed to influence the structure of the state in such a way as to increase economic exploitation to the maximum level which is compatible with the continuation of legally regulated domination.     The insight is fundamental that “law grows out of two essentially different roots.” On the one hand, out of the law of the association of equals, which can be called a “natural right,” even if it is no natural right, and on the other hand, out of the law of violence transformed into regulated might, the law of unequals.     On the relation between private and public law, see also F.A. Hayek, Law, Legislation and Liberty, 3 vols. (Chicago: University of Chicago Press, 1973–79), esp. vol. I, chap. 6 and vol. II, pp. 85–88.
  • 15.See James Buchanan and Gordon Tullock, The Calculus of Consent (Ann Arbor: University of Michigan Press, 1962), p. 19.
  • 16.See Hans-Hermann Hoppe, Eigentum, Anarchie, und Staat (Opladen: Westdeutscher Verlag, 1987); idem, A Theory of Socialism and Capitalism.
  • 17.See Hans-Hermann Hoppe, “Banking, Nation States and International Politics,” Review of Austrian Economics 4 (1990); supra chap. 3; Rothbard, The Mystery of Banking, chaps. 15–16.
  • 18.See on this in particular Rothbard, Man, Economy, and State, chap. 10, esp. the section “The Problem of One Big Cartel”; also Mises, Socialism, chaps. 22–26.
  • 19.See on this Gabriel Kolko, The Triumph of Conservatism (Chicago: Free Press, 1967); James Weinstein, The Corporate Ideal in the Liberal State (Boston: Beacon Press, 1968); Ronald Radosh and Murray N. Rothbard, eds., A New History of Leviathan (New York: Dutton, 1972); Leonard Liggio and James J. Martin, eds., Watershed of Empire (Colorado Springs, Colo.: Ralph Myles, 1976).
  • 20.On the relationship between state and war see Ekkehart Krippendorff, Staat Und Krieg (Frankfurt/M.: Suhrkamp, 1985); Charles Tilly, “War Making and State Making as Organized Crime,” in Peter Evans et al., eds., Bringing the State Back In (Cambridge: Cambridge University Press, 1985); also Robert Higgs, Crisis and Leviathan (New York: Oxford University Press, 1987).
  • 21.On a further elaborated version of this theory of military and monetary imperialism see Hoppe, Banking, Nation States and International Politics (supra chap. 3).
  • 22.See on this in particular Ludwig von Mises, Theory and History (Auburn, Ala.: Ludwig von Mises institute, 1985), esp. part 2.
  • 23.It may be noted here that Marx and Engels, foremost in their Communist Manifesto, championed the historically progressive character of capitalism and were full of praise for its unprecedented accomplishments. Indeed, reviewing the relevant passages of the Manifesto concludes Joseph A. Schumpeter, Never, I repeat, and in particular by no modern defender of the bourgeois civilization has anything like this been penned, never has a brief been composed on behalf of the business class from so profound and so wide a comprehension of what its achievement is and what it means to humanity. (“The Communist Manifesto in Sociology and Economics,” in idem, Essays of Joseph A. Schumpeter, ed. Richard Clemence [Port Washington, N.Y.: Kennikat Press, 1951], p. 293)    Given this view of capitalism, Marx went so far as to defend the British con-quest of India, for example, as a historically progressive development. See Marx’s contributions to the New York Daily Tribune, of June 25, 1853, July 11, 1853, August 8, 1853 (Marx and Engels, Werke [East Berlin: Dietz, 1960], vol. 9). As a contemporary Marxist taking a similar stand on imperialism see Bill Warren, Imperialism: Pioneer of Capitalism (London: New Left Books, 1981).
  • 24.See on the theory of revolution in particular Charles Tilly, From Mobilization to Revolution (Reading, Mass.: Addison-Wesley, 1978); idem, As Sociology Meets History (New York: Academic Press, 1981).
  • 25.For a neo-Marxist assessment of the present era of “late capitalism” as characterized by “a new ideological disorientation” born out of permanent economic stagnation and the exhaustion of the legitimatory powers of conservatism and social-democratism, (i.e., “liberalism” in American terminology) see Jürgen Habermas, Die Neue Unübersichtlichkeit (Frankfurt/M.: Suhrkamp, 1985); also idem, Legitimation Crisis (Boston: Beacon Press, 1975); C. Offe, Strukurprobleme des kapitalistischen Staates (Frankfurt/M.: Suhrkamp, 1972).
  • 26.For an Austrian-libertarian assessment of the crisis-character of late capitalism and on the prospects for the rise of a revolutionary libertarian class consciousness see Rothbard, “Left and Right”; idem, For a New Liberty, chap. 15; idem, The Ethics of Liberty (Atlantic Highlands, N.J.: Humanities Press, 1982), part V.
  • 27.On the internal inconsistencies of the Marxist theory of the state see also Hans Kelsen, Sozialismus und Staat (Vienna, 1965).

Note: The views expressed on are not necessarily those of the Mises Institute.

Posted October 19, 2017 by aurorawatcherak in economics

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What Would My Cut Be?   Leave a comment

Poverty is the natural state of the world and the big mystery of human history is not how people become poor, but how people get rich.

Image resultBut let’s imagine that we could magically grab $2.4 trillion in cash from the world’s billionaires and not force them to sell off everything the economy relies on to exist.

My math nerds tell me that if you divided the assets of the 1% amongst the rest of us 99%ers in the United States (about 319,000,000 people), we’d all walk away with a one-time-payment of just $7,500.

$7,500? Yeah, that’s seven thousand, five hundred dollars. That’s less than I pay for housing for a year.

So I asked my math nerds to limit the transfer from the richest 1% to the poorest 20% (about 70 million people). The median salary in the US is $52,000. Each person would get $37,151.70 in a one-time payment and receive less than the average American makes annually at a job..

I’m all for that extra cash in my pocket, but once we’ve done that … if we could do that without crashing the economy, which my last post suggests we can’t … that money would be gone and we would have sent a clear signal to the most successful businessmen & women in the world that the reward for building a company like Google or Apple is to have all your assets taken from you and your business destroyed.

What happens then?

Neither long-term government dependency or wrecking the economy for a short-term payout is the answer.

So what should we do instead?

Posted October 6, 2017 by aurorawatcherak in economics

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Can Rich People Fix Poverty?   2 comments

There’s a belief that the problem of poverty can be solved if only rich people were forced to give their wealth to poorer people. There’s a certain plausibility to that myth until you do some math. I know … I don’t like math either, but I know a few math nerds and when you feed them figures, they do what they do best.

Image result for image of wealth redistributionIf you combine the entire net worth of Forbes’ list of the world’s 400 richest people, you’d come out with about $2.4 trillion. Yes, it’s an enormous number, but it’s about one-quarter of the annual US budget. It’s also not quite what you think.

We’re talking net worth here, which is not money all piled up somewhere for a rich guy to admire. It’s the estimated monetary value of all the assets they own. That means all the office buildings, furniture, computers, telephone lines and other capital infrastructure of their various businesses. It also includes the value of their employee salaries, payroll, and pensions; and the on-paper economic value of the businesses themselves.

Let’s just look at one example.

Amazon reportedly holds $83.4 billion in assets. That includes all their warehouses, trucks, servers, and the actual stuff they keep in stock for people to purchase (stuff like my books). Jeff Bezos himself suppostedly has a personal net worth of $89 billion, but he can’t just cash out all of those billions without liquidating the inventory his company holds, selling all of his buildings, and divesting himself from Amazon entirely. Of course, he wouldn’t find a lot of buyers for his stuff if all the other rich folks were also being forced to sell everything off. Who would buy it? I don’t have a spare $80 billion. Do you?

Thus, that $2.4 trillion isn’t a real number in any sense that can be converted into a transfer of income.


Posted October 5, 2017 by aurorawatcherak in economics

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