It Is in Spain, in the School of Salamanca, that We Find the Intellectual Roots of the Austrian School of Economics

In short, the Scholastics of the Spanish Golden Age were able to articulate what would later become the key theoretical principles of the Austrian school of economics, specifically: first, the subjective theory of value (Diego de Covarrubias y Leyva); second, the correct relationship between prices and costs (Luis Saravia de la Calle); third, the dynamic nature of the market and the impossibility of realizing the equilibrium model (Juan de Lugo and Juan de Salas); fourth, the dynamic concept of competition understood as a process of rivalry between sellers (Castillo de Bovadilla and Luis de Molina); fifth, the principle of time preference (rediscovered by Martín de Azpilcueta); sixth, the profoundly distorting effect inflation exerts on the real economy (Juan de Mariana, Diego de Covarrubias and Martín de Azpilcueta); seventh, the critical analysis of fractional-reserve banking (Luis Saravia de la Calla and Martín de Azpilcueta); eighth, the recognition that bank deposits form part of the money supply (Luis de Molina and Juan de Lugo); ninth, the impossibility of organizing society via coercive commands, since the information necessary to give such commands a coordinating quality is lacking (Juan de Mariana); and tenth, the libertarian tradition that all unjustified intervention in the market constitutes a violation of natural law (Juan de Mariana).

Hence there are well-founded reasons to conclude that though the dynamic, subjectivist conception of the market was taken up again and given a definitive boost by Menger in 1871, it originated in Spain. It is there, namely in the School of Salamanca, that we find the intellectual roots of the Austrian economic tradition. Like the modern Austrian school, and in stark contrast to the neoclassical paradigm, the School of Salamanca is above all characterized by the great realism and rigor of its analytical premises.

—Jesús Huerta de Soto, The Austrian School: Market Order and Entrepreneurial Creativity (Cheltenham, UK: Edward Elgar, 2008), 33-34.

The North American Free Trade Agreement is a Managed-Trade Deal Sold to the Public as a “Free Trade” Deal

The North American Free Trade Agreement (NAFTA) is the quintessential managed-trade vehicle sold under the rubric of free trade. The first tip-off should be its size. While we earlier saw how 54 words in the U.S. Constitution established free trade among the states of the Union, NAFTA weighs in at over 2,000 pages, 900 of which are tariff rates. (Under true free trade, there is one tariff rate — 0 percent). The agreement does have trade-liberalizing features, to be sure. Consisting of a 10 percent reduction in tariffs to be phased in over 15 years, however, they are all but buried under the profusion of controls NAFTA also establishes.

In the first place, the benefit from those tariff reductions are jeopardized by the agreement's “snap-back provisions.” Those permit pre-NAFTA tariff levels to be restored against imported items which “cause or threaten serious injury to domestic industry.” In other words, NAFTA supports free trade as long as it does not promote international competition which is too hot for favored domestic firms to handle. In addition, NAFTA's rules of origin are designed to divert trade from the world's most efficient suppliers to North America's most efficient suppliers. This hobbles the international division of labor instead of expanding it, as true free trade does.

The importance of NAFTA clauses that keep out foreign goods came to light as U.S. clothing manufacturers railed against the import of wool suits from our NAFTA partner Canada. The suits in question were made from third-country wool not covered by NAFTA rules of origin. Since Canadian tariffs on foreign wool were lower than U.S. tariffs (10 percent vs. 34 percent), Canadian suits sold for less and soon claimed a large share of the U.S. market. The fact that the entire discussion of this issue centered on closing this "loophole" in NAFTA rather than on lowering the injurious U.S. tariff on wool should prove how devoted NAFTA's supporters are to free trade.

Free trade does not depend on international bureaucracies, yet NAFTA creates several of them. Its Commission for Environmental Cooperation was set up to enforce the environmental aim of sustainable growth. One tactic it uses is to prevent countries from trying to create a friendlier environment for investors by relaxing any extant environmental regulations. Such rules are to be enforced by trade sanctions and fines, with the latter to go into a slush fund for “environmental law enforcement.”

—Robert Batemarco, “Why Managed Trade Is Not Free Trade,” The Freeman: Ideas of Liberty 47, no. 8 (August 1997): 489.

Economics Relies On Deductive Logic to Answer Titillating Questions Like “Was Karl Marx a Two-Headed Monster?”

In economics, we operate with deductive logic. (Bertrand Russell, a twentieth-century English philosopher, once said that there are two kinds of logic, deductive and bad).

Deductive logic is a tool of amazing power. Given a true statement, we can, by using deduction, obtain other true statements from it. These new statements not only are true—their truth is guaranteed! If the statements we started with are true, then our conclusions are also true.

Let’s look at a few examples:

• ALL COMMUNISTS ARE TWO-HEADED MONSTERS
• KARL MARX WAS A COMMUNIST
• THEREFORE, KARL MARX WAS A TWO-HEADED MONSTER

Does the conclusion, “Karl Marx was a two-headed monster,” follow from the premises (the statements it was deduced from)? Yes, it does. Then, if the premises are true, so is the conclusion. 

Have we proved that Karl Marx was a two-headed monster? Not so fast. All we know is that if the premises are true, then so is the conclusion. Unless both premises are in fact true, we can’t claim that they show the conclusion to be true.

What good is logic, then? Well, let’s go over the basic point again. We know that whenever the premises are true, the conclusion is true. An argument in which the conclusion is correctly deduced from the premises is called a valid argument. If we can (somehow) arrive at true premises, then we are guaranteed true conclusions. And, as you will discover in this book, sometimes obvious truths can have very startling consequences.

—David Gordon, An Introduction to Economic Reasoning (Auburn, AL: Ludwig von Mises Institute, 2000), 1-2.

Consumer Protection Laws Are Like the Government Providing Cushions for All the Children Who Might Fall Down!

As for the first object, that in trade no one should injure another, it is evidently sufficient that the government should always protect the natural liberty of the buyer to buy, and of the seller to sell. For if the buyer is always the one who decides whether to buy or not, it is certain that he will select among all the sellers the man who will give him at the best price the merchandise that suits him best. It is no less certain that every seller, it being his chief interest to gain preference over his competitors, will sell in general the best merchandise at the lowest possible price, in order to attract customers. It is not true therefore that a merchant may be interested in deception—unless he has some exclusive privilege.

But if the government limits the number of sellers by exclusive privileges or otherwise, it is certain that the consumer will be wronged and that the seller, certain of selling, will compel him to buy bad articles at a high price.

If, on the contrary, it is the number of buyers which is diminished, by the exclusion of foreigners or of certain other persons, then the seller is wronged, and, if the injury is carried to the point where the price does not compensate him, with profit, for the costs and risk, he will cease to produce the commodity in such abundance, and scarcity will result.

The general freedom of buying and selling is therefore the only means of assuring, on the one hand, the seller of a price sufficient to encourage production, and on the other hand, the consumer, of the best merchandise at the lowest price. This is not to say that in particular instances we may not find a cheating merchant and a duped consumer; but the cheated consumer will learn by experience and will cease to frequent the cheating merchant, who will fall into discredit and thus will be punished for his fraudulence; and this will never happen very often, because generally men will be enlightened upon their evident self-interest.

To expect the government to prevent such fraud from ever occurring would be like wanting it to provide cushions for all the children who might fall. To assume it to be possible to prevent successfully, by regulation, all possible malpractices of this kind, is to sacrifice to a chimerical perfection the whole progress of industry; it is to restrict the imagination of artificers to the narrow limits of the familiar; it is to forbid them all new experiments; to renounce even the hope of competing with the foreigners in the making of the new products which they invent daily. . .

Thus, with obvious injustice, commerce, and consequently the nation, are charged with a heavy burden to save a few idle people the trouble of instructing themselves or of making enquiries to avoid being cheated. To suppose all consumers to be dupes, and all merchants and manufacturers to be cheats, has the effect of authorizing them to be so, and of degrading all the working members of the community.

—Anne Robert Jacques Turgot, “In Praise of Gournay: Letter from Turgot to Marmontel,” in The Turgot Collection: Writings, Speeches, and Letters of Anne Robert Jacques Turgot, Baron de Laune, ed. David Gordon (Auburn, AL: Ludwig von Mises Institute, 2011), 107-108.

Socialism's Aim Is to Use “the State” to Save Individuals from the Struggle for Existence and from the Competition of Life

When I say that protectionism is socialism I mean to classify it and bring it not only under the proper heading but into relation with its true affinities. Socialism is any device or doctrine whose aim is to save individuals from any of the difficulties or hardships of the struggle for existence and the competition of life by the intervention of “the State.” Inasmuch as “the State” never is or can be anything but some other people, socialism is a device for making some people fight the struggle for existence for others. The devices always have a doctrine behind them which aims to show why this ought to be done.

The protected interests demand that they be saved from the trouble and annoyance of business competition, and that they be assured profits in their undertakings, by “the State,” that is, at the expense of their fellow-citizens. If this is not socialism, then there is no such thing. If employers may demand that “the State” shall guarantee them profits, why may not the employees demand that “the State” shall guarantee them wages? If we are taxed to provide profits, why should we not be taxed for public workshops, for insurance to laborers, or for any other devices which will give wages and save the laborer from the annoyances of life and the risks and hardships of the struggle for existence? The “we” who are to pay changes all the time, and the turn of the protected employer to pay will surely come before long.

—William Graham Sumner, “Protectionism: The –Ism Which Teaches that Waste Makes Wealth,” in The Forgotten Man and Other Essays, ed. Albert Galloway Keller (New Haven: Yale University Press, 1918), 79.

In Addition to His Famous “Law of Markets,” Jean-Baptiste Say Was a Pioneer in Praxeological Methodology

The praxeological tradition has a long history in economic thought. We will indicate briefly the outstanding figures in the development of that tradition, especially since these economic methodologists and their views have been recently neglected by economists steeped in the positivist world view.

One of the first self-conscious methodologists in the history of economics was the early-nineteenth-century French economist Jean-Baptiste Say. In the lengthy introduction to his magnum opus, A Treatise on Political Economy, Say laments that people

are too apt to suppose that absolute truth is confined to the mathematics and to the results of careful observation and experiment in the physical sciences; imagining that the moral and political sciences contain no invariable facts of indisputable truth, and therefore cannot be considered as genuine sciences, but merely hypothetical systems.

Say could easily have been referring to the positivists of our day, whose methodology prevents them from recognizing that absolute truths can be arrived at in the social sciences, when grounded, as they are in praxeology, on broadly evident axioms. Say insists that the “general facts” underlying what he calls the “moral sciences” are undisputed and grounded on universal observation.

—Murray N. Rothbard, “Praxeology as the Method of the Social Sciences,” in Economic Controversies (Auburn, AL: Ludwig von Mises Institute, 2011), 42.

The Communist Doctrine Ignores the Essential Difference between a Status/Caste Society and a Capitalist Society

Marx obfuscated the problem by confusing the notions of caste and class. Where status and caste differences prevail, all members of every caste but the most privileged have one interest in common, viz., [namely] to wipe out the legal disabilities of their own caste. All slaves, for instance, are united in having a stake in the abolition of slavery. But no such conflicts are present in a society in which all citizens are equal before the law. No logical objection can be advanced against distinguishing various classes among the members of such a society. Any classification is logically permissible, however arbitrarily the mark of distinction may be chosen. But it is nonsensical to classify the members of a capitalistic society according to their position in the framework of the social division of labor and then to identify these classes with the castes of a status society. . . .

This socialist or communist doctrine fails entirely to take into account the essential difference between the conditions of a status or caste society and those of a capitalistic society. Feudal property came into existence either by conquest or by donation on the part of a conqueror. It came to an end either by revocation of the donation or by conquest on the part of a more powerful conqueror. It was property by “the grace of God,” because it was ultimately derived from military victory which the humility or conceit of the princes ascribed to special intervention of the Lord. The owners of feudal property did not depend on the market, they did not serve the consumers; within the range of their property rights they were real lords. But it is quite different with the capitalists and entrepreneurs of a market economy. They acquire and enlarge their property through the services they have rendered to the consumers, and they can retain it only by serving daily again in the best possible way. This difference is not eradicated by metaphorically calling a successful manufacturer of spaghetti “the spaghetti king.”

—Ludwig von Mises, Theory and History: An Interpretation of Social and Economic Evolution (Auburn, AL: Ludwig von Mises Institute, 2007), 113, 115-116.

Individualists Are Antiegalitarian, Believing in Human Differences and “Natural” (Not “Artificial”) Inequalities

In one sense, the “conservative” label for Nock and Mencken was, and had been, correct, as it is for all individualists, in the sense that the individualist believes in human differences and therefore in inequalities. These are, to be sure, “natural” inequalities, which, in the Jeffersonian sense, would arise out of a free society as “natural aristocracies”; and these contrast sharply with the “artificial” inequalities that statist policies of caste and special privilege impose on society. But the individualist must always be antiegalitarian. Mencken had always been a frank and joyous “elitist” in this sense, and at least as strongly opposed to democratic egalitarian government as to all other forms of government. But Mencken emphasized that, as in the free market, “an aristocracy must constantly justify its existence. In other words, there must be no artificial conversion of its present strength into perpetual rights.” Nock came by this elitism gradually over the years, and it reached its full flowering by the late 1920s. Out of this developed position came Nock’s brilliant and prophetic, though completely forgotten, Theory of Education in the United States, which had grown out of 1931 lectures at the University of Virginia.

—Murray N. Rothbard, The Betrayal of the American Right, ed. Thomas E. Woods Jr. (Auburn, AL: Ludwig von Mises Institute, 2007), 28.

Murray Rothbard on the Terrifying Idea of a Unitary World “Democratic” Government

But the inner logic of that mystique, and the basic logic of minarchist political theory, is at once simple and terrifying: unitary world “democratic” government. The minarchist argument against anarcho-capitalist libertarians is that there must be a single, overriding government agency with a monopoly force to settle disputes by coercion. OK, but in that case and by the very same logic shouldn't nation-states be replaced by a one-world monopoly government? Shouldn't unitary world government replace what has been properly termed our existing “international anarchy?”

Minarchist libertarians and conservatives balk at the inner logic of world government for obvious reasons: for they fear correctly that world taxation and world socialization would totally and irreversibly suppress the liberty and property of Americans. But they remain trapped in the logic of their own position. Left-liberals, on the other hand, are happy to embrace this logic precisely because of this expected outcome. Even the democratic Establishment, however, hesitates at embracing the ultimate logical end of a single world democratic state, at least until they can be assured of controlling that monstrous entity.


—Murray N. Rothbard, “The Nationalities Question,” in The Irrepressible Rothbard: The Rothbard-Rockwell Report; Essays of Murray N. Rothbard, ed. Llewellyn H. Rockwell Jr. (Burlingame, CA: The Center for Libertarian Studies, 2000), 229-230.

Anti-Trust Laws Illustrate Another Instance of Defining Property in Terms of Values, Not Physical Criteria

Anti-trust laws serve many purposes. From the point of view of the expert in law and economics, for instance, they function as a full employment bill, calling forth millions of hours of highly paid expert testimony. From the perspective of the neo-classical economist it furnishes an opportunity to demonstrate manual dexterity with average and marginal cost and revenue curves, “dead weight losses” and “resource misallocations,” the better to dazzle naive students. For the political ideologue, the theory of monopoly, upon which anti-trust laws are based, provides the “scientific legitimation” for the permanency of so-called market failures; it is a stick which can be used to beat up on the private property (capitalist) system.

For our purposes, anti-trust laws illustrate yet another instance of defining property in terms of values, not physical criteria. If company A sells a better product, or the same one at a lower price, how does it “hurt” its competitors? Only in value terms, not physical ones. As in the case of witch craft, or heresy during the period of the inquisition, there is no defense against the charge of monopoly. Promotion of consumer welfare is no defense; indeed, it is part of the indictment. Selling at a price lower than competitors’ is prima facie evidence of cutthroat competition; selling at a higher price indicates monopolistic profiteering; selling at the same price as everyone else is evidence of collusion. Since there is no fourth alternative, any firm is theoretically guilty as charged, no matter what its behavior. Similarly with quantity sold. Too much is pre-emptive, too little is monopolistic withholding, and the same as others is collusive dividing up of the market. Heads the anti-trust division and the Federal Trade Commission win; tails, the business concern loses.

—Walter E. Block, Property Rights: The Argument for Privatization, Palgrave Studies in Classical Liberalism (Cham, CH: Springer Nature Switzerland, 2019), 15-16.

Benjamin Constant Waged an Intellectual War Against Theocratic Conservatives and Socialists

Constant was the first great liberal thinker who was compelled to wage an intellectual battle on two fronts, a situation that became typical of liberalism in the nineteenth century and into our own time. His enemies were the Jacobin and socialist descendants (for the most part) of Jean-Jacques Rousseau on the one side, and, on the other, the theocratic conservatives such as de Maistre and de Bonald.

As against the egalitarians and socialists who aimed to overthrow tradition, especially in religion, Constant appreciated the importance of voluntary traditions, those generated by the free activity of society itself. In this respect, Constant was much superior to John Stuart Mill, whose distaste for all of the inherited ways of mankind has misled Anglo-American liberalism in highly unfortunate directions. Constant emphasized the value of these old ways in the struggle against state power. Having lived through the Reign of Terror and the Napoleonic dictatorship, he was one of the first to understand the power of the modern state. Any element of social life that might act as a barrier to it was welcome in his eyes. Anticipating Tocqueville, and, in our century, thinkers like Bertrand de Jouvenel and Robert Nisbet, Constant wrote:

The interests and memories which are born of local customs contain a germ of resistance which authority suffers only with regret, and which it hastens to eradicate. With individuals it has its way more easily; it rolls its enormous weight over them effortlessly, as over sand.

As for the conservatives, they attempted to erect the Christian notion of Original Sin into the theoretical underpinning for a system of oppression, arguing for a strong state to keep a firm check on natural man. Constant was willing to grant some plausibility to the notion of the natural corruption of human nature. But how could this be turned into a warrant for an authoritarian state? Were the politicians born of an Immaculate Conception? As Constant wrote:

[There is a] bizarre notion according to which it is claimed that because men are corrupt, it is necessary to give certain of them all the more power . . . on the contrary, they must be given less power, that is, one must skillfully combine institutions and place within them certain counterweights against the vices and weaknesses of men.

—Ralph Raico, “The Centrality of French Liberalism,” in Classical Liberalism and the Austrian School (Auburn, AL: Ludwig von Mises Institute, 2012), 224-225.

Positivists Rest Their Case on Misleading Analogies from the Epistemology of Physics But Human Action Is Not Like Physics

First, it should be made clear that neither Professor Machlup nor Professor Hutchison is what Mises calls a praxeologist, that is, neither believes (a) that the fundamental axioms and premises of economics are absolutely true; (b) that the theorems and conclusions deduced by the laws of logic from these postulates are therefore absolutely true; (c) that there is consequently no need for empirical “testing,” either of the premises or the conclusions; and (d) that the deduced theorems could not be tested even if it were desirable. Both disputants are eager to test economic laws empirically. The crucial difference is that Professor Machlup adheres to the orthodox positivist position that the assumptions need not be verified so long as their deduced consequents may be proven true—essentially the position of Professor Milton Friedman—while Professor Hutchison, wary of shaky assumptions takes the more empirical—or institutionalist—approach that the assumptions had better be verified as well.

Strange as it may seem for an ultra-apriorist, Hutchison’s position strikes me as the better of the two. If one must choose between two brands of empiricism, it seems like folly to put one’s trust in procedures for testing only conclusions by fact. Far better to make sure that the assumptions also are correct. Here I must salute Professor Hutchison’s charge that the positivists rest their case on misleading analogies from the epistemology of physics. This is precisely the nub of the issue. All the positivist procedures are based on the physical sciences. It is physics that knows or can know its “facts” and can test its conclusions against these facts, while being completely ignorant of its ultimate assumptions. In the sciences of human action, on the other hand, it is impossible to test conclusions. There is no laboratory where facts can be isolated and controlled; the “facts” of human history are complex ones, resultants of many causes. These causes can only be isolated by theory, theory that is necessarily a priori to these historical (including statistical) facts. Of course, Professor Hutchison would not go this far in rejecting empirical testing of theorems; but, being commendably skeptical of the possibilities of testing (though not of its desirability), he insists that the assumptions be verified as well.

—Murray N. Rothbard, “In Defense of ‘Extreme Apriorism,’” in Economic Controversies (Auburn, AL: Ludwig von Mises Institute, 2011), 103-105.

Using Political Force, the State Lives on a Revenue Produced in the Private Sphere for Private Purposes

One would not think it difficult for scholars and laymen alike to grasp the fact that government is not like the Rotarians or the Elks; that it differs profoundly from all other organs and institutions in society; namely, that it lives and acquires its revenues by coercion and not by voluntary payment. The late Joseph Schumpeter was never more astute than when he wrote:

The friction or antagonism between the private and the public sphere was intensified from the first by the fact that . . . the state has been living on a revenue which was being produced in the private sphere for private purposes and had to be deflected from these purposes by political force. The theory which construes taxes on the analogy of club dues or of the purchase of the services of, say, a doctor only proves how far removed this part of the social sciences is from scientific habits of mind.

Apart from the public sector, what constitutes the productivity of the “private sector” of the economy? The productivity of the private sector does not stem from the fact that people are rushing around doing something, anything, with their resources; it consists in the fact that they are using these resources to satisfy the needs and desires of the consumers.

—Murray N. Rothbard, “The Fallacy of the Public Sector,” in Egalitarianism as a Revolt Against Nature and Other Essays, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2000), 134.

Liberals Push the “Welfare” Part and Conservatives Push the “Warfare” Part of the “Welfare-Warfare State”

The indispensable intellectual role of engineering popular consent for state rule is played, for the Great Society, by the liberal intelligentsia, who provide the rationale of “general welfare,” “humanity,” and the “common good” (just as the conservative intellectuals work the other side of the Great Society street by offering the rationale of “national security” and “national interest”). The liberals, in short, push the “welfare” part of our omnipresent welfare-warfare state, while the conservatives stress the warfare side of the pie. . . .

The cruelest myth fostered by the liberals is that the Great Society functions as a great boon and benefit to the poor; in reality, when we cut through the frothy appearances to the cold reality underneath, the poor are the major victims of the welfare state. The poor are the ones to be conscripted to fight and die at literally slave wages in the Great Society's imperial wars. The poor are the ones to lose their homes to the bulldozer of urban renewal, that bulldozer that operates for the benefit of real estate and construction interests to pulverize available low-cost housing. All this, of course, in the name of “clearing the slums” and helping the aesthetics of housing. The poor are the welfare clientele whose homes are unconstitutionally but regularly invaded by government agents to ferret out sin in the middle of the night. The poor (e.g., Negroes in the South) are the ones disemployed by rising minimum wage floors, put in for the benefit of employers and unions in higher-wage areas (e.g., the North) to prevent industry from moving to the low-wage areas. The poor are cruelly victimized by an income tax that left and right alike misconstrue as an egalitarian program to soak the rich; actually, various tricks and exemptions insure that it is the poor and the middle classes who are hit the hardest. The poor are victimized too by a welfare state of which the cardinal macro-economic tenet is perpetual if controlled inflation. The inflation and the heavy government spending favor the businesses of the military-industrial complex, while the poor and the retired, those on fixed pensions or Social Security, are hit the hardest. . . . And the burgeoning of compulsory mass public education forces millions of unwilling youth off the labor market for many years, and into schools that serve more as houses of detention than as genuine centers of education. Farm programs that supposedly aid poor farmers actually serve the large wealthy farmers at the expense of sharecroppers and consumer alike; and commissions that regulate industry serve to cartellize it. The mass of workers is forced by governmental measures into trade unions that tame and integrate the labor force into the toils of the accelerating corporate state, there to be subjected to arbitrary wage “guidelines” and ultimate compulsory arbitration.

—Murray N. Rothbard, “The Great Society: A Libertarian Critique,” in The Great Society Reader: The Failure of American Liberalism, ed. Marvin E. Gettleman and David Mermelstein (New York: Random House, 1967), 508-509.

A State of War Continues to be Profitable to the Governing Class and to Officials Administering the Army

The fact that war has become useless is not, however, sufficient to secure its cessation. It is useless because it ceases to minister to the general and permanent benefit of the species, but it will not cease until it also becomes unprofitable, till it is so far from procuring benefit to those who practice it, that to go to war is synonymous with embracing a loss. . . .

Every State includes a governing class and a governed class. The former is interested in the immediate multiplication of employments open to its members, whether these be harmful or useful to the State, and also desires to remunerate these officials at the best possible rate. But the majority of the nation, the governed class, pays for the officials, and its only desire is to support the least necessary number. A State of War, implying an unlimited power of disposition over the lives and goods of the majority, allows the governing class to increase State employments at will — that is, to increase its own sphere of employment. . . . a State of War continues to be profitable both to the governing class as a whole, and to those officials who administer and officer the army. . . .

But while the State of War has become more and more profitable to the class interested in the public services, it has become more burdensome and more injurious to the infinite majority which only consumes those services. In time of tranquility it supports the burden of the armed peace, and the abuse, by the governing class, of the unlimited power of taxation necessitated by the State of War, intended to supply the means of national defense, but perverted to the profit of government and its dependents. The case of the governed is even worse in time of war. . . .

The human balance sheet under a State of War thus favours the governor at the expense of the governed.

—Gustave de Molinari, The Society of Tomorrow: A Forecast of Its Political and Economic Organisation, trans. P. H. Lee Warner (London, T. Fisher Unwin, 1904), 168-170.

Chronic Inflation Worldwide Has Been Mainly the Consequence of Welfarism Run Wild

So the tendency of welfare spending in the United States has been to increase at an exponential rate. This has also been its tendency elsewhere. Only when the economic and budgetary consequences of this escalation become so grave that they are obvious to the majority of the people—i.e., only when irreparable damage has been done—are the welfare programs likely to be curbed. The chronic inflation of the last 25 to 35 years in nearly every country in the world has been mainly the consequence of welfarism run wild.

The causes of this accelerative increase are hardly mysterious. Once the premise has been accepted that “the poor,” as such, have a “right” to share in somebody else's income—regardless of the reasons why they are poor or others are better off—there is no logical stopping place in distributing money and favors to them, short of the point where this brings about equality of income for all. If I have a “right” to a “minimum income sufficient to live in decency,” whether I am willing to work for it or not, why don't I also have a “right” to just as much income as you have, regardless of whether you earn it and I don't?

Once the premise is accepted that poverty is never the fault of the poor but the fault of “society” (i.e., of the self-supporting), or of “the capitalist system,” then there is no definable limit to be set on relief, and the politicians who want to be elected or reelected will compete with each other in proposing new “welfare” programs to fill some hitherto “unmet need,” or in proposing to increase the benefits or reduce the eligibility requirements of some existing program.

—Henry Hazlitt, The Conquest of Poverty, Principles of Freedom Series (Irvington-on-Hudson, NY: Foundation for Economic Education, 1996), 96-97.

The Welfare State Is Merely a Method for Transforming the Market Economy Step-by-Step into Socialism

Unfortunately, the third part of Professor Hayek’s book [The Constitution of Liberty] is rather disappointing. Here the author tries to distinguish between socialism and the Welfare State. Socialism, he alleges, is on the decline; the Welfare State is supplanting it. And he thinks the Welfare State is, under certain conditions, compatible with liberty.

In fact, the Welfare State is merely a method for transforming the market economy step-by-step into socialism. The original plan of socialist action, as developed by Karl Marx in 1848 in the Communist Manifesto, aimed at a gradual realization of socialism by a series of governmental measures. The ten most powerful of such measures were enumerated in the Manifesto. They are well known to everybody because they are the very measures that form the essence of the activities of the Welfare State, of Bismarck’s and the Kaiser Wilhelm’s German Sozialpolitik as well as of the American New Deal and British Fabian Socialism. The Communist Manifesto calls the measures it suggests “economically insufficient and untenable,” but it stresses the fact that “in the course of the movement” they outstrip themselves, necessitate further inroads upon the old social order, and are unavoidable as a means of entirely revolutionizing the mode of production.”

Later, Marx adopted a different method for the policies of his party. He abandoned the tactics of a gradual approach to the total state of socialism and advocated instead a violent revolutionary overthrow of the “bourgeois” system that at one stroke should “liquidate” the “exploiters” and establish “the dictatorship of the proletariat.” This is what Lenin did in 1917 in Russia and this is what the Communist International plans to achieve everywhere. What separates the communists from the advocates of the Welfare State is not the ultimate goal of their endeavors, but the methods by means of which they want to attain a goal that is common to both of them. The difference of opinions that divides them is the same as that which distinguished the Marx of 1848 from the Marx of 1867, the year of the first publication of the first volume of Das Kapital.

However, the fact that Professor Hayek has misjudged the character of the Welfare State does not seriously detract from the value of his great book. His searching analysis of the policies and concerns of the Welfare State shows to every thoughtful reader why and how these much praised welfare policies inevitably always fail. These policies never attain those, allegedly beneficial, ends which the government and the self-styled progressives who advocated them wanted to attain, but, on the contrary, bring about a state of affairs which—from the very point of view of the government and its supporters—is even more unsatisfactory than the previous state of affairs they wanted to “improve.”

--Ludwig von Mises, “Liberty and Its Antithesis,” in Economic Freedom and Interventionism: An Anthology of Articles and Essays, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 1990), 174-175.

Economic Freedom and Compulsory Social Insurance Are Not Compatible

Every time I speak on the theme of social security I am in danger of being accused of going beyond my brief. . . . The social market economy cannot flourish if the spiritual attitude on which it is based — that is, the readiness to assume the responsibility for one's fate and to participate in honest and free competition — is undermined by seemingly social measures in neighbouring fields. . . .

I have repeatedly stressed that I consider personal freedom to be indivisible. With this conviction I have worked since 1948 to reduce all economic restrictions. A free economic order can only continue if and so long as the social life of the nation contains a maximum of freedom, of private initiative and of foresight.

If, on the other hand, social policy aims at granting a man complete security from the hour of birth, and protecting him absolutely from the hazards of life, then it cannot be expected that people will develop that full measure of energy, effort, enterprise and other human virtues which are vital to the life and future of the nation, and which, moreover, are the prerequisites of a social market economy based on individual initiative. The close link between economic and social policy must be stressed; in fact, the more successful economic policy can be made the fewer measures of social policy will be necessary. . . .

If we desire to guarantee a permanent free economic and social order, then it becomes essential to achieve freedom with an equally freedom-loving social policy. That is why, for example, it is contradictory to exclude from the market economic order private initiative, foresight and responsibility, even when the individual is not in a material position to exercise such virtues. Economic freedom and compulsory insurance are not compatible.

—Ludwig Erhard, Prosperity through Competition, trans. and ed. Edith Temple Roberts and John B. Wood (New York: Frederick A. Praeger Publishers, 1958), 185-186.

The Eminent Swedish Economist Gustav Cassel Explained How a “Planned Economy” Must Lead to Despotism

Another result of the promise of instant utopia has been a gigantic growth of governmental power—of interference in the details of everybody's business and everybody's life. As this power has increased, it has also become concentrated in fewer and fewer hands. In America the towns and villages have steadily lost power to the States, the States to the Federal Government, and Congress to the President.

One mark of the welfare state everywhere has been the gathering of power into the hands of one man. This is no mere unfortunate coincidence; it has been inevitable. Thirty-six years ago the eminent Swedish economist Gustav Cassel explained in a prophetic lecture how “planned economy,” long enough continued, must lead to despotism:

The leadership of the State in economic affairs which advocates of Planned Economy want to establish is, as we have seen, necessarily connected with a bewildering mass of government interferences of a steadily cumulative nature. The arbitrariness, the mistakes and the inevitable contradictions of such policy will, as daily experience shows, only strengthen the demand for a more rational coordination of the different measures and, therefore, for unified leadership. For this reason Planned Economy will always develop into Dictatorship.

—Henry Hazlitt, Man vs. the Welfare State (New Rochelle, NY: Arlington House, 1970), 2.

All Modern Dictators Believe in Social Security, Especially in Coercing People into Governmentalized Medicine

Perhaps the most spectacular “social” aspect of Nazism was its emphasis on health, as part and parcel of a racial nationalism. That was not accidental. The health, or rather sickness, propaganda employed by Bismarck elevated that aspect of social welfare to a prime political issue. Just why were such ruthless men as Bismarck and Hider so profoundly interested in the physical well-being of their subjects — and in high birth-rates! — while totally indifferent, nay, inimical to their mental integrity? But after a fashion so were their predecessors in the Mercantilist age, especially the ministers of the imperialistic Bourbons and the power-lusty Hohenzollerns. And so are their successors to this day.

Evidently, more than humanitarianism was at stake. Watching the world-wide growth of compulsory health insurance, from Icelandic fisherman to coal miners in China, I noticed something that seemed to be overlooked: that all modem dictators — communist, fascist, or disguised — have at least one thing in common. They all believe in Social Security, especially in coercing people into governmentalized medicine.

A selected list of men who have claimed credit for, or have been credited with, introducing or strengthening and expanding governmentalized medical care reads like an extraordinary Who's Who:

• Prince Otto von Bismarck, Chancellor of Germany (1884);
• Franz Joseph I, Emperor of Austria (1888);
• Franz Joseph I, King of Hungary (1891);
• Wilhelm II, “the kaiser” of Germany (1911);
• Admiral Miklos Horthy, reorganizing the scheme as Regent of Hungary (1927);
• Nicholas II, Czar of Russia (1911);
• Vladimir Lenin-Ulianof, founder of modern dictatorship in Soviet Russia (1922);
• Joseph Stalin-Dzhugashvili, almighty Prime Minister and dictator of the U.S.S.R.;
• Joseph Pilsudski, Marshal and para-dictator of Poland (1920);
• Alexander I, King and dictator of Yugoslavia (1922);
• Antonio de Oliveira Salazar, the professor-dictator of Portugal (1919 and 1933);
• Benito Mussolini, Prime Minister and the Duce of Italy (1932 and 1943);
• Francisco Franco, military dictator of Spain (1942 and 1945);
• Yoshihito, Mikado of Japan (1922);
• Hirohito, Mikado of Japan (1934);
• Carol II, pseudo-constitutional King of Romania (1933);
• Joseph Vargas, President and would-be dictator of Brazil (1944);
• Juan Peron, President and boss of the military junta of Argentina (1944);
• Adolf Hitler, Chancellor, the führer of Germany (1933, etc.);
• Pierre Laval, Prime Minister of France (1930), later executed for his fascist activities;
• Ambroise Croizat, Communist Minister of Labor in France (1945);
• Georgi Dimitrov, the late chief agent of the global Comintern, Premier of sovietized Bulgaria (1948);
• Josip Broz, alias Tito, Prime and Foreign Minister, dictator, general secretary of the Communist Party of Yugoslavia (1947);
• Boleslaw Bierut, President and dictatorial figure-head of Satellite Poland (1947);
• Klement Gottwald, President of the Sovietized Republic of Czechoslovakia (1948).

This list of power dynamos — or symbols of power — with bleeding hearts for human suffering is by no means complete.

—Melchior Palyi, Compulsory Medical Care and the Welfare State (Chicago: National Institute of Professional Services, 1949), 18-19.

The Collectivization of Medical Costs Creates the Potential for a Limitless Rise in the Price of Medical Services

Insofar as medical services or facilities are limited in supply, the notion of the need-based right to medical care and the collectivization of medical costs to finance it create the potential for a limitless rise in the price of medical services. To understand this, imagine an auction. There are a large number of units of some good for sale. But there are not enough units for sale to satisfy all the bidders for all of their requirements. Thus some bidders must go away empty handed, or at least with fewer units than they would like. (As I indicated before, there could have been a larger number of units for sale, but the government does not let them on to the floor of the auction. It keeps them out by means of licensing legislation.) To the extent that the equivalent of the perverted notion of the need-based right to medical care prevails at this auction and the individual is relieved of financial responsibility by virtue of being able to charge his bids to a collective, there is simply nothing present to stop the rise in the bidding. No matter how high prices go, people still assert their alleged right to the item and go on meeting or exceeding ever higher bids, in the knowledge that their bid will be paid for by their collective. If this is an auction market for medical services, they go on bidding in the knowledge that their bids will be paid for by their insurance company or by the government. The only people who are eliminated from the bidding are those who lack medical insurance or the medical coverage of some government program. The rise in prices only stops if there are enough uninsured bidders who can be made to drop out of the bidding so that, for the moment at least, the insured ones can be satisfied.

Of course, when this situation was reached in the 1960s, and it was the uninsured poor and elderly who had to drop out of the bidding, the government soon stepped in to remedy the situation by making additional billions available for them, through the Medicaid and Medicare programs, so that they could carry on in the bidding for the supplies its licensing legislation had artificially reduced. Then, of course, the uninsured bidders who had to drop out of the bidding were drawn from a higher economic rank, namely, the lower middle class. This was because the rise in prices fueled by the government’s injection of still more funds into the medical market now surpassed their financial ability to pay.

Understanding these facts, incidentally, should make clear why the Clinton administration’s current proposal to force employers to provide medical insurance for the 37 million Americans who remain uninsured, leaves absolutely no alternative but price controls and rationing as the means of controlling costs. This is because if virtually everyone is now to have the need-based right to medical care and have his bills sent to the collective for payment, there will be absolutely no limit to the bidding and the rise in prices unless the government restricts the medical care he is allowed to have and determines the price that is to be paid for it. Try to imagine, for example, a situation in which there are 100 units of a supply available and 137 bidders, each of whom would like to have one unit of that supply and is in a position to send the bill for his bid to the government. The rise in cost to the government can only be controlled if the government imposes some kind of limitation on the amount anyone is allowed to bid for in this manner, such as 100/137 of a unit of the supply, and refuses to allow anyone to attempt to buy more by raising his bid even with his own money, because that too would increase the cost to the government.

—George Reisman, “The Real Right to Medical Care Versus Socialized Medicine,” http://www.capitalism.net/articles/SOC_MED_files/The Real Right to Medical Care Versus Socialized Medicine.html (accessed December 9, 2019).

The “New Orthodoxy” of the Public Debt Burden Is the Economic Analogue to the “Perpetual Motion Machine”

The ‘‘new orthodoxy’’ of public debt stood almost unchallenged among economists during the 1940s and 1950s, despite its glaring logical contradictions. The Keynesian advocates failed to see that, if their theory of debt burden is correct, the benefits of public spending are always available without cost merely by resort to borrowing, and without regard to the phase of the economic cycle. If there is no transfer of cost onto taxpayers in future periods (whether these be the same or different from current taxpayers), and if bond purchasers voluntarily transfer funds to government in exchange for promises of future interest and amortization payments, there is no cost to anyone in society at the time public spending is carried out. Only the benefits of such spending remain. The economic analogue to the perpetual motion machine would have been found.

A central confusion in the whole Keynesian argument lay in its failure to bring policy alternatives down to the level of choices confronted by individual citizens, or confronted for them by their political representatives, and, in turn, to predict the effects of these alternatives on the utilities of individuals.

It proved difficult to get at, and to correct, this fundamental confusion because of careless and sloppy usage of institutional description. The Keynesian economist rarely made the careful distinction between money creation and public debt issue that is required as the first step toward logical clarity. Linguistically, he often referred to what amounts to disguised money creation as ‘‘public debt,’’ notably in his classification of government ‘‘borrowing’’ from the banking system. . . .

The ‘‘New Economics’’ had finally moved beyond the elementary textbooks and beyond the halls of the academy. The enlightened would rule the world, or at least the economic aspects of it. But such dreams of Camelot, in economic policy as in other areas, were dashed against the hard realities of democratic politics. Institutional constraints, which seem so commonplace to the observer of the 1970s, were simply overlooked by the Keynesian economists until these emerged so quickly in the 1960s. They faced the rude awakening to the simple fact that their whole analytical structure, its strengths and its weaknesses, had been constructed and elaborated in almost total disregard for the institutional world where decisions are and must be made.

—James M. Buchanan and Richard E. Wagner, Democracy in Deficit: The Political Legacy of Lord Keynes, vol. 8 of The Collected Works of James M. Buchanan (Indianapolis: Liberty Fund, 2000), 36-37.

Both Monopolists and Communists Start with “Artificial Organization” and End with Terror

Suppose nevertheless that the partisans of an artificial organization, either the monopolists or the communists, are right; that society is not naturally organized, and that the task of making and unmaking the laws that regulate society continuously devolves upon men, look in what a lamentable situation the world would find itself. The moral authority of governors rests, in reality, on the self-interest of the governed. The latter having a natural tendency to resist anything harmful to their self-interest, unacknowledged authority would continually require the help of physical force.

The monopolist and the communists, furthermore, completely understand this necessity.

If anyone, says M. de Maistre, attempts to detract from the authority of God’s chosen ones, let him be turned over to the secular power, let the hangman perform his office.

If anyone does not recognize the authority of those chosen by the people, say the theoreticians of the school of Rousseau, if he resists any decision whatsoever of the majority, let him be punished as an enemy of the sovereign people, let the guillotine perform justice.

These two schools, which both take artificial organization as their point of departure, necessarily lead to the same conclusion: TERROR.

—Gustave de Molinari, The Production of Security, trans. J. Huston McCulloch (Auburn, AL: Ludwig von Mises Institute, 2009), 51-52.

Rejecting Classical Cost Theory, Menger Filled the Gap with a New Version of Galiani's and Condillac's Cost Theory

Menger based his theory of imputation entirely on utility and not on costs. He rejected the classical cost theory, but he still had to explain the value of the factors of production, for otherwise an empty spot remained in his system. He filled the gap with a new version of Galiani's and Condillac's cost theory. Not the value of the cost goods determines the value of the finished goods, but the opposite is true; the value of the consumer goods or, in Menger's terminology, the value of the goods of lower order determines the value of the factors of production or goods of higher order. Menger introduced an interesting refinement into Condillac's statement: not the actual marginal utility of the consumer good but the presumed future value determines the value of capital, labor, and land. Menger, in a theory of production and distribution, emphasized the time element much more strongly than Galiani and even Gossen.

Menger understood quite well that the transfer of value creates a new problem, because factors of production are complementary. They work together in the production of consumer goods. Menger, like Gossen, tried to find a key with which the marginal value of consumer goods can be distributed on each factor inside the factor combination; in this Gossen was more skeptical and cautious than Menger. The latter believed indeed that the problem can be solved and that he had already done so. His interpretation contains ideas which Gossen had already mentioned, and some new suggestions which his student Boehm-Bawerk had refined. Menger's and Boehm-Bawerk's theorem will be discussed together. What Menger thought about this problem is not as important as the fact that he started a discussion in the Austrian camp which is still going on.

—Emil Kauder, A History of Marginal Utility Theory, Princeton Legacy Library (Princeton, NJ: Princeton University Press, 1965), 79.

“Menger's Law” States That the Value of All Goods Derives Ultimately from the Utility of the Services of Consumer Goods

Carl Menger, the founding theorist of the Austrian School of Economics, suggested that the material world was composed of goods and services and considered the end of all economic activity to be the consumption of valuable services produced by goods of various “orders.” He divided goods into two exclusive kinds: free goods and economic goods. Free goods are those for which, at a zero price, less would be desired than is available. By contrast, economic goods are those for which, at a zero price, more would be desired than is available. Economic goods are scarce, have value, and will command a positive price if freely traded. Economic goods have value because they yield desirable services. These services provide consumers with utility.

Economic goods may, in turn, be divided into two types: those whose services yield utility directly, first order or consumption goods, and those whose services provide utility indirectly, production goods, or higher-order goods. Production goods provide services that are used in the production of other production goods successively in a supply chain leading to the emergence of consumer goods that provide services yielding utility. Thus, the value of all goods derives ultimately from the utility of the services of consumer goods (Israel Kirzner has called this “Menger’s Law”).

The distinction between stocks and flows is fundamental and important and often neglected. People do not desire goods “in themselves”; they desire what flows from having or renting them. It is the services of goods that are the ultimate objective of economic action. As Menger points out, these can be obtained directly from nature or indirectly by production, using produced instruments of production, production goods.

—Peter Lewin and Nicolas Cachanosky, Austrian Capital Theory: A Modern Survey of the Essentials, Cambridge Elements in Austrian Economics (Cambridge, UK: Cambridge University Press, 2019), 5.