Mises Institute Home Study Course in Austrian Economics SUPPLEMENTAL READINGS

LUDWIG VON MISES INSTITUTE HOME STUDY COURSE IN AUSTRIAN ECONOMICS

Supplemental Readings

Compiled by Robert P.Murphy Copyright © 2005 Ludwig von Mises Institute All rights reserved. Written permission must be secured from the publisher to use or reproduce any part of this book, except for brief quotations in critical reviews or articles.

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6 Mises Institute Home Study Course in Austrian Economics SUPPLEMENTAL READINGS

(in lesson-plan order):

1. Rothbard, Murray N. For a New Liberty: The Libertarian Manifesto, chapter 2: “Property and Exchange,” rev. ed. (New York: Collier Books, 2002).

2. Klein, Peter, “Entrepreneurship and Corporate Governance,” Quarterly Journal of Austrian Economics 2, no. 2 (Summer, 1999): 19-42.

3. Hoppe, Hans-Hermann, “On Certainty and Uncertainty, Or: How Rational Can Our Expectations Be?” Review of Austrian Economics 10, no. 1 (1997): 49–78.

4. Block, Walter, “Free Market Transportation: Denationalizing the Roads,” Journal of Libertarian Studies 3, no. 2 (1979): 209–38.

5. Callahan, Gene, “Rethinking Patent Law,” Mises.org Daily Article, July 18, 2000.

6. Callahan, Gene, “In Praise of Bugs,” Mises.org Daily Article, March 27, 2000.

7. Mises, Ludwig von, Money, Method, and the Market Process, chapter 21: “The Idea of Liberty is Western,” Richard Ebeling, ed. (Norwell, Mass.: Kluwer Academic Publishers, 1990).

8. Mises, Ludwig von Mises, Money, Method, and the Market Process, Chapter 12, “The Plight of the Underdeveloped Nations,” Richard Ebeling, ed. (Norwell, Mass.: Kluwer Academic Publishers, 1990).

9. Rothbard, Murray N. “World War I as Fulfillment: Power and the Intellectuals,” Journal of Libertarian Studies IX, no. 1 (Winter, 1989): 81–125.

10. Block, Walter, “Coase and Demsetz on Private Property Rights,” Journal of Libertarian Studies 1, no. 2 (1977): 111–15.

Property and Exchange For a New Liberv Chapter 2

Murray N. Rothbard

The Nonaggression Axiom

THE LIBERTARIAN CREED rests upon one central axiom that no man or group of men may aggress against the person or property of anyone else. This may be called the "nonaggression axiom." "Aggression" is defined as the initiation of the use or threat of physical violence against the person or property of anyone else. Aggression is therefore synony- mous with invasion. If no man may aggress against another; if, in short, everyone has the absolute right to be "free" from aggression, then this at once implies that the libertarian stands foursquare for what are generally known as "civil y7 liberties : the freedom to speak, publish, assemble, and to engage in such "victimless crimes" as pornography, sexual deviation, and prostitution (which the libertarian does not regard as "crimes" at all, since he defines a "crime" as violent invasion of someone else's person or property). Furthermore, he regards conscription as slavery on a massive scale. And since war, especially modem war, entails the mass slaughter of civilians, the libertarian regards such conflicts as mass murder and therefore totally illegitimate. All of these positions are now considered "leftist" on the contemporary ideological scale. On the other hand, since the libertarian also opposes invasion of the rights of private property, this also means that he just as emphatically opposes government interference with property rights or with the fiee-market economy through controls, regulations, subsidies, or

Murray N. Rothbard, For A New Liberty, rev. ed. (New York: Macmillan) Copyright 1973, 1978, 2005 Ludwig von Mises Institute Property and Exchange 23 prohibitions. For if every individual has the right to his own property without having to suffer aggressive depredation, then he also has the right to give away his property (bequest and inheritance) and to exchange it for the property of others (free contract and the free market economy) without interference. The libertarian favors the right to unrestricted private property and free exchange; hence, a system of "laissez-faire capitalism." In current terminology again, the libertarian position on property and economics would be called "extreme right wing." But the libertarian sees no inconsistency in being "leftist" on some issues and "rightist" on others. On the contrary, he sees his own position as virtually the only consistent one, consistent on behalf of the liberty of every individual. For how can the leftist be opposed to the violence of war and conscription while at the same time supporting the violence of taxation and government control? And how can the rightist trumpet his devotion to private property and free enterprise while at the same time favoring war, conscription, and the outlawing of noninvasive activities and practices that he deems immoral? And how can the rightist favor a free market while seeing nothing amiss in the vast subsidies, distortions, and unproductive inefficiencies involved in the military industrial complex? While opposing any and all private or group aggression against the rights of person and property, the libertarian sees that throughout history and into the present day, there has been one central, dominant, and overriding aggressor upon all of these rights: the State. In contrast to all other thinkers, left, right, or in-between, the libertarian refuses to give the State the moral sanction to commit actions that almost everyone agrees would be immoral, illegal, and criminal if committed by any person or group in society. The libertarian, in short, insists on applying the general moral law to everyone, and makes no special exemptions for any person or group. But if we look at the State naked, as it were, we see that it is universally allowed, and even encouraged, to commit all the acts which even norrlibertarians concede are reprehensible crimes. The State habitually commits mass murder, which it calls "war," or sometimes "suppression of subversion"; the State engages in enslavement into its military forces, which it calls "conscription"; and it lives and has its being in the practice of forcible theR, which it calls "taxation." The libertarian insists that whether or not such practices are supported by the majority of the population is not germane to their nature: that, regardless of popular sanction, War is Mass Murder, Conscription is Slavery, and Taxation is 24 The Libertarian Creed

Robbery. The libertarian, in short, is almost completely the child in the fable, pointing out insistently that the emperor has no clothes, Throughout the ages, the emperor has had a series of pseudo-clothes provided for him by the nation's intellectual caste. In past centuries, the intellectuals informed the public that the State or its rulers were divine, or at least clothed in divine authority, and therefore what might look to the naive and untutored eye as despotism, mass murder, and theft on a grand scale was only the divine wo~kingits benign and mysterious ways in the body politic. In recent decades, as the divine sanction has worn a bit threadbare, the emperor's "court intellectuals" have spun ever more sophisticated apologia: informing the public that what the government does is for the "common good" and the "public welfare," that the process of taxationand-spending works through the mysterious process of the "multiplier" to keep the economy on an even keel, and that, in any case, a wide variety of governmental "services" could not possibly be performed by citizens acting voluntarily on the market or in society. All of this the libertarian denies: he sees the various apologia as fraudulent means of obtaining public support for the State's rule, and he insists that whatever services the government actually performs could be supplied far more efficiently and far more morally by private and cooperative enterprise. The libertarian therefore considers one of his prime educational tasks is to spread the demystification and desanctification of the State among its hapless subjects. His task is to demonstrate repeatedly and in depth that not only the emperor but even the "democratic" State has no clothes; that all governments subsist by exploitive rule over the public; and that such rule is the reverse of objective necessity. He strives to show that the very existence of taxation and the State necessarily sets up a class division between the exploiting rulers and the exploited ruled. He seeks to show that the task of the court intellectuals who have always supported the State has ever been to weave mystification in order to induce the public to accept State rule, and that these intellectuals obtain, in return, a share in the power and pelf extracted by the rulers from their deluded subjects. Take, for example, the institution of taxation, which statists have claimed is in some sense really "voluntary." Anyone who truly believes in the "voluntary" nature of taxation is invited to refuse to pay taxes and to see what then happens to him. If we analyze taxation, we find that, among all the persons and institutions in society, only the government acquires its revenues through coercive violence. Everyone else in society acquires income either through voluntary gift (lodge, charitable society, chess club) Property and Exchange 25 or through the sale of goods or services voluntarily purchased by consumers. If anyone but the government proceeded to "tax," this would clearly be considered coercion and thinly disguised banditry. Yet the mystical trappings of "sovereignty" have so veiled the process that only libertarians are prepared to call taxation what it is: legalized and organized theft on a grand scale.

Property Rights

If the central axiom of the libertarian creed is nonaggression against anyone's person and property, how is this axiom arrived at? What is its groundwork or support? Here, libertarians, past and present, have differed considerably. Roughly, there are three broad types of foundation for the libertarian axiom, corresponding to three kinds of ethical philosophy: the emotivist, the utilitarian, and the natural rights viewpoint. The emotivists assert that they take liberty or nonaggression as their premise purely on subjective, emotional grounds. While their own intense emotion might seem a valid basis for their own political philosophy, this can scarcely serve to convince anyone else. By ultimately taking themselves outside the realm of rational discourse, the emotivists thereby insure the lack of general success of their own cherished doctrine. The utilitarians declare, from their study of the consequences of liberty as opposed to alternative systems, that liberty will lead more surely to widely approved goals: harmony, peace, prosperity, etc. Now no one disputes that relative consequences should be studied in assessing the merits or demerits of respective creeds. But there are many problems in confining ourselves to a utilitarian ethic. For one thing, utilitarianism assumes that we can weigh alternatives, and decide upon policies, on the basis of their good or bad consequences. But if it is legitimate to apply value judgments to the consequences of X, why is it not equally legitimate to apply such judgments to X itself) May there not be something about an act itself which, in its very nature, can be considered good or evil? Another problem with the utilitarian is that he will rarely adopt a principle as an absolute and consistent yardstick to apply to the varied concrete situations of the real world. He will only use a principle, at best, as a vague guideline or aspiration, as a tendency which he may choose to override at any time. This was the major defect of the nineteenthcentury 26 The Libertarian Creed

English Radicals, who had adopted the laissez-faire view of the eighteentkcentury liberals but had substituted a supposedly "scientific" utilitarianism for the supposedly "mystical" concept of natural rights as the groundwork for that philosophy. Hence the nineteentkcentury laissez- faire liberals came to use laissez-faire as a vague tendency rather than as an unblemished yardstick, and therefore increasingly and fatally compromised the libertarian creed. To say that a utilitarian cannot be "trusted" to maintain libertarian principle in every specific application may sound harsh, but it puts the case fairly. A notable contemporary example is the free-market economist Professor Milton Friedman who, like his classical economist forebears, holds to freedom as against State intervention as a general tendency, but in practice allows a myriad of damaging exceptions, exceptions which serve to vitiate the principle almost completely, notably in the fields of police and military affairs, education, taxation, welfare, "neighborhood effects," antitrust laws, and money and banking. Let us consider a stark example: Suppose a society which fervently considers all redheads to be agents of the Devil and therefore to be executed whenever found. Let us further assume that only a small number of redheads exist in any generation-so few as to be statistically insignificant. The utilitaria~libertarianmight well reason: "While the murder of isolated redheads is deplorable, the executions are small in number; the vast majority of the public, as nonredheads, achieves enormous psychic satisfaction from the public execution of redheads. The social cost is negligible, the social, psychic benefit to the rest of society is great; therefore, it is right and proper for society to execute the redheads." The natural-rights libertarian, overwhelmingly concerned as he is for the justice of the act, will react in horror and staunchly and unequivocally oppose the executions as totally unjustified murder and aggression upon nonaggressive persons. The consequence of stopping the murders- depriving the bulk of society of great psychic pleasure-would not influence such a libertarian, the "absolutist" libertarian, in the slightest. Dedicated to justice and to logical consistency, the natural-rights libertarian cheefilly admits to being "doctrinaire," to being, in short, an unabashed follower of his own doctrines. Let us turn then to the natural-rights basis for the libertarian creed, a basis which, in one form or another, has been adopted by most of the libertarians, past and present. "Natural rights" is the cornerstone of a political philosophy which, in turn, is embedded in a greater structure of Property and Exchange

"natural law." Natural law theory rests on the insight that we live in a world of more than one-in fact, a vast number-of entities, and that each entity has distinct and specific properties, a distinct "nature," which can be investigated by man's reason, by his sense perception and mental faculties. Copper has a distinct nature and behaves in a certain way, and so do iron, salt, etc. The species man, therefore, has a specifiable nature, as does the world around him and the ways of interaction between them. To put it with undue brevity, the activity of each inorganic and organic entity is determined by its own nature and by the nature of the other entities with which it comes in contact. Specifically, while the behavior of plants and at least the lower animals is determined by their biological nature or perhaps by their "instincts," the nature of man is such that each individual person must, in order to act, choose his own ends and employ his own means in order to attain them. Possessing no automatic instincts, each man must learn about himself and the world, use his mind to select values, learn about cause and effect, and act purposively to maintain himself and advance his life. Since men can think, feel, evaluate, and act only as individuals, it becomes vitally necessary for each man's survival and prosperity that he be free to learn, choose, develop his faculties, adact upon his knowledge and values. This is the necessary path of human nature; to interfere with and cripple this process by using violence goes profoundly against what is necessary by man's nature for his life and prosperity. Violent interference with a man's learning and choices is therefore profoundly "antihuman"; it violates the natural law of man's needs. Individualists have always been accused by their enemies of being "atomistic"-of postulating that each individual lives in a kind of vacuum, thinking and choosing without relation to anyone else in society. This, however, is an authoritarian straw man; few, if any, individualists have ever been "atomists." On the contrary, it is evident that individuals always learn from each other, cooperate and interact with each other; and that this, too, is required for man's survival. But the point is that each individual makes the final choice of which influences to adopt and which to reject, or of which to adopt first and which afterwards. The libertarian welcomes the process of voluntary exchange and cooperation between freely acting individuals; what he abhors is the use of violence to cripple such voluntary cooperation and force someone to choose and act in ways different from what his own mind dictates. The Libertarian Creed

The most viable method of elaborating the natural-rights statement of the libertarian position is to divide it into parts, and to begin with the basic axiom of the "right to self-ownership." The right to self-ownership asserts the absolute right of each man, by virtue of his (or her) being a human being, to "own" his or her own body; that is, to control that body free of coercive interference. Since each individual must think, learn, value, and choose his or her ends and means in order to survive and flourish, the right to self-ownership gives man the right to perform these vital activities without being hampered and restricted by coercive molestation. Consider, too, the consequences of denying each man the right to own his own person. There are then only two alternatives: either (1) a certain class of people, A, have the right to own another class, B; or (2) everyone has the right to own his own equal quotal share of everyone else. The first alternative implies that while Class A deserves the rights of being human, Class B is in reality subhuman and therefore deserves no such rights. But since they are indeed human beings, the first alternative contradicts itself in denying natural human rights to one set of humans. Moreover, as we shall see, allowing Class A to own Class B means that the former is allowed to exploit, and therefore to live parasitically, at the expense of the latter. But this parasitism itself violates the basic economic requirement for life: production and exchange. The second alternative, what we might call "participatory communak ism" or "communism," holds that every man should have the right to own his equal quotal share of everyone else. If there are two billion people in the world, then everyone has the right to own one two-billionth of every other person. In the first place, we can state that this ideal rests on an absurdity: proclaiming that every man is entitled to own a part of everyone else, yet is not entitled to own himself. Secondly, we can picture the viability of such a world: a world in which no man is free to take any action whatever without prior approval or indeed command by everyone else in society. It should be clear that in that sort of "communist" world, no one would be able to do anything, and the human race would quickly perish. But if a world of zero self-ownership and one hundred percent other ownership spells death for the human race, then any steps in that direction also contravene the natural law of what is best for man and his life on earth. Finally, however, the participatory communist world cannot be put into practice. For it is physically impossible for everyone to keep continual tabs on everyone else, and thereby to exercise his equal quotal share of Property and Exchange 29 partial ownership over every other man. In practice, then, tk concept of universal and equal other-ownership is utopian and impossible, and supervision and therefore control and ownership of others necessarily devolves upon a specialized group of people, who thereby become a ruling class. Hence, in practice, any attempt at communist rule will automatically become class rule, and we would be back at our first alternative. The libertarian therefore rejects these alternatives and concludes by adopting as his primary axiom the universal right of self-ownership, a right held by everyone by virtue of being a human being. A more difficult task is to settle on a theory of property in nonhuman objects, in the things of this earth. It is comparatively easy to recognize the practice when someone is aggressing against the property right of another's person: If A assaults B, he is violating the property right of B in his own body. But with nonhuman objects the problem is more complex. If, for example, we see X seizing a watch in the possession of Y we cannot automatically assume that X is aggressing against Y s right of property in the watch; for may not X have been the original, "true" owner of the watch who can therefore be said to be repossessing his own legitimate property? In order to decide, we need a theory of justice in property, a theory that will tell us whether X or Y or indeed someone else is the legitimate owner. Some libertarians attempt to resolve the problem by asserting that whoever the existing government decrees has the property title should be considered the just owner of the property. At this point, we have not yet delved deeply into the nature of government, but the anomaly here should be glaring enough: it is surely odd to find a group eternally suspicious of virtually any and all functions of government suddenly leaving it to government to define and apply the precious concept of property, the base and groundwork of the entire social order. It is particularly the utilitarian laissez-fairists who believe it most feasible to begin the new libertarian world by confirming all existing property titles; that is, property titles and rights as decreed by the very government that is condemned as a chronic aggressor. Let us illustrate with a hypothetical example. Suppose that libertarian agitation and pressure has escalated to such a point that the government and its various branches are ready to abdicate. But they engineer a cunning ruse. Just before the government of New York state abdicates it passes a law turning over the entire territorial area of New York to become the private property of the Rockefeller family. The Massachusetts legislature does the same for the Kennedy family. And so on for each state. The The Libertarian Creed government could then abdicate and decree the abolition of taxes and coercive legislation, but the victoriour libertarians would now be confronted with a dilemma. Do they recognize the new property titles as legitimately private property? The utilitarians, who have no theory of justice in property rights, would, if they were consistent with their acceptance of given property titles as decreed by government, have to accept a new social order in which fifty new satraps would be collecting taxes in the form of unilaterally imposed "rent." The point is that only naturakights libertarians, only those libertarians who have a theory of justice in property titles that does not depend on government decree, could be in a position to scoff at the new rulers' claims to have private property in the territory of the country, and to rebuff these claims as invalid. As the great nineteenthcentury liberal Lord Acton saw clearly, the natural law provides the only sure ground for a continuing critique of governmental laws and decrees.' What, specifically, the naturakrights position on property titles may be is the question to which we now turn. We have established each individual's right to self-ownership, to a property right in his own body and person. But people are not floating wraiths; they are not self-subsistent entities; they can only survive and flourish by grappling with the earth around them. They must, for example, stand on land areas; they must also, in order to survive and maintain themselves, transform the resources given by nature into "consumer goods," into objects more suitable for their use and consumption. Food must be grown and eaten; minerals must be mined and then transformed into capital and then useful consumer goods, etc. Man, in other words, must own not only his own person, but also material objects for his control and use. How, then, should the property titles in these objects be allocated? Let us take, as our first example, a sculptor fashioning a work of art out of clay and other materials; and let us waive, for the moment, the question of original property rights in the clay and the sculptor's tools. The question then becomes: Who owns the work of art as it emerges from the sculptor's fashioning? It is, in fact, the sculptor's "creation,'' not in the sense that he has created matter, but in the sense that he has transformed nature-given matter-the clay-into another form dictated by his own

- - ' See Gertrude Himrnelfarb, Lord Acton; A Study in Conscience and Politics (Chicago: Phoenix Books, 1962), pp. 294-05. Compare also John Wild, Pluto's Modern Enemies and the Theory ofNatural Law (Chicago: University of Chicago Press, 1953), p. 176. Property and Exchange 31 ideas and fashioned by his own hands and energy. Surely, it is a rare person who, with the case put thus, would say that the sculptor does not have the property right in his own product. Surely, if every man has the right to own his own body, and if he must grapple with the material objects of the world in order to survive, then the sculptor has the right to own the product he has made, by his energy and effort, a veritable extension of his own personality. He has placed the stamp of his person upon the raw material, by "mixing his labor" with the clay, in the phrase of the great property theorist John Locke. And the product transformed by his own energy has become the material embodiment of the sculptor's ideas and vision. John Locke put the case this way:

...every man has a property in his own person. This nobody has any right to but himself. The labour of his body and the work of his hands, we may say, are properly his. Whatsoever, then, he removes out of the state that nature hath provided and left it in, he hath mixed his labour with it, and joined it to something that is his own, and thereby makes it his property. It being by him removed from the common state nature placed it in, it hath by this labour something annelced to it that excludes the common right of other men. For this labour being the unquestionable property of the labourer, no man but he can have a right to what that is once joined to.. .2

As in the case of the ownership of people's bodies, we again have three logical alternatives: (1) either the transformer, or "creator" has the property right in his creation; or (2) another man or set of men have the right in that creation, i.e., have the right to appropriate it by force without the sculptor's consent; or (3) every individual in the world has an equal, quota1 share in the ownership of the sculpture-the "communal" solution. Again, put baldly, there are very few who would not concede the monstrous injustice of confiscating the sculptor's property, either by otle or more others, or on behalf of the world as a whole. By what right do they do so? By what right do they appropriate to themselves the product of the creator's mind and energy? In this clear-cut case, the right of the creator to own what he has mixed his person and labor with would be generally conceded. (Once again, as in the case of communal ownership of persons, the world communal solution would, in practice, be reduced to an

John Locke, An Essay Concerning the True Original Extent and End ofcivil Government, In E. Barker, ed., Social Contract (New York: Oxford University Press, 1948), pp. 17- 18. 32 The Libertarian Creed oligarchy of a few others expropriating the creator's work in the name of "world public" ownership.) The main point, however, is that the case of the sculptor is not qualita- tively different fiom all cases of "production." The man or men who had extracted the clay fiom the ground and had sold it to the sculptor may not be as "creative" as the sculptor, but they too are "producers," they too have mixed their ideas and their technological know-how with the nature- given soil to emerge with a useful product. They, too, are "producers," and they too have mixed their labor with natural materials to transform those materials into more useful goods and services. These persons, too, are entitled to the ownership of their products. Where then does the process begin? Again, let us turn to Locke:

He that is nourished by the acorns he picked up under an oak, or the apples he gathered from the trees in the wood, has certainly appropriated them to himself. Nobody can deny but the nourishment is his. I ask then, when did they begin to be his? When he digested? or when he ate? or when he boiled? or when he brought them home? or when he picked them up? And 'tis plain, if the first gathering made them not his, nothing else could. That labour put a distinction between them and common. That added something to them more than Nature, the common mother of all, had done, and so they became his private right. And will any one say he had no right to those acorns or apples he thus appropriated because he had not the consent of all mankind to make them his? Was it a robbery thus to assume to himself what belonged to all in common? If such a consent as that was necessary, man had starved, notwithstanding the plenty God had given him. . . . Thus, the grass my horse has bit, the turfs my servant has cut, and the ore I have digged in my place, where I have a right to them in common with others, become my property without the assignation or consent of any body. The labour that was mine, removing them out of that common state they were in, hath fixed my property in them. By making an explicit consent of every commoner necessary to any one's appropriating to himself any part of what is given in common, children or servants could not cut the meat which their father or master had provided for them in common without assigning to every one his peculiar part. Though the water running in the fountain be every one's, yet who can doubt hut that in the pitcher is his only who drew it out? His labour hath taken it out of the hands of Nature where it was common . . . and hath thereby appropriated it to himself. Thus the law of reason makes the deer that Indian's who killed it; 'tis allowed to be his goods who hath bestowed his labour upon it, though, before, it was the common right of every one. And amongst those who are counted the civilized part of mankind . . . this original Property and Exchange

law of nature for the beginning of property, in what was before common, still takes place, and by virtue thereof, what fish any one catches in the ocean, that great and still remaining common of mankind; or what ambergris any one takes up here is by the labour that removes it out of that common state nature left it in, made his property who takes that pains about it.3

If every man owns his own person and therefore his own labor, and if by extension he owns whatever property he has "created" or gathered out of the previously unused, unowned, "state of nature," then what of the last great question: the right to own or control the earth itself, In short, if the gatherer has the right to own the acorns or berries he picks, or the farmer the right to own his crop of wheat or peaches, who has the right to own the land on which these things have grown? It is at this point that Henry George and his followers, who have gone all the way so far with the libertarians, leave the track and deny the individual's right to own the piece of land itself, the ground on which these activities have taken place. The Georgists argue that, while every man should own the goods which he produces or creates, since Nature or God created the land itself, no individual has the right to assume ownership of that land. Yet, if the land is to be used at all as a resource in any sort of efficient manner, it must be owned or controlled by someone or some group, and we are again faced with our three alternatives: either the land belongs to the first user, the man who first brings it into production; or it belongs to a group of others; or it belongs to the world as a whole, with every individual owning a quota1 part of every acre of land. George's option for the last solution hardly solves his moral problem: If the land itself should belong to God or Nature, then why as it more moral for every acre in the world to be owned by the world as a whole, than to concede individual ownership? In practice, again, it is obviously impossible for every person in the world to exercise effective ownership of his four-billionth portion (if the world population is, say, four billion) of every piece of the world's land surface. In practice, of course, a small oligarchy would do the controlling and owning, and not the world as a whole. But apart from these difficulties in the Georgist position, the natural- rights justification for the ownership of ground land is the same as the

Locke, Civil Government, pp. 18-49. While Locke was a brilliant property theorist, we are not claiming that he developed and applied his theory with anything like complete consistency. 34 The Libertarian Creed justification for the original ownership of all other property. For, as we have seen, no producer really "creates" matter; he takes nature-given matter and transforms it by his labor energy in accordance with his ideas and vision. But this is precisely what the pioneer-the "homesteader"-- does when he brings previously unused land into his own private ownership. Just as the man who makes steel out of iron ore transforms that ore out of his know-how and with his energy, and just as the man who takes the iron out of the ground does the same, so does the homesteader who clears, fences, cultivates, or builds upon the land. The homesteader, too, has transformed the character of the nature-given soil by his labor and his personality. The homesteader is just as legitimately the owner of the property as the sculptor or the manufacturer; he is just as much a "producer" as the others. Furthermore, if the original land is nature- or God-given then so are the people's talents, health, and beauty. And just as all these attributes are given to specific individuals and not to "society," so then are land and natural resources. All of these resources are given to individuals and not to "society," which is an abstraction that does not actually exist. There is no existing entity called "society"; there are only interacting individuals. To say that "society" should own land or any other property in common, then, must mean that a group of oligarchs-in practice, government bureaucrats-should own the property, and at the expense of expropriating the creator or the homesteader who had originally brought this product into existence. Moreover, no one can produce anything without the cooperation of original land, if only as standing room. No man can produce or create anything by his labor alone; he must have the cooperation of land and other natural raw materials. Man comes into the world with just himself and the world around him-the land and natural resources given him by nature. He takes these resources and transforms them by his labor and mind and energy into goods more useful to man. Therefore, if an individual cannot own original land, neither can he in the full sense own any of the fruits of his labor. The farmer cannot own his wheat crop if he cannot own the land on which the wheat grows. Now that his labor has been inextricably mixed with the land, he cannot be deprived of one without being deprived of the other. Moreover, if a producer is not entitled to the hits of his labor, who is? It is difficult to see why a newborn Pakistani baby should have a moral claim to a quota1 share of ownership of a piece of Iowa land that someone Property and Exchange 35 has just transformed into a wheatfield-and vice versa of course for an Iowan baby and a Pakistani farm. Land in its original state is unused and unowned. Georgists and other land communalists may claim that the whole world population really "owns" it, but if no one has yet used it, it is in the real sense owned and controlled by no one. The pioneer, the homesteader, the first user and transformer of this land, is the man who first brings this simple valueless thing into production and social use. It is difficult to see the morality of depriving him of ownership in favor of people who have never gotten within a thousand miles of the land, and who may not even know of the existence of the property over which they are supposed to have a claim. The moral, naturakrights issue involved here is even clearer if we consider the case of animals. Animals are "economic land," since they are original nature-given resources. Yet will anyone deny full title to a horse to the man who finds and domesticates it-is this any different from the acorns and berries that are generally conceded to the gatherer? Yet in land, too, some homesteader takes the previously "wild," undomesticated land, and "tames" it by putting it to productive use. Mixing his labor with land sites should give him just as clear a title as in the case of animals. As Locke declared: "As much land as a man tills, plants, improves, cultivates, and can use the product of, so much is his property. He by his labour does, as it were, enclose it from the ~ornrnon."~ The libertarian theory of property was eloquently summed up by two nineteentkcentury laissez-faire French economists:

If man acquires rights over things, it is because he is at once active, intelligent and free; by his activity he spreads over external nature; by his intelligence he governs it, and bends it to his use; by his liberty, he establishes between himself and it the relation of cause and effect and makes it his own.. . . Where is there, in a civilized country, a clod of earth, a leaf, which does not bear this impress of the personality of man? In the town, we are surrounded by the works of man; we walk upon a level pavement or a beaten road; it is man who made healthy the formerly muddy soil, who took from the side of a far-away hill the flint or stone which covers it. We live in houses; it is man who has dug the stone from the quarry, who has hewn it, who has planed the woods; it is the thought of man which has arranged the materials properly and made a building of what was before rock and wood. And in the country, the action of man

Locke, Civil Government, p. 20. 36 The Libertarian Creed

is still everywhere present; men have cultivated the soil and generations of laborers have mellowed and enriched it; the works of man have dammed the rivers and created fertility where the waters had brought only desolation. . . . Everywhere a powerful hand is divined which has moulded matter, and an intelligent will which has adapted it . . . to the satisfaction of the wants of one same being. Nature has recognized her master, and man feels that he is at home in nature. Nature has been appropriated by him for his use; she has become his own; she is his property. This property is legitimate; it constitutes a right as sacred for man as is the free exercise of his faculties. It is his because it has come entirely from himself, and is in no way anything but an emanation from his being. Before him, there was scarcely anything but matter; since him, and by him, there is interchangeable wealth, that is to say, articles having acquired a value by some industry, by manufacture, by handling, by extraction, or simply by transportation. From the picture of a great master, which is perhaps of all material production that in which matter plays the smallest part, to the pail of water which the carrier draws from the river and takes to the consumer, wealth, whatever it may be, acquires its value only by communicated qualities, and these qualities are part of human activity, intelligence, strength. The producer has left a fragment of his own person in the thing which has thus become valuable, and may hence be regarded as a prolonga- tion of the faculties of man acting upon external nature. As a free being he belongs to himself; now the cause, that is to say, the productive force, is himself; the effect, that is to say, the wealth produced, is still himself. Who shall dare contest his title of ownership so clearly marked by the seal of his personality?. . . It is then, to the human being, the creator of all wealth, that we must come back . . . it is by labor that man impresses his personality on matter. It is labor which cultivates the earth and makes of an unoccupied waste an appropriated field; it is labor which makes of an untrodden forest a regularly ordered wood; it is labor, or rather, a series of labors often executed by a very numerous succession of workmen, which brings hemp from seed, thread from hemp, cloth from thread, clothing from cloth; which transforms the shapeless pyrite, picked up in the mine, into an elegant bronze which adorns some public place, and repeats to an entire people the thought of an artist.. .. Property, made manifest by labor, participates in the rights of the person whose emanation it is; like him, it is inviolable so long as it does not extend so far as to come into collision with another right; like him, it is individual, because it has origin in the independence of the individual, and because, when several persons have cooperated in its formation, the latest possessor has pulchased with a value, the fruit of his personal labor, the work of all the fellow-laborers who have preceded him: this is what is usually the case with manufactured articles. When property has passed, by sale or by inheritance, from one Property and Exchange

hand to another, its conditions have not changed; it is still the fruit of human liberty manifested by labor, and the holder has the rights as the producer who took possession of it by right5

Society and the Individual

We have talked at length of individual rights; but what, it may be asked, of the "rights of society"? Don't they supersede the rights of the mere individual? The libertarian, however, is an individualist; he believes that one of the prime errors in social theory is to treat "society" as if it were an actually existing entity. "Society" is sometimes treated as a superior or quasi-divine figure with overriding "rights" of its own; at other times as an existing evil which can be blamed for all the ills of the world. The individualist holds that only individuals exist, think, feel, choose, and act; and that "society" is not a living entity but simply a label for a set of interacting individuals. Treating society as a thing that chooses and acts, then, serves to obscure the real forces at work. If, in a small community, ten people band together to rob and expropriate three others then this is clearly and evidently a case of a group of individuals acting in concert against another group. In this situation, if the ten people presumed to refer to themselves as "society" acting in "its" interest, the rationale would be laughed out of court; even the ten robbers would probably be too shamefaced to use this sort of argument. But let their size increase, and this kind of obfuscation becomes rife and succeeds in duping the public. The fallacious use of a collective noun like "nation," similar in this respect to "society," has been trenchantly pointed out by the historian Parker T. Moon:

When one uses the simple monosyllable "France" one thinks of France

as a unit, an entity.y When . . . we say "France sent her troops to conquer Tunis '-we impute not only unit but personality to the country. The very words conceal the facts and make international relations a glamorous drama in which personalized nations are the actors, and all too easily we forget the flesh-and-blood men and women who are the true actors. . . if we had no such word as "France". . . then we should more accurately describe the Tunis expedition in some such way as this: "A few of these thirty-eight million persons sent thirty

Leon Wolowski and Emile Levasseur, "Property," in Lalor's Cyclopedia of Political Science. . . (Chicago: M. B. Cary & Co., 1884), 111, pp. 392-93. 38 The Libertarian Creed

thousand others to conquer Tunis." This way of putting the fact immediately suggests a question, or rather a series of questions. Who were the "few"? Why did they send the thirty thousand to Tunis? And why did these obey? Empire-building is done not by "nations," but by men. The problem before us is to discover the men, the active, interested minorities in each nation, who are directly interested in imperialism and then to analyze the reasons why the majorities ay the expense and fight the war necessitated by imperialist expansion.!

The individualist view of "society" has been summed up in the phrase: "Society7 is everyone but yourself. Put thus bluntly, this analysis can be used to consider those cases where "society" is treated, not only as a superhero with superrights, but as a supervillain on whose shoulders massive blame is placed. Consider the typical view that not the individual criminal, but "society," is responsible for his crime. Take, for example, the case where Smith robs or murders Jones. The "old-fashioned" view is that Smith is responsible for his act. The modern liberal counters that "society" is responsible. This sounds both sophisticated and humanitarian, until we apply the individualist perspective. Then we see that what liberals are really saying is that everyone but Smith, including of course the victim Jones, is responsible for the crime. Put this baldly, almost everyone would recognize the absurdity of this position. But conjuring up the fictive entity "society" obfuscates this process. As the sociologist Arnold W. Green puts it: "It would follow, then, that if society is responsible for crime, and criminals are not responsible for crime, only those members of society who do not commit crime can be held responsible for crime. Nonsense this obvious can be circumvented only by conjuring up society as devil, as evil being apart from people and what they do."7 The great American libertarian writer Frank Chodorov stressed this view of society when he wrote that "Society Are People."

Society is a collective concept and nothing else; it is a convenience for designating a number of people. So, too, is family or crowd or gang, or any other name we give to an agglomeration of persons. Society . . . is not an extra "person"; if the census totals a hundred million, that's all there are, not one more, for there cannot be any accretion to Society except by procreation. The concept of Society as a metaphysical person falls flat when we observe that Society disappears when the component

Parker Thomas Moon, Imperialism and World Politics (New York: Macmillan, 1930), p. 58. Arnold W. Green, "The Reified Villain," Social Research (Winter, 1968), p. 656. Property and Exchange

parts disperse; as in the case of a "ghost town" or of a civilization we learn about by the artifacts they left behind. When the individuals disappear so does the whole. The whole has no separate existence. Using the collective noun with a singular verb leads us into a trap of the imagination; we are prone to personalize the collectivity and to think of it as having a body and a psyche of its own.8

Free Exchange and Free Contract

The central core of the libertarian creed, then, is to establish the absolute right to private property of every man: first, in his own body, and second, in the previously unused natural resources which he first transforms by his labor. These two axioms, the right of self-ownership and the right to "homestead," establish the complete set of principles of the libertarian system. The entire libertarian doctrine then becomes the spinning out and the application of all the implications of this central doctrine. For example, a man, X, owns his own person and labor and the farm he clears on which he grows wheat. Another man, Y, owns the fish he catches; a third man, 2, owns the cabbages he has grown and the land under it. But if a man owns anything, he then has the right to give away or exchange these property titles to someone else, after which point the other person also has absolute property title. From this corollary right to private property stems the basic justification for free contract and for the free- market economy. Thus, if X grows wheat, he may and probably will agree to exchange some of that wheat for some of the fish caught by Y or for some of the cabbages grown by 2. With both X and Y making voluntary agreements to exchange property titles (or Y and 2, or X and 2) the property then becomes with equal legitimacy the property of the other person. If X exchanges wheat for Ys fish, then that fish becomes X's property to do with as he wishes, and the wheat becomes Ys property in precisely the same way. Further, a man may exchange not only the tangible objects he owns but also his own labor, which of course he owns as well. Thus, Z may sell his labor services of teaching farmer Xs children in return for some of the farmer's produce.

-- - - - Frank Chodorov, The Rise and Fall of Society (New York: Devin Adair, 1959), pp. 29- 30. 40 The Libertarian Creed

It so happens that the free-market economy, and the specialization and division of labor it implies, is by far the most productive form of economy known to man, and has been responsible for industrialization and for the modem economy on which civilization has been built. This is a fortunate utilitarian result of the free market, but it is not, to the libertarian, the prime reason for his support of this system. That prime reason is moral and is rooted in the natural-rights defense of private property we have developed above. Even if a society of despotism and systematic invasion of rights could be shown to be more productive than what Adam Smith called "the system of natural liberty," the libertarian would support this system. Fortunately, as in so many other areas, the utilitarian and the moral, natural rights and general prosperity, go hand in hand. The developed-market economy, as complex as the system appears to be on the surface, is nothing more than a vast network of voluntary and mutually agreed-upon two-person exchanges such as we have shown to occur between wheat and cabbage farmers, or between the farmer and the teacher. Thus, when I buy a newspaper for a dime, a mutually beneficial two-person exchange takes place: I transfer my ownership of the dime to the newsdealer and he transfers ownership of the paper to me. We do this because, under the division of labor, I calculate that the paper is worth more to me than the dime, while he newsdealer prefers the dime to keeping the paper. Or, when I teach at a university, I estimate that I prefer my salary to not expending my labor of teaching, while the university authorities calculate that they prefer gaining my teaching services to not paying me the money. If the newsdealer insisted on charging 50$ for the paper, I might well decide that it isn't worth the price; similarly, if I should insist on triple my present salary, the university might well decide to dispense with my services. Many people are willing to concede the justice and propriety of property rights and the free-market economy, to concede that the farmer should be able to charge whatever his wheat will bring from consumers or the worker to reap whatever others are willing to pay for his services. But they balk at one point: inheritance. If Willie Stargell is ten times as good and "productive" a ball player as Joe Jack, they are willing to concede the justice of Stargell's earning ten times the amount; but what, they ask, is the justification for someone whose only merit is being born a Rockefeller inheriting far more wealth than someone born a Rothbard? The libertarian answer is to concentrate not on the recipient, the child Rockefeller or the child Rothbard, but to concentrate on the giver, the man who bestows the Property and Exchange 41 inheritance. For if Smith and Jones and Stargell have the right to their labor and property and to exchange the titles to this property for the similar property of others, they also have the right to give their property to whomever they wish. And of course most such gifts consist of the gifts of the property owners to their childre-in short, inheritance. If Willie Stargell owns his labor and the money he earns from it, then he has the right to give that money to the baby Stargell. In the developed freemarket economy, then, the farmer exchanges the wheat for money; the wheat is bought by the miller who processes and transforms the wheat into flour; the miller sells the flour to the baker who produces bread; the baker sells the bread to the wholesaler, who in turn sells it to the retailer, who finally sells it to the consumer. And at each step of the way, the producer may hire the labor services of the workers in exchange for money. How "money" enters the equation is a complex process; but it should be clear that conceptually the use of money is equivalent to any single or group of useful commodities that are exchanged for the wheat, flour, etc. Instead of money, the commodity exchanged could be cloth, iron, or whatever. At each step of the way, mutually beneficial exchanges of property titles are agreed upon and transacted. We are now in a position to see how the libertarian defines the concept of ''freedom" or "liberty." Freedom is a condition in which a person's ownership rights in his own body and his legitimate material property are not invaded, are not aggressed against. A man who steals another man's property is invading and restricting the victim's freedom, as does the man who beats another over the head. Freedom adunrestricted property right go hand in hand. On the other hand, to the libertarian, "crime" is an act of aggression against a man's property right, either in his own person or his materially owned objects. Crime is an invasion, by the use of violence, against a man's property and therefore against his liberty. "Slavery"-the opposite of freedom-is a condition in which the slave has little or no right of self-ownership; his person and his produce are systematically expropriated by his master by the use of violence. The libertarian, then, is clearly an individualist but not an egalitarian. The only "equality" he would advocate is the equal right of every man to the property in his own person, to the property in the unused resources he "homesteads," and to the property of others he has acquired either through voluntary exchange or gift. The Libertarian Creed

Property Rights and "Human Rights"

Liberals will generally concede the right of every individual to his "personal liberty," to his freedom to think, speak, write, and engage in such personal "exchanges" as sexual activity between "consenting adults." In short, the liberal attempts to uphold the individual's right to the ownership of his own body, but then denies his right to "property," i.e., to the ownership of material objects. Hence, the typical liberal dichotomy between "human rights," which he upholds, and "property rights," which he rejects. Yet the two, according to the libertarian, are inextricably intertwined; they stand or fall together. Take, for example, the libeml socialist who advocates government ownership of all the "means of production" while upholding the "human" right of freedom of speech or press. How is this "human" right to be exercised if the individuals constituting the public are denied their right to ownership of property? If, for example, the government owns all the newsprint and all the printing shops, how is the right to a free press to be exercised? If the government owns all the newsprint, it then necessarily has the right and the power to allocate that newsprint, and someone's "right to a free press" becomes a mockery if the government decides not to allocate newsprint in his direction. And since the government must allocate scarce newsprint in some way, the right to a free press of, say, minorities or "subversive" antisocialists will get short shrift indeed. The same is true for the "right to free speech" if the government owns all the assembly halls, and therefore allocates those halls as it sees fit. Or, for example, if the government of Soviet Russia, being atheistic, decides not to allocate many scarce resources to the production of matzohs, for Orthodox Jews the "fi-eedom of religion" becomes a mockery; but again, the Soviet government can always rebut that Orthodox Jews are a small minority and that capital equipment should not be diverted to matzoh production. The basic flaw in the liberal separation of ''human rights" and "property rights" is that people are treated as ethereal abstractions. If a man has the right to self-ownership, to the control of his life, then in the real world he must also have the right to sustain his life by grappling with and transforming resources; he must be able to own the ground and the resources on which he stands and which he must use. In short, to sustain Property and Exchange 43 his "human rightv--or his property rights in his own person-he must also have the property right in the material world, in the objects which he produces. Property rights are human rights, and are essential to the human rights which liberals attempt to maintain. The human right of a free press depends upon the human right of private property in newsprint. In fact, there are no human rights that are separable from property rights. The human right of free speech is simply the property right to hire an assembly hall from the owners, or to own one oneself; the human right of a free press is the property right to buy materials and then print leaflets or books and to sell them to those who are willing to buy. There is no extra "right of free speech" or free press beyond the property rights we can enumerate in any given case. And furthermore, discovering and identifying the property rights involved will resolve any apparent conflicts of rights that may crop up. Consider, for example, the classic example where liberals generally concede that a person's "right of freedom of speech" must be curbed in the name of the "public interest": Justice Holmes' famous dictum that no one has the right to cry "fire" falsely in a crowded theater. Holmes and his followers have used this illustration again and again to prove the supposed necessity for all rights to be relative and tentative rather than precise and absolute. But the problem here is not that rights cannot be pushed too far but that the whole case is discussed in terms of a vague and wooly "freedom of speech" rather than in terms of the rights of private property. Suppose we analyze the problem under the aspect of property rights. The fellow who brings on a riot by falsely shouting "fire" in a crowded theater is, necessarily, either the owner of the theater (or the owner's agent) or a paying patron. If he is the owner, then he has committed fraud on his customers. He has taken their money in exchange for a promise to put on a movie or play, and now, instead, he disrupts the sbw by falsely shouting "fire" and breaking up the performance. He has thus welshed on his contractual obligation, and has thereby stolen the propertythe money- of his patrons and has violated their property rights. Suppose, on the other hand, that the shouter is a patron and not the owner. In that case, he is violating the property right of the owner-as well as of the other guests to their paid-for performance. As a guest, he has gained access to the property on certain terms, including an obligation not to violate the owner's property or to disrupt the performance the owner is 44 The Libertarian Creed putting on. His malicious act, therefore, violates the property rights of the theater owner and of all the other patrons. There is no need, therefore, for individual rights to be restricted in the case of the false shouter of "fire." The rights of the individual are still absolute; but they are property rights. The fellow who maliciously cried "fire" in a crowded theater is indeed a criminal, but not because his so- called "right of free speech" must be pragmatically restricted on behalf of the "public good"; he is a criminal because he has clearly and obviously violated the property rights of another person.

ENTREPRENEURSHIP AND CORPORATE GOVERNANCE

PETER G. KLEIN

n his “closing salvo” in the socialist calculation debate, Mises (1949, pp. 705–10) argued that the market socialists failed to understand the role of Ifinancial markets in an industrial economy. Even with markets for consumer goods, he explained, socialism would fail because it substituted collective ownership of the means of production for private capital markets. Through these markets, owners of financial capital decide which firms, and which industries, receive resources to make consumer goods. In a modern economy, most production takes place in publicly held corporations. Of prime importance, then, is the problem of corporate governance: How do owners of financial capital structure their agreements with those who receive that capital, to prevent its misuse? Unfortunately, there exists little research in this area from an Austrian perspective. In this article, I focus on the financial-market entrepreneur—what Rothbard (1962, 1985) calls the capitalist–entrepreneur—to outline some features of an Austrian theory of corporate governance. I begin by reviewing the traditional, production-function theory of the firm and suggesting two alternative perspectives: that of the entrepreneur and that of the capitalist. I next discuss the Coasian, or “contractual” approach to the firm and argue that it provides a useful organizing framework for Austrian research on the firm. The subsequent section proposes entrepreneurship and economic calculation as building blocks for an Austrian theory of the firm. Finally, after a brief review of capital-market behavior and the disciplinary role of takeovers, I outline four areas for Austrian research in corporate governance: firms as investments, internal capital markets, comparative corporate governance, and financiers as entrepreneurs. THE TRADITIONAL THEORY OF THE FIRM In economics textbooks, the “firm” is a production function or production possibilities set, a “black box” that transforms inputs into outputs. Given the existing state of technology, the prices of inputs, and a demand schedule, the firm maximizes money profits subject to the constraint that its production plans must

PETER G. KLEIN is assistant professor of economics at the University of Georgia. Earlier versions of this article were presented at George Mason University’s “Seminars in Austrian Economics IV: Inside the Black Box,” October 1997; the Austrian Scholars Conference 4, Auburn University, April 1998; and Copenha- gen Business School’s RESPECT workshop, November 1998. The author thanks participants at those meetings, and Jerry Ellig, Richard Langlois, Ivo Sarjanovic, and Narin Smith, for helpful suggestions. The Quarterly Journal of Austrian Economics vol. 2, no. 2 (Summer 1999): 19–42 19 20 THE QUARTERLY JOURNAL OF AUSTRIAN ECONOMICS VOL. 2, NO. 2 (SUMMER 1999) be technologically feasible. The firm is modeled as a single actor, facing a series of uncomplicated decisions: what level of output to produce, how much of each factor to hire, and the like. These “decisions,” of course, are not really decisions at all; they are trivial mathematical calculations, implicit in the underlying data. In the long run, the firm may choose an optimal size and output mix, but even these are determined by the characteristics of the production function (economies of scale, scope, and sequence). In short: the firm is a set of cost curves, and the “theory of the firm” is a calculus problem. While descriptively vacuous, the production–function approach has the appeal of analytical tractability along with its elegant parallel to neoclassical consumer theory (profit maximization is like utility maximization, isoquants are indifference curves, and so on). Nonetheless, many economists now see it as increasingly unsatisfactory, as unable to account for a variety of real-world business practices: vertical and lateral integration, mergers, geographic and product-line diversification, franchising, long-term commercial contracting, transfer pricing, research joint ventures, and many others. The inadequacy of the traditional theory of the firm explains much of the recent interest in agency theory, transaction cost economics, the capabilities approach, and other facets of the “new institutional economics.”1 A more serious problem with the traditional theory, however, has received less attention. The theory of profit maximization is nearly always told from the perspective of the manager, the agent who operates the plant, not that of the owner, who supplies the capital to fund the plant. Yet owners control how much authority to delegate to operational managers, so capitalists are the ultimate decisionmakers. To understand the firm, then, we must focus on the actions and plans of the suppliers of financial capital. Focusing on capital markets and the corporate governance problem highlights a fundamental analytical problem with the traditional approach to the theory of the firm. In the production-function approach, money capital is treated as a factor of production. The manager’s objective is to maximize the difference between total revenues and total costs, with the cost of capital treated simply as another cost (and typically assumed to be exogenous). The residual, “profit,” is retained by the manager. Hence financial capital receives scant attention. As discussed below, this can be a serious flaw. TWO ALTERNATIVE PERSPECTIVES What, then, is the proper way to understand the business firm? Two alternative perspectives deserve consideration. The first perspective, which has received substantial attention in the Austrian literature, is that of the entrepreneur, or what Mises (1949, pp. 254–55) calls the “entrepreneur–promoter.” Entrepreneurship, in the Misesian sense, is the act of bearing uncertainty. Production unfolds through time, and thus the entrepreneur must purchase factors of production in the present (paying today’s prices, which are known), in anticipation of revenues from the future sale of the product (at tomorrow’s prices, which are uncertain). En- trepreneurial profit or loss is the difference between these revenues and the initial outlays, less the general rate of interest. As such, profit is the reward for successfully bearing uncertainty. Successful promoters make accurate forecasts of future

1For recent surveys of this literature see Furubotn and Richter (1997), and Klein (1998a). ENTREPRENEURSHIP AND CORPORATE GOVERNANCE 21 prices and receive returns greater than their outlays. Those whose forecasts are less accurate earn losses. Promoters who systematically make poor forecasts quickly find themselves unable to secure any further resources for investment and eventually exit the market. The second perspective is that of the capitalist, the owner of the firm. Ownership can also be thought of as a factor of production—what Rothbard (1962, pp. 538–41) calls the “decisionmaking factor”—but it is different from the other factors. In an ownership approach, money capital is treated as a unique factor of production, the “controlling factor”; the investor is both ultimate decisionmaker and residual claimant. The firm’s objective is to maximize the return on the owner’s investment. Because the owner delegates certain functions to managers, a central focus of the theory of the firm becomes the problem of corporate governance: How do suppliers of capital structure their arrangements with managers in a way that maximizes their returns? This article argues that the most interesting problems in the theory of the firm relate to the intersection between the entrepreneurial function and the capitalist function. Indeed, as Mises argued, the driving force behind the market economy is a particular type of entrepreneur, the capitalist–entrepreneur, who risks his money capital in anticipation of future, uncertain, returns. Moreover, as discussed below, the entrepreneur is nearly always also a capitalist, and the capitalist is also an entrepreneur. Economists now increasingly recognize the importance of the capitalist in the direction of the firm’s affairs. In the introduction to his influential book Strong Managers, Weak Owners, Mark Roe (1994, p. vii) makes the point succinctly: Economic theory once treated the firm as a collection of machinery, technology, inventory, workers, and capital. Dump these inputs into a black box, stir them up, and one got outputs of products and profits. Today, theory sees the firm as more, as a management structure. The firm succeeds if managers can successfully coordinate the firm’s activities; it fails if managers cannot effectively coordinate and match people and inputs to current technologies and markets. At the very top of the firm are the relationships among the firm’s shareholders, its directors, and its senior managers. If those relationships are dysfunctional, the firm is more likely to stumble. As Roe suggests, the relationships between the firm’s owners (shareholders) and its top managers are centrally important in determining firm performance.2 THE CONTRACTUAL APPROACH Both the entrepreneurial perspective and the ownership perspective can be understood from within the “contractual” framework associated with Coase (1937). Coase was the first to explain that the boundaries of the organization depend not only on the productive technology, but on the costs of transacting business. In the Coasian framework, as developed and expanded by Williamson (1975, 1985, 1996), Klein, Crawford, and Alchian (1978), Grossman and Hart (1986), Hart and Moore (1990), and others, the decision to organize transactions within the firm as opposed to on the open market—the “make or buy decision”—depends on the

2For recent surveys of the literature on corporate governance see Gilson (1995), Shleifer and Vishny (1997), and Zingales (1998). 22 THE QUARTERLY JOURNAL OF AUSTRIAN ECONOMICS VOL. 2, NO. 2 (SUMMER 1999) relative costs of internal versus external exchange. The market mechanism entails certain costs: discovering the relevant prices, negotiating and enforcing contracts, and so on. Within the firm, the entrepreneur may be able to reduce these “transaction costs” by coordinating these activities himself. However, internal organization brings other kinds of transaction costs, namely problems of information flow, incentives, monitoring, and performance evaluation. The boundary of the firm, then, is determined by the tradeoff, at the margin, between the relative transaction costs of external and internal exchange. In this sense, firm boundaries depend not only on technology, but on organizational considerations; that is, on the costs and benefits of various contracting alternatives. Economic organization, both internal and external, imposes costs because complex contracts are usually incomplete. The transaction-cost literature makes much of the distinction between complete and incomplete contracts. A complete contract specifies a course of action, a decision, or terms of trade contingent on every possible future state of affairs. In textbook models of competitive general equilibrium, all contracts are assumed to be complete. The future is not known with certainty, but the probability distributions of all possible future events are known.3 In an important sense, the model is “timeless”: all relevant future contingencies are considered in the ex ante contracting stage, so there are no decisions to be made as the future unfolds. The Coasian approach relaxes this assumption and holds that complete, contingent contracts are not always feasible. In a world of “true” (structural, rather than parametric) uncertainty, the future holds genuine surprises (Foss 1993a), and this limits the available contracting options. In simple transactions—for instance, procurement of an off-the-shelf component—uncertainty may be relatively unim- portant, and spot-market contracting works well. For more complex transactions, such as the purchase and installation of specialized equipment, the underlying agreements will typically be incomplete—the contract will provide remedies for only some possible future contingencies.4 One example is a relational contract, an agreement that describes shared goals and a set of general principles that govern the relationship (Goldberg 1980). Another is an implicit contract—an agreement that while unstated, is presumably understood by all sides.5 Regardless, contractual incompleteness exposes the contracting parties to certain risks. In particular, investment in relationship-specific assets exposes agents to a potential “holdup” problem: If circumstances change, their trading partners may try to expropriate the rents accruing to the specific assets. Suppose an upstream supplier tailors its equipment to service a particular customer. After the equipment is in place, the customer may demand a lower price, knowing that the salvage value of the specialized equipment is lower than the net payment it offers. Anticipating this possibility, the supplier will be unwilling to install the custom machinery without

3What Knight (1921) would describe as “risk,” rather than “uncertainty.” 4Williamson (1975, 1985) attributes contractual incompleteness to cognitive limits or “bounded rationality,” following Simon’s (1961, p. xxiv) interpretation of human action as “intendedly rational, but only limitedly so.” Other economists are more agnostic, assuming only that some quantities or outcomes are unobservable (or not verifiable to third parties, such as the courts), in which case contracts cannot be made contingent on these variables or outcomes. 5This is the sense in which Kreps (1990) understands “corporate culture.” ENTREPRENEURSHIP AND CORPORATE GOVERNANCE 23 protection for such a contingency, even if the specialized technology would make the relationship more profitable for both sides. One way to safeguard rents accruing to specific assets is vertical (or lateral) integration, where a merger eliminates any adversarial interests. Less extreme options include long-term contracts (Joskow 1985, 1987, 1988, 1990), partial ownership agreements (Pisano, Russo, and Teece 1988; Pisano 1990), or agreements for both parties to invest in offsetting relationship-specific investments (Heide and John 1988). Overall, parties may employ several governance structures. The Coasian literature tries to match the appropriate governance structure with the particular characteristics of the transaction. There is some debate within the Austrian literature about whether the basic Coasian approach is compatible with Austrian economics. O’Driscoll and Rizzo (1985, p. 124), while acknowledging Coase’s approach as an “excellent static conceptualization of the problem,” argue that a more evolutionary framework is needed to understand how firms respond to change. Some Austrian economists have suggested that the Coasian framework may be too narrow, too squarely in the general-equilibrium tradition to deal adequately with Austrian concerns (Boudreaux and Holcombe 1989; Langlois 1994). However, as Foss (1993b) has pointed out, there are “two Coasian traditions.” One tradition, the moral-hazard or agency-theoretic branch associated with Alchian and Demsetz (1972), studies the design of ex-ante mechanisms to limit shirking when supervision is costly. Here the emphasis is on monitoring and incentives in an (exo- genously determined) agency relationship. The above criticisms may apply to this branch of the modern literature, but they do not apply to the other tradition, the governance or asset-specificity branch, especially in Williamson’s more heterodox formulation. Williamson’s transaction cost framework incorporates non-maximizing behavior (bounded rationality); true, “structural” uncertainty or genuine surprise (complete contracts are held not to be feasible, meaning that not all ex-post contingencies can be contracted upon ex ante); and process or adapta- tion over time (trading relationships develop over time, typically undergoing a “fundamental transformation” that changes the terms of trade). In short, “at least some modern theories of the firm do not at all presuppose the ‘closed’ economic universe—with all relevant inputs and outputs being given, human action concep- tualized as maximization, etc.—that [some critics] claim are underneath the contemporary theory of the firm” (Foss 1993a, p. 274). Stated differently, one can adopt an essentially Coasian perspective without abandoning the Knightian or Austrian view of the entrepreneur as an uncertainty-bearing, innovating decisionmaker.6 BUILDING BLOCKS OF AN AUSTRIAN THEORY OF THE FIRM Beginning with the basic Coasian or contractual framework, we can add two elements as building blocks to an Austrian theory of the firm: entrepreneurship and economic calculation. Entrepreneurship represents the bearing of uncertainty. Economic calculation is the tool entrepreneurs use to assess costs and expected future benefits. Consider each in turn.

6Foss and Foss (1998) argue, more generally, that contractual and “knowledge-based” theories of the firm are fundamentally complements, not rivals. 24 THE QUARTERLY JOURNAL OF AUSTRIAN ECONOMICS VOL. 2, NO. 2 (SUMMER 1999)

Entrepreneurship Entrepreneurship, in the Misesian sense, is the act of bearing uncertainty. In an ever-changing world, decisions must be made based on expectations of future events. Because production takes time, resources must be invested before the returns on those investments are realized. If the forecast of future returns is inaccurate, the expected profits will turn out to be losses. This is, of course, true not only of financial investors, but of all human actors. If the future were known with certainty, man would not act, since his action would not change the future. Thus, all purposeful human action carries some risk that the means chosen will not bring about the desired end. In this sense, all human actors are entrepreneurs. Austrians tend to focus on this kind of pure entrepreneurship, the entrepreneurial aspect of all human behavior. In doing so, however, they often overlook a particular case of entrepreneurship, the driving force behind the structure of production: the capitalist–entrepreneur, who risks his money capital in anticipation of future events. Kirzner’s (1973, 1979) influential interpretation of Mises identifies “alertness” or “discovery,” rather than uncertainty bearing, as the defining property of entrepreneurship. In Kirzner’s framework, entrepreneurial profit is the reward to superior alertness to profit opportunities. The simplest case is that of the arbitrageur, who discovers a discrepancy in present prices that can be exploited for financial gain. In a more typical case, the entrepreneur is alert to a new product or a superior production process and steps in to fill this market gap before others. Kirzner’s formulation has been criticized, however, for a lack of attention to uncertainty. According to this criticism, mere alertness to a profit opportunity is not sufficient for earning profits. To reap financial gain, the entrepreneur must invest resources to realize the discovered profit opportunity. “Entrepreneurial ideas without money are mere parlor games until the money is obtained and committed to the projects” (Rothbard, 1985, p. 283). Moreover, excepting the few cases where buying low and selling high are nearly instantaneous (say, electronic trading of currencies or commodity futures), even arbitrage transactions require some time to complete. The selling price may fall before the arbitrageur has made his sale, and thus even the pure arbitrageur faces some probability of loss. In Kirzner’s formulation, the worst that can happen to an entrepreneur is the failure to discover an existing profit opportunity. Entrepreneurs either earn profits or break even, but it is unclear how they suffer losses. Kirzner (1997, p. 72) argues, more recently, that entrepreneurs can earn losses when they misread market conditions. “[E]ntrepreneurial boldness and imagination can lead to pure entrepreneurial losses as well as to pure profit. Mistaken actions by entrepreneurs mean that they have misread the market, possibly pushing price and output constellations in directions not equilibrative.” But even this formulation makes it clear that it is mistaken actions—not mistaken discover- ies—that lead to loss. Misreading market conditions leads to losses only if the entrepreneur has invested resources in a project based on this misreading. It is the failure to anticipate future market conditions correctly that causes the loss. It seems obscure to describe this as erroneous discovery, rather than unsuccessful uncertainty bearing.7

7In his defense, it should be noted that Kirzner’s (1997) remarks appear in the context of defending the equilibrating tendency of markets, against the Walrasian picture of instantaneous market ENTREPRENEURSHIP AND CORPORATE GOVERNANCE 25

Mises, by contrast, consistently identifies entrepreneurship with both profit and loss. “There is a simple rule of thumb to tell entrepreneurs from non-entrepreneurs. The entrepreneurs are those on whom the incidence of losses on the capital employed falls” (Mises 1951, p. 112). Moreover, while Mises indeed acknowledges the element of entrepreneurship in all human action, it is clear that the potential losses of the capitalist–entrepreneurs are particularly important: Mises applies the concept of the entrepreneur to all cases of uncertainty-bearing, and since laborers face uncertainty in deciding where to move or what occupation to go into, laborers are also entrepreneurs. But the most important case of entrepreneurship, the driving force in shaping the actual structure and patterns of production in the market economy, are the capitalist–entrepreneurs, the ones who commit and risk their capital in deciding when, what, and how much to produce. The capitalists, too, are far more subject to actual monetary losses than are the laborers. (Rothbard 1985, p. 282)8 Mises is careful to distinguish entrepreneurship from management, the carrying out of those tasks specified by the capitalist–entrepreneur. “[T]hose who confuse entrepreneurship and management close their eyes to the economic problem” Mises 1949, p. 708). It is the capitalist–entrepreneurs who control the allocation of capital to the various branches of industry. It is clear from this formulation that the capitalist–entrepreneur must own property. He cannot invest without prior ownership of financial capital. Menger’s (1871, pp. 159–61) treatment of production includes as entrepreneurial functions economic calculation, the “act of will,” and “supervision of the execution of the production plan.” These functions “entail property ownership and, therefore, mark the Mengerian entrepreneur as a capitalist–entrepreneur” (Salerno 1999, p. 30). Menger describes “command of the services of capital” as a “necessary prerequisite” for economic activity. Even in large firms, although he may employ “several helpers,” the entrepreneur himself continues to bear uncertainty, perform economic calculation, and supervise production, even if these functions “are ultimately confined . . . to determining the allocation of portions of wealth to particular productive purposes only by general categories, and to selection and control of persons” (Menger 1871, pp. 160–61; quoted in Salerno 1999, p. 30).9 An Austrian theory of the firm, then, is essentially a theory about the ownership and use of capital. As Yu (1998, p. 7) puts it, “the Austrian firm is a collection of capital resources.” Unfortunately, the Austrian literature on the firm often confuses entrepreneurship with innovation, strategic planning, leadership, and other functions more properly associated with management than ownership. Witt (1998a,b), for example, describes entrepreneurship as a form of “cognitive leadership.” Witt (1998b) outlines a potential Austrian theory of the firm by combining recent literature on cognitive psychology with Kirzner’s concept of entrepreneurship. Entrepreneurs require complementary factors of production, he argues, which are coordinated within the firm. For the firm to be successful, the entrepreneur must establish a adjustment. Still, the defense could perhaps be made equally well without reference to the discovery metaphor. 8It should be noted that bondholders, as well as equity holders, are partly entrepreneurs, since even bondholders bear some default risk. 9For more on Misesian entrepreneurship and its various interpretations, see also Salerno (1993, pp. 116–33) and Kirzner (1996). 26 THE QUARTERLY JOURNAL OF AUSTRIAN ECONOMICS VOL. 2, NO. 2 (SUMMER 1999) tacit, shared framework of goals—what the management literature terms “leadership.” A proper Austrian theory of the firm, then, must take account of the ways in which entrepreneurs communicate their business conceptions within the organization. The problem with this argument is that while organizational leadership is undoubtedly important, it is not particularly “entrepreneurial.” Entrepreneurship has little necessarily to do with having a business plan, communicating a “corporate culture,” or other dimensions of business leadership; these are attributes of the successful manager, who may or may not be an entrepreneur.10 Moreover, even if top-level managerial skill were the same as entrepreneurship, it is unclear why “cognitive leadership”—tacit communication of shared modes of thought, core capabilities, and the like—should be more entrepreneurial than other, comparatively mundane managerial tasks such as structuring incentives, limiting op- portunism, administering rewards, and so on. Economic Calculation All entrepreneurs, particularly capitalist–entrepreneurs, use economic calculation as their primary decisionmaking tool. By economic calculation we simply mean the use of present prices and anticipated future prices to compare present costs with expected future benefits. In this way, the entrepreneur decides what goods and services should be produced, and what methods of production should be used to produce them. “The business of the entrepreneur is not merely to experiment with new technological methods, but to select from the multitude of technologically feasible methods those which are best fit to supply the public in the cheapest way with the things they are asking for most urgently” (Mises 1951, p. 110). To make this selection, the entrepreneur must be able to weigh the costs and expected benefits of various courses of action. The need for economic calculation places ultimate limits on the size of the organization (Klein 1996). Indeed, many writers have recognized the connections between the socialist calculation debate and the problems of internal organization (Montias 1976; Williamson 1991). Kirzner, for example, interprets the costs of internal organization in terms of Hayek’s knowledge problem:

In a free market, any advantages that may be derived from “central planning” . . . are purchased at the price of an enhanced knowledge problem. We may expect firms to spontaneously expand to the point where additional advantages of “central” planning are just offset by the incremental knowledge difficulties that stem from dispersed information. (Kirzner 1992, p. 162) What, precisely, drives this knowledge problem? The mainstream literature on the firm focuses mostly on the costs of market exchange, and much less on the costs of governing internal exchange. The new research has yet to produce a fully satisfactory explanation of the limits to firm size (Williamson 1985, chap. 6). In Coase’s words, “Why does the entrepreneur not organize one less transaction or one more?” Or, more generally, “Why is not all production carried on in one big firm?”

10One distinction between entrepreneurship (as uncertainty bearing) and management is that managerial functions can be purchased on the market: innovation can be outsourced to R&D labs; strategic planning can be contracted out to consultants; corporate identities, both internal and external, can be developed and communicated by outside specialists; and so on. ENTREPRENEURSHIP AND CORPORATE GOVERNANCE 27

(Coase 1937, pp. 42–43). Existing contractual explanations rely on problems of authority and responsibility (Arrow 1974); incentive distortions caused by residual ownership rights (Grossman and Hart 1986; Holmström and Tirole 1989; Hart and Moore 1990); and the costs of attempting to reproduce market governance features within the firm (Williamson 1985, chap. 6). Rothbard (1962, pp. 544–50) offered an explanation for the firm’s vertical boundaries based on Mises’s claim that economic calculation under socialism is impossible. Rothbard argued that the need for monetary calculation in terms of actual prices not only explains the failures of central planning under socialism, but places an upper bound on firm size. Rothbard’s account begins with the recognition that Mises’s position on socialist economic calculation is not exclusively, or even primarily, about socialism. It is about the role of prices for capital goods. Entrepreneurs allocate resources based on their expectations about future prices, and the information contained in present prices. To make profits, they need information about all prices, not only the prices of consumer goods but the prices of factors of production. Without markets for capital goods, these goods can have no prices, and hence entrepreneurs cannot make judgments about the relative scarcities of these factors. In any environment, then—socialist or not—where a factor of production has no market price, a potential user of that factor will be unable to make rational decisions about its use. Stated this way, Mises’s claim is simply that efficient resource allocation in a market economy requires well-functioning asset markets. To have such markets, factors of production must be privately owned. Rothbard’s contribution was to generalize Mises’s analysis of this problem under socialism to the context of vertical integration and the size of the organization. Rothbard writes in Man, Economy, and State that up to a point, the size of the firm is determined by costs, as in the textbook model. However, “the ultimate limits are set on the relative size of the firm by the necessity for markets to exist in every factor, in order to make it possible for the firm to calculate its profits and losses” (Rothbard 1962, p. 536). This argument hinges on the notion of “implicit costs.” The market value of opportunity costs for factor services—what Rothbard calls “estimates of implicit incomes”—can be determined only if there are external markets for those factors (pp. 542–44). For example, if an entrepreneur hires himself to manage the business, the opportunity cost of his labor must be included in the firm’s costs. Yet, without an actual market for the entrepreneur’s managerial services, he will be unable to figure out his opportunity cost; his balance sheets will therefore be less accurate than they would if he could measure his opportunity cost. The same problem affects a firm owning multiple stages of production. A large, integrated firm is typically organized into semi-autonomous profit centers, each specializing in a particular final or intermediate product. The central management of the firm uses the implicit incomes of the business units, as reflected in statements of divisional profit and loss, to allocate physical and financial capital across the divisions. To compute divisional profits and losses, the firm needs an economically meaningful transfer price for all internally transferred goods and services. If there is an external market for the component, the firm can use that market price as the transfer price. Without a market price, however, the transfer price must be estimated, either on a cost-plus basis or by bargaining between the buying and selling divisions (Gabor 1984; Eccles and White 1988; King 1994). Such estimated transfer prices contain less information than actual market prices. 28 THE QUARTERLY JOURNAL OF AUSTRIAN ECONOMICS VOL. 2, NO. 2 (SUMMER 1999)

The use of internally traded intermediate goods for which no external market reference is available thus introduces distortions that reduce organizational efficiency. This gives us the element missing from contemporary theories of economic organization, an upper bound: the firm is constrained by the need for external markets for all internally traded goods. In other words, no firm can become so large that it is both the unique producer and user of an intermediate product; for then no market-based transfer prices will be available, and the firm will be unable to calculate divisional profit and loss and therefore unable to allocate resources correctly between divisions.11 Of course, internal organization does avoid the holdup problem, which the firm would face if there were a unique outside supplier; conceivably, this benefit could outweigh the increase in “incalculability” (Rothbard 1962, p. 548). Usually, however, the costs from the loss of calculation will likely exceed the costs of external governance.12 Like Kirzner (1992), Rothbard viewed his contribution as consistent with the basic Coasian framework. In a later elaboration of this argument, he states that his own treatment of the limits of the firm serves to extend the notable analysis of Professor Coase on the market determinants of the size of the firm, or the relative extent of corporate planning within the firm as against the use of exchange and the price mechanism. Coase pointed out that there are diminishing benefits and increasing costs to each of these two alternatives, resulting, as he put it, in an “‘optimum’ amount of planning” in the free-market system. Our thesis adds that the costs of internal corporate planning become prohibitive as soon as markets for capital goods begin to disappear, so that the free-market optimum will always stop well short not only of One Big Firm throughout the world market but also of any disappearance of specific markets and hence of economic calculation in that product or resource. (Rothbard 1976, p. 76) “Central planning” within the firm, then, is possible only when the firm exists within a larger market setting.13

11Note that in general, Rothbard is making a claim only about the upper bound of the firm, not the incremental cost of expanding the firm’s activities (as long as external market references are available). As soon as the firm expands to the point where at least one external market has disappeared, however, the calculation problem exists. The difficulties become worse as more and more external markets disappear, as “islands of noncalculable chaos swell to the proportions of masses and continents. As the area of incalculability increases, the degrees of irrationality, misallocation, loss, impoverishment, etc., become greater” (Rothbard 1962, p. 548). 12Similarly, Rothbard’s claim is not that because external prices are necessary for large firms to function efficiently, firms will tend to become large where external markets are “thick” or better developed. On the contrary, large firms typically arise precisely where external markets are poorly developed or hampered by government intervention; these are the kinds of circumstances that give entrepreneurs an advantage in coordinating activities internally (Chandler 1977). However, such firms are still constrained by the need for some external market reference. 13Ironically, the only reason the Soviet Union and the communist nations of Eastern Europe could exist at all is that they never fully succeeded in establishing socialism worldwide, so they could use world market prices to establish implicit prices for the goods they bought and sold internally (Rothbard, 1991, pp. 73–74). As Mises (1949, pp. 702–03) observes, “[w]ithout the aid of [world] prices their actions would have been aimless and planless. Only because they were able to refer to these foreign prices were they able to calculate, to keep books, and to prepare their much talked about plans.” Indeed, traditional command-style economies, such as that of the former U.S.S.R., appear to be able only to mimic those tasks that market economies have performed before; they are unable to set up and execute original tasks (Ericson 1991, p. 21). ENTREPRENEURSHIP AND CORPORATE GOVERNANCE 29

Rothbard’s argument about the limits to firm size has several implications for research in industrial organization and business strategy. First, all else equal, firms able to use market-based transfer prices should eventually outperform firms using administered or negotiated transfer prices. Second, innovation should be particularly difficult in industries where few of the relevant manufacturing capabilities exist in the market (Langlois and Robertson 1995). Because innovating firms are more likely to be using unique intermediate goods and production processes, innovation carries with its benefits the cost of more severe internal distortions. Economic calculation is then another obstacle the innovator must overcome. Third, the allocation of overhead or fixed cost across divisions will be particularly problematic. If an input is essentially indivisible (or nonexcludable), then there is no way to compute the opportunity cost of just the portion of the input used by a particular division (see Rogerson 1992, for a discussion of these problems).14 Firms with high overhead costs should thus be at a disadvantage relative to firms able to allocate costs more precisely between business units. In the literature on cost accounting there has been some recent interest in “market simulation accounting” (Staubus 1986), by which firms try to assess the price at which an asset would trade in an active market, based on observed market prices and related information. Rothbard’s position on the limits to firm size suggests that the market simulation approach may prove a useful accounting technique. CAPITAL MARKETS If the capitalist–entrepreneur is the driving force behind the industrialized, market economy, then economists should focus their attention on the financial markets, the capitalist–entrepreneur’s main venue. It is here that this most important form of entrepreneurship takes place. Of course, in the traditional, production–function theory of the firm, capital markets do little but supply financial capital to managers, who can get as much capital as they wish at the going market price. In a more sophisticated understanding, managers do not decide how much capital they want; capitalists decide where capital should be allocated. In doing so, they provide essential discipline to the plant-level manager, whom Mises (1949, p. 304) calls the entrepreneur’s “junior partner.” When capitalists supply resources to firms, they usually delegate to managers the day-to-day responsibility for use of those resources. Managers may thus be able to use those resources to benefit themselves, rather than the capitalist. The problem of managerial discretion—what we now call the principal–agent problem—occupies much current research in the theory of the firm. Under what conditions can managers exercise discretionary behavior? What kinds of rules, or mechanisms, can be designed to align the manager’s interest with the owner’s? Without effective rules, what actions will managers choose? An early application was the proposed “separation of ownership and control” in the modern corporation. Berle and Means (1932) argued that the modern firm is run not by its owners, the share-holders, but by salaried managers, whose interests are different from those of shareholders and include executive perks, prestige, and similar rewards. If the corporation is diffusely held, no individual shareholder has sufficient motivation to engage in (costly) monitoring managerial decisions, and therefore discretion will flourish at

14Mises (1944, p. 32) recognized the problem of allocating overhead costs, mentioning this as a possible exception to the notion that divisional accounting costs can reflect “true” costs. 30 THE QUARTERLY JOURNAL OF AUSTRIAN ECONOMICS VOL. 2, NO. 2 (SUMMER 1999) the expense of the market value of the firm. However, Berle and Means did not consider how owners might limit this discretion ex ante, without the need for detailed ex post monitoring. Agency theory—now the standard language of corporate finance—addresses these problems. As developed by Jensen and Meckling (1976), Fama (1980), Fama and Jensen (1983), and Jensen (1986), agency theory studies the design of ex-ante incentive-compatible mechanisms to reduce agency costs in the face of potential moral hazard (malfeasance) by agents. Agency costs are defined by Jensen and Meckling (1976, p. 308) as the sum of “(1) the monitoring expenditures of the principal, (2) the bonding expenditures by the agent, and (3) the residual loss.” The residual loss represents the potential gains from trade that fail to be realized because perfect incentives for agents cannot be provided when the agent’s actions are unobservable. In a typical agency model, a principal assigns an agent to do some task (producing output, for instance), but has only an imperfect signal of the agent’s performance (for example, effort). The agency problem is analogous to the signal-extraction problem popularized in macroeconomics by Lucas (1972): how much of the observable outcome is due to the agent’s effort, and how much is due to factors beyond the agent’s control? The optimal incentive contract balances the principal’s desire to provide incentives to increase the agent’s effort (for example, by basing compensation on the outcome) with the agent’s desire to be insured from the fluctuations in compensation that come from these random factors. Owners of corporations (shareholders) use a variety of control or governance mechanisms to limit the managerial discretion described by Berle and Means. Both “internal” and “external” governance may be employed. Internally, owners may establish a board of directors to oversee the actions of managers. They can use performance-based compensation to motivate managers to act in the owners’ interest (for instance, giving managers stock options instead of cash bonuses). They can adopt a particular organizational form, such as the “M-form” structure, in which managerial discretion is more easily kept in check (Williamson 1975). Finally, they can rely on competition within the firm for top-level management positions—what Fama (1980) calls the internal market for managers—to limit the discretionary behavior of top-level management. Even more important are external forces that help align managers’ interests with those of shareholders. Competition in the product market, for example, assures that firms whose managers engage in too much discretionary behavior will fail, costing the managers their jobs. In countries where universal banking is permitted, large equity holders such as banks can exercise considerable influence over managerial behavior. The external governance mechanism that has received the most attention, however, is the market for ownership itself, the “market for corporate control.” Henry Manne’s essay, “Mergers and the Market for Corporate Control” (1965), responded to Berle and Means by noting that managerial discretion will be limited if there is an active market for control of corporations. When managers engage in discretionary behavior, the share price of the firm falls, and this invites takeover and subsequent replacement of incumbent management. Therefore, while managers may hold considerable autonomy over the day-to-day operations of the firm, the stock market places strict limits on their behavior. ENTREPRENEURSHIP AND CORPORATE GOVERNANCE 31

Mises makes the same general point in the passage in Human Action (1949) distinguishing what he calls “profit management” from “bureaucratic management” (pp. 308–11). It is true, Mises acknowledges, that the salaried managers of a corporation hold considerable autonomy over the day-to-day operations of the firm. Nonetheless, the shareholders make the ultimate decisions about allocating resources to the firm, in their decisions to buy and sell stock: [The Berle–Means] doctrine disregards entirely the role that the capital and money market, the stock and bond exchange, which a pertinent idiom simply calls the “market,” plays in the direction of corporate business. . . . [T]he changes in the prices of common and preferred stock and of corporate bonds are the means applied by the capitalists for the supreme control of the flow of capital. The price structure as determined by the speculations on the capital and money markets and on the big commodity exchanges not only decides how much capital is available for the conduct of each corporation’s business; it creates a state of affairs to which the managers must adjust their operations in detail. Mises 1949, p. 303) Mises does not identify the takeover mechanism per se as a means for capitalists to exercise control—takeovers were much less popular before the late 1950s, when the tender offer began to replace the proxy contest as the acquisition method of choice—but the main point is clear: The true basis of the market system is not the product market, the labor market, or the managerial market, but the capital market, where entrepreneurial judgments are exercised and decisions carried out.15 Mises’s treatment of the importance of financial markets is also the key to his final rebuttal in Human Action to Lange, Lerner, and the other market-socialist critics of his calculation argument (Mises 1949, pp. 698–715). The market socialists, he argued, fail to understand that the main task performed by a market system is not the pricing of consumer goods, but the allocation of financial capital among the various branches of industry. By focusing on production and pricing decisions within a given structure of capital, the socialists ignore the vital role of capital markets. TOWARD AN AUSTRIAN THEORY OF CORPORATE GOVERNANCE Given that financial-market entrepreneurship is the defining feature of a market economy, that economic calculation is the capitalist–entrepreneur’s primary tool, and that economic calculation requires well-functioning capital markets, what can capitalist–entrepreneurs do to govern their relationships with operational managers? What should be the basis of an Austrian theory of corporate governance? This section suggests four areas that Austrians should address: (1) the concept of the firm as an investment; (2) the relationship between internal and external capital markets; (3) comparative corporate governance; and (4) financiers as entrepreneurs. Consider each in turn.

15Compare Rothbard (1962, p. 538): Hired managers may successfully direct production or choose production processes. But the ultimate responsibility and control of production rests inevitably with the owner, with the businessman whose property the product is until it is sold. It is the owners who make the decision concerning how much capital to invest and in what particular processes. And particularly, it is the owners who must choose the managers. The ultimate decisions concerning the use of their property and the choice of the men to manage it must therefore be made by the owners and by no one else. 32 THE QUARTERLY JOURNAL OF AUSTRIAN ECONOMICS VOL. 2, NO. 2 (SUMMER 1999)

Firms as Investments Because the owner, and not the manager, is the ultimate decisionmaker, the Austrian theory of the firm should comprise two elements: a theory of investment (corporate finance), and a theory of how investors provide incentives for managers to use these resources efficiently (corporate governance). In microeconomics textbooks, by contrast, what the capital investors give to the firm is treated as just another factor of production. Its price, the “rental price of capital” or interest, is simply another cost to the producer. Any excess of revenues over costs, including the cost of capital, goes to the manager (sometimes confusingly called the “entrepreneur”). This residual is called “profit,” though it is not profit in the Misesian sense. In the ownership perspective, as developed by Gabor and Pearce (1952, 1958), Vickers (1970, 1987), Moroney (1972), and others, the firm is viewed as an investment. The firm’s goal is to maximize the return on invested capital. This money capital may be regarded as a factor of production, but it is a unique factor, the “controlling” factor that receives the net proceeds of the operation. Other factors, such as labor (including management) and physical capital, are regarded as “contracting” factors that receive a fixed payment. The services of the top-level manager are thus treated as a cost, while the investor is considered the residual claimant. Also note that because the capitalist bears the risk that the investment will fail, upon investing the capitalist has become an entrepreneur. Furthermore, to the extent that the entrepreneur (as Kirznerian discoverer) hires himself out to the capitalist as a salaried manager, his compensation is not entrepreneurial profit; it is a cost to the owner of the firm (Rothbard 1985, p. 283).This has significant implications for firm behavior. First, the firm will not always expand output to the point where marginal revenue equals marginal cost. For if the firm is earning positive net returns at its current level of output, instead of increasing output until marginal net returns fall to zero, the firm could simply take those returns and employ them elsewhere, either to set up a new firm in the same industry or to diversify into a new industry (Gabor and Pearce 1952, p. 253). The efficient scale of production is determined by outside investment opportunities, not simply the marginal returns from producing a single output. Indeed, it is easy to show that under fairly weak assumptions, the output level that maximizes the profit rate is less than the output level that maximizes the level of profit. Consider a standard, concave profit function; add a “money capital requirement,” the amount of capital required to finance a given level of output. As long as the money capital requirement is increasing in output, the output level that maximizes the profit rate—profit divided by the money capital required to finance that output level—is less than the output level that maximizes profit. From the capitalist’s perspective, output should be expanded to the point where the return on the last dollar of money capital is just equal to the opportunity cost of that last dollar of money capital. But as long as the plant manager is not free to invest his financial capital elsewhere, the manager’s cost curves do not reflect this opportunity cost. Hence, the manager chooses a higher output level than that which maximizes the capitalist’s return. Significantly, for internal accounting purposes, firms are typically structured such that the goal of any operating unit is to maximize the return on its invested capital. In fact, not only do firms set up divisions as profit centers, as discussed above, but groups of profit centers are frequently grouped together as “investment ENTREPRENEURSHIP AND CORPORATE GOVERNANCE 33 centers” within the firm itself. Reece and Cool (1978) studied 620 of the largest U.S. firms in 1978 and found that seventy-four percent had investment centers. These subunits are commonly evaluated according to a return-on-investment (ROI) criterion, such as the ratio of accounting net income generated by the investment center divided by total assets invested in the investment center. More recently, measures such as residual income and “economic value added” (EVA) have become popular as an alternative to ROI (Stern, Stewart, and Chew 1995). The point is that individual divisions are being evaluated on the same basis as the corporation itself—namely, what kind of return is being generated on the financial resources invested. Second, the firm-as-investment concept relates closely to an emerging literature on merger as a form of firm-level investment (Bittlingmayer 1996; Andrade and Stafford 1997). Once managers have acquired financial resources from capitalists, these managers have some discretion over how to invest those resources. To supplement the “normal” forms of firm-level investment—capital expenditures and R&D—managers may choose to purchase assets of existing firms through merger. Merger may be a different form of investment; Andrade and Stafford (1997) find, for example, that mergers in particular industries tend to be clustered over time, while rankings of non-merger forms of investment by industry tend to remain constant. This suggests that merger activity is encouraged by specific industry or policy shocks, like deregulation, the emergence of junk-bond financing, and increased foreign competition (Mitchell and Mulherin 1996). None- theless, mergers will be evaluated by the returns they generate, just like any other investment. Internal Capital Markets In his extension of the Coasian framework, Williamson (1975, 1981) describes the modern multidivisional or “M-form” corporation as a means of intra-firm capital allocation. Capital markets allocate resources between stand alone, single- product firms. In the diversified, multidivisional firm, by contrast, resources are allocated internally, as the entrepreneur distributes funds among profit-center divisions. This “internal capital market” replicates the allocative and disciplinary roles of the financial markets, shifting resources toward more profitable lines of production.16 Coase claimed that firms “supplant” markets when the transaction costs of market exchange exceed those of internal production. Williamson adds

16Such a process is described explicitly in the 1977 Annual Report of Fuqua Industries, a diversified firm with interests in lawn and garden equipment, sports and recreation, entertainment, photofin- ishing, transportation, housing, and food and beverages: Fuqua’s strategy is to allocate resources into business segments having prospects of the highest return on investment and to extract resources from areas where the future return on investment does not meet our ongoing requirements. . . . The same principle of expanding areas of high return and shrinking areas of low return is constantly extended to product lines and markets within individual Fuqua operations. Only with a diversified business structure is the application of this modern fundamental business investment policy practical. Another highly diversified firm, Bangor Punta Corporation, explains that the role of its corporate headquarters is “to act as a central bank supplying operating units with working capital and capital funds” (1966 Annual Report). 34 THE QUARTERLY JOURNAL OF AUSTRIAN ECONOMICS VOL. 2, NO. 2 (SUMMER 1999) that diversified, multidivisional firms “supplant” capital markets when the costs of external finance exceed those of internal resource allocation. According to the internal capital markets theory, diversified firms arise when limits in the capital market permit internal management to allocate and manage funds more efficiently than the external capital market. These efficiencies may come from several sources. First, the central headquarters of the firm (HQ) typically has access to information unavailable to external parties, which it extracts through its own internal auditing and reporting procedures (Williamson 1975, pp. 145–47).17 Second, managers inside the firm may also be more willing to reveal information to HQ than to outsiders, since revealing the same information to the capital market would also reveal it to rival firms, potentially hurting the firm’s competitive position. Third, HQ can also intervene selectively, making marginal changes to divisional operating procedures, whereas the external market can discipline a division only by raising or lowering the share price of the entire firm. Fourth, HQ has residual rights of control that providers of outside finance do not have, making it easier to redeploy the assets of poorly performing divisions (Gertner, Scharfstein, and Stein 1994). More generally, these control rights allow HQ to add value by engaging in “winner picking” among competing projects when credit to the firm as a whole is constrained (Stein 1997). Fifth, the internal capital market may react more “rationally” to new information: those who dispense the funds need only take into account their own expectations about the returns to a particular investment, and not their expectations about other investors’ expectations. Hence there would be no speculative bubbles or waves. Bhide (1990) uses the internal capital markets framework to explain both the conglomerate merger wave of the 1960s and the divestitures of the 1980s, regarding these developments as responses to changes in the relative efficiencies of internal and external finance. For instance, corporate refocusing can be explained as a consequence of the rise of takeover by tender offer rather than proxy contest, the emergence of new financial techniques and instruments like leveraged buyouts and high-yield bonds, and the appearance of takeover and breakup specialists, like Kohlberg Kravis Roberts, which themselves performed many functions of the conglomerate HQ (Williamson 1992). Furthermore, the emergence of the conglomerate in the 1960s can itself be traced to the emergence of the M-form corporation. Because the multidivisional structure treats business units as semi-independent profit or investment centers, it is much easier for an M-form corporation to expand via acquisition than it is for the older unitary structure. New acquisitions can be integrated smoothly when they can preserve much of their internal structure and retain control over day-to-day operations. In this sense, the conglomerate could emerge only after the multidivisional structure had been diffused widely throughout the corporate sector. Internal capital market advantages, then, explain why diversification can increase the value of the firm. During the 1960s, entrepreneurs took advantage of financial- market imperfections (many due to regulatory interference) to form large, highly diversified firms (Hubbard and Palia 1999; Klein 1998b). They also benefited from

17Myers and Majluf (1984) show that if the information asymmetry between a stand-alone firm and potential outside investors is large enough, the firm may forego investments with positive net present value rather than issue risky securities to finance them. ENTREPRENEURSHIP AND CORPORATE GOVERNANCE 35 government spending in high-technology and other defense-related businesses, which were particularly suited for acquisition. In the two subsequent decades, financial-market performance improved, reducing the internal capital market advantages of conglomerate firms. If entrepreneurs have a special ability to manage information and allocate financial resources within the firm—if diversified firms “supplant” external capital markets—then why are capital markets necessary at all? Why not, to paraphrase Coase’s (1937, pp. 42–43) second question, organize the entire economy as one giant conglomerate? The answer is that the argument for internal capital market advantages does not “scale up”; it applies only to firms that are themselves engaged in rivalrous competition. This situation, in turn, implies strict limits to firm size, even for large conglomerates. The argument for the efficiency of internal capital markets is that compared with outside investors, the entrepreneur can extract additional information about divisional requirements and performance. It is not that the entrepreneur’s knowledge substitutes for the knowledge embodied in market prices. To evaluate the merit of a proposed investment, the central management of a diversified conglomerate still relies on market prices to calculate expected (money) benefits and cost. Internal accounting does not substitute for money prices; it merely uses the information contained in prices in a particular way. When capital- goods prices are distorted—for example, because of financial market regulation—then the entrepreneur’s additional knowledge is that much more valuable. So under those conditions we would expect an increase in M-form corporations, allocating resources via internal capital markets. During the 1960s, that is exactly what we observed. Correctly understood, the internal capital markets hypothesis does not state that internal capital markets supplant financial markets. It states that internal capital markets supplement financial markets. Even ITT’s Harold Geneen, LTV’s James Ling, Litton’s “Tex” Thornton, and the other conglomerators of the 1960s were constrained by the need for economic calculation in terms of money prices. Thornton’s “Whiz Kids” have been criticized for their advocacy of “scientific management” or “management by the numbers.” Yet Thornton’s techniques were quite successful at Litton. It was only when his disciple Robert McNamara tried to apply the same techniques to a nonmarket setting—the Vietnam War—that the limitations of “scientific management” were revealed.18 Comparative Corporate Governance How well do various systems of corporate governance function? The last few years have seen the growth of a new literature on “comparative corporate governance,” the study of alternative means of governing relations between firm owners and managers. The typical comparison is between stock-market systems like those in the U.S. and U.K., and bank-centered systems like those in Germany and Japan (Roe 1994, 1998; Gilson and Black 1997; Milhaupt 1997). According to Roe, the phenomenon he calls “strong managers, weak owners” is an outgrowth not of the market process, but of legal restrictions on firm ownership and control. In the U.S., for example, banks and other institutions are forbidden from owning firms; antitrust laws

18For more on the relationship between Thornton and McNamara, see Shapley (1993), and Byrne (1993). 36 THE QUARTERLY JOURNAL OF AUSTRIAN ECONOMICS VOL. 2, NO. 2 (SUMMER 1999) prohibit industrial combinations like the Japanese keiretsu; and anti-takeover restrictions dilute the effects of the takeover mechanism. Laws that require diffuse ownership create what Roe terms the “Berle–Means corporation,” in which “fragmented ownership shifts power in the firm to managers” (p. 93). Mises makes a very similar argument in Human Action. There he notes that “the emergence of an omnipotent managerial class is not a phenomenon of the unham- pered market economy,” but a result of government policy (Mises 1949, p. 307). Here he expands upon his earlier analysis in Bureaucracy (1944, p. 12), where he attacks the claim that bureaucracy follows naturally from firm size. Mises conceives of bureaucracy as rule-following, as opposed to profit-seeking, behavior. He reserves the term “bureaucratic management” for the governing of activities that have no cash value on the market. As long as a firm’s inputs and outputs are bought and sold, the central management of the firm will have the information provided by market prices to evaluate the efficiency of the various branches and divisions within the firm. Then subordinate managers can be given wide discretion to make daily operational decisions without the pursuit of profit.19 If an organization produces a good or service that has no market price—the output of a government agency, for example—then subordinate managers must be given specific instruc- tions for how to perform their tasks. The fact that managers in a private firm have latitude to make day-to-day decisions, Mises argues, does not make the firm “bureaucratic.” “[N]o profit-seeking enterprise, no matter how large, is liable to become bureaucratic provided the hands of its management are not tied by government interference. The trend toward bureaucratic rigidity is not inherent in the evolution of business. It is an outcome of government meddling with business” (Mises 1944, p. 12). By this Mises means that government interference impedes the entrepreneur’s use of economic calculation and the attempt to use prices to impose managerial discipline. Mises gives three examples (pp. 64–73): taxes and price regulations that interfere with corporate profits (distorting an important signal of managerial performance); laws that interfere with hiring and promotion (including the need to hire public relations staffs and legal and accounting personnel to comply with government reporting requirements); and the omnipresent threat of arbitrary antitrust or regulatory activity, in response to which entrepreneurs must become adept at “diplomacy and bribery” (p. 72). The effect of legal restrictions on corporate governance and organizational form is an important and growing area, and further research from an Austrian perspective is sorely needed. Financiers as Entrepreneurs As discussed above, the market for corporate control places strict limits on the ability of managers to pursue their own goals rather than those of the capitalist–entrepreneurs. However, in the mainstream literature at least, there is much debate

19Chapter 1 of Bureaucracy, on profit management and the sources of entrepreneurial profit, contains a remarkably lucid account of economic calculation under capitalism and its impossibility under socialism. “To the entrepreneur of capitalist society a factor of production through its price sends out a warning: Don’t touch me, I am earmarked for another, more urgent need. But under socialism these factors of production are mute” (Mises 1944, p. 29). Mises also provides a very Coase-like discussion of the make-or-buy decision, though without citation (p. 33). ENTREPRENEURSHIP AND CORPORATE GOVERNANCE 37 about the effectiveness of the takeover mechanism in providing managerial discipline.20 If managers desire acquisitions to increase their own prestige or span of control—to engage in “empire building”—then an unregulated market will generate too many takeovers. Indeed, several studies have found a sharp divergence between market participants’ pre-merger expectations about the post-merger performance of merging firms, and the firms’ actual performance rates. Raven- scraft and Scherer’s (1987) large-scale study of manufacturing firms, for example, found that while the share prices of merging firms did on average rise with the announcement of the proposed restructuring, post-merger profit rates were unim- pressive. They find that nearly one-third of all acquisitions during the 1960s and 1970s were eventually divested. Ravenscraft and Scherer conclude that mergers typically promote empire building rather than efficiency, and they support increased restrictions on takeover activity. Jensen (1986, 1993) suggests changes in the tax code to favor dividends and share repurchases over direct reinvestment, thus limiting managers’ ability to channel free cash flow into unproductive acquisitions. However, the fact that some mergers—indeed, many mergers, takeovers, and reorganizations—turn out to be unprofitable does not imply market failure or necessarily prescribe any policy response. Errors will always be made in a world of uncertainty. Even the financial markets, which aggregate the collective wisdom of the capitalist–entrepreneurs, will sometimes make the wrong judgment on a particular business transaction. Sometimes the market will reward, ex ante, a proposed restructuring that has no efficiency rationale. But this is due not to capital market failure, but to imperfect knowledge. Final judgments about success and failure can be made only ex post, as the market process plays itself out. Moreover, there is no reason to believe that courts or regulatory authorities can make better judgments than the financial markets. The decisions of courts and government agencies will, in fact, tend to be far worse: unlike market participants, judges and bureaucrats pursue a variety of private agendas, unrelated to economic efficiency. Furthermore, the market is quick to penalize error as it is discovered; no hearings, committees, or fact-finding commissions are required. In short, that firms often fail is surprising only to those committed to textbook models of competition in which the very notion of “failure” is defined away. Another criticism of the market for corporate control is that unregulated financial markets engage in too few takeovers, due to a free-rider problem associated with tender offers (see, for example, Scharfstein 1988). Critics point out that if the difference between the current (undervalued) price of the firm and its after- takeover market value is common knowledge, then the target firm’s shareholders will refuse to tender their shares until the current price is bid up, appropriating a share of the returns to the acquiring firm. These critics conclude that regulation, not the takeover market, should be used to discipline managers. The flaw in this argument is that it assumes perfect knowledge on the part of investors. The typical shareholder will not usually have the same information as incumbent managers, outside “raiders,” and other specialists. It is not in the small shareholder’s interest to learn these details; that is why he delegates such responsibilities

20For overviews of this literature see Romano (1992), Shleifer and Vishny (1997), and Zingales (1998). 38 THE QUARTERLY JOURNAL OF AUSTRIAN ECONOMICS VOL. 2, NO. 2 (SUMMER 1999) to the managers in the first place. As Hayek (1945) described it, there is a “division of knowledge” in society. The raider who discovers a difference between a firm’s current market value and its potential value under new management has an opportunity for an entrepreneurial profit (less the transaction costs of takeover). Because shareholders have delegated these responsibilities, they will not usually earn a share of this profit. Nonetheless, as Rothbard (1962, p. 372) observes, because shareholders (owners) choose to delegate operational responsibility to managers—contracting out for the managerial function—they themselves retain the ultimate rights of control. Moreover, the post-takeover market value of the firm is uncertain; the raider’s profit, if he is successful, is the reward for bearing this uncertainty. In this sense, the takeover artist is a Misesian capitalist–entrepreneur. This account, however, could use further elaboration. For example, how is the bearing of uncertainty distributed among participants in various forms of restructuring? How do regulatory barriers hamper the capitalist–entrepreneur’s ability to exercise the entrepreneurial function in this context? CONCLUSIONS The main message of this article is that Austrians can continue to work within the contractual, or Coasian, approach to the firm in elaborating the insights discussed above. In particular, the problem of corporate governance, and the corollary view that firms are investments, belongs at the forefront of Austrian research on the theory of the firm. Emphasis should thus be placed on the plans and actions of the capitalist–entrepreneur. A particularly undeveloped area concerns the provision of capital to small, “entrepreneurial” ventures. Most of the literature on governance focuses on the large corporation, and the use of stock and bond markets to govern these organizations. Equally important, however, are smaller, privately held firms, financed with venture capital or other forms of investment. So far, the firm-as-investment literature has said little about these organizations, despite their growing importance, particularly in high-growth, technologically-advanced industries like software and biotechnology. Further research in this area is sorely needed.

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Hans-Hermann Hoppe

The honest historicist would have to say: Nothing can be asserted about the future. Ludwig von ~ises'

The future is to all of us unknowable. Ludwig LachmannZ

t is possible to imagine a world characterized by complete certainty. All future events and changes would be known in advance and could be predicted precisely. There would be no errors and no surprises. We would know all of our future actions and their exact outcomes. In such a world, Inothing could be learned, and accordingly, nothing would be worth knowing. Indeed, the possession of consciousness and knowledge would be useless. For why would anyone want to know anything if all future actions and events were completely predetermined and it would not make any difference for the future course of events whether or not one possessed this or any knowledge? Our actions would be like those of an automaton-and an automaton has no need of any knowledge. Thus, rather than representing a state of perfect knowledge, complete certainty actually eliminates the value of all knowledge. Obviously, we do not inhabit a world of complete certainty. We cannot predict all of our future actions and their outcome. There are in our world surprises. Our knowledge of future events and outcomes is less than perfect. We make errors, can distinguish between failure and success, and are capable of learning. Unlike for an automaton, for us knowledge is valuable. To know something

Hans-Hermann Hoppe is professor of economics at the University of Nevada, Las Vegas and is co-editor of The Renew ofAustrian Eronomicr. '~udwi~vonMises, 7Iwy and Hiswty (Auburn, Ala.: Ludwig von MisInstitute, 1985). p. 203. 2 LudwigLachmann, "From Mises to Shackle: An Essay on Austrian Economics and the Kaleidic Society,"Journal ofEconomic Literature 14 (1976): 55-59. Review ojAustrian Economics 10, no. 1 (1997): 49-78 ISSN:0889-3047 50 Review of Austrian Economics 10, No. 1 (1 997) or not makes a difference. Knowledge is not of predetermined events and states of affairs, but knowledge of how to intefere with and divert the natural course of events so as to improve our subjective well-being. Knowledge does not help us predict an unalterable course of events but is a tool of purposefully changing and hope- fully bettering future outcomes and events. Our actions, unlike the operations of an automaton, are not a series of predetermined events which the knower cannot influence and with respect to whose outcome he is indifferent. Rather, our actions are sequences of decisions (choices) of altering the predetermined course of events to our advantage. We are never neutral or indifferent toward the course of future events. Instead, we always prefer one course of events over another, and we use our knowledge to bring about our preferences. For us, knowledge is practical and effective, and while it is imperfect and subject to error, it is the only means of achieving human betterment.

From the recognition of the fact that ~erfectforesight eliminates the very need of knowing and knowers, and that such a need only arises if, as in our world, foresight is less than perfect, and insofar as knowledge is a means of bringing about preferences, it does not follow that everything is uncertain. Quite to the contrary In a world where everything is certain, the idea of certainty would not even come into existence. The idea of certain knowledge requires, as its logical counterpart, the idea of uncertainty. Certainty is defined in contrast to uncertainty, and not everything can be certain. Likewise, uncertainty cannot be defined without reference to certainty, and not all knowledge can be uncertain. It is this latter part of one and the same conclusion which critics of the model of perfect foresight, such as Ludwig Lachmann, have failed to recognize. From the correct insight that we do not inhabit a world of perfect knowledge it does not follow that we live in a world of perfect uncertainty; i.e., in a world with no certainty at all, and from the fact that I cannot predict all of my and others' future actions it does not follow that I can say nothing at all about them. In fact, even if I do not know everything about my future actions, for instance, I do know something to be true about each and every one of them: that I will, as long as I act, employ my knowledge to interfere in the natural course of events so as to-hope- fully-bring about a more preferable state of affairs. Later on, more will be said about the importance of this insight. But it is worth emphasizing from the outset that the idea of perfect or radical uncertainty (or ignorance) is either openly contradictory insofar as it is meant to say "everything about the future is uncertain except that there will be uncertainty-about this we are certain," or it entails an implicit contradiction if it is meant to say Hoppe: On Certainty and Uncertainty 5 1

"everything is uncertain and that there is nothing but uncertainty, is uncertain, too." (I do know such and such to be the case, and I do not know whether such and such is the case or not.) Only a middle-of-the-road position between the two 3 extremes of perfect knowledge and perfect ignorance is consistently defensible : There exists uncertainty but this we know for certain. Hence, also certainty exists, and the boundary between certain and uncertain knowledge is certain (based on certain knowledge).

IPI Nothing about the external, physical world is or can be known with certainty-except for those rather abstract but universal and real things that are already implied in the certain knowledge of acting and action: that this must be a world of objects and object-qualities (predicates), of countable units, physical magnitudes, and quantitative determinateness (causality). Without objects and object-qualities there can be no such thing as propositions; without countable units there can be no arithmetic; and without quantitative determinatenessthe fact that definite quantities of causes only bring about definite (limited) effects--there can be no ends and means (goods); i.e., no active interference in the course of external events with the purpose of bringing about a more highly-valued end (preferred effect). Apart from the laws of propositional logic, arithmetic, and causality, however, all other knowledge about the external world is uncertain (a posteriori). We do not and cannot know with certainty (a priori) what kinds of objects and object-qualities exist, how many units of what physical dimensions there are, and what quantitative cause-and-effect relationships exist (or do not exist) between various magnitudes of various objects. All of this must be learned from experience. Moreover, experience is invariably past experience, that of past events. It cannot reveal whether or not the facts and relationships of the past will also hold in the future. We cannot but assume that this will be the case, by and large. But it cannot be ruled out categorically that we might be mistaken, and that the future will be so different from the past that all of our past knowledge will be entirely useless. It is possible that none of our instruments or machines will work anymore tomorrow, that our houses will collapse on top of us, that the earth will open up, and that all of us will perish. It

j~eeOskar Morgenstern, "Perfect Foresight and Economic Equilibrium," in Selected Economic Writings ofOskarMorgenstem, A. Schotter, ed. (New York: New York University Press, 1976), esp. p. 175; Roger W Garrison, "Austrian Economics as Middle Ground," in Method, Praess, and Austrian Economics, Israel Kirmer, ed. (Lexington, Mass.: Lexington Books, 1982); idem, "From Lachmann to Lucas: On Institutions, Expectations, and EquilibratingTendencies, " in Subjectivism, Intelligibility and Economic Understanding: Essay in Honor ofLudmg M. Lachmann (New York: New York University Press, 1986). 5 2 Review ofAustrian Economics 10, No. 1 (1 99 7) is in this sense that our knowledge of the external physical world must be ultimately regarded as uncertain. Notwithstanding this ultimate uncertainty of our knowledge concerning the external world, however, as a result of contingent circumstances, the relative stability and regularity in the concatenation of external objects and events, it has been ~ossiblefor mankind to accumulate a vast and expanding body of practically certain knowledge. This knowledge does not render the future predictable, but it helps us predict the effects to be produced by definite actions. Even though we do not know why things work the way they do, and whether or not they must always work in this way, we do know with complete practical certitude that and how certain things will operate now and tomorrow. One would never know it from the writings of the apostles of radical uncertainty but an innumerable and growing number of events (outcomes) can be produced literally at will and predicted with almost perfect exactitude. My toaster will toast, my key will open the door, my computer, telephone, and fax will work as they are supposed to, my house will protect me from the weather, cars will drive, airplanes will fly, cups will still hold water, hammers will still hammer, and nails will still nail. Much of our future is, practically speaking, perfectly certain. Every product, tool, instrument or machine represents a piece of practical certainty To claim, instead, that we are faced with radical uncertainty and that the future is to all of us unknowable is not only self-contradictory but also appears to be a position devoid of common sense.

Our practical certainty concerning future outcomes and events extends even further. There are many future events about whose outcome we are practically certain because we literally know how to produce them (the outcome is under our complete practical control). We can also predict with practical certainty a great and growing number of outcomes outside and beyond anyone's control. Some- times my tools, machines, and products are defective. My toaster does not toast, my telephone is silent, a hurricane or an earthquake has destroyed my house, my airplane crashes, or my cup is broken. I had no knowledge that this would happen to me here and now, and hence I could not have acted differently from the way I did. I am thus taken by surprise. But my surprise and my uncertainty must not be complete. For while I may know absolutely nothing about the single event-this cup will now break, this airplane will now crash, my house will be destroyed in an earthquake two years from now-and thus cannot possibly predict and alter any such event, I may know practically everything with respect to the whole class of events (broken cups, crashing airplanes, earthquakes) of which this single event is a member. I may know, based on the observation of Hoppe: On Certainy and Uncerrainy 5 3 long-run frequency distributions, that airplanes of a certain type crash every so often, that one in ten thousand cups produced is defective, that machines of such and such a type function on the average for ten years, and that an earthquake strikes a certain region on the average twice a year and destroys, in the long run, one percent of the existing housing stock per year. Then, although the single event still comes as a surprise, 1 do know with practical certainty that surprises such as these exist and how frequent they are. I am surprised neither by the type of surprise nor its long-run frequency. My surprise is only relative. I am surprised that such and such happens here and now rather than elsewhere or later. But I am not surprised that it happens at all, here, there, now, or later. In thus delineating the range and frequency of possible surprises, my uncertainty concerning the future, while not eliminated, is systematically reduced. Cases of limited surprises or reduced uncertainty are, of course, what Frank Knight first classified as "risk" (as opposed to "uncertainty"), and what Ludwig von Mises, building on Knight and the work on the foundations of probability theory of his mathematician brother, Richard von Mises, would later define as "class probability" (as opposed to ILcaseprobability")4: "Class probability means: We know or assume to know, with regard to the problem concerned, everything about the behavior of a whole class of events or phenomena; but about the actual singular events or phenomena we know nothing but that they are elements of this clas~."~I know nothing about whether this or that cup will be broken, and I know nothing about whether my house or your house will be destroyed by a tornado within the next year, but I do know from the observation of long-run frequency distributions regarding cups and tornadoes, for instance, that no more than one in ten thousand cups is defective and that of a thousand houses in a given territory, no more than one per year on the average will be destroyed. If, based on this knowledge, I adopted a strategy of always predicting that the next cup will not be broken, and that my house will not be destroyed next year, I would commit errors. But in the long run, the strategy would assure more successes than errors: my errors would be 'correct' errors. On the other hand, if I adopted the strategy of predicting always that the next cup will be broken and my house destroyed, I might well be correct. But in the long run this strategy would assuredly fail: I would be erroneously correct. Whenever the conditions of class probability are met and we do not know enough to avoid mistakes altogether but enough to make

4 See Frank Knight, kk, h~e~in~and ?+.fit (Chicago: University of Chicago Press, 197 l), esp. chap. 7; Richard von Mises, Robobiliy, Statistics, and Tmth (London: George Allen and Unmn, 1957), esp. chaps. 1 and 3; Ludwigvon Mises, Human Action: A Treatise on Economics (Chicago: Henry Regnery, 1966), esp. chap. 6. bid., p. 109. 54 Review ofAustrian Economics 10, No. 1 (1 997) only correct mistakes, it is possible to take out insurance. As a producer of cups, for instance, I know that on the average I will have to produce 10,001 cups in order to have 10,000. I cannot avoid broken cups, but I can insure myself against the risk of broken cups by including it, as a regularly-occuring loss, in my cost-accounting, and by thus associating a correspondingly-higher cost with my production of cups. Similarly, I cannot avoid tornadoes, but I can insure myself against them. Because tornado losses are large and infrequent in relation to the size and operations of my household, it would be difficult (although not impossible) to provide insurance internally (within my household). But it is possible to pool my tornado risk with yours and that of other households or firms in a given region. Not one of us knows who will be affected by the risk in question, but based on the knowledge of the objective long-run frequency of tornadoes and tornado damage for the entire region, it is possible to calculate a premium against payment of which each one of us can be insured for this hazard. It is not only the knowledge incorporated in our tools, instruments, and machines, then, which provides practical certain information about our future: in this case, knowledge of how we will generate various singular events. Also, the knowledge incorporated in any form of insurance, whether internally practiced or by method of pooling, represents practical certain knowledge: in this case, knowledge of how to be prepared for various classes of events whose individual occurrence is beyond anyone's control. To be sure, while the conditions of class probability and insurability can be stated exactly, with certainty, the question of whether or not there exist insurable events, which ones, and the various expenses of insuring against them, cannot be answered with certainty. On the one hand, the knowledge of objective probability distributions must be acquired through observational experience, and as is the case for all knowledge based on such experience, we can never know whether or not past regularities will also hold in the future. We may have to make revisions. On the other hand, even in order to collect such information, it is necessary that various singular events be classified from the outset as falling into one and the same class (of events). This cup or tornado and that cup or tornado are both members of the same class of cup or tornado. Yet any such classification is tainted with uncertainty. The joint classification of a series of singular events is only correct (for the purpose of insurance) if it holds that I do not know more about any of the single class members than that each one of them is a member of the same class. If I learned, however, that one cup was made of clay A and another from clay B, for instance, and that this fact makes a difference for the long-run frequency of defects, my initial classification would become faulty. Similarly, I might learn from experience that tornado damage on the eastside of a given valley is systematically higher than on its Hoppe: On Certainty and Uncertainty 55

western side. In this case, too, my original classification would have to be changed, new and revised classes and subclasses of insurable events would have to be formed, and new and different insurance premiums would have to be calculated. These uncertainties notwithstanding, however, it deserves to be pointed out that as a contingent fact of human life, the actual range of insurance, and hence of relatively certain information about future events and outcomes, is vast and growing: We know how many ships will likely sink, how many airplanes crash, how often it will rain or shine, how many people of a given age will die, how many hot water-boilers will explode, how many people will be struck by cancer, that more women than men will be affected by breast cancer, that smokers will die earlier than non-smokers, that Jews suffer more frequently from Tay-Sachs disease than Gentiles, and Blacks more from sickle cell anemia than Whites, that tornadoes, earthquakes, and floods occur here but not there, etc. Our future is most definitely not unknowable.

Little of this ever attracts the attention of theoreticians of radical uncertainty. The existence of a practical working technology and of a vast and flourishing insurance industry constitutes an embarrassment for any theory of radical uncertainty. If pressed sufficiently hard, of course, Lachmann and his followers would probably admit the undeniable and, as if all of this did not matter, quickly move onto another problem. So far, it might be pointed out with some justification, attention has been directed almost exclusively either to the technological rather than the economic aspect of action-to accidents rather than to actions. The phenomenon of radical uncertainty, however, arises in a different arena. While it may be possible to predict the physical outcomes fsuch and such an action is taken, and while it may be possible also to predict the pattern of various physical events entirely outside of human control, matters are completely different when it comes to predicting our own future actions. I can predict that my toaster will toast if I employ it in a certain way, and I can predict that toasters generally do not work longer than ten years, but presumedly 1 cannot predict whether or not 1 will actually employ my toaster in the future, nor could I have predicted before it actually happened that I ever wanted-and constructed or bought-a toaster in the first place. It is here, in the arena of human choices and preferences, where supposedly radical uncertainty reigns. Lachmann and his followers are correct in emphasizing that the problem of predicting my and others' future actions is categorically different from that of predicting the physical outcomes ofgiven actions or of natural events. In fact, the destructive part of Lachmann's argument is largely correct even though it is 5 6 Review ofAustrian Economics 10, No. I (I 997) hardly new (and entirely insufficient to establish his constructive thesis of radical uncertainty).6 This is the roof that not only the idea of ~erfectforesight, underlying general equilibrium theory, is mistaken, but likewise the idea, advanced by rational expectations theorists, that all human uncertainty can be subsumed under the heading of insurable risks: that the uncertainty concerning our future actions in particular is no different from that regarding the future of natural events, such that we can, based on our observation of long-run frequency distributions, predict their general pattern in the same way as we can predict the pattern of earthquakes, tornadoes, cancer, or car accidents, for example. As Lachmann points out, and as Frank Knight and Ludwig von Mises explained long before, the new theory of rational expectations suffers from essentially the same deficiency as the old general equilibrium model of perfect foresight: it cannot account for the phenomenon of learning and hence, of knowledge and consciousness. Rational expectation theorists only replace the model of man as a never-failing automaton with that of a machine subject to random errors and breakdowns of known types and characteristics. Rather than possessing perfect knowledge of all singular (individual) actions, man is assumed to possess merely perfect knowledge of the probability distribution of all future classes of actions. He is assumed to commit forecasting errors, but his errors are always correct errors. False predictions never require a revision of a person's given stock of knowledge. There is no learning from success or failure and, hence, there is no change, or only predictable change, in the future pattern of human actions. Such a model of man, Knight, Mises, and Lachmann agree, is no less faulty than the one it is supposed to replace. It not only stands in manifest contradiction to the facts, but any proponent of this model is also inevitably caught up in logical contradictions. First off, if our expectations (predictions) concerning our future actions were indeed as rational as rational expectation theorists believe them to be, this would imply that it would be possible to give an exhaustive classification of all possible actions (just as one could list all possible outcomes of a game of roulette or all possible locations of a physical body in space). For without a complete enumeration of all possible types of actions there can be no knowledge of their relative frequencies. Obviously, no such list of all possible human actions exists, however. We know of a great number of types of action performed then or now, but this list is always open and incomplete. Indeed, actions are designed to alter the natural course of events in order to bring about something as yet non-existent. They are the result of creative imagination. New and different actions are

6 See Ludwig Lachmann, neMarker as an Ikonomic Profess (Oxford: Basil Blackwell, 1986), chap. 2, esp. pp. 27-29; also Gerald E O'DriscoU, Jr., and Mario J. Rizzo, The Economics $Erne and Ignorance (Oxford: Basil Blackwell, 1985), chap. 2, esp. pp. 24-26. Hoppe: On Certainty and Uncenainy 57

constantly added to the list, and old ones dropped. For instance, new or different products and services are constantly added to the pre-existing list of products and services, while others disappear from the list. However, something as yet non-existent-a new product--cannot appear on any list until after it has been imagined and produced by someone. Even the producer of a new product X does not know-and could not have predicted-anything regarding the relative frequency of actions such as the supply of or the demand for X before he had actually had the new idea of X-yet any new product idea and any new product must necessarily upset (alter) the entire pre-existing pattern of the relative frequency of various forms of action (and of relative prices). Moreover, if we could indeed predict our future actions, either perfectly or subject only to random errors, then it would have to be implicitly assumed as well that every actor must possess the same (identical) knowledge as everyone else. I must know what you know, and you must know what I know. Otherwise, if our knowledge were somehow different, it would be impossible that both our predictions could be equally correct or else equally correctly wrong. Instead, either my predictions would have to be correct and yours would have to be wrong, or vice versa, and either my predictions or yours then would have to be wrongly wrong. The error (mine or yours) would not be random but systematic, for it could have been avoided had I (or you) known what you (or I) knew. This precisely is the case, however: our knowledge is not identical. You and 1 may know some things in common, but I also know things (about myself, for instance) that you do not know, and vice versa. Our knowledge, and hence our predictions and expectations concerning future actions, are in fact different. Yet if different actors possess different knowledge, the likelihood (frequency) of their predicting correctly or incorrectly will be different as well. Hence, neither the success nor the failure of our predictions can be considered purely random but will have to be ascribed instead, at least partially, to a person's more-and-better or less-and- worse individual knowledge. Most importantly, however, the rational expectations' model of man as a machine which is endowed with perfect knowledge of the relative frequency distribution of all of its possible future classes of actions (but that knows nothing about any particular action falling into any one of these classes except that it is a member of such and such a class and that this class of action has such and such a relative frequency) is fraught with inescapable internal contradictions. On the one hand, .as far as the assumption that all actors possess identical knowledge is concerned, any proponent of this view is caught in a performative contradiction: his words are belied by the very fact of uttering them. For there would be no need to say what he is saying if everyone else already knew what he knows. Indeed, if everyone's knowledge were 5 8 Review $Austrian Economics 10. No. 1 (1 997) identical to everyone else's, no one would have to communicate at all. That men do communicate demonstrates that they must assume instead, contrary to the stated assumption, that their knowledge is not identical. Rational expectations theorists, too, by virtue of presenting their ideas to the reading public, must obviously assume that the public dois not yet know what they already know, and hence, that the public's predictions concerning the future course of actions-in contrast to their own predictions-will be systematically flawed until it has successfully absorbed the lesson of rational expectations. Similarly, anyone proposing the assumption of a given list of all possible forms of human actions, with its implied denial of all learning, is caught up in contradictions. For one, if his knowledge was indeed given, this would imply assuming that he already knows everything that he will ever know (otherwise, if he could learn something tomorrow that is not already known today, his list of possible classes of actions could no longer be assumed to be complete). Yet if this were the case, then inevitably the question arises how he ever came to know this. If he cannot learn, it would appear that he also could not possibly have learned to know that there is no human learning. Rather, this knowledge must have always been there, as part of his initial natural endowment, like his hands and fingers. But this idea-that our knowledge is given as our hands and fingers are given-is absurd. Knowledge is always the knowledge of something: the knowledge of hands and fingers, for instance, and it cannot possibly be conceived of as anything but sequen- tially (in time) aquired knowledge (as something based upon and learned about some logically and temporarily prior facts). Moreover, the denial of the possibility of learning is again belied by the proponent's action. In proposing his thesis, he cannot but assume that others can understand and possibly learn from him something that they do not yet know. And in waiting for and listening to the response of others to his proposition-by engaging in any form of argumentation-he cannot but also assume that he himself can possibly learn from what others have to say. Other- wise, if he already knew what they would respond and how he would respond to their responses, and so on, there would simply be no purpose to the whole enterprise of communication and argumentation. Indeed, if he knew in advance all of his arguments (propositions) and all possible replies and counterreplies (or at least their relative frequency distribution), it would also be senseless to even engage in any form of internal, intra-personal argumentation, because his knowledge would already be complete, and he would already possess the answers to all questions. Of course, the rational expectation theorists do engage in argumentation-and no one could argue that he cannot argue without thereby falling into a contradiction-and they do conduct research (which no one would do if he already knew everything there is to know). Hence, they demonstrate through Hoppe: On Grtainy and Uncenaing 5 9 their own actions that their model of man must be considered systematically flawed, and that man must think of himself as capable of learning something as yet unknown (unpredictable).

What are the consequences as regards the nature of the social sciences that follow from the recognition of man as a learning actor? It is in the answer to this question that Knight and Mises on the one hand, and Lachmann on the other, ultimately part company. They would agree only on one consequence: that there exists a categorical difference between the logic of the natural sciences and that of the social sciences. Indeed, it follows from the recognition of man as a learning actor that the (still) dominating positivist (or falsificationist) philosophy, which assumes that all (empirical) sciences follow the same method-a uniform logic of science-is 7 self-contradictory. It is one thing to predict the physical outcomes resulting from a given action (technology) or to predict the future pattern of a given class of natural events outside an actor's physical control (insurance). It is an entirely different matter to predict what action an actor will actually perform or against which classes of natural events he will actually want to insure himself. As far as the former problem is concerned, there is no need to dispute what positivism has to say: An actor wants to produce a certain physical result and he has an idea about what type of interference of his is capable of bringing about such a change. His idea is a hypothetical one. The actor never can be ultimately certain that his action will lead to the desired result. He can only try and see what happens. If his action is successful and the anticipated outcome is achieved, his idea is confirmed. How- ever, even then the actor cannot be sure that the same interference will always bring about the same result. All that a confirmation adds to his previous knowledge is the certitude that his hypothesis so far has not yet been shown to be faulty. On the other hand, if his action fails, his idea is falsified and a new, revised or amended hypothesis will have to be formed. Thus, even if certainty is out of human reach, it is still possible, through a process of trial and error, that an actor may continuously improve his technological know-how. Likewise, as regards natural events outside one's control, insofar as an actor is not indifferent (un- concerned) about such events but prefers the presence of any such event over its absence, or vice versa, he may form an idea concerning the relative frequency distribution of the entire class of the particular event in question. This idea, based

7~eeHans -Hermann Hoppe, Kritik der kaucalwissensch~dichenSozia$rschung (Opladcn: Wcst- deutscher Verlag, 1983); idem, 7he Economics and Erhicc $Private Propeny (Boston: Kluwcr, 1993), chap. 7. 60 Review ofAustrian Economics 10, No. 1 (1 997) as it is on the joint classification of singular events and the observation of long-run frequencies, is hypothetical, too. In this case, however, the occurrence of a single favorable or unfavorable event does not constitute a confirmation or a falsification of one's hypothesis. Rather, because the hypothesis refers to an entire class of favorable or unfavorable events and does not state anything regarding any singular event except that it is a member of this class, the question whether or not the course of future events confirms or falsifies one's idea can only be decided based on the observation of a large number of cases. This fact, although seemingly less than completely satisfying, does not imply that the experiences of confirmation and falsification, of success and failure, and of scientific progress proceeding through trial and error are any less real, however. In this case, whether or not one's hypothesis is confirmed or falsified can be decided based on the 'hard' and objective fact that an insurer-whether a single individual who insures himself over time through personal savings or an agency that insures a class of individuals across time against payment of a premium--either has, or has not, saved or collected premiums sufficient to cover the cost resulting from the occurrence of each and all unfavorable singular events. If he has, his hypothesis is temporarily confirmed, and if he has not, his hypothesis is falsified, and he will either have to change his frequency estimate and increase his savings or premiums, or he will have to revise his classification of singular events and introduce a new, further differentiated-system of classes and subclasses. Thus, even if certainty is again unattainable, continuous scientific progress is possible also with respect to man's ability to forecast accidents (natural events outside of his control). Granted that this is so, however, the question arises if it is also true, as positivists maintain, that man can be thought of as following the same logic--of hypothetical conjecture, confirmation or falsification, and of scientific progress proceeding through a process of trial and error-when it comes to the problem of predicting his own future actions. But this must be categorically denied. For in proceeding in the way he does regarding the world of physical events inside or outside his control, an actor must necessarily conceive of himself as capable of learning (otherwise, why conduct any research at all?). Yet if man can learn and possibly improve his predictive mastery over nature, it must be assumed that he can not only alter his knowledge, and hence his actions, in the course of time, but also that these possible changes must be regarded by him as in principle unpredictable (such that any progress in his ability to predict these changes must be considered systematically impossible). Or putting things somewhat differently, if man proceeds, as positivists say he does, to interpret a predictive success as a confirmation of his hypothesis such that he would, given the same circumstance, employ the same knowledge in the future, and if he interprets a predictive failure Hoppe: On Certainty and Uncerrainty 6 1 as a falsification such that he would not employ the same but a different hypothesis in the future, he can only do so if he assumes-even if only implicitly-that the behavior of the objects under consideration does not change over the course of time. Otherwise, if their behavior were not assumed to be time-invariant-if the same objects were to behave sometimes this way and at other times in a different way-no conclusion as to what to make ofa predictive success or failure would follow. A success would not imply that one's hypothesis had been temporarily confirmed, and hence, that the same knowledge should be employed again in the future. Nor would any predictive failure imply that one should not employ the same hypothesis again under the same circumstances. But this assumption-that the objects of one's research do not alter their behavior in the course of time--cannot be made with respect to the very subject engaging in research without thereby falling into a self-contradiction. For in interpreting his successful predictions as confirmations and his failed predictions as falsifications, the researcher must necessarily assume himecfto be a learning subject-someone who can learn about the behavior of objects conceived by him as non-learning objects. Thus, even if everything else may be assumed to have a constant nature, the researcher cannot make the same assumption with respect to himself. He must be a different person after each confirmation or falsification than he was before, and it is then his nature to be able to change his personality over the course of time.' But if the positivist-falsificationist view of a uniform logic of science is rejected and the logic of the social sciences considered categorically different from that applying to the natural sciences, as Knight, Mises, and Lachmann would agree, then what is the method appropriate for the study of human action? It is here that Knight and Mises would fundamentally disagree with Lachmann. Knight and Mises argue-correctly, as will be seen-that it does not follow from the recognition of man as a learning actor that everything concerning the future of human actions must be considered unknowable-indeed, they would consider such a view self-contradictory-but rather only that one must admit the existence of two categorically-different branches within the social sciences: of apodictic (aprioristic) theory (economics) on the one hand and of history and

'~ikewise, it would be self-contradictory for me to state about my actions performed over the course of time what would have to be assumed if I wanted to consider them instances of insurable events (class probability): that I know nothing about any one of my actions except that they are my actions (in the same way as one may legitimately say, for instance, that I know nothing about any singular outcome of a game of roulette except that each one is the outcome of the same roulette). In fact, I do know more about each of them. I know that each action is influenced by my knowledge, and that my knowledge will be changed dependent on the outcome of each action, such that each action will be performed by a dgerent me and must be considered a unique event (forming an entire class by itself). 62 Review ofAustrian Economics 10, No. I (1 997) entrepreneurship on the other.9Lachmann and his followers conclude precisely this: (1) that there can be no such thing as economic theory capable of prediction at all, that all of the social sciences are nothing but history and "economists must confine 10 their generalizations to the knowable past" ; and (2), that all of our predictions concerning human actions, which we must venture day in and day out, are nothing but haphazard guesses, that "man in his true humanity," as Lachmann approvingly cites Shackle, %an neither predict nor be predicted."11

Regarding the first of Lachrnann's two contentionsthe impossibility of economic theory-it should be noted from the outset that this thesi-ontrary to Lach- mann's own claim, and in particular the self-congratulatory attitude found among some of his younger disciplesis anydung but new and original, but represents instead a return to Lachrnann's intellectual beginnings as a student of Werner Sombart and the "historicist" teachings of the German Kothedersozialisten (and thus most definitely has nothing whatsoever to do with Austrian ~conomics).'~ Ludwig von Mises, the twentieth century's foremost Austrian economist and life-long critic of historicism, has thus characterized its doctrine: "The fundamental thesis of historicism is the proposition that . . . there is no knowledge but that provided by history. . . . The honest historicist would have to say: Nothing can be asserted about the future. Nobody can know how a definite policy will work in the future. All we believe to know is how similar policies worked in the past. Provided all relevant conditions remain unchanged, we may expect that the future effects will not widely differ from those of the past. But we do not know whether or not these relevant conditions will remain unchanged. Hence we cannot make any prognostication about the-necessarily future--effects of any measure considered. We are dealing with the history of the past, not with the history of the future."13 That this is also an accurate description of Lachrnann's position is made perfectly clear by Lachrnann's following comment on the so- called Austrian theory of the trade cycle: "Here we have a body of anabcal thought designed to meet the requirements set out above: to depict a recurrent pattern

9~nthe methodological views of Frank Knight in particular, see his The Ethics of6mpetition and Otber Erscys (New York: Harper Bros., 1935), and, idem, On the Hiswry and Method of Economics (Chicago: University of Chicago Press, 1956). 1°Lachmann, The Market as an hnomic Process, p. 32. I I . - Ibid., quoted in G.LS. Shackle, Dme in Economia (Amsterdam: North Holland, 1958), p. 105. I I Austrians from Carl Menger onward considered the German historicists as anti-economists and their intellectual foes. The historicists, in articular their leader Gustav Schmoller and his successor Werner Sombart, amply reciprocated this animosity. i3~ises,Theoryand Hiswy, pp.'199, 203-4. Hoppe: On Certainry and Uncenainy 6 3 of events with booms and depressions following each other in ceaseless succession. But can we really believe that agents witnessing these events will learn nothing from them and act in successive cycles in identical fashion? Is it not more likely that their action in each cycle will be affected by the lessons they have learnt from its predecessors, even though, as always happens, different people learn different lessons from the same events? Once we admit that people learn from experience, the cycle cannot be reproduced time after time. These considerations suggest that it may be better to give up the doubtful quest for a model of the business cycle and to regard phenomena such as cyclical fluctuations in output and prices simply as phenomena of history in the explanation of which changes in human knowledge will naturally play a part, with the events of each successive 14 cycle requiring different, although often enough similar, explanations." While in and of itself this does not yet prove Lachmann wrong, it is a first step in the direction ofa rigorous refutation that the position taken by Lachmann involves nothing less than an all-out social relativism-indeed: nihilism-that cannot but immediately strike one as entirely counter-intuitive. The relativistic consequences of historicism are hinted at clearly in the just quoted passage from Mises, while they may appear somewhat obscured by Lachmann in restricting his remarks to but one theory, the theory of the trade cycle (incidentally without bothering to explain, even if only briefly, what the theory actually states). How- ever, there can be no doubt whatsoever that the trade cycle theory is cited by Lachmann as an example and that he actually believes his argument to be equally applicable to all other economic theorems. In the same way and for the same reason that there can be no such thing as the theory of the trade cycle, according to Lachmann, there also can be no such thing as the theory of exchange, the theory of prices, the theory of money, the theory of interest, the theory of wages, the theory of socialism, the theory of taxation, the theory of wage and price controls, or the theory of interventionism. What holds for the phenomenon of cyclical fluctuations supposedly also holds for all other phenomena: that they must be regarded as phenomena of history in the explanation of which changes in human knowledge will naturally play a part, with each successive exchange, price, use of money, interest, wage, socialism, tax, wage and price control, and government intervention requiring different, although often enough similar, explanations. But can we really believe this? Can we really believe, as Lachmann does, that we cannot say anything "applying equally to future and past" exchanges, prices, monies, or taxes? Can we really believe that, due to the possibility of learning, it may no longer be true in the future that every voluntary exchange will- ante-be

I4~achmann,The Marker or an konornic Process, pp. 30-3 1. 64 Review ofAustrian Economics 10, No. 1 (1997) beneficial to both exchangers, and that every coercive exchange such as a tax will benefit one (the taxman) at the expense of the other (the taxed)? Can we really believe that each successive socialist experiment requires a different explanation, and that it is impossible to say anything applicable to each and every form of socialism, so that as long as there exists no private ownership of the means of production, and hence no factor prices, economic calculation (cost-accounting) will be impossible and permanent misallocation (waste) will have to result? Can we really believe that, as long as socialism is not actual4 abolished, this proposition may no longer hold true, because agents can learn from experience and may no longer act in an identical fashion? Can we really believe that if a central bank were to double the paper money supply overnight, this would not, now and forever, lead to a drop in the purchasing power of money as well as a systematic income redistribution in favor of the central bank and the early receivers of the newly-created money at the expense of those receiving it later or not at all? Can we really believe that if the minimum wage were fixed today at one million dollars per hour and if this decree were strictly enforced and no increase in the money supply were to take place, this measure might not lead to mass unemployment and a breakdown of the division of labor because people can learn from experience? To be sure, Lachmann believes all of this, and it is easy to understand why some other people-taxmen, socialists, central bankers, and minimum wage legislators-would like us to believe as he does. But it is difficult to imagine how anyone but Lachmann-includingeven those who would personally benefit from us believing that the future effects of various policies can never be known in advance-can actually consider any of this seriously. As already indicated in section I1 above, the fundamental logical error involved in Lachmann's reasoning consists in the fact that it does not follow from the proposition that human actors face an uncertain future that everything IS regarding our future must be considered uncertain. Nor does it follow from the fact that humans can learn, and hence their actions may change in the course of time, that everything concerning the future of human actions may possibly change in the course of time. Quite to the contrary. To draw these conclusions, as Lachmann does, is self-contradictory for evidently Lachmann claims to know for certain the unhowability of future knowledge and, by logical extension, of actions. Yet then he does howsomething about future knowledge and action. He must assume to know something about knowledge and action as such. Likewise, in claiming to know that humans are capable of learning and alteringtheir actions in accordance with what they may learn, Lachmann must admit knowing something about man as such.

"see also Hoppe, Kritik der kausalwissensrh~dichenSozia~orschung, chap. 3, esp. p. 47. Hoppe: On Certainty and Uncertainty 65

He must assume to know not only that man may change his future behavior, but also that these changes are the result of a process oflearning; that is, that they are the result of man being able to distinguish between success and failure, between confirmation and falsification, and draw conclusions dependent upon such categorically distinct experiences; and hence, that all possible changes in the behavior of man, unpredictable as their specific content may be, follow a predictable pattern-a uniform and constant logic of human action and learning. To use a ~erfectanalog while it is true that I am unable to predict eveything that I will -- say or write in the future, this does not imply that I cannot predict anything about my future speaking and writing. I can predict, and indeed I can predict with perfect certainty, and regardless of whether I will speak or write in English or German, that, as long as I will speak or write at all, in any language whatsoever, all of my speaking and writing will have a constant and invariable logical (propositional) structure: that I must use identifyingexpressions, such as proper names, and predicators to assert or deny some specific property of the identified or named object, for instance.I6 In the same way it holds that even though I cannot predict what goals I may pursue in the future, what means I will deem appropriate to reach these goals, and what other conceivable courses of action I will choose to reject in order to do what I will actually do (my opportunity cost), I can still predict that as long as I act at all, there will be goals, means, choices, and costs; that is, I can predict the general, logical structure of each and every one of my actions, whether past, present or future. And this is precisely what economic theory or, as Mises has termed it, praxeolou, is all about: providing knowledge regarding actions as such and knowledge about the structure which any future knowledge and learning must have by virtue of the fact that it invariably must be the knowledge and learning of actors. To be sure, the knowledge of the invariant logical structure of acting and learning is acquired knowledge, too, as is all human knowledge. Man is not endowed with it. However, once learned, the knowledge conveyed by praxeology as well as that conveyed by propositional logic can be recognized as necessarily true-4 priori valid-knowledge, such that no future learning from experience could possibly falsify it. While all of my knowledge regarding the external world

I6see Paul Lorenzen, Normative Logic and Ethics (Mannheim: Bibliographischeslnstitut, 1969), chap. 1. Lorenzen explains (p. 16): "I call a usage a convention if I know of another usage which I could accept instead. . . . However, I do not know of another behavior which could replace the use of elementary sentences. If I did not accept proper names and predicators, I would not know how to speak at all. . . . Each proper name is a convention, . . . but to use proper names at all is not a convention: it is a unique pattern of linguistic behavior. Therefore, I am going to call it 'logical'. The same is true with predicators. Each predicator is a convention. This is shown by the existence of more than one natural language. But all languages use predicators." See also Wilhelm Kamlah and Paul Lorenzen, Logische Ropaedeutik (Mannheim: Bibliographisches Institut, 1968), chap. 1. 66 Review ofAustrian Economics 10. No. 1 (1997) is, and forever will be tainted by uncertainty (it is not inconceivable that the law of gravitation may no longer hold in the future or that the sun will not rise tomorrow), my knowledge concerning the structure of my future action and learning is and forever will be non-hypothetically true: it is inconceivable that, as long as I am alive, I will not act and reach or not reach my goal and revise or not revise my knowledge depending on the outcome of my actions. Learning is the learning from success and failure, and there can be no learning of the fact that there is no success or failure. Thus, writes Mises, "man as he exists on this planet in the present period of cosmic history may one day disappear. But as long as there are beings of the species Homo sapiens there will be human action of the categorical kind praxeology deals with. In this restricted sense praxeology provides exact knowledge of future conditions. . . . The predictions of praxeology are, within their range of applicability, absolutely certain."17 How is it possible, then, especially in light of the fact that Lachmann was familiar with Mises and his writings, that he could have committed an elementary logical blunder such as not to recognize that it does not follow from the fact that we are capable of learning that eveything about the future of human actions is unknowable? How could he not recognize that only those aspects of our actions which may actually be affected by learning can be considered unpredictable, while those aspects that are a necessary part of any action and learning and thus cannot be altered by future learning-the underlying logical structure of action and learning itself-annot? The answer to this riddle lies in the fact that although he considered himself a staunch opponent of the positivist philosophy, Lachmann still fell prey to one of its fundamental misconceptions. Like Friedrich A. Hayek, his second teacher, Lachmann, whether wittingly or not, accepted the view of Hayek's friend and prot6g6 Karl R. Popper that all scientific knowledge must be such that, in principle, it is falsifiable by experience, and that all knowledge that is not falsifiable is not genuine knowledge at all but represents merely empirically empty tautologies, i.e., arbitrary definitions (formalisms). It is thus that Lachmann can write in response to the challenge posed to his thesis of an unknowable future by Mises and his idea of a logic of action that "precisely by virtue of the logical necessity inherent in it, it is impotent to engender empirical generalizations. Its truth is purely abstract and formal truth. The means and ends it connects are abstract entities. In the real world the concrete means used and ends sought are ever-changing as knowledge changes and what seemed worthwhile yesterday no longer seems so today. We appeal in vain to the

17 Ludwig von Mises, The Ultimore Foundation ojkonomic Science (Kansas City: Sheed Andrews and McMeel, 1978), pp. 84-85. Hoppe: On Certaing and Uncenaing 67 logic of means and ends to provide us with support for empirical generalizations."" But surely, as popular as this view of regarding all non-hypothetically true propositions-such as the laws of propositional logic, for instance-as empirically-empty formalisms has become in the wake of the rise of the positivist philosophy, it is completely fallacio~s.'~In referring to highly-abstract entities such as objects and properties, rather than concrete ones such as my cactus and its red blossoms, I am still speaking about real phenomena. The term "tree" is more abstract than the term "pine tree," but the former has no less an empirical content than the latter. In the same vein, in saying something about ends, means, exchange, money, or interest-rather than about my desire to please my wife with flowers, a trade of two oranges against three apples, US dollars, or my exchange of two present socks for four socks three months hence-1 am still stating something about real phenomena with an empirical content. Notes Mises, "if one accepts the terminology of logical positivism and especially also that of Popper, a theory or hypothesis is 'unscientific' if in principle it cannot be refuted by experience. Conse- quently, all a prior] theories, including mathematics and praxeology, are 'unscientific.' This is merely a verbal quibble. No serious man wastes his time in discussing such a terminological question. Praxeology and economics will retain their paramount significance for human life and action however people may classify and describe them.n20 In light of Lachmann's multiple logical errors, one can now turn back to our rhetorical questions raised in response to his claim of the impossibility of any and all economic theory and prediction. The reason it appeared absurd that one should be unable to predict anything regarding each and every voluntary exchange, tax, socialism, money supply increase, and minimum wage law, is that while man may learn many things and alter his behavior in many ways, he is unable to experience and

IsLachmann, The Market as an Economic Prmess, p. 3 1; for the similar views of Hayek see his "Economics and Knowfedge," in Friedrich A. Hayek, Individualism and Economic Order (Chicago: University of Chicago F'ress, 1948). 19see Arthur Pap, Semantics and Necessoy T~th(New Haven, Conn.: Yale University Press, 1958); Brand Blanshard, Reason andAnalysis (LaSalle, Ill.: Open Court, 1962); Friedrich Kambartel, Erjahmng und Stdtur (Frankfurt/M.:Suhrkamp, 1968); Hoppe, The Economics and Ethics ofprivate Propen , chap. 6. "Mises, The Ultimate Foundation ofEnnomic Science, p. 70. Equally incomprehensible as the charge that praxeology is empirically empty because its propositions are non-falsifiable is the charge brought against Mises and Menger by O'Driscoll and Rizw (The Economics of Erne and Ignorance, p. 23), that the belief in the existence of "apodictic praxeological theoremsn and "exact economic laws" implies the assumption of some sort of "rigid determinism!" And would one also have to give up the belief in the existence of universal and unchanging laws of logic if one were to adopt O'Driscoll's and Rizzo's indeterministic "dynamic subjectivism"? 68 Review ofAustrian Economics 10, No. 1 (1997) learn anything that is at variance with the laws of logic and the nature of man as an actor. I may not be able to predict that I will engage in voluntary exchanges, when, what it is that will be exchanged, or the exchange ratio at which the goods or services in question will be traded, etc., because all of this may indeed be affected by my and others' knowledge and change as this knowledge changes. But I can predict with perfect certitude that fa voluntary exchange takes place, regardless of where, when, what, and at what exchange ratio, both exchange partners must have had opposite preference orderings and must have expected to benefit from the exchange. No possible learning can ever change this. Like- wise, I may not be able to predict that or when a socialist experiment will be undertaken or discontinued. Nor will I ever be able to predict such an experiment's many specific features. All of this may be affected by learning. But regardless of whatever people may learn and how their learning may shape the peculiar shape of socialism, I can'still predict with absolute certainty that as long as one is in fact dealing with socialism, any and all economic calculation will be impossible and permanent misallocations of production factors must result because this consequence is already logically implied in what socialism is. Simi- larly, I may not be able to forecast that a money will actually come into existence, and it is certainly possible that mankind may one day revert back to barter. Nor can I predict with certainty what specific kind of money will be employed in the future. But I can predict with perfect certitude that if there is any money in use at all, an increase in its supply must lead to a reduction in its purchasing power below what it otherwise would have been. This follows simply from the definition of money as a medium ofexchange. Lastly, Lachmann also errs regarding the example of the Austrian theory of the trade cycle. He claims that due to the fact that businessmen can learn-they may hear of or read about Mises's theory-they may possibly alter their future behavior in such a way that the effects predicted by the theory will no longer ensue.21But such a claim simply involves a misunderstanding of what the theory actually states. True enough, people can learn from Mises, and this may actually prevent business cycles from occurring at all, just as people may learn from Mises never to engage in a socialist experiment in the first place. However, this is entirely beside the point, for the theory states that ij a bank creates additional paper-money credit, above and beyond the credit made available by the public's voluntary savings, and ijthis additional credit is in fact placed into the hands of borrowers and the interest rate is thus lowered below what it otherwise would have been, i.e., the natural rate of interest, then,

''~udwi~Lachmann, 'The Role of Expectations in Economics as a Social Science," in idem, Capital, Expectations, and the Market ROCPSI(Kansas City: Sheed Andrews and McMeel, 1977). Hoppe: On Certainty and Uncenaing 69 and only then, will there be first a boom--over-investment-and consequently a bust-the systematic liquidation of some of the investments as malinvestment. Whatever businessmen may learn after a credit expansion has actually taken place cannot possibly affect this predicted outcome in the slightest, because an intertemporal discoordination is already logically implied in the stated premises. And if the if-clause is not fulfilled, then the theory of the trade cycle is not refuted, of course. It simply does not apply. 22

Having rejected Lachmann's first contention of the impossibility of economic theory applicable to past and future alike, and havingargued the case of Knight's and in particular Mises's instead, not only of the possibility of such theory but, even more strongly, of a priori theory and apodictic (non-hypothetical) prediction, in this final section Lachmann's second contention-the "kaleidic" nature of the social world and the haphazardous character of entrepreneurial prediction-will have to be examined. Even if the existence of a logic of action-praxeology-is admitted, as it must be, it does not follow that the knowledge provided by it can render our future certain. Praxeology allows us to predict with certainty some future events and aspects of the world of human actions, but its range of applicability is strictly limited. There are many events and aspects, and indeed far more of far greater practical significance, about which praxeology has nothing to say. As Mises explains, "there is, but for Robinson Crusoe before he met his man Friday, no action that could be planned or executed without paying full attention to what the actor's fellow men will do. Action implies understanding other men's reaction~.""The~~ task with which acting man, that is, everybody, is faced in all relations with his fellows does not refer to the past; it refers to the future. To know the future reactions of other people is the first task of acting man. . . . It is obvious that this knowledge which provides a man with the ability to anticipate to some degree other people's future attitudes is not a priori knowledge. The a priori discipline of human action, praxeology, does not deal with the actual content of value judgments; it deals only with the fact that men value and then act according to their valuations. What we know about the actual content of judgments of value can be derived only from experience."24 Quite apart from

"see Ludwig von Mises, "'Elastic Expectations' and the Austrian Theory of the Trade Cycle," Economica 10 (1943): 251-52; also George Selgin, "Raxeology and Understanding," Renew of Austrian Economics 2 (1988): 54. 23~ises,The Ultimate Foundotion $Economic Science, p. 49. 24 Mises, Theory and Histoy, p. 3 11. 70 Review ofAustrian Economics 10, No. 1 (1 997) whatever praxeology, technology, and insurance can possibly teach us about the future, then, Mises (as well as Knight) would agree with Lachmann that there remains as one of mankind's most pressing problems the need to predict our fellow men's concrete value judgments, the specific means they will choose to bring their valued ends about, and their evaluations once the results of their actions are in. And as has already been explained, they would also agree with Lachmann that because humans are capable of learning and their learning may affect their values, choices of means, and evaluations of outcomes, the positivist- falsificationist prescriptions of how to deal with this problem are logically inap- propriate and impotent. But what else can we do? Or can nothing be done to deal with this aspect of uncertainty? While it may appear that Lachmann's answer to these questions is similar to Mises's-both refer throughout their writings to the same group of philosophers of the Geisteswiaenschajen and the social sciences, most notably Max Weber and Alfred Schuetz, and both mention the method of understanding (Verstehen)-this impression is mistaken (although due to Lachmann's generally less-than-clear writing and a considerable amount of hedging on his part, this issue is admittedly somewhat difficult to decide).25For whereas Mises's answer to the above questions is an unambiguous yes, there exists a method of dealing with the ineradicable uncertainty of future human choices, and even though this method is not, and never can be, perfect, by not availing ourselves of it we would rob ourselves of the very intellectual tool of successful action and encounter more frequent disappoint- ments than otherwise would be the case. Lachmann seems to hold precisely this: that regardless of what we do, our successes or failures in predicting our fellow men's future actions are purely random. As for Mises's position, it is essential to recognize that-and why-he rejects the view that the future of human actions may be considered random or haphazard. To entertain such a view can mean one of two things. It can mean that we know literally nothing. But this is clearly false, for we do know something: we know that the future events in question are human actions and will display the structure inherent in each and every action, and hence, that while our knowledge may be deficient, we are still in a position to say more than simply ignoramus. 26 Or it can mean that with regard to the problem of future human choices, we know everything about the behavior of the whole class of events, but we do not know anything about any singular choice except that it is an element of the entire class of human choices. The view that human actions may be regarded as instances of "class probability" has already been rejected above. We do not, and or a similar assessment see Selgin, "Raxeology and Understanding." Mises, Human Action, p. 107. Hoppe: On Certainty and Uncertainty 7 1 never will, know everything about the whole class of human actions. But from this it does not follow that we will have to confess complete ignorance regarding singular human choices (apart from the known fact that they are all choices). In fact, we do know something (more) about each singular event: we know that each singular event is the result of individual actors acting based on individual knowledge subject to changes by individual learning, such that each event as it unfolds in human history past and future, must be conceived of as a unique, and non-re- peatable event (with each event being in a class by itself); and we also know that in order to grasp the past or anticipate the future actions of our fellow men, we will have to pay attention and try to understand their individual knowledge, their individual values and personal know-how. It is thus that Mises characterizes the epistemological task faced by man in his dealings with his fellows as one of "case probability." "Case probability (or the specific understanding of the sciences of human action) . . . means: We know, with regard to a particular event, some of the factors which determine its outcome; but there are other determining factors about which we know nothing."27 Categorically different as this situation of case probability is from that of class probability, it is hardly a situation in which the future is random or haphazard. Indeed, in some respect we are in a better (not worse) epistemological position in the field of human history, past and future, than we are in the field of natural events, of technology and insurance. For in the latter field we are categorically precluded from the possibility of understanding. Each singular event must be treated as a member of a class ofhomogeneous, except for their class membership indistinguishable singular events. In contrast, in the field of past and future human history, we are capable of distinguishing between every singular event (each event can be treated as heterogeneous); and to improve our grasp of the past, and our anticipations of the future actions of our fellows, we know and are capable of learning something about the individual causes-the personal knowledge-uniquely affecting the outcome of each and every singular human event (with each event deserving of its own special attention). While neither random nor haphazard, then, the task of anticipating our fellows' actions based or1 an understanding of their individuality is not without its inescapable difficulties and imperfections, for every understanding of an individual is always an understanding of his past values and knowledge. However, as Mises was quoted above, our first task in life is to know the&ture reactions of

"~ises,Humon Action, pp. 107-10. Ibid., p. 59, Mises notes, that "historical events have one common feature: they are human action. History comprehends them as human actions; it conceives their meaning by the instrumentality cognition and understands their meaning in looking at their individual and unique features. What counts for history is always the meaning of the men concerned: the meaning that they attach to the state of affairs they want to alter, the meaning they attach to their actions, and the meaning they attach to the effects produced by the actions. 72 Review ofAustrian Economics 10, No. 1 (1 997) other people. "Knowledge of their past value judgments and actions, although indispensable, is only a means to this end."*' Thus, in all of our attempts of anticipating the future, in addition to an understanding of the past actions of a given individual, we must also necessarily make a judgment regarding the relative stability or instability of the various parts of his system of values and knowledge as displayed in the past; that is, we must form an opinion about his personality or character. As Mises explains, we must "assume that, by and large, the future conduct of people will, other things being equal, not deviate without special reason from their past conduct, because we assume that what determined their past conduct will also determine their future conduct. However different we may know ourselves to be from other people, we try to guess how they will react to changes in their environment. Out of what we know about a man's past behavior, we construct a scheme about what we call his character. We assume that this character will not change if no special reasons interfere, and, going a step farther, we even try to foretell how definite changes in conditions will affect his reaction~."'~Likewise, if we are concerned about the future behavior of groups of individuals (rather than only a single one), we cannot but classify individuals according to the similarity or dissimilarity of their character or personality; that is, we cannot but form ideas of group charactersideal types-and sort individuals according to their membership in such types. "If an ideal type refers to people," explains Mises, "it implies that in some respect these men are valuing and acting in a uniform or similar way. When it refers to institutions, it implies that these institutions are products of uniform or similar ways of valuing and acting or that they influence valuing and acting in a uniform or similar way."30 Our anticipations, based on an understanding of the past, and the construction of character and ideal types and the classification of individuals and. groups into such types, are necessarily hypothetical, or rather, tentative predictions. In ascribing a certain character to an actor, we attempt to reduce the uncertainty surrounding his future behavior. We form a tentative judgment concerning more or less stable parts of his personality and predict that the future changes in his behavior, whatever they may be, will be changes in line with his character, i.e., changes which follow a general-predictable-pattern. Our prediction may turn out to be successful or not. We may have misclassified the actor(s). Or,

28~ises,Theov and History, p. 3 1 1. 29~ises,The Ultimore Foundation ofEconomic Science, pp. 49-50; and he continues then to say: "Compared with the seemingly absolute certainty provided by some of the natural sciences, these assumptions and all the conclusions derived from them appear as rather shaky; the postivists may ridicule them as unscientific. Yet they are the only available approach to the problems concerned and indispensable for any action to be accomplished in a social environment." 30~ises,Theoiy and History, p. 3 16. Hoppe: On Certainy and Uncertainty 73 contrary to our judgment, the actor(s) may change their very character; and indeed, over the course of time some character types may die out and new ones may emerge, requiring the development of a different and changing system of classification. Or our character constructs may turn out too abstract or too specific; that is, even though they may yield correct predictions, we may find, in retrospect, that what they predict is of lesser importance than anticipated. The prediction may turn out to say too little of much importance, or too much of little importance, requiring further typological revisions. Moreover, whether we evaluate our predictions as successful or not, the meaning of success and failure is necessarily ambiguous. In the natural sciences, success means that so far your hypothesis has not been falsified; apply it again; and failure means that your hypothesis as it stands is wrong; change it. In our dealings with our fellow men, the implications are not, and never can be, as clear-cut. Maybe our prediction was wrong because some people, as can happen sometimes, acted out of character-in this case we would want to use our hypothesis again even though it had been apparently falsified. Or maybe our prediction was successful, but the individual in question has meanwhile undergone a change in his character-in this case we would not want to use our hypothesis again even though it had just been seemingly confirmed. Or maybe the actor in question knew our prediction and deliberately acted so as to confirm or falsify our hypothesis, in which case we might or might not want to change our future prediction. Every success and every failure, then, bears only inconclusive results and necessitates another tentative judgment, a new and updated understanding of the actors concerned and a renewed assessment of their characters in light of their most recent actions, and so on. Thus, in contrast to the situation in the natural sciences, where success and failure have an unambiguous meaning, where we are allowed to conclude that what was false in the past will also be so in the future and what worked once will likely work again, and where we may thus successively acquire a growing stock of knowledge, in dealing with the problem of anticipating our fellow men's actions, we can never rest on our past laurels but must always start again fresh and judge the applicability of our past knowledge anew, we can never possess a stock of knowledge that we may blindly rely upon in the future. Nothing in this-Mises's-view regarding the nature of human history, past and future, is likely to strike anyone as new or revolutionary Indeed, if it were not for the fact of the very different positivistic view of the matter, it would appear almost trivial and a self-evident truism. As Mises notes, "the methods of scientific inquiry [in the social sciences] are categorically not different from the procedures applied by everybody in his daily mundane comportment. They are merely more refined and as far as possible purified of inconsistencies and contradictions. Under- 7 4 Review ofAustrian Economics 10, No. 1 (1997) standing is not a method of procedure peculiar only to historians. It is practiced by infants as soon as they outgrow the merely vegetative stage of their first days and weeks. There is not conscious response of man to any stimuli that is not 31 direct by understanding. It is not entirely surprising, then, that Lachmann, too, while his methodological considerations (in distinct contrast to Mises's) are largely unsystematic and marred by an abundance of metaphorical expression and a lack of analpcal rigor, should at times appear to be in essential agreement with this commonsensical view as embraced by Mises. Lachmann, too, makes 32 frequent reference to understanding, ideal types, and institutions. Yet despite such apparent similarities, Mises and Lachmann reach completely different conclusions as regards the nature of human-entrepreneurial-uncertainty. Whereas for Mises the result of the method of understanding is moderate uncertainty, for Lachmann it is radical uncertainty. How is this to be explained? In putting the best possible-because it is the most consistent-face on Lachmann, the disagreement between his and Mises's position may be said to boil down to one regarding a contingent-empirical-fact. There is agreement on the method to be employed; there is disagreement only on how successful this method actually is-remarkably so and most of the time, as Mises would contend, or insignificantly and only occasionally so, as would Lachmann. Instead of disagreeing on principle, on methodology, they only disagree on a matter of fact: whether the social world is, in fact, kaleidic or not. But what of the facts, then? Although the empirical question of whether we inhabit a kaleidic world or not may appear to be of rather minor importance, given the fact that we must deal with it in any case and we have nothing but understanding available to us to do so, and although questions of this nature may easily degenerate into idle semantic quibbles such as whether a glass of water is half empty or half full, empirical questions-disagreements on matters of fact-are accessible to empirical research and can, in principle, be decided upon based on the observation of the facts. In the bright light of empirical facts, however, Lachmann's theory of radical uncertainty fares no better than in the pale light of logic. So as to generate a radically-uncertain world of kaleidic change, Lachmann must assume, as a matter of empirical fact, that individual actors do not possess any such thing as a character. Understanding, as has been explained, is always understanding of past actions. In order to be able to successfully predict future actions based on an understanding of past actions, it is necessary that one assume that the past and the future are somehow related-not in the sense that the past

31 Mises, The Ultimate Foundation ofEconomic Science, p. 48. 32~eeLachmann, The Market as an Economic Process, pp. 34-42. Hoppe: On Certainty and Uncertainty 75 would determine the future, but rather in the sense that the past values and know-how of an individual (which determined his past actions) shape and constrain his future values and know-how (which determine his future actions). Indeed, if this were not assumed to be the case and an individual's past values and actions were viewed as completely unrelated to his future values and actions, the study of history would be entirely useless. We only study an individual's past because we believe that this knowledge is valuable in helping us anticipate something regarding his future conduct. Without this belief, the study of history must be regarded as a sheer waste of time. In Mises's view, the link connecting an individual's past with his future and the empirical reason for our concern for the study of history is the existence of individual characters and personalities. It is the existence ofa person's character, changing though it may be over the course of time, that assures the continuity of change: patterned social change instead of kaleidic flux. Accordingly, only if individual actors were assumed to be completely-disjointed personalities, such that my actions tomorrow were always entirely unrelated and unaffected by my actions today or yesterday, could Lach- mann's scenario of radical uncertainty ever become reality. While this would indeed be a nightmare if it ever existed, it can safely be said that it has no resemblance whatsoever either to us or to the world we inhabit. Indeed, it is difficult to imagine how a world of disjointed personalities could be reconciled even with human biolou. Solely on account of our physical bodily nature-which is a contingent fact, but as long as we are alive a relatively stable contingency--we cannot possibly be quite like Lachmann thinks we are, or else we would quickly die out. As a matter of fact, actors, from the earliest stages of infancy on, display a personal character, they possess a personal identity and conceive of their past and future as forming a whole: their personal life history. We do not start building a house today and then, tomorrow, without any special reason, do something entirely unrelated. Rather, our past actions influence, circumscribe, and constrain our future actions. We do not always begin from scratch, but most of the time we continue what was already begun and planned as a part of a lengthy sequence of actions. And even if we abandon one such integrated plan, we typically adopt another one. Otherwise, if there were no such continuity in our actions, it would be impossible to explain one of the most striking features of human life-the existence and continued employment of a stock of capital goods. To produce a capital good is to begin something stretching into the future, and to employ an existing capital good is to continue something begun in the past. If the future were indeed unrelated to the past, it should be expected that capital goods, insofar as they come into existence at all, will just as quickly be abandoned in the future as they may have been adopted in the past. However, 76 Review of Austrian Economics 10, No. 1 (1 99 7) while there exist some ruins of abandoned capital goods, most of yesterday's capital goods are still employed today and tomorrow-which is empirical proof of the past's continuing influence on the future. As the author of a book on capital, Lachmann ;fall people should have been able to recognize this, and this alone should have given him reason enough to discard his thesis of kaleidic change and radical uncertainty. Moreover, equally difficult for Lachmann to explain would be another fundamental feature of human history-the existence of enduring differences among various individuals in their ability to forecast the future; that is, not only the fact that I may be better able to predict the actions of A, B, and C, while you may be better able to predict those of D, E, and F, but also the fact that you and I, confronted with one and the same group of individuals G, H, and J, may display lastingly-different forecasting abilities. From Mises's view these facts pose no problem. Different individuals do not, and cannot possibly know (understand) everyone's past equally well. They know different individuals differently well, and accordingly, their forecasting ability should be expected to be different dependent on whose actions need to be predicted. Likewise, assuming that different individuals are concerned with forecasting the actions of the same individual or group of individuals, it should be expected that there will be systematically-and hence enduringly-different success rates among these forecasters. For in Mises's view, every prediction requires not only an understanding of the past but also a tentative judgment, influenced but not determined by the knowledge of the past, as to the underlying character structure of the individual adtors concerned. As an essentially cognitive task involving different and complex intellectual operations, nothing should be less surprising than the fact that different individuals, with strikingly-different talents in all other areas of intellectual endeavor, will also perform differently when it comes to predicting their fellow men. However, if an individual's past and future were indeed unrelated, as Lachmann believes is the case, then everyone should be expected to predict everyone else's behavior equally well (or badly). A person with an understanding of an individual's past actions should not be able to predict his future actions any more successfully than someone else not so acquainted with the individual in question. Because the past is unconnected to the future, not knowing it cannot make a difference in our forecasting abilities. And since without our knowledge of past actions there is nothing left to go on to form a character judgment, we are all equally ignorant and without a rudder; hence, there also should be no lasting difference in our rate of success or failure. Successes and failures should be expected to be randomly distributed among actors and personal fortunes to dissipate as quickly as they are found. Hoppe: On Certainty and Uncenaing 77

It is almost needless to say that none of this fits historical reality. Based on my long understanding of my wife, for instance, 1 can anticipate her actions and reactions in almost all foreseeable circumstances; and vice versa, she can predict me almost to perfection. There are few if any surprises, and probably no one else could predict us better than we can predict each other. Likewise, I can predict, with great precision and better than almost everybody else, the behavior of my children, while they have (still) considerably more difficulty understanding me and my character. Similarly, 1 can anticipate better than almost anybody else the actions and reactions of many of my family and friends under a great variety of circumstances, and they, knowing me, can successfully predict many or even most of my reactions. There is nothing radical or kaleidic about the uncertainty involved. As well, I know quite a bit about the history of men and women, Germans, Austrians, Turks, Americans, Italians, Mexicans, Protestants, Catho- lics, Jews, Blacks, Asians, university professors, politicians, businessmen, private and public employees, and so on, and in many respects I can predict the behavior of the members of these groups very successfully, and certainly more successfully than the average person. Moreover, as far as predictions about the behavior of one and the same (group of) individual(s) by different predictors are concerned, even if all predictors have equal access to the record of past events and can base their prediction on an understanding of this past, they are most definitely not equally successful in their predictions. Most importantly, in the narrower field of capitalist-entrepreneurship, where forecasters must estimate their present and current production costs and form a judgment regarding future consumer demand in order to successfully complete an anticipated exchange of present money against future money, and where there exists a set of objective criteria for success-profit and loss, continued operation and bankruptcy, and growth, stagnation, or decline of capital values-the degree of success among different individuals is strikingly different. While many of those who try fail and drop from the rank of a capitalist-entrepreneur to become involved in less risky and intel- lectually-demanding tasks, many others succeed to stay in business year after year, and some have succeeded in accumulating great fortunes during their life, and even to bring up heirs capable of preserving or enhancing their fortune beyond their own lifetime. This empirical fact, too, stands in open contradiction to the idea of kaleidic change and rather confirms the great cognitive value of the method of understanding (even more so in light of the fact that the superior predictive capability of the capitalist-entrepreneurs simultaneously reduces the uncertainty facing all of their employees by providing them with a present income even if they themselves could not have correctly anticipated the future demand for their own line of work). 78 Review ofAustrian Economics 10, No. 1 (1 997)

1 Certainly all of this-the predictive power of the method of understanding as manifested in the empirical facts of capital formation and maintenance, of successful everyday-life entrepreneurship (forecasting of family, friends, colleagues, and acquaintances), and of enduring business successes-in conjunction with the apodictic certitude provided by praxeology and the wide-ranging practical certainty afforded by technology and insurance sflould be more than sufficient to dispel all talk about radical uncertainty and kaleidic social change as either contradictory and meaningless or patently false. FREE MARKET TRANSPORTATION: DENATIONALIZING THE ROADS*

by Walter Block Department of Economics Rutgers University, Newark

Introduction Were a government to demand the sacrifice of 46,700 citizens' each year, there is no doubt that an outraged public would revolt. If an organized religion were to plan the immolation of 523,335 of the faithful in a decade,' there is no question that it would be toppled. Were there a Manson-type cult that murdered 790 people to celebrate Memorial Day, 770 to usher in the Fourth of July, 915 to commemorate Labor Day, 960 at Thanksgiving, and solemnized Christmas with 355 more deaths,3 surely The New York Times would wax eloquent about the carnage, calling for the greatest manhunt this nation has ever seen. If Dr. Spock were to learn of a disease that killed 2,077 children4 under the age of five each year, or were New York City's Andrew Stein to uncover a nursing home that allowed 7,346 elderly people to die ann~ally,~there would be no stone unturned in their efforts to combat the enemy. To compound the horror, wereprivate enterprise responsible for this butchery, a cataclysmic reaction would ensue: investigation panels would be appointed, the justice department would seek out antitrust violations, company executives would be jailed, and an outraged hue and cry for nationalization would follow. The reality, however, is that the government is responsible for such slaughter-the toll taken on our nation's roadways. Whether at the local, state, regional, or national level, it is government that builds, runs, manages, administers, repairs, and plans for the roadway network. There is no need for the government to take over; it is already fully in charge, and with a vengeance. I believe there is a better way: the market place. Explaining how a free market can serve to provide road and highway service, as it has furnished us with practically every other good and service at our disposal, is the objective of this article.

* The author wishes to express a debt af gratitude to Charles G. Koch and Edward H. Crane 111 of the Cato Institute, without whose efforts this work could not have been undertaken. 209 210 THE JOURNAL OF LIBERTARIAN STUDIES

Before dismissing the idea as impossible, consider the grisly tale of government road management. Every year since 1925 has seen the death of more than 20,000 people. Since 1929, the yearly toll has never dropped below 30,000 per year. In 1962, motor vehicle deaths first reached the 40,000 plateau and have not since receded below that level. To give just a hint of the callous disregard in which human life is held by the highway authorities, consider the following statement about the early days of government highway design and planning:

The immediate need was to get the country out of the mud, to get a connected paved road system that would connect all county seats and population centers with mudless, dustless roads. These were the pioneer- ing years. Safery, volume, and traffic operarions were nor considereda problem. But by the middle thirties there was an awakening and a recognition that these elements were vital to efficient and safe operation of the highway system. [Emphasis added.16

By the "middle thirties," indeed, nearly one-half million people had fallen victim to traffic fatalities.' Rather than invoking indignation on the part of the public, government management of the roads and highways is an accepted given. Apart from a Ralph Nader, who only inveighs against unsafe vehicles (only a limited part of the problem), there is scarcely a voice raised in opposition. The government seems to have escaped opprobrium because most people blame traffic accidents on a host of factors other than governmental mismanagement: drunkenness, speeding, lack of caution, mechanical failures, etc. Typical is the treatment undertaken by Sam Peltzman,x who lists no less than thirteen possible causes of accident rates without even once mentioning the fact of government ownership and management.

Vehicle speed . . . alcohol consumption . . . the number ofyoungdrivers . . . changes in drivers' incomes. . . the money costs of accidents. . . the average age of cars . . . the ratio of new cars to all cars (because it has been suggested that while drivers familiarize themselves with their new cars, accident risk may increase) . . . trafic density. . . expenditures on traffic-law enforcement by state highway patrols . . . expenditures on roads . . . the ratio of imports to total cars (because there is evidence that small cars are more lethal than large cars if an accident occurs) . . . education of the population . . . and the availability of hospital care (which might reduce deaths if injury occurs).

Further, David M. Winch cites another reason for public apathy: the belief that "[mlany persons killed on the roads are partly to blame for their death . . ."9 True, many victims of road accidents are partly responsible. But this in no way explains public apathy toward their deaths. For people killed in New York City's Central Park during the late evening hours, are also at FREE MARKET TRANSPORTATION 21 1 least partially to blame for their own deaths; it takes a monumental indifference, feeling of omnipotence, absent-mindedness or ignorance to embark upon such a stroll. Yet the victims are pitied, more police are demanded, and protests are commonly made. The explanation of apathy toward highway mismanagement that seems most reasonable is that people simply do not see any alternative to government ownership. Just as no one "opposes" or "protests" a volcano, which is believed to be beyond the control of man, there are very few who oppose governmental roadway control. Along with death and taxes, state highway management seems to have become an immutable, if unstated, fact. The institution of government has planned, built, managed and maintained our highway network for so long that few people can imagine any other work- able possibility. While Peltzman puts his finger on theproximate causes of highway accidents, such as excessive speed and alcohol, he has ignored the agency, government, which has set itself up as the manager of the roadway apparatus. This is akin to blaming a snafu in a restaurant on the fact that the oven went out, or that the waiter fell on a slippery floor with a loaded tray. Of course the proximate causes of customer dissatisfaction are uncooked meat or food in their laps. Yet how can these factors be blamed, while the part of restaurant management is ignored? It is the restaurant manager's job to insure that the ovens are performing satisfactorily, and that the floors are properly maintained. If he fails, the blame rests on his shoulders, not on the ovens or floors. We hold the trigger man responsible for murder, not the bullet. The same holds true with highways. It may well be that speed and alcohol are deleterious to safe driving; hut it is the road manager's task to ascertain that the proper standards are maintained with regard to these aspects of safety. If unsafe conditions prevail in a private, multi-story parking lot, or in a shopping mall, or in the aisles of a department store, the entrepreneur in question is held accountable. It is he who loses revenue unless and until the situation is cleared up. It is logically fallacious to place the blame for accidents on unsafe conditions, while ignoring the manager whose responsibility it is to ameliorate these factors. It is my contention that all that is needed to virtually eliminate highway deaths is a non-utopian change, in the sense that it could take place now, even given our present state of knowledge, if only society would change what it can control: the institutional arrangements that govern the nation's highways.

Answering the Charge "Impossible" Before I explain how a fully free market in roads might function, it appears appropriate to discuss the reasons why such a treatment is likely not to receive a fair hearing. 212 THE JOURNAL OF LIBERTARIAN STUDIES

A fully private market in roads, streets, and highways is likely to be rejected out of hand, first, because of psychological reasons. The initial response of most people goes something as follows: "Why, that's impossible. You just can't do it. There would be millions of people killed in traffic accidents; traffic jams the likes of which have never been seen would be an everyday occurrence; motorists would have to stop every twenty-five feet and put one-hundredth of a penny in each Little old lady's toll box. Without eminent domain, there would be all sorts of obstructionists setting up roadblocks in the oddest places. Chaos, anarchy, would reign. Traffic would grind to a screeching halt, as the entire fabric of the economy fell about our ears." If we were to divide such a statement into its cognitive and psychological (or emotive) elements, it must be stated right at the outset that there is nothing at all reprehensible about the intellectual challenge. Far from it. Indeed, if these charges cannot be satisfactorily answered, the whole idea of private roads shall have to be considered a failure. But there is also an emotive element which is responsible, perhaps, not for the content of the objection, but for the hysterical manner in which it is usually couched and the unwillingness, even, to consider the case. The psychological component stems from a feeling that government road management is inevilable and that any other alternative is therefore unthinkable. It is this emotional factor that must he flatly rejected. We must realize that just because the government has alwaysL0 built and managed the roadway network, this is not necessarily inevitable, the most efficient procedure, nor even justifiable. On the contrary, the state of affairs that has characterized the past is, logically, almost entirely irrelevant. Just because "we have 'always' exorcised devils with broomsticks in order to cure disease" does not mean that this is the best way. We must ever struggle to throw off the thralldom of the status quo. To help escape "the blinds of history" consider this statement by William C. Wooldridge: Several years ago I was a student at St. Andrews. University in Scotland, and I found that placing a telephonecall constituted one of the environment's greatest challenges. Private phones were too expensive to be commonplace, so a prospective telephoner first had to accumulate four pennies for each call he desired to make, a project complicated by the absence of any nearby commercial establishment open beyond the hour of six or seven. Next, the attention of an operator had to be engaged, in itself a sometimes frustrating undertaking, whether because of inadequate manpower or inadequate enthusiasm on the switchboard I never knew. Finally, since the landward side of town apparently boasted no more telephones than the seaward, a long wait frequently followed even a successful connection, while whoever had answered the phone FREE MARKET TRANSPORTATION 213 searched out the party for whom the call was intended. A few repetitions of this routine broke my telephone habit altogether, and I joined my fellow students in communicating in person or by message when it was feasible.~~~~~ ~ ~. and not communicatine- at all when it was not. Nevertheless, the experience rankled, so I raised the subject one night in the cellar of a former bishop's residence, which now accommodates the student union's beer bar. Why were the telephones socialized? Why weren't thev. a . orivatelv owned utilitv. since there was so little to lose in the way of service by denationalization? The reaction was not, as might he expected, in the least defensive, but instead positively condescending. It should he self-evident to even a chauvinistic American that as important a service as the telephone system could not he entrusted to private business. It was inconceivable to operate it for any other than the public interest. Who ever had heard of a private telephone company? That incredulity slackened only slightly after a sketchy introduction to Mother Bell (then younger and less rheumatic than today), hut at least the American company's example demonstrated that socialized tele- nhone service was not an invariable -eiven in the eauation of the universe. My friends still considered the private telephone idea theoretically misbeeotten and ooliticallv.. urevosterous, . hut no longer could it remain literaliy inconceivable, for there we all were sitting around a table in the bishop's basement talking about it. It had been done. It might-heaven forfend-be done again. The talk necessarily shifted from possibility to desirability, to what lawyers call the merits of the case. Like the St. Andrews students, Americans show a disposition to accept our government's customary functions as necessarily the exclusive province of government; when city hall has always done something, it is difficult to imagine anyone else doing it. When an activity is being undertaken for the first time, the overation of the Telstar comkunicat&s satellite, for instance, people keenly feel and sharply debate their option for public or private ownership. Discus- sion of the costs and advantages of each alternative accompanies the final choice. But once the choice is made and a little time passes, an aura of inevitability envelops the status quo, and consciousness of any alternative seeps away with time. Todav. most Americans nrobablv feel the teleeranh naturallv belongs within ihe private sphere, and few doubt the ~os;Office shouldnaturaiy be a ~ublicmonooolv. . . "Naturallv." however. in such a context means only that's-the-way-it's-heen-for-as-long-as-wean-remember,an Amer- icanized version of Pope's declaration that "Whatever is is right." Yet few could think of a convincing a priori rationale for distinguishing the postal from the telegraphic mode of communication. At least one Postmaster General could not: in 1845 his Annual Report prophesied intolerable competition from the telegraph and suggested it might ap- orooriatelv be committed to the government. At that earlv. staee- in its bisiory, tie telegraph might co~eivahlyhave become a government monooolv for the same reasons the Post Office alreadv was. but the mere passage of time has obliterated any consideration ofwhet'her they were good reasons or bad reasons." 214 THE JOURNAL OF LIBERTARIAN STUDIES

In advocating a free market in roads, on one level, we shall be merely arguing that there is nothing unique about transportation; that the economic principles we accept as a matter of course in practically every other arena of human experience are applicable here too. Or at the very least, we cannot suppose that ordinary economic laws are nol apropos in road transportation until after the matter has been considered in some detail. Says Gabriel Roth: . . . [Tlhere is a[n] approach to the problem of traffic congestion-the economic approach-which offers a rational and practical solution. . . . The first step is to recognize that road space is a scarce resource. The second, to apply to it the economic principles that we find helpful in the manufacture and distribution of other scarce resources, such as electric- ity or motor cars or petrol. There is nothing new or unusual about these principles, nor are they particularly difficult. What isdifficull is ro applj' them ro roads, probablj' because we have aN been broughr up to regard roads as community assetsfreely available lo all comers. The difficulty does not lie so much in the technicalities of the matter, but rather in the idea that roads can usefully be regarded as chunks of real estate. [Emphasis added.]'Z

Unfortunately, even those economists who, like Roth, call explicitly for a consideration of the similarities between roads and other goods are unwilling to carry the analogy through to its logical conclusion: free enterprise highways and streets. Instead, they limit themselves to advocacy of road pricing, but to be administered, always, by governmental authorities. What reasons are there for advocating the free market approach for the highway industry? First and foremost is the fact that the present government ownership and management has failed. The death toll, the suffocation during urban rush hours, and the poor state of repair of the highway stock, are all eloquent testimony to the lack of success which has marked the reign of government control. Second, and perhaps even more important, is a reason for this state of affairs. It is by no means an accident that government operation has proven to be a debacle, and that private enterprise can succeed where government has failed. It is not only that government has been staffed with incompetents. The roads authorities are staffed, sometimes, with able management. Nor can it be denied that at least some who have achieved high rank in the world of private business have been incompetent. The advantage enjoyed by the market is the automatic reward and penalty system imposed by profits and losses. When customers are pleased, they continue patronizing those merchants who have served them well. These businesses are thus allowed to earn a profit. They can prosper and expand. Entrepreneurs who fail to satisfy, on the other hand, are soon driven to bankruptcy. This is a continual process repeated day in, day out. There is always a FREE MARKET TRANSPORTATION 215 tendency in the market for the reward of the able, and the deterrence of those who are not efficient. Nothing like perfection is ever reached, but the continual grinding down of the ineffective, and rewarding of the competent, brings about a level of managerial skill unmatched by any other system. Whatever may be said of the political arena, it is one which completely lacks this market process. Although there are cases where capability rises to the fore, there is no continual process which promotes this. Because this is well known, even elementary, we have entrusted the market to produce the bulk of our consumer goods and capital equipment. What is difficult to see is that this analysis applies to the provision of roads no less than to fountain pens, frisbees, or fishsticks.

A Free Market in Roads Let us now turn to a consideration of how a free market in roads might operate.'' Along the way, we will note and counter the intellectual objections to such a system. Alltransport thoroughfares would be privately owned: not only the vehicles, buses, trains, automobiles, trolleys, etc., that travel upon them, but the very roads, highways, byways, streets, sidewalks, bridges, tunnels, crosswalks themselves upon which journeys take place. The transit corridors would be as privately owned as is our fast food industry. As such, all the usual benefits and responsibilities that are incumbent upon private enterprise would affect roads. The reason a company or individual would want to build or buy an already existing road would be the same as in any other business-to earn a profit. The necessary funds would be raised in a similar manner-by floating an issue of stock, by borrowing, or from past savings of the owner. The risks would be the same-attracting customers and prospering, or failing to do so and going bankrupt. Likewise for the pricing policy; just as private enterprise rarely gives burgers away for free, use of road space would require payment. A road enterprise would face virtually all of the problems shared by other businesses: attracting a labor force, subcontracting, keeping customers satisfied, meeting the price of competitors, innovating, borrowing money, expanding, etc. Thus, a highway or street owner would he a businessman as any other, with much the same problems, opportunities, and risks. In addition, just as in other businesses, there would be facets peculiar to this particular industry. The road entrepreneur would have to try to contain congestion, reduce traffic accidents, plan and design new facilities in coordi- nation with already existing highways, as well as with the plans of others for new expansion. He would have to set up the "rules of the road" so as best to accomplish these and other goals. The road industry would be expected to carry on each and every one of the tasks now undertaken by public roads authorities: fill potholes, install road signs, guard rails, maintain lane mark- 216 THE JOURNAL OF LIBERTARIAN STUDIES ings, repair traffic signals, and so on for the myriad of "road furniture" that keeps traffic moving. Applying the concepts of profit and loss to the road industry, we can see why privatization would almost certainly mean a gain compared to the present nationalized system of road management. As far as safety is concerned, presently there is no road manager who loscs financially if the accident rate on "his" turnpike increases, or is higher than other comparable avenues of transportation. A civil servant draws his annual salary regardless of the accident toll piled up under his domain. But if he were a private owner of the road in question, in competition with numerous other highway companies (as well as other modes of transit such as airlines, trains, boats, etc.), completely dependent for financial sustenance on the voluntary payments of satisfied customers, then he would indeed lose out if his road compiled a poor safety record (assuming that customers desire, and are willing to pay for, safety). He would. then, have every incentive to try to reduce accidents, whether by technological innovations, better rules of the road, improved methods of selecting out drunken and other undesirable drivers, etc. If he failed, or did less well than his competition, he eventually would be removed from his position of responsibility. Just as we now expect better mousetraps from a private enterprise system which rewards success and penalizes failure, so could we count on a private ownership setup to improve highway safety. Thus, as a partial answer to the challenge that private ownership would mean the deaths of millions of people in traffic accidents, we reply, "There are, at present, millions of people who have been slaughtered on our nation's highways; a changeover to the enterprise system would lead to a precipitous decline in the death and injury rate, due to the forces of competition." Another common objection to private roads is the spectre of having to halt every few feet and toss a coin into a tollbox. This simply would not occur on the market. To see why not, imagine a commercial golf course operating on a similar procedure: forcing the golfers to wait in line at every hole, or demanding payment every time they took a swipe at the ball. It is easy to see what would happen to the cretinous management of such an enterprise: it would very rapidly lose customers and go broke. If roads were privately owned, the same process would occur. Any road with say, 500 toll booths per mile, would be avoided like the plague by customers, who would happily patronize a road with fewer obstructions, even at a higher money cost per mile. This would be a classical case of economies of scale, where it would pay entrepreneurs to buy the toll collection rights from the millions of holders, in order to rationalize the system into one in which fewer toll gates blocked the roads. Streets that could be so organized would prosper as thoroughfares; others would not. So even if the FREE MARKET TRANSPORTATION 217 system somehow began in this patchwork manner, market forces would come to bear, mitigating the extreme inefficiency. There is no reason, however, to begin the market experiment in this way. Instead of arbitrarily assigning each house on the block a share of the road equal to its frontage multiplied by one-half the width of the street in front of it (the way in which the previous example was presumably generated in someone's nightmare vision), there are other methods more in line with historical reality and with the libertarian theory of homesteading property rights. One scenario would follow the shopping center model: a single owner- builder would buy a section of territory, build roads, and (fronting them) houses. Just as many shopping center builders maintain control over parking lots, malls, and other "in common" areas, the entrepreneur would continue the operation of common areas such as the roads, sidewalks, etc. Primarily residential streets might be built in a meandering, roundabout manner replete with cul-de-sacs, to discourage through travel. Tolls for residents, guests, and deliveries might be pegged at low levels, or be entirely lacking (as in the case of modern shopping centers), while through traffic might be charged at prohibitive rates. Standing in the wings, ensuring that the owner effectively discharges his responsibilities, would be the profit and loss system. Consider now a road whose main function is to facilitate through traffic. If it is owned by one person or company, who either built it or bought the rights of passage from the previous owners, it would be foolish for him to install dozens of toll gates per mile. In fact, toll gates would probably not he the means of collection employed by a road owner at all. There now exist highly inexpensive electrical devices14 which can register the passage of an automobile past any fixed point on a road. Were suitable identifying electronic tapes attached to the surface of each road vehicle, there would he no necd for a time-wasting, labor costly system of toll collection points. Rather, as the vehicle passes the check point, the electrical impulse set up can be transmitted to a computer which can produce one monthly bill for all roads used, and even mail it out automatically. Road payments could be facilitated in as unobtrusive a manner as utility hills are now. Then there is the eminent domain challenge: the allegation that roads could not be efficiently constructed without the intermediation of government-imposed eminent domain laws which are not at the disposal of private enterprise. The argument is without merit. We must first realize that even with eminent domain, and under the system of government road construction, there are stilllimits as to where a new road may be placed. Not even a government could last long if it decided to tear down all the skyscrapers in Chicago's Loop in order to make way for yet 218 THE JOURNAL OF LIBERTARIAN STUDIES

another highway. The logic of this limitation is obvious: it would cost billions of dollars to replace these magnificent structures; a new highway near these buildings, but one which did not necessitate their destruction, might well be equally valuable, but at an infinitesimal fraction of the cost. With or without eminent domain, then, such a road could not be built. Private enterprise could not afford to do so, because the gains in siting the road over carcasses of valuable buildings would not be worthwhile; nor could the government accomplish this task, while there was still some modicum of common sense prohibiting it from operating completely outside of any economic bounds. It is true that owners of land generally thought worthless by other people would be able to ask otherwise exorbitant prices from a developer intent upon building a straight road. Some of these landowners would demand high prices because of psychic attachment (e.g.. the treasured old homestead); others solely because they knew that building plans called for their particular parcels, and they were determined to obtain the maximum income possible. But the private road developer is not without defenses, all of which will tend to lower the price he must pay. First, there is no necessity for an absolutely straight road, nor even for one that follows the natural contours of the land. Although one may prefer, on technical grounds, path A, it is usually possible to utilize path B. . . . .Z, all at variously higher costs. If so, then the cheapest of these alternatives provides an upper limit to what the owners along path A may charge for their properties. For example, it may be cheaper to blast through an uninhabited mountain rather than pay the exorbitant price of the farmer in the valley; this fact tends to put a limit upon the asking price of the valley farmer. Secondly, the road developer, knowing that he will be satisfied with any of five trajectories, can purchase options to buy the land along each site. If a recalcitrant holdout materializes on any one route, he can shift to his second, third, fourth or fifth choice. The competition between owners along each of these passageways will tend to keep the price down. Thirdly, in the rare case of a holdout who possesses an absolutely essential plot, it is always possible to build a bridge over this land or to tunnel underneath. Ownership of land does not consist of property rights'up to the sky or down to the core of the earth; the owner cannot forbid planes from passing overhead, nor can he prohibit a bridge over his land, as long as it does not interfere with the use of his land. Although vastly more expensive than a surface road, these options again put an upper bound on the price the holdout can insist upon. There is also the fact that land values are usually influenced by their neighborhood. What contributes to the value of a residence is the existence FREE MARKET TRANSPORTATION 219 of neighboring homes, which supply neighbors, friends, companionship. Similarly, the value of a commercial enterprise is enhanced by the proximity of other businesses, customers, contacts, even competitors. In New York City, the juxtaposition of stock brokerage firms, flower wholesalers, a jewelry exchange, a garment district, etc., all attest to the value of being located near competitors. If a road 150 feet wide sweeps through, completely disrupting this "neighborliness," much of the value of the stubborn landowner's property is dissipated. The risk of being isolated again puts limitations upon the price which may he demanded. In an out-of-the-way, rural setting, a projected road may not be expected to attract the large number of cash customers necessary to underwrite lavish expenditures on the property of holdouts. However, it will be easier to find alternative routes in a sparsely settled area. Urban locations present the opposite problem: it will be more difficult to find low-cost alternatives, but the expected gains from a road which is expected to carry millions of passengers may justify higher payments for the initial assemblage. Of course, eminent domain is a great facilitator; it eases the process of land purchase. Seemingly, pieces of land are joined together at an exceed- ingly low cost. But the real costs of assemblage are thereby concealed. Landowners are forced to give up their property at prices determined to be "fair" by the federal bureaucracy, not at prices to which they voluntarily agree. While it appears that private enterprise would have to pay more than the government, this is incorrect. The market will have to pay the full, voluntary price, but this will, paradoxically, be less than the government's real payment (its money paymentsplus the values it has forcibly taken from the original owners). This is true because the profit incentive to reduce costs is completely lacking in state "enterprise." Furthermore, the extra costs undergone by the government in the form of bribes, rigged bidding, cost- plus contracts, etc., often would bloat even limited government money outlays past the full costs of private road developers. Another objection against a system of private roads is the danger of being isolated. The typical nightmare vision runs somewhat as follows: "A man buys a piece of land. He builds a house on it. He stocks it with food, and then brings his family to join him. When they are all happily ensconced, they learn that the road fronting their little cottage has been purchased by an unscrupulous street owning corporation, which will not allow him or his family the use of the road at any but an indefinitely high price. The family may 'live happily ever after', but only as long as they keep to their own house. Since the family is too poor to afford a helicopter, the scheming road owner has the family completely in his power. He may starve them into submission, if he so desires." This does indeed appear frightening, but only because we are not accus- 220 THE JOURNAL OF LIBERTARIAN STUDIES

tomed to dealing with such a problem. It could not exist under the present system, so it is difficult to see how it could be solved by free market institutions. Yet, the answer is simple: no one would buy any plot of land without first insuring that he had the right to enter and leave at will.'* Similar contracts are now commonplace on the market, and they give rise to no such blockade problems. Flea markets often rent out tables to separate merchandisers; gold and diamond exchanges usually sublet booths to individual, small merchants; desk space is sometimes available to people who cannot afford an entire office of their own. The suggestion that these contracts are unworkable or unfeasible, on the grounds that the owner of the property might prohibit access to his subtenant, could only be considered ludicrous. Any lawyer who allowed a client to sign a lease which did not specify the rights of access in advance would be summarily fired, if not disbarred. This is true in the present, and would also apply in an era of private roads. It is virtually impossible to predict the exact future contour of an industry that does not presently exist. The task is roughly comparable to foretelling the makeup of the airline industry immediately after the Wright Brothers' experiments at Kitty Hawk. How many companies would there be? How many aircraft would each one own? Where would they land? Who would train the pilots? Where could tickets he purchased? Would food and movies be provided in flight? What kinds of uniforms would be worn by the stewardesses? Where would the financing come from? These are all questions not only impossible to have answered at that time, but ones that could hardly have arisen. Were an early advocate of a "private airline industry" pressed to point out, in minute detail, all the answers in order to defend the proposition that his idea was sound, he would have had to fail. In like manner, advocates of free market roads are in no position to set up the blueprint for a future private market in transport. They cannot tell how many road owners there will be, what kind of rules of the road they will set up, how much it will cost per mile, how the entrepreneurs will seek to reduce traffic accidents, whether road shoulders will he wider or narrower, or which steps will be taken in order to reduce congestion. Nor can we answer many of the thousands of such questions that are likely to arise. For one thing, these are not the kinds ofquestions that can he answered in advance with any degree of precision, and not only in transportation. The same limitations would have faced early attempts to specify industrial setups in computers, televisions, or any other industry. It is impossible to foretell the future of industrial events because, given a Cree market situation, they are the result of the actions of an entire cooperatingeconomy, even though these actions may not be intended by any individual actor.'6 Each person bases his actions on the limited knowledge at his disposal. Nevertheless, we shall attempt a scenario, though not for the purpose of FREE MARKET TRANSPORTATION 22 1 mapping out, forevermore, the shape of the road market of the future. We realize that such patterns must arise out of the actions of millions of market participants, and will be unknown to any of them in advance. Yet if we are to consider objections to a road market intelligently, we must present a general outline of how such a market might function. We will now consider some problems that might arise for a road market, and some possible solutions.

1. Who will decide upon the rules of the road? This question seems important because we are accustomed to governments determining the rules of the road. Some people even go so far as to just;f:j the very existence of government on the ground that someone has to fashion highway rules, and that government seems to be the only candidate. In the free market, each road owner will decide upon the rules his customers are to follow, just as nowadays rules for proper behavior in some locations are, to a great extent, determined by the owner of the property in question. Thus, roller and ice skating emporia decide when and where their patrons may wander, with or without skates. Bowling alleys usually require special bowling shoes, and prohibit going past a certain line in order to knock down the pins. Restaurants demand that diners communicate with their waiter and busboy, and not go marching into the kitchen to consult with the chef. There are no "God-given" rules of the road. While it might have been convenient had Moses been given a list of the ten best rules for the road, he was not. Nor have legislators been given any special dispensations from on high. It is therefore man's lot to discover what rules can best minimbe costs and accidents, and maximize speed and comfort. There is no better means of such discovery than the competitive process. Mr. Glumph of the Glumph Highway Company decides upon a set of rules. Each of his competitors decides upon a (slightly) different version. Then the consumer, by his choice to patronize or not, supports one or the other. To the extent that he patronizes Glumph and avoids his competitors, he underwrites and supports Glumph's original decisions. If Glumph loses too many customers, he will be forced to change his rules (or other practices) or face bankruptcy. In this way the forces of the market will be unleashed to do their share in aiding the discovery process. We may never reach the all-perfect set of rules that maximizes the attainment of all conceivable goals, but the tendencj. toward this end will always operate.

2. Ifa free market in roads is allowed and bankruptcies occur, what will be done about the havoc created for the people dependent upon them? Bankrupt road companies may well result from the operations of the market. There are insolvencies in every area of the economy, and it would be 222 THE JOURNAL OF LIBERTARIAN STUDIES

unlikely for this curse to pass by the road sector. Far from a calamity, however, bankruptcies are paradoxically a sign of a healrhy economy. Bankruptcies have a funclion. Stemming from managerial error in the face of changing circumstances, bankruptcies have several beneficial effects. They may be a signal that consumers can no longer achieve maximum benefit from a stretch of land used as a highway; there may be an alternative use that is ranked higher. Although the subject might never arise under public stewardship, surely sometime in the past ten centuries there were roads constructed which (from the vantage point of the present) should not have been built; or, even if they were worth building originally, have long since outlasted their usefulness. We want a capacity in our system to acknowledge mistakes, and then act so as ro correcr [hem. The system of public ownership is deficient, in comparison, precisely because bankruptcy and conversion to a more valuable use never exists as a serious alternative. The mistakes are, rather, "frozen in concrete," never to be changed. Would we really want to apply the present non-bankruptcy system now prevailing in government road management to any other industry? Would it be more efficient to maintain every single grocery store, once built, forevermore? Of course not. It is part of the health of the grocery industry that stores no longer needed are allowed to pass on, making room for those in greater demand. No less is true of the roadway industry. Just as it is important for the functioning of the body that dead cells he allowed to disappear, making way for new life, so is it necessary for the proper functioning of our roadway network that some roads be allowed to pass away. Bankruptcy may serve a second purpose. A business may fail not because there is no longer any need for the road, but because private management is so inept that it cannot attract and hold enough passengers to meet all its cpsts. In this case, the function served by bankruptcy proceedings would he to relieve the ineffective owners of the road, put it into the hands of the creditors and, subsequently, into the hands of better management.

3. How would traffic snarls be countered in the free market? If the roads in an entire section of town (e.g., the upper east side of Manhattan), or all of the streets in a small city were completely under the control of one company, traffic congestion would present no new problem. The only difference between this and the present arrangement would be that a private company, not the government road authority, would he in charge. As such, we could only expect the forces ofcompetition to improve matters. For example, one frequent blocker of traffic, and one which in no way aids the overall movement of motorists, is the automobile caught in an intersection when the light has changed. This situation arises from entering an intersecting cross street, in the hope of making it across so that, when the light changes, one will be ahead of vehicles turning off that street. In the FREE MARKET TRANSPORTATION 223 accompanying diagram #I (see below) a motorist is traveling west along the Side Street. Although the Side Street west of Main Street is chock full of cars, he nevertheless enters the intersection between Main Street and Side Street; he hopes that, by the time Main Street again enjoys the green light, the cars ahead of him will move forward, leaving room for him to leave the intersection. Diagram I (North) I Main Street Side Street 1

All too often, however, what happens is that traffic ahead of him on Side Street remains stationary, and the motorist gets caught in the middle of the intersection. Then, even when the traffic is signaled to move north on Main Street, it cannot; because of the impatience of our motorist, he and his fellows are now stuck in the intersection, blocking northbound traffic. If this process is repeated on the four intersections surrounding one city block (see diagram #2) it can (and does) bring traffic in the entire surrounding area to a virtual standstill. Diagram 2

Broadway Main Street

Side Street

Maple Street

Currently, government regulations prohibit entering an intersection when there is no room on the other side. This rule is beside the point. The question is not whether a traffic system legally cal/sfor certain actions, but whether this rule succeeds or not. If the mere passage of a law could suffice, all that 224 THE JOURNAL OF LIBERTARIAN STUDIES

would be needed to return to the Garden of Eden would be "enabling legislation." What is called for, in addition to the proper rules of the road, is the actual attainment of motorists'conformity with those rules. As far as this problem is concerned, private road companies have a comparative advantage over governments. For, as we have seen, if a government fails in this kind of mission, there is no process whereby it is relieved of its duties; whereas, let a private enterprise fail and retribution, in the form of bankruptcy, will be swift and total. Another street company, and still another. if needed, will evolve through the market process, to improve matters. It is impossible to tell, in advance, what means the private street companies will employ to rid their territories of this threat. Just as private universities, athletic stadiums, etc., now enforce rules whose purpose is the smooth functioning of the facility, so might road owners levy fines to ensure obedience to rules. For example, automobiles stuck in an intersection could be registered by the road's computer- monitoring system, and charged an extra amount for this driving infraction, on an itemized bill.*

4. What problems would ensue of each street owned by a separate companj', or individual?

It might appear that the problems are insoluble. For each owner would seem to have an incentive to encourage motorists on his own street to try as hard as they can to get to the next block, to the total disregard of traffic on the cross street. (The more vehicles passing through, the greater the charges that can be levied.) Main Street, in this scenario, would urge its patrons, traveling north, to get into the intersection between it and Side Street, so as to pass on when the next light changed. The Side Street management would do the same: embolden the drivers heading west to try to cross over Main Street, regardless whether there was room on the other side. Each street owner would, in this view, take an extremely narrow stance; he would try to maximize his own profits, and not overly concern himself with imposing costs on the others. The answer to this dilemma is that it could never occur in a free market, based on specified individual private property rights. For in such a system, all aspects of the roadway are owned, including the intersection itself: In the nature of things, in a full private property system, the intersection must be owned either by the Main Street Company, the Side Street Company, or by some third party. As soon as the property rights to the intersection between the two streets are fully specified (in whichever of these three ways) all such problems and dilemmas cease.

* I owe this paint to David Ramsay Steele, of the Department of Sociology. University of Hull. FREE MARKET TRANSPORTATION 225

Suppose the Main Street Company had been the first on the scene. It is then the full owner of an unbroken chain of property, known as Main Street. Soon after, the Side Street Company contemplates building. Now the latter company knows full well that allof Main Street is private property. Building a cross street to run over the property of Main Street cannot be justified. The Main Street Company, however, has every incentive to welcome a Side Street, if not to build one itself, for the new street will enhance its own property if patrons can use it to arrive at other places. A city street that has no cross street options does not really function as an access route; it would be more like a limited access highway in the middle of a city. The two companies shall have to arrive at a mutually satisfactory arrangement. Presumably, the Side Street Company will have to pay for the right to build a cross street. On the other hand, if the owners of Main Street intend to use it as a limited access highway, then the Side Street Company shall have to build over it, under it, or around it, but not across it. (As part of the contract between the two parties, there would have to be an agreement concerning automobiles getting stuck in the intersection. Presumably this would be prohibited.) Since original ownership by the Side Street Company would be the same analytically as the case we have just considered, but with the names of the companies reversed, we may pass on to a consideration of ownership by a third party. If the intersection of the two streets is owned by an outsider, then it is he who decides conflicts between the two road companies. Since his interests would best be served by smoothly flowing traffic, the presumption is that the owner of the intersection would act so as to minimize the chances of motorists from either street being isolated in the intersection as the traffic light changed. This analysis of the ownership situation concerning cross streets and their intersections will enable us to answer several other possibly perplexing problems.

5. How would green light time be parceled out under free enterprise? Of course, most street owners, if they had their choice, would prefer the green light for their street 100% of the time. Yet, this would be tantamount to a limited access highway. If it is to be a city street, a road must content itself with less. What proportion of red and green lights shall be allotted to each street? If all the streets in one neighborhood are owned by one company, then it decides this question, presumably with the intention of maximizing its profits. Again, and for the same reasons, we can expect a more eff'ectivejob from such a "private" owner, than from a city government apparatus. In the case of intersection ownership by a third party, the two cross street 226 THE JOURNAL OF LIBERTARIAN STUDIES owners will bid for the green light time. Ceteris paribus, the presumption is that the owner of the street with the larger volume of street traffic will succeed in bidding for more of the green light time. If the owner of the larger volume street refused to bid for a high proportion of green light time, his customers would tend to patronize competitors-who could offer more green lights, and hence a faster trip. A similar result would take place with two street owners, no matter what the property dispersal.': It is easy to see this if the larger street company owns the intersections. The larger company would simply keep a high proportion (213, 314, or perhaps even 415) of green light time for itself, selling only the remaining small fraction to the intersecting side street. But much the same result would ensue if the smaller road owned the common intersections! Although the relatively lightly traveled road company might like to keep the lion's share of the green lights for itself, it will find that it cannot afford to do so. The more heavily traveled street, representing a clientele willing and able in the aggregate to pay far more for green light privileges, will make it extremely tempting for the small street owner to accept a heavy payment, in order to relinquish most of its green light time. In other words, the customers of the main street, through indirect payments via the main street owner, will bid time away from the smaller number of customers using the minor street. This principle is well established in business, and is illustrated every time a firm sublets space, which it could have used to satisfy its own customers. because it receives more income subletting than retaining the premises for its own use. The provision of staggered traffic lights (the lights continually turn green. for example, as an auto proceeding at 25 M.P.H. approaches them) may present some conceptual difficulties but, again, they are easily overcome. Of course, there are virtually no problems if either one company owns all the roads, or if the main road (the one to be staggered) is continuously owned. The only question arises when the side streets are continuously owned, and it is the main avenues which are to receive the staggered lights. (We are assuming that staggering cannot efficiently be instituted for both north- south and intersecting east-west streets, and that staggering is better placed on the inain roads than the side ones.) Under these conditions, there are several possible solutions. For one, the main avenues_ being able to make better use of the staggering system, may simply purchase (or rent) the rights to program the lights so that staggering takes place on the main roads. The side roads, even as owners of the intersections, would only be interested in the proportion of each minute.that their lights could remain green; they would be indifferent to the necessity of staggering. Since this is precisely what the main roads desire, it seems that some mutually advantageous agreement could feasibly be made. Another possibility is that the main roads, better able to utilize the FREE MARKET TRANSPORTATION 227 staggering capabilities which intersection ownership confers (and perhaps better able to utilize the other advantages bestowed upon their owners) will simply arrange to purchase the intersections outright. If so, the pattern would change from one where the sidestreet corporations owned the intersections to one in which these came under the possession of the main street companies. Still another alternative would be integration of ownership. We have no idea as to the optimal size of the road firm (single block, single road, continuous road, small city, etc.), so thoughts in this direction can only be considered speculative. With regard to the ease of coordinating staggered light systems, however, it may well be that larger is better. If so, there will be a market tendency for merger, until these economies are exhausted. Let us recapitulate. We have begun by indicating the present mismanagement of roads by government. We have claimed that improvements, given the status quo of government management, are not likely to suffice.We have briefly explored an alternative-the free market in road ownership and management-and shown how it might deal with a series of problems, and rejected some unsophisticated objections. We are now ready to examine in some detail how private road owners actually might compete in the market place.

How Private Road Owners Might Compete On the rare occasions when the feasibility of private road ownership has been considered by mainstream economists, it has been summarily rejected, based on the impossibility of competition among private road owners. Seeing this point as almost intuitively obvious, economists have not em- barked on lengthy chains of reasoning in refutation. Thus, says Smerk, rather curtly, "Highways could not very well be supplied on a competitive basis, hence they are provided by the various levels of g~vernment."'~ Economists, however, are willing to expound, at great length, upon the need for the conditions of perfect competition, if efficiency is to prevail in the private sector. One of the main reasons the idea of private enterprise for roads has not been accepted is the claim that perfect competition cannot exist in this sphere. A typical example of this kind of thinking is that of Haveman.lY Says he: A number of conditions must be met if the private sector of the economy-the market system-is to function efficiently. Indeed, these conditions are essential if the private sector is to perform in the public interest. . . . [1]t is the absence of these conditions which often gives rise to demands for public sector [government] action.

These conditions of perfect competition are widely known: numerous buyers and sellers, so that no one of them is big enough to "affect price"; a 228 THE JOURNAL OF LIBERTARIAN STUDIES homogeneous good; and perfect information. One problem with the strict requirement that an industry meet these conditions, or else be consigned to government operation, is that there is virtually no industry in a real-life economy that would remain in the private sector! Almost every industry would have to be nationalized, were the implicit program of Haveman followed. This is easy to see, once we realize how truly restrictive are these conditions. The homogeneity requirement, by itself, would be enough to bar most goods and services in a modern, complex economy. Except for thumb tacks, rubber bands, paper clips, and several others of this kind, there are hardly any commodities which do not differ, even slightly, in the eyes of most consumers. Perfect information bars even the farm staples from inclusion in the rubric of perfect competition. This can be seen in a healthy, functioning Chicago mercantile exchange. If there were full information available to all and sundry, there could be no such commodities market. Not "affecting price" also presents difficulties. No matter how small a part of the total market a single individual may be, he can always hold out for a price slightly higher than that commonly prevailing. Given a lack of perfect information, there will usually (but not always) be someone willing to purchase at the higher price. Therefore, the objection to private roads on the ground that they are inconsistent with perfect competition cannot be sustained. It is true that this industry could not maintain the rigid standards required for perfect competition, but neither can most. In pointing out thatperfect competition cannot apply to roads, we have by no means conceded that competition between the various road owners would not be a vigorous, rivalrous process. On the contrary, were we to allow that perfect competition couldapply to roads, we would then have to retract our claim that vigoroos competition could also ensue. For perfect competition, and competition in the ordinary sense of that word (implying rivalry, attempts to entice customers away from one another) are opposites, and inconsistent with each other.20 In the perfectly competitive model, each seller can sell all he wants, at the given market price. (This is the assumption that each perfect competitor faces a perfectly elastic demand curve.) A typical rendition of this point of view is furnished by Stonier and Hague:>' The shape of the average revenue curve [demand curve] of the individual firm will depend on conditions in the market in which the firm sells its product. Broadly speaking, the keener the competition of its rivals and the greater the number of fairly close substitutes for its product, the more elastic will a firm's average revenue curve be. As usual, it is possible to be precise about limiting cases. One limiting case will occur when there are so many competitors producing such close substitutes [the perfectly competitive model] that the demand for the product of each individual firm is infinitely elastic and its average revenue curve is a horizontal straight line. This will mean that the firm can sell as much of its product as it wishes at the ruling market price. If the firm raises its FREE MARKET TRANSPORTATION 229

price, then. owing to the ease with which the same, or a very similar, product can be bought from competitors, it will lose all its customers. If the firm were to lower its price, it would be swamped by orders from customers wishing to take advantage of its price reduction. The demand-and the elasticity of demand-for its product would be infinite. Under these conditions, competition in the usual sense of opposition, contention, rivalry, etc. would be completely lacking. Where is the need to attract the customers of other firms to oneself if each so-called "competitor" can "sell as much of its product as it wishes at the ruling market price?" Why go out and compete if one is guaranteed all the customers one could possibly want? If "competition" is supposed to indicate rivalrous behavior, one would think that "perfect competition" would denote a sort of super- contentiousness. Instead, through dint of misleading definition, it means the very opposite: a highly passive existence, where firms do not have to go out and actively seek customers. Again, we can see that rejecting the possibility of perfect competition for a roads industry is by no means equivalent to conceding that there can he no rivalrous competition between the different road owners. Paradoxically, only if perfect competition were applicable to roads, might we have to consider the possibility that the process of competition might not be adapt- able to highways. In contrast to the passive notion of perfect competition, which has held center stage in the economics profession for the last few decades, there is a new comprehension of competition, in the market process sense, that is now drawing increasing attention. Instead of concentrating on the maximization of ends, assuming given scarce means, as does the Robbinsian22 notion of perfect competition, the market process view makes the realistic assumption that the means, although scarce, are in no way given; rather, knowledge of them must actively be sought out. The allocation of scarce means among competing ends is a passive procedure when the means and the ends are known. All that need be done can be accomplished by a suitably programmed computer. But the active seeking out of the ends and the means in the first place is a task that can be accomplished only by entrepreneurial talent; active, not passive. The entrepreneur, denied his crucial role in the perfectly competitive world view, takes center stage in the market process conception. Instead of merely economizing, the entrepreneur seeks new and hitherto unknown profit opportunities; not content to allocate given means to already selected ends, the businessman blazes new trails, continually on the lookout for new ends, and different means. States Israel Kirzner,23 one of the pathbreakers in this way of looking at our economy: We have seen that the market proceeds through entrepreneurial competition. In this process market participants become aware of opportunities for profit: they perceive price discrepancies (either between 230 THE JOURNAL OF LIBERTARIAN STUDIES

the prices offered and asked by buyers and sellers of the same good or between the price offered by buyers for a product and that asked by sellers for the necessary resources) and move to capture the difference for themselves through their entrepreneurial buying and selling. Competi- tion, in this process, consists of perceiving possibilities of offering opportunities to other market participants which are more attractive than those currently being made available. It is an essentially rivolrous process . . . [which] . . . consists not so much in the regards decisionmakers have for the likely future reactions of their competitors as in their awareness that in making their present decisions they themselves are in a position to do better for the market than their rivals are prepared to do; it consists not of market participants' reacting passively to given conditions, but of their actively grasping profit opportunities by positively changing the existing conditions. It is this competirive market process that can apply to the road industry. Highway entrepreneurs can continually seek newer and better ways of providing services to their customers. There is no reason why street corporations should not actively compete with other such firms for the continued and increased tolls of their patrons. There may not be millions of buyers and sellers of road transport service at each and every conceivable location (nor is there for any industry) but this does not preclude vigorous rivalry among the market participants, however many. How might this work? North Diagram 3

A BCD E FGH 1 FREE MARKET TRANSPORTATION 23 1

Let us consider, for the sake of simplicity, a town laid out into 64 blocks, as in a checker board (see diagram 3). We can conveniently label the north- south or vertical avenues A through I, and the east-west or horizontal streets 1st through 9th. If a person wants to travel from the junction of First Street and Avenue A to Ninth Street and Avenue 1, there are several paths he may take. He might go east along First Street to Avenue I, and then north along Avenue I, to Ninth Street, a horizontal and then a vertical trip. Or he may first go north to Ninth Street, and then east along Ninth Street to Avenue I. Alternatively, he may follow any number of zig-zag paths: east along First Street to Avenue B; north along Avenue B to Second Street; east again, along Second Street to Avenue C; north on C to Third Street . . . etc. Additionally, there are numerous intermediate paths between the pure zig- zag and the one turn. These possibilities do not open an indefinitely large number of paths, as might be required by the dictates of perfect competition. However, they are sufficiently numerous to serve as the basis for rivalrous competition, where one road entrepreneur, or set of entrepreneurs, seeks to offer better and cheaper channels for transportation than others. Let us consider the traffic that wishes to go from the junction of First Street and Avenue D to Ninth Street and Avenue D. (Intersections can be seen as whole towns or cities, and streets as actual or potential highways.) If Avenue D is owned by one firm, it might be thought that here, no competition is possible. For the best route is obviously right up Avenue D from First to Ninth Street. Even though this is true, there is still potential competition from Avenues C and E (and even from Band F). If the Avenue D Corpora- tion charges outrageous prices, the customer can use the alternative paths of C or E (or, in a pinch, to B or F, or even A or G, if need be). A second source of potential competition derives, as we have seen, from the possibility of building another road above the road in question, or tunneling beneath it. Consider again, the management of Avenue D, which is charging an outra- geously high price. In addition to the competition provided by nearby roads, competition may also be provided by double, triple, or quadruple decking the road. The transportation literature is not unaware of the possibility of double decking roads, tunneling, or adding overhead ramps. For example, Wilfred Owenz4 tells us: The Port of New York Authority Bus Terminal helps relieve mid- Manhattan traffic congestion. Approximately 90% of intercity bus de- partures and intercity bus passengers from mid-Manhattan originate at this terminal. The diversion of this traffic on overhead ramps from the terminal to the Lincoln Tunnel has been equivalent to adding three cross-town streets. 232 THE JOURNAL OF LIBERTARIAN STUDIES

John Burchard lauds double decking as follows: On one short span of East River Drive [in New York City] there are grassed terraces carried over the traffic lanes right out to the edge of the East River, a special boon for nearby apartment dwellers. The solution was perhaps triggered by the fact that space between the established building lines and the river was so narrow as to force the superposirion of the north and soulh lanes. But this did not do more than suggest the opportunity. Applause goes to those who grasped it, hut none to those who with the good example in view so consistently ignored it thereafter. [Emphasis added.]>> From Burchard's limited perspective, it is indeed a mystery that some should have taken this step and that, once it was taken and proven successful, it should not have been emulated. From the vantage point of a market in roads, the mystery disappears: one bureaucrat stumbled, out of necessity, onto a good plan. Having no financial incentive toward cost minimization, no others saw fit to expand this innovation. On the market, given that it is economical to double deck, there will be powerful forces tending toward this result: the profit and loss system. An authoritative reference to double decking was made by Charles M. Noble, former Director of the Ohio Department of Highways and chief engineer of the New Jersey Turnpike Authority:

It seems clear that, ultimately, many urban freeways will become double or tripledeck facilities, with upper decks carrying the longer distance volumes, possibly with reversible lanes, and probably operating with new interchanges to avoid flooding of existing interchanges and connecting streets.26 It is impossible to foretell exactly how this competition via multiple decking might work out in the real world. Perhaps one company would undertake to build and maintain the roads, as well as the bridgework supporting all the different decks. In this scenario, the road deck owner might sublease each individual deck, much in the same way as the builder of a shopping center does not himself run any of the stores, preferring to sublet them to others. Alternatively, the main owner-builder might decide to keep one road for himself, renting out the other levels to different road companies. This would follow the pattern of the shopping center which builds a large facility for itself, but leases out the remainder of the space. Whatever the pattern of ownership, there would be several, not just one road company in the same "place"; they could compete with each other. If Avenue D, as in our previous example, becomes multiple decked, then traveling from First Street and Avenue D to Ninth Street and Avenue D need not call for a trip along Avenue C or E, in order to take advantage of competition. One might also have the choice between levels w,x,y,z, all running over Avenue D! FREE MARKET TRANSPORTATION 233

Let us consider the objections of 2. Haritos: There is joint road consumption by consumers with different demand functions. The road is not as good as steel which may be produced to different specifications of quality and dimensions. The economic characteristics necessitate the production of one kind of road for all users at any given place." This statement is at odds with what we have just been saying. In our view, the double or triple decking of roads allows for the production of at least several kinds of road along any given roadway. We would then be forced to reject Haritos's contention. One point of dispute is the equivocation in his use of the word "place." For in one sense, Haritos is correct. If we define "place" as the entity within which two different things cannot possibly exist, then logic forces us to conclude that two different roads cannot exist in the same place. But by the same token, this applies to steel as well. Contrary to Haritos, a road occupies the same logical position as steel. If roads cannot be produced to different specifications of quality and dimensions at any given place. then neither can steel. But if we reverse matters, and use the word "place" in such a way that two different things (two different pieces of steel, with different specifications) can exist in one place (side by side, or close to each other) then steel may indeed he produced to different specifications at any given place, but so may roads! For many different roads, through the technique of multiple decking, can flow along the same pathway, or exist in the same "place." Another objection charges that competition among roadway entrepreneurs would involve wastefulduplication. Says George M. Smerk: "[Clompe- tition between public transport companies, particularly public transit firms with fixed facilities, would require an expensive and undesirable duplication of plant."zx This is a popular objection to market competition in many areas; railroad "overbuilding," in particular, has received its share of criticism on this score. However, it is fallacious and misdirected. We must first of all distinguish between investment ex ante and expost. In the ex ante sense. all investment is undertaken with the purpose of earning a profit. Wasteful overbuilding or needless duplication cannot exist in the ex ante sense; no one intends, at the outset of his investment, that it should be wasteful or unpr~fitable.~~Ex ante investment must of necessity, be non- wasteful. Ex post perspective is another matter. The plain fact of our existence is that plans are often met by failure; investments often go awry. From the vantage point of history, an investment may very often be judged unwise, wasteful and needlessly duplicative. But this hardly constitutes a valid argument against private roads! For the point is that all investors are liable 234 THE JOURNAL OF LIBERTARIAN STUDIES

to error. Unless it is contended that government enterprise is somehow less likely to commit error than entrepreneurs who have been continuously tested by the market process of profit and loss, the argument makes little sense. (There are few, indeed, who would be so bold as to make the claim that the government bureaucrat is a better entrepreneur than the private businessman.) Very often criticisms of the market, such as the charge of wasteful duplication on the part of road owners, stems from a preoccupation with the perfectly competitive model. Looking at the world from this vantage point can be extremely disappointing. The model posits full and perfect information, and in a world of perfect knowledge there of course can be no such thing as wasteful duplication. Ex post decisions would be as successful as those ex ante. By comparison, in this respect, the real world comes off a distant second best. It is perhaps understandable that a person viewing the real world through perfectly competitive-tinged sunglasses should experience a profound unhappiness with actual investments that turn out to be unwise, or needlessly duplicative. Such disappointment, however, is not a valid objection to the road market. What must be rejected is not the sometimes mistaken investment of a private road firm, but rather the perfectly competitive model which has no room in it for human error. An intermediate position on the possibility of road competition is taken by Gabriel Roth. He states:

. . . while it is possible to envisage competition in the provision of roads connecting points at great distances apart-as occurred on the railways in the early days-it is not possible to envisage competition in the provision of access roads in towns and villages, for most places are served by one road only. A highway authority is in practice in a monopoly position. If any of its roads were to make large profits, we could not expect other road suppliers to rush in to fill the gap. If losses are made on some roads, there are no road suppliers to close them down and transfer their resources to other sectors of the economy.'O Here we find several issues of contention. First, it is a rare small town or village that is served by oncv one road, path, or cattle track. Most places have at least several. But even allowing that in many rural communities there is only one serviceable road, let us note the discrepancy in Roth between roads and other services. Most local towns and villages are also served by only one grocer, butcher, baker, etc. Yet Roth would hardly contend that competition cannot thereby exist in these areas. He knows that, even though there is only one grocer in town, there is potential, if not actual competition from the grocer down the road, or in the next town. The situation is identical with roads. As we have seen, there is always the likelihood of building another road next to the first, if the established one FREE MARKET TRANSPORTATION 235 proves highly popular and profitable. There is also the possibility of building another road above, or tunneling beneath the first road. In addition, competition is also brought in through other transportation induslries. There may he a trolley line, railroad or subway linking this town with the outside world. If there is not, and the first established road is very profitable, such competition is always open in a free market. Finally, we come to the statement, "If losses are made on some roads, there are no road suppliers to close them down and transfer their resources to other sectors of the economy." We agree, because a road is generally fixed, geographically. An entrepreneur would no more "move" a no longer profitable road, than he would physically move an equivalently unprofitable farm, or forest. More importantly, even if it were somehow economically feasible to "move" an unprofitable road to a better locale, there are no such road suppliers simply because private road ownership is now prohibited. With Roth's statement, we also come to the spectre of monopoly, and to claims that a private road market must function monopolistically. Why are such claims made? There are two reasons usually given. First, indivisibilities-the fact that many factors of production cannot be efficiently utilized at low levels of output. A steel mill or automobile factory cannot be chopped in half and then be asked to produce one-half of the output it had previously been producing. Says Mohring, "But indivisibilities do exist in the provision of transportation facilities. Each railroad track must have two rails, and each highway or country road must be at least as wide as the vehicles that use it."" In similar vein, says Haritos, "To get from A to B, you need a whole lane, not just half, for the full distance, not half of it."32 And, in the words of Peter Winch, ". . . indivisibility of highways make it impractical to have competing systems of roads, and the responsible authority must therefore be a monopoly."33 We do not believe that the existence of indivisibilities is enough to guarantee monopoly, defined by many as a situation in which there is a single seller of a commodity.3"here are indivisibilities in every industry, and in all walks of life. Hammers and nails, bicycles and wheelbarrows, locomotives and elevators, tractors and steel mills, professors and podia- trists, ballet dancers and bricklayers, musicians and motorists, ships and slippers, buckets and broomsticks, none of them can be chopped in half (costlessly) and be expected to produce just half of what they had been producing before. A railroad needs two rails (with the exception, of course, of the monorail), not one, or any fraction thereof. Also, in order to connect points A and B, it must stretch completely from one point to the other. It may not end halfway between them, and offer the likelihood of transportation between the two points. Does this establish the need for government takeover of railroads? Of course not. Yet they exhibit the concept of indivisibilities just as do roads 236 THE JOURNAL OF LIBERTARIAN STUDIES and highways. If indivisihilities justify government involvement in roadways, then they should justify it in aN othercases wherein indivisibilities can he found. Since the advocates of the indivisibility argument are not willing to extend it to broomsticks, slippers, steel mills, and practically every other good and commodity under the sun, logic compels them to retract it in the case of highways.

Conclusion So what do we conclude? Having debunked the notion that private ownership of the roads is not "impossible," and that, in fact, it may offer a variety of exciting alternatives to the present system, we return to the question of why should it even be considered. There we come face-to-face again with the problem of safety. A worse job than that which is presently being done by the government road managers is difficult to envision. We need only consider what transpires when safety is questioned in other forms of transportation to see a corollary. When an airline experiences an accident, it often experiences a notable dropping off of passengers. Airlines with excellent safety records, who have conducted surveys, have found that the public is aware of safety and will make choices based upon it. Similarly, private road owners will be in a position to establish regulations and practices to assure safety on their roads. They can impact on the driver, the vehicle, and the road-the key elements of highway safety. They can react more quickly than the government bureaucracy in banning such vehicles as "exploding Pintos." The overriding problem with the National Highway Traffic Safety Administration, and with all similar governmental systems of insuring against vehicle defects, for example, is that there is no competition allowed. Again, in a free market system, opportunities would open up for innovative approaches to safety problems. Should stiffer penal- ties he shown unsuccessful in reducing unsafe vehicles and practices, an incentive system may be the answer. We cannot paint all the details of the future from our present vantage point. But we do know that "there has to be a better way."

NOTES

I. The number of people who were victims of motor vehicle accidents in 1976, in Accidenl Focrs (Chicago: National Safety Council, 1977), p. 13. 2. The number of road and highway deaths in the decade, 1967-1976, in ibid. 3. Data for 1968. in ibid., p. 57. 4. Data far 1969, in ibid., p. 60. 5. Data for 1969, in ibid. 6. Statement by Charles M. Noble, distinguished trafic engineer who served as director of the Ohio Department of Highways, chief engineer of the New Jersey Turnpike, and was recipient of the Matson Memorial Award for Outstanding Contributions to the Advance- FREE MARKET TRANSPORTATION 237

ment of Traffic Engineering. "Highway Design and Construction Related to Trahic Opera- tions and Safety," Traffic Quarlerly (Nov. 1971). p. 534. 7. Accident Facts. p. 13. 8. Regulation and Aulomubile Sqle~y(Washington, D.C.: American Enterprise Institute for Public Policy Research. 1975). pp. 8, 9. 9. David M. Winch. The Economics of Highway Planning (Toronto: The University of Toronto Press, 1963) p. 87. 10. Strictlv, soeakine.. " this is far from the truth. Before the 19th centurv., . most roads and hridees" in England and the U.S. were built by quasi-private stock companies. I I. William C. Wooldridge, Uncle Sam, the Monopoly Man (New Rochelle. N.Y.: Arlington House. 1970). pp. 7-9. 12. Gabriel Roth, Paying /or Roads-The Economic3 qf Tdffic Congestion (Baltimore: Penguin Books, 1967), p. 16. See also: "The highway situation can be improved substantially by visualizing the similarities between the highway problem and a host of comparable problems to which economists have applied same rather ancient ideas: namely, those of 'good old supply and demand analysis."' OH. Brownlee and Walter W. Heller, "Highway Development and Financing." Americon Economic Revieu, (May 1956). p. 233. "The provision of highways involves basically the same problems as any other economic activity. Scarce resources must be used to satisfy human wants by the provision of goods and services, and decisions must be made as to haw much of our resources will be devoted to one particular service, and who is going to make the necessary sacrifice." Winch. Economics of Highway Planning, p. 141. ". . . Many of the characteristics that are held to make transpartation'diRerent' arc in fact found in other industries as well. and . . .the same forms ofanalvsis that are aoolicahle in

hut Ikr,. ~n mdn) ;.orer th.cn lor .i nGu3p:lper C'.,ngc~t~on.,ra#r, in ,upcrm.irkct,. 11111 ~~tr.rtt.il~ttc..>r 'n:tpnhorhu.ki cltritr' .Ire pcr\a,ltc (:u.lornr.r rlmr ;..rt I, ~n\olseclin ~FIIIIIA.$ natr;tlt '' \\IIII.IIII \ t;kr~\. "KCICU 31 Hc~hcr~\lt~hrtng. I~.I,I~,,~~~,,I,I~ t, /...I- nomizs." (unpublished manuscript). 13. The present author wishes to express a debt of gratitude to the two trailblazers into this subject: Jarret B. Wollstein, Public Services Under Laissc; Faire (New York: Arno Press, 1974). and Murray N. Rothbard, For n New Liberty (New York: Macmillan, 1973). pp. 202-218. 14. William Vickrey, "Pricing and Resource Allocation in Transportation and Public Utilities," Americon Economic R~view(May 1963), p. 452; Vickrey, "Breaking the Bottleneck by Sophisticated Pricing of Roadway Use," General Morors Quorlerlj (Spring 1974). p. 24. 15. Says Murray N. Rathbard: "The answer is that everyone, in purchasing homes or street service in a libertarian society, would make sure that the purchase or lease contract provides full access for whatever term of years is specified. With this sort of'easement' provided in advance by contract, no such sudden blockade would be allowed, since it would be an invasion of the property right of the landowner." For o New Liberty, p. 205. 16. F. A. Hayek, The Constitulion o/Liberty (Chicago: University of Chicago Press. 1960). p. 160. 17. We assume away here the presence of psychic income phenomena. See the present authois "Caase and Demsetr on Private Property Rights," The JournolofLiberrarion Studies, Vol. I, No. 2 (Spring 1977) p. I1 1. 18. George M. Smerk, Wbon Transponotion: The Federal Role (Bloamington, Ind.: Indiana University Press, 1965) p. 228. 19. Robert H. Haveman, The Economics qf the Public Seelor (New York: John Wiley and Sons. 1970). rr. 23. For a telline criticism of the "control over oricc" confusion. see Murrav N. ~athbard,Mon. ~conomy-andSlate (LOS Angeles: ~ash'puh.Co.. 1971). pp. 87-90. 20. Cf. Israel Kirzner, Compelition and Entrepreneurship (Chicago: University of Chicago Press, 1973). 238 THE JOURNAL OF LIBERTARIAN STUDIES

Alfred W. Stonier and Douglas C. Hague, A Texrbook ofEconomic Theory (3rd Ed., New York: John Wiley and Sons, 1964), p. 104. See Lionel Robbins, An Essas on rhe Nature and Signifreonce of Economic Science (London: Macmillan, 1932). 23. Kirzner, Comperirion and Enrrepreneurrhip, pp. 122-123. 24. The Merropoliran Tronsporrarion Problem (Washington, D.C.: The Braokings Institution, -,~~,.1956) n. ~~..119 25. John Burchard, "Design and Urban Beauty in the Central City," in J. Q. Wilson, ed., fie Mererropoliron Enigma (Garden City, N.Y.: Doubleday. 1970). p. 245. 26. Noble, "Highway Design," pp. 546-547. 27. Z. Haritas, "Theory of Road Pricing," 13 Tronsporrdion Journol (Spring 1974), p. 57. 28. Smerk, Orbon Transporrorion. p. 228. 29. Even if someone intends, for same reason, to purposefully invest in a "lasing" praposition, we would still deny, exnnre, that he intends to worsen his posilion. That people act in order to benefit themselves is an axiom of economics. If a person intends to lose mone.v through his investment. it could only be because, by so doing, he thinks he will increase his psychic income by enough to more than compensate himself for his loss of money. In short. hc is engaging in charity. 30. Roth, Poying/or Roods. p. 63. 31. Herbert Mahring, "Urban Highway Investmenls," in Robert Dorfman, ed.. Measuring Benqlirs of Governmmr lnv~srmenls(Washington, D.C.: The Brookings Institution. 1965), n 240 r. ~ ~ 32. Haritas, "Theory of Road Pricing," p. 56. 33. Winch, Economics o/ Highway Planning, p. 3. 34. Fur an explanation of "monopoly" as a government grant of exclusive privilege, see Rathbard, Man. Economy, and Slale. pp. 586-619. Rethinking Patent Law

Gene Callahan*

Several stories recently in the news call for a fresh look at patent law. For the last few months there has, quite rightly, been great consternation throughout the software world over Amazon.com's "one-click" patent, whereby the company has patented the idea of purchasing items with a single mouse click. James Gleick, writing in the NY Times Sunday Magazine of March 12, said: "When 21st-century historians look back at the breakdown of the United States patent system, they will see a turning point in the case of Jeff Bezos and Amazon.com and their special invention: 'The patented One Clickr feature,' Bezos calls it."

More horrifically, British Telecom announced a couple of weeks ago that they have a patent on hyperlinks, and that they mean to begin enforcing it. Apparently, in 1989, someone at BT succeeded in registering this patent, despite several decades of "prior art." After doing nothing with it for over a decade, BT suddenly woke up to the fact that they had the opportunity to collect tolls on the Information Superhighway.

Adding to the list of current worries, the completion of the mapping of the human genome last month raises the specter of the patenting of genetic information.

As Gleick says, "In ways that could not have been predicted even a few years ago, the patent system is in crisis." Innovation in high technology fields is overwhelming the capabilities of patent examiners, who cannot be expected to judge these issues well. It is impossible for a trained engineer working full-time in a specialized section of the computer field, say, database technology, to keep up with more than a small percentage of the advances in the area.

However, this is not really a new problem, but, rather, the worsening of an old one. Gleick quotes the commissioner of Patents and Trademarks, Q. Todd Dickinson, as claiming: "The patent system has done its job for two centuries of protecting and nurturing and rewarding innovation. The system has worked."

But what is the evidence that patent law ever "worked"? Certainly, the U.S. has had a great history of invention. Some of these inventions might not have existed if patents did not exist. On the other hand, we may have had other inventions that would have existed except for patent law. The late economist Murray Rothbard says, in Man, Economy and State:

It is by no means self-evident that patents encourage an increased absolute quantity of research expenditures. But certainly patents distort the type of research expenditure being conducted. For while it is true that the first discoverer benefits from the privilege, it is also true that competitors are excluded from production in the area of the patent for many years... Moreover, the patentee is himself discouraged

*"Rethinking Patent Law," Mises.org Daily Article, July 8, 2000. http://www.mises.org/fullstory.aspx?control=468&FS=Rethinking+Patent+Law

1 from engaging in further research in this field, for the privilege permits him to rest on his laurels....

And, as intellectual property lawyer Stephan Kinsella points out, "...maybe more money for R&D would be available if it were not being spent on patents and lawsuits."

The idea that patent law "used to work" relies heavily on the indefensible notion that someone could objectively determine whether "too little" invention is occurring. Gleick says, "[Patent law] fueled industrial progress in the early United States..." But how does he know? Did he examine the history of an alternate-universe United States and observe that it had less industrial progress? All we can say for certain is that the early United States had both patent law and rapid industrial progress. Perhaps it had rapid industrial progress despite patent law. Or perhaps it was powdery wigs that led to America's prosperity. We can gain an understanding of whether patent law "worked" only with the aid of a coherent theory of property rights and their effect on economic progress.

If we examine these foundations, we find that patents are not grounded in common law notions of property rights, but, instead, are a government intervention that strips the property rights of those who, through independent invention, arrive at the same device as a patent holder. To again quote Rothbard, "Patents prevent a man from using his invention even though all the property is his and he has not stolen the invention, either explicitly or implicitly, from the first inventor."

Most of the positive aspects of patents can be gained through trade secrets and licensing agreements, while avoiding many of these negative ones. The conclusion of Gleick's article is well reasoned and persuasive—except that what he views as an argument for "reforming" the patent system is actually an argument for eliminating it:

One thing is certain: the modern Internet entrepreneur is not a species in need of extra government incentives. If one-click ordering had not been patentable, surely Jeff Bezos would have invented it anyway in May 1997, put it to work in September 1998 and seen it copied in subsequent years by Barnes & Noble and thousands of other Internet merchants, all learning from his success, to the benefit of consumers.

Surely he would have become a very rich man; and his future success would depend on his ability to continue outperforming his competitors, and to continue innovating.

2 In Praise of Bugs

by Gene Callahan*

Few pundits are willing to question the overall efficiency of the market economy, but claims of market failure are still commonplace. One area where this complaint has been heard with some frequency is that of software reliability. Wall Street Journal tech columnist Walter Mossberg wrote a column last year entitled "I'm Tired of the Way Windows Freezes!" in which he indicts the reliability of his PC software.

As Mossberg puts it, "[Computers] should just work, all the time." In a similar vein, San Jose Mercury News tech columnist Dan Gillmor complains, "...the attitude [of the technical industry ] toward reliability and customer service has been scandalous."

Over the years, any number of other writers have sounded similar themes: computer systems are too buggy, if programmers built houses we’d be afraid to live in them, and so on. In the view of these writers, software defects are a moral issue, instead of simply a result of the well-known trade-off between schedule, cost, and quality. For them, there is no trade-off possible—defects are a moral failing, and a complete absence of defects must be assured, whatever achieving this goal does to the cost and the schedule.

But is achieving bug-free software always in the customer’s best interest? Consider an example. I once went to work for a partnership that trades stocks with the partners’ capital. There, the people who specified the software, the people who managed its development, the people who paid for this development and the end users were all the same people! There is little risk that the same group of people, in, for instance, their role managing the development, are misrepresenting their own interests in their role as users of the end product.

Nevertheless, I was shocked at the haste with which my first development effort was put into production, practically untested. One of the partners explained to me that this was not recklessness or ignorance, but simple accounting sense. For a company creating an automated trading system, one measure of its quality would be the ratio of "good trades" (i.e., trades the designers intended the system to make) to "bad trades." If the average cost for a bad trade is $600, and the average benefit of a good one $400, then at the point the system would generate 61% good trades, it is profitable. Any pre-release testing beyond that point is costing the firm money. Further testing may make the system more profitable, but by 61% it is worth releasing.

After the publication of Mossberg’s column, one woman wrote to him: "I never have to reboot my refrigerator, no matter what I put in it." But a refrigerator does the same thing with all inputs—keeps them cold. It doesn’t have to connect to your head of cabbage, format your waffles, recalculate the spiciness of your horseradish, or spell check the labels on your pickles. A refrigerator is a fairly simple device, and a

*"In Praise of Bugs," Mises.org Daily Article, March 27, 2000. http://www.mises.org/story/404 refrigeration engineer could explain the inner workings of one to Mossberg’s correspondent in about half an hour.

On the other hand, modern computer systems are among the most complex devices humans have ever constructed. To achieve a moderate understanding of the inner workings of Windows NT or Linux, starting from scratch, would take years. Sounding the same theme as Mossberg’s correspondent, Gillmor writes, "The appliances we use at home do not crash." He seems blissfully unaware of the existence of washing machine repairmen, plumbers, electricians, telephone repairmen, and the dozens of other trades that help maintain our homes.

Consumers' fantasies about life in an ideal world where there is a surplus of everything is irrelevant to economics. In such a world there would no longer be economic goods, and the science itself would cease to be of importance. Consumers would no doubt love to have software that contained every feature they might ever want to use, was completely without defects, and merely appeared on a small portion of their hard drive at no cost.

But here in the real world, where resources are scarce, consumption involves choosing A while foregoing B. Software can be made more reliable only by leaving out features, or increasing the cost of developing it, or both. Consumers’ preferences in regard to this trade-off are embodied in their actual purchases.

Gillmor says: "[Consumers] just don't want to consider the possibility that low prices can mean not-so-great service… People have to patronize the companies that provide quality, and have to be willing to pay more." He doesn’t seem to consider that consumers might be aware of this possibility and could rationally choose to trade quality for price. Someone using an online brokerage might decide that saving $15 a trade is worth suffering the service being down for one hour a month. But for Gillmor making this seemingly rational trade-off is a sign of obtuseness on the part of the consumer.

Even in the market most thoroughly dominated by Microsoft, desktop operating systems, consumers are able to make their own choices on software reliability. There are, after all, two major varieties of Windows on the market. Windows 98, the cheaper of the two, is much more prone to crashing than Windows NT, the more expensive. This fact is well publicized in reviews and advice columns. Yet consumers overwhelmingly opt for Windows 98. Why shouldn’t they have this option?

Microsoft may or may not have a monopoly in some or all of its markets. Whatever the case, Microsoft certainly spends a great deal of time and effort putting out new releases of its products. As is often lamented, these releases tend to focus on new features, and generally contain about the same number of problems as pervious releases. But if customers truly cared about the bugs more than the new features, even as a monopolist, wouldn’t Microsoft want to focus on that area, so as to sell more upgrades?

There is no reason to conclude that consumers are not getting the level of software reliability they prefer, given the scarcity of resources available to produce software. But let us imagine for a moment that this were not the case. Either explicitly or implicitly, views like those described above contain calls for the government to "do something" about the problem. Once interventionists believe that they have found an area in which the market’s behavior is, in some sense, "less than optimal," they feel that they have fully justified the case for government intervention. But, as Nobel- Prize-winning economist Ronald Coase points out, they have barely begun: Even if most software is, in some sense, "too buggy," what evidence exists that some government intervention could improve the situation?

A regime of government-enforced strict liability for all software products would decimate the industry, making the risks of developing software prohibitive for all but behemoths like Microsoft—hardly the result the interventionists desire! Another common suggestion is to enforce a licensing system for software engineers. However, such schemes, by driving up the cost of entry, serve to protect the salary of those who can acquire the licenses and to raise the cost of software. I know of no evidence that practitioners who have, for instance, a masters in Computer Science produce software that is more reliable than those who have entered the field with no formal training.

The attempt to replace the actual preferences of consumers, as expressed in their willingness to pay real prices for real products, with fanciful musings about an ideal world in which one’s ends are achieved without expending any means except jawboning is doomed to disappoint. Such frivolity is not an attempt to strive toward an unrealizable standard, as there is no striving involved on the part of the daydreamer! Instead, these ideas, when acted upon by the state, only serve to cripple our ability to create the less-than-perfect goods that we less-than-perfect beings actually can produce.

The Idea of Liberty is Western

Ludwig von Mises*

The history of civilization is the record of a ceaseless struggle for liberty.

Social cooperation under the division of labor is the ultimate and sole source of man's success in his struggle for survival and his endeavors to improve as much as possible the material conditions of his well-being. But as human nature is, society cannot exist if there is no provision for preventing unruly people from actions incompatible with community life. In order to preserve peaceful cooperation, one must be ready to resort to violent suppression of those disturbing the peace. Society cannot do without a social apparatus of coercion and compulsion, i.e., without state and government. Then a further problem emerges: to restrain the men who are in charge of the governmental functions lest they abuse their power and convert all other people into virtual slaves. The aim of all struggles for liberty is to keep in bounds the armed defenders of peace, the governors and their constables. Freedom always means: freedom from arbitrary action on the part of the police power.

The idea of liberty is and has always been peculiar to the West. What separates East and West is first of all the fact that the peoples of the East never conceived the idea of liberty. The imperishable glory of the ancient Greeks was that they were the first to grasp the meaning and significance of institutions warranting liberty. Recent historical research has traced back to Oriental sources the origin of some of the scientific achievements previously credited to the Hellenes. But nobody has ever contested that the idea of liberty was created in the cities of ancient Greece. The writings of Greek philosophers and historians transmitted it to the Romans and later to modern Europe and America. It became the essential concern of all Western plans for the establishment of the good society. It begot the laissez-faire philosophy to which mankind owes all the unprecedented achievements of the age of capitalism.

The meaning of all modern political and judicial institutions is to safeguard the individuals' freedom against encroachments on the part of the government. Representative government and the rule of law, the independence of courts and tribunals from interference on the part of administrative agencies, habeas corpus, judicial examination and redress of acts of the administration, freedom of speech and the press, separation of state and church, and many other institutions aimed at one end only: to restrain the discretion of the officeholders and to render the individuals free from their arbitrariness.

The age of capitalism has abolished all vestiges of slavery and serfdom. It has put an end to cruel punishments and has reduced the penalty for crimes to the minimum indispensable for discouraging offenders. It has done away with torture and other objectionable methods of dealing with suspects and lawbreakers. It has repealed all

*Ludwig von Mises, "The Idea of Liberty is Western," Money, Method, and the Market Process (Norwell, Mass.: Kluwer Academic Publishers, 1990), chap. 21.

1 privileges and promulgated equality of all men under the law. It has transformed the subjects of tyranny into free citizens.

The material improvements were the fruit of these reforms and innovations in the conduct of government affairs. As all privileges disappeared and everybody was granted the right to challenge the vested interests of all other people, a free hand was given to those who had the ingenuity to develop all the new industries which today render the material conditions of people more satisfactory. Population figures multiplied and yet the increased population could enjoy a better life than their ancestors.

Also in the countries of Western civilization there have always been advocates of tyranny—the absolute arbitrary rule of an autocrat or an aristocracy on the one hand and the subjection of all other people on the other hand. But in the Age of Enlightenment the voices of these opponents became thinner and thinner. The cause of liberty prevailed. In the first part of the nineteenth century the victorious advance of the principle of freedom seemed to be irresistible. The most eminent philosophers and historians got the conviction that historical evolution tends toward the establishment of institutions warranting freedom and that no intrigues and machinations on the part of the champions could stop the trend toward liberalism.

In dealing with the preponderance of the liberal social philosophy there is a disposition to overlook the power of an important factor that worked in favor of the idea of liberty, viz., the eminent role assigned to the literature of ancient Greece in the education of the elite. There were among the Greek authors also champions of government omnipotence, such as Plato. But the essential tenor of Greek ideology was the pursuit of liberty. Judged by the standards of modern liberal and democratic institutions, the Greek city-states must be called oligarchies. The liberty which the Greek statesmen, philosophers and historians glorified as the most precious good of man was a privilege reserved to a minority. In denying it to metics and slaves they virtually advocated the despotic rule of an hereditary caste of oligarchs. Yet it would be a grave error to dismiss their hymns to liberty as mendacious. They were no less sincere in their praise and quest of freedom than were, two thousand years later, the slaveholders George Washington and Thomas Jefferson. It was the political literature of the ancient Greeks that begot the ideas of the Monarchomachs, the philosophy of the Whigs, the doctrines of Althusius, Grotius, and John Locke, and the ideology of the fathers of modern constitutions and bills of rights. It was the classical studies, the essential feature of a liberal education, that kept awake the spirit of freedom in England of the Stuarts and George III, in France of the Bourbons, and in Italy, subject to the despotism of a galaxy of princes.

No less a man than Bismarck, among the nineteenth-century statesmen the foremost foe of liberty, bears witness to the fact that even in the Prussia of Frederick William III the Gymnasium was a stronghold of republicanism. [1] The passionate endeavors to eliminate the classical studies from the curriculum of the liberal education and thus virtually to destroy its very character were one of the major manifestations of the revival of the servile ideology.

2 It is a fact that a hundred years ago only a few people anticipated the overpowering momentum which the antiliberal ideas were destined to acquire in a very short time. The ideal of liberty seemed to be so firmly rooted that everybody thought that no reactionary movement could ever succeed in eradicating it. It is true, it would have been a hopeless venture to attack freedom openly and to advocate unfeignedly a return to subjection and bondage. But antiliberalism got hold of people's minds camouflaged as superliberalism, as the fulfillment and consummation of the very ideas of freedom and liberty. It came disguised as socialism, communism, and planning.

No intelligent man could fail to recognize that what the socialists, communists, and planners were aiming at was the most radical abolition of the individual's freedom and the establishment of government omnipotence. Yet the immense majority of the socialist intellectuals were convinced that in fighting for socialism they were fighting for freedom. They called themselves left-wingers and democrats, and nowadays they are even claiming for themselves the epithet liberals.

These intellectuals and the masses who followed their lead were in their subconsciousness fully aware of the fact that their failure to attain the far-flung goals which their ambition impelled them to aim at was due to deficiencies of their own. They were either not bright enough or not industrious enough. But they were eager not to avow their inferiority both to themselves and to their fellow men and to search for a scapegoat. They consoled themselves and tried to convince other people that the cause of their failure was not their own inferiority but the injustice of society's economic organization. Under capitalism, they declared, self-realization is only possible for the few. "Liberty in a laissez-faire society is attainable only by those who have the wealth or opportunity to purchase it." [2] Hence, they concluded, the state must interfere in order to realize "social justice." What they really meant is, in order to give to the frustrated mediocrity "according to his needs."

III

As long as the problems of socialism were merely a matter of debates people who lack clear judgment and understanding could fall prey to the illusion that freedom could be preserved even under a socialist regime. Such self-deceit can no longer be nurtured since the Soviet experience has shown to everybody what conditions are in a socialist commonwealth. Today the apologists of socialism are forced to distort facts and to misrepresent the manifest meaning of words when they want to make people believe in the compatibility of socialism and freedom.

The late Professor Laski—a self-styled noncommunist or even anticommunist—told us that "no doubt in Soviet Russia a Communist has a full sense of liberty; no doubt also he has a keen sense that liberty is denied him in Fascist Italy." [3] The truth is that a Russian is free to obey all the orders issued by the great dictator. But as soon as he deviates a hundredth of an inch from the correct way of thinking as laid down by the authorities, he is mercilessly liquidated. All those politicians, office-holders, authors, musicians, and scientists who were "purged" were—to be sure—not anticommunists. They were, on the contrary, fanatical communists, party members in good standing, whom the supreme authorities, in due recognition of their loyalty to the Soviet creed, had promoted to high positions. The only offense they had

3 committed was that they were not quick enough in adjusting their ideas, policies, books or compositions to the latest changes in the ideas and tastes of Stalin. It is difficult to believe that these people had "a full sense of liberty" if one does not attach to the word liberty a sense which is precisely the contrary of the sense which all people always used to attach to it.

Fascist Italy was certainly a country in which there was no liberty. It had adopted the notorious Soviet pattern of the "one party principle" and accordingly suppressed all dissenting views. Yet there was still a conspicuous difference between the Bolshevik and the Fascist application of this principle. For instance, there lived in Fascist Italy a former member of the parliamentary group of communist deputies, who remained loyal unto death to his communist tenets, Professor Antonio Graziadei. He regularly received the pension which he was entitled to claim as professor emeritus, and he was free to write and to publish, with the most eminent Italian publishing firms, books which were orthodox Marxian. His lack of liberty was certainly less rigid than that of the Russian communists who, as Professor Laski chose to say, "no doubt" have "a full sense of liberty."

Professor Laski took pleasure in repeating the truism that liberty in practice always means liberty within law. He went on saying that the law always aims at "the conference of security upon a way of life which is deemed satisfactory by those who dominate the machinery of state." [4] This is a correct description of the laws of a free country if it means that the law aims at protecting society against conspiracies intent upon kindling civil war and upon overthrowing the government by violence. But it is a serious misstatement when Professor Laski adds that in a capitalistic society "an effort on the part of the poor to alter in a radical way the property rights of the rich at once throws the whole scheme of liberties into jeopardy." [5]

Take the case of the great idol of Professor Laski and all his friends, Karl Marx. When in 1848 and 1849 he took an active part in the organization and the conduct of the revolution, first in Prussia and later also in other German states, he was—being legally an alien—expelled and moved, with his wife, his children, and his maid, first to Paris and then to London. [6] Later, when peace returned and the abettors of the abortive revolution were amnestied, he was free to return to all parts of Germany and often made use of this opportunity. He was no longer an exile, and he chose of his own account to make his home in London. [7] Nobody molested him when he founded, in 1864, the International Working Men's Association, a body whose avowed sole purpose it was to prepare the great world revolution. He was not stopped when on behalf of this association he visited various Continental countries. He was free to write and to publish books and articles which, to use the words of Professor Laski, were certainly an effort "to alter in a radical way the property rights of the rich." And he died quietly in his home, 41, Maitland Park road, on March 14, 1883.

Or take the case of the British Labor Party. Their effort "to alter in a radical way the property rights of the rich" was, as professor Laski knew very well, not hindered by any action incompatible with the principle of liberty.

Marx, the dissenter, could at ease live, write and advocate revolution in Victorian England just as the Labor Party could at ease engage in all political activities in post-

4 Victorian England. In Soviet Russia not the slightest opposition is tolerated. This is what the difference between liberty and slavery means.

The critics of the legal and constitutional concept of liberty and the institutions devised for its practical realization are right in their assertion that freedom from arbitrary action on the part of the officeholders is in itself not yet sufficient to make an individual free. But in emphasizing this indisputable truth they are running against open doors. For no advocate of liberty ever contended that to restrain the arbitrariness of officialdom is all that is needed to make the citizens free. What gives to the individuals as much freedom as is compatible with life in society is the operation of the market system. The constitutions and bills of rights do not create freedom. They merely protect the freedom that the competitive economic system grants to the individuals against encroachments on the part of the police power.

In the market economy people have the opportunity to strive after the station they want to attain in the structure of the social division of labor. They are free to choose the vocation in which they plan to serve their fellow men. In a planned economy they lack this right. Here the authorities determine each man's occupation. The discretion of the superiors promotes a man to a better position or denies him such promotion. The individual entirely depends on the good graces of those in power. But under capitalism everybody is free to challenge the vested interests of everybody else. If he thinks that he has the ability to supply the public better or more cheaply than other people do, he may try to demonstrate his efficiency. Lack of funds cannot frustrate his projects. For the capitalists are always in search of men who can utilize their funds in the most profitable way. The outcome of his business activities depends alone on the conduct of the consumers who buy what fits them best.

Neither does the wage earner depend on the employer's arbitrariness. An entrepreneur who fails to hire those workers who are best fitted for the job concerned and to pay them enough to prevent them from taking another job is penalized by a reduction of net revenue. The employer does not grant to his employees a favor. He hires them as an indispensable means for the success of his business in the same way in which he buys raw materials and factory equipment. The worker is free to find the employment which suits him best.

The process of social selection that determines each individual's position and income is continuously going on in the capitalist society. Great fortunes are shrinking and finally melting away completely while other people, born in poverty, ascend to eminent positions and considerable incomes. Where there are no privileges and governments do not grant protection to vested interests threatened by the superior efficiency of newcomers, those who have acquired wealth in the past are forced to acquire it every day anew in competition with all other people.

Within the framework of social cooperation under the division of labor everybody depends on the recognition of his services on the part of the buying public of which he himself is a member. Everybody in buying or abstaining from buying is a member of the supreme court which assigns to all people—and thereby also to himself—a definite place in society. Everybody is instrumental in the process that assigns to

5 some people a higher and to others a smaller income. Everybody is free to make a contribution which his fellow men are prepared to reward by the allocation of a higher income. Freedom under capitalism means: not to depend more on other people's discretion than these others depend on one's own. No other freedom is conceivable where production is performed under the division of labor and there is no perfect economic autarky of everybody.

There is need to stress the point that the essential argument advanced in favor of capitalism and against socialism is not the fact that socialism must necessarily abolish all vestiges of freedom and convert all people into slaves of those in power. Socialism is unrealizable as an economic system because a socialist society would not have any possibility of resorting to economic calculation. This is why it cannot be considered as a system of society's economic organization. It is a means to disintegrate social cooperation and to bring about poverty and chaos.

In dealing with the liberty issue one does not refer to the essential economic problem of the antagonism between capitalism and socialism. One rather points out that Western man as different from the Asiatics is entirely a being adjusted to life in freedom and formed by life in freedom. The civilizations of China, Japan, India, and the Mohammedan countries of the Near East as they existed before these nations became acquainted with Western ways of life certainly cannot be dismissed as barbarism. These peoples already many hundreds, even thousands of years ago brought about marvelous achievements in the industrial arts, in architecture, in literature and philosophy and in the development of educational institutions. They founded and organized powerful empires. But then their effort was arrested, their cultures became numb and torpid, and they lost the ability to cope successfully with economic problems. Their intellectual and artistic genius withered away. Their artists and authors bluntly copied traditional patterns. Their theologians, philosophers, and lawyers indulged in unvarying exegesis of old works. The monuments erected by their ancestors crumbled. Their empires disintegrated. Their citizens lost vigor and energy and became apathetic in the face of progressing decay and impoverishment.

The ancient works of Oriental philosophy and poetry can compare with the most valuable works of the West. But for many centuries the East has not generated any book of importance. The intellectual and literary history of modern ages hardly records any name of an Oriental author. The East has no longer contributed anything to the intellectual effort of mankind. The problems and controversies that agitated the West remained unknown to the East. In Europe there was commotion; in the East there was stagnation, indolence, and indifference.

The reason is obvious. The East lacked the primordial thing, the idea of freedom from the state. The East never raised the banner of freedom, it never tried to stress the rights of the individual against the power of the rulers. It never called into question the arbitrariness of the despots. And, first of all, it never established the legal framework that would protect the private citizens' wealth against confiscation on the part of the tyrants. On the contrary, deluded by the idea that the wealth of the rich is the cause of the poverty of the poor, all people approved of the practice of the governors of expropriating successful businessmen. Thus big scale capital

6 accumulation was prevented, and the nations had to miss all those improvements that require considerable investment of capital. No "bourgeoisie" could develop, and consequently there was no public to encourage and to patronize authors, artists, and inventors.

To the sons of the people all roads toward personal distinction were closed but one. They could try to make their way in serving the princes. Western society was a community of individuals who could compete for the highest prizes. Eastern society was an agglomeration of subjects entirely depending on the good graces of the sovereigns. The alert youth of the West looks upon the world as a field of action in which he can win fame, eminence, honors, and wealth; nothing appears too difficult for his ambition. The meek progeny of Eastern parents know of nothing else than to follow the routine of their environment. The noble self-reliance of Western man found triumphant expression in such dithyrambs as Sophocles' choric Antigone-hymn upon man and his enterprising effort and Beethoven's Ninth Symphony. Nothing of the kind has ever been heard in the Orient.

Is it possible that the scions of the builders of the white man's civilization should renounce their freedom and voluntarily surrender to the suzerainty of omnipotent government? That they should seek contentment in a system in which their only task will be to serve as cogs in a vast machine designed and operated by an almighty planmaker? Should the mentality of the arrested civilizations sweep the ideals for the ascendancy of which thousands and thousands have sacrificed their lives?

Ruere in servitium, they plunged into slavery, Tacitus sadly observed in speaking of the Romans of the age of Tiberius.

[Reprinted here from American Affairs (October 1950)—Ed.]

[1] Cf. Otto von Bismark, Gedanken und Erinnerungen, vol. 1 (New York: Cotta, 1898), p. 1.

[2] Cf. H. Laski, "Liberty" in Encyclopaedia of the Social Siences, vol. 9 (New York: Macmillan, 1930), p. 448.

[3] Cf. Ibid., p. 445-46.

[4] Cf. Ibid., p. 446.

[5] Cf. Ibid., p. 446.

7 [6] About Marx's activities in the years 1848 and 1849 see: Karl Marx, "Chronikseines Lebens in Einzeldaten" (Moscow: Marx-Engels-Lenin-Institute, 1934), pp. 48-81.

[7] In 1845 Marx voluntarily renounced his Prussian citizenship. When later, in the early 1860's, he considered a political career in Prussia, the ministry denied his application for restoring his citizenship. Thus a political career was closed to him. Perhaps this fact decided him to remain in London.

8 The Plight of the Underdeveloped Nations

Ludwig von Mises*

Foreign investment was an achievement of laissez-faire capitalism. It developed step by step only in the nineteenth century. Writing in 1817, Ricardo could still assert that most men of property are "satisfied with a low rate of profits in their own country, rather that seek a more advantageous employment for their wealth in foreign nations." [1]

What impelled entrepreneurs and capitalists toward foreign investment was, of course not "altruism," but the eagerness to earn profits by supplying the domestic consumers in the best possible and cheapest way with those commodities they demanded most urgently. They went into foreign countries in order to supply the home market directly or indirectly (i.e., by triangular trade) with raw materials and foodstuffs which could otherwise not have been obtained at all or only at higher costs. If the consumers had been more eager for the acquisition of a greater quantity of goods that could be produced at home without the aid of foreign resources than for imported food and raw materials, it would have been more profitable to expand domestic production further than to invest abroad.

But foreign investment benefited the receiving nations no less than the investing nations. These receiving nations were backward and underdeveloped insofar as they had been slow in developing those ideological and institutional conditions which are the indispensable prerequisite of large scale capital accumulation. While amply endowed by nature, they lacked the capital needed for the exploitation of their dormant resources. On account of the paucity of capital available, the marginal productivity of labor and thereby wage rates were low when compared with the state of affairs in the capitalistic countries. The inflow of foreign capital raised wage rates and improved the masses' average standard of living.

The socialists provide a different interpretation of the problems involved. As they see it, a business enterprise is a contrivance to exploit unfairly the workers employed. Its very existence and operation are contrary to the external laws of morality. There is but one means to put an end to this exploitation, namely socialization, i.e., the expropriation of the private capitalists and entrepreneurs and the transfer of their plants, mines, and farms to the hands of the state. This is what the labor government is anxious to achieve in the United Kingdom and what the Iranian government, imbued with a truly Fabian spirit, is just doing in its own country. If it is right for the British to nationalize the the British coal mines, it cannot be wrong for the Iranians to nationalize the Iranian oil industry. If Mr. Attlee [2] were consistent, he would have congratulated the Iranians on their great socialist achievement. But no socialist can be or ever was consistent.

*Ludwig von Mises, "The Plight of the Underdeveloped Nations," Money, Method, and the Market Process (Norwell, Mass.: Kluwer Academic Publishers, 1990), chap. 12. 1

1 It is hopeless for the British to dissuade the Iranians from nationalizing the British- owned wells, refineries, and pipe lines by pointing out the disadvantages that will certainly result for the people of Iran. They themselves did not pay heed to such "reactionary" talk when the problem of nationalizing various British industries was at issue.

Under the present state of international law every sovereign nation is free to deal as it pleases with all property situated within its boundaries. A foreign government may diplomatically protest and support claims of its citizens for an indemnification. But if the government of the nationalizing nation is not prepared to yield to such diplomatic overtures, that settles the matter. It is enough to refer to such precedents as the case of Russia in 1917 or the case of the Mexican expropriation of the oil industry.

The foreign government may submit the case to the International Court of Justice. But the decisions of this Court are practically unenforceable.

If the foreign government resorts to the ultima ratio regum, to military intervention, this would under the charter of the United Nations represent a clear case of aggression.

The pundits of international law and the lawyers of the United Nations will certainly write very profound reports and treatises about the legal aspect of the Anglo-Iranian conflict. Such utterances are not worth the paper on which they are printed. The simple truth is that if the government of Iran does not of its own accord change its mind because it may expect some immediate political and material gain from such a change, nothing can prevent it from expropriating the oil industry. For it is obvious that Great Britain cannot win anything by military measures. Even in the unlikely event of a British success, the British would discover that bayonets are very uncomfortable to sit upon in a business office. Besides there is the spectre of a Russian occupation of the greater part of Iran and the still more threatening danger of a new world war.

The immediate consequences of the Iranian oil expropriation are very sad indeed. It seriously affects the military plans of the Western powers and revolutionizes conditions on the world oil market.

Still more important are the remoter consequences of the affair. Foreign investment of private enterprises and citizens already came to an almost complete standstill years ago. The private investor has learned from experience that investing abroad is virtually tantamount to throwing away one's own wealth. It is true, not all receiving countries resorted to undisguised expropriation of property and repudiation of loans. But many of the "good" countries too have effectively robbed the foreign investors and creditors by foreign exchange control and discriminatory taxation. It is of little use for an American or a Swiss to own a blocked balance with a Ruritanian bank, especially if he notices that the purchasing power and the equivalent in hard currency of the Ruritanian monetary unit is dropping more and more.

2 The American Administration recommends as an adequate substitute for private investment abroad public investment and loans either granted directly by the governmental (national or international) banks or guaranteed by such banks. The idea is that the governments, first of all the American government, should fill the gap that the anti-capitalistic policies of the underdeveloped countries have willfully created. But the example of Iran shows that such governmental investments and loans are also not safe against predatory ventures. Why should the American government pump American funds into Ruritania if the Ruritanian parliament is free to deal with them as it pleases? Are there no investment opportunities left within the United States? It is rather unrealistic to assume that Congress will continue to tolerate a policy that subsidizes foreign countries at the expense of the American taxpayer. There is no use in fooling ourselves. The hopes that the much talked about Point Four [3] may work as a satisfactory substitute for the disintegrated international capital market have proved fallacious.

III

It is this disintegration of the international capital market that creates the plight of the underdeveloped countries.

These countries were in the last decades benefited by the modern methods of fighting epidemics and other diseases which the capitalistic West has developed. Mortality rates dropped and the average length of life was prolonged. Population increased considerably. But the economic policies of these nations are preventing an expansion of the insufficient amount of domestic saving and capital accumulation; sometimes they even directly induce capital de-accumulation. As there is no longer any importation of foreign capital worth mentioning, the per head quota of capital invested decreases. The outcome is a drop in the marginal productivity of labor. But at the same time the governments and the labor unions try to enforce wage rates which exceed the marginal productivity of labor. The result is spreading unemployment.

Unaware of the causes of unemployment the governments try to remove it by various measures which, although entirely futile, are so costly that they by far exceed the public revenue and are financed by the issuance of additional fiat money. Inflation still more discourages domestic saving and capital formation.

The governments of all these underdeveloped countries indefatigably talk of the necessity to "industrialize" and to modernize the outdated methods of agricultural production. But their own policies are the main obstacle to any improvement and economic progress. There cannot be any question of imitating the technological procedures of the capitalistic countries if there is no capital available. Whence should this capital come if domestic capital formation as well as the inflow of foreign capital are sabotaged?

About two hundred years ago conditions in England were hardly better, perhaps even worse than they are today in India and China. The then prevailing system of production was lamentably inadequate. In its frame there was no room left for an ever increasing part of the population. Masses of destitute paupers were barely living on the verge of starvation. The ruling landed aristocracy did not know of any means

3 to cope with these wretched people other than the poorhouse, the workhouse, and the prison. But then came the "Industrial Revolution." Laissez-faire capitalism converted the starving beggars into self-supporting breadwinners. It improved conditions step by step until, at the end of the Victorian age, the average standard of living of the common man was the highest in Europe, much higher than that of people whom earlier ages had considered as sufficiently well-to-do.

What the underdeveloped nations must do if they sincerely want to eradicate penury and to improve the economic conditions of their destitute masses is to adopt those policies of "rugged individualism" which have created the welfare of Western Europe and the United States. They must resort to laissez faire; they must remove all obstacles fettering the spirit of enterprise and stunting domestic capital accumulation and the inflow of capital from abroad.

But what the governments of these countries are really doing today is just the contrary. Instead of emulating the polices that created the comparative wealth and welfare of the capitalistic nations, they are choosing those contemporary policies of the West which slow down the further accumulation of capital and lay stress on what they consider to be a fairer distribution of wealth and income. Leaving aside the problem whether or not these policies are beneficial to the economically advanced nations, it must be emphasized that they are patently nonsensical when resorted to in the economically backward countries. Where there is very little to be distributed, a policy of an allegedly "fairer" redistribution is of no use at all.

In the second part of the nineteenth century the shrewdest among the patriots of the underdeveloped nations began to contrast the unsatisfactory conditions of their own countries with the prosperity of the West. They could not help realizing that the Europeans and Americans have better succeeded in fighting penury and starvation than their own peoples. To make their own peoples as prosperous as those of the West became their foremost aim. So they sent the elite of their youth to the universities of Europe and America to study economics and thus to learn the secret of raising the standard of living. Hindus, Chinese, Africans, and members of other backward nations thronged the lecture halls, eagerly listening to the words of the famous British, American, and German professors.

This is what these professors—Marxians, Fabians, Veblenians, socialists of the chair, champions of government omnipotence and all-round planning, peacemakers of inflation, deficit spending and confiscatory taxation—taught their students: rugged individualism, the policy of laissez faire and private enterprise are the worst evils that ever befell mankind. They enriched a few robber barons and condemned the masses of decent people to ever-increasing poverty and degradation. But fortunately the black age of capitalism is approaching its end. People will no longer let themselves be fooled by the spurious doctrines of the sycophants of the bourgeoisie, the depraved apologists of a manifestly unfair social order. We, the adamant advocates of justice and riches for all, have for ever exploded the fallacies and paralogisms of the orthodox authors. The Welfare State will bring prosperity and security to everybody. The economics of abundance and plenty will be substituted for

4 the economics of scarcity. Production for use will be substituted for production for profit. There will be freedom from want; i.e., everybody will get all he wants.

Never did these professors mention the—in their opinion manifestly absurd—truism that there is no means to improve the conditions of any nation or the whole of mankind other than to increase the per head quota of capital invested. On the contrary. They indulged in expounding the Keynesian dogma of the dangers of saving and accumulating capital. Never did they refer to the fact that nature—not the capitalists—has made the means of human sustenance scarce. As they saw it, the State had inexhaustible funds at its disposal that enabled the government to spend without any limits. They have even today not yet realized that progressive taxation has already exhausted this alleged surplus in all other countries and will have exhausted it even in the United States very soon.

Indoctrinated with these principles the graduates of the Western universities returned to their countries and tried to put into effect what they had learned. They were sincerely convinced that to create prosperity for all nothing else was needed than to apply the formulas of Occidental pseudo-progressivism. They thought that industrialization means labor unions, minimum wage rates and unemployment doles and that trade and commerce means controls of every kind. They wanted to nationalize before they had permitted business to build plants and enterprises which could be expropriated. They wanted to establish a new fair deal in countries whose distress consisted precisely in the fact that they had not known what is today disparaged as the old and unfair deal.

All these radical intellectuals of the underdeveloped countries blame Europe and America for the backwardness and poverty of their own peoples. They are right, but for reasons which are very different from those they themselves have in mind. Europe and America did not cause the plight of the underdeveloped nations, but they have prolonged its duration by implanting in their intellectuals the ideologies which are the most serious obstacle to any improvement of conditions. The socialists and interventionists of the West have poisoned the mind of the East. They are responsible for the anti-capitalistic bias of the East and for the sympathies with which those Eastern intellectuals look upon the Soviet system as the most intransigent realization of Marxian ideas.

All underdeveloped countries are flooded with translations of the writings of Marx, Lenin, and Stalin and of the books of all shades of non-Marxian socialism and anti- capitalism. But only very rarely have books expounding the operation of the market economy and critically analyzing the dogmas of the socialist creed been published in one of the languages of these nations. Little wonder that their reading public believes that the description of capitalism as provided by the Communist Manifesto exactly fits present day American conditions, that, for instance, the laborer "sinks deeper and deeper" with the progress of industry and that "the bourgeoisie is incompetent to assure an existence to its slave within his slavery." Little wonder that they look upon the Soviet system as the model of a better future.

We must comprehend that it is impossible to improve the economic conditions of the underdeveloped nations by grants in aid. If we send them foodstuffs to fight famines, we merely relieve their governments from the necessity of abandoning their

5 disastrous agricultural policies. In the past, for instance, Yugoslavia's main problem was how to find foreign markets for its considerable surplus of cereals, pigs, fruits, and lumber. Today the country that includes the most fertile land of Europe outside Russia and Romania is famine stricken. If we send to the poor countries manufactures or "lend" them dollars, we virtually pay for the deficits of their nationalized transportation and communication systems and their socialized mines and processing industries. The truth is that the United States is subsidizing all over the world the worst failure of history: socialism. But for these lavish subsidies the continuation of the socialist schemes would have become long since unfeasible.

The problem of rendering the underdeveloped nations more prosperous cannot be solved by material aid. It is a spiritual and intellectual problem. Prosperity is not simply a matter of capital investment. It is an ideological issue. What the underdeveloped countries need first is the ideology of economic freedom and private enterprise and initiative that makes for the accumulation and maintenance of capital as well as for the employment of the available capital for the best possible and cheapest satisfaction of the most urgent wants of the consumers.

In no other way can the United States contribute to the improvement of the economic conditions of the underdeveloped countries than by transmitting to them the ideas of economic freedom.

[1] [David Ricardo, On the Principles of Political Economy and taxation, vol. 1 of The Works and Correspondence of david Ricardo, Piero Sraffa, ed. (Cambridge: Cambridge University Press, 1951-1973), p. 137—Ed.]

[2] [Lord Clement Attlee was leader of the British Labor Party from 1935-1955 and a committed socialist. He was prime minister of England from 1945-1951—Ed.]

[3] [Point Four of the Atlantic Charter was concerned with equality of access to trade and raw materials of the world and to securing for all nations an improved labor standard, economic adjustment, and social security—Ed.]

6 7le Iloml offibrnotim Ydirs, Vol m, No. I Wimu 1989)

World War I as Fulfillment: Power and the Intellectuals*

by Murray N. Rothbard

Depament of Economics, University of Nevaah, LaVegas

I. Introduction In contrast to older historians who regarded World War I as the destruction of progressive reform, I am convinced that the war came to the United States as the "fulfdlment," the culmination, the veritable apotheosis of progressivism in American life.' I regard progressivism as basically a movement on behalf of Big Government in all walks of the economy and society, in a fusion or coalition between various pupsof big businessmen, led by the House of Morgan, and rising groups of technocratic and statist intellectuals. In this fusion, the values and interests of both groups would be pursued through government. Big business would be able to use the government to cartelize the economy, restrict competition, and regulate production and prices, and also to be able to wield a militaristic and imperialist foreign policy to force open markets abroad and apply the sword of the State to protect foreign investments. Intellectuals would be able to use the government to restrict entry into their professions and to assume jobs in Big Government to apologize for, and to help plan and staff, government operations. Both groups also believed that, in this fusion, the Big State could be used to harmonize and interpret the "national interest" and thereby provide a "middle way" between the extremes of "dogeatdog" laissez faire and the bitter conflicts of proletarian Marxism. Also animating both groups of progressives was a postmillennia1 pietist Protestantism that had conquered "Yankee" areas of northern Protestantism by the 1830s and had impelled the pietists to use local, state, and finally federal governments to stamp out "sin," to make America and eventually the world holy, and thereby to bring about the Kingdom of God on earth. The victory of the Bryanite forces at the Democratic national convention of 1896 destroyed the Democratic Party as the

* An earlier version of this paper was delivered at a Pacific Institute Conference on "Crisis and Leviathan," at Menlo Park, CA, October 1986. 82 THE JOURNAL OF LIBERTARIAN STUDIES Winter vehicle of "liturgical" Roman Catholics and German Lutherans devoted to personal liberty and laissez faire and created the roughly homogenized and relatively nonide logical party system we have today. After the turn of the century, this development created an ideological and power vacuum for the expanding number of progressive technocrats and administrators to fiu. In that way, the locus of government shifted from the legislature, at least partially subject to democratic check, to the oligarchic and technocratic executive branch. World War I brought the fulfdlment of all these progressive trends. Militarism, conscription, massive intervention at home and abroad, a collectivized war economy, all came about during the war and created a mighty cartelized system that most of its leaders spent the rest of their lives trying to recreate, in peace as well as war. In the World War I chapter of his outstanding work, Crisis and Leviathan, Professor Robert Higgs concentrates on the war economy and illuminates the interconnections with conscription. In this paper, I would like to concentrate on an area that Professor Higgs relatively neglects: the coming to power during the war of the various groups of progressive intelle~tuals.~I use the term "intellectual" in the broad sense penetratingly described by F. A. Hayek: that is, not merely theorists and academicians, but also all manner of opinion-molders in society- writers, journalists, preachers, scientists, activists of all sort-what Hayek calls "secondhand dealers in ideas."' Most of these intellectuals, of whatever strand or occupation, were either dedicated, messianic poshdennial pietists or else former pietists, born in a deeply pietist home, who, though now secularized, still possessed an intense messianic belief in national and world salvation through Big Government. But, in addition, oddly but characteristically, most combined in their thought and agitation messianic moral or religious fervor with an empirical, allegedly "value-free" and strictly "scientific" devotion to social science. Whether it be the medical profession's combined scientific and moralistic devotion to stamping out sin or a similar position among economists or philosophers, this blend is typical of progressive intellectuals. In this paper, I will be dealing with various examples of individual or groups of progressive intellectuals, exulting in the triumph of their creed and their own place in it, as a result of America's entry into World War I. Unfortunately, lita- tions of space and time preclude dealing with all facets of the wartime activity of progressive intellectuals; in particular, I regret having to omit treatment of the conscription movement, a fascinating example of the creed of the "therapy" of "discipline" led by upper-class intellectuals and businessmen in the J. P. Morgan ambit.' I shall also have to omit both the highly significant trooping to the war colors of the nation's preachers, and the wartime impetus toward the permanent centralization of scientific research.' There is no bener epigraph for the remainder of this paper than a congratulatory note sent to President Wilson after the delivery of his war message on April 2, 1917. The note was sent by Wilson's son-in-law and fellow Southern pietist and 1989 MURRAY N. ROTHBARD-WORLD WAR I AS FULFLLMENT 83 progressive, Secretary of the Treasury William Gibbs McAdoo, a man who had spent his entire life as an industrialist in New YorkCity, solidly in the J. P. Morgan ambit. McAdoo wrote to Wilson: "You have done a great thimg nobly! I firmly believe that it is God's will that America should do this transcendent service for humanity throughout the world and that you are His chosen instrument."6 It was not a sentiment with which the president could disagree.

11. Pietism and Prohibition One of the few important omissions in Professor Higgs's book is the crucial role of postmillennial pietist Protestantism in the drive toward statism in the United States. Dominant in the "Yankee" areas of the North from the 1830s on, the aggressive "evangelical" form of pietism conquered Southern Protestantism by the 1890s and played a crucial role in progressivism after the turn of the cenhlry and through World War I. Evangelical pietism held that requisite to any man's salvation is that he do his best to see to it that everyone else is saved, and doing one's best inevitably meant that the State must become a crucial instmment in maximizing people's chances for salvation. In particular, the State plays a pivotal role in stamping out sin, and in "making America holy." To the pietists, sin was very broadly defined as any force that might cloud men's minds so that they could not exercise their theological free will to achieve salvation. Of particular importance were slavery (until the Civil War), Demon Rum, and the Roman Catholic Church, headed by the Antichrist in Rome. For decades after the Civil War, "rebellion" took the place of slavery in the pietist charges against their great political enemy, the Democratic party.' Then in 1896, with the evangelical conversion of Southern Protestantism and the admission to the Union of the sparsely populated and pietist Mountain states, William Jennings Bryan was able to put together a coalition that transformed the Democrats into a pietist party and ended forever that party's once proud role as the champion of "liturgical" (Catholic and High German Lutheran) Christianity and of personal liberty and laissez faire.8.9 The pietists of the nineteenth and early twentieth centuries were all postmillennialist: They believed that the Second Advent of Christ will occur only afrer the millennium-a thousand years of the establishment of the Kingdom of God on earth-has been brought about by human effort. Postmillennialists have therefore tended to be statists, with the State becoming an important instrument of stamping out sin and Christianizing the social order so as to speed Jesus' return.1° Professor Timberlake neatly sums up this politico-religious conflict: Unlike those extremist and apocalyptic sects that rejected and withdrew from the world as hopelessly corrupt, and unlike the more conservative churches, such as the Roman Catholic, Protestant Episcopal, and Lutheran, that tended to assume a more relaxed attitude toward the influence of religion in culture, evangelical Protestantism sought to overcome the corruption of the world 84 THE JOURNAL OF LIBERTARIAN STUDIES Winter

in a dynamic manner, not only by converting men to belief in Christ but also by Christianizing the social order through the power and force of law. According to this view, the Christian's duty was to use the secular power of the state to transform culture so that the community of the faithful might be kept pure and the work of saving the unregenerate might be made easier. Thus the function of law was not simply to restrain evil but to educate and uplift." Both prohibition and progressive reform were pietistic, and as both movements expanded after 1900 they became increasingly intertwined. The Prohibition Party, once confined-at least in its platform-to a single issue, became increasingly and frankly progressive after 1904. The Anti-Saloon League, the major vehicle for prohibitionist agitation after 1900, was also markedly devoted to progressive reform. Thus at the League's annual convention in 1905, Rev. Howard H. Russell rejoiced in the growing movement for progressive reform and particularly hailed Theodore Roosevelt, as that "leader of heroic mould, of absolute honesty of character and purity of life, that foremost man of this world. . . ."" At the Anti- Saloon League's convention of 1909, Rev. Purley A. Baker lauded the labor union movement as a holy crusade for justice and a square deal. The League's 1915 convention, which attracted 10,000 people, was noted for the same blend of statism, social service, and combative Christianity that had marked the national convention of the Progressive Party in 1912." And at the League's June 1916 convention, Bishop Luther B. Wilson stated, without contradiction, that everyone present would undoubtedly hail the progressive reforms then being proposed. During the Progressive years, the Social Gospel became pan of the mainstream of pietist Protestantism. Most of the evangelical churches created commissions on social service to promulgate the Social Gospel, and virtually all of the denomina- tions adopted the Social Creed drawn up in 1912 by the Commission of the Church and Social Service of the Federal Council of Churches. The creed called for the abolition of chid labor, the regulation of female labor, the right of labor to organize (i.e., compulsory collective bargaining), the elimination of poverty, and an "equitable" division of the national product. And right up there as a matter of social concern was the liquor problem. The creed maintained that liquor was a grave hindrance toward the establishment of the Kingdom of God on earth, and it advocated the "protection of the individual and society from the social, economic, and moral waste of the liquor traffic."" The Social Gospel leaders were fervent advocates of statism and of prohibition. These included Rev. Walter Rauschenbusch and Rev. Charles Stelzle, whose tract Why Prohibition! (1918) was distributed, after the United States' entry into World War I, by the Commission on Temperance of the Federal Council of Churches to labor leaders, members of Congress, and important government officials. A particularly important Social Gospel leader was Rev. Josiah Strong, whose monthly journal, Re Gospel of the Kingdom, was published by Strong's 1989 MURRAY N. ROTHBARD-WORLD WAR I AS FULFLLMENT 85

American Institute of Social Service. In an article supporting prohibition in the July 1914 issue, The Gospel of the Kingdom hailed the progressive spirit that was at last putting an end to "personal liberty": "Personal Liberty" is at last an uncrowned, dethroned king, with no one to do him reverence. The social consciousness is so far developed, and is becoming so autocratic, that institutions and governments must give heed to its mandate and share their life accordingly. We are no longer frightened by that ancient bogy-"paternalism in government." We affirm boldly, it is the business of govemment to be just that-paternal. . . . Nothing human can be foreign ro a true governmenr.15 As true crusaders, the pietists were not content to stop with the stamping out of sin in the United States alone. If American pietism was convinced that Americans were God's chosen people, destined to establish a Kingdom of God within the United States, surely the pietists' religious and moral duty could not stop there. In a sense, the world was America's oyster. As Professor Timberlake put it, once the Kingdom of God was in the course of being established in the United States, "it was therefore America's mission to spread these ideals and institutions abroad so that the Kmgdom could be established throughout the world. American Protestants were accordimgly not content merely to work for the kingdom of God in America, but felt compelled to assist in the reformation of the rest of the world also."'6 American entry into World War I provided the fullfillment of prohibitionist dreams. In the first place, all food production was placed under the control of Herbert Hoover, Food Administration czar. But if the U.S. government was to control and allocate food resources, shall it permit the precious scarce supply of grain to be siphoned off into the "waste," if not the sin, of the manufacture of liquor? Even though less than two percent of American cereal production went into the manufacture of alcohol, think of the starving children of the world who might otherwise be fed. As the progressive weekly 7he Independent demagogically phrased it. "Shall the many have food, or the few have drink?" For the ostensible purpose of "conserving" grain, Congress wrote an amendment into the Lever Food and Fuel Control Act of August 10, 1917, that absolutely prohibited the use of foodstuffs, hence grain, in the production of alcohol. Con- gress would have added a prohibition on the manufacture of wine or beer, but President Wilson persuaded the Anti-Saloon League that he could accomplish the same goal more slowly and thereby avoid a delaying filibuster by the wets in Congress. However, Herbert Hoover, a progressive and a prohibitionist, persuaded Wilson to issue an order, on December 8, both greatly reducing the alcoholic content of beer and limiting the amount of foodstuffs that could be used in its manufacture." The prohibitionists were able to use the Lever Act and war patriotism to good effect. Thus, Mrs. W. E. Lindsey, wife of the governor of New Mexico, delivered a speech in November 1917 that noted the Lever Act, and declared: 86 THE JOURNAL OF LIBERTARIAN STUDIES Winter

Aside from the long list of awful tragedies following in the wake of the liquor traffic, the economic waste is too great to be tolerated at this time. With so many people of the allied nations near to the door of starvation, it would be criminal ingratitude for us to continue the manufacture of whiskey." Another rationale for prohibition during the war was the alleged necessity to protect American soldiers from the dangers of alcohol to their health, their morals, and their immortal souls. As a result, in the Selective Service Act of May 18, 1917, Congress provided that dry zones must he established around every army base, and it was made illegal to sell or even to give liquor to any member of the military establishment within those zones, even in one's private home. Any inebriated servicemen were suhject to courts-martial. But the most severe thrust toward national prohibition was the Anti-Saloon League's proposed eighteenth constitutional amendment, outlawing the manufacture, sale, transportation, import or export of all intoxicating liquors. It was passed by Congress and submitted to the states at the end of December 1917. Wet arguments that prohibition would prove unenforceable were met with the usual dry appeal to high principle: Should laws against murder and robbery he repealed simply because they cannot be completely enforced? And arguments that private property would be unjustly confiscated were also brushed aside with the contention that property injurious to the health, morals, and safety of the people had always been subject to confiscation without compensation. When the Lever Act made a distinction between hard liquor (forbidden) and beer and wine (limited), the brewing industry tried to save their skins by cutting themselves loose from the taint of distilled spirits. "The true relationship with beer," insisted the United States Brewers Association, "is with light wines and soft drinks-not with hard liquors. . . ." The hrewers affirmed their desire to "sever, once for all, the shackles that hound our wholesome productions . . . to ardent spirits. . . ." But this craven attitude would do the brewers no good. After all, one of the major objectives of the drys was to smash the brewers, once and for all, they whose product was the very embodiment of the drinking habits of the hated German-American masses, both Catholic and Lutheran, liturgicals and beer drinkers all. German-Americans were now fair game. Were they not all agents of the satanic Kaiser, bent on conquering the world? Were they not conscious agents of the dreaded Hun Kultur, out to destroy American civilization? And were not most hrewers German? And so the Anti-Saloon League thundered that "German brewers in this country have rendered thousands of men inefficient and are thus crippling the Republic in its war on Prussian militarism." Apparently, the Anti-Saloon League took no heed of the work of German hrewers in Gemny, who were presumably performing the estimable service of rendering "Prussian militarism" helpless. The hrewers were accused of being pro-German, and of subsidizing the press (apparently it was all right to he pro-English or to subsidize the press if one were not 1989 MURRAY N. ROTHBARD-WORLD WAR I AS FULFILLMENT 87 a brewer). The acme of the accusations came from one prohibitionist: "We have German enemies," he warned, "in this country too. And the worst of all our German enemies, the most treacherous, the most menacing are Pabst, Schlitz, Blatz, and Miller."19 In this sort of atmosphere, the brewers didn't have a chance, and the Eigh: teenth Amendment went to the states, outlawing all forms of liquor. Since twenty- seven states had already outlawed liquor, this meant that only nine more were needed to ratify this remarkable amendment, which directly involved the federal constitution in what had always been, at most, a matter of police power of the states. The thirty-sixth state ratified the Eighteenth Amendment on January 16, 1919, and by the end of February all but three states (New Jersey, Rhode Island, and Connecticut) had made liquor unconstitutional as well as illegal. Technically, the amendment went into force the following January, but Congress speeded matters up by passing the War Prohibition Act of November 11, 1918, which banned the manufacture of beer and wine after the following May and outlawed the sale of all intoxicating beverages after June 30, 1919, a ban to continue in effect until the end of demobilization. Thus total national prohibition really began on July 1, 1919, with the Eighteenth Amendment taking over six months later. The constitutional amendment needed a congressional enforcing act, which Con- gress supplied with the Volstead (or National Prohibition) Act, passed over Wilson's veto at the end of October 1919. With the battle against Demon Rum won at home, the restless advocates of pietist prohibitionism looked for new lands to conquer. Today America, tomorrow the world. In June 1919 the triumphant Anti-Saloon League called an international prohibition conference in Washington and created a World League Against Alcoholism. World prohibition, after all, was needed to finish the job of making the world safe for democracy. The prohibitionists' goals were fervently expressed by Rev. A. C. Bane at the Anti-Saloon League's 1917 convention, when victory in America was already in sight. To a wildly cheering throng, Bane thundered: Amencs will "go over the lop" in humnir)'~greatest battle [aganst liquor] adplant the vetonou, while standard of Prnhihition uwn the nuion's loR1es1 eminence. Then catching sight of the beckoning hands of our sister nations across the sea, struggling with the same age-long foe, we will go forth with the spirit of the missionary and the cmsader to help drive the demon of drink from all civilization. With America leading the way, with faith in Omnipo- tent God, and bearing with patriotic hands our stainless flag, the emblem of civic purity, we will soon . . . bestow upon mankind the priceless gift of World Prohibiti~n.'~ Fortunately, the prohibitionists found the reluctant world a tougher nut to crack.

111. Women at War and at the PnUs Another direct outgrowth of World War I, coming in tandem with prohibition but lasting more permanently, was the Nineteenth Amendment, submitted by Con- 88 THE JOURNAL OF LIBERTARIAN STUDIES Winter gress in 1919 and ratified by the following year, which allowed women to vote. Women's suffrage had long been a movement directly allied with prohibition. Desperate to combat a demographic trend that seemed to be going against them, the evangelical pietists called for women's suffrage (and enacted it in many Western states). They did so because they knew that while pietist women were socially and politically active, ethnic or liturgical women tended to be culturally bound to hearth and home and therefore far less likely to vote. Hence, women's suffrage would greatly increase pietist voting power. In 1869 the Prohibitionist Party became the first party to endorse women's suffrage, which it continued to do. The Progressive Party was equally enthusiastic about female suffrage; it was the first major national Party to permit women delegates at its conventions. A leading women's suffrage organization was the Women's Christian Temperance Union, which reached an enormous membership of 300,000 by 1900. And three successive presidents of the major women's suffrage group, the National American Woman Suffrage Association-Susan B. Anthony, Mrs. Carrie Chapman Catt and Dr. Anna Howard Shaw-all began their activist careers as prohibitionists. Susan B. Anthony put the issue clearly: There is an enemy of the homes of this nation and that enemy is drunkenness. Everyone connected with the gambling house, the brothel and the salwn works and votes solidly against the enfranchisement of women, and, I say, if you believe in chastity, if you believe in honesty and integrity, then . . . take the necessary steps to put the ballot in the hands of women." For its part, the German-American Alliance of Nebraska sent out an appeal during the unsuccessful referendum in November 1914 on women suffrage. Written in German, the appeal declared, "Our German women do not want the right to vote, and since our opponents desire the right of suffrage mainly for the purpose of saddling the yoke of prohibition on our necks, we should oppose it with all our might. . . ."2' America's entry into World War I provided the impetus for overcoming the substantial opposition to woman suffrage, as a corollary to the success of prohibition and as a reward for the vigorous activity by organized women in behalf of the war effort. To close the loop, much of that activity consisted in stamping out vice and alcohol as well as instilling "patriotic" education into the minds of often suspect immigrant groups. Shortly after the U.S. declaration of war, the Council of National Defense created an Advisory Committee on Women's Defense Work, known as the Woman's Committee. The purpose of the committee, writes a celebratory contemporary account, was "to coordinate the activities and the resources of the organized and unorganized women of the country, that their power may be immediately utilized in time of need, and to supply a new and direct channel of cooperation between women and governmental department^."^' Chairman of the Woman's Committee, working energetically and full time, was the former president of the 1989 MURRAY N. ROTHBARD-WORLD WAR 1 AS FULFLLMENT 89

National American Woman Suffrage Association, Dr. Anna Howard Shaw, and another leading member was the suffrage group's current chairman and an equally prominent suffragette, Mrs. Carrie Chapman Catt. The Woman's Committee promptly set up organizations in cities and states across the country, and on June 19, 1917 convened a conference of over fifty national women's organizations to coordinate their efforts. It was at this conference that "the first definite task was imposed upon American women" by the indefatigable Food Czar, Herbert Hoo~er.~'Hoover enlisted the cooperation of the nation's women in his ambitious campaign for controlling, restricting, and cartelizing the food industry in the name of "conservation" and elimination of "waste." Celebrating this coming together of women was one of the Woman's Committee members, the Progressive writer and muckraker Mrs. Ida M. Tarbell. Mrs. Tarbell lauded the "growing consciousness everywhere that this great enterprise for democracy which we are launching [the U.S. enuy into the war] is a national affair, and if an individual or a society is going to do its bit it must act with and under the government at Washington." "Nothing else," Mrs. Tarbell gushed, "can explain the action of the women of the country in coming together as they are doing today under one centralized directi~n."~~ Mrs. Tarbell's enthusiasm might have been heightened by the fact that she was one of the directing rather than the directed. Herbert Hoover came to the women's conference with the proposal that each of the women sign and distribute a "food pledge card" on behalf of food conservation. While support for the food pledge among the public was narrower than anticipated, educational efforts to promote the pledge became the basis of the remainder of the women's conservation campaign. The Woman's Committee appointed Mrs. Tarbell as chairman of its committee on Food Administration, and she not only tirelessly organized the campaign but also wrote many letters and newspaper and magazine articles on its behalf. In addition to food control, another important and immediate function of the Woman's Committee was to attempt to register every woman in the country for possible volunteer or paid work in support of the war effort. Every woman aged sixteen or over was asked to sign and submit a registration card with all pertinent information, including training, experience, and the sort of work desired. In that way the government would know the whereabouts and training of every woman, and government and women could then serve each other best. In many states, especially Ohio and lllinois, state govenunents set up schools to train the registrars. And even though the Woman's Committee kept insisting that the registration was completely voluntary, the state of Louisiana, as Ida Clarke puts it, developed a "novel and clever" idea to facilitate the program: women's registration was made compulsory. Louisiana's Governor Ruftin G. Pleasant decreed October 17, 1917 compulsory registration day, and a host of state officials collaborated in its operation. The 90 THE JOURNAL OF LIBERTARIAN STUDIES Winter

State Food Commission made sure that food pledges were also signed by all, and the State School Board granted a holiday on October 17 so that teachers could assist in the compulsory registration, especially in the rural districts. Six thousand women were officially commissioned by the state of Louisiana to conduct the registration, and they worked in tandem with state Food Conservation officials and parish Demonstration Agents. In the French areas of the state, the Catholic priests rendered valuable aid in personally appealing to all their female parishioners to perform their registration duties. Handbills were circulated in French, house- to-house canvasses were made, and speeches urging registration were made by women activists in movie theaters, schools, churches, and courthouses. We are informed that all responses were eager and cordial; there is no mention of any resistance. We are also advised that "even the negroes were quite alive to the situation, meeting sometimes with the white people and sometimes at the call of their own pastors."26 Also helping out in women's registration and food control was another, smaller, but slightly more sinister women's organization that had been launched by Congress as a sort of prewar wartime group at a large Congress for Constructive Patriotism, held in Washington, D.C. in late January 1917. This was the National League for Woman's Service (NLWS), which established a nationwide organization later overshadowed and overlapped by the larger Woman's Committee. The difference was that the NLWS was set up on quite frankly military lines. Each local working unit was called a "detachment" under a "detachment commander," districtwide and statewide detachments met in annual "encampments," and every woman member was to wear a uniform with an organization badge and insignia. In particular, "the basis of training for all detachments is standardized, physical drill. "17 A vital part of the Woman's Committee work was engaging in "patriotic education." The government and the Woman's Committee recognized that immigrant ethnic women were most in need of such vital instruction, and so it set up a committee on education, headed by the energetic Mrs. Carrie Chapman Can. Mrs. Catt stated the problem well to the Woman's Committee: Millions of people in the United States were unclear on why we were at war, and why, as Ida Clarke paraphrases Mrs. Can, there is "the imperative necessity of winning the war if future generations were to be protected from the menace of an unscrupulous militari~m."'~ Presumably U.S. militarism, being "scrupulous," posed no problem. Apathy and ignorance abounded, Mrs. Catt went on, and she proposed to mobilize twenty million American women, the "greatest sentiment makers of any community," to begin a "vast educational movement" to get the women "fervently enlisted to push the war to victory as rapidly as possible." As Mrs. Catt continued, however, the clarity of war aims she called for really amounted , to pointing out that we were in the war "whether the nation likes it or does not 1989 MURRAY N. ROTHBARD-WORLD WAR 1 AS FULFlLLMENT 91 like it," and that therefore the "sacrifices" needed to win the war "willingly or unwillingly must be made." These statements are reminiscent of arguments supporting recent military actions by Ronald Reagan ("He had to do what he had to do"). In the end, Mrs. Catt could come up with only one reasoned argument for the war, apart from this alleged necessity, that it must be won to make it "the war to end war~."~9 The "patriotic education" campaign of the organized women was largely to "Americanize" immigrant women by energetically persuading them (a) to become naturalized American citizens and (b) to learn "Mother English." In the campaign, dubbed "America First," national unity was promoted through getting immigrants to learn English and trying to get female immigrants into afternoon or evening English classes. The organized patriot women were also worried about preserving the family structure of the immigrants. If the children learn English and their parents remain ignorant, children will scorn their elders, "parental discipline and control are dissipated, and the whole family fabric becomes weakened. Thus one of the great conservative forces in the community becomes inoperative." To preserve "maternal control of the young", then, "American- ization of the foreign women through language becomes imperative." In Erie, Pennsylvania, women's clubs appointed "Block Matrons," whose job it was to get to know the foreign families of the neighborhood and to back up school authorities in urging the immigrants to learn English, and who, in the rather naive words of I& Clarke, "become neighbors, friends, and veritable mother confessors to the foreign women of the block." One would like to have heard some com- ments from recipients of the attentions of the Block Matrons. All in all, as a result of the Americanization campaign, Ida Clarke concludes, "the organized women of this country can play an important part in making ours a country with a common language, a common purpose, a common set of ideals-a unified America."'o Neither did the government and its organized women neglect progressive economic reforms. At the organizing June 1917 conference of the Woman's Com- mittee, Mrs. Carrie Catt emphasized that the greatest problem of the war was to assure that women receive "equal pay for equal work." The conference suggested that vigilance committees be established to guard against the violation of "ethical laws" governing labor and also that all laws restricting ("protecting") the labor of women and children be rigorously enforced. Apparently, there were some values to which maximizing production for the war effort had to take second place. Mrs. Margaret Dreier Robins, president of the National Women's Trade Union's League, hailed the fact that the Woman's Committee was organizing committees in every state to protect minimum standards for women and children's labor in industry and demanded minimum wages and shorter hours for women. Mrs. Robins particularly warned that "not only are unorganized women workers in vast numbers used as underbidders in the labor market for lowering industrial 92 THE JOURNAL OF LIBERTARIAN STUDIES Winter

standards, but they are related to those groups in industrial centers of our country that are least Americanized and most alien to our institutions and ideals." And so "Americanization" and cartelization of female labor went hand in hand.3'Jz

IV. Saving Our Boys from Alcohol and Vice One of organized womanhood's major contributions to the war effort was to col- laborate in an attempt to save American soldiers from vice and Demon Rum. In addition to establishing rigorous dry zones around every military camp in the United States, the Selective Service Act of May 1917 also outlawed prostitution in wide zones around the military camps. To enforce these provisions, the War Department had ready at hand a Commission on Training Camp Activities, an agency soon imitated by the Department of the Navy. Both commissions were headed by a man tailormade for the job, the progressive New York settlement- house worker, municipal political reformer, and former student and disciple of Woodrow Wilson, Raymond Blaine Fosdick. Fosdick's background, life, and career were paradigmatic for progressive intellectuals and activists of that era. Fosdick's ancestors were Yankees from Massachusetts and Connecticut, and his great-grandfather pioneered westward in a covered wagon to become a frontier farmer in the heart of the Burned-Over District of transplanted Yankees, Buffalo, New York. Fosdick's grandfather, a pietist lay preacher born again in a Baptist revival, was a prohibitionist who married a preacher's daughter and became a lifelong public school teacher in Buffalo. Grandfather Fosdick rose to become Superintendant of Education in Buffalo and a battler for an expanded and strengthened public school system. Fosdick's immediate ancestry continued in the same vein. His father was a public school teacher in Buffalo who rose to become principal of a high school. His mother was deeply pietist and a staunch advocate of prohibition and women's suffrage. Fosdick's father was a devout pietist Protestant and a "fanatical" Republican who gave his son Raymond the middle name of his hero, the veteran Maine Republican James G. Blaine. The three Fosdick children, elder brother Harry Emerson, Raymond, and Raymond's twin sister, Edith, on emerging from this atmosphere, all forged lifetime careers of pietism and social service. While active in New York reform administration, Fosdick made a fateful friend- ship. In 1910, John D. Rockefeller, Jr., like his father a pietist Baptist, was chairman of a special grand jury to investigate and to try to stamp out prostitution in New York City. For Rockefeller, the elimination of prostitution was to become an ardent and lifelong crusade. He believed that sin, such as prostitution, must be criminated, quarantined, and driven underground through rigorous suppression. In 191 1, Rockefeller began his crusade by setting up the Bureau of Social Hygiene, into which he poured $5 million in the next quarter century. Two years later he enlisted Fosdick, already a speaker at the annual dinner of Rockefeller's 1989 MURRAY N. ROTHBARD-WORLD WAR I AS FULFILLMENT 93

Baptist Bible class, to study police systems in Europe in conjunction with activities to end the great "social vice." Surveying American police after his stint in Europe at Rockefeller's behest, Fosdick was appalled that police work in the United States was not considered a "science" and that it was subject to "sordid" political influences." At that point, the new Secretary of War, the progressive former mayor of Cleveland Newton D. Baker, became disturbed at reports that areas near the army camps in Texas on the Mexican border, where troops were mobilized to combat the Mexican revolutionary Pancho Villa, were honeycombed with saloons and prostitution. Sent by Baker on a fact-finding tour in the summer of 1916, scoffed at by tough army officers as the "Reverend," Fosdick was horrif~edto fmd saloons and brothels seemingly everywhere in the vicinity of the military camps. He reported his consternation to Baker, and, at Fosdick's suggestion, Baker cracked down on the army commanders and their lax attitude toward alcohol and vice. But Fosdick was beginning to get the glimmer of another idea. Couldn't the suppression of the bad be accompanied by a positive encouragement of the good, of wholesome recreational alternatives to sin and liquor that our boys could enjoy? When war was declared, Baker quickly appointed Fosdick to be chairman of the Commission on Training Camp Activities. Armed with the coercive resources of the federal government and rapidly building his bureaucratic empire from merely one secretary to a staff of thousands, Raymond Fosdick set out with determination on his twofold task: stamping out alcohol and sin in and around every militaly camp, and filling the void for American soldiers and sailors by providing them with wholesome recreation. As head of the Law Enforcement Division of the Training Camp Commission, Fosdick selected Bascom Johnson, attorney for the American Social Hygiene Association." Johnson was commissioned a major, and his staff of forty aggressive attorneys became second lieutenants. Employing the argument of health and military necessity, Fosdick set up a Social Hygiene Division of his commission, which promulgated the slogan "Fit to Fight." Using a mixture of force and threats to remove federal troops from the bases if recalcitrant cities did not comply, Fosdick managed to bludgeon his way into suppressing, if not prostitution in general, then at least every major red light district in the country. In doing so, Fosdick and Baker, employing local police and the federal Military Police, far exceeded their legal authority. The law authorized the president to shut down every red light district in a five-mile zone around each military camp or base. Of the 110 red light districts shut down by military force, however, only 35 were included in the prohibited zone. Suppres- sion of the other 75 was an illegal extension of the law. Nevertheless, Fosdick was triumphant: "Through the efforts of this Commission [on Training Camp Activities] the red light district has practically ceased to be a feature of American city life."35 The result of this permanent destmction of the red light district, of 94 THE JOURNAL OF LIBERTARIAN STUDIES Winter course, was to drive prostitution onto the streets, where consumers would be deprived of the protection of either an open market or of regulation. In some cases, the federal anti-vice crusade met considerable resistance. Secretary of Navy Josephus Daniels, a progressive from North Carolina, had to call out the marines to patrol the streets of resistant Philadelphia, and naval troops, over the strenuous objections of the mayor, were used to crush the fabled red light district of Storyville, in New Orleans, in November 1917.36 In its hubris, the U.S. Army decided to extend its anti-vice crusade to foreign shores. General John J. Pershing issued an official bulletin to members of the American Expeditionary Force in France urging that "sexual continence is the plain duty of members of the A.E.F., both for the vigorous conduct of the war, and for the clean health of the American people after the war." Pershing and the American military tried to close all the French brothels in areas where American trwps were located, but the move was unsuccessFu1 because the French objected bitterly. Premier Georges Clemenceau pointed out that the result of the "total prohibition of regulated prostitution in the vicinity of American troops" was only to increase "venereal diseases among the civilian population of the neighborhood." Finally, the United States had to rest content with declaring French civilian areas off limits to the troops." The more positive pan of Raymond Fosdick's task during the war was supplying the soldiers and sailors with a constructive substitute for sin and alcohol, "healthful amusements and wholesome company." As might be expected, the Woman's Committee and organized womanhood collaborated enthusiastically. They followed the injunction of Secretary of War Baker that the government "cannot allow these young men . . . to be surrounded by a vicious and demoralizing environment, nor can we leave anything undone which will protect them from unhealthy influences and crude forms of temptation." The Woman's Com- mittee found, however, that in the great undertiking of safeguarding the health and morals of our boys, their most challenging problem proved to be guarding the morals of their mobilized young girls. For unfortunately, "where soldiers are stationed . . . the problem of preventing girls from being misled by the glamour and romance of war and beguiling uniforms looms large.'' ForNnately, perhaps, the Maryland Committee proposed the establishment of a "Patriotic League of Honor which will inspire girls to adopt the highest standards of womanliness and loyalty to their country."38 No group was more delighted with the achievements of Fosdick and his Miltary Training Camp Commission than the burgeoning profession of social work. Surrounded by handpicked aides from the Playground and Recreation Associa- tion and the Russell Sage Foundation, Fosdick and the others "in effect tried to create a massive settlement house around each camp. No army had ever seen anything like it before, but it was an outgrowth of the recreation and community organization movement, and a victory for those who had been arguing for the 1989 MURRAY N. ROTHBARD-WORLD WAR I AS FULFILLMENT 95 creative use of leisure time."39 The social work profession pronounced the program an enormous success. The influential Survey magazine summed up the result as "the most stupendous piece of social work in modem times."40 Social workers were also exultant about prohibition. In 1917, the National Con- ference of Charities and Corrections (which changed its name around the same time to the National Conference of Social Work) was emboldened to drop whatever value-free pose it might have had and come out squarely for prohibition. On returning from Russia in 1917, Edward T. Devine of the Charity Organization Society of New York exclaimed that "the social revolution which followed the prohibition of vodka was more profoundly important . . . than the political revolution which abolished autocracy." And Robert A. Woods of Boston, the Grand Old Man of the settlement house movement and a veteran advocate of prohibition, predicted in 1919 that the Eighteenth Amendment, "one of the greatest and best events in history," would reduce poverty, wipe out prostitution and crime, and liberate "vast suppressed human potentialities."" Woods, president of the National Conference of Social Work during 1917-18, had long denounced alcohol as "an abominable evil." A postmillennial pietist, he believed in "Christian statesmanship" that would, in a "propaganda of the deed," Christianize the social order in a corporate, communal route to the glorification of God. Liemany pietists, Woods cared not for creeds or dogmas but only for advancing Christianity in a communal way; though an active Episcopalian, his "parish" was the community at large. In his settlement work, Woods had long favored the isolation or segregation of the "unfit," in particular "the tramp, the drunkard, the pauper, the imbecile," with the settlement house as the nucleus of this reform. Woods was particularly eager to isolate and punish the drunkard and the tramp. "Inveterate drunkards" were to receive increasing levels of "punishment," with ever lengthier jail terms. The "tramp evil" was to be gotten rid of by rounding up and jailing vagrants, who would be placed in tramp workhouses and put to forced labor. For Woods the world war was a momentous event. It had advanced the process of "Americanization,"a "great humanizing process through which all loyalties, all beliefs must be wrought together in a better o~der.'"~The war had wonder- fully released the energies of the American people. Now, however, it was important to carry the wartime momentum into the postwar world. Lauding the war collectivist society during the spring of 1918, Robert Woods asked the crucial question, "Why should it not always be so? Why not continue in the years of peace this close, vast, wholesome organism of service, of fellowship, of constructive creative power?"''

V. The New Republic Collectivists The New Republic magazine, founded in 1914 as the leadimg intellectual organ of progressivism, was a living embodiment of the burgeoning alliance between 96 THE JOURNAL OF LIBERTARIAN STUDIES Winter big business interests, in particular the House of Morgan, and the growing legion of collectivist intellectuals. Founder and publisher of the New Republic was Willard W. Straight, partner of 1. P. Morgan & Co., and its fmancier was Straight's wife, the heiress Dorothy Wbitney. Major editor of the influential new weekly was the veteran collectivist and theoretician of Teddy Roosevelt's New Nationalism, Herbert David Croly. Croly's two coeditors were Walter Edward Weyl, another theoretician of the New Nationalism, and the young, ambitious former official of the Intercollegiate Socialist Society, the future pundit Walter Lippmam. As Woodrow Wilson began to take America into World War I, the New Republic, though originally Rooseveltian, became an enthusiastic supporter of the war, and a virtual spokesman for the Wilson war effort, the wartime collectivist economy, and the new society molded by the war. On the higher levels of ratiocination, unquestionably the leading progressive intellectual, before, during, and after World War I, was the champion of pragmatism, Professor John Dewey of Columbia University. Dewey wrote frequently for the New Republic in this period and was clearly its leading theoretician. A Yankee born in 1859, Dewey was, as Mencken put it, "of indestructible Vermont stock and a man of the highest bearable sobriety." John Dewey was the son of a small town Vermont grocer.44Although he was a pragmatist and a secular humanist most of his Life, it is not as well known that Dewey, in the years before 1900, was a postmillemial pietist, seeking the gradual development of a Christianized social order and Kingdom of God on earth via the expansion of science, community, and the State. During the 1890s, Dewey, as professor of philosophy at the University of Michigan, expounded his vision of postmillennial pietism in a series of lectures before the Students' Christian Association. Dewey argued that the growth of modem science now makes it possible for man to establish the biblical idea of the Kingdom of God on earth. Once humans had broken free of the restraints of orthodox Christianity, a truly religious Kingdom of God could be realized in "the common incarnate Life, the purpose . . . animating all men and binding them together into one harmonious whole of sympathy ."&5 Religion would thus work in tandem with science and democracy, all of which would break down the barriers between men and establish the Kingdom. After 1900 it was easy for John Dewey, along with most other post- millennia1 intellectuals of the period, to shift gradually but decisively from postmillemial progressive Christian statism to progressive secular statism. The path, the expansion of statism and "social control" and planning, remained the same. And even though the Christian creed dropped out of the picture, the intellectuals and activists continued to possess the same evangelical zeal for the salvation of the world that their parents and they themselves had once possessed. The world would and must still be saved through progress and statism.46 A pacifist while in the midst of peace, John Dewey prepared himself to lead the parade for war as America drew nearer to armed intervention in the Euro- 1989 MURRAY N. ROTHBARD-WORLD WAR I AS FULFILLMENT 97 pean struggle. First, in January 1916 in the New Republic, Dewey attacked the "professional pacifist's" outright condemnation of war as a "sentimental phan- tasy ," a confusion of means and ends. Force, he declared, was simply "a means of getting results," and therefore wuld neither be lauded or condemned per se. Next, in April Dewey signed a pro-Allied manifesto, not only cheering for an Allied victory but also proclaiming that the Allies were "struggling to preserve the liberties of the world and the highest ideals of civilization." And though Dewey supported U.S. entry into the war so that Germany could be defeated, "a hard job, but one which had to be done," he was far more interested in the wonderful changes that the war would surely bring about in the domestic American polity. In particular, war offered a golden opportunity to bring about collectivist social control in the interest of social justice. As one historian put it, because war demanded paramount commitment to the national interest and necessitated an unprecedented degree of government planning and economic regulation in that interest, Dewey saw the prospect of permanent socialization, permanent replacement of private and possessive interest by public and social interest, both within and among nations." In an interview with the New York World a few months after U.S. entry into the war, Dewey exulted that "this war may easily be the beginning of the end of business." For out of the needs of the war, "we are beginning to produce for use, not for sale, and the capitalist is not a capitalist . . . [in the face ofl the war." Capitalist conditions of production and sale are now under government control, and "there is no reason to believe that the old principle will ever be resumed. . . . Private property had already lost its sanctity . . . industrial democracy is on the way."'o In short, intelligence is at last being used to tackle social problems, and this practice is destroying the old order and creating a new social order of "democratic integrated control." Labor is acquiring more power, science is at last being socially mobilized, and massive government controls are socializing industry. These developments, Dewey proclaii, were precisely what we are fighting for.49 Furthermore, John Dewey saw great possibilities opened by the war for the advent of worldwide collectivism. To Dewey, America's entrance into the war created a "plastic juncture" in the world, a world marked by a "world organization and the beginnings of a public control which crosses nationalistic boundaries and interests," and which would also "outlaw war."'O The editors of the New Republic took a position similar to Dewey's, except that they arrived at it even earlier. In his editorial in the magazine's fust issue in November 1914, Herbert Croly cheerily prophesied that the war would stimulate America's spirit of nationalism and therefore bring it closer to democracy. At first hesitant about the collectivist war economies in Europe, the New Republic soon began to cheer and urged the United States to follow the lead of the warring European nations and socialize its economy and expand the powers of the State. 98 THE JOURNAL OF LIBERTARIAN STUDIES Winter

As America prepared to enter the war, the New Republic, examining war collectivism in Europe, rejoiced that "on its administrative side socialism [had] won a victory that [was] superb and compelling." Tme, European war collectivism was a bit grim and autocratic, but never fear, America could use the selfsame means for "democratic" goals. The New Republic intellectuals also delighted in the "war spirit" in America, for that spirit meant "the substitution of national and social and organic forces for the more or less mechanical private forces operative in peace. . . ." The purposes of war and social reform might be a bit different, but, after all, "they are both purposes, and luckily for mankind a social organization which is efficient is as useful for the one as for the other."" Lucky indeed. As America prepared to enter the war, the New Republic eagerly looked forward to imminent collectivization, sure that it would bring "immense gains in national efficiency and happiness." After war was declared, the magazine urged that the war be used as "an aggressive tool of democracy." "Why should not the war serve," the magazine asked, "as a pretext to be used to foist innovations upon the country?" In that way, progressive intellectuals could lead the way in abolishing "the typical evils of the sprawling half-educated competitive capitalism." Convinced that the United States would attain socialism through war, Walter Lippmann, in a public address shortly after American entry, trumpeted his apocalyptic vision of the future: We who have gone to war to insure democracy in the world will have raised an aspiration here that will not end with the overthrow of the Prnssian autocracy. We shall turn with fresh interests to our own tyrannies-to our Colorado mines, our autocratic steel industries, sweatshops, and our slums. A force is loose in America. . . . Our own reactionaries will not assuage it. . . . We shall know how to deal with them.52 Walter Lippmann, indeed, had been the foremost hawk among the New Republic intellectuals. He had pushed Croly into backing Wilson and into supporting intervention, and then had collaborated with Colonel House in pushing Wilson into entering the war. Soon Lippmann, an enthusiast for conscription, had to confront the fact that he himself, only twenty-seven years old and in fine health, was eminently eligible for the draft. Somehow, however, Lippmann failed to unite theory and praxis. Young Felix Frankfurter, progressive Harvard Law Professor and a close associate of the New Republic editorial staff, had just been selected as a special assistant to Secretary of War Baker. Lippmann somehow felt that his own inestimable services could be better used planning the postwar world than battling in the trenches. And so he wrote to Frankfurter asking for a job in Baker's office. "What I want to do," he pleaded, "is to devote all my time to studying and speculating on the approaches to peace and the reaction from the peace. Do you think you can get me an exemption on such high-falutin 1989 MURRAY N. ROTHBARD-WORLD WAR I AS FULFILLMENT 99 grounds?" He then rushed to reassure Frankfurter that there was nothing "personal" in this request. After all, he explained, "the thiigs that need to be thought out, are so big that there must be no personal element mixed up with this." Frankfurter having paved the way, Lippmann wrote to Secretary Baker. He assured Baker that he was only applying for a job and draft exemption on the pleading of others and in stem submission to the national interest. As Lippmann put it in a remarkable demonstration of cant: I have consulted all the people whose advice I value and they urge me to apply for exemption. You can well understand that this is not a pleasant thing to do, and yet, after searching my soul as candidly as I know how, I am convinced that I can serve my bit much more effectively than as a private in the new armies. No doubt. As icing on the cake, Lippmam added an important bit of "disinformation." For, he piteously wrote to Baker, the fact is "that my father is dying and my mother is absolutely alone in the world. She does not know what his condition is, and I cannot tell anyone for fear it would become known." Apparently, no one else "knew" his father's condition either, including his father and the medical profession, for the elder Lippmam managed to peg along successfully for the next ten years.53 Secure in his draft exemption, Walter Lippmann hied off in high excitement to Washington, there to help run the war and, a few months later, to help direct Colonel House's secret conclave of historians and social scientists setting out to plan the shape of the future peace treaty and the postwar world. Let others fight and die in the trenches; Walter Lippmann had the satisfaction of knowing that his talents, at least, would be put to their best use by the newly emerging collectivist State. As the war went on, Croly and the other editors, having lost Lippmam to the great world beyond, cheered every new development of the massively controlled war economy. The nationalization of railroads and shipping, the priorities and allocation system, the total domination of all parts of the food industry achieved by Herbert Hoover and the Food Administration, the prounion policy, the high taxes, and the draft were all hailed by the New Republic as an expansion of democracy's power to plan for the general good. As the Armistice ushered in the postwar world, the New Republic looked back on the handiwork of the war and found it good: "We revolutionized our society." All that remained was to organize a new constitutional convention to complete the job of reconstructing America. 54 But the revolution had not been fully completed. Despite the objections of Ber- nard Baruch and other wartime planners, the govenunent decided not to make most of the war collectivist machinery permanent. From then on, the fondest ambition of Baruch and the others was to make the World War I system a perma- 100 THE JOURNAL OF LIBERTARIAN STUDIES Winter nent institution of American life. The most trenchant epitaph on the World War I polity was delivered by Rexford Guy Tugwell, the most frankly collectivist of the Brain Trusters of Franklin Roosevelt's New Deal. Looking hack on "America's wartime socialism" in 1927, Tugwell lamented that if only the war had lasted longer, that great "experiment" could have been completed: "We were on the verge of having an international industrial machine when peace broke," Tugwell mourned. "Only the Armistice prevented a great experiment in control of production, control of prices, and control of consumption."55 Tugwell need not have been troubled; there would soon be other emergencies, other wars. At the end of the war, Lippmann was to go on to become America's foremost journalistic pundit. Croly, having broken with the Wilson Administration on the harshness of the Versailles Treaty, was bereft to find theNew Republic no longer the spokesman for some great political leader. During the late 1920s he was to discover an exemplary national collectivist leader abroad-in Benito Mu~solini.~~ That Croly ended his years as an admirer of Mussolini comes as no surprise when we realize that from early childhood he had been steeped by a doting father in the authoritarian socialist doctrines of Auguste Comte's Positivism. These views were to mark Croly throughout hi life. Thus, Herbert's father, David, the founder of Positivism in the United States, advocated the establishment of vast powers of government over everyone's life. David Croly favored the growth of trusts and monopolies as a means both to that end and also to eliminate the evils of individual competition and "selfishness." Like his son, David Croly railed at the Jeffersonian "fear of government" in America, and looked to Hamilton as an example to counter that trend." And what of Professor Dewey, the doyen of the pacifist intellectuals-turned drumbeaters for war? In a little known period of his life, John Dewey spent the immediate postwar years, 1919-21, teaching at Peking University and travelling in the Far East. China was then in a period of turmoil over the clauses of the Versailles Treaty that transferred the rights of dominance in Shantung from Germany to Japan. Japan had been promised this reward by the British and French in secret treaties in return for entering the war against Germany. The Wilson Administration was tom between the two camps. On the one hand were those who wished to stand by the Allies' decision and who envisioned using Japan as a club against Bolshevik Russia in Asia. On the other were those who had already begun to sound the alarm about a Japanese menace and who were committed to Chi,often because of connections with the American Protestant missionaries who wished to defend and expand their extraterritorial powers of governance in China. The Wilson Administration, which had originally taken a proChinese stand, reversed itself in the spring of 1919 and endorsed the Versailles provisions. , Into this complex situation John Dewey plunged, seeing no complexity and of course considering it unthinkable for either him or the United States to stay out of the entire fray. Dewey leaped into total support of the Chinese nationalist posi- 1989 MURRAY N. ROTHBARD-WORLD WAR I AS FULFILLMENT LO1 tion, hailing the aggressive Young China movement and even endorsing the pro- missionary YMCA in China as "social workers." Dewey thundered that while "I didn't expect to be a jingo," that Japan must be called to account and that Japan is the great menace in Asia. Thus, scarcely had Dewey ceased being a champion of one terrible world war than he began to pave the way for an even greater one.J8

VI. Economics in Service of the State: The Empiricism of Richard T. Ely World War I was the apotheosis of the growing notion of intellectuals as servants of the State and junior partners in State rule. In the new fusion of intellectuals and State, each was of powerful aid to the other. Intellectuals could serve the State by apologizing for and supplying rationales for its deeds. Intellectuals were also needed to staff important positions as planners and controllers of the society and economy. The State could also serve intellectuals by restricting entry into, and thereby raising the income and the prestige of, the various occupations and professions. During World War I, historians were of particular importance in supplying the government with war propaganda, convincing the public of the unique evil of Germans throughout history and of the satanic designs of the Kaiser. Economists, particularly empirical economists and statisticians, were of great importance in the planning and control of the nation's wartime economy. Historians playing preeiminent roles in the war propaganda machine have been studied fairly extensively; economists and statisticians, playing a less blatant and allegedly "value-free" role, have received far less attention.39 Although it is an outworn generalization to say that nineteenth century economists were stalwart champions of laissez faire, it is still true that deductive economic theory proved to be a mighty bulwark against government intervention. For, basically, economic theory showed the harmony and order inherent in the free market, as well as the counterproductive distortions and economic shackles imposed by state intervention. In order for statism to dominate the economics profession, then, it was important to discredit deductive theory. One of the most important ways of doing so was to advance the notion that, to be "genuinely scientific," economics had to eschew generalization and deductive laws and simply engage in empirical inquiry into the facts of history and historical institutions, hoping that somehow laws would eventually arise from these detailed investi- gations. Thus the German Historical School, which managed to seize control of the economics discipline in Germany, fiercely proclaimed not only its devotion to statism and government control, but also its opposition to the "abstract" deductive laws of political economy. This was the first major group within the economics profession to champion what Ludwig von Mises was later to call "anti- economics." Gustav Schmoller, the leader of the Historical School, proudly 102 THE JOURNAL OF LIBERTARIAN STUDIES Winter

declared that his and his colleagues' major task at the University of Berlin was to form "the intellectual bodyguard of the House of Hohenzollern." During the 1880s and 1890s bright young graduate students in history and the social sciences went to Germany, the home of the Ph.D. degree, to obtain their doctorates. Almost to a man, they returned to the United States to teach in col- leges and in the newly created graduate schools, imbued with the excitement of the "new" economics and political science. It was a "new" social science that lauded the German and Bismarckian development of a powerful welfare-warfare State, a State seemingly above all social classes, that fused the nation into an integrated and allegedly harmonious whole. The new society and polity was to be run by a powerful central government, cartelizing, dictating, arbitrating, and controlling, thereby eliminating competitive laissez-faire capitalism on the one hand and the threat of proletarian socialism on the other. And at or near the head of the new dispensation was to be the new breed of intellectuals, technocrats, and planners, directing, staffing, propagandizing, and "selfessly" promoting the common good while ruling and lording over the rest of society. In short, doing well by doing good. To the new breed of progressive and statist intellectuals in America, this was a heady vision indeed. Richard T. Ely, virtually the founder of this new breed, was the leading progressive economist and also the teacher of most of the others. As an ardent postmillennialist pietist, Ely was convinced that he was serving God and Christ as well. Like so many pietists, Ely was born (in 1854) of solid Yankee and old Puritan stock, again in the midst of the fanatical Burned-Over District of western New York. Ely's father, Ezra, was an extreme Sabbatarian, preventing his family from playing games or reading books on Sunday, and so ardent a prohibitionist that, even though an impoverished, marginal farmer, he refused to grow barley, a crop uniquely suitable to his soil, because it would have been used to make that monstrously sinful product, beer.6Waving been graduated from Columbia College in 1876, Ely went to Germany and received his Ph.D. from Heidelberg in 1879. In several decades of teaching at Johns Hopkins and then at Wisconsin, the energetic and empire-building Ely became enormously influential in American thought and politics. At Johns Hopkins he turned out a gallery of influential students and statist disciples in all fields of the social sciences as well as economics. These disciples were headed by the prounion institutionalist economist John R. Commons, and included the social-control sociologists Edward Alsworth Ross and Albion W. Small; John H. Finlay, President of City College of New York; Dr. Albert Shaw, editor of the Review of Reviews and influential adviser and theoretician to Theodore Roosevelt; the municipal reformer Frederick C. Howe; and the historians Frederick Jackson Turner and J. Franklin Jameson. Newton D. Baker was trained by Ely at Hopkins, and Woodrow Wilson was also his student there, although there is no direct evidence of intellectual influence. 1989 MURRAY N. ROTHBARD-WORLD WAR I AS FULFILLMENT 103

In the mid-1880s Richard Ely founded the American Economic Association in a conscious attempt to commit the economics profession to statism as against the older laissez-faire economists grouped in the Political Economy Club. Ely continued as secretary-treasurer of the AEA for seven years, until his reformer allies decided to weaken the association's commitment to statism in order to induce the laissez-faire economists to join the organization. At that point. Ely, in high dudgeon, left the AEA. At Wisconsin in 1892, Ely formed a new School of Economics, Political Science, and History, surrounded himself with former students, and gave birth to the Wisconsin Idea which, with the help of John Commons, succeeded in passing a host of progressive measures for government regulation in Wisconsin. Ely and the others formed an unofficial but powerful braintrust for the progressive regime of Wisconsin Governor Robert M. La Follette, who got his start in Wisconsin politics as an advocate of prohibition. Though never a classroom student of Ely's, La Follette always referred to Ely as his teacher and as the molder of the Wisconsin Idea. And Theodore Roosevelt once declared that Ely "first introduced me to radicalism in economics and then made me sane in my radi~alism."~' Ely was also one of the most prominent postmillennialist intellectuals of the era. He fervently believed that the State is God's chosen instrument for reforming and Christianizing the social order so that eventually Jesus would arrive and put an end to history. The State, declared Ely, "is religious in its essence," and, furthermore, "God works through the State in carrying out His purposes more universally than through any other institution.'' The task of the church is to guide the State and utilize it in these needed reforms.62 An inveterate activist and organizer, Ely was prominent in the evangelical Chautauqua movement, and he founded there the "Christian Sociology" summer school, which infused the influential Chautauqua operation with the concepts and the personnel of the Social Gospel movement. Ely was a friend and close associate of Social Gospel leaders Revs. Washington Gladden, Walter Rauschenbusch, and Josiah Strong. With Strong and Commons, Ely organized the Institute of Chris- tian Soci~logy.~~Ely also founded and became the secretary of the Christian Social Union of the Episcopal Church, along with Christian Socialist W. D. P. Bliss. All of these activities were infused with poshnillennial statism. Thus, the Institute of Christian Sociology was pledged to present God's "kingdom as the complete ideal of human society to be realized on earth." Moreover, Ely viewed the state as the greatest redemptive force in society. . . . In Ely's eyes, government was the God-given instrument through which we had to work. Its preeminence as a divine instrument was based on the post- Reformation abolition of the division between the sacred and the secular and on the State's power to implement ethical solutions to public problems. The same identification of sacred and secular which took place among liberal clergy enabled Ely to both divinize the state and socialize Christianity: he thought of government as God's main instrument of redemption. . . ." IW THE JOURNAL OF LIBERTARIAN STUDIES Winter

When war came, Richard Ely was for some reason (perhaps because he was in his sixties) left out of the excitement of war work and economic planning in Washington. He bitterly regretted that "I have not had a more active part then I have had in this greatest war in the world's history."6S But Ely made up for his lack as best he could; virtually from the start of the European war, he whooped it up for militarism, war, the "discipline" of conscription, and the suppression of dissent and "disloyalty" at home. A lifelong militarist, Ely had tried to volunteer for war service in the Spanish-American War, had called for the suppression of the Philippine insurrection, and was particularly eager for conscription and for forced labor for "loafers" during World War I. By 1915 Ely was agitating for immediate compulsory military service, and the following year he joined the ardently prowar and heavily big business-influenced National Security League, where he called for the liberation of the German people from "aut~cracy."~~ In advocating conscripticn, Ely was neatly able to combine moral, economic, and prohibitionist arguments for the draft: "The moral effect of taking boys off street comers and out of saloons and drilling them is excellent, and the economic effects are likewise benefi~ial."~'Indeed, conscription for Ely served almost as a panacea for all ills. So enthusiastic was he about the World War I experience that Ely again prescribed his favorite cure-all to alleviate the 1929 depression. He proposed a permanent peacetime "industrial army" engaged in public works and manned by conscripting youth for strenuous physical labor. This conscription would instill into America's youth the essential "military ideals of hardihood and discipline," a discipline once provided by life on the farm but unavailable to the bulk of the populace now growing up in the effete cities. This small, standing conscript army could then speedily absorb the unemployed during depressions. Under the command of "an economic general staff," the industrial army would "go to work to relieve distress with all the vigor and resources of brain and brawn that we employed in the World War."68 Deprived of a position in Washington, Ely made the stamping out of "disloyalty" at home his major contribution to the war effort. He called for the total suspension of academic freedom for the duration. Any professor, he declared, who stated "opinions which hinder us in this awful struggle" should be "fired" if not indeed "shot." The particular focus of Ely's formidable energy was a zealous campaign to try to get his old ally in Wisconsin politics, Robert M. La Follette, expelled from the U.S. Senate for continuing to oppose America's participation in the war. Ely declared that his "blood boils" at La Follette's "treason" and attacks on war profiteering. Throwing himself into the battle, Ely founded and became president of the Madison chapter of the Wisconsin Loyalty Legion and mounted a campaign to expel La F~llette.~~The campaign was meant to mobilize the Wisconsin faculty and to support the ultrapatriotic and ultrahawkish activities of Theodore Roosevelt. Ely wrote to TR that "we must crush La Follettism." In his unremitting campaign against the Wisconsin Senator, Ely thundered that 1989 MURRAY N. R0THBARI)-WORLD WAR I AS FULFILLMENT 105

La Follette "has been of more help to the Kaiser than a quarter of a million troops." 70 "Empiricism" rampant. The faculty of the University of Wisconsin was stung by charges throughout the state and the country that its failure to denounce La Follette was proof that the university-long affiliated with La Follette in state politics-supported his disloyal antiwar policies. Prodded by Eiy, Commons, and others, the university's War Committee drew up and circulated a petition, signed by the university president, all the deans, and over 90 percent of the faculty, that provided one of the more striking examples in United States history of academic truckling to the State apparatus. None too subtly using the constitutional verbiage for treason, the petition protested "against those utterances and actions of Senator La Follette which have given aid and comfort to Germany and her allies in the present war; we deplore his failure loyally to support the government in the prosecution of the war."'O Behind the scenes, Ely tried his best to mobilize America's historians against La Follette, to demonstrate that he had given aid and comfort to the enemy. Ely was able to enlist the services of the National Board of Historical Service, the propaganda agency established by professional historians for the duration of the war, and of the government's own propaganda arm, the Committee on Public Information. Warning that the effort must remain secret, Ely mobilized historians under the aegis of these organizations to research German and Austrian newspapers and journals to try to build a record of La Follette's alleged influence, "indicating the encouragement he has given Germany." The historian E. Merton Coulter revealed the objective spirit animating these researches: "I understand it is to be an unbiased and candid account of the Senator's [La Follette's] course and its effect-but we all know it can lead hut to one conclusion-something little short of treason."" Professor Gmber well notes that this campaign to get La Follette was "a remarkable example of the uses of scholarship for espionage. It was a far cry from the disinterested search for truth for a group of professors to mobilize a secret research campaign to find ammunition to destroy the political career of a United States senator who did not share their view of the war."72 In any event, no evidence was turned up, the movement failed, and the Wisconsin professoriat began to move away in distrust from the Loyalty Legion.73 After the menace of the Kaiser had been extirpated, the Armistice found Pro- fessor Ely, along with his compatriots in the National Security League, ready to segue into the next round of patriotic repression. During Ely's anti-La Follette research campaign he had urged investigation of "the kind of influence which he [La Follette] has exerted against our country in Russia." Ely pointed out that modem "democracy" requires a "high degree of conformity" and that therefore the "most serious menace" of Bolshevism, which Ely depicted as "social disease germs," must be fought "with repressive measures." 106 THE JOURNAL OF LIBERTARIAN STUDIES Winter

By 1924, however, Richard T. Ely's career of repression was over, and what is more, in a rare instance of the workings of poetic justice, he was hoist with his own petard. In 1922 the much traduced Robert La Follette was reelected to the Senate and also swept the Progressives back into power in the state of Wis- consin. By 1924 the Progressives had gained control of the Board of Regents, and they moved to cut off the water of their former academic ally and empire- builder. Ely then felt it prudent to move out of Wisconsin together with his Institute, and while he lingered for some years at Northwestern, the heyday of Ely's fame and fortune was over.

VII. Economics in Service of the State: Government and Statistics Statistics is a vital, though much underplayed, requisite of modern government. Government could not even presume to control, regulate, or plan any portion of the economy without the service of its statistical bureaus and agencies. Deprive government of its statistics and it would be a blind and helpless giant, with no idea whatever of what to do or where to do it. It might be replied that business firms, too, need statistics in order to function. But business needs for statistics are far less in quantity and also different in quality. Business may need statistics in its own micro area of the economy, but only on its prices and costs; it has little need for broad collections of data or for sweeping, holistic aggregates. Business could perhaps rely on its own privately collected and unshared data. Furthermore, much entrepreneurial knowledge is qualitative, not enshrined in quantitative data, and of a particular time, area, and location. But government bureaucracy could do nothing if forced to be confined to qualitative data. Deprived of profit and loss tests for efficiency, or of the need to serve consumers efficiently, conscripting both capital and operating costs from taxpayers, and forced to abide by fixed, bureaucratic rules, modern government shorn of masses of statistics could do virtually nothing." Hence the enormous importance of World War I, not only in providing the power and the precedent for a collectivized economy, but also in greatly accel- erating the advent of statisticians and statistical agencies of government, many of which (and who) remained in government, ready for the next leap forward of power. Richard T. Ely, of course, championed the new empirical "look and see" approach, with the aim of fact-gathering to "mold the forces at work in society and to improve existing conditions."" More importantly, one of the leading authorities on the growth of government expenditure has linked it with statistics and empirical data: "Advance in economic science and statistics . . . strengthened belief in the possibilities of dealing with social problems by collective action. It made for increase in the statistical and other fact-finding activities of 1989 MURRAY N. ROTHBARD-WORLD WAR I AS FULFILLMENT 107 govenunent."76 As early as 1863, Samuel B. Ruggles, American delegate to the International Statistical Congress in Berlin, proclaimed that "statistics are the very eyes of the statesman, enabling hi to survey and scan with clear and com- prehensive vision the whole structure and economy of the body Conversely, this means that stripped of these means of vision, the statesman would no longer be able to meddle, control and plan. Moreover, government statistics are clearly needed for specific types of intervention. Government could not intervene to alleviate unemployment unless statistics of unemployment were collected-and so the impetus for such collection. Carroll D. Wright, one of the first Commissioners of Labor in the United States, was greatly influenced by the famous statistician and German Historical School member, Ernst Engel, head of the Royal Statistical Bureau of Prussia. Wright sought the collection of unemployment statistics for that reason, and in general, for "the amelioration of unfortunate industrial and social relations." Henry Carter Adams, a former student of Engel's, and, like Ely, a statist and progressive "new economist," established the Statistical Bureau of the Interstate Commerce Commission, believing that "ever increasing statistical activity by the government was essential-for the sake of controlling naturally monopolistic industries. . . ." And Professor Irving Fisher of Yale, eager for government to stabilize the price level, conceded that he wrote The Making of Index Numbers to solve the problem of the unreliability of index numbers. "Until this difficulty could be met, stabilization could scarcely be expected to become a reality." Carroll Wright was a Bostonian and a progressive reformer. Henry Carter Adams, the son of a New England pietist Congregationalist preacher on missionary duty in Iowa, studied for the ministry at his father's alma mater, Andover Theological Seminary, but soon abandoned this path. Adams devised the accounting system of the Statistical Bureau of the ICC. This system "served as a model for the regulation of public utilities here and throughout the world."7a Irving Fisher was the son of a Rhode Island Congregationalist pietist preacher, and his parents were both of old Yankee stock, his mother a strict Sabbatarian. As befitted what his son and biographer called his "crusading spirit," Fisher was an inveterate reformer, urging the imposition of numerous progressive measures including Esperanto, simplified spelling, and calendar reform. He was particularly enthusiastic about purging the world of "such iniquities of civilization as alcohol, tea, coffee, tobacco, refined sugar, and bleached white flour. . . ."79 During the 1920s Fisher was the leading prophet of that so-called New Era in economics and in society. He wrote three books during the 1920s praising the noble experiment of prohibition, and he lauded Governor Benjamin Strong and the Federal Reserve System for following his advice and expanding money and credit so as to keep the wholesale price level virtually constant. Because of the Fed's success in imposing Fisherine price stabilization, Fisher was so sure that there could be no depression that as late as 1930 he wrote a book claiming 108 THE JOURNAL OF LIBERTARIAN STUDIES Winter that there was and could be no stock crash and that stock prices would quickly rebound. Throughout the 1920s Fisher insisted that since wholesale prices remained constant, there was nothing amiss about the wild boom in stocks. Mean- while he put his theories into practice by heavily investing his heiress wife's considerable fortune in the stock market. After the crash he frittered away his sister-in-law's money when his wife's fortune was depleted, at the same time calling frantically on the federal government to inflate money and credit and to reinflate stock prices to their 1929 levels. Despite his dissipation of two family fortunes, Fisher managed to blame almost everyone except himself for the debacle.80 As we shall see, in view of the importance of Wesley Clair Mitchell in the burgeoning of government statistics in World War I, Mitchell's view on statistics are of particular importan~e.~'Mitchell, an institutionalist and student of Thor- stein Veblen, was one of the prime founders of modern statistical inquiry in economics and clearly aspired to lay the basis for "scientific" government planning. As Professor Dorfman, friend and student of Mitchell's, put it: "clearly the type of social invention most needed today is one that offers defmite techniques through which the social system can be controlled and operated to the optimum advantage of its members." (Quote from Mitchell.) To this end he constantly sought to extend, improve and refme the gathering and compilation of data. . . . Mitchell believed that business-cycle analysis . . . might indicate the means to the achievement of orderly social control of business a~tivity.'~ Or, as Mitchell's wife and collaborator stated in her memoirs: . . . he [Mitchell] envisaged the great contribution that government could make to the understandingof economic and social problems if the statistical data gathered independently by various Federal agencies were systematized and pianned so that the inte~relationshipsamong them could be studied. The idea of developing social statistics, nor merely as a record bur as a basis for planning, emerged early in his own w0rk.~3 Particularly important in the expansion of statistics in World War I was the growing insistence, by progressive intellectuals and corporate liberal businessmen alike, that democratic decision-making must be increasingly replaced by the administrative and technocratic. Democratic or legislative decisions were messy, "inefficient," and might lead to a significant curbing of statism, as had happened in the heyday of the Democratic party during the nineteenth century. But if decisions were largely administrative and technocratic, the burgeoning of state power could continue unchecked. The collapse of the laissez-faire creed of the Democrats in 1896 left a power vacuum in government that administrative and corporatist types were eager to fdl. Increasingly, then, such powerful corporatist big business groups as the National Civic Federation disseminated the idea that governmental decisions should be in the hands of the efficient technician, the allegedly value- 1989 MURRAY N. ROTHBARD-WORLD WAR I AS FULFILLMENT 109 free expert. In short, government, in virtually all of its aspects, should be "taken out of politics." And statistical research with its aura of empiricism, quantitative precision, and nonpolitical value-freedom, was in the forefront of such emphasis. In the municipalities, an increasingly powerful progressive reform movement shifted decisions from elections in neighborhood wards to citywide professional managers and school superintendants. As a corollary, political power was increasingly shifted from working class and ethnic German Lutheran and Catholic wards to upper-class pietist business groups." By the time World War I arrived in Europe, a coalition of progressive intellectuals and corporatist business men was ready to go national in sponsoring allegedly objective statistical research institutes and think tanks. Their views have been aptly summed up by David Eakins: The conclusion being drawn by these people by 1915 was that fact-fmding and policymaking had to be isolated from class sttuggle and freed from political pressure groups. The reforms that would lead to industrial peace and social order, these experts were coming to believe, could only be derived from data determined by objective fact-finders (such as themselves) and under the auspices of sober and respectable organizations (such as only they could construct). The capitalist system could be improved only by a single-minded reliance upon experts detached from the hurly-burly of democratic policymaking. The emphasis was upon eff~ciency-and democratic policymaking was inefficient. An approach to the making of national economic and social policy outside traditional democratic political processes was thus emerging before the United States fonnally entered World War I." Several corporatist businessmen and intellectuals moved at about the same time toward founding such statistical research institutes. In 190647, Jerome D. Greene, secretary of the Harvard University Corporation, helped found an elite Tuesday Evening Club at Harvard to explore important issues in economics and the social sciences. In 1910 Greene rose to an even more powerful post as general manager of the new Rockefeller Institute for Medical Research, and three years later Greene became secretary and CEO of the powerful philanthropic organization, the. Rockefeller Foundation. Greene immediately began to move toward establishing a Rockefeller-funded institute for economic research, and in March 1914 he called an exploratory group together in New York, chaired by his friend and mentor in economics, the first Dean of the Harvard Graduate School of Business, Edwin F. Gay. The developing idea was that Gay would become head of a new, "scientific" and "impartial" organization, The Institute of Economic Research, which would gather statistical facts, and that Wesley Mitchell would be its director.86 Opposing advisers to John D. Rockefeller, Jr., won out over Greene, however, and the Institute plan was s~uttled.~'Mitchell and Gay pressed on, with the lead now taken by Mitchell's long-time friend, chief statistician and vice-president of A.T. & T., Malcolm C. Rorty. Rorty lined up support for the idea from a number of progressive statisticians and businessmen, including Chicago publisher 110 THE JOURNAL OF LIBERTARIAN STUDIES Winter of business books and magazines, Arch W. Shaw; E. H. Goodwin of the U.S. Chamber of Commerce; Magnus Alexander, statistician and assistant to the president of General Electric, like A.T. & T. a Morgan-oriented concern; John R. Commons, economist and aide-de-camp to Richard T. Ely at Wisconsin; and Nahum I. Stone, statistician, former Marxist, a leader in the "scientific management" movement, and labor manager for the Hickey Freeman clothing company. This group was in the process of forming a "Committee on National income" when the United States entered the war, and they were forced to shelve their plans temp~rarily.~~After the war, however, the group set up the National Bureau of Economic Research, in 1920.89 While the National Bureau was not to take fmal shape until after the war, another organization, created on similar lines, successfully won Greene's and Rockefeller's support. In 1916 they were persuaded by Raymond B. Fosdick to found the Institute for Government Research (IGR).90 The IGR was slightly different in focus from the National Bureau group, as it grew directly out of municipal progressive reform and the political science profession. One of the important devices used by the municipal reformers was the private bureau of municipal research, which tried to seize decision-making from allegedly ''corrupt" democratic bodies on behalf of efficient, nonpartisan organizations headed by progressive technocrats and social scientists. In 1910 President William Howard Taft, intrigued with the potential for centralizing power in a chief executive inherent in the idea of the executive budget, appointed the "father of the budget idea," the political scientist Frederick D. Cleveland, as head of a Commission on Economy and Efficiency. Cleveland was the director of the New York Bureau of Municipal Research. The Cleveland Commission also included political scientist and municipal reformer Frank Goodnow, professor of public law at Columbia University, first president of the American Political Science Association and president of Johns Hopkins; and William Franklin Willoughby, former student of Ely, Assistant Director of the Bureau of Census, and later President of the American Association for Labor Legi~lation.~'The Cleveland Commission was delighted to tell President Taft precisely what he wanted to hear. The Commission recommended sweeping administrative changes that would provide a Bureau of Central Administrative Control to form a "consolidated information and statistical arm of the entire national government." And at the heart of the new Bureau would be the Budget Division, which was to develop, at the behest of the president, and then present "an annual program of business for the Federal Government to be financed by Congres~."~~ When Congress balked at the Cleveland Commission's recommendations, the disgruntled technocrats decided to establish an Institute for Government Research in Washington to battle for these and similar reforms. With funding secured from the Rockefeller Foundation, the IGR was chaired by Goodnow, with Willoughby as its dire~tor.~'Scan Robert S. Brookings assumed responsibility for the financing. 1989 MURRAY N. ROTHBARD-WORLD WAR I AS FULFLLMENT 111

When America entered the war, present and future NBER and IGR leaders were all over Washington, key figures and statisticians in the collectivized war economy. By far the most powerful of the growing number of economists and statisticians involved in World War I was Edwin F. Gay. Arch W. Shaw, an enthusiast for rigid wartime planning of economic resources, was made head of the new Commercial Economy Board by the Council for National Defense as soon as America entered the war.94 Shaw, who had taught at and served on the administrative board of Harvard Business School, staffed the Board with Harvard Business people; the secretary was Harvard economist Melvin T. Copeland, and other members included Dean Gay. The Board, which later became the powerful Conservation Division of the War Industries Board, focused on restricting competition in industry by eliminating the number and variety of products and by imposing compulsory uniformity, all in the name of "conservation" of resources to aid the war effort. For example, garment firms had complained loudly of severe competition because of the number and variety of styles, and so Gay urged the garment firms to form a trade association to work with the government in curbing the surfeit of competition. Gay also tried to organize the bakers so that they would not follow the usual custom of taking back stale and unsold bread from retail outlets. By the end of 1917, Gay was tired of using voluntary persuasion and was urging the government to use compulsory measures. Gay's major power came in early 1918 when the Shipping Board, which had officially nationalized all ocean shipping, determined to restrict drastically the use of ships for civilian trade and to use the bulk of shipping for transport of American troops to France. Appointed in early January 1918 as merely a "special expert" by the Shipping Board, Gay in a brief time became the key figure in redirecting shipping from civilian to military use. Soon Edwin Gay had become a member of the War Trade Board and head of its statistical department, which issued restrictive licenses for permitted imports; head of the statistical department of the Shipping Board; representative of the Shipping Board on the War Trade Board; head of the statistical committee of the Department of Labor; head of the Division of Planning and Statistics of the War Industries Board (WIB); and, above all, head of the new Central Bureau of Planning and Statistics. The Central Bureau was organized in the fall of 1918, when President Wilson asked WIB chairman Bernard Baruch to produce a monthly survey of all the government's war activities. This "conspectus" evolved into the Central Bureau, responsible directly to the President. The importance of the Bureau is noted by a recent historian: The new Bureau represented the "peak" statistical division of the mobilization, becoming its "seer and prophet" for the duration, coordinating over a thousand employees engaged in research and, as the agency responsible for giving the president a concise picture of the entire economy, becoming the closest approximation to a "central statistical commission." During the 112 THE JOURNAL OF LIBERTARIAN STUDIES Winter

latter stages of the war it set up a clearinghouse of statistical work, organized liaisons with the statistical staff of all the war boards, and centralized the data production process for the entire war bureaucracy. By the war's end, Wesley Mitchell recalled, "we were in a fair way to develop for the first time a systematic organization of federal statistic^."^^ Within a year, Edwin Gay had risen from a special expert to the unquestioned czar of a giant network of federal statistical agencies, with over a thousand researchers and statisticians working under his direct control. It is no wonder then that Gay, instead of being enthusiastic about the American victory he had worked so hard to secure, saw the Armistice as "almost . . . a personal blow" that plunged him "into the slough of despond." All of his empire of statistics and control had just been coming together and developing into a mighty machine when suddenly "came that wretched Armi~tice."~~Truly a tragedy of peace. Gay tried valiantly to keep the war machinery going, continually complaining because many of his aides were leaving and bitterly denouncing the "hungry pack" who, for some odd reason, were clamoring for an immediate end to all wartime controls, including those closest to his heart, foreign trade and shipping. But one by one, despite the best efforts of Baruch and many of the wartime planners, the WIB and other war agencies di~appeared.~'For a while, Gay pinned his hopes on his Central Bureau of Planning and Statistics (CBPS), which, in a fierce bout of bureaucratic infighting, he attempted to make the key economic and statistical group advising the American negotiators at the Versailles peace conference, thereby displacing the team of historians and social scientists assembled by Col- onel House in the Inquiry. Despite an ofticial victory, and an eight volume report of the CBPS delivered to Versailles by the head of CBPS European team, John Foster Dulles of the War Trade Board, the bureau had little influence over the final treaty.98 Peace having finally and irrevocably arrived, Edwin Gay, hacked by Mitchell, tried his best to have the CBPS kept as a permanent, peacetime organization. Gay argued that the agency, with himself of course remaining as its head, could provide continuing data to the League of Nations, and above all could serve as the president's own eyes and ears and mold the sort of executive budget envisioned by the old Taft Commission. CBPS staff member and Harvard economist Edmund E. Day contributed a memorandum outlining specific tasks for the bureau to aid in demobilization and reconstruction, as well as rationale for the bureau becoming a permanent part of government. One thing it could do was to make a "continuing canvass" of business conditions in the United States. As Gay put it to President Wilson, using a favorite organicist analogy, a permanent Board would serve "as a nervous system to the vast and complex organization of the govenunent, furnishing to the controlling brain [the President] the information necessary for directing the efficient operation of the various members."99 Although 1989 MURRAY N. ROTHBARD-WORLD WAR I AS FULFILLMENT 113 the President was "very cordial" to Gay's plan, Congress refused to agree, and on June 30, 1919 the Central Bureau of Planning and Statistics was finally terminated, along with the War Trade Board. Edwin Gay would now have to seek en~ploymentin, if not the private, at least the quasi-independent, sector. But Gay and Mitchell were not to be denied. Nor would the Brookings- Willoughby group. Their objective would be met more gradually and by slightly different means. Gay became editor of the New York Evening Post under the aegis of its new owner and Gay's friend, J. P. Morgan partner Thomas W. Lamont. Gay also helped to form and become first president of the National Bureau of Economic Research in 1920, with Wesley C. Mitchell as research director. The Institute for Government Research achieved its major objective, establishing a Budget Bureau in the Treasury Department in 1921, with the director of the IGR, William F. Wiloughby, helping to draft the bill that established the bureau.'w The IGR people soon expanded their role to include economics, establishing an Institute of Economics headed by Robert Brookings and Arthur T. Hadley of Yale, with economist Harold G. Moulton as director.I0' The Institute, funded by the Carnegie Corporation, would be later merged, along with the IGR, into the Brook- ings Institution. Edwin Gay also moved into the foreign policy field by becoming secretary-treasurer and head of the Research Committee of the new and extremely influential organization, the Council on Foreign Relations (CFR).lOZ And finally, in the field of government statistics, Gay and Mitchell found a more gradual but longer-range route to power via collaboration with Herbert Hoover, soon to be Secretary of Commerce. No sooner had Hoover assumed the post in early 1921 when he expanded the Advisory Committee on the Census to include Gay, Mitchell, and other economists and then launched the monthly Survey of Current Business. The Survey was designed to supplement the infor- mational activities of cooperating trade associations and, by supplying business information, aid these associations in Hoover's aim of carteliiing their respective industries. Secrecy in business operations is a crucial weapon of competition, and conversely, publicity and sharing of information is an important tool of cartels in policing their members. The Survey of Current Business made available the current production, sales, and inventory data supplied by cooperating industries and technical journals. Hoover also hoped that by building on these services, eventually "the statistical program could provide the knowledge and foresight necessary to combat panic or speculative conditions, prevent the develop ment of diseased industries, and guide decision-making so as to iron out rather than accentuate the business cycle."lo3 In promoting his cartelization doctrine, Hoover met resistance both from some businessmen who resisted prying ques- tionnaires and sharing competitive secrets and from the Justice Department. But, a formidable empire-builder, Herbert Hoover managed to grab statistical services from the Treasury Department and to establish a "waste elimination division" to organize businesses and trade associations to continue and expand the wartime 114 THE JOURNAL OF LIBERTARlAN STUDIES Winter

"conservation" program of compulsory uniformity and restriction of the number and variety of competitive products. As assistant secretary to head up this program, Hoover secured engineer and publicist Frederick Feiker, an associate of Arch Shaw's business publication empire. Hoover also found a top assistant and lifelong disciple in Brigadier General Julius Klein, a protege of Edwin Gay's, who bad headed the Latin American division of the Bureau of Foreign and Domestic Commerce. As the new head of the bureau, Klein organized seventeen new export commodity divisions-reminiscent of commodity sections during wartime collectivism-each with "experts" drawn from the respective industries and each organizing regular cooperation with parallel industrial advisory committees. And through it all Herbert Hoover made a series of well-publicized speeches during 1921, spelling out how a well-designed government trade program, as weU as a program in the domestic economy, could act both as a stimulant to recovery and as a permanent "stabilizer," while avoiding such unfortunate measures as abolishing tariffs or cutting wage rates. The best weapon, both in foreign and domestic trade, was to ''eliminate waste" by a "cooperative mobiiiza- tion" of government and industry.lo4 A month after the Armistice, the American Economic Association and the American Statistical Assmiation met jointly in Richmond, Virginia. The presidential addresses were delivered by men in the forefront of the exciting new world of government planning, aided by social science, that seemed to loom ahead. In his address to the American Statistical Association, Wesley Clair Mitchell proclaimed that the war had "led to the use of statistics, not only as a record of what had happened, but also as a vital factor in planning what should be done." As he had said in his final lecture in Columbii University the previous spring, the war had shown that when the community desires to attain a great goal "then within a short period far-reaching social changes can be achieved." "The need for scientific planning of social change," he added, "bas never been greater, the chance of making those changes in an intelligent fashion . . . has never been so good." The peace will bring new problems, he opined, but "it seems impossible" that the various countries will "attempt to solve them without utilizing the same sort of centralized directing now employed to kill their enemies abroad for the new purpose of reconstructing their own life at home. . . ." But the careful empiricist and statistician also provided a caveat. Broad social planning requires "a precise comprehension of social processes" and that can be provided only by the patient research of social science. As he had written to his wife eight years earlier, Mitchell stressed that what is needed for government intervention and planning is the application of the methods of physical science and industry, particularly precise quantitative research and measurement. In contrast to the quantitative physical sciences, Mitchell told the assembled statisticians, the social sciences are "immature, speculative, filled with controversy" and class struggle. But quantitative knowledge could replace such struggle and 1989 MURRAY N. ROTHBARD-WORLD WAR I AS FULFILLMENT 115

conflict by commonly accepted precise knowledge, "objective" knowledge "amenable to mathematical formulation" and "capable of forecasting group phenomena." A statistician, Mitchell opined, is "either right or wrong," and it is easy to demonstrate which. As a result of precise knowledge of facts, Mitchell envisioned, we can achieve "intelligent experimenting and detailed planning rather than . . . agitation and class struggle." To achieve these vital goals none other than economists and statisticians would provide the crucial element, for we would have to be "relying more and more on trained people to plan changes for us, to follow them up, to suggest alterations. "lo' In a similar vein, the assembled economists in 1918 were regaled with the visionary presidential address of Yale economist Irving Fisher. Fisher looked forward to an economic "world reconstruction" that would provide glorious opportunities for economists to satisfy their constructive impulses. A class sttuggle, Fisher noted, would surely be continuing over distribution of the nation's wealth. But by devising a mechanism of "readjustment," the nation's economists could occupy an enviable role as the independent and impartial arbiters of the class struggle, these disinterested social scientists makimg the crucial decisions for the public good. In shon, both Mitchell and Fisher were, subtly and perhaps half-consciously, advancing the case for a postwar world in which their own allegedly impartial and scientific professions could levitate above the narrow struggles of classes for the social product, and thus emerge as a commonly accepted, "objective" new ruling class, a twentieth-century version of the philosopher-kings. It might not be amiss to see how these social scientists, prominent in their own fields and spokesmen in different ways for the New Era of the 1920s. fared in their disquisitions and guidance for the society and the economy. Irving Fisher, as we have seen, wrote several works celebrating the alleged success of prohibition, and insisted even after 1929, that since the price level had been kept stable, there could be no depression or stock market crash. For his pan, Mitchell culminated a decade of snug alliance with Herbert Hoover by directing, along with Gay and the National Bureau, a massive and hastily written work on the American economy. Published in 1929 on the accession of Hoover to the presi- dency, with all the resources of scientific and quantitative economics and statistics brought to bear, there is not so much as a hint in Recent Economic Changes in the United States that there might be a crash and depression in the offing. The Recent Economic Changes study was originated and organized by Herbert Hoover, and it was Hoover who secured the financing from the Carnegie Cor- poration. The object was to celebrate the years of prosperity presumably produced by Secretary of Commerce Hoover's corporatist planning and to find out how the possibly future President Hoover could maintain that prosperity by absorbing its lessons and making them a permanent pan of the American political stmc- 116 THE JOURNAL OF LIBERTARIAN STUDIES Winter

ture. The volume duly declared that to maintain the current prosperity, economists, statisticians, engineers, and enlightened managers would have to work out "a technique of balance" to be installed in the economy. Recent Economic Changes, that monument to "scientific" and political folly, went through three quick printings and was widely publicized and warmly received on all sides.'06 Edward Eyre Hunt, Hoover's long time aide in organizing his planning activities, was so enthusiastic that he continued celebrating the hook and its paean to American prosperity throughout 1929 and 1930.'07 It is appropriate to end our section on government and statistics by noting an unsophisticated yet perceptive cry from the heart. In 1945 the Bureau of Labor Statistics approached Congress for yet another in a long line of increases in appropriations for government statistics. In the process of questioning Dr. A. Ford Hinrichs, head of the BLS, Representative Frank B. Keefe, a conservative Republican Congressman from Oshkosh, Wisconsin, put an eternal question that has not yet been fully and satisfactorily answered: There is no doubt but what it would be nice to have a whole lot of statistics. . . . I am just wondering whether we are not embarking on a program that is dangerous when we keep adding and addimg and adding to this thing. . . . We have been planning and getting statistics ever since 1932 to try to meet a situation that was domestic in character, but were never able to even meet that auestion. . . . Now we are involved in an international ouestion. . . . It looks to me as though we spend a tremendous amount of time with graphs and charts and statistics and nlannine.- What mv.. wo~le . are interested in is what is it all about? Where are we going, and where are you going?'08

Notes I

1. The title of this paper is barnwed from the pianeenng last chapter of James Weinstein's excellent work, lh Corpomte Ideal in the Liberal State, 1900-1918 (Boston: Beacon Press, 1968). The last chapter is entitled, "War as Fulfillment." 2. Robert Higgs, Crisis Mdhiarhan (New York: Oxford University Press, 1987), pp. 123-158. For my own acmunt of the wllectiv$ed war emnomy of World War I, see Murray N. Rothbard, "War Collectivism in Wodd War I", in R. Radosh and M. Rnhbard, eds., A New Histop ofhinrhnn: Essays on the Rise of the Amrican Corporate State (New York: Dunon, 1972), pp. 66-110. 3. F. A. Hayek, "The Intellechlals md Socialism," in Wiesin Philosophy, Politics MdEm~m'cs (Chicano:. - UniversiW of Chicaeo- Press. 1967).. DD.. . 178ff. 4. On the wnwription movement, see in particular Michael Pearlman, To Make Democracy Safe for Amn'co: Paricim MdPrmoredmss in the Pmnre~siveEm (Urbana: University of Olinois .F'~.=ss, 1984). See also John W. Chamben n, "~~~~ri~tingfor Colossus: The Adoption of the Draft in the United Stltes in World War I," Ph.D. diss., Columbia University. 1973; John Patrick Finnegan, Against the Specter of o Dmgon: the Campoign for Amricon Military Preparedness, 1914-1917Ouestpart, Conn. Greenwmd Press, 1974): and John Gany Clif- ford, 7he Citizen Soldiers: 7he PPlnttsburg Tmining Gunp Movement (Lexington: University Press of Kentucky, 1972). 1989 MURRAY N. ROTHBARD-WORLD WAR I AS FULFILLMENT I17

5. On ministers and the war, see Ray H. Abrams, Preachers Present Arms (New York: Rwnd Table Press, 1933). On the mobilization of science, see David F. Noble, Americo By Design: Science, Technology and the Rise of Copmre Cqitalism (New York: Oxford University Press, 1977). and Ronald C. Tobey, lhe Ame"con Ideology of Narionnl Science, 1919-1930 (Pirts- burgh: University of Piusburgh Press, 1971). 6. Cited in Gerald Edward Markowitz, "Pmgressive Imperialism: Consensus and Conflict in the Progressive Movement on Foreign Policy, 1898-1917," Ph.D. diss., University of Wisconsin, 1971, p. 375, an unfortunately neglected work on a highly impomnt topic. 7. Hence the famous imprecation hulled at the end of the I884 campaim that bmubt the Democrats lnlo the prcrtdcncy for the firs1 llmr slncc the C~vdWar. that the ~rmocray~cParry was the pany of "Rum. Roman~smand Rebell~an" In that one phrase, the Kcw York Pmteslanl muster uas able lo sum up the pul~t~calconcerns of thc plcurt movemenl 8 For an mtnxturt~onto the pmu ing l~tcra~rrof "ethnorel~gluur" wl~ttralhlnorv in the Unlted Statcs. uc Paul ~lc~~ncr:7hrC~SX of Culnrw (New ~oik:the Fret Press. 1950); and idrm. lhe lhrd Ekrtuml Ssxtem. 1853-1892 .(Chaal . Hill. N C.: Univcrriw of North Carolma Press. 1979). For the latest research on the formatian of the Repblican Party as a pietist ply, reflecting the interconnected had of pietist concerns-antislavery, prohibition, and antiCatholicism- sec William E. Gienapp, "Nativism and the Creation of a Republican Majority in the North before the Civil War," Journal of Anwicon History 72 (December 1985): 529-559. 9. German Lutherans were largely "high" or liturgical and confessional Lutherans who placed emphasis on the Church and its creed or sacraments rather than on a pietist, "born-again," emotional conversion experience. Scandinavian-Americans, on the other hand, were mainly vietist Lutherans. LO. Orthodox Augustinian Christianity, as fallowed by the liturgicals, is "a-millennialist", i.e., it believes fhaf fhe "millennium" is simply a metaphor for the emergence of the Chris& Church and that Jesus will refurn without human aid and at his own unspecified time. Modern "funda- mentalists," as rhey have beencalled since theearly years of the oumW century, an "premillen- nidists," i.e., they believe that Jesus will return to usher in a thousand years of the Kingdom of God on Earth, a time marked by various "tribulations" and by Armageddon, until history is finally ended. Premillennialists, or "millennarians," do not have the statist drive of the postmillennialists; instead, they tend to focus on vredictions and signs- of Armaaeddan- and of Icsus' advent. 11. James H. Timberlake, Pmhibition and the Pmgressive Movement. 1!9C%1920 (New York: Atheneum. 1970). pp. 7-8. 12. Quoted in Timberlake, Prohibition. p. 33. 13. The Pmgressive Party convention was a mighty fusion of all the major trends in the progressive movement: statist economists, techocrafs, social enginan, social workers, professional pietists, and partners of I. P. Morgan & Co. Social Gospel leaders Lyman AbboU, the Rev. R. Heber Newton and the Rev. Washinetan- Gladden. were leadine- Proeressive- PUN. deleeates. The Pm gressive Party pmclaimed itself as the "recmdescenee of the religious spirit in American political life." Theodore Raosevelt's ecceuance mhwas s'ificantllv- entitled "A Confession of Faith." and his words uere punclualcJ by "amms" and h) a continual smgmg of pietist Chnnian hymm by the arwmbled dclcgaler They. mw. "Onnard Chnstian Soldters." "The Banlc Hvmn of the Republic," and especially the revivalist hymn, "Follow, Fallow, We Will Follow Jesus," with the word "Roosevelt" replacing "Jesus" at every turn. The horrified New York limes summed up the uunuwal experience by calling the Pmgnssive grmping "a convention of fanatics." And it added, "It was not a convention at all. It was an assembla~eof religious enthusiasts. It was such a convention as Peter the Hermit held. It was a ~ethodistcamp following done over inm political terms." Cited in John Men Gable, lhe Bull Mwse Yeon: lheodore Rmsevelt and rhe Progressive Pmry (Pon Washington, N.Y.: Kmnikat Press, 1978). p. 75. 14. Timberlake, Prohibition. p. 24. 118 THE JOURNAL OF LIBERTARIAN STUDIES Winter

15. Quoted in Timberlake, Prohibition, p. 27. Iralics in the article. Or, as the Rev. Stelzle put it, in Why Pmhibition!, "There is no such thing as an absolute individual right Lo do any pmicular thing, or lo eat or drink any particular thing, or to enjoy the association of one's own family, or even lo live, if that thing is in conflict with the law of public necessity." Quoted in David E. Kyvig, Repealing Nmioml Prohibition (Chicago: Univenity of Chicago Press, 1979), p. 9. 16. Timberlake, Prohibition, pp. 37-38. 17. See David Burner, HerbenHmwr: A Public Life (New York: Alfred A. Knopf, 1979), p. 107. 18. James A. Burran, "Prohibition in New Mexico, 1917," New Mexico Hislorim1 Wnerly48 (Apnl 19731: 140-141. MR. L~ndqof roume rhoued no concern uhalcver fur the German. allled, and neutral wunvlcr of Europe king sublmed to slawation b) the British naval blwkadc. The only arcas of Seu Mcrico that rcrtslcJ the pruh~b~tluncrusade in the referendum in the November 1917 ela'l~onswere the heavily. Hapanic.Calholc. d~slnul,. 19. Timberlake, Prohibition. p. 179. 20. Quoted in Timberlake, Prohibition, pp. 180-181. 21. Quain Alan P. Grk,7he PuPm Erhic and WornS&age (New York: Oxford University Press, 1967), p. 78. 22. Grimes, Purimn Ethic. p. 116. 23. Ida Clyde Clarke, Americon Women and the World War (New York: D. Appleton and Co., 1918). p. 19. 24. Clarke, American Women, p. 27. 25. Ibid., p. 31. Actually Mn. Tarbell's muckraking activities were pretty much confmed to Rockefeller and Standard Oil. She was highly favorable lo business leaden in the Morgan ambit, as witness her laudatory biographies of Judge Elbert H. Gary, of U.S. Steel (1925) and Owen D. Young, of General Electric (1932). 26. Ibid., p. 277, pp. 275-279, p. 58. 27. Ibid., p. 183. 28. Ibid., p. 103. 29. Ibid., pp. 104-105. 30. bid., p. 101. 3 1. Ibid., p. 129. Marzaret. Dreier Robins and her husband Raymond were virmallv.. a Damdiematic - progressive couple. Raymond was a Florida-born wanderer and successful gold prospecfor who underwent a mystical conversion experience in the Alaska wilds and became a pietist preacher. He moved to Chicago, where he became a leader in Chiigo settlement house work and municipal reform. Margaret Dreier and her sister Mary were daughters of a wealthy and socially prominent New York family who worked for and fmanced the emergent National Women's Trade Union League. Margaret married Raymond Robins in 1905 and moved 0 Chicago, wan teaming longtime president of the league. in Chicago, the Robinses led and organized progressive political causes for over two decades, becomina-. to~leaders of theProaressive- Party from 1912 Lo 1916. During the Mar. Raymond Roban\ engaged ~n con\~dcrablcdlpbmat~r activ~ty as head of a Red Cross mtsrton lo RLSIUIOn the Robm,cr, m Allen F Davs. bmhwdfor. ReTom. rhe Slntol Senlements and the Progressive Movement, 1890-1914 (New York: Oxford University Press, 1967). 32. For more on women's war work and woman suffrage, see the standard history of the suffrage movement, Eleanor Flexner, Cenhrrv ofSlP~~nle: lhe Wornon's Rinhrs Movement in the Unired Sfder (New Yurk Atheneum, 1%8). 28~289Intcrerungl). The Nallonzl War Labor Board (NWLBl fdy. adopted . the wnrepl of "equal . ..pa) fur equal uurk" m uder to lmu the cmploy. . - men1 of women workers by imposing higher wsu on theemployer. The "only check," affirmed the NWLB, on excessive employment of women "is to make it no more profitable Lo employ women lhan men." Quoted Valerie I. Conner, "'The Mothers of the Race' in world W& I: The National War Labor Board and Women in industry," Lobor Histop 21 (Winter 1979-80): 34. I989 MURRAY N. ROTHBARD-WORLD WAR I AS FULFILLMENT 119

33. See Raymond B. Fosdick, Chronicle of o Generorion: An Autobiography (New York: Harper & Bms., 1958). p. 133. Also see Peter Collier and David Horowitz, Ihe Rockefellers: An American Oymry (New York: New American Library, 1976). pp. 103-105. Fosdick was patticularly appalled that American pamlmen on street duty actually smoked cigars! Fosdick, Chronicle, p. 135. 34 The American Swal Hygrenc Assocralion, wilh ilr ~nflucnlialjournal Sor#al Hygtene, war thr mqo1 organim~~onin what uas known as the "punly cluude " The a>\u.lallon *as launched when lhc New Yurk ph)sr~anDr Pnncc A. Murruw, mspscd b) Ule agtlation agamv venereal d~wwand in favor of lhc runlmence urged by the Frmh syphdognpher. lean-Alid Fourn~er. formed in 1905 rhc American Sotlet) for Saniw and Moral Prnphylar~s(ASSMP) Soon. the term, proposed b) lhc Ch~iagubrwr'h of ASSMP. "wial hygbene" and "sex hyganc." became uldel) uwJ for lhcrr medical and sclcnlific patina, and in 1910 ASSMP changed iu mle to the Amcncan Fuler~l~onfor Sex Hygicnc (AFSH). Flnall), in lalc 1913. AFSH. an urglntatlnn of ph)ricidn\. comb~neduilh the Nat~onalVlgilancc Asuclalldn (formerly lhe Amerlan Purq Alliance). a gmup of clergymen and ,nclal uurken, w form ihc all.crnbmcing Amen;sn Sor.tal Hygicnc Aswc~al~on(ASHA,. ln th~sur.d hb~lene.. movement, the moral and medical ucnl hand m hmd. Thus Dr Mormw welcomed the new knowledge about venereal disease because it demonstrated that "punishment for sexual sin" no longer had Lo be "reserved for the hereafter." Thc firs preudea or ASHA was lhe prer~dcaof Hanard Unlrer5~t).Charles W Ellot In h~raddress lo the fin1 mcelmg. Elrol made clear that total abslmence from alcohol, a,baccu. and even spices was pan and parcel of the antiprostitution and purity crusade. On physicians, the purity crusade, and the formation of ASHA, see Ronald Hamowy, "~edicineand the ~knitionof Sin: 'Self-Abuse' in 1% Century America," Zhe Journal of tibenorion Sfdies I (Summer 1972): 247-259; lames Wunsch, "Prostitution and Public Policy: From Regulation to Suppression, 1858-1920," Ph.D. diss., University of Chicago, 1976; and Roland R. Wagner, "Vittue Against Vice: A Shidy of Mod Reformers and Pro- stitution in the Progressive Era," Ph.D. diss., University of Wisconsin, 1971. On Momw, also see John C. Burnham, "The Progressive Era Revolution in American Attitudes Toward Sex," Jouml ofAmerican Hisrory 59 (March 1973): 899; and Paul Boyer, Urban Mosses and Moral Order in America, 1820-1920 (Cambridge: Harvard University Press, l978), p. 201. Also see Bumham, "Medical Specialists and Movements Toward Social Conml in the Pro- gressive Era: Three Examples," in I. Israel, ed., Building rhe Orgoflizan'oM/ Sociefy: Essays in Associario~/Anivifies in Modem America (New York: Free Press. 1972). pp. 24-26. 35. In Daniel R. Beaver, NmnD. &*erandfheAmerican War Effon 1917-1919 (LinwIn, Nebr.: University of Nebraska Press, 1966). p. 222. Also see ibid., pp. 221-224; and C. H. Cramer, Newton D. Baker: A. Biography (Cleveland: World Publishing Co., l%l), pp. 99-102. 36. Fosdick, Chronicle, pp. 145-147. While prostitution was indeed banned in Storyville &I 1917. Storyville, wnmry to legend, never "closed", rhe saloons and dance balls remained open. and wnuary to orthodox accounts, jazz was never really shut down in Storyville or New Orleans, and it was therefore never forced up river. For a revisionist view of the impact of the closure uf Storyrrllcon lhc hr,tog ofjzz, scc Tom Wll,GorgcLe~m A JemmfromNew OIIPMS (Bcrkcle) Unl\entt) of Caltfarnta Pms. 1977). pp 67,and Al Row. Stom-dlt. NPBOrltom (~ont~oiery,~la.:~niversity of ~labamapress: 1974). Also, on later Storyville, see Boyer, Urbon Masses, p. 218. 37. See Hamowy, "Crimination of Sin," p. 226 n. The quote from Clemenceau is in Fosdick, Chronicle, p. 171. Newton Baker's loyal biographer declared that Clemenceau, in this response, showed "his animal nroelivities as the 'Tiner- of France'". Cnuner. Newon Baker. D. 101. 38. Clarke, Amedcan Women, pp. 90, 87.93. In some cases, organized women took the offensive to help stamD aB vice and liquor in their wmmunily. Thus in Texas in I917 the Texas Women's ~nti-vice&mminee led in;he creation of a "white Zane" around all the military bases. By 120 THE JOURNAL OF LIBERTARIAN STUDIES Winter

autumn the Committee expanded into the Texas Social Hygiene Association to cwniinate the work of eradicating prostitution and saloons. San Antonio proved to be its biggest problem. Lewis L. Gould, Progressives and Prohibitionists: Terar Democrats in the Wilson Era (Austin: University of Texas Press, 1973), p. 227. 39. Davis, S~carheadsforRefom. p. 225. 40. Fodak, Chn,ndrlr, p. 144. Aficr the War. Raymond Fasd~;k went on to fame and fununc, fin! as Under Serreur, General of Ule Ledcur- of Sation\. and then for the resl of hs lrfe as il member of the small lnncr CI~ICrlo~ to John D. Rockefeller. Ir. In that capacny. Fodirk rase to hecome head adf the Rockefcllcr Fuundatiun and Rwkefcllcr's official biographer. Mcan- while, Fosdick's bmther, Rev. Harry Emem, bmme Rockefeller's hand-picked&ish minister, first at Park Avenue Presbyterian Church and then at the new interdenominational Riverside Church, built with Rockefeller funds. Harry Emerson Fosdick was Rockefeller's principal aide in batdine.- wirhin the Protestant Church, in favor of wdennial, sratist. "liberal" Profestantism and against Ihe rising tlde of premillennial Christianity, known as "fundamenfalist" since the years before World War I. See Collier and Horowitz, 7he Rockefellers pp. 140-142, 151-153. 41. Davis, Spearheads for Reform. p. 226; Tlrnbedake, Prohibition, p. 66; Boyer, Urban Masses, p. 156. 42. Eleanor H. Woods, Roben A. Woods; Chompion of Democracy (Boston: Houghton Mifflin, 1929), p. 316. Also see ibid., pp. 201-202, 250ff.. 268ff. 43. Davis, Spearheads for Reform, p. 227. 44. H. L. Mencken. "Pmfessor Veblen." in A Memken Chrestomarhv (New York: Alfred A. Knmf, 1949), p. 267. 45. Ouoted in the imDatant article bv Jean B. Ouandt. "Relieion- and Social Thoueht: The Seculariza- #tonof Pmm~llcnn~al~~m.'Amenrun Quntrl, 25 i0nubc.r 19731 404 Alw we luhn Bleuetl, S J . "Demc,crao as Rclreton- Un~t)~n Human Relallonr." ~n Blcuen. ed , JuhnDeno. Hlr Thought und influence (New York: Fordham University Press, 1960), pp. 33-58; and John Dewey: me Early Work,1882-1989, eds., I. Boydstan et al., (Carbondale: Southern nlinols University Press, 1x9-71), vols. 2 and 3. 46. On the -eeneral secularization of wstmillennial pietism after IWO, see Quandt, "Religion and Social Thought," pp. 3W409; and James H. Mwrhead, "The Erosion of Postmillennialism in American Religious Thought, 1865-l925", Church History 53 (March 1984): 61-77. 47. Cam1 S. Gruber, Mon ondMine~:World Wor Iundrhe Uses of the Higher Leamhg in Amerim (Baton Rouee:" Louisiana State Univeniw Press, 1975).. .D. 92. 48. Quoted in Gmber, Mars andMinerva, pp. 92-93. Also see William E. Leucbtenburg, "The New Deal and rhe Analogue of War," in J. Braeman, R. Bremner, and E. Walters, eds., hge and Continuity in Twentieth-Century America (New Yark: Hapr & Row, l966), p. 89. Far similar reasons. Thorstein Veblen... ~roohet . of the alleged- dichotomy. of .production for profit vs. production for use, championed the war and began to come out openly for socialism in an anicle in the New Reoublic in 1918. later reprinted in his me Vested Interests and the State ofthe industrdd Ans (19191 See Charles Hwschfeld, "Nstlonalisl Progre,s~v~smand World War I." Mnd-~rnncu45 (July. . 1%3), p. 150. Also see Dmid Rieiman. 'Ihooretn Veblen: A Critical Inre~retation(New York: Charles Scribner's Sons, 1960). pp. 30-31. 49. Hirschfeld, "Nationalist Progressivism," p. 150. 50. Gmber, Mars and Minervn, p. 92. 51. Hirschfeld. "Nationalist Pmeressivism,- " p. 142. It is intriauin~- - that for the New Republic intellecDlals, achlly existent private individuals are dismissed as "mechanical," whereas nonex- istent entities such as "national and social" forces are hailed as being "organic." 52. Quoted in Hirschfeld, "Nationalist Pmgressivism," p. 147. A minority of pmwar Socialists broke off from the antiwar Socialist Party to form the Social Democratic League, and to join a prowar front organized and financed by the Wilson administration, the American Alliance 1989 MURRAY N. ROTHBARD-WORLD WAR I AS FULFILLMENT I21

for Labor and Democracy. The umwar socialists welcomed the war as urovidina- "startlina- progress in collectivism," and opined that after the war, the existent state socialism wuld be advanced toward "demoeratic collectivism."The pmwar ylcialists included John Spargo, Algie Simons, W. 1. Ghent, Robert R. LaMonte, Charles Edward Russell. 1. G. Phelps Stokes, Upton Sinclair. and William English- Walline.- Wallina- so succumbed to war fever that he denounced the Socialist Party as a wnscious tool of the Kaiser and advocated the suppression of freedom of speech for pacifists and for antiwar socialists. See Hirschfeld, "Nationalist Progressivism," p. 143. On Walling, see James Gilbert, Designing rhe Industrial Stme: The lnrellecrual Pursuir of Collecrivism in Amrica, 1880-1940(Chicago: Quadrangle Books, 1972), pp. 232-233. On the American Alliance for Labor and Democracy and its mle in the war effon, see Ronald Radmh, Amerimn Lobor and Unired SrmForeign Policy (New York: Ramlorn House, l%9), pp. 58-71. 53. In fact, Jacob Lippmann was to wntract cancer in 1925 and die two years later. Moreover, Liipmann, before and after Jacob's death, was supremely indifferent to his father. Ronald Steel, Wolrer Lippmann and the American Century (New York: Random House, l981), p. 5, pp. 116-1 17. On Walter Lippmann's enthusiasm for conscription, at least for others, see Beaver, Newton Baker, pp. 26-27. 54. Hirschfeld, "Nationalist Progressivism," pp. 148-150. On theNew Republic and the war, and particularly on John Dewey, also see Christopher Lasch, 7he New Rodicnlism in Amrico, 1889-1963: The Infellec~losASocial Type (New York: Vintage Books, 1%5), pp. 181-224, especially pp. 202-204. On the three New Republic editors, see Charles Forcey, 7he Cmrmdr oflibemlism: Cmly. Wql, Lippmm and the Progressive Em. 1W1925(New York: Oxford University Press, 1961). Also see David W. Noble, "The New Republic and the Idea of Pro- gress, 1914-1920," Mississippi Volley Historical Review. 38 (December 1951): 387-402. In a book titled The Endoffhe War (1918). New Republic editor Walter Weyl assured his readers that "the new economic solidariw once -.eained. can never aeain- be surrendered." Cited in Leuchtenburg. "New Deal," p. 90. 55. Rexford GUYTuwcll. "America's War-Time Socialism" 7he Nation (1927)...... DD. 364-365. Quoted in Leuchtenburg, "The New Deal." pp. 90-91. 56. In Januarv 1927 Crolv wrote aNewRe~ubliceditorial." An Awlom. -. for Fascism." endorsine an accompanying article. "Fascism for the Italians," wrimn by the distinguished philosopher Horace M. Kallen, a disciple of John Dewey and an exponent of progressive pragmatism. Kallen praised Mussolini for his pragmatic approach, and in particular for the elon viral that Mussolini had infused into Italian life. Tme, Professor Kallen conceded, fascism is coercive, but surely this is only a temporary expedient. Noting fascism's excellent achievement in economics, education, and administrative reform, Kallen added that "in this respect the Fascist revolution is not unlike the Communist revolution. Each is the application by force . . . of an idealogy to a cow dition. Each should have Ule freest omrorlunity once it has made a start. . . ." The accompanying New Republic editorial endorsed alli in's thesis and added that "alien critics should beware of outlawinz. a .lalitical experiment which aroused in a whole nation an increased moral energy and dignified its activities by subordinating them to a deeply felt common purpose." NewRepublic49 (January 12, 1927).. pp.. 207-213. Cited in John Patrick Dimins,.. "Mussolini's Italy: The View from America," Ph.D. diss., University of Southern California, 1%4, pp. 214-217. 57. Born in Ireland, David Croly bxame a distinguished journalist in New Yark City and rose to the editorship of the New York World. Cmly organized the fim Positivist Circle in the United States and financed an American speaking tour for the Comtian Henry Edgar. The Positivist Circle met at Cmly's home, and in 1871 David Croly published A Posirivisr Primer. When Herbert was bom in 1869, he was consecrated by his father to the Goddess Humanity, the symbol of Comte's Religion of Humanity. See the illuminating recent biography of Herbert by David W. Levy, Herben Croly of rhe New Republic (Princeton: Princeton University Press, 1985). 122 THE JOURNAL OF LIBERTARIAN STUDIES Winter

58. See Jerry Israel, Progressivism and the Open Dmr: America ond Ch,1905-1921 (Pinsburgh: University of Pittsburgh Press, 1971). 59. For a refreshingly acidulous portrayal of the actions of the historians in World War I, see C. Hartley Grattan, "The Historians Cut Loose," American Mercup, August 1927, reprinted in Harry Elmer Barnes, In Quest of Truth ond Jutice, 2nd ed. (Colorado Springs: Ralph Myles Publisher, 1972), pp. 142-164. A more extended account is George T. Blakey, Histo~nron the Homefont: American Propagandists for the Great War (Lexington: University Press of Kentucky, 1970). Gruber, Mars ond Minervn, deals with academia and social scientisu, but concentrates an historians. lama R. Mock and Cedric Lvson, Wonlr thor Won he War (Princetan University Press, 1939). presents the story of the "Creel Committee," the Committee on Public Information, the official .pmpazanda .. ministry during the war. 60. See the useful biography of Ely, Benjamin G. ~ader,The Acodernic Mind ond Reform: The Influence of Richard T. Ely in American Life (Lexington: University Press of Kentucky, 1966). 61. Sidney Fie, Laissez F& mtd the Cewml-Welfare %ole: A Srudy of Conpin in Amerim %ugh 1865-1901 (Ann Arbor: Univeniw of Michigan- Press. 1956).. ..DD. 239-240. 62. Fine, hisser Faire, pp. 180-181. 63. John Rogers. Commons was of old Yankee stock, descendant of John Roeers." Puritan martvr in England, and born in the Yan!cee area of the Western Reserve in Ohio and reared in Indiana. His Vermont mother was a graduate of the hotbed of pietism, Oberlin College, and she sent John to Oberlin in the hopes that he would become a minister. While in college, Commons and his mother launched a prohibitionist publication at the request of the Anti-Saloon League. After graduation. Commons went to Johns Hapkins to study under Ely, but flunked out of graduate schwl. See John R. Commons, Mvself(Madison.. .. Wisc.: Universitv of Wisconsin Press.. 1964).. Also see Joseph Dorfman, 7he Economic Mind in American ~ivi&tion (New York: Viking, 1949). vol. 3, 276-277; Mary 0. Fumer, Advocacy and Objectivity: A Crisis in the Profes- sio~lizationofAmerican Social Science, 1865-1905 (Lexington: University Press of Kentucky, 197% .pp.. 198-204. 64. Quandt, "Religion and Social Thought," pp. 40243. Ely did mt expect the milledKingdom to be far off. He believed that it was the task of the universities and of the social sciences "to teach the complexities of the Christian duty of brotherhood in order to arrive at rhe New Jerusalem "which we are all eagerly. . awaiting.. " Thechurch's mission was ta attack every evil institution, "until the earth becomes a new earth, and all its cities, cities of God." 65. Gmber, Mors rind Minema, p. 114. 66 See Racier. ArodemtcMtnd, pp 181-191. On top hag bustness affilin~on$of Sal~nndSecunly hpcladen. c$peclall) J P Morgan mJ others in the Morgan amb~l,wu C.Hartley (innan. Wh, We Fought (New Ynrk Vanguard Prcs$, 19291 pp 111-118, and Koben D Wurd, The

Onelnand Activ~uc,of the Sauorwl Security. Iwse.- 1Y14-1919."Mt1~1~11)~t.. Vdl~~tli(t~~nc~o1 view, 47 (June 1960): 51-65. 67. The Chamber of Commerce of the United Stltes spelled out the long-run economic benefit of conscription, that for America's youth it would "substihtte a period of helpful discipline for a period of demoralizing freedom from restraint." John Patrick Finnegan, Against the Specter ofn Dmgon: The Campaign forlignforricm Militmy Preparedness, 1914-1917(Westpan, Conn.: Greenwood Press, 1974). p. 110. On the bmad and enthusiastic support given to the drali by the Chamber of Commerce, see Chase C. Mmney and Manha E. Layman, "Some Phases of the Compulsory Military Training Movement, 1914-1920," Mississippi Volley HinoricalRevlew 38 (March 1952): MO. 68. Richard T. Ely, Hard Zimimes: The Way In ond the Way Out (1931), cited in Joseph Dorfman, 7he Economic Mind in American Civilirorion (New Yark: Viking, 1949). vol. 5, p. 671; and in Leuchtenburg, "The New Deal," p. 94. 1989 MURRAY N. ROTHBARD-WORLD WAR I AS FULFILLMENT 123

69. Ely drew up a superpatriotic pledge for the Madison chapter of the Loyalty Legion, pledging its members to "starnu out dislovaltv.". . The .vledge - also exoressed unqualified suppon.. for the Espionage An and vowed to "work against La Follettism in all its anti-war forms." Rader, Acodem'c Mind, pp. 183ff. 70. Gruber, Mom and Minema, p. 207. 71. Ibid... P..D . 208. 20811. 72. Ibid., pp. 209-210. Ln his autobiography, written in 1938, Richard Ely rewrote history to aver up. his ignominious- mle in the. get -La Follene campaign.. - He acknowledged- signing.- the faculty petition, but then had the temerity to claim that he "was not one of the ring-leaders, as La Follette thought, in circulating this petition. . . ." There is no mention of his secret research campaign against La Follette. 73. For more an the anti-La Follelte campaign, see H. C. Peterson and Gilbert C. Fite, Opponents uf War 1917-1918(hlJdmn ~mveityk~luomin ksr. 1957). pp. 68-72; Paul L. MU*). World Wur Iundrhe OnainofCialLjbcnier. . in rhc Untr~dSli~res(New York: W. W. Nunon. 1979), p. 120; and Belle Case La Follette and Fola La Follette, Roben M. LaFolletle (New Yark: Macmillan, 1953). volume 2. 74. Thus, T. W. Hutchison, from a very different perspective, notes the convast between Carl Menger's stress on the beneficent, unplanned phenomena of society, such as the free market, and tk growth of "social self-wnsciousness" and government planning. Hutchison recognizes that a clucial component of Ulat social self-consciousness is govemment statistics. T. W. Hutchison, A Review of Economic Doctrines, 1870-1929 (Oxford: Clarendon Press, 1953). pp. 150-151. 427. 75. Fine, Loissez-Foire, p. 207. 76. Solomon Fabncant. 7hr Trend of Golrrnmenr Ao,,rty in thr Untrrd Srurrr jtnce 1YW (New Yark Nauonal Burrru of Ewnumlr Research. 1952). p. 143 Slm~larl).an vuthurlwl~veuurk on the growth of government in England puts it this way: "The accumulation of factual information ahtsocial wnditions and tix development of mmicsand the social ssienees increased the pressure for government intervention. . . . As stltistics improved and students of social conditions multiplied, the continued existence of such conditions was kept before the public. lncrw~ngkn,,uledge of then1 arousal lnflucnual circles and furnahed worhnp cla,s movements

" Mows Abmvru and ~ilhtacld weapons Vera F. Elwsberg. llw Gwnrh ofPublr~Employ- ~ ~ men1 in Greor ~ritoin(Princeton: National Bureau of ~conoicResearch, 1957), pp. 22-23, 30. Also see M. I. Cullen, 7he Stotislicol Movemnr in Early Victorinn Brimin: nlhe Founda- tions of Enlpiricnl Social Research (New York: Barnes & Noble, 1975). 77. See Joseph Doriman, "The Role of the German Historical School in American Economic Thuught." Ampricon t~on~,mirRev~~n,PoperrondPrureedinp45 (Ma) 1955). p. 18. Georgc Hildchrand remarked un the indurti\e rmphas~rof the GemnHtrlortcal Suhwl that "perhap, there ir. then. vrmc connwtton betuecn this kind of teaching and thu pupularit) ufr.mJe ideas of .ph,s~cal . planning . In more rwent tlmcs." Gmrgc . H Hildebrand. "lntemntonal Flou uf Economic Ideas-Discussion," ibid., p. 37. 78. Dorfman, "Role," p. 23. On Wright and Adams, see Joseph Doriman. 7he Econom'c Mind in American Civilirotion (New York: Viking Press, 1949), vol. 3, 164-174, 123; and Boyer, Urban Mosses, p. 163. Funhermore, the first professor of statistics in the United States, Roland P. Falkner, was a devofed shldent of Engel's and a vanslator of the works of Engel's assistant, August Meiuen. 79. Irving Norton Fisher, My Fatherlming Fisher (New York: Comet Press, 1956), pp. 146-147. Also for Fisher, see Irving Fisher, SlabilisedMoney (London: Allen & Unwin, 193% p. 383. 80. Fisher, My Fohter, pp. 264-267. On Fisher's role and influence during this period, see Murray N. Rothbard, Amrico S Great Depression, 4thed. (New York: Richardson & Snyder, 1983). 124 THE JOURNAL OF LIBERTARIAN STUDIES Wintel

Also see Joseph S. Davis, 7he Wor!A Between the Wars, 1919-39, An Eonomist'r View (Baltimore: Johns Hopkins University Press, 1975), p. 194; and Melchior Palyi, 7he Twilight of Gold, 1914.1936: My& and Realities (Chicago: Henry. Regnery,.. 1972), .pp. . 240, 249. 81. Wcrlc) C. Mltchcll was of old Yankee piellst stocl. HISgrandparent, were larmcr* ~n Maine and then in Western New York His father fallowed the path of man) Yankecc in migraung to a farm in northern Illinois. Mitchell attended the university of chicago, where he was skongG influenced by Veblen and John Dewey. Dorfman, Economic Mind, vol. 3, 456. 82. Dorfman, Economic Mind, vol. 4, 376, 361. 83. Emphasis added. Lucy Sprague Mitchell, Two Lives (New York: Simon and Schuster, 1953), p. 363. For more on this entire topic, see Murray N. Rothbard, "The Politics of Political Economists: Comment," Lhurnerly Journal of Economics 74 (November 1960): 659-6565, R4. See in particular lame, Welnste~n,lb Gwporutr 1ded in rhp DbemISturr. 19(WIY18(Boswn. Bearan Pres\. 1968);and Samuel P Hays, "The Polttlcs of Reform in .Uunrival tinvernmcnt in the Progressive Era;' Pacific ~onhwestQuanerly 59 (October 19611, 157-169. 85. David Eakins, "The Origins of Corporate Liberal Policy Research, 1916-1922: The Political- Economic Expen and the Decline of Public Debate," in Israel, ed., Building the Orgnnim- tiowl Society,. .p. 161. 86. Herben Heawn, Edwin F Goy, A Scholar in Anion (Cambridge: Harvard University Press, 1952). Edwin Gav was born in Detroit of old New Eneland- stock. His father had been born in Boston and went into his father-in-law's lumber business in Michigan. Gay's mother was the daughter of a wealthy preacher and lumberman. Gay entend the University of Michigan, was heavily influenced by the teaching of John Dewey, and then stayed in graduate school in Germany for over a dozen years, finally obtaining his Ph.D. in econmic history at the Univer- sity of Berlin. The major German lnfiuences on Gay were GusW Schmoller, head of the Hiswrical School, who emphasized that emnomics must be an "inductive science," and Adolf Wagner, also at the University of Berlin, who favored large-scale government intervention in the economy in behalf of Christian ethics. Back at Harvard. Gay was Ihe major single force, in collaboration with the Boston Chamber of Commerce, in pushing through a factory inspection act in Massachusem, and in early 1911 Gay became president of rhe Massachusetts branch of the American Association for Labor Legislation, an organization founded by Richard T. Ely and dedicated to agitating for government intervention in the area of labor unions, minimum wage rates, unemployment, public works, and welfare. 87. On the pulling and hauling among Rockefeller advisers on the Jnsti~te,see David M. Grossman, "American Foundations and the Suppon of Economic Research, 1913-29," Minervo 22 (Spring- Summer 1982): 62-72. 88. See Eakins, "Origins," pp. 166-167; Grossman, "American Foundations," pp. 76-78; Heaton, Edwin F. Gqv. On Stone, see Dob,Eco~m'c Mind, vol. 4,42,6041; and Samuel Haber, Eficiency and Up/@ Sdrnrific Mmgemenr in the Progressive Em 1SiL1920(Chicago: Univer- sity of Chicago Press, 19M), pp. 152, 165. During his Marxist period, Stone had translated Man's Poveny of Philosophy. 89. See Guy Alchon, lh Invisible Hand of Planning: Cnpitolism, Social Science, and the Srnte in the 19205 (Princeton: Princeton University Press, 1985), pp. 54ff. 90. Collier and Horowia, lhe RockefeNers, p. 140. 91. Eakins, "Origins," p. 168. Also see Furner, Advocacy end Objectivity, pp. 282-286. 92. Stephen Skowronek, BuiIdinp a New American Stare: lhe Emomion ofNorio~1Mministmtive Copacirier, 1877-1920 (Cambridge: Cambridge University Press, 1982), pp. 187-188. 93. Vice-chairman of the IGR was retired St. Louis merchant and lumberman and former president of Washington University of St. Louis, Roben S. Bmkings. Secretary of the IGR was James F. Cunis, formerly Assistant Secretary of the Treasury under Tali and now secretary and deputy governor of the New York Federal Reserve Ba*. Others on the board of the IGR were ex-President Tan; railroad executive Fnderick A. Delano, uncle of Franslin D. Rmsevelt and 1989 MURRAY N. ROTHBARD-WORLD WAR I AS FULFILLMENT 125

member of the Federal Reserve Board; Arthur T. Hadley, economist and president of Yale; Charles C. Van Hise, progressive president of the University of Wisconsin, and ally of Ely; reformer and influential young Harvard Law professor, Felix Frankfurter; Theodore N. Vail, chairman of A.T. & T.; progressive engineer and businessman. Herbert C. Hoover; and fmancier R. Fulton Cutting, an officer of the New York Bureau of Municipal Research. Ealrins, "Origins," pp. 168-169. 94. On the Commercial Economy Board, see Orosvenor B. Clarkson, Industrial America in rhe World Wac 7ke Strategy Behind the Line, 1917-1918 (Eloston: Houghton Mifilin, 1923), pp. 211ff. 95. Alchon, Invisible Hand, p. 29. Mitchell headed the price statistics section of the Price-Fixing Committee of the War Industries Board. 96. Heaton, Edwin Gay, p. 129. 97. See Rothbard, "War Collectivism," pp. 100-112. 98. See Heaton, Edwin Gay, pp. 129ff; and the excellent book on the Inquiry, Lawrence E. Gelfand, 7he inquiry: American Preparmionsfor Peace, 1917-1919 (New Haven: Yale Uni- versity Press, 1963), pp. 166-168, 177-178. 99. Heaton, Edwin Goy, p. 135. Also see Alchon, Invisible Hand, pp. 35-36. IW. In 1939 the Bureau of the Budget would be vansferred to the Executive Office, thus completing the IGR abiective. 101. Maulton was a professor of economics at the University of Chicago, and vice-president of the Chicago- Association of Commerce. See Eakiis. "Origins.- " .m.. 172-177; Dmfman. Economic Mind, vol. 4, 11, 195-197. 1M. Gav had been recommended to the -group .. bv one of its founders, Thomas W. Lamont. It was Gay's suggestion that the CFR begin its major project by establishing an "authoritative" journal, Forcign Affairs. And it was Gay who selected his Hmard historian colleague Archibald Cary Coolidge as the first editor and the New York Post reporter Hamilton Fish Amstrong as assistant editor and executive director of the CFR. See Lawrence H. Shourr and William Minter. Imperial Bmin Tmsr: lhe Council on Foreign Relations ond United States Foreign Policy (New York: Monthly Review Press, 1977). pp. 16-19, 105, 110. 103. Ellis W. Hawley, "Herbert Hoover and Economic Stabilization, 192-22," in E. Hawley, ed., Herben Hmver ar Secrcrnry of Commerce: Snrdies in New Era 7houghr and Pmctice Oowa City: University of Iowa Press, 1981). p. 52. 104. Hawley, "Herbert Hoover," p. 53. Also see ibid., pp. 42-54. On the continuing collaboration between Hoover, Gay, and Mitchell throughout the 1920s see Alchon, Invisible Hand. 105. Alchon, lnvirible Hond. pp. 3942; Dorfman, Economic Mind, vol. 3, 490. 106. One exception was the critical review in the Commercial and Financial Chronicle (May 18, 1929). which derided the impression given- the reader that the capacity. . of the United Stales "for continued prosperity is well-nigh unlimited." Quoted in Davis, World Between the Wars, p. 144. Also on Recent Economic Changes and economists' opinions at the time, see ibid., pp. 136-151, 403417; David W. Eakins, "The Development of Corporate Liberal Policy Research in the United States. 1885-1965," Ph.D. diss.. doctoral dissertation University of Wisconsin, 1966). pp. 166-169, 205; and Edward Angly, amp., Oh Yed?(New York: ~ik- ing Press, 1931). 107. In 1930, Hunt published a book-length, popularizing summary, An Audir ofAmPrico. On Recenr Economic Changes, also see Alchon, InvisibleHand, pp. 129-133, 135-142, 145-151, 213. 108. Deponmenr of Labor-FSA Appropriation Bill for 1945. Hearings Before the Subcommittee on Appropriations. 78th Congress, 2nd Session, Part I Washington, 1945), pp. 258f.. 276f. Quoted in Rothbard, "Polities of Political Economists," p. 665. On the growth of efonomistr and statisticians in government, especially during watiime, see also Herbert Stein, "The Washington Economics Industry," American Economic Association Papers and Proceedings 76 (May 1986). pp. 2-3.

Journolo/Ll&nn?l~nStudlr. Vol. I. No. 2. op. 111-115. Pergamon Pres 3977. PrinlcdinGrealBritun.

COASE AND DEMSETZ ON PRIVATE PROPERTY RIGHTS

WALTER BLOCK

Deportment ojEconomim, Rutgers University

In his seminal work, "The Problem of Social allowing him to pollute: The farmer can only Cost," Coase held that in cases of private be compensated by receiving at least the $100,000 property right disputes involving what have which he would lose in damages and the manu- been called externalities, "with costless market facturer can get away with paying only $75,000 transactions, the decision of the courts to install the SPD. concerning liability for damage would be If the court does not find the manufacturer without effect on the allocation of resources."l~l liable, then the farmer cannot get an injunction. I shall try to show that this view is mistaken The manufacturer is not legally bound to install because it does not take account of psychic the SPD. But note: The farmer stands to gain income. I shall then consider what can only be $100,000 (in undamaged crops) if he can convince considered immoral implications Demsetz draws the manufacturer to do something which costs from Coase's view of property. only $75,000 (install the SPD). There will be a Let us suppose that the damage to a farmer's bargaining situation where a bribe from the crops from a neighboring factory amounts to farmer to the manufacturer of something between $100,000; that there is no way that the farmer $75,000 and $100,000 will make them both better himself can prevent the damage to his crops; that off. For instance, a payment of S9b.000 will bargaining transactions between the farmer and save the farmer $10,000 (the farmer can save the manufacturer are costless; that changes in the $100,000 worth of crops at a cost of only $90,000) distribution of wealth between them can be and will earn $15,000 for the manufacturer ignored; and finally, that the manufacturer can (the manufacturer receives $90,000 for installing stop the crop damage by installing a smoke a $75,000 SPD). What if the farmer just does prevention device (SPD) which will cost him not happen to have $90,000 lying around? This $75,000. is not an insurmountable problem. The farmer Under these conditions, Coase would argue does have $100,000 worth of crops lying around, that whether the court assigns crop damage which, presumably, will serve as collateral for liability to the manufacturer or not, the SPD a $90,000 loan. The farmer will obtain the will be installed. This means that the allocation $90,000 loan, pay the manufacturer the $90,000, of resources between farming and manufacturing sell his crops for $100,000, and then pay off the will not depend on the court decision. This cost of the loan out of his $10,000 gain. means, moreover, that the value of production Now let us consider a case exactly like the will be maximized, since a $75,000 cost will gain preceding except for one thing: instead of there $100,000. How does this work? being $100,000 worth of crops lying around If the court finds the manufacturer liable. that can be ruined by smoke pollution, there is and grants the farmer an injunction to stop the but one flower bed that can be so mined. smoke pollution, the manufacturer is legally But this a rather special flower bed (to the bound to install the SPD (or to cease operation). farmer). Its pecuniary value to other people is He will not be able to bribe the farmer into nil; however, the farmer's mother, on her death 112 WALTt!R BLOCK bed, asked him to care for it. It is so valuable values a military life would entail. How can we to the farmer in a psychic sense, that only, as it be sure that he would be "precisely" the highest happens, $100,000 would compensate the bidder under the 'let-him-buy-his-way-out' farmer for the ruination of the flower bed. property right system? He might be too poor If the court finds the manufacturer liable, to pay "precisely" the highest bid. He might be then the psychic loss case works out as did the too poor to even pay a bribe that would keep pecuniary loss case: the manufacturer will have him out of military service at ail. His reserves to install the SPD since he can install for less of "human capital" might well be so low so as ($75,000) than what a bribe will cost him to be unable to borrow money to bribe his way ($100,000 or more). out even if human beings could be used as If the court does not find the manufacturer collateral. In shm, Demsetz is correct only if liable, then, as before, a bribe of something we may safely ignore psychic losses on the part between $75,000 and $100,000 (say $90,000) of people who are unable to afford the bribe. will insure the installation of the SPD. If the Yet this case is one where this procedure would farmer has $90,000 with which to save his seem particularly dangerous. Psychic, not (so flower bed, the SPD will be installed. much) pecuniary, losses are likely to be very Coase's view breaks down when we consider important; and draftable men are likely to be at the case of psychic income loss where the loser a stage in their lives where they are unlikely to does not have the wherewithal to make a bribe have been able to accumulate much capital. greater than the cost of the SPD ($75,000). All A few words are in order here on the almost the psychic income in the world may not be revolutionary changes in moral outlook implicit enough collateral to support a $90,000 loan to in this view of property rights. In the traditional save a flower bed. moral view of private property rights, the "let- In this case, the allocation of resources will him-buy-his-way-out" property right system depend on the decision of the court. If the would be, if anything, a contradiction in terms, court holds the polluter responsible, the SPD and not really a private property right system will be installed; if the court does not hold the at all. According to traditional morality, each polluter responsible, the SPD will not be installed. person is a self-owner. Any attempt to involve We now turn to a more realistic example to the individual in a "let-him-buy-his-way-out" illustrate psychic income. Demsetz holdsf21that system would necessarily involve enslaving him the same citizens would join the military "no first. To first enslave a individual and to then matter whether taxpayers must hire military offer him the possibility of buying his way out volunteers or whether draftees must pay tax- would have been thought of as equivalent to payers to be excused from service. For tax- asking the individual to pay ransom to his payers will hire only those military (under the kidnappers. To say the least, this would be 'buy-him-in' property right system) who would anathema to a system of private propw rights. not pay to be exempted (under the 'let-him-buy- And to further declare that "it makes no his-way-out' system). The highest bidder under difference"whether an individual is kidnapped the 'let-him-buy-his-way-out' property right and then offered the possibility of paying ransom system would be precisely the last to volunteer or whether the individual is not kidnapped but under a 'buy-him-in' system." rather offered employment on a voluntary basis, When the phenomena of psychic income is would have been thought of as just adding incorporated into the analysis, however, it is by insult to injury. no means certain that "the highest bidder under Demsetz considers ahother inte~estingcaset3l: the 'let-him-buy-his-way-out' property right "Whether or not a new product will be system would be precisely the last to volunteer profitable is, in tbe absence of exchange under a 'buy-him-in' system." Consider a and police costs, independent of which died-in-the-wool-pacifist who would be the last property right assignment is chosen: to volunteer under the 'buy-him-in' system (A) Producers of new products are assigned the because of the extraordinary sacrifice of psychic right to sell new products without compen- COASE AND DEMSETZ ON PRIVATE PROPERTY RIGHTS 113 - sating competitors who are injured. wsts wuld be reduced by giving the initial assignment of Producers of old products are assigned to rights to set owners. If set owners arc given thcx rights, some homeowners wiU contract to buy thcm from wt ownen retain their customers." but, by assumption, the number and presumably thecost of I have already. argued- that this is correct only such exchanges would be lcss than under the alternative if negoliat,on income or wealth asstgnmmc of rights. A number of seu that approximates s chic thecfhctcnt number would be ainved at w~ththe use of lcss p y effects,can be resources for conduct~neexchannes ~f set ouncrr are %wen Here I am concerned to point out the deviation the right rather than ho&emuner~L4~ from traditional private property views. According to the traditional or libertarian Consider the case of very rich sadists who view, old producers do not, cannot, must not, have a maniacally strong desire to torture poor have any right to retain their customers, if for people; such a strong desire, it might be added, no other reason than that they do not own their that most sadists would be able to purchase customers in.the first place. All they own is most of the torture rights from their poorer what they produce. More exactly, all they own fellows. According to the criteria of minimizing are thephysicalgoods that they produce. They exchange costs, it would seem that the sadists cannot own the value of what they produce, should be given the "right to torture" in the because the value of a good is determined by first place. It need hardly be pointed out, other producers and consumers, (as well as by except perhaps to the most thoroughgoing their own valuations), but none of these people advocate of the "Coase - Demsetz" view1jI. that are owned by the old producers. It is true that granting rights to torture is incompatible with the advent of new producers can lower the a free enterprise, private property system. value of what the producers own. So can the Coase also gives advice on assigning property refusal of old customers to continue patroni- rights. He considers tKe case where negotiation zation. So can weather conditions, etc. costs are greater than the expected gains to be According to this traditional view of the free obtained from such negotiations. He holds that: enterprise system, everyone has a right to try to "In a world in which there are high costs of compete. Likening destruction of physical rearranging the rights established by the legal property to the destruction of the value of system, the courts, in cases relating to nuisance, property by forbidding the latter as well as the are, in effect, making a decision on the economic former can only be considered a travesty of the problem and determining how resources are to free enterprise, private property system. be employed"161. Let us now consider non-zero transactions An example will illustrate: Assume the costs. Demsetz has advice to give on the previous case where installation of a smoke assignation of property rights in the case of prevention device will cost $75,000, where high transactions costs, where he concedes that monetary harm due to smoke is $100,000, where court decisions are relevent to the allocation of income effects are insignificant, but where the resources. Demsetz calls attention to realignment costs of negotiation are $200,000. costs and holds that they should have an im- If the judge decides in favor of the farmer, the portant part to play in such assignments. Re- devise will be installed-not because it will not alignment costs are the costs of transacting that pay the manufacturer to bribe the farmer into occur after the new assignment of property accepting the smoke-but because it will be too rights. expensive to negotiate the bribe. In short, "The courts directly influence "For example, let us consider the property right problems associated with the introduction of home air conditioners. economic activity... when market transactions The question arises as to whether homeowners should are so costly as to make it difficult to change have the right to prevent noise levels from rising above a the arrangement of rights established by the .aiven intensity or whether air conditioner owners should law[7l."

~u ~~~~~~ ~~ -~~ have the richt to~ run their~~ ~~~ sets even thou~hnoise levels.on~~. surroundrng land will be ra~rcd. If it is generally true that Coase then concludes: owners owrate the~rsets that they uill purchase most of the noise control rights from their ne~ghborr. then exchange "It would therefore seem desirable that the courts should understand the economic cQnscquencss of their dccislons settled out of court based on court precedents. and should, insofar as this is possible without creating too Substituting the "flexible" court judgment of much uncertainty about the legal position itself, take these costs for rigid rule will impose extra costs the consequents into account when making their decision^'"^'. in form of more cases reaching the courts for ad- Coase urges the courts to make "a comparison judication, since precedents are not based on between the utility and harm produced (as) an flexible judgments and evaluations. element in deciding whether a harmful effect There is the further problem of added un- should be considered a nuisance"[9]. certainty and consequent diminished ability to In effect, I take Coase to be advising the court forecast and plan ahead. It is questionable to decide in favor of that party which, in the whether it is possible to substitute judgment absence of negotiation costs, would be unable for rigid rules "without creating too much un- to be bribed in the normal course of negotiations. certainty about the legal position itself." The In other words, the court should give the question is a marginal one: at what point do manufacturer the right to belch forth smoke the gains (if, indeed, there are any) of more upon the farmer if the monetary costs of in- scope for judgments and evaluations of harm stalling a smoke prevention device were greater begin to be outweighed by the losses tied to in- than the resultant monetary harm to crops. And ability to plan ahead? the court should decide in favor of the farmer Two analogies come to mind. One is the con- if the monetary costs of the smoke prevention cept of "rule of law" associated with Friedrich device were less than concomitant financial Hayek. According to this philosophy men are damage to crops. freer contending with publicized rigid laws than One might fear that such advice is not likely with "judgments," "opinions," "estimates." to maximize the value of production; that having "Laws" that judge "each case on its merits" the courts "adopt a rigid rule" might well "give like this would be more akin to absence of law economically more satisfactory results" than than to its presence. (One cannot make too having the courts follow Coase's advice; that, much of this philosophy with its emphasis. on in reality, it will not be likely for the court to the form of the law and its disemphasis on the take these economic consequences of their content of law. Laws that sentence all people decision into account without creating too much to death at age fowcan be weU publicized, rigid, uncertainty about the legal position itself. known in advance and are consonant in all ways First of 311, the judges might act "very with Hayek's rule of law; they are haray con- foolishly" and award the property rights to the ducive to freedom or justice, however.) wrong person. The task of comparing losses if The other analogy is from the field of the externality is allowed to continue, with losses monetary policy. Milton Friedman has long necessitated by the cessation of the externality, been an effective spokesman for the view sup- is one calling for no mean level of skill. Can it porting monetary "rules" as against monetary be expected that judges appointed largely "authority." His contention, made famous by through the political process will judge correctly the 5% rule, is that it would be an improvement (more than half the time)? to reduce the myriad activity of the Fed to one Moreover, there is no market test to ensure of increasing the money supply at a steady 5% that judges who are inept at evaluating relative per year. The arguments he marshalls are too losses make way for judges who have greater well known to bear repition here; my point is ability. that these arguments can be seen as defending Even assuming that the courts will not be too the view that rigid rules might well be more inefficient in guessing relative costs, there are efficient than allowing judges the "authority" still problems with Coase's advice. to tinker wound and estimate the benefits and Presently, for every legal case that reaches harms associated with externalities. the courts for final judgment, there are hund- But more important than any of these utili- reds if not thousands of potential disputes that tarian considerations, we must reject Coase's are not tried in the courts. Many cases can be advice because it is just plain downright immoml. COASE AND DEMSETZ ON PRIVATE PROPERTY RIGHTS l IS It is evil and vicious to violate our most cherished NOTES and precious property rights in an ill conceived I. Journal of Law and Economiu; (Oct. 1960). page LO. attempt to maximize the monetary value of 2. "Toward a theory of property rights" by H. Demsetz in production. As the merest study of praxeological Pro~o~dingsoflheAEA. Spring 1967. axioms will show, it is also impossible 'for an 3. "Some aspects of propmy rights", pp. 62-63. JLE, Oct. outside observer (the judge) to maximize the 1966. psychic value of production. I must conclude, 4. "Someaspects", op. cir. p. 66. 5. This is not meant so as to obliterate distinctions in the then, with some advice of my own to the two men's views. It is meant merely as a shorthand Chicagoans, Coase and Demsetz: a study of device. Austrian economics has great value, apart from 6. Sechis "The Problem of Social Cost." J.L.E., Oct. IW, its intrinsic merits; it will prevent straying from ScctionVII, pp. 19 - 28. the paths of righteousness. 7. Ibid. p. 19. 8. Ibid, p. 19. 9. Ibid, p. 20.