Category: Uncategorized

By Richard Ebeling

Originally published on September 23, 2024 for The Future of Freedom Foundation

Seventy-five years ago, on September 14, 1949, Yale University Press published Ludwig von Mises’s Human Action: A Treatise on Economics. Almost 900 pages in length, it soon became recognized as one of the major works in economics in the twentieth century.

Not that this recognition was felt in the economics profession of the time. Few reviews appeared in the professional economics journals, and the ones that did were far from complimentary. This was not surprising given the dominance of Keynesian and socialist ideas in the years following the Second World War. Few were the voices in the economics profession who were consistent advocates of a liberal, free-market perspective or had the courage to challenge the theoretical and economic policy orthodoxy of that time.

It was presumed that the Great Depression had “proven” the failure of unbridled capitalism and that every society needed a transformation into either some form of government centralized planning or at least strong fiscal and monetary intervention by the federal government to ensure economy-wide stability and full employment. At the same time, any “reformed” capitalist system needed government regulatory restrictions on market competition to prevent monopoly and unfair business practices, along with a larger and larger redistributive welfare state.

But then in 1949 there appeared this major work that not only offered a systematic and detailed analysis of the logic and workings of the free market and its dynamic competitive process but also defended its philosophical foundations, its historical importance, and its institutional prerequisites if there was to be a free and prosperous society.

Shortly after the German-language predecessor of Human Action had been published in Switzerland in 1940 under the title Nationalökonomie, Mises’s friend and colleague Friedrich A. Hayek wrote in a review:

There appears to be a width of view and an intellectual spaciousness about the whole book that are much more like that of an eighteenth-century philosopher than that of a modern specialist. And yet, and perhaps because of this, one feels throughout much nearer reality, and is constantly recalled from the discussion of the technicalities to the consideration of the great problems of our time…. It ranges from the most general philosophical problems raised by all scientific study of human action to the major problems of economic policy of our time…. The result is a really imposing unified system of a liberal social philosophy. It is here also, more than elsewhere, that the author’s astonishing knowledge of history as well as the contemporary world helps most to illustrate his argument.

Similarly, when Human Action appeared in 1949, the free-market journalist and Newsweekcolumnist Henry Hazlitt wrote in his weekly article:

[The] book is destined to become a landmark in the progress of economics…. Human Action is, in short, the most uncompromising and the most rigorously reasoned statement of the case for capitalism that has yet appeared…. It should become the leading text of everyone who believes in freedom, in individualism, and the ability of a free-market economy not only to outdistance any government-planned system in the production of goods and services for the masses, but to promote and safeguard, as no collectivist tyranny can ever do, those intellectual, cultural, and moral values upon which all civilization ultimately rests.

The foundations of the study of human action

The very structure of Mises’s book made it seem alien to the mainstream of the economics profession when it appeared. Economics was increasingly becoming a narrowly technical and highly mathematical discipline, with a growing use of and dependency on aggregate statistical data in designing theories and “models” of the economy.

Instead, the first 200 pages of Human Action were devoted to the philosophical and epistemological problems of the human sciences, especially economics and history. Most economists had come to believe that if economics was to be a “real” science, it needed to ape the methods and techniques of the natural sciences. This was the reason behind the presumption that all economic theorizing required the reduction of human activity and interactions to mathematical functions and simultaneous equations to achieve states of economic equilibrium. Statistical data was assumed to capture and incorporate the objectively measurable aspects of human conduct that would ensure economics becoming an “empirical” science for hypothesis testing and predictions of future economic trends.

Mises challenged this entire direction of the economics profession. He argued that there was a distinctly unique quality and characteristic to the study of human beings. Unlike the inanimate objects of the world that fields like physics or chemistry primarily studied, man acts. That is, human beings have consciousness. They think and reason. They reflect on their past and imagine their future. They conceive of desired ends to pursue and imagine means and methods to try to successfully realize those ends.

The study of economics, Mises said, began with reflections on the logical workings of man’s own mind because all human action is nothing more than human reason applied to the pursuit of human purposes. Economics, therefore, begins not with observations of the external manifestations of the outcomes of human action but with an introspective reflection on the logical structure of human reasoning.

What, then, does it mean to “act” and to be able to act? Mises stated that there were three prerequisites in the context of which human beings undertook purposeful action: First, causality. The individual must believe that there are discoverable causal relationships the use of which could enable a desired end to be achievable. Second, uncertainty. The actor must believe that his actions can influence the course of events in such a way that future circumstances may be made different than they would have been if not for his active intervention. Third, temporality. Causality implies the existence of time, since any action undertaken implies a before, a during, and an after. Therefore, all human action occurs in and through time and is something about which man is not indifferent.

While these three elements —causality, uncertainty, and time —are inseparable from the very notion of the “doing” of an action, there remain three other conditions that must be present: First, a feeling of uneasiness. The actor must be dissatisfied in some way with his present or expected circumstances. Second, an imagined and preferred state of affairs. The actor is able to imagine and project into the future a situation or circumstance he would prefer to the one that is likely to prevail if he does not act. Third, a belief or expectations about the availability of useable and useful means to bring his preferred state of affairs into existence at a point in the future.

From these fundamental concepts, Mises argued, all the core principles and relationships of economics were derivable. The reality of the world shows man that many of the available and useful means are insufficient to simultaneously pursue all his desired ends. This implies that the human actor must rank his desired ends in some order of relative importance and apply the means for pursuing these ends in a descending order reflecting the subjective (personal) valuation of these ends. While some choices are categorical (either/or), most choices, due to the discreteness of both the ends and the means, are incremental (“marginal”) in nature. This imposes upon man the necessity of trade-offs, that is, a little bit more of this versus a little bit less of that. Hence, scarcity of means for the attainment of ends imposes upon man the necessity of choice.

Every such trade-off likewise implies something given up in exchange for something gained. That which is potentially gained from a trade-off is the benefit of a choice, while that which is given up or forgone is the cost of any choice. The profit from such trade-offs is the subjective sense of a net improvement in personal wellbeing from having or achieving the “A” over the “B” that is given up. However, since all actions and choices undertaken are done so under degrees of uncertainty, it is always possible that after an action and trade, the actor will find that the outcome was less than he expected and hoped for. He may regret the choice made and consider himself worse rather than better off; that is, he has suffered a loss.

None of this has anything to do with mathematical functions or data collection and statistical correlation. They precede any attempt to represent human decision-making in mathematical functional form, because it would not be known how to formulate the nature and shape of the functions without this prior introspective knowledge of how human beings think, reason, and act. And it is the choices first made in the minds of interacting human beings about valuations of both ends and means before any external manifestation of it occurs in the forms of production and consumption, buying and selling, prices offered, and bids made and agreed upon in the marketplace that the data collector and statistician attempt to arrange and correlate.

This led Mises to conclude:

Economics is not about things and tangible material objects; it is about men, their meanings and actions. Goods, commodities, and wealth and all the other notions of conduct are not elements of nature; they are elements of human meaning and conduct. He who wants to deal with them must not look at the external world; he must search for them in the meaning of acting men.

This is why for Mises social and market interactions not only begin with individuals — after all, only individuals think, reason, and act — but that human actions arise from people’s subjective interpretations of the world. What are desirable ends and useful means, what are the methods by which means may be applied to achieve ends, what is valued more and what less, which trade-offs would make the actor better off or worse off, and what outcomes would be considered a net gain rather than a loss? None of this is independent and separable from the subjective (personal) interpretations and judgements of the individual human actors.

Equally, all human interactions arise from and depend upon how the actors view the intentions and actions of others. Someone is running toward you waving his arms late at night in a dark alley. Is he a threatening attacker or a long lost relative rapidly approaching to embrace you? The man standing over you has a pointed, sharp instrument in his hand. Is he planning to use this knife to kill you, or is he a surgeon about to make an incision with a scalpel to save your life? Are a group of people jumping up and down in a circle performing a war dance or celebrating at a wedding? The meanings seen in one’s own actions and that of others defines and determines the type of social and economic interactions they are and which influence the respective actions each individual plans and undertakes.

It was Mises’s emphasis on methodological individualism and subjectivism that made Hayek observe in The Counter-Revolution of Science (1952):

It is probably no exaggeration to say that every important advance in economic theory during the last one hundred years was a further step in the consistent application of subjectivism…. This is a development which has probably been carried out most consistently by Ludwig von Mises, and I believe that most peculiarities of his views which at first strike many readers as strange and unacceptable trace to the fact that in the consistent development of the subjectivist approach, he has for a long time moved ahead of his contemporaries.”

Division of labor as the bond of human association

Society emerged out of a long evolutionary process of various forms of human association based on intersubjective beliefs and rules of interaction. The fundamental basis of human beings continuously living together, Mises argued, was the tacit discovery of the benefits from division of labor, that specialization of activities and tasks are far superior to attempts at self-sufficient methods of production to satisfy people’s wants.

From the most ancient of primitive, tribal times, some men were found to be better at fishing or tool making, while others had advantages at hunting or as warriors to protect the tribe from the threats of rival human groups. “The division of labor is what first makes social ties,” Mises explained, “it is the social element pure and simple.” Throughout history, there have been two general forms of human association under division of labor: hegemonic and contractual. Hegemonic relationships are based on command and subjugation, with one or a small group of men ruling over and controlling and directing the actions of others under the threat or use of force. Contractual relationships are based on voluntary agreement and mutual consent of the participants in the association.

The history of human civilization has been a slow replacement of the hegemonic relationship with the society of contract. Individual freedom, voluntary association, and market-based cooperation have served as the basis for the material and cultural advancement of mankind. But the improvements in the human condition have required the emergence and maintenance of certain crucial institutions. Mises explained them:

First, private property, that is, the private ownership of the means of production. Individuals have the right of possession and use of not only goods ready for consumption but the factors of production out of which final goods and services can be manufactured and used.

Second, freedom, that is, the individual liberty to be guided by one’s own purposes and plans, on the basis of which people voluntarily integrate themselves into the social system of division of labor through contract and mutual agreement concerning the terms of association and trade.

Third, peace, that is, the removal and abolition of violence from human relationships, because only in a climate of tranquil association can each individual feel secure to apply his mind, talents, and efforts for creative improvements to the human condition.

Fourth, equality, that is, equal personal and political freedom before the law so each individual may have the liberty to participate in the system of division of labor as he thinks most profitable without legal barriers or restrictions.

Fifth, inequality of wealth and income, that is, each individual’s material position in society depends on his success in serving others in the system of division of labor; the relative income and wealth positions of each individual reflects his inevitable unequal accomplishments in satisfying the wants and desires of others as demonstrated in the profits, wages, interest, or rent each earns for services rendered to their fellow man.

Sixth, limited government, that is, the political authority is restricted in its powers and responsibilities to those tasks required for the securing of the peace under which each individual’s freedom and honestly acquired property is protected from violence, fraud, and aggression.

Market, prices, and economic calculation versus socialist planning

In a system of division of labor, the privately owned means of production are set to work to produce products and provide services desired by others as the means by which each owner — including the owners of their own labor — may successfully earn the financial means to obtain, in turn, the goods and services they want that are being offered by others in their respective roles as producers.

But given the complex network of specialization, and the fact that the participants are separated from each other by both space and time, how can each person successfully communicate to all the others what they desire and are willing to pay as a consumer and what might they be able to do, and at what cost, in their role as a producer?

The answer to this became part of Ludwig von Mises’s most important and recognized contribution to economics. In the years immediately following the First World War, especially in revolutionary Russia, postwar Germany, and in some other European countries, the case was made that the time had come to do away with the capitalist system and replace it with socialist central planning. Mises responded to this with an article on “Economic Calculation in the Socialist Commonwealth” (1920), which he soon expanded into a full treatise in 1922 on the dangers and unworkability of a socialist economic order, which was later published in English as Socialism: An Economic and Sociological Analysis (1936). In the face of criticism and often vicious attacks, Mises restated and refined his argument against central planning in the pages of Human Action.

A functioning and complex market system of division of labor is made possible by the existence of a competitively generated price system on the basis of which both consumer goods and the physical means of production (land, labor, and capital) are expressed in commensurable value through a medium of exchange — money. A market-based monetary price system enables a process of economic calculation through which it is possible to compare and determine the value of outputs relative to the value of inputs in terms of sums of money.

Hence, those guiding and directing production in the market economy — the enterprising entrepreneurs — are able to estimate whether particular productive activities would be profit-making or loss-suffering and, among the alternative ways of combining the factors of production to manufacture desired products, which ones would enable the least-costly methods of bringing desired goods to market. For this reason, Mises highlighted that

Monetary calculation is the guiding star of action under the social system of division of labor. It is the compass of the man embarking upon production…. Monetary calculation is the main vehicle of planning and acting in the social setting of a society of free enterprise directed and controlled by the market and its prices…. Our civilization is inseparably linked with our methods of economic calculation. It would perish if we were to abandon this most precious intellectual tools of acting.

The socialist system of centralized government planning did away with private ownership and control of the means of production; market transactions were eliminated in determining what and how things would be produced, with no market-generated money prices informing what consumer goods or factors of production would be worth for different purposes and in different uses.

The gist of Mises argument against socialist planning can be expressed in the following way: With no private property in the means of production, there is nothing (legally) to buy and sell. With no buying and selling of the factors of production, there are no incentives for people to make bids or offers. With no bids and offers, there can be no agreed-upon terms of trade. With no agreed-upon terms of trade, there would be no real prices telling factor owners what their services and resources may be worth in alternative employments, and no way for the central planners to know what lines of production might be profit-making versus loss-creating, or which combinations of the means of production would enable the least-costly ways of producing what consumers actually want. Thus, rather than a material horn-of-plenty exceeding anything ever experienced under capitalism, socialism in practice would result in what Mises once entitled a short work of his, Planned Chaos (1947). (See my article, “The Centenary of Ludwig von Mises’s Critique of Socialism,” Future of Freedom, June 2022.)

Sovereignty of the consumers and the entrepreneur

In the free, open, and competitive market economy, the ultimate decision-makers are the consumers, who are “sovereign” in deciding what they want to buy and the prices they are willing to pay. They are the determiners of how the scarce means of production are allocated and used in producing and supplying which goods and services. But standing as the market intermediary between the consumers of the society and the factors of production employed to make what those consumers want are the entrepreneurs. Their role in the social system of division of labor is to be the undertakers of private enterprises, the decision-makers as to what to produce, where and how to produce what consumers want, and with what combinations of the factors of production.

The entrepreneur’s reward for successfully doing so are profits earned and the additional revenues for expanding his operations. Losses are the punishment for failure in mistaking what consumers desire and the prices they are willing to pay, or in doing so less effectively and less efficiently than his supply-side market rivals; unless he mends his decision-making ways, the loss-making enterpriser eventually goes out of business and control of the means of production at his disposal passes into potentially more competent entrepreneurial hands.

This dynamic and never-ending competitive market process, Mises stated, brings about the cooperative coordination of the actions of everyone in the society by determining each person’s most efficient and productive place in the division of labor. It is the process that brings about a matching of supplies with demands and creates the incentives and opportunities for entrepreneurs and others in trying their hands at producing more, better, different, and less costly goods and services in the quest for profits and avoidance of losses. The outcome has been the ever-improving standard of living that free market capitalism has brought to millions and now billions of people.

Government interventions and monetary distortions

Hampering the ability of free markets to do so to the greatest extent, Mises lamented, has been the interventionist welfare state. Government price and production regulations do not abolish the market economy, but these government interventions play the role of sand in the machine, preventing the price system from successfully coordinating all the supplies and demands in the market and hindering entrepreneurs from use their personal (subjective) knowledge, judgment, and “reading” of consumer demand to bring to market what buyers want and in the forms and types they desire. Carried far enough, government controls on prices and production cumulatively can end up imposing a form of planned economy in its place by suffocating the market with controls and regulations.

Mises’s other major contribution to economics during his lifetime was his “Austrian” theory of money and the business cycle. First presented in The Theory of Money and Credit (1912, 2nd ed., 1924) and Monetary Stabilization and Cyclical Policy (1928), he used the publication of Human Action as the opportunity to restate and refine his theory of the origin of money and of how changes in the money supply impact prices, wages, production, and resource uses in “non-neutral” distorting ways.

One form of this monetary-induced distortion of market relationships came through central bank manipulation of money and interest rates that brought about the booms and busts of the business cycle. The only real protection from this happening over and over again, Mises insisted, was the separation of money from the state through private, competitive free banking. (See my three-part series, “Ludwig von Mises and the Austrian Theory of Money, Banking and the Business Cycle,” Future of Freedom, March, April, and May 2024.)

Free markets bring freedom and prosperity

The conclusions that Mises reached based on his analysis of the market economy versus socialism versus the interventionist state was that there was no viable alternative to an open, competitive capitalist system. This was the case not only in terms of which economic system has the potential to most effectively “deliver the goods” that people want and at the least cost but also in the sense of providing the individual with the greatest degree of personal freedom consistent with a peaceful living with others in society.

Private property provides the individual an autonomous sphere in which to live independently of the control and command of government through his own actions and interactions with other private individuals by the voluntary associations of the marketplace. Such freedom is threatened and does not exist in any political arrangement
in which government has a commanding control of production and employment. Especially under socialism, there are no employment opportunities, no accesses to the necessities or amenities of life, or availability to independent sources of knowledge and information outside of the State. As Mises pointed out:

The concepts of freedom and bondage make sense only when referring to the way in which government operates…. As far as the government — the social apparatus of compulsion and oppression — confines the exercise of its violence and the threat of such violence to the suppression and prevention of antisocial action, there prevails what reasonably and meaningfully can be called liberty….

Liberty and freedom are the conditions of man within a contractual society. Social cooperation under a system of private ownership of the factors of production means that within the range of the market the individual is not bound to obey and to serve an overlord. As far as he gives and serves other people, he does so of his own accord in order to be rewarded and served by the receivers. He exchanges goods and services; he does not do compulsory labor and does not pay tribute. He is certainly not independent. He depends on the other members of society. But this dependence is mutual. The buyer depends on the seller and the seller on the buyer…. There is no kind of freedom and liberty other than the kind which the market economy brings about….

Government is in the last resort the employment of armed men, of policemen, gendarmes, soldiers, prison guards, and hangmen. The essential feature of government is the enforcement of its decrees by beating, killing, and imprisoning. Those who are asking for more government interference are asking ultimately for more compulsion and less freedom.

Seventy-five years may have passed since Ludwig von Mises’s Human Action was published. Yet, the logic of human action and the workings of the market economy are no different now than when Mises enunciated them in his treatise. Nor are the impossibilities and dangers from various forms of government planning and intervention any different today than in 1949.

Indeed, in the midst of the current collectivist counterrevolution against freedom in all its facets —political, cultural and social, as well as economic — the lessons to be learned from within the pages of Human Action have never been more important. It remains one of the timeliest classics of the last 100 years.

By Richard Ebeling

Originally published on July 4, 2021 for The Future of Freedom Foundation

The Declaration of Independence, proclaimed by members of the Continental Congress on July 4, 1776, is the founding document of the American experiment in free government. What is too often forgotten is that what the Founding Fathers argued against in the Declaration was the heavy and intrusive hand of big government.

Most Americans easily recall those eloquent words with which the Founding Fathers expressed the basis of their claim for independence from Great Britain in 1776:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty, and the Pursuit of Happiness – That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed – That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.

The Grievances Against Intrusive Government

But what is usually not recalled is the long list of enumerated grievances that make up most of the text of the Declaration of Independence. The Founding Fathers explained how intolerable an absolutist and highly centralized government in faraway London had become. This distant government violated the personal and civil liberties of the people living in the 13 colonies on the eastern seaboard of North America.

In addition, the king’s ministers imposed rigid and oppressive economic regulations and controls on the colonists that was part of the 18th-century system of government central planning known as mercantilism.

“The history of the present King of Great Britain is a history of repeated injuries and usurpations, all having in direct object the establishment of an absolute Tyranny over these States,” the signers declared.

Concentration of Power and Arbitrary Rule

At every turn, the British Crown had concentrated political power and decision-making in its own hands, leaving the American colonists with little ability to manage their own affairs through local and state governments. Laws and rules were imposed without the consent of the governed; local laws and procedures meant to limit abusive or arbitrary government were abrogated or ignored.

The king also had attempted to manipulate the legal system by arbitrarily appointing judges that shared his power-lusting purposes or were open to being influenced to serve the monarch’s policy goals. The king’s officials unjustly placed colonists under arrest in violation of writ of habeas corpus, and sentenced them to prison without trial by jury.  Colonists often were violently conscripted to serve in the king’s armed forces and made to fight in foreign wars.

A financially burdensome standing army was imposed on the colonists without the consent of the local legislatures. Soldiers often were quartered in the homes of the colonists without their approval or permission.

In addition, the authors of the Declaration stated, the king fostered civil unrest by creating tensions and conflicts among the different ethnic groups in his colonial domain. (The English settlers and the Native American Indian tribes.)

Government Violation of Economic Liberty

But what was at the heart of many of their complaints and grievances against King George III were the economic controls that limited their freedom and the taxes imposed that confiscated their wealth and honestly earned income.

The fundamental premise behind the mercantilist planning system was the idea that it was the duty and responsibility of the government to manage and direct the economic affairs of society. The British Crown shackled the commercial activities of the colonists with a spider’s web of regulations and restrictions. The British government told them what they could produce, and dictated the resources and the technologies that could be employed.

The government prevented the free market from setting prices and wages, and manipulated what goods would be available to the colonial consumers.  It dictated what goods might be imported or exported between the 13 colonies and the rest of the world, thus preventing the colonists from benefiting from the gains that could have been theirs under free trade.

Everywhere, the king appointed various “czars” who were to control and command much of the people’s daily affairs of earning a living. Layer after layer of new bureaucracies were imposed over every facet of life. “He has erected a multitude of New Offices, and sent hither swarms of Officers to harass our people, and eat out their substance,” the Founding Fathers explain.

In addition, the king and his government imposed taxes upon the colonists without their consent. Their income was taxed to finance expensive and growing projects that the king wanted and that he thought were good for the people, whether the people themselves wanted them or not.

Burdensome Taxes, Tax Evasion, and Violent Government

The 1760s and early 1770s saw a series of royal taxes that burdened the American colonists and aroused their ire: the Sugar Act of 1764, the Stamp Act of 1765, the Townsend Acts of 1767, the Tea Act of 1773 (which resulted in the Boston Tea Party), and a wide variety of other fiscal impositions.

The American colonists often were extremely creative at avoiding and evading the Crown’s regulations and taxes through smuggling and bribery (Paul Revere smuggled Boston pewter into the West Indies in exchange for contraband molasses.)

The British government’s response to the American colonists’ “civil disobedience” against its regulations and taxes was harsh. The king’s army and navy killed civilians and wantonly ruined people’s private property. “He has plundered our seas, ravaged our Coasts, burnt our towns, and destroyed the lives of our people,” the Declaration laments.

Opposing Oppressive Government to be Free

After enumerating these and other complaints, the Founding Fathers said in the Declaration:

In every stage of these Oppressions We have Petitioned for Redress in the most humble terms: Our repeated Petitions have been answered only by repeated injury. A Prince whose character is thus marked by every act which may define a Tyrant, is unfit to be the ruler of a free people.

Thus, the momentous step was taken to declare their independence from the British Crown. The signers of the Declaration then did “mutually pledge to each other our Lives, our Fortunes and our sacred Honor,” in their common cause of establishing a free government and the individual liberty of the, then, three million occupants of those original 13 colonies.

Never before in history had a people declared and then established a government based on the principles of the individual’s right to his life, liberty, and property.

Never before was a society founded on the ideal of economic freedom, under which free men were declared to have the right to live for themselves in their own individual interest, and peacefully produce and exchange with each other on the terms they find mutually beneficial without the stranglehold of regulating and planning government.

Never before had a people made clear that self-government meant not only the right of electing those who would hold political office and pass the laws of the land, but also meant that each human being had the right to be self-governing over his own life.

Indeed, in those inspiring words in the Declaration, the Founding Fathers were insisting that each man should be considered as owning himself, and not be viewed as the property of the state to be manipulated by either king or Parliament.

It is worth remembering, therefore, that what we are celebrating every July 4 is the idea and the ideal of each human being’s right to his life and liberty, and his freedom to pursue happiness in his own way, without paternalistic and plundering government getting in his way.

Overcoming the Chains of Political Tyranny Today

We should turn to the words of Thomas Jefferson, written to mark the fiftieth anniversary of the signing of the Declaration of Independence on July 4, 1826, the very day, in fact, that Jefferson died at the age of eighty-three:

May it be to the world, what I believe it will be, (to some parts sooner, to others later, but finally to all,) the Signal of arousing men to burst the chains, under which monkish ignorance and superstition had persuaded them to bind themselves, and to assume the blessings & security of self-government.

That form which we have substituted, restores the free right to the unbounded exercise of reason and freedom of opinion.  All eyes are opened, or opening, to the rights of man . . . The palpable truth, that the mass of mankind has not been born with saddles on their backs, nor a favored few booted and spurred, ready to ride them legitimately, by the grace of god.  These are grounds of hope for others.  For ourselves, let the annual return of this day forever refresh our recollections of these rights, and an undiminished devotion to them.

The “monkish ignorance and superstition” of today is the misplaced belief that the individual is to be sacrificed to the group, the collective, to the nation – as long as the banner under which it is done is called “democracy” or “social justice.”

Instead of the divine right of kings, America’s modern-day “progressives” speak of the secular divine right to “entitlements.” They call for an even greater fiscal and regulatory servitude of the productive and creative for the redistributive advantage of the less productive and more politically connected members in society.

Those who today believe that some have been “born with saddles on their back” to be ridden by “a favored few booted and spurred” are the ones who want to reinforce and extend a system of political favors and privileges for corrupt and corrupted businessmen  — the “crony capitalists” – who are unwilling or unable to honestly acquire the income and wealth they want through the peaceful and voluntary trades of the free marketplace.

And it is we, who believe in the liberty for which the Founding Fathers pledged their lives, fortunes and sacred honor in that war of independence, who must do all in our power to restore that crucial understanding and appreciation of individual freedom and individual rights among our fellow citizens, without which that great American “experiment” in political and economic individualism may be lost beyond recovery.

By Richard Ebeling

Originally published on March 12, 2024 for The Future of Freedom Foundation

One hundred years ago, in 1924, the Austrian economist Ludwig von Mises issued a revised German-language edition of his 1912 book Theorie des Geldes und der Unlaufsmittel. Ninety years ago, in 1934, there appeared an English-language edition under the title The Theory of Money and Credit. Over the more than a century since Mises’s book first appeared, the political and institutional circumstances of much of the world have gone through dramatic changes, yet the theoretical and policy analyses and insights of The Theory of Money and Credit have withstood the test of time. 

When the first edition was published, the major countries of the world, including Mises’s Austro-Hungarian homeland, had monetary systems based on the gold standard. In 1912, two years before the beginning of the First World War, many Europeans and North Americans were still living in the afterglow of the classical-liberal epoch of the nineteenth century. Governments were still relatively limited in size and scope. Taxes were fairly low, with accompanying modest levels of government spending. Those same governments, in general, mostly respected a wide array of civil liberties and personal freedoms. Freedom of trade and enterprise was the normative standard, even if some of those governments, especially in Imperial Germany, had reintroduced various protectionist barriers and were intervening in a variety of domestic economic activities. Yet, at the same time, the far-flung British Empire was administered as a global free-trade zone welcoming buyers and sellers and investors with few if any limits based on their nationality. 

The monetary system before and after World War I

The central banks of these European countries (the United States did not have a comparable national central bank in the form of the Federal Reserve System until 1914) all generally followed the “rules” of the gold standard. Bank notes and bank deposits were viewed and treated as “money substitutes,” that is, claims to the “real” money of gold and silver. Discretionary monetary manipulations by central banking authorities were generally frowned upon and not excessively practiced. If prices in general significantly rose for a period of time, it was usually due to significant increases in the world supply of gold, not the result of politically motivated paper-money inflations. However, the rationales and calls for “activist” monetary policies were increasingly for purposes of “social policy.”   

When the revised second German edition of The Theory of Money and Credit appeared in 1924, the world was a radically different place from what it had been in 1912. Many of those major countries had gone through the four years of the First World War (1914–1918), and some had politically disintegrated, with the German, Russian, and Austro-Hungarian empires disappearing from the map of Europe. The prewar liberal institutions and beliefs concerning personal and economic freedom had been weakened, if not shattered. Gold redemption for paper currencies had ended among the belligerent nations in 1914 so their governments could, respectively, resort to the monetary printing presses to cover their huge war expenses. 

In the immediate postwar years of the early 1920s, destructive hyperinflations were experienced in places like Germany, Austria, and Russia. Half-hearted attempts were made to restore gold-based currencies that were mere shadows of the prewar monetary system. In addition, dictatorships had come to power in the form of Marx-inspired communism in Russia under Lenin and the Bolsheviks and in the form of fascism in Italy under the leadership of Mussolini (who coined the term “totalitarianism” to express his conception of the role and power of the state). An assortment of authoritarian regimes came to power in a number of other countries.

Ten years later, in 1934, when the English-language edition of The Theory of Money and Credit was published in Great Britain, the world had changed even more. The major industrial countries were in the throes of the Great Depression following the stock market crash of October 1929, with worst of the rising unemployment and falling production experienced in the United States and Germany, though the severity of the depression was not much less felt in Great Britain and France and many other places. The gold standard had been abandoned, either de jure or de facto, virtually everywhere, with paper monies in their place as government policy tools to try to “fight” the depression. 

Also, in 1933, Hitler and the Nazi Party had come to power in Germany, with dictatorial control rapidly imposed on all facets of German life and society. In the United States, Franklin Roosevelt had become president and soon imposed his own version of a fascist-like economic system on the United States in the form of New Deal centralized economic planning (which partially came to an end through a series of Supreme Court decisions in 1935 and 1936 that declared some New Deal programs to be unconstitutional).  

Economic principles and the theory of money

In the preface to the 1934 English edition, Mises said that the monetary and banking institutional circumstances certainly had changed from the times when the first and second editions of his book had appeared in 1912 and 1924, respectively. But he argued: 

Ten years have elapsed since the second German edition of the present book was published. During this time the external apparatus of the currency and banking problems of the world has completely altered…. [But] amid this flux, the theoretical apparatus which enables us to deal with these questions remains unaltered. In fact, the value of economics lies in its enabling us to recognize the true significance of problems, divested of their accidental trimmings. No very deep knowledge of economics is usually needed for grasping the immediate effects of a [policy] measure; but the task of economics is to foretell the remoter effects; and so to allow us to avoid such acts as attempt to remedy some present ill by sowing the seeds of a much greater ill in the future.

Economists had been intensely analyzing monetary and banking theory and policy issues since at least the middle of the eighteenth century. Some of them were among the most famous economists of their time, including David Hume, Adam Smith, David Ricardo, John Stuart Mill, and others like Jean-Baptiste Say, Henry Thornton, Nassau Senior, and John E. Cairnes, to name just a few of the prominent ones. 

But virtually all of them built their ideas on the “classical” labor theory of value, that is, that the value of any good — including a commodity such as gold or silver — ultimately derived its long-run value in the marketplace based on its costs of production, reducible to a quantity of labor time and effort that had gone into the extraction of resources and the manufacture of the finished good.

After the emergence of the subjective theory of value, especially with the publication of Carl Menger’s Principles of Economics (1871) and its elaboration by his “Austrian” followers, Friedrich von Wieser and Eugen von Böhm-Bawerk in the 1880s and 1890s, the labor theory of value was replaced by the theory of (marginal) subjective value. Ultimately, the value of any good was derived from its “utility” or usefulness in satisfying a human want or desire. The “utility” of any particular unit of a specific quantity of a good was based on the wants it satisfied in descending order of importance. 

The means of production (land, resources, labor, capital) received their value from their “indirect” usefulness in enabling a desired finished good to be manufactured into the final form that resulted in the desired consumption satisfaction. In turn, the marginal value of any specific unit of such means of production was derived from the value of the marginal unit of the final good produced relative to its utility to being used in some alternative line of production. 

Menger had explained the origin of money as a medium of exchange in his Principles of Economics(1871) and in his Investigations into the Methods of the Social Sciences (1883). He demonstrated that money was not a creature or a creation of the State; it emerged “spontaneously” over a long period of time as people attempted to overcome the difficulties of direct barter exchange. In his famous monograph on “Money” (1892), Menger extended his analysis to trying to analyze the demand to hold money based on its marginal valuation in acts of exchange.  

The origin of money and its value through time

But it really was not until Mises’s Theory of Money and Credit that there was an especially thorough and satisfying exposition of the demand for money and its purchasing power, or value, in the marketplace. Mises adopted Menger’s theory of the origin of money: individuals in search of opportunities for gains from trade may discover that while Sam has what Bill wants, Bill does not possess what Sam would take in trade to give up what is in his possession. Even if there is what economists have come to call a double coincidence of wants (each has what the other desires in a trade), the characteristics of the goods in question may preclude their division into relative amounts reflecting a set of agreed upon terms of trade without one or both of these goods losing their desired qualities (for example, dividing a horse in half ends its usefulness for riding or pulling a wagon). 

Over time, individuals discover that some goods are more valuable in terms of the fairly wide demand for them or their relative ease of divisibility without losing their desired qualities, or their convenience in being transported to where trades may occur, or the durability of their qualities and useful characteristics over time. Historically, those goods that have demonstrated the greatest combinations of such attributes have tended to be more frequently utilized as a media of exchange, until only one or two have become the ones most widely used for money. 

Money, increasingly, therefore, is on one side of every exchange. People trade the good they possess for a sum of the money, and then turn around and use that money to purchase all the other goods they desire from all the other individuals participating in the expanding social system of division of labor. As a result, again over time, the good used as money derives its market value from two sources: from its original usefulness as some good used for consumption or production and its now additional usefulness as a medium of exchange. As time passes, its usefulness and value for as a medium of exchange may overshadow and perhaps finally completely supersede its usefulness and value as a consumption or production good. 

Then its primary or even singular value is simply as a market-chosen means of exchange. Its continued use is now based on its social institutionalization as money and people’s estimates of its value in market transactions based upon its observed value for exchange purposes. The link in following money’s value backwards would be traceable to the day when that good was first also used as money, the day before which it simply was considered useful and valuable as a consumption or production good. While money’s historicity explains how and why it had a value for exchange purposes in the past, its value is determined by people’s subjective (marginal) valuations concerning its anticipated usefulness and value in the exchange opportunities today and in the future. Mises’s analysis of the value of money through and back in time became known as the Regression Theorem.

The meaning of the value of money and economic calculation

Another particular quality of the money-good in the marketplace is that unlike other goods bought and sold, money has no single price. With money on one side of every exchange, all traded goods and services tend to have one price, their respective money price. That is, how many units of money to buy or sell a hat, or purchase a house, or pay for a particular meal in a restaurant. Money becomes the unit of account, with the relative values of all goods expressed in the single common denominator of their respective money prices. This makes possible and facilitates the ease of “economic calculation,” the valuation and appraisement of the relative values of individual goods and combination of goods for purposes of determining “more expensive” and “less expensive,” and of profit or loss. 

However, due to money’s unique place in the nexus of exchange, money has as many prices as goods against which it trades. This is precisely because money remains as the only good that directly trades for everything else offered on the market. Money may be thought of as the hub of a wheel of exchange, with each of the spokes being the individual goods against which money is being traded, with all the spokes connected by the same unit of exchange. If we then ask, what is the value, or general purchasing power, of money, the answer is the array, or set, or network of relative prices between money and all the other goods against which it is trading at any moment in time. 

Mises was critical of the now common attempts to “measure” the value of money through the construction of price indices, such as the Consumer Price Index (CPI). Every such index involves creating a selected “basket” of goods considered representative of the purchasing habits of some “average” household or buying unit to which are assigned “weights” to the various goods in the basket (that is, the relative amounts of each purchased on a regular basis), and which is then tracked to determine the cost of buying that “basket” over a given period of time. If the cost of the basket has increased (decreased) over that period, it is said that the value of the monetary unit has decreased (increased) by a certain percentage and that the society has experienced price inflation (price deflation) to that degree over that time period. 

Understanding the reason for Mises’s critical view of index-number methods for trying to measure changes in the value or purchasing power of money gets us to a crucial and central aspect of his whole 
theory of how monetary changes 
influence the market process. The focus on a single price index number for an averaged and summarized set of individual goods and their prices in that “basket” easily creates the impression that changes in the purchasing power of money occur uniformly and seemingly simultaneously. 

Mises was an adherent of what is generally referred to as the quantity theory of money. That is, all other things held the same, any general rise or fall in the value or purchasing power of money has its basis in either a change in the total quantity of money in the economy or in a change in people’s willingness to hold a certain average monetary cash balance to facilitate their desired transactions over a period of time (often referred to as money’s “velocity,” that is, the number of times a given quantity of money “turns over” to facilitate a given number of transactions over a period of time). 

Mises argued that if prices, in fact, increased (decreased) simultaneously and proportionally, that is, at the same time and by the same percentage, monetary changes would have no or few “real” effects on the relative price, wage, production, and output relationships in the market. For instance, suppose the price of a pair of shoes was $10 and the price of a hat was $20; then their relative price relationship would be two pairs of shoes traded for one hat in the marketplace. If now a 10 percent increase in the quantity of money resulted in a proportional rise the price of shoes to $11 and the price of a hat to $22, the relative price relationship between shoes and hats would still be two pairs of shoes for one hat, even though in absolute terms the price of both was now higher. Monetary changes would be “neutral” in their effects on the “real” relationships between prices and goods in the marketplace. 

The nonneutrality of monetary changes

However, this was and is not the way changes in the quantity of money impact and influence prices or the relative supplies of goods in the market process, Mises insisted. Money, instead, was “nonneutral” in its effects. Mises, of course, was not the first economist to point this out. Richard Cantillon (1680–1734) drew attention to it in his Essay on the Nature of Commerce in General (1755), as did David Hume (1711–1776) in his famous essay “Of Money” (1752). An especially detailed analysis of money’s nonneutral effects was given by John E. Cairnes (1823–1875) in his essays on the impact of the Australian gold discoveries in the 1840s on global prices over time in his Essays in Political Economy (1873).

But Mises made the nonneutrality of money a centerpiece of his analysis in The Theory of Money and Credit and in his later expositions in Monetary Stabilization and Cyclical Policy (1928) and in Human Action, A Treatise on Economics (1949). There is no such thing as “helicopter money” that falls from the sky and reaches the pockets of each member of the society at the same time and in the same amount. New or additional quantities of money are introduced or “injected” into the market at some particular point(s) as additional cash holdings now available, first, to some individuals before others. 

Suppose there is an increase in the gold supply, as Cairnes analyzed in the case of the Australian gold discoveries. The newly mined gold appeared first in the pockets of the prospectors who brought that gold to the coastal towns of Australia. It was used to increase the demand for the variety of particular goods and services these miners wished to buy, with the prices of these goods rising first in the face of an increased monetary demand for them. 

To meet the new demand, a portion of the newly discovered gold was exported to Great Britain and other European countries in exchange for increased supplies of manufactured goods now wanted in those Australian towns, with European prices rising, in turn, in a particular sequence. To expand production for those export goods and the greater consumer demands of the European exporters who now had the financial wherewithal to increase their own demands for desired goods, some of the additional gold in the hands of Europeans was exported to other parts of the world in exchange for greater supplies of resources and raw materials in an attempt to increase the supply of manufactured goods. Resource and raw material and goods prices began to rise in a certain sequence in other parts of the world to meet the new demand. 

Slowly but surely, the gold discoveries in Australia affected global prices, first in the Australian coastal areas, then in various parts of Europe, followed by rising prices in other corners of the world. Many, if not all, prices were eventually impacted throughout the world, Cairnes argued, but in a particular temporal sequence reflecting who had the new supplies of gold first, second, and third and the patterned effect this had on relative prices, wages, profits, and productions. The final effect of this process was a generally higher “level” of prices in the world economy, but this had come about neither simultaneously nor proportionally.

If one follows the “microeconomics” of the “macroeconomic” effect of changes in the quantity of money, there is no way that prices in general can be rising other than through the sequential process by which new quantities of money are introduced into the hands and demands of one group of people, then another group of people, followed by another and another. It is only then that through the rising demands for first some goods, then other goods, and, then, still other goods that, cumulatively, prices in general will have gone up in some uneven and sequential pattern. 

The monetary injection points and their nonneutral impact

Mises emphasized that there is no rigid and mechanical process about all this because it all depends upon the historical and institutional circumstances of how the change in the quantity of money is introduced. The sequence outlined above with an increase in gold supplies “injected” into the global economy via, at first, the spending patterns of Australian gold miners, will be different from a fiat-money system in which paper currency is printed and used by a government to cover, say, war expenses. 

As Mises explained, in this alternative scenario, the new money enters the economy as a greater government demand for military armaments and accompanying war material. The demands for and the prices of war manufactures will tend to rise first. Their profit margins increase at the start, followed by the wages and resource prices of the factors of production they increase to satisfy the government’s greater demands for the means needed for war. The higher relative revenues and incomes of those working in and drawn into war-related productions in the economy now increase their money demands for other desired goods, bringing about rises in another set of prices and demands for the things they wish to buy. And so on, until, again, prices in general in the economy may now be higher, but it will have been brought about in its own particular nonneutral temporal sequence of rising prices and wages and changes in the relative productions of various goods and services.

Another element in this non-neutral monetary process, Mises argued, was an inescapable modification and redistribution of income and wealth. The very fact that some demands and prices and wages rise before others necessarily improves the real relative income positions of some in the society and reduces the real relative incomes of others. Those who experience higher prices and wages for their goods and services earlier in this temporal sequence have higher money incomes to spend before many of the prices of the goods they want to demand have increased in price. Hence, they have more money to spend for goods whose prices have not yet increased or not by as much as their own. This represents a real increase in income for as long as the prices they receive from the goods and services they sell continue to rise more and before the prices the goods and services they buy. 

Others in society do not do as well. Given the temporal sequence in which the demands and prices of various goods are rising during the monetary expansion, those individuals and groups who experience higher and rising prices for the goods and services they regularly buy before the prices and wages for the goods and services they sell rise equally or more experience a decline in their real relative incomes. These latter members of society lose during the monetary inflationary process, while those in the earlier groups and sectors of the economy gain from the on-going inflation. Those on fixed incomes or pensions are, clearly, the most obvious victims of monetary inflations. 

Monetary deflations are equally nonneutral in their effects

Mises was equally clear that monetary contractions, or “deflationary” processes, were just as nonneutral in their effects on prices, wages, profits, and incomes. As he explained in The Theory of Money and Credit: 

Monetary appreciation [falling prices], like monetary depreciation [rising prices] does not occur suddenly and uniformly throughout a whole community, but as a rule starts from single classes and spreads gradually…. The first of those who have to content themselves with lower prices than before for the commodities they sell, while they still have to pay the older higher prices for the commodities they buy, are those who are injured by the increase in the value of money. Those, however, who are the last to have to reduce the prices of the commodities they sell and have meanwhile been able to take advantage of the fall in prices of other things, are those who profit from the change.

This is why Mises considered it futile and counterproductive to try to compensate for the effects of a prior monetary inflation by following it by a monetary deflation. The deflation merely brings in its wake its own nonneutral effects different from and in no way compensating for the loses that particular individuals may have suffered during the monetary inflation. Or as Mises expressed it in a later essay on “The Non-Neutrality of Money” (1938): 

[Some] suggest methods to undo changes in the purchasing power of money; if there has been an inflation they wish to deflate to the same extent and vice versa. They do not realize that by this procedure they do not undo the social consequences of the first change, but simply add to it the social consequences of a new change. If a man has been hurt by being run over by an automobile, it is no remedy to let the car go back over him in the opposite direction.

Mises emphasized, as we saw, that how monetary expansions (or contractions) work their way through the marketplace depends on the particular institutional and historical circumstances in which the monetary change occurs. But, in fact, the monetary and banking institutional setting when Mises published and revised The Theory of Money and Credit and wrote his later expositions, as in Human Action, remained fairly much the same, and remains so today. That is, monetary and credit expansions occur through banking systems overseen and fundamentally controlled by central banks. 

Given this institutional arrangement of modern monetary and banking systems, Mises applied his theory of the nonneutrality of money to understand and analyze the processes through which inflations and recessions, the booms and busts of the business cycle, are brought about. And, furthermore, what institutional changes would have to be introduced if the causes and consequences of the business cycle were to be eliminated or at least greatly reduced.

By Richard Ebeling

Originally published on September 25, 2017 for The Future of Freedom Foundation

One of the great political mysteries has been the success of governments in ruling over societies with little opposition and resistance from the vast majority of the population, even when those governments have been brutal tyrannies and openly dictatorial in their control.

This has been true, no less, under democratic regimes, as well, under which levels of taxation have been far higher and the degrees of regulation over personal, social and economic activities often much more intrusive than under tyrants of bygone ages. This has been in spite of the fact that those governments are formally “answerable to the people” through regular elections determining who holds high political office with legitimized power over the electorate’s lives.

Conquest and Plunder as the Origin of the State

It has long been understood by historians that most modern States, such as in Europe, have their origins in conquest and plunder. Invading tribes and bands would vanquish existing rulers and their peoples, and settle down to permanently live off those whom they had not killed during the conquest.

The German sociologist, Franz Oppenheimer (1864-1943), especially emphasized this in his classic work on the origin of political power and authority, The State (1914). He argued that there are fundamentally two ways by which individuals may obtain the material means that they wish to have to maintain and improve their lives: the economic means and the political means: Said Oppenheimer:

There are two fundamentally opposed means whereby man, requiring sustenance, is impelled to obtain the necessary means for satisfying his desires. There are work or robbery, one’s own labor and the forcible appropriation of the labor of others.

I propose in the following discussion to call one’s own labor and the equivalent exchange of one’s own labor for the labor of others, the ‘economic means’ for the satisfaction of needs, while the unrequited appropriation of the labor of others will be called the ‘political means’ . . .

Oppenheimer warned that when individuals have the choice between these two methods for acquiring what they desire, people were too often tempted to use coercion rather than avenues of peaceful production and trade. He said: “Wherever opportunity offers, and man possesses the power, he prefers political to economic means for the preservation of his life.”

Oppenheimer then asked:

What, then, is the State as a sociological concept? The State . . . is a social institution, forced by a victorious group of men on a defeated group, with the sole purpose of regulating the dominion of the victorious group over the vanquished, and securing itself against revolt from within and attacks from aboard . . . This dominion had no other purpose than the economic exploitation of the vanquished by the victors. No primitive state known in history originated in any other way.

From Roving Bandits to Permanent Power

Oppenheimer’s view was restated in more recent times by the Public Choice theorist, Mancur Olson (1932-1998), in his posthumous work, Power and Prosperity (2000), in terms of the economic motives and actions of the conqueror.  Olson argued that the origin of the state could be seen in the replacement of roving bands of plundering thieves by stationary bandits who settle down to rule over a territory over a prolonged period.

The roving band cares nothing for what happens in the area it has looted and then leaves behind. But the stationary bandit who wants to permanently live off the conquered area has to take into consideration the conditions and the incentives of his subjects if they are to keep producing and therefore creating something for him to plunder through taxation year-after-year.

Thus, out of the taxes he imposes, the stationary bandit must also, in his own self-interest, to some extent secure his subject’s property rights, enforce contracts, establish a judicial system to adjudicate their disputes, and even supply some “public goods,” such as roads and harbors to facilitate commerce.

But the resident conqueror’s motive in providing any such protections and enforcements for those over whom he rules is to extract the greatest amount of tax revenue for himself at the least cost of respecting and enforcing the property rights of his subjects, but to whom he must offer some minimal degree of such security. Otherwise, their incentive to produce the wealth out of which his tax revenues come might be far less. Said Mancur Olson:

The bandit leader, if he is strong enough to hold a territory securely and monopolize theft there, has an encompassing interest in his domain. This encompassing interest leads him to limit and regularize the rate of theft and to spend some of the resources he controls on public goods that benefit his victims no less than himself.

Since the settled bandit’s victims are for him a source of tax payments, he prohibits the murder and maiming of his subjects. Because stealing by his subjects, and the theft-averting behavior that it generates, reduces total income, the bandit does not allow theft by anyone but himself.

He serves his interests by spending some of the resources he controls to deter crime among his subjects and to provide other public goods. A bandit leader with sufficient strength to control and hold a territory has an incentive to settle down, to wear a crown, and to become a public goods-providing autocrat.

But brute force and fear is, in the long run, not a sustainable basis for permanent plunder and privilege by a conquering few over the conquered many. It is far better if those over whom the ruler rules not only acquiesce in his control and commands out of fear, but also do so willingly through belief in the rightness and justness of his political authority over them.

How, then, do political rulers inculcate this belief in their right to rule and with it an obedient allegiance and loyalty by the subjects and citizens to the governments they command?

Louis Rougier and Political and Economic Mystiques

This was a theme taken up by the French philosopher and classical liberal economist, Louis Rougier (1889-1982). Especially in the two decades of the 1920s and 1930s, between the two World Wars, Rougier was one of the leading European defenders of limited government and free market, competitive capitalism, and a critic of the totalitarian collectivisms of that time that seemed to be threatening to dominate much of the world.

He discussed this question in two works, Modern Political Mystiques and Their International Impact(1935) and Modern Economic Mystiques and Their International Impact (1938), both originally delivered as series of lectures at the Graduate Institute of International Studies in Geneva, Switzerland. The Graduate Institute was a classical liberal-oriented seat of higher learning that with the rise of Italian fascism and German Nazism served as a refuge for a number of prominent scholars searching for an intellectual home away from their, now, totalitarian homelands (including the Austrian economist, Ludwig von Mises, German economist, Wilhelm Röpke, and Italian historian, Guglielmo Ferrero, among others).

Governments and ideological movements, Rougier explained, wrap themselves in “mystiques” that serve as the rationales for claims to an ethical and legal right to rule. What is a “mystique”? Said Rougier:

The term refers then to a combination of beliefs which could not be demonstrated by reason or based on experience but which are accepted blindly for irrational reasons: by the effect of custom of which Pascal speaks, of education, of authority, of example, of preconceptions alleged to be inevitable, in short by the effect of all the pressures of social conformism.

These beliefs may be moral, esthetic, scientific, social, or political. Every doctrine that one no longer feels the curiosity or the need to call into question, whether it is because one accepts it as a dogma so evident that any inquiry about its solidity is superfluous, or because one adheres to it by an act of faith considered so necessary as a consequence of its sacrosanct beneficence that to abandon it would be outrageous, is a mystique and is accepted as such.

The Economic Mystique versus Laws of the Marketplace

An “economic mystique,” Rougier said, is one that allows a person to believe in the power of government to do anything it wants, say, in the form of various types of government intervention affecting wages, prices or production with the unquestioning presumption that what the government declares as the intervention’s purpose will fully materialize with no negative or unintended consequences.

The notion that there are economic “laws” of supply and demand, or cost and price relationships effecting profitability or employability, are either unknown or ignored or rejected by a seemingly unreasoned belief that because the stated goal of the intervention is “good,” then it is only necessary for government to implement the interventionist policy to make it so. The same applies, Rougier, said, in the case of the proponents of socialist central planning.

If something hinders or prevents the achievement of the intervention’s goal, then it must be due to either not enough “force” being applied or not enough money spent to make it so; or some nefarious, socially evil individuals or groups acting to thwart it. The same applies, Rougier argued, in the case of the proponents of socialist central planning. The failure to successfully meet the government’s planning targets can only be due to intriguing “enemies of the people,” or traitorous “wreckers” in the service of foreign powers trying undermine the triumph of the collectivist utopia, or a negligent lack of sufficient enthusiasm and disciplined dedication among some of the workers and managers.

The classical liberal-oriented economist has reason on his side relative to the believer in such economic mystiques because, Rougier insisted, not every value-judgment is merely a matter of “subjective” or personal, desire or belief, not open to objective investigation or evaluation. If a person says that he prefers wearing red ties to blue ones, or enjoys driving one type of car versus another, there may be little to dispute or challenge by someone else about that stated preference.

But if someone says, for instance, that they support a government imposed minimum wage or a trade barrier because he believes that such a policies will, respectively, improve the living condition of the unskilled with no affect on the amount of employment for such workers, or will increase the overall level of production and employment in the economy with no adverse effects, the economist has a logical and experiential benchmark on the basis of which to evaluate them. That benchmark is: will the interventionist means chosen, in fact, achieve the goals, purposes and ends in mind? Or as Rougier expressed it:

If afflicted with an inferiority complex, you prefer authoritarian regimes [because it “subjectively” enhances your sense of self-esteem], nobody will deny that your choice answers a real need in your character, and there is nothing to argue about. But if you state, ‘I prefer authoritarian and totalitarian governments to liberal government because they are better suited to assure the well-being of individuals and the peace of nations,’ you offer a judgment that one can submit to the verification of experience, to the facts and of history.

And the lessons of economic history and economic theory show beyond much of a reasonable doubt, said Rougier, that the means chosen in these cases – minimum wage laws, protectionist trade barriers, authoritarian regimes – will not bring about the desired ends of higher incomes, improved living standards, and international peace and harmony.

Attempts to reason with the holders of such economic mystiques are often brushed aside by their believers. The reasoned argumentation, presentation and discussion of historical or contemporary facts and evidence or logical argument are often emotionally rejected as a proof that the critic of the economic mystique has no compassion or a sense of caring for those to be helped by the intervention or the government planning.

Political Mystiques as Rationalizations of Power and Plunder

Part of the reason for this, Rougier suggests, is the wider and deeper problem of “political mystiques” that serve as the bases to justify and legitimize the right of some to rule over others, and the accompanying belief in their power to do “good” if only given enough power.

From the time of antiquity, Rougier explains, the conquerors and rulers have searched for that legitimizing justification for their control and command over others in society. The “monarchical mystique” did so, and for thousands of years, by successfully rationalizing political power through the claim and the indoctrination of a divine right to rule. The king held his absolute and unquestionable authority because he was a “god” himself, or had had this status bestowed on him by “the gods” or God.

From the time of the ancient Hebrews the anointing of the ruler by a high priest by poring “holy oil” upon his head, or being handed the sacred sceptered, or by having placing a crown upon the royal head, all symbolized that a “higher power” than any mortal man had selected this person and his heirs to command all others in his domains with loyalty and obedience by all those below him.

In Europe a long train of events over several hundreds of years challenged and weakened the absolutist claims of the king or emperor; this was partly done by the Catholic Church attempting to maintain or extend its own autonomy and authority, and partly by noblemen and then commoners who chafed under and resented and resisted the arbitrary decisions and demands of the monarchs under which they lived. By the time of the Enlightenment in the 1700s, secular skepticism and political dissent weakened and finally undermined the “superstition” of the “divine” authority and legitimacy of kings. While it linger on into the 1800s, the right of kings to rule over and command others was symbolically beheaded along with the actual decapitation of the king of France, Louis XVI, in Paris in 1793.

The Democratic Mystique of “the People’s” Self-Rule

But a new mystique arose rapidly in its place in the late eighteenth and early nineteenth centuries, the “democratic mystique.” From the rule of “the one” there emerged the idea and ideal of the “rule of the many.” Rougier explained:

By a daring transposition sovereignty was transferred from the monarch to the people themselves. It appeared that as soon as power was exercised by those who bore its burden, it would be exercised with the minimum of despotism . . .

Since all the citizens are considered by their representatives to participate in the establishment of the law, the law seems to be the expression of the general will. Everyone submits to it willingly because everyone has the illusion that he has participated in its formation and that, obeying everybody, he obeys himself. The fundamental political problem, that of freely granted obedience, is, in a way, solved by definition.  This is where the great strength of democracies comes from. Never has any form of government exercised such extensive discretionary power over the governed without the apparatus of coercion.

Let us compare the ease with which the democracies have established general [military] conscription or have taken away up to 80 percent of the wealth of their citizens without provoking a revolt with the difficulty the monarchies under the old regime had in raising soldiers and taxes. By making the sovereign and the subject one, the democratic mystique has brought about the maximum of authority with the minimum of constraint.

But democracy “works,” argued Rougier, only for as long as the reach and responsibility of a government extends, in general, no further than primarily securing, protecting and respecting the rights of the individual members of society to their lives, liberty and property. The freedom of the individual is only assured for as long as the government does not intrude into the marketplace with interventions, regulations, controls and central planning.

That is, democracy served as a peaceful way of appointing those holding political office and securing people’s liberty rather than violating it only for as long as it functioned in a cultural and social setting based on the ideas and ideals of political and economic classical liberalism. In Rougier’s words:

As soon as the state adds economic power to its political power, whether it holds all the means of production or simply claims to regulate production according to a preconceived plan, it turns out to have all powers and to grant some of them only arbitrarily to individuals.

In reality, for an individual to be free vis-à-vis the state he must be able to do without the state’s services, he must be able, if need be, to resign from a public function, if he is forced to act against his conscience, without running the risk of not finding other employment. Now this in inconceivable in a statist or collectivist regime, where the individual has no other alternative than to be a functionary, a client of the state, or die of hunger.

Buried in the democratic mystique, Rougier explains, in the fallacy of “the people” ruling themselves. Once delegation of authority is transferred from the citizens themselves to representatives in the government who pass, administer, and enforce legislation and the law, two things have historically come into play. First, the elected representatives are discovered to have their own purposes and interests that may have little or nothing to do with that of the constituents as a whole who have put them in political office.

And, second, election and reelection may be more easily assured and maintained by serving coalitions of special interest groups who see ways of using the State for their own ends outside of the free and voluntary competition of market exchange. The political system of politicians and special interests “buries economic liberalism by using state intervention for its own benefit to maintain the positions it has acquired,” lamented Rougier.

Writing in the 1930s, Louis Rougier’s concern and fear was that the corrupted and corrupting “democratic mystique” was being superseded by the “totalitarian mystiques” of communism, fascism and Nazism – mystiques surrounding alternative collectivisms in the forms of Marxian class conflict, fascist aggressive nationalism, and Nazi “race warfare.” Here were other conceptions of the collective mystique of “the will of the people” far more brutal and tyrannical than anything seen in modern history.

The Tyranny of Modern Tribal Identity Mystiques

Today, there are other “political mystiques” that are advancing over the landscape of society. These are the “gender mystique,” the new multicultural “race mystique,” and the new anti-income inequality “social class conflict mystique.” They are all versions and forms of cultural and economic collectivism joined with demagogic intolerance of speech, thought and peaceful action, based on new tribal mystiques of group identity within which the individual is confined and from which there is no escape as an thinking and choosing individual.

And here, once again, what makes them “mystiques” as Rougier defined them, are unreflective and unchallengeable beliefs not open to reasoned discourse and debate. Any questioning and criticism of them is met with hysteria, emotional condemnation, and insistence that the opponent of the new tribal-group identity mystique be forcibly silenced and banished. Even, as some dare to say, to be put to death as an enemy of the gender, racial or ethnic collectives declared to be the irreducible social entities within which the individual is to be culturally and politically imprisoned.

In the 1930s, Louis Rougier insisted that if both the democratic mystique and the totalitarian mystiques were to be stopped and reversed, there was only one lasting avenue: “to return to the practices of political, economic, and cultural [classical] liberalism.” That message is no less true and relevant today in the face of the emerging totalitarianism of the new gender, racial and ethnic “identity politics” mystiques.

By Richard Ebeling

Originally published on March 13, 2017 for the Foundation for Economic Education

Based on a presentation delivered as the John W. Pope Lecture sponsored by the Clemson Institute for the Study of Capitalism at Clemson University on March 1, 2017.

The great German sociologist, Max Weber (1864-1920) offered an understanding of the evolution of socialist regimes in the twentieth century from revolutionary radicalism to a stagnant system of power, privilege and plunder, manned by self-interested Soviet socialist office holders.

Max Weber, in his posthumously published monumental treatise, Economy and Society (1925), defined a charismatic leader as one who stands out from the ordinary mass of men because of an element in his personality viewed as containing exceptional powers and qualities. He is on a mission because he has been endowed with a particular intellectual spark that enables him to see what other men do not, to understand what the mass of his fellow men fail to comprehend.

But his authority, Weber explains, does not come from others acknowledging his powers, per se. His sense of authority and destiny comes from within, knowing that he has a truth that he is to reveal to others and then knowing that truth will result in men being set free; and when others see the rightness of what he knows, it becomes obvious and inevitable that they should follow his leadership.

Certainly Vladimir Lenin (1870-1924) fit that description. While many who met or knew him pointed out his either non-descript or even unattractive physical appearance and presence, most emphasized at the same time Lenin’s single-mindedness of being on a “mission” for which he had absolute confidence and unswerving determination, and due to which others were drawn to him and accepted his leadership authority.

Surrounding Lenin, the charismatic, was an array of disciples and comrades who were called and chosen, and saw themselves as serving the same mission: the advancement of the socialist revolution. As Weber says:

“The . . . group that is subject to charismatic authority is based on an emotional form of communal relationship . . . It is . . . chosen in terms of the charismatic qualities of its members. The prophet has his disciples . . . There is a ‘call’ at the instance of the leader on the basis of the charismatic qualification of those he summons . . .”

The “chosen” group renounces (at least in principle, if not always in practice) the material temptations of the worldly circumstances, which the goal of their “mission” is meant to overthrow and destroy. And, this too, marked the often conspiring, secretive and sometimes Spartan lifestyle of Marxist revolutionaries. Max Weber explained:

“There is no such thing as salary or a benefice. Disciples or followers tend to live primarily in a communistic relationship with their leader . . . Pure charisma . . . disdains and repudiates economic exploitation of the gifts of grace as a source of income, though to be sure, this often remains more an ideal than a fact . . . On the other hand, ‘booty’. . . whether extracted by force or other means, is the other typical form of charismatic provision of needs.”

But once the charismatic and his followers are in power, a transformation soon occurs in their behavior and relationship to the rest of the society. Now it becomes impossible to stand outside of the flow of the mundane affairs of daily life. Indeed, if they do not immerse themselves in those matters, their power over society would be threatened with disintegration. Slowly, the burning fervor of ideological mission and revolutionary comradeship begins to die. Said Max Weber:

“Only the members of the small group of enthusiastic disciples and followers are prepared to devote their lives purely and idealistically to their calling. The great majority of disciples and followers will in the long run ‘make their living’ out of their ‘calling’ in a material sense as well . . . Hence, the routinization of charisma also takes the form of the appropriation of powers of control and of economic advantages by the followers and disciples and the regulation of the recruitment of these groups . . .

Correspondingly, in a developed political body the vassals, the holders of benefices, or officials are differentiated from the ‘taxpayers.’ The former, instead of being ‘followers’ of the leader, become state officials or appointed party officials . . . With the process of routinization the charismatic group tends to develop into one of the forms of everyday authority, particularly . . . the bureaucratic.”

I would suggest that in Max Weber’s analysis we see the outline of the historical process by which a band of Marxist revolutionaries, convinced that they saw the dictates of history in a way that other mere mortals did not, took upon themselves to be the midwives of that history through violent revolution.

But as the embers of socialist victory cooled, such as in Russia after the Revolution of 1917 and the bloody three-year civil war that followed, the revolutionaries had to turn to the mundane affairs of “building socialism.” Building socialism meant the transformation of society, and the transforming of society meant watching, overseeing, controlling and commanding everything.

Self-Interest and the New Socialist “Class Society”

Hence, was born in the new Soviet Union what came to be called the Nomenklatura. Beginning in 1919, the Communist Party established the procedure of forming lists of government or bureaucratic positions requiring official appointment and the accompanying lists of people who might be eligible for promotion to these higher positions of authority. Thus was born the new ruling class under socialism.

In the end, the socialist state did not transform human nature; human nature found ways to use the socialist state for its own ends.

Ministries needed to be manned, Party positions needed to be filled, nationalized industries and collective farms needed managers assigned to supervise production and see to it that central planning targets were fulfilled, state distributions networks needed to be established, trade unions needed reliable Party directors, and mass media needed editors and reporters to tell the fabricated propaganda stories about socialism’s breakthrough victories in creating a new Soviet Man in his new glorious collectivist society.

Contrary to the socialist promises of making a new man out of the rubble of the old order, as one new stone after another was put into place and the socialist economy was constructed, into the cracks between the blocks sprouted once again the universals of human nature: the motives and psychology of self-interested behavior, the search for profitable avenues and opportunities to improve one’s own life and that of one’s family and friends, through the attempt to gain control over and forms of personal use of the “socialized” scarce resources and commodities within the networks and interconnections of the Soviet bureaucracy.

Since the state declared its ownership over all the means of production, it was not surprising that as the years and then the decades went by more and more people came to see membership in the Nomenklatura and its ancillary positions as the path to a more prosperous and pleasant life. In the end, the socialist state did not transform human nature; human nature found ways to use the socialist state for its own ends.

The system of privilege and corruption that Soviet socialism created was explained by Boris Yeltsin (1931-2007), the Russian Communist Party member who, more than many others, helped bring about the end of the Soviet Union and an independent Russia in 1991 that at first tried democracy. In his book, Against the Grain (1990), Yeltsin explained:

“The Kremlin ration, a special allocation of normally unobtainable products, is paid for by the top echelon at half its normal price, and it consists of the highest-quality foods. In Moscow, a total of 40,000 people enjoy the privilege of these special rations, in various categories of quantities and quality. There are whole sections of GUM – the huge department store that faces the Kremlin across Red Square – closed to the public and specially reserved for the highest of the elite, while for officials a rung or two lower on the ladder there are other special shops. All are called ‘special’: special workshops, special dry cleaners, special polyclinics, special hospitals, special houses, and special services. What a cynical use of the world!”

The promised “classless society” of material and social equality was, in fact, the most granulated system of hierarchical privilege and power. Bribery, corruption, connections and favoritism permeated the entire fabric of Soviet socialist society. Since the state owned, produced and distributed anything and everything, everyone had to have “friends,” or friends who knew the right people, or who knew the right person to whom you could show just how appreciative you could be through bribery or reciprocal favors to gain access to something impossible to obtain through the normal channels of the central planning distributive network for “the masses.”

And overlaid on this entire socialist system of power, privilege and Communist Party-led plunder was the Soviet secret police, the KGB, spying, surveilling and threatening anyone and everyone who challenged or questioned the propaganda or workings of the “workers’ paradise.”

Communist Contradictions and the End to Soviet Socialism

It all finally came to an end in 1991 when the privilege, plunder and poverty of “real socialism” made the Soviet system unsustainable.

It is not an exaggeration to say that everything that the Marxists said was the nature of the capitalist system – exploitation of the many by a privileged few; a gross inequality of wealth and opportunity simply due to an artificial arrangement of control over the means of production; a manipulation of reality to make slavery seem as if it meant freedom – was, in fact, the nature and essence, of Soviet socialism. What a warped and perverted twisting of reality through an ideologically distorted looking glass!

It all finally came to an end in 1991 when the privilege, plunder and poverty of “real socialism” made the Soviet system unsustainable. Indeed, by that time it was hard to find anyone in any corner of Soviet society who believed, anymore, in the “false consciousness” of communist propaganda. The Soviet Union had reached the dead-end of ideological bankruptcy and social illegitimacy. The “super-structure” of Soviet power collapsed.

In 1899, the French social psychologist, Gustave Le Bon (1841-1931), looked at the, then, growing socialist movement at the end of the nineteenth century and the soon to be beginning twentieth century, and sadly said in his book, The Psychology of Socialism:

“One nation, at least, will have to suffer . . . for the instruction of the world. It will be one of those practical lessons which alone can enlighten the nations who are amused with the dreams of happiness displayed before their eyes by the priests of the new [socialist] faith.”

Not only Russia, but also many other countries in Eastern Europe, Asia, Africa, and Latin America have been forced to provide that “practical lesson” in the political tyranny and economic disaster that socialist society, especially in its Marxist permutation, offered to mankind.

It stands as a stark demonstration of the disastrous consequences when a society fully abandons a political philosophy of classical liberal individualism, an economic system of free markets, and an acceptance of self-interested human nature functioning within a social arrangement of voluntary association and peaceful exchange.

Let us hope that with this year marking the one-hundredth anniversary of the communist revolution in Russia mankind will learn from that tragic mistake, and come to realize and accept that only individual liberty and economic freedom can provide the just, good, and prosperous society that humanity can and should have.

By Richard Ebeling

Originally published on January 1, 2000 for the Foundation for Economic Education

On April 1, 1947, 35 free-market economists, political scientists, philosophers, journalists, and businessmen met at the Swiss Alpine resort of Mont Pèlerin. They had been brought together by F. A. Hayek to found a society of classical liberals devoted to the restatement and defense of the principles of the free society. Among the attendees were Milton Friedman, F. A. Harper, Henry Hazlitt, Frank H. Knight, Ludwig von Mises, Michael Polanyi, Karl Popper, FEE President Leonard E. Read, Lionel Robbins, Wilhelm Ropke, and George Stigler.

The opening address was delivered by William E. Rappard, co-founder and director of the Graduate Institute of International Studies in Geneva, Switzerland. After welcoming the participants he reminded them that “economics” can be viewed either as a science concerned with objectively explaining how the market functions or as a policy that, based on scientific insights, proposes how men may more effectively arrange their social relationships to improve their circumstances. Rappard emphasized that:

Science cannot be liberal or illiberal. In a sense it cannot be anything but liberal. An economist as a scholar may be learned or ignorant, intelligent or dull, profound or superficial, but he cannot be liberal or illiberal. Rather, if he is illiberal as a man of science, that is, if he dogmatically and intolerantly denies the rights of liberty of thought without which there can be no true science, then he is not worthy of being called a man of science. Policies can however be liberal or illiberal. Most policies all over the world today are in fact illiberal and it is because we believe that they should be liberal that we are assembled here today. It is as economists in the second sense of that equivocal word that we are liberal. Or rather we are liberals by conviction, by faith, while most of us are by profession scientific economists.

The contemporary world had turned its back on the classical liberal, free-market alternative in favor of socialism, interventionism, and welfare statism. It was to begin “an intellectual, economic and political renaissance” for liberty that the Mont Pelerin Society was being founded, Rappard said. Because, he continued, “Unless the world has become completely mad, it must sooner or later come to realize and to admit the productive superiority of a society based on the principle of free enterprise.”

The years between the two world wars were a dark time for the advocates of individual liberty, free markets, and limited government. The dominant ideologies had been socialism, communism, fascism, national socialism, interventionism, and political and economic nationalism in short, practically every imaginable form of collectivism.

The voices that spoke out against this trend were few. Among them, and one of the most articulate and influential, was that of William E. Rappard. He was an international man in an age of collectivism and nationalism, speaking in defense of global peace, free trade, and human freedom. His long-time friend and former colleague Ludwig von Mises considered him one of “the world’s foremost experts in the field of international political and economic relations.” Mises called Rappard’s 1938 book, The Crisis of Democracy, “the most powerful refutation of the doctrines of Communism and Nazism. There are but few authors whose judgment, competence, and impartiality enjoy a prestige equal to that of Rappard.”  And Lionel Robbins, professor at the London School of Economics, considered Rappard to be “one of the truly great men of the interwar period.”

Born in New York

William Emmanuel Rappard was born in New York City on April 22, 1883, of Swiss parents, his father working in the United States as a representative of various Swiss industries.  William Rappard did his graduate studies in economics at Harvard University from 1906 to 1908. During the academic year 1908-1909 he did additional study at the University of Vienna in Austria-Hungary, attending the seminars of Eugen von Bohm-Bawerk and Eugen Philippovich von Philippsberg, two of the leading figures of the Austrian school of economics before the First World War. And from 1911 to 1913, he was an adjunct professor of political economy at Harvard.

In 1913 he was appointed professor of economic history and public finance at the University of Geneva in Switzerland. He also served as rector of the University of Geneva during 1926-1928 and 1936-1938. From 1917 to 1919, Rappard was a member of various Swiss diplomatic missions to Washington, D. C., London, and Paris, including service with the Swiss delegation to the peace conference in France that ended the First World War. He made a strong impression on President Woodrow Wilson and was highly influential in persuading him to choose Geneva as headquarters of the League of Nations beginning in 1920.

From 1920 to 1925 he was the director of the Mandates Division of the League for overseeing the administration of colonial territories lost by the Central Powers at the end of the war, and was a member of the Permanent Mandates Commission of the League from 1925 to 1939. From 1928 to 1939 he also served as a member of the Swiss delegation to the annual meetings of the League’s General Assembly.

But in the struggle for classical-liberal and free-trade ideals, Rappard’s greatest institutional contribution between the world wars was his co-founding in 1927 of the Graduate Institute for International Studies in Geneva, with Paul Mantoux, the internationally respected economic historian and expert on the industrial revolution. Rappard’s goal was to offer to international students “the most eminent specialists available. If these specialists are well chosen, not only for their intelligence and erudition, but also for their character, and if they are made to realize that their sole professional duty is to contribute to the progress of science through their own work,” then the Institute would have done all that it could to train a new generation of scholars and advance the cause of peace and freedom. Throughout the 1930s the Institute’s financial status was secured by the generosity of the Rockefeller Foundation.

Among the teaching staff at the Graduate Institute in the 1930s, along with Rappard and Mantoux, were Maurice Bourquin, professor of diplomatic history; Guglielmo Ferrero, professor of contemporary history; Michael A. Heilperin, professor of international monetary relations; Hans Kelsen, professor of international law; Mises, professor of international economic relations; Pitman Potter, professor of international political relations; and Wilhelm Ropke, professor of international economic relations. Each was internationally renowned as a leading contributor to his respective discipline, and several had found sanctuary at the Graduate Institute as exiles from Nazism and fascism in their own homelands.

Hosted Visiting Scholars

Rappard also brought to Geneva during these years an array of famous visiting scholars, many of them leading classical liberals, who would deliver lectures over a week; their lectures often were sponsored for publication by the Graduate Institute. Among those visitors were R6pke (before he joined the Institute’s staff), F. A. Hayek, Lionel Robbins, Louis Rougier, Quincy Wright, Luigi Einaudi, Eric Voegelin, Fritz Machlup, Gottfried Haberler, and Bertil Ohlin.

The Institute also held a lecture program every summer from 1927 to 1939 on the topic of international peace and order. The lectures were published in an annual series under the title Problems of Peace. In 1938, to mark the Institute’s tenth anniversary, Rappard edited a collection of essays by the Institute’s faculty on the theme of The World Crisis, through which the world was then passing.

In September 1939, days after the beginning of the Second World War in Europe, Robbins recalled his last visit to the Graduate Institute as a guest lecturer and said nostalgically: “How much of all that was most stimulating and inspiring in the period between the wars is typified in their lovely college by the lake. Long may it flourish, an oasis of sanity in a mad world, to preserve and advance the great principles of international citizenship for which it so conspicuously stands.” The Graduate Institute survived the war and continued to flourish after 1945, with Rappard as its director until his retirement in 1955. He died on April 29, 1958, a few days after his 75th birthday.

Three Themes

Throughout the interwar period Rappard’s writings focused on what he argued were three interdependent themes: (1) international order and collective security as represented by the League of Nations; (2) free trade and private commerce to depoliticize economic relationships and reduce international tensions; and (3) respect for the dignity of the individual and protection of his rights to liberty and property to assure a free and just society.

After the disillusionment with and failures of the League of Nations, Rappard’s fervent defense and support of it in the 1920s and 1930s may seem peculiar and misplaced in the context of more recent classical-liberal and conservative criticisms of concentrated power in international organizations. But it needs to be appreciated that in the nineteenth and twentieth centuries many if not most of the free-market liberals considered private commerce and free trade as essential not only for enhancing the wealth of nations but for fostering peace by reducing to the minimum the intervention of governments in human intercourse.

As an extension of this, they also considered treaties and agreements among governments for the uniformity of law and contract to be essential for international trade and commerce. They believed that an international court to adjudicate disputes between nations would reduce the likelihood of war. And to prevent war some supported an international system of collective security, composed of a consortium of nations’ military power, to provide mutual defense against would-be aggressors.

Even as principled an advocate of laissez faire and strictly limited government as Ludwig von Mises said in 1927 that “The [classical] liberal therefore demands that the political organization of society be extended until it reaches its culmination in a world state that unites all nations on an equal basis. For this reason he sees the law of each nation as subordinate to international law, and that is why he demands supranational tribunals and administrative authorities to assure peace among nations in the same way that the judicial and executive organs within each country are charged with the maintenance of peace within its own territory.” And he offered the hope that “a world super state really deserving of the name may some day be able to develop that would be capable of assuring the nations the peace that they require.

Rappard wrote four books on the ideal, the practice, and the failure of the League of Nations. These were supplemented by various articles on the workings and reality of the League.

Swiss Model

Rappard’s model of international organization for world peace was based on his analysis of the evolution of collective security in the Swiss confederation.  Starting in the thirteenth and fourteenth centuries, a coalition of independent states in the Swiss Alps began to be formed for mutual military assistance against external threats. It eventually incorporated most of the territory now known as Switzerland. The common policy was strict neutrality and noninterference in the affairs of surrounding countries (though many individual Swiss soldiers sold their military services to other governments in Europe). Switzerland was invaded and conquered by Napoleon in 1798. After the defeat of France by the Allied nations, Swiss independence and neutrality were once again recognized by the European powers. In 1848 a new federal constitution was established in Switzerland that was modeled after the U.S. Constitution, with two legislative chambers but no presidency because of the people’s suspicion of any concentration of power in one person’s hands.

The Swiss federal authority had responsibility only for national defense and neutrality-based foreign policy issues. All other matters were strictly left up to the respective cantons and to the private citizens. The constitution was also imbued with the spirit of classical liberalism and economic freedom. “Freedom of trade, residence, conscience and worship, of the press, of association and of petition were guaranteed for all …. [A]ll forms of protectionism were condemned as being contrary . . . to the fundamental principle of equality before the law,” Rappard explained.

The danger from concentration of federal power manifested itself, however, with the growth in socialist and interventionist ideas in the second half of the nineteenth century. In the 1874 revisions to the Swiss constitution the federal government was given socialist and welfare-statist responsibilities over both the cantons and individual citizens; those powers had increasingly come to threaten the liberty of the Swiss people. In 1936 Rappard expressed concern that what was developing was a form of “state socialism” and wondered if Switzerland was not on a road to serfdom: “How much further this economic anti-liberalism can be carried without seriously threatening the political liberalism to which the Swiss people are still firmly attached, is the great problem of the future.”

In Rappard’s eyes, the League of Nations was meant to serve as an association of the countries of the world for purposes of mutual defense against violators of international peace, whether or not the aggressor was a member. The internal affairs of the member states were not subject to interference from the other members, though the hope was that those nations not yet wholly guided in their home policies by allegiance to liberty, property, and free enterprise would eventually see the benefits of establishing a regime of domestic freedom.

The peace treaty of 1919 that ended World War I had included the covenant that established the League of Nations. The new organization was assigned three primary tasks: (1) implementation of the terms of peace; (2) establishment of a system of justice through an international court to adjudicate disputes between nations; and (3) formation of an association for collective security to maintain the peace if one or more nations violated the territory and freedom of any of the member countries.

What was a new and important principle in the peace treaty, Rappard argued, was the insistence that no people may be ruled without their consent. This was reflected in the ideal of self-determination, under which individuals within geographical areas in Europe could determine through plebiscite whether they would be citizens of one nation rather than another or form their own independent national entity. In the case of Germany’s former African and Asian colonies this meant not outright annexation of these territories by one of the victorious powers, but supervision and oversight by the League of how they were administrated as a “mandate” by one of the victorious powers. The goal was to assure the rights of the people in these territories and possibly their eventual independence rather than permanent colonial control.

The idea behind an international court of justice was that no claimant in a dispute was capable of objectively judging his own case. Instead, a court of internationally selected and respected judges would sit in the Hague in Holland, and member states of the League would obligate themselves to present their claims against and disputes with other countries before this judicial body and accept its decisions as binding. International law and justice would replace the costs and catastrophe of war in the settling of potential global conflicts.

Finally, the members would agree to support politically, militarily, and financially any necessary armed resistance that the League as a body might agree was required to repel and defeat an attack on one of the member states by an aggressor nation that had initiated international violence. The hope was that the threat of such collective resistance would serve as a deterrent against any nation contemplating disruption of the international peace.

The ideal for which Rappard argued was a world of peace, freedom, law, and order. The League was not and had not been planned to be a world government. For many classical liberals like William Rappard, the logical extension of limited national government was to develop the practice of international justice under law, the adjudication of national disputes before an international court, and an international policing against war and violence between nations.

A Different Reality

That was one version of the classical-liberal ideal. The reality was very different. Rappard was a dispassionate recorder of the League in practice. In violation of the peace concepts of 1919, governments either manipulated or prevented self-determination for peoples through plebiscites. They refused to recognize or respect decisions made by the international court at the Hague; indeed, governments tried to manipulate the selection of judges appointed to serve their national purposes. They filled League commissions, bureaus, and departments with members of their national bureaucracies both as a spoils system and to influence League activities. In the League’s General Assembly and ruling Council, governments instructed their representatives to vote in the service of their respective “national interests” rather than for the protection and improvement of an international order of freedom, justice, and peace. And finally, in the 1930s when imperial Japan, fascist Italy, and Nazi Germany began to violate international treaties and law through war, conquest, and annexation, the League members chose to follow not the idea of collective security, but policies of national armament and defense.

Why had so many nations turned their backs on the potential and possibility for a classical-liberal world of freedom and peace? Rappard tried to answer this in three insightful monographs and a book, the latter originally delivered as a series of lectures at the University of Chicago.

After the disruptions, dislocations, and destruction of World War I, the countries of the world had participated in numerous conferences in the 1920s and early 1930s at which it was pointed out that permanent economic stability and improved material prosperity could only be assured through renewed free trade, more open immigration, a safe environment for global private investment, and stable foreign exchange rates linked to gold. Instead the nations of the world practiced “super-protectionism,” with high tariffs, import quotas, export restrictions, foreign-exchange manipulations and controls, agricultural and industrial subsidies, redistributive welfare schemes, and domestic planning, often with the goal of creating national economic self-sufficiency. While governments may have given lip service to the ideal of economic liberalism, what they all practiced was in fact economic nationalism. Rappard explained this idea and policy:

Economic and political nationalism . . . are, however, so closely related one to the other that we can in no case avoid the necessity of defining the latter if we wish to fully understand the former. Nationalism, then, is the doctrine which places the nation at the top of the scale of political values, that is above the three rival values of the individual, of regional units and of the international community. . . . If we wished to define economic nationalism by its underlying purpose, we should say that it was a doctrine destined to serve the nation by making it not richer, but freer, by promoting not its material welfare, but its independence of foreign influences. Economic nationalism is the policy of national self-sufficiency.

While Rappard pointed out the most extreme forms of economic nationalism were practiced in fascist Italy and Nazi Germany, it was the dominant economic policy in all the Western democracies as well. During the First World War, governments had introduced economic planning in the name of the war effort, gaining control or influence over many aspects of commercial and social life previously viewed as the exclusive domain of private choice, association, and enterprise. After the war, many groups desired intervention and planning in peace time; some because they thirsted after the ideal of social engineering, others because they wished their vested interests to be politically protected in the changed environment of the postwar period. Still others expected government to guarantee or provide employment and business profits or market shares. After the start of the Great Depression in 1929, the pressures and appeals for such policies only increased. It was said that the various forms of national intervention needed to be isolated from international market forces that otherwise might undermine them, an isolation for which the weapons of economic nationalism were applied.

Tool of Economic Warfare

In addition, the experience of the last war and the fear of a new war generated a general climate of political insecurity in which governments built up not only their military armaments but also their tools of economic warfare to assure domestic supplies of raw materials, agricultural produce, industrial commodities for military preparedness, and artificially manufactured substitutes for goods that might not be available during times of international conflict. “By economic armaments,” said Rappard, “we mean all those legislative and administrative devices intended to restrict imports and to develop domestic production with a view of reducing international interdependence. Economic armaments are the tools of economic nationalism.”²²

Rappard tried to explain how this shift from economic liberalism to paternalistic government and economic nationalism had come about. He gave a concise answer in a lecture he delivered in the United States in 1936. After citing the individualist and antistatist rationale for the American and French revolutions and the political evolution of England, he noted:

In the latter half of the nineteenth century and up to the present day, the individual, having emancipated himself from the state and having subjected the state to his will [through the democratic process], has furthermore demanded of the state that it serve his material needs. Thereby he has complicated the machinery of the state to such a degree that he has again fallen under subjection to it and has been threatened with losing control over it.

[T]he individual has increasingly demanded of the state services which the state is willing to render. Thereby, however, he has been led to return to the state an authority over himself which it was the main purpose of the revolutions in the beginning of the nineteenth century to shake and break.

Preserving the liberty that men still had and regaining the liberty that men had already lost was possible, Rappard argued, only with a reversal of state control over economic affairs through a return to economic liberalism, and with it a reduction in the powers and responsibilities of the state:

As we see it, the defense of democracy demands a return to greater economic freedom, without which no state, however organized, can give its citizens more than the illusion of governing themselves …. It is, therefore, not only because we believe private enterprise to be more creative, more progressive, more efficient, and consequently more productive of greater general prosperity than that of the state, that we venture to advocate a limitation of the latter. It is also because we believe that no state that has been allowed to become totalitarian in its activities can fail to become totalitarian in its claim on the subservience of its subjects. Our plea for more private liberty is, therefore, political no less than economic.

For Rappard, the calamity of the Second World War was the inevitable outcome of the collectivist, nationalist, and socialist tendencies set loose during the First World War and that reached their apex in the 1930s. Whathope, then, did he have for the world that emerged from the second “Great War” of the twentieth century?

Dubious about the U.N.

In the immediate aftermath of the war, during a visit to the United States, he delivered a series of lectures in which he expressed little confidence in the new United Nations that had superseded the old League of Nations. Rappard argued that the United Nations was the product of a “victors’ peace.” It was designed and brought into existence by the United States, Great Britain, and the Soviet Union before the war had even ended, and was controlled and dominated by them. The initial membership was restricted to those nations who had allied themselves with the Big Three in the war, and excluded neutral countries like Switzerland. The U.N.’s real power resided in the Security Council, in which five governments the United States, the Soviet Union, Great Britain, France, and China—not only determined when and how military force would be used against the other nations of the world, but in which each also had a veto power that prevented any U.N. sanctions and actions against themselves. Any decision on which the Big Five could agree could be virtually imposed on the other members of the United Nations. It was an organization constructed for these five powers to be the masters of the postwar world.

In 1954 Rappard delivered a lecture in which he reviewed the attempt for global peace since the end of the First World War. In the post-World War II period, he said, global peace through the U.N. had been impossible not only because of the Big Five monopoly, but also because the two leading powers–the United States and the Soviet Union–held radically different conceptions of the meaning of “freedom,” “justice,” “self-determination,” and “peace.” Peace had depended on the two military alliances surrounding the United States and the Soviet Union. The worst fear was that a war would break out between these two camps, resulting in a nuclear calamity far more terrible than the other world wars of the century.

What was Rappard’s hope for the long run? He believed that eventually the Soviet Union would collapse from internal forces. He argued that however meager living standards may be under socialist planning compared to the West, any improvement would stimulate the Russian people to want an improvement in their political status as well:

[M]ay we not hope that, as they [Soviet people] become less indigent, they will become less subservient? And as they become more impatient of police rule and of censorship, may they not grow more skeptical about the myths on which their ignorance has heretofore been fed about the West, about its exploitation of the masses, about capitalism, and about its necessarily aggressive imperialism? . . . But even if it be deemed unlikely, it seems to me that the policy of the West should not dismiss it as necessarily untrue. Nothing is to be gained by acting as if the masters of the East were omniscient in declaring war to be inevitable and everything would be assuredly lost if we let ourselves be persuaded that they were as infallible as they are dogmatic.

But besides any eventual internal collapse of communism in the Soviet Union, the West had to have its own ideal. In his last book, The Secret of American Prosperity, Rappard tried to explain to his fellow Europeans the lessons to be learned from the United States without forfeiting their own traditions and cultural contributions to the world. What underlay America’s technological superiority and productive strength, he said, was its spirit of free and open competitive enterprise, which created the innovations and material achievements that were the envy of the world. The secret of America’s success was human liberty, Rappard emphasized. The ideal of liberty had originally come to America from Europe. Europe now needed to relearn some of that lesson from America. If it did, a world of freedom, free trade, peace, and prosperity could become a reality, rather than only the classical-liberal ideal.

By Richard Ebeling

Originally Published on September 25, 2017 for The Future of Freedom Foundation

One of the great political mysteries has been the success of governments in ruling over societies with little opposition and resistance from the vast majority of the population, even when those governments have been brutal tyrannies and openly dictatorial in their control.

This has been true, no less, under democratic regimes, as well, under which levels of taxation have been far higher and the degrees of regulation over personal, social and economic activities often much more intrusive than under tyrants of bygone ages. This has been in spite of the fact that those governments are formally “answerable to the people” through regular elections determining who holds high political office with legitimized power over the electorate’s lives.

Conquest and Plunder as the Origin of the State

It has long been understood by historians that most modern States, such as in Europe, have their origins in conquest and plunder. Invading tribes and bands would vanquish existing rulers and their peoples, and settle down to permanently live off those whom they had not killed during the conquest.

The German sociologist, Franz Oppenheimer (1864-1943), especially emphasized this in his classic work on the origin of political power and authority, The State (1914). He argued that there are fundamentally two ways by which individuals may obtain the material means that they wish to have to maintain and improve their lives: the economic means and the political means: Said Oppenheimer:

There are two fundamentally opposed means whereby man, requiring sustenance, is impelled to obtain the necessary means for satisfying his desires. There are work or robbery, one’s own labor and the forcible appropriation of the labor of others.

I propose in the following discussion to call one’s own labor and the equivalent exchange of one’s own labor for the labor of others, the ‘economic means’ for the satisfaction of needs, while the unrequited appropriation of the labor of others will be called the ‘political means’ . . .

Oppenheimer warned that when individuals have the choice between these two methods for acquiring what they desire, people were too often tempted to use coercion rather than avenues of peaceful production and trade. He said: “Wherever opportunity offers, and man possesses the power, he prefers political to economic means for the preservation of his life.”

Oppenheimer then asked:

What, then, is the State as a sociological concept? The State . . . is a social institution, forced by a victorious group of men on a defeated group, with the sole purpose of regulating the dominion of the victorious group over the vanquished, and securing itself against revolt from within and attacks from aboard . . . This dominion had no other purpose than the economic exploitation of the vanquished by the victors. No primitive state known in history originated in any other way.

From Roving Bandits to Permanent Power

Oppenheimer’s view was restated in more recent times by the Public Choice theorist, Mancur Olson (1932-1998), in his posthumous work, Power and Prosperity (2000), in terms of the economic motives and actions of the conqueror.  Olson argued that the origin of the state could be seen in the replacement of roving bands of plundering thieves by stationary bandits who settle down to rule over a territory over a prolonged period.

The roving band cares nothing for what happens in the area it has looted and then leaves behind. But the stationary bandit who wants to permanently live off the conquered area has to take into consideration the conditions and the incentives of his subjects if they are to keep producing and therefore creating something for him to plunder through taxation year-after-year.

Thus, out of the taxes he imposes, the stationary bandit must also, in his own self-interest, to some extent secure his subject’s property rights, enforce contracts, establish a judicial system to adjudicate their disputes, and even supply some “public goods,” such as roads and harbors to facilitate commerce.

But the resident conqueror’s motive in providing any such protections and enforcements for those over whom he rules is to extract the greatest amount of tax revenue for himself at the least cost of respecting and enforcing the property rights of his subjects, but to whom he must offer some minimal degree of such security. Otherwise, their incentive to produce the wealth out of which his tax revenues come might be far less. Said Mancur Olson:

The bandit leader, if he is strong enough to hold a territory securely and monopolize theft there, has an encompassing interest in his domain. This encompassing interest leads him to limit and regularize the rate of theft and to spend some of the resources he controls on public goods that benefit his victims no less than himself.

Since the settled bandit’s victims are for him a source of tax payments, he prohibits the murder and maiming of his subjects. Because stealing by his subjects, and the theft-averting behavior that it generates, reduces total income, the bandit does not allow theft by anyone but himself.

He serves his interests by spending some of the resources he controls to deter crime among his subjects and to provide other public goods. A bandit leader with sufficient strength to control and hold a territory has an incentive to settle down, to wear a crown, and to become a public goods-providing autocrat.

But brute force and fear is, in the long run, not a sustainable basis for permanent plunder and privilege by a conquering few over the conquered many. It is far better if those over whom the ruler rules not only acquiesce in his control and commands out of fear, but also do so willingly through belief in the rightness and justness of his political authority over them.

How, then, do political rulers inculcate this belief in their right to rule and with it an obedient allegiance and loyalty by the subjects and citizens to the governments they command?

Louis Rougier and Political and Economic Mystiques

This was a theme taken up by the French philosopher and classical liberal economist, Louis Rougier (1889-1982). Especially in the two decades of the 1920s and 1930s, between the two World Wars, Rougier was one of the leading European defenders of limited government and free market, competitive capitalism, and a critic of the totalitarian collectivisms of that time that seemed to be threatening to dominate much of the world.

He discussed this question in two works, Modern Political Mystiques and Their International Impact(1935) and Modern Economic Mystiques and Their International Impact (1938), both originally delivered as series of lectures at the Graduate Institute of International Studies in Geneva, Switzerland. The Graduate Institute was a classical liberal-oriented seat of higher learning that with the rise of Italian fascism and German Nazism served as a refuge for a number of prominent scholars searching for an intellectual home away from their, now, totalitarian homelands (including the Austrian economist, Ludwig von Mises, German economist, Wilhelm Röpke, and Italian historian, Guglielmo Ferrero, among others).

Governments and ideological movements, Rougier explained, wrap themselves in “mystiques” that serve as the rationales for claims to an ethical and legal right to rule. What is a “mystique”? Said Rougier:

The term refers then to a combination of beliefs which could not be demonstrated by reason or based on experience but which are accepted blindly for irrational reasons: by the effect of custom of which Pascal speaks, of education, of authority, of example, of preconceptions alleged to be inevitable, in short by the effect of all the pressures of social conformism.

These beliefs may be moral, esthetic, scientific, social, or political. Every doctrine that one no longer feels the curiosity or the need to call into question, whether it is because one accepts it as a dogma so evident that any inquiry about its solidity is superfluous, or because one adheres to it by an act of faith considered so necessary as a consequence of its sacrosanct beneficence that to abandon it would be outrageous, is a mystique and is accepted as such.

The Economic Mystique versus Laws of the Marketplace

An “economic mystique,” Rougier said, is one that allows a person to believe in the power of government to do anything it wants, say, in the form of various types of government intervention affecting wages, prices or production with the unquestioning presumption that what the government declares as the intervention’s purpose will fully materialize with no negative or unintended consequences.

The notion that there are economic “laws” of supply and demand, or cost and price relationships effecting profitability or employability, are either unknown or ignored or rejected by a seemingly unreasoned belief that because the stated goal of the intervention is “good,” then it is only necessary for government to implement the interventionist policy to make it so. The same applies, Rougier, said, in the case of the proponents of socialist central planning.

If something hinders or prevents the achievement of the intervention’s goal, then it must be due to either not enough “force” being applied or not enough money spent to make it so; or some nefarious, socially evil individuals or groups acting to thwart it. The same applies, Rougier argued, in the case of the proponents of socialist central planning. The failure to successfully meet the government’s planning targets can only be due to intriguing “enemies of the people,” or traitorous “wreckers” in the service of foreign powers trying undermine the triumph of the collectivist utopia, or a negligent lack of sufficient enthusiasm and disciplined dedication among some of the workers and managers.

The classical liberal-oriented economist has reason on his side relative to the believer in such economic mystiques because, Rougier insisted, not every value-judgment is merely a matter of “subjective” or personal, desire or belief, not open to objective investigation or evaluation. If a person says that he prefers wearing red ties to blue ones, or enjoys driving one type of car versus another, there may be little to dispute or challenge by someone else about that stated preference.

But if someone says, for instance, that they support a government imposed minimum wage or a trade barrier because he believes that such a policies will, respectively, improve the living condition of the unskilled with no affect on the amount of employment for such workers, or will increase the overall level of production and employment in the economy with no adverse effects, the economist has a logical and experiential benchmark on the basis of which to evaluate them. That benchmark is: will the interventionist means chosen, in fact, achieve the goals, purposes and ends in mind? Or as Rougier expressed it:

If afflicted with an inferiority complex, you prefer authoritarian regimes [because it “subjectively” enhances your sense of self-esteem], nobody will deny that your choice answers a real need in your character, and there is nothing to argue about. But if you state, ‘I prefer authoritarian and totalitarian governments to liberal government because they are better suited to assure the well-being of individuals and the peace of nations,’ you offer a judgment that one can submit to the verification of experience, to the facts and of history.

And the lessons of economic history and economic theory show beyond much of a reasonable doubt, said Rougier, that the means chosen in these cases – minimum wage laws, protectionist trade barriers, authoritarian regimes – will not bring about the desired ends of higher incomes, improved living standards, and international peace and harmony.

Attempts to reason with the holders of such economic mystiques are often brushed aside by their believers. The reasoned argumentation, presentation and discussion of historical or contemporary facts and evidence or logical argument are often emotionally rejected as a proof that the critic of the economic mystique has no compassion or a sense of caring for those to be helped by the intervention or the government planning.

Political Mystiques as Rationalizations of Power and Plunder

Part of the reason for this, Rougier suggests, is the wider and deeper problem of “political mystiques” that serve as the bases to justify and legitimize the right of some to rule over others, and the accompanying belief in their power to do “good” if only given enough power.

From the time of antiquity, Rougier explains, the conquerors and rulers have searched for that legitimizing justification for their control and command over others in society. The “monarchical mystique” did so, and for thousands of years, by successfully rationalizing political power through the claim and the indoctrination of a divine right to rule. The king held his absolute and unquestionable authority because he was a “god” himself, or had had this status bestowed on him by “the gods” or God.

From the time of the ancient Hebrews the anointing of the ruler by a high priest by poring “holy oil” upon his head, or being handed the sacred sceptered, or by having placing a crown upon the royal head, all symbolized that a “higher power” than any mortal man had selected this person and his heirs to command all others in his domains with loyalty and obedience by all those below him.

In Europe a long train of events over several hundreds of years challenged and weakened the absolutist claims of the king or emperor; this was partly done by the Catholic Church attempting to maintain or extend its own autonomy and authority, and partly by noblemen and then commoners who chafed under and resented and resisted the arbitrary decisions and demands of the monarchs under which they lived. By the time of the Enlightenment in the 1700s, secular skepticism and political dissent weakened and finally undermined the “superstition” of the “divine” authority and legitimacy of kings. While it linger on into the 1800s, the right of kings to rule over and command others was symbolically beheaded along with the actual decapitation of the king of France, Louis XVI, in Paris in 1793.

The Democratic Mystique of “the People’s” Self-Rule

But a new mystique arose rapidly in its place in the late eighteenth and early nineteenth centuries, the “democratic mystique.” From the rule of “the one” there emerged the idea and ideal of the “rule of the many.” Rougier explained:

By a daring transposition sovereignty was transferred from the monarch to the people themselves. It appeared that as soon as power was exercised by those who bore its burden, it would be exercised with the minimum of despotism . . .

Since all the citizens are considered by their representatives to participate in the establishment of the law, the law seems to be the expression of the general will. Everyone submits to it willingly because everyone has the illusion that he has participated in its formation and that, obeying everybody, he obeys himself. The fundamental political problem, that of freely granted obedience, is, in a way, solved by definition.  This is where the great strength of democracies comes from. Never has any form of government exercised such extensive discretionary power over the governed without the apparatus of coercion.

Let us compare the ease with which the democracies have established general [military] conscription or have taken away up to 80 percent of the wealth of their citizens without provoking a revolt with the difficulty the monarchies under the old regime had in raising soldiers and taxes. By making the sovereign and the subject one, the democratic mystique has brought about the maximum of authority with the minimum of constraint.

But democracy “works,” argued Rougier, only for as long as the reach and responsibility of a government extends, in general, no further than primarily securing, protecting and respecting the rights of the individual members of society to their lives, liberty and property. The freedom of the individual is only assured for as long as the government does not intrude into the marketplace with interventions, regulations, controls and central planning.

That is, democracy served as a peaceful way of appointing those holding political office and securing people’s liberty rather than violating it only for as long as it functioned in a cultural and social setting based on the ideas and ideals of political and economic classical liberalism. In Rougier’s words:

As soon as the state adds economic power to its political power, whether it holds all the means of production or simply claims to regulate production according to a preconceived plan, it turns out to have all powers and to grant some of them only arbitrarily to individuals.

In reality, for an individual to be free vis-à-vis the state he must be able to do without the state’s services, he must be able, if need be, to resign from a public function, if he is forced to act against his conscience, without running the risk of not finding other employment. Now this in inconceivable in a statist or collectivist regime, where the individual has no other alternative than to be a functionary, a client of the state, or die of hunger.

Buried in the democratic mystique, Rougier explains, in the fallacy of “the people” ruling themselves. Once delegation of authority is transferred from the citizens themselves to representatives in the government who pass, administer, and enforce legislation and the law, two things have historically come into play. First, the elected representatives are discovered to have their own purposes and interests that may have little or nothing to do with that of the constituents as a whole who have put them in political office.

And, second, election and reelection may be more easily assured and maintained by serving coalitions of special interest groups who see ways of using the State for their own ends outside of the free and voluntary competition of market exchange. The political system of politicians and special interests “buries economic liberalism by using state intervention for its own benefit to maintain the positions it has acquired,” lamented Rougier.

Writing in the 1930s, Louis Rougier’s concern and fear was that the corrupted and corrupting “democratic mystique” was being superseded by the “totalitarian mystiques” of communism, fascism and Nazism – mystiques surrounding alternative collectivisms in the forms of Marxian class conflict, fascist aggressive nationalism, and Nazi “race warfare.” Here were other conceptions of the collective mystique of “the will of the people” far more brutal and tyrannical than anything seen in modern history.

The Tyranny of Modern Tribal Identity Mystiques

Today, there are other “political mystiques” that are advancing over the landscape of society. These are the “gender mystique,” the new multicultural “race mystique,” and the new anti-income inequality “social class conflict mystique.” They are all versions and forms of cultural and economic collectivism joined with demagogic intolerance of speech, thought and peaceful action, based on new tribal mystiques of group identity within which the individual is confined and from which there is no escape as an thinking and choosing individual.

And here, once again, what makes them “mystiques” as Rougier defined them, are unreflective and unchallengeable beliefs not open to reasoned discourse and debate. Any questioning and criticism of them is met with hysteria, emotional condemnation, and insistence that the opponent of the new tribal-group identity mystique be forcibly silenced and banished. Even, as some dare to say, to be put to death as an enemy of the gender, racial or ethnic collectives declared to be the irreducible social entities within which the individual is to be culturally and politically imprisoned.

In the 1930s, Louis Rougier insisted that if both the democratic mystique and the totalitarian mystiques were to be stopped and reversed, there was only one lasting avenue: “to return to the practices of political, economic, and cultural [classical] liberalism.” That message is no less true and relevant today in the face of the emerging totalitarianism of the new gender, racial and ethnic “identity politics” mystiques.

By Richard Ebeling

Originally published on December 5, 2023 for The Future of Freedom Foundation

Fifty years ago, on October 10, 1973, one of the leading members of the Austrian School of Economics, Ludwig von Mises (1881–1973), passed away at the age of 92. There was little notice of Mises’s death in the mainstream of the economics profession, even though he had been one of the most widely recognized economists in Europe during the interwar years of the 1920s and 1930s. At the time of Mises’s passing, it was difficult to even refer to an existing Austrian School of Economics. Except for a small handful of individuals, the Austrian School, for all intents and purposes, had been relegated to being a closed chapter in the history of economic ideas.

The Keynesian Revolution in macroeconomics had swept away all the competing approaches for understanding inflations and recessions. This included the Austrian theory of money and the business cycle that had been developed by Mises before and after the First World War. It was then reformulated and given international recognition by Mises’s protégé, Friedrich A. Hayek (1899–1992) during the 1930s as part of his debates and controversies with John Maynard Keynes (1883–1946) over the causes of the Great Depression and the policies most appropriate to restore full employment and sustainable long-term growth and prosperity. As one writer suggested, the Austrian School had been swept away in the Keynesian avalanche.

In the field of microeconomics, circumstances were no better. From the founding of the Austrian School in 1871 with Carl Menger’s (1840–1921) Principles of Economics, a particular characteristic in the writings of many members of the school had been a focus on the nature and workings of the market process —the determination of prices through the competitive interactions of suppliers and demanders. This was especially the case in the contributions of Mises and Hayek in the 1930s and 1940s. The market was seen as an entrepreneurially driven, dynamic competitive process in which the decentralized and ever-changing knowledge of the interdependent market participants determined prices.

However, beginning at the same time in the 1930s and 1940s, and coming to dominate economics in the 1950s and 1960s and after, there was an increasingly arid mathematical formalism in which everything going on the market was part of a series of simultaneous mathematical equations that measured and promoted the stability of the economy’s general equilibrium among all the individual suppliers and demanders for all the goods and services and factors of production offered for purchase and sale. The origin of the general equilibrium approach began in the 1870s by a French economist, Leon Walras (1834–1910), who, like Carl Menger, had developed a version of the theory of marginal utility. But it was only in the middle decades of the twentieth century that it came to be the primary focus of those specializing in microeconomic theory.

The peculiar assumptions of perfect competition

Central to this dominant economic approach was the concept of “perfect competition,” which was intended to ensure some of the assumptions considered crucial for a unique equilibrium to exist. First, all consumers and producers are individually too small, relative to the overall market in which they participate, to influence the market price by increasing or decreasing the amount they, respectively, buy or sell. Hence, each is a “price taker,” adjusting how much they find it desirable or profitable to buy or sell at the given market price. Second, on the supply-side, every seller in their particular market offers for sale a product that is perfectly interchangeable for the product their rivals also offer for sale in that same market. Thus, no seller can or does attempt to differentiate their version of the product from that of their competitors, and as such, none of them can sell their product at a price different from what other sellers in that same market are receiving.

Finally, buyers and sellers are presumed to have perfect or sufficient knowledge of all relevant market circumstances and therefore never make the mistake of buying a product at a price higher than someone else may be offering it or selling a product at a price less than they need to. Logically, therefore, all markets meeting the conditions of perfect competition are in a perfect long-run equilibrium since all buyers and sellers know the “objective” circumstances prevailing in and across markets. Hence, they never make the mistake of missing out on a profit opportunity that could have been theirs or suffering a loss that might have been avoided if only they had known all the correct information about all market circumstances that they face.

The mathematical general equilibrium approach had already been challenged by Carl Menger in an exchange of letters he had had with Leon Walras in the 1880s. In 1932, Hans Mayer (1879–1955), a prominent member of the Austrian School who taught at the University of Vienna, published a 100-page monograph, “The Cognitive Value of Functional Theories of Price,” in which he offered a critique of several of the leading general equilibrium theorists for narrowly limiting their analysis to merely describing the conditions for and the configuration of a final economic equilibrium state. He contrasted this with what he referred to as the “causal-genetic” approach of the Austrian School that focused on the origin of market prices in the subjective valuations of individuals and the competitive process through which prices were formed and adjusted through time, leading to a possible equilibrium outcome.

Ludwig von Mises also emphasized, most especially in his treatise, Human Action (1949), the dynamic nature of the market process in which rival entrepreneurs attempt to do better than each other in anticipating and estimating the consumer demands of the future and devising ways of organizing, directing, and producing ever better new and less expensive goods to earn profits and avoid losses. Price competition and product differentiation were essential hallmarks of a vibrant, functioning, and ever-improving market economy and society. Mises insisted that the “market is a process” rather than a never-attained hypothetical final equilibrium state in which all change would come to an end.

Mises and Hayek criticized the central-planning idea

In the 1920s, Mises had challenged the socialist idea of central economic planning by arguing against its realistic workability, first in an essay on “Economic Calculation in the Socialist Commonwealth” (1920) and then in, Socialism: An Economic and Sociological Analysis (1922; revised ed., 1932). He argued that by doing away with the institutional foundations of a functioning market economy — that is, private property in the means of production; an open competitive process through which prices for consumer goods and the factors of production (land, resources, labor, capital) could be formed; and a market-based medium of exchange (money) — the socialist central planners would not be able to undertake any rational form of economic calculation for purposes of determining profitable versus loss-making lines of production in the most cost-efficient ways. He refined his critical analysis of socialism in his book Human Action in the context of his broader exposition of the entrepreneurial-guided market process for satisfaction of consumer demands.

As a professor at the London School of Economics in the 1930s and 1940s, Hayek took up Mises’s arguments in debating advocates of socialist central planning. He first offered his own critique in the opening and closing chapters of a book he edited on Collectivist Economic Planning (1935). But his own unique contribution came in three articles: “Economics and Knowledge,” (1937), “The Use of Knowledge in Society” (1945), and “The Meaning of Competition” (1946), all of which were reprinted in Hayek’s Individualism and Economic Order (1948).

The essential nature of “the economic problem,” Hayek argued, was the division of knowledge that accompanies the division of labor in society. The knowledge of the world is decentralized and dispersed in the minds of all people around the globe. The question was, how shall that knowledge, possessed and most fully appreciated only in the minds of each particular person, be effectively brought to bear in ways that benefit and improve the conditions of others, as well as the person possessing that knowledge, in the interconnected system of division of labor?

Hayek’s answer was the market system of competitively formed prices. Prices are a communication network through which consumers and producers, suppliers and demanders can inform each other about what it is they respectively want or might be able to do in the arenas of exchange, without anyone needing to know all the knowledge that, in fact, no one could ever successfully master. Prices help generate a coordinated system of mutual association and benefit encompassing, in principle, everyone in the world without any one person or few having to guide, direct, or command it. In Hayek’s view, this was a primary reason why a system of comprehensive socialist central planning was an unworkable substitute for a functioning market economy.

The importance of the competitive process

Part of the error on the part of socialists and too many economists in general when they conceived of an economic system was to do so in the context of the perfect competition model, Hayek said. It was presumed that “somehow” it was possible to have a “perfect knowledge” of market circumstances to ensure a perfect equilibrium of supply and demand. Then, when anything falls short in the real world from the benchmark of the perfect-competition assumptions, it is claimed to be an instance of “market failure.” Government regulatory and interventionist policies are called for to correct them, under the presumption that those in political power could or do know and understand enough to ensure that actors in the real world conform to the perfect competition postulates, resulting in perfect equilibrium outcomes.

Hayek insisted that the purpose and role of real competition, that is, rivalrous competition among sellers in the marketplace and competition as a dynamic process of discovery, is to find out who could do what, and how they might be able do it better than others who are attempting to market the same goods and services.

If we already knew ahead of time what people wanted, how best to produce it, and which methods of production and combinations of resources, capital, and labor that would do the job in the most cost-effective way, society would have the most economically optimal set of relationships and resource uses. The economy would be and could remain in a perfect, long-run general equilibrium. It is precisely because we do not know all these things ahead of time, however, due to the fact that people’s knowledge is imperfect and dispersed among all in society, that competition in the marketplace is socially desirable and beneficially.

It is only in the dynamic process of competition that people find out what they can do and how they might do it better compared to others in the social system of division of labor. Thus, in Hayek’s view, far too many economists used and judged the market economy by a hypothetical, perfectly planned socialist system or perfectly regulated economy by a government presumed, again, to be able to know and understand more than any of those in government can ever have the capacity to know.

Mainstream economists ignored the Austrian challenges

But rather than confront and reply to the types of arguments that Mises and Hayek had articulated in the 1930s and 1940s about the competitive market economy, or the impossibilities of central planning, or the unworkability of the regulatory interventionist state, the mainstream of the economics profession just blissfully played on with their mathematical models of general equilibrium and with how wisely introduced planning or regulation could correct all the ills in society created by the presumed market failures due to unregulated free markets in the imaginary world of the theory of perfect competition.

In other words, for the mainstream economics profession, the Austrian School was a closed chapter in the history of economic ideas. It was irrelevant to “modern” economic theory and policy considerations precisely because the “Austrians” had been of an earlier generation not educated in and wise enough to understand and appreciate the “true scientific method” of hyper-mathematization combined with aggregated statistical analysis to manage and manipulate the macroeconomics of total output, total employment, and the general price level.

After coming to America during the Second World War, Mises taught graduate seminars as a “visiting professor” at New York University until 1969, when he was almost 89 years old. Most of his more scholarly writings in the postwar period had turned to questions of the methodology of the social sciences, such as his books Theory and History (1957) and The Ultimate Foundations of Economic Science (1962). Hayek also had moved away from the narrower questions of economic theory and policy after the war. His interests turned to the social and political philosophy of the liberal free society, as reflected in his works The Constitution of Liberty (1962) and Law, Legislation, and Liberty, 3-vols. (1973–1979).

Ludwig M. Lachmann (1906–1990), who had left Germany in 1933 and earned an MA degree under Hayek’s supervision at the London School of Economics, taught for decades at the University of Witwatersrand in Johannesburg, South Africa. He wrote mostly on the Austrian Theory of Capital and Its Structure (1956) and Macroeconomic Theory and the Market Economy(1973), as well as on the methods of the social science, including The Legacy of Max Weber (1971).  In conversation in later years, he would say that in the 1950s and 1960s, he feared that he would be “the last” Austrian economist.

New beginnings of the Austrian School: Rothbard and Sennholz

But there were the seeds of a new generation of Austrian economists, mostly surrounding Ludwig von Mises at New York University. Mises seemed to have an uncanny ability and talent for attracting interested and bright students. He had done so at the University of Vienna between the two world wars, where he taught as a part-time unsalaried lecturer and as a full-time senior economic policy analyst for the Vienna Chamber of Commerce, Crafts, and Industry.

He did so again at NYU, where his two leading so-inspired students were Murray N. Rothbard (1926–1995) and Israel M. Kirzner (b. 1930). In the late 1940s, Rothbard was told that there was this economist teaching at NYU who would soon be publishing a book that was about “everything.” When recalling this, Rothbard said that he replied, “How can one book be about ‘everything?’” But when Human Action was published in September 1949 and Rothbard read it, he would then say, “It was about ‘everything!’”

While finishing his own PhD at Columbia University, Rothbard regularly attended Mises’s NYU seminar. The result of Mises’s influence on him led to the writing of Rothbard’s two-volume work, Man, Economy, and State: A Treatise on Economics (1962), followed by his “Austrian” analysis of The Great Depression (1963) and Power and Market: Government and the Economy (1974). The significance of Man, Economy, and State was that it presented a clear, logical, and comprehensive exposition of the “Austrian” view of economics from the starting elements of human action and the logic of choice to the complexities of exchange, markets and prices, the time structure of production, capital and interest, and the intricacies of money, monetary transactions, the purchasing power of money, and the political economy of the business cycle, along with a critique of socialist central planning and the contradictions of the interventionist state. It was a lucid and readable guidebook to the Austrian perspective on the nature, concepts, and theory of economics from A to Z.

In addition, Rothbard also drew around him a group of young libertarians who were introduced both to the ideas of liberty and the insightfulness of the Austrian approach for understanding the potentials of a free market for both liberty and prosperity in comparison to any form of government control and command. A good number of these young people, then in their teens or twenties, helped bring about the revival of the Austrian School during the remaining decades of the twentieth century as they followed their own careers, many of them as academic economists. .

Also attending Mises’s NYU seminar was Hans Sennholz (1922–2007), who had earned a doctorate in political science in Germany after the war and came to New York precisely to study for a PhD under Mises. Sennholz’s expertise was not only a detailed knowledge of both Austrian and mainstream economics but also a unique capacity to articulate both economic theory and policy matters with great ease and clarity for a wider popular audience through articles and the spoken word. This included a decades-long professorship in economics at Grove City College in Pennsylvania, through which he influenced a good number of students who went on to prominent academic careers in economics and the Austrian tradition.

Israel Kirzner on acting man and the market process

The other leading protégé of Ludwig von Mises at New York University was Israel M. Kirzner. Born in London, Kirzner was at New York University working on an MBA when he took Mises’s graduate seminar. The first evening of the course, Kirzner recalled, Mises began by saying that “the market is a process.” Figuring out what that fully meant became Kirzner’s lifelong intellectual pursuit. He wrote his dissertation under Mises on The Economic Point of View (1960), a doctrinal investigation on the subject matter of economics, from the classical economists to the Austrians. This was followed by Market Theory and the Price System (1963), a textbook exposition of the core concepts of microeconomics from a clearly defined market-process approach. Not meant to be as comprehensive as Rothbard’s Man, Economy, and State, Kirzner offered a theory of market adaptation to changing circumstances that included an emphasis on the role and significance of time in the processes of adjustment to conditions of market coordination.

With little doubt, Kirzner’s most important and influential work from this period was Competition and Entrepreneurship (1973), which was published a few months before the death of Ludwig von Mises. This year marked the 50th anniversary of the publication of Kirzner’s book. Kirzner blends Mises’s idea of the market as an entrepreneurial process with Hayek’s conception of competition as a discovery process that coordinates the activities of all the participants in the social order through the price system.

Kirzner’s starting point is Mises’s conception of “human action.” Man is a purposeful and active being who is open and alert to new and previously unthought of opportunities and avenues to improve his circumstances. He imagines and selects among the ends that might be desirable to attain, and he intentionally looks for means and methods to pursue them. In this sense, the individual actively chooses his ends and purposely searches for means to better his life.

This is significantly different from the mainstream microeconomic premises, Kirzner said, in which the analysis assumes from the start that each and every agent already has a clear and delineated set of “given” ends and means. The “economic problem” is merely a mathematical exercise in “constrained maximization,” that is, given his “given” and ranked ends and given the known means available, how does he logically apply those means in such a way to achieve the greatest number of his ends? Where and how the individual decides upon the ends to pursue, and where and how he discovers and decides on which things might be useful as well as useable means to pursue them, is never explained or explored.

“Austrian” man, if we may use such a phrase, creates the “given” ends and means taken for granted in the mainstream microeconomic framework. Indeed, if we do not at least attempt to understand the preceding active and alert acts by individuals in discovering ends worth pursuing and deciding upon what might be useful means to try to attain them, it becomes impossible to ever explain how and why people’s chosen ends and selected means ever change. In other words, how would today ever be different from yesterday, or tomorrow from today, if the economic agents merely keep acting within the “given” ends-means framework they begin with? The only changes would come from some change in the “objective” physical circumstances, to which individuals would merely react, given their “given” ends and known means.

Kirzner on entrepreneurial alertness and competitive discovery

In taking up Hayek’s ideas of competition as a discovery process in comparison to the assumptions of the mainstream perfect competition theory, Kirzner then asked, if sellers in the market are prohibited from offering lower prices than their rivals, and if they are not allowed to differentiate their product by innovatively devising ways to make them new, better, and improved in comparison to their competitors, how do any new and better quality products ever come on the market?

Mainstream microeconomics had constructed a theoretical edifice claiming to “explain” how markets work but that did so on a set of peculiar assumptions and premises that prevented any understanding of actual markets in a real world that is populated by real people who, in fact, are alert, purposeful human beings constantly open to and trying to find new and better ends and means.

This alertness, Kirzner said, building on Mises’s work, was the nature and essence of entrepreneurship. The entrepreneur is always looking out for and attempting to take advantage of discoverable profit opportunities. Part of Mises’s point is that, fundamentally, each and every one of us is an “entrepreneur” trying to find profitable opportunities to better our life in all that we do. An entrepreneurial element, therefore, is inseparable from human action and the human condition.

In the marketplace division of labor, there are those who specialize in this task and combine it with the decision-making of what products to produce; how, when, and where to produce them; and with what combination of inputs, based on their expectations of what products consumers may want and the prices they might be willing to pay some time in the future when the production processes have been completed. Real competition in the marketplace is a competition between rival entrepreneurial visions of the discoverable and the possible, the reality of which will be found out when their competing goods are offered to consumers and they earn either hoped-for profits or suffer unfortunate losses.

The resulting outcomes of experienced profits or losses bring about adjustments and adaptive changes that move modified productions and supplies into a more consistent coordination with consumer demands. However, in this Austrian understanding of the on-going and never-ending competitive market process, a “perfect” equilibrium is never attained because there are always new entrepreneurial discoveries, products, and price offerings before the market has fully adjusted to the earlier supply and demand conditions. There is a constant tendency toward equilibrating coordination in the marketplace, but it is a continuously “moving target.”

Kirzner on misguided government interventions 

This Austrian market-process view also leads to radically different economic policy conclusions in comparison to the “perfect-competition” presumptions in mainstream microeconomics. As we saw, within the mainstream microeconomic framework, any seller’s attempt to competitively change his price to offer consumers better terms of trade than his rivals or to differentiate his product, including by offering a better or different version of it, can be considered instances of anti-competitive “market failure.” This leads to proposals for a variety of government interventions to “correct” the unregulated market.

An instance of this, which Kirzner discusses, is business advertising. From the perfect competition perspective, advertising is viewed as wasteful and undesirable since it is one competitor trying to create an impression in the minds of consumers that his product is different than his rivals. But within the Austrian market process approach, advertising is a logical and useful means by which entrepreneurs attempt to inform consumers about product opportunities they may not and often do not know about.

In fact, those entrepreneurs are creatively devising ways to make those new and better products and frequently offering them at better prices than those in the past. Only in the la-la land assumptions of perfect competition, under which every buyer and seller start with perfect or sufficient knowledge to never make a buying or selling mistake, can informing people about things they may not know about in ways that get people’s attention in a world with many distractions, can business advertising be considered a “failure” of the unregulated capitalist system.

A few years after the publication of Competition and Entrepreneurship, Kirzner delivered a lecture entitled “The Perils of Regulation: A Market-Process Approach” (1979). He reiterated and extended his critique of mainstream microeconomic policy views. He explained some of the negative effects from various forms of government intervention:

Government controls constrain and constrict; they rearrange and repattern the structure of incentives; they redistribute incomes and wealth, and sharply modify both the processes of production and the composition of consumption…. The most serious impact of government regulation on the market discovery process well might be the likelihood that regulation, in a variety of ways, may discourage, hamper, or even completely stifle the discovery process of the unregulated market…. Regulatory constraints, that is, are likely to bar the discovery of pure profit opportunities….

The beneficent aspect of competition in the sense of a rivalrous process … arises out of freedom of entry. What government regulations so often erect, are regulatory barriers to entry. Freedom of “entry,” for the Austrian approach, refers to the freedom of potential competitors to discover and to move to exploit opportunities for pure profit. If entry is blocked, such opportunities simply may never be discovered, either by existing firms in the industry, or by regulatory authorities, or for that matter by outside entrepreneurs who mighthave discovered such opportunities, were they allowed to be exploited when found.

This is the danger and undesirability of antitrust regulations that prevent market-based mergers and acquisitions and prevent existing firms from simply gaining larger market shares resulting from their ability to attract more customers due to better products or more attractive prices. Drug-testing regulations, Kirzner warned, “not only reduce the flow of new pharmaceutical drugs where successful research might have been more or less predictable, but also discourage the entrepreneurial discovery of wholly unknown research procedures.” As Kirzner concluded:

The basic insight underlying these conclusions, in sum, is a simple one. The competitive-entrepreneurial process, being a process of discovery of the as-yet-unknown, can hardly be predicted in any but the broadest terms. The imposition of regulatory constraints necessarily results, therefore, in a pattern of consequences different from and most plausibly, distinctly less desirable than, that which would have occurred in the unregulated market.

The year 1974 saw two momentous events for the rebirth and revival of an active and vibrant Austrian School: a conference on Austrian Economics organized by the Institute for Humane Studies, held in South Royalton, Vermont, that brought together about 40 students and young professors to hear a series of lectures by Israel Kirzner, Ludwig Lachmann, and Murray Rothbard. They were published soon after as The Modern Foundations of Austrian Economics (1976). And certainly, most unexpectedly, there was the awarding of the Nobel Prize in Economics to Friedrich A. Hayek in October of 1974.

These two events will be celebrating their 50th anniversary in 2024, and it will be a notable time to appreciate the half-century of the reborn and revitalized Austrian School that is so actively contributing to economic understanding today.

By Richard Ebeling

Originally published on October 11, 2023 for The Future of Freedom Foundation

It is almost 100 years since the libertarian essayist and social critic Albert Jay Nock (1870–1945) published his essay “On Doing the Right Thing” in the pages of the American Mercury (November 1924). Nowadays, the very title of the essay may seem strange to many modern American readers. The “right thing?” Surely, the right thing is just “doing your own thing.”

Even in 1924, Nock explained that the notion of “doing the right thing” was not present in the thinking of many Americans, though he thought it was still widely prevalent in the minds of many British. Having spent some time in London, he noticed the number of times the phrase, “doing the right thing,” was used and repeated by people going about their everyday affairs. This was observed by Nock regardless of whether the people saying it were members of the working or middle class or among the upper elite.

“A dozen times a day one will hear Englishmen mutter in an apologetic tone,” Nock said, “Beastly bore, you know! — oh, dev’lish bore! — but then, you know, one really must do the Right Thing, mustn’t one?’” Nock immediately saw a connection between this notion of doing the right thing and the idea of individual liberty. In fact, doing the right thing, he said, only had relevance and reality in an environment of extensive personal and economic freedom.

Freedom and Three Arenas of Life

Nock distinguished between three arenas of human conduct. The first was that area of a person’s life most directly influenced by government. There, the actions of the individual are constrained by the necessity to follow what the law proscribes, such things as not killing, stealing from, or defrauding others. That is, the negative constraints of a properly limited government.

The second area of life, given these legal prohibitions, Nock referred to as the matters of personal and “indifferent” choice. Will you wear a green necktie or a red one, or maybe no necktie at all. Will you dress according to social conventions or as the eccentric little concerned about how others may think? Will you furnish you home in Victorian or rustic style? Spend your weekends in a drunken stupor carousing with your equally inebriated friends or teetotallingly sober and focused on mowing your lawn or fixing that squeaky screen door? Whiling away your time in the evening in front of the television or taking night classes to earn the degree that may open the opportunity for a promotion at work?

In a free society, to use some of the lyrics of the old song, “It Ain’t Nobody’s Business If I Do”:
If I should take a notion to jump into the ocean,
Ain’t nobody’s business if I do.
If I go to church on Sunday, then cabaret all day Monday,
Ain’t nobody’s business if I do.

If my man ain’t got no money and I say, “Take all of mine, honey,”
Ain’t nobody’s business if I do.
If I give him my last nickel and it leaves me in a pickle,
Ain’t nobody’s business if I do….

Finally, there is the third area of life, the one, Nock said, that incorporates “doing the right thing”:

There is a region where conduct is controlled by unenforced, self-imposed allegiance to moral or social consideration. In this region, for instance, one follows the rule of “women and children first,” takes a long risk to get somebody out of a burning house, or, like Sir Philip Sidney, refuses to slake one’s own thirst when there is not water enough to go around.

Giving Others Their Just Due

In another essay written around the same time in the mid-1920s, “A Study in Manners,” Nock gave some other examples of what might be considered doing the right thing. In these instances, doing the right thing is treating others with a sense of right or appropriate conduct, even if the law does not require it and you could personally benefit by taking advantage of the situation. That is, in good conscience, does it really seem right not to act or interact in a certain way toward someone else given the circumstances and even if it would be to your advantage? Says Nock:

In stealing an inventor’s purse, let us say, one must reckon with the law; in stealing his idea, one must reckon with the sense of morals, with the common conscience of mankind; in buying up and suppressing his idea or in exploiting it without adequate compensation, one must reckon with the sense of manners, with the fine and high perception established by culture, to which such transactions at once appear mean and low. When Baron Tachnitz paid in full royalties to foreign authors whose works he republished before the days of international copyright, he was governed by a sense of manners; for no law compelled him to pay anything, and the morals of trade would have been quite satisfied if he had paid whatever he chose.

Clearly, in paying whatever might have been standard royalties to authors whose works he republished, Baron Tachnitz was doing what his conscience was telling him was the right thing, even though existing international law did not make it illegal to fail to do so. Suppose the law said that pickpocketing someone’s wallet was illegal, but seeing it fall out of someone’s pocket and not returning it was not theft under the law. “Doing the right thing” would be going up to the person who lost his wallet in this way and handing it back to him, contents intact. To do otherwise would be to take something from another that is their property, without their consent, due to the accident of circumstances.

Doing the Right Thing in a Presidential Election

In another interesting example, Nock relates a story about John Jay, one of the writers of The Federalist Papers and then governor of New York State at the time of the 1800 presidential election. John Adams had been elected the second president of the United States in 1796 and was running for reelection against Thomas Jefferson. Adams was running as the Federalist candidate and Jefferson as the Republican. Supporters of Jefferson’s vice-presidential running mate, Aaron Burr, had successfully won the New York legislative elections in 1800, meaning they would be seated as the majority in early 1801; under the then-current practice, this new Republican majority would be selecting the New York Electoral College representatives who would be voting on who would be appointed the next president of the United States, therefore helping to assure that Thomas Jefferson became the third president of the country.

Alexander Hamilton, a supporter of John Adams and strongly anti-Jefferson, wrote to John Jay proposing that as governor of New York he could call a special session of the state legislator while the Federalists still held the majority so that the method by which the electors were chosen could be changed, increasing the certainty that Adams would win a second term in office instead of Jefferson succeeding him. So bitter was the political divide in the country at the time between Federalists and Republicans that Hamilton said in his letter to John Jay, “in times like these in which we live, it will not do to be overscrupulous. It is easy to sacrifice the substantial interests of society by a strict adherence to ordinary rules.” It was not illegal for Jay to call a lame-duck session of the state legislature to change the Electoral College procedure, argued Hamilton, even though it would be seen as an act of abusive political expediency. After all, Hamilton continued, it would “prevent an Atheist in Religion and a Fanatic in politics from getting possession of the helm of State.” A bit of legislative trickery was needed to save the country “from the fangs of Jefferson.”

It seems John Jay never wrote back to Alexander Hamilton after receiving this letter. What is known is that he did not follow the course of political action proposed by Hamilton, but after Jay’s death, it was found that on the backside of Hamilton’s letter, John Jay had written, “Proposing a measure for party purposes which I do not think it would become me to adopt.” That is, while no doubt legal for him to do so as governor and ensuring a major political victory over someone Jay strongly opposed, it would not be “doing the right thing.” It would fly in the face of the legitimate elective procedures and be an inappropriate and abusive use of political power as governor of the state to reverse what otherwise would be the lawful outcome of the presidential election of 1800. Explained Nock:

Governor Jay had unusual ability and the most nearly flawless character probably, of any man in public life of that time…. In principle he was as strong a Federalist as Hamilton himself…. He had a deep distrust of popular government, and viewed the prospective triumph of Mr. Jefferson, the “fanatic of politics,” with apprehension and distaste…. He could quite legally and constitutionally have made the move that Hamilton implored him to make, for the old legislature still had tenure of office for seven or eight weeks…. With his party continued in power at Washington, the Administration would have taken royal good care of him and given him his pick of patronage. Every predilection of his own was in favor of Hamilton’s suggestion. A devout man, he might well have let the end justify the means of keeping a person of Jefferson’s well-known unorthodoxy out of the presidency. Yet he looked at the opportunity and passed it by in silence because he did not think it would be becoming to embrace it.

Cultivating Doing the Right Thing

In the essay “On Doing the Right Thing,” Nock argued that whether it was the liberty to make those everyday choices that primarily effect ourselves or those decisions that embrace, impact, or affect those around us that require us to weigh thinking about and “doing the right thing,” the scope and range of such choices are greatly influenced by the degree to which government intrudes upon or leaves us alone to determine them on our own.

The more that government interferes with these matters, the less range there is for each of us to take responsibility for what we do and how we do it in guiding our own lives and in developing ethical and moral senses concerning our relationships and voluntary obligations and noncompulsory duties to others in society. The development and exercise of these choices, Nock insisted, depends on freedom and the confinement of government to securing each person’s liberty rather than restraining it through various forms of political paternalism. Said Nock:

The practical reason for freedom, then, is that freedom seems to be the only condition under which any kind of substantial moral fiber can be developed. Everything else has been tried, world without end. Going against reason and experience, we have tried law, compulsion, and authoritarianism of various kinds, and the result is nothing to be proud of…. In suggesting that we try freedom, therefore, the anarchist or individualist has a strictly practical aim. He aims at the production of a race of responsible beings. He wants more room for the savoir se gener [knowing how to get along], more scope for the noblesse oblige [the obligations of position], a larger place for the sense of the Right Thing.

If our legalists and authoritarians could once get this well through their heads, they would save themselves a vast deal of silly insistence on a half-truth and upon the suppressio veri[lying by omission] which is the meanest and lowest form of misrepresentation. Freedom, for example, as they keep insisting, undoubtedly means freedom to drink oneself to death. The anarchist grants this at once; but at the same time, he points out that also means freedom to say with the gravedigger in Les Misérables, “I have studied, I have graduated; I never drink.”

It unquestionably means freedom to go on without any code of morals at all; but it also means freedom to rationalize, construct and adhere to a code of one’s own. The anarchist presses the point invariably overlooked that freedom to do the one without correlative freedom to do the other is impossible; and that just here comes in the moral education which legalism and authoritarianism, with their denial of freedom, can never furnish.

Free Choice and Doing the Right Thing

In nineteenth-century America, during a time when government played a much smaller part in people’s everyday lives than is the case today, it was taken for granted that not only were personal and family affairs the responsibility of individuals but that there was a far greater sense of obligation and duty to “do the right thing” concerning the problems of society. For instance, in a famous passage in volume 2 of Alexis de Tocqueville’s Democracy in America (1840), he highlighted the extent to which Americans took upon themselves the voluntary forming of associations and organizations to foster and cultivate improvements in society, including hospitals, orphanages, fire departments, charities for those who had fallen upon hard times, and philanthropic activities for religious and secular education and training to assist people in becoming more self-supporting. Tocqueville believed that Europeans, so used to relying upon and turning to the state to take care of such matters, should take note of the American example of the opposite.

A Polish political dissident, Count Adam Gurowski (1805–1866), who had come to America in 1849, published a book in 1857 entitled America and Europe in which he compared the two. He drew attention to how much of the most beneficial and generous improvements in the United States had nothing to do with the government and were almost solely due to the private initiative and actions of individuals and voluntary associations. All the types of things that Nock had categorized under personal choice and doing the right thing with and toward others were what Adam Gurowski drew our attention to:

Everything great, beneficial, useful in America, is accomplished without the action of the so-called government, notwithstanding even its popular, self-governing character. Individual impulses, private enterprise, association, free activity, the initiative pouring everlasting from within the people, are mostly substituted here for what in European societies and nations forms the task of governments….

By far the larger number of monuments, works and useful establishments, for industry, trade, for facilitating and spreading tuition and mental culture, universities, schools, and scientific establishments, are created and endowed by private enterprise, by private association, and by individual munificence…. Neither individuals separately, nor the aggregated people look to the government for such creations; private associations and enterprise, these corollaries of self-government — untrammeled by government action — have covered the land [with progress]…. All this could not have been miraculously carried out, if the American people had been accustomed to look to government for the initiative, instead of taking it themselves. Without the self-governing impulse, America would be materially and socially a wilderness.

Pervasive Presence of Government

Nock observed even in 1924:

I remember seeing recently a calculation that the poor American is staggering along under a burden of some two million laws; and obviously, where there are so many laws, it is hardly possible to conceive of any items of conduct escaping contact with one or more of them. Thus, the region where conduct is controlled by law so far encroaches upon the region of free choice and the region where conduct is controlled by a sense of the Right Thing, that there is precious little left of either.

If this was anywhere near the truth a hundred years ago, what is to be said about the arenas of completely free action in the America of today? Our movements are surveilled, and our language is policed. Our associations with others are monitored and held up to criticism and “cancellation.” We have little responsibility for the raising and educating of our own children, and how we attempt to do it is subject to intervention by government social workers, including removal of a child from the parent’s care.

Our words and actions, past and present, hang over our heads to be scrutinized and criticized like the sword of Damocles that may fall at any time and destroy the remainder of our lives. Picking a necktie to wear can get you persecuted and maybe even prosecuted for being supposedly “phobic” about something or violating the “political correctness” of the time.  And watch out about the song you hum or the joke you laugh at. You better not be caught watching YouTube videos of Rodney Dangerfield, Joan Rivers, or Don Rickles. George Carlin is okay, so long as it’s not one of his videos in which he is criticizing the environmentalists or the political and corrupt paternalistic busybodies manning the halls of government power. Otherwise, you are likely to be labelled homophobic, racist, sexist, an enemy of “the planet,” or insensitive to the feelings and “safe spaces” of others. That laugh may be your last.

At the same time, government regulates how businesses are run, and how workers employed are hired, paid, and fired. This includes what is produced, how it is produced and sold, and under what terms of sale, all of which are dictated by swarms of bureaucrats at all levels of government. Taxes consume anywhere between 25 percent and 50 percent of many people’s income, if you add together federal, state, and local taxes.

Self-Responsibility and Doing the Right Thing

The interventionist-redistributive state pervades so much of society that it is estimated that nearly 50 percent of Americans receive a monetary or “in-kind” transfer from others through the conduit of government, taking from the Peters to give to the Pauls of the country. How are people to have the financial wherewithal to take greater responsibility for their own lives and cultivate this in their children when not only education but health care, medical insurance, and retirement have been taken out of the hands of the individual and moved into the “care” of government?

This also increasingly limits the monetary means of people “doing the right thing.” More than 70 years ago, Bertrand de Jouvenel warned of the consequences in The Ethics of Redistribution (1951). Denying an individual the honest income and wealth he has earned means denying him the ability to formulate and give expression to his own purposes as a human being. You deny him the capacity to make his voluntary contribution to the civilization and society in which he lives as he sees best. Income is not merely a means for physical maintenance of oneself and one’s family, plus a few dollars for leisure activities. What we do with our income is an expression of ourselves, a statement about what we value, how we see ourselves, and what we wish and hope to be. The way we use our income also enables us to teach future generations about those things which are considered worthwhile in life. Our own earned income provides the means to perform many activities through donations and free time that are considered the foundation of the social order, from community and church work to support for the arts and humanities. In other words, the many things that make up, as a good citizen of society, the capacity of “doing the right thing.”

When government replaces the free marketplace with subsidies, cushy contracts, and trade protections from foreign and domestic competition, picking someone else’s pocket no longer becomes illegal or seems unethical. These days, a seemingly “normal” way of acquiring income is having access to other people’s money through government redistribution.

Rejecting Protectionism to Do the Right Thing

Back in the 1960s, I recall reading an article on the opinion page of the Wall Street Journal by a businessman named William Law, who owned and operated a tannery company in Wisconsin. He said that he opposed a protectionist trade bill being sponsored by other enterprises in the tannery business because it would artificially raise the price of imported goods and secure a larger market and profit margin for the domestic firms in his industry by limiting the foreign competition. He explained that he did not want to be acquiring ill-gotten gains by politically raising prices above a more market-determined price; this would amount to picking the pockets of American consumers for the tannery industry’s special interest.

Mr. Law went on to say that he would rather go out of business in a free market than prosper on a government-manipulated market at the expense of foreign rivals and domestic consumers. In other words, in William Law’s eyes, gaining profits through government protectionism would not be doing the right thing; instead, it would be the very opposite. Or to use John Jay’s phrase, it would not “become him” to endorse or accept such a political privilege at other people’s expense.

For some others, nowadays, the honesty and consistency of their words and actions no longer seem to matter. Elon Musk has insisted that he values unbridled freedom of speech as the owner of Twitter, but during a trip to China in July 2023 connected to his Tesla production and sales activities in that country, he pledged allegiance to the Communist Party’s “core socialist values” in pricing his electric cars under the dictatorial regime of Xi Jinping. “Doing the right thing” in America in rhetorically defending free speech, obviously, is different from what seems to be the right thing for his sales and profits in a fascist-type economy (government control and command over private businesses) in communist China.

Not Doing the Right Thing in American Politics

A good number of years ago, I asked a free market–oriented Texas member of the U.S. House of Representatives what had he found most surprising when he first came to Washington, D.C., after being elected by the voters in his district. He replied that it was the discovery that there were two arguments, if made as part of his remarks about legislation being discussed on the floor of the House of Representatives, that resulted in his congressional colleagues laughing at him and not taking him seriously. The two arguments concerning any legislation or other matters being debated that got you ignored and laughed at were: it’s unconstitutional and it’s immoral.

In other words, there is no “doing the right thing” in politics or not doing something because it would not be “becoming,” as John Jay decided in 1800. There are far too many in the politically connected business world that believe there is no “right thing” or anything unbecoming in following the pursuit of gains; it does not matter if it violates others’ freedom of choice and opportunity or requires cozying up to tyrants and terrorists to assure market share or protection from competitors.

But why should we be surprised? When we are told that there are no rights and wrongs in politics or life in general, that it is all about how you “feel” and what you want, with nothing constrained by custom, tradition, “good conscience,” or respect for the rights, liberty, and property of others, what else should we expect? Back in the early 1990s, I was invited to speak at several conventions of the State Farm Bureau Association. I found an interesting difference in generational attitudes among the farmers with whom I spoke to about government intervention in the agricultural sector.

If someone, at that time, was, say, over 50 or 60 years old, and I asked them if they supported government farm subsidies of various types, including being paid by Uncle Sam for not growing anything at all, many of them said, “No.” If there was a way to do away with these government programs so no one had an unfair advantage of getting government money while other farmers did not, they would, in principle, be glad to see the end of them.

However, when I asked the same question of the younger farmers, those especially under 40 years of age, they for the most part did not even understand my question. In their minds, having grown up and operated under the network of government farm programs, they could not understand why receiving subsidies and other political supports from the government was any different than revenues earned from producing and selling farm products wanted and paid for by consumers interested in what they had for sale.

The greater the intrusiveness of government over people’s lives, the smaller the areas of life left to people for freedom of choice and self-responsibility. The narrower the range of individual decision-making, the less the need for people to weigh and act upon what used to be called “doing the right thing” both in the marketplace and the wider social arena of human association. This is why it is important to halt and reverse the size and scope of government in society. Otherwise, both liberty and responsibility as ideas and in actions may disappear.

By Richard Ebeling

Originally published on December 6, 2017 for FEE Stories

Numerous misunderstandings and mythologies surround the meaning of capitalism and competition, but few match the confusions over the meaning and relevance of “monopoly” in the workings of the market economy. When looked at dispassionately, factually, and historically, monopoly has almost always represented a problem in society only when created or protected by government intervention. 

Critics of capitalism have proposed to nationalize “monopolistic” industries, to break them up into smaller “competitive” firms, or to regulate their pricing policies and influence the output they produce. A noticeable amount of the criticism of the existence of, or supposed “threats” from, monopoly is connected with the particular way economists have come to think about “competition” and “monopoly,” especially as found in a textbook.

The Fantasy World of “Perfect Competition”

The student is told that the benchmark of market analysis is the theory of “perfect competition,” a conception in which there are so many competitors on the supply-side of the market that each is too small to influence the prevailing market price for the good they are offering to buyers. Each seller, therefore, takes the market price as “given,” and they respond in terms of the optimal output to produce and offer on the market given their (marginal) costs of manufacturing.

All buyers and all sellers in each and every market have a “perfect” or “sufficient” knowledge of all relevant circumstances. 

In addition, in the world of “perfect competition,” there is no competitive product differentiation in the sense of the individual seller trying to devise new and improved versions of his product to get an edge on his rivals in the market in which he operates.

It is assumed that entry and exit from any market are effortless and costless, so any discovered profits to be earned or losses to be avoided due to, say, a change in market demand, is appropriately adjusted to virtually instantaneously, so those profits or losses are eliminated in seemingly non-existent time.

And what assures all of the above is the additional assumption that all buyers and all sellers in each and every market have a “perfect” or “sufficient” knowledge of all relevant circumstances and conditions that no errors or mistakes will be made by buyers paying too much or sellers accepting too little for what they are, respectively, demanding and supplying. 

The Logical Absurdity of Perfect Knowledge in Perfect Competition

University of Chicago economist Frank H. Knight formalized this now-textbook conception of “perfection competition” in Risk, Uncertainty, and Profit (1921). But five years earlier, in 1916, Knight emphasized the fictitious and logical absurdities in:

. . . the impossible conditions of ideally perfect competition, where time and space were annihilated and universal omniscience prevailed . . . 

It is the fact of omniscience [perfect knowledge], however, which is the prerequisite to perfect competition, and if this were realized in any other manner, no amount or kind of change would disturb the operation of ideal economic law [the optimal equilibrium of the ‘perfect competition’ market].

Once it is postulated that individuals in the marketplace possess “perfect knowledge,” then it is assured that the market will always be in a state of perfect long-run equilibrium because no other state of affairs can exist. 

Nothing can ever be in the wrong place at the wrong time, and no good or service can ever be priced at the wrong price. Total “costs” always and everywhere equal total revenue. Profits can never be earned, and losses can never be suffered. 

Since each individual wishes to “maximize” their subjective satisfaction (“utility”) or their profit, then having a perfect knowledge of all current and future circumstances, each can act in no other way than the “objectively” most “optimal” because to act otherwise would be contrary to the purpose of maximizing utility or profit. 

The absurdity of the perfect knowledge assumption in the theory of perfect competition was especially highlighted by the Austrian economist Oskar Morgenstern in his 1935 article, “Perfect Foresight and Economic Equilibrium:” 

Full foresight . . . must mean a foresight up to the end of the world . . . 

In consequence of the interdependence of all economic processes and given conditions on one another, and this with all other facts, no instance could be given of a sector, however small, of the event, the foresight of which would not mean, at the same time, the foresight of all the rest . . . 

The individual exercising foresight must thus not only know exactly the influence of his own transactions on prices but the influence of every other individual, and of his own future behavior on that of others, especially of those relevant for him personally . . . 

The individuals would have to have a complete insight into theoretical economics, for how else would they be able to foresee action at a distance? 

And as Austrian economist Friedrich A. Hayek explained in his famous articles “The Use of Knowledge in Society” (1945) and “The Meaning of Competition” (1946), such a theory assumes away all the reality of what we normally think of as competition: an active rivalry among sellers, each of whom has limited and imperfect knowledge and is attempting to discover ways and means to make new, better, and less expensive goods to offer to the consuming public. It is this active and dynamic real competitive market process operating with prices not already in equilibrium that tends to move markets into a coordinated balance between supply and demand, and in which, over time, profits may be competed away and losses eliminated. 

The notion of “perfect competition” assumes the existence of the hypothetical “perfect” market equilibrium that it is the task of real-world dynamic competition to bring about. Actual market conditions are then judged by a standard, Hayek said, that almost by necessity condemns any real competitive situation at most moments in time as being “anti-competitive” and therefore potentially “monopolistic.” 

The Textbook Portrayal of Monopoly

But what makes a market supplier’s actions “monopolistic” in the theoretical world of “perfect competition?” In essence, that he is able to influence the market price at which he sells his product and make his product different from that offered by any other seller. In the textbook expositions, the “monopoly seller” is able to select that higher price and lower quantity combination that maximizes his profit but which does not reflect the lower price and total larger quantity that would be offered on the market if there were a multitude of sellers.

The monopoly situation pictured in the diagram is presented without a context. 

The textbooks portray the monopolist’s situation and his ability to pick and choose the price-quantity combination in a supply and demand diagram. However, this monopoly situation as shown in the textbook diagram has neither a past nor a future. It is the “frozen picture” of a market situation that is “out of time.”  The diagram, by itself, does not answer the following questions:

What market or other forces in the “past” brought about this current situation? Given this situation, are there any market forces at work looking to “tomorrow” that would change the circumstances from its present “monopolistic” state? Are there any non-market — that is, any government — barriers that would prevent such a change over time? 

In other words, the monopoly situation pictured in the diagram is presented without a context to reasonably analyze what conclusions might be made in terms of whether the “social” significance of this monopoly situation suggests the need for an economic policy to “correct” some “problem” with it. 

Or whether, instead, when analyzed from a perspective of a market process in time and through time, there may be no “monopoly problem” at all but just one of the “transition” stages through which markets are passing all the time. 

Reasons There May be a “Single Seller” in a Market

The word “monopoly” originates from the ancient Greek: “mono,” meaning single, and “poly,” meaning seller.  But there are a variety of reasons why there may be only one seller in a market at or over a given period of time. First of all, it may be because an entrepreneur has creatively developed a new or significantly different product, and as a result, he is the first and only supplier of this good on the market. After all, every new idea must begin in some individual’s mind and that person’s willingness to undertake the task of bringing it to market.

There may be a single seller because the consumer demand is too limited to make it profitable for more than one seller to operate in that market. 

To the extent that he has correctly anticipated future consumer demand for this new or different product, the very profits that he may earn will attract the competitors who will enter his market and, over time, compete away the profits he has been earning by their devising ways to make similar versions of his new idea with more attractive features and offered at lower prices than the “monopolist” initially was charging.

If, on the other hand, this single seller has misjudged future market demand for his product and suffers losses, it would not be socially desirable for rivals to enter his market and waste more time and resources producing a loss-making product – unless, of course, if they see a way to make profitable that which the initial “monopolist” could not. 

Second, there may be a single seller because the consumer demand is too limited to make it profitable for more than one seller to operate in that market. Imagine the small, rural town with one general store. The owner may be making a profitable go of it, but if a rival entered the area and opened a competing general store, the sales and revenues now divided between the two of them may not be enough to cover their respective costs of operations. The market is too limited to sustain more than one seller. 

Third, there may be a single seller in a market due to their ownership or control of a vital resource or raw material without which a product cannot be successfully produced. This was a hypothetical possibility pointed out by Austrian economists Ludwig von Mises and Israel M. Kirzner. 

The Dynamic Workings of Free Market Competition

However, if we look beyond the situation at a moment in time, we can see countervailing market forces that likely will be set in motion if there are potential profits to be made from selling this resource-specific product. 

First, this situation would create incentives to prospect for and extract any possible alternative supplies of this resource outside the control of the “monopolist,” so competitors could enter this market at some point in the future. 

Second, if this is a profitable product, there would be incentives for competitors to market substitutes to his product out of alternative types of resources and offer their substitute products at lower prices than the monopolist’s. Thus, over time, competitive market forces would either eliminate or weaken even a “monopoly” position of this type. 

The Austrian-born economist Joseph A. Schumpeter argued that the essence of the dynamic market economy is the innovative entrepreneurs who introduce the new, better products as well as new methods of production. To understand what Schumpeter called the competitive process of “creative destruction,” it is necessary to look beyond any seemingly “monopoly” situation at a moment in time and take the longer historical perspective of the market. 

Textbook conceptions of “perfect competition” and “monopoly” are of little relevance or help, therefore, for understanding how markets actually work. As Schumpeter explained it in Capitalism, Socialism and Democracy (1942):

In dealing with capitalism we are dealing with an evolutionary process . . . that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. 

The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates. 

In capitalist reality as distinguished from its textbook picture . . . The kind of competition which counts . . . [is] the competition from the new commodity, the new technology, the new source of supply, the new type of organization . . . The competition that commands a decisive cost or quality advantage . . . 

It is hardly necessary to point out that competition of the kind we now have in mind acts not only when in being but also when it is merely an ever-present threat. It disciplines before it attacks. The businessman feels himself to be in a competitive situation even if he is alone in his field.

Market Competition Is Best Understood as a Process Through Time

The market economy, to the extent that it has a noticeable degree of competitive freedom, is an arena of change, transformation, and creativity. But looking at the textbook diagram of a supposed monopoly situation easily misses all this by ignoring what preceded it or what may follow it. 

Suppose you are shown a single frame of a motion picture, one that contains the image of a person hanging in midair just off the edge of a cliff. What conclusions are we to draw from this image? It all depends upon what preceded that frame and what follows it. Suppose that the person was cornered by an attacker who has thrown this unfortunate fellow off the cliff with the intention of killing him on the rocks below. But what if he saw his attacker coming, and this person chose to jump off the cliff to escape this aggressor, hoping to survive the fall by successfully landing in a river below and swimming to safety?

Only 59 enterprises were on the list in both these years — less than 15 percent.

We do not know how to evaluate the situation captured in that single frame taken out of the motion picture. It all depends. And in the same way, we do not know how to evaluate a market situation of a single seller in the market unless we know the market processes before and after that diagram-depicted moment in time.

To show the relevance of taking this longer view of competitive and monopoly situations, we may draw upon an interesting article published on October 20, 2017, by economist Mark Perry on the website of the American Enterprise Institute. He compares the lists of Fortune 500 firms in 1955 with those six decades later in 2017. 

Only 59 enterprises were on the list in both these years — less than 15 percent. Many of the companies on the 1955 Fortune 500 list were not only not on the 2017 list, but they no longer existed at all. Many of the companies on the list both of those years held different relative positions, with some higher and others lower in 2017 than in 1955. And a good number of companies on the 2017 list had not even existed sixty years earlier and therefore could not have been on the 1955 list. 

Government Intervention as the Cause of Monopoly Problems

What, then, may be the cause behind a “monopoly” that may be considered as “anti-competitive” and “socially harmful?” This requires us to appreciate the role of the state in creating and perpetuating such a situation.

There may be a single seller in a market (or a small number of sellers) because of a legal privilege given by the government to be the only producer and/or seller of a good or service within a part or the whole of the geographical area over which the government has political authority. This is one of the oldest meanings of monopoly frequently used by economists since Adam Smith published The Wealth of Nations (1776).

In modern American history, it was the government that legally provided a monopoly position to AT&T.

In this case, the privileged monopolist may be in the position to limit supply and raise his price because he is protected from any direct market competition since the government has made it illegal for all others to compete in this market. This is the one case in which the “frozen picture” of the textbook monopoly diagram is most appropriate because market competition cannot change the “picture.” The government prevents any market process working over time from generating the competition that would likely emerge in a more open market.

However, it would be expected that potential competitors might still try to develop and offer various substitutes for the government-protected monopoly product to the extent they could do so without breaking the law. Also, it might still occur that illegal “black markets” might emerge if profits were sufficiently high to make it attractive to run the risk of being caught and imprisoned by the government. 

In modern American history, it was the government that legally provided a monopoly position to AT&T in the provision of telephone services around the United States through most of the Twentieth Century. It was government regulation that limited market entry and controlled pricing and routes to a handful of passenger airline carriers from the mid-1930s to the end of the 1970s. It was government control of the airwaves that restricted radio and television broadcasting to a limited number of companies, again, until the late 1970s. 

But once these government-created-and-protected monopoly or near-monopoly situations were abolished through legislative repeal, the markets for communication, travel, and information and entertainment exploded into the vibrant and diverse array of far more competitive providers and suppliers and offerings that we now happily take for granted. 

Taking the market process long-view, the appearance of single sellers and seemingly “monopoly” or near-monopoly situations is easily shown to be limited moments in the wider horizon of dynamic and creative competition over time. As long as government secures and protects private property rights, enforces all contracts entered into voluntarily and through mutual agreement, and assures law and order under an impartial rule of law, “monopoly” as an economic or social problem is virtually non-existent. But introduce government intervention into the market system, and monopoly invariably becomes a social harm and an economic problem.