THE LAST PREMIER OF THE SOVIET UNION, Mikhail Gorbachev, is said to have asked British Prime Minister Margaret Thatcher: How do you see to it that people get food? The answer was that she didn’t. Prices did that. And the British people were better fed than those in the Soviet Union, even though the British have never grown enough food to feed themselves in more than a century. Prices bring them food from other countries.
Prices play a crucial role in determining how much of each resource gets used where. Yet this role is seldom understood by the public and it is often disregarded entirely by politicians.
Many people see prices as simply obstacles to their getting the things they want. Those who would like to live in a beach-front home, for example, may abandon such plans when they discover how expensive beach-front property is. But high prices are not the reason we cannot all live on the beach front. On the contrary, the inherent reality is that there are not nearly enough beach-front homes to go around and prices simply convey that underlying reality. When many people bid for a relatively few homes, those homes become very expensive because of supply and demand. But it is not the prices that cause the scarcity, which would exist under whatever other economic or social arrangements might be used instead of prices.
High prices are not the reason we cannot all live on the beach front. On the contrary, the inherent reality is that there are not nearly enough beach-front homes to go around and prices simply convey that underlying reality.
If the government were to come up with a “plan” for “universal access” to beach-front homes and put “caps” on the prices that could be charged for such property, that would not change the underlying reality of the high ratio of people to beach-front land. With a given population and a given amount of beach-front property, rationing without prices would now have to take place by bureaucratic fiat, political favoritism or random chance—but the rationing would still have to take place. Even if the government were to decree that beach-front homes were a “basic right” of all citizens, that would still not change the underlying reality in the slightest.
Prices are like messengers conveying news—sometimes bad news, in the case of beach-front property desired by far more people than can possibly live at the beach, but often also good news. For example, computers have been getting both cheaper and better at a very rapid rate, as a result of the development of technological ingenuity. Yet the vast majority of beneficiaries of these high-tech advances, insights, and talents have not the foggiest idea of what these technical changes are specifically. But prices convey to them the end results—which are all that matter for their own decision-making and their own enhanced productivity and well-being from using computers.
Similarly, if vast new rich iron ore deposits were discovered, perhaps no more than one percent of the population would be likely to be aware of it, but everyone would discover that things made of steel were becoming cheaper. People thinking of buying desks, for example, would discover that steel desks had become more of a bargain compared to wooden desks and some would undoubtedly change their minds as to which kind of desk to purchase because of that. The same would be true when comparing various other products made of steel to competing products made of wood, aluminum, plastic or other materials. In short, price changes would enable a whole society—indeed, consumers around the world—to adjust automatically to a greater abundance of iron ore, even if 99 percent of those consumers were wholly unaware of the new discovery.
Prices not only guide consumers, they guide producers as well. When all is said and done, producers cannot possibly know what millions of different consumers want. All that automobile manufacturers, for example, know is that when they produce cars with a certain combination of features they can sell those cars for a price that covers their production costs and leaves them a profit, but when they manufacture cars with a different combination of features, they don’t sell as well. In order to get rid of the unsold cars, they must cut the prices to whatever level is necessary to get them off the dealers’ lots, even if that means taking a loss. The alternative would be to take a bigger loss by not selling them at all.
While a free market economic system is sometimes called a profit system, it is really a profit-and-loss system—and the losses are equally important for the efficiency of the economy, because they tell the manufacturers what to stop producing. Without really knowing why consumers like one set of features rather than another, producers automatically produce more of what earns a profit and less of what is losing money. That amounts to producing what the consumers want and stopping the production of what they don’t want. Although the producers are only looking out for themselves and their companies’ bottom line, nevertheless from the standpoint of the economy as a whole the society is using its scarce resources more efficiently because decisions are guided by prices.
From the standpoint of society as a whole, the “cost” of anything is the value that it has in alternative uses. That cost is reflected in the market when the price that one individual is willing to pay becomes a cost that others are forced to pay, in order to get a share of the same scarce resource or the products made from it. But, no matter whether a particular society has a capitalist price system or a socialist economy or a feudal or other system, the real cost of anything is still its value in alternative uses. The real cost of building a bridge are the other things that could have been built with that same labor and material. This is also true at the level of a given individual, even when no money is involved. The cost of watching a television sitcom or soap opera is the value of the other things that could have been done with that same time.
Different economic systems deal with this underlying reality in different ways and with different degrees of efficiency, but the underlying reality exists independently of whatever particular economic system is used. Once we recognize that, we can then compare how economic systems which use prices to force people to share scarce resources among themselves differ in efficiency from economic systems which determine such things by having kings, politicians or bureaucrats issue orders saying who can get how much of what.
During the brief era of glasnost (openness) and perestroika (restructuring) in the last years of the Soviet Union, two Soviet economists named Nikolai Shmelev and Vladimir Popov wrote a book giving a very candid account of how their economy worked and this book was later translated into English. As Shmelev and Popov put it, production enterprises in the U.S.S.R. “always ask for more than they need” in the way of raw materials, equipment, and other resources used in production. “They take everything they can get, regardless of how much they actually need, and don’t worry about economizing on materials,” according to these economists. “After all, nobody ‘at the top’ knows exactly what the real requirements are,” so “squandering” makes sense. Among the resources that get squandered are workers. These economists reported that “from 5 to 15 percent of the workers in the majority of enterprises are surplus and are kept ‘just in case.’”
The consequence was that far more resources were used to produce a given amount of output in the Soviet economy as compared to a price-coordinated economic system, such as that in the United States. Citing official Soviet statistics, the Soviet economists lamented:
According to the calculations of the Soviet Institute of World Economy and International Relations, we use 1.5 times more materials and 2.1 times more energy per unit of national income than the United States … . We use 2.4 times more metal per unit of national income than the U.S. This correlation is apparent even without special calculations: we produce and consume 1.5 to 2 times more steel and cement than the United States, but we lag behind by at least half in production of items derived from them … Recently, in Soviet industry the consumption of electrical energy exceeded the American level, but the volume of industrial output in the U.S.S.R is—by the most generous estimates—only 80 percent of the American level.
The Soviet Union did not lack for resources, but was in fact one of the most richly endowed nations on earth—if not the most richly endowed. What it lacked was an economic system that made efficient use of scarce resources. Because Soviet enterprises were not under the same financial constraints as capitalist enterprises, they acquired more machines than they needed, “which then gather dust in warehouses or rust out of doors,” as the Soviet economists put it. In short, Soviet enterprises were not forced to economize—that is, to treat their resources as both scarce and valuable in alternative uses. While such waste cost these enterprises little or nothing, they cost the Soviet people dearly, in the form of a lower standard of living than their resources and technology were capable of producing.
The Soviet Union did not lack for resources, but was in fact one of the most richly endowed nations on earth—if not the most richly endowed. What it lacked was an economic system that made efficient use of scarce resources.
Such a waste of inputs as these economists described could not of course continue in the kind of economy where these inputs would have to be chased and where the enterprise itself could survive only by keeping its costs lower than its sales receipts.In such a price-coordinated capitalist system, the amount of inputs ordered would be based on the enterprise’s most accurate estimate of what was really needed, not on how much its managers could make sound plausible to higher government officials, who cannot possibly be experts on all the wide range of industries and products they oversee.
The contrast between the American and the Soviet economies is just one of many that can be made between economic systems which use prices to allocate resources and those which have relied on government control. In other regions of the world as well, and in other political systems, there have been similar contrasts between places that used prices to ration goods and allocate resources versus places that have relied on hereditary rulers, elected officials or appointed planning commissions.
When many African nations achieved independence in the 1960s, a famous bet was made between the president of Ghana and the president of the neighboring Ivory Coast as to which country would be more prosperous in the years ahead. At that time, Ghana was not only more prosperous than the Ivory Coast, it had more natural resources, so the bet might have seemed reckless on the part of the president of the Ivory Coast. However, he knew that Ghana was committed to a government-run economy and the Ivory Coast to a freer market. By 1982, the Ivory Coast had so surpassed Ghana that the poorest 20 percent of its people had a higher real income per capita than most of the people of Ghana.
This could not be attributed to any superiority of the country or its people. In fact, in later years, when Ivory Coast politicians eventually succumbed to the temptation to have the government control more of their country’s economy, while Ghana finally learned from its mistakes and began to loosen government controls, these two countries’ roles reversed—and now Ghana’s economy began to grow, while that of the Ivory Coast declined.
Similar comparisons could be made between Burma and Thailand, the former having had the higher standard of living before instituting socialism and the latter a much higher standard of living afterwards. Other countries—India, Germany, China, New Zealand, South Korea, Sri Lanka—have experienced sharp upturns in their economies when they freed those economies from many government controls and relied more on prices to allocate resources.
In a society of millions of consumers, no given individual or set of government decision-makers sitting around a table can possibly know just how much these millions of consumers prefer one product to another, much less thousands of products to thousands of other products—quite aside from the problem of knowing how much of each of thousands of resources should be used to produce which products. In an economy coordinated by prices, no one has to know. Each producer is simply guided by what price that producer’s product can sell for and by how much must be paid for the ingredients that go into making that product.
Knowledge is one of the most scarce of all resources and a pricing system economizes on its use by forcing those with the most knowledge of their own particular situation to make bids for goods and resources based on that knowledge, rather than on their ability to influence other people. However much articulation may be valued by intellectuals, it is not nearly as efficient a way of conveying accurate information as confronting people with a need to “put your money where your mouth is.”
Human beings are going to make mistakes in any kind of economic system. In a price-coordinated economy, any producer who uses ingredients that are more valuable elsewhere is likely to discover that the costs of those ingredients cannot be repaid from what the consumers are willing to pay for the product. After all, he has had to bid these resources away from alternative users, paying more than these resources are worth to some of those alternative users. If it turns out that these resources are not more valuable in the uses to which he puts them, then he is going to lose money. There will be no choice but to discontinue making that product with those ingredients. For those producers who are too blind or too stubborn to change, continuing losses will force their business into bankruptcy, so that the waste of society’s resources will be stopped that way.
In a price-coordinated economy, employees and creditors insist on being paid, regardless of whether the managers and owners have made mistakes. This means that capitalist businesses can make only so many mistakes for so long before they have to either stop or get stopped—whether by an inability to get the labor and supplies they need or by bankruptcy. In a feudal economy or a socialist economy, leaders can continue to make the same mistakes indefinitely. The consequences are paid by others in the form of a standard of living lower than it would be if there were greater efficiency in the use of scarce resources.
In a feudal economy or a socialist economy, leaders can continue to make the same mistakes indefinitely. The consequences are paid by others in the form of a standard of living lower than it would be if there were greater efficiency in the use of scarce resources.
As already noted, there were many products which remained unsold in stores or in warehouses in the Soviet Union, while there were desperate shortages of other things. But, in a price-coordinated economy, the labor management, and physical resources that went into producing unwanted products would have had to go into producing something that could pay its own way from sales. That means producing something that the consumers wanted more than they wanted what was actually produced. In the absence of compelling price signals and the threat of financial losses to the producers that they convey, inefficiency and waste in the Soviet Union could continue until such time as each waste reached proportions big enough and blatant enough to attract the attention of central planners in Moscow, who were preoccupied with thousands of other decisions.
Ironically, the problems caused by trying to run an economy by fiat or by arbitrarily-imposed prices created by government dictates were foreseen by Karl Marx and Friedrich Engels, whose ideas the Soviet Union claimed to be following. Engels pointed out that price fluctuations have “forcibly brought home to the commodity producers what things and what quantity of them society requires or does not require.” Without such a mechanism, he demanded to know “what guarantee we have that necessary quantity and not more of each product will be produced, that we shall not go hungry in regard to corn and meat while we are choked in beet sugar and drowned in potato spirit, that we shall not lack trousers to cover our nakedness while trouser buttons flood us in the millions.” Marx and Engels apparently understood economics much better than their latter-day followers. Or perhaps Marx and Engels were more concerned with economic efficiency than with maintaining political control from the top.
Prof. Sowell is a senior fellow at the Hoover Institution. This article is adapted from Basic Economics: A Citizen’s Guide to the Economy by Thomas Sowell. Copyright © 2004. Available from Basic Books, an imprint of Perseus Books, a division of PBG Publishing, LLC, a subsidiary of Hachette Book Group, Inc.
THE PRESIDENTIAL CAMPAIGN has brought “democratic socialism” out of the shadows of fringe ideologies and into the spotlight of mainstream American politics. Is socialism seriously still in play? Didn’t the horrors of the 20th century finally bury that ideological monstrosity?
No, that’s communism you’re thinking of. To quote the Democratic Socialists of America (DSA): “Socialists have been among the harshest critics of authoritarian Communist states. Just because their bureaucratic elites called them ‘socialist’ did not make it so; they also called their regimes ‘democratic.’”
If the communists weren’t really socialists, then what the heck does socialism mean?
The basic definition of socialism, democratic or otherwise, is collective ownership of the means of production. The DSA website says: “We believe that the workers and consumers who are affected by economic institutions should own and control them.”
But the DSA keeps the emphasis on democracy:
Democratic socialists believe that both the economy and society should be run democratically—to meet public needs, not to make profits for a few. To achieve a more just society, many structures of our government and economy must be radically transformed through greater economic and social democracy so that ordinary Americans can participate in the many decisions that affect our lives.
Socialism, then, as the democratic socialists understand the term, is just the logical consequence of the democratic ideal: “Democracy and socialism go hand in hand. All over the world, wherever the idea of democracy has taken root, the vision of socialism has taken root as well.”
On this point, at least, many in America’s free-market tradition would agree.
Ludwig von Mises may have been the most radical classical liberal in 20th-century Europe, but when he came to the United States, Mises found himself at odds with American libertarians who felt that his liberalism didn’t go far enough.
Mises had defended both capitalism and democracy in his book Liberalism. American libertarians such as R.C. Hoiles and Frank Chodorov shared Mises’s appreciation of the free market but were far less sanguine about majority rule. The harshest language came from Discovery of Freedom author Rose Wilder Lane:
As an American I am of course fundamentally opposed to democracy and to anyone advocating or defending democracy, which in theory and practice is the basis of socialism.
It is precisely democracy which is destroying the American political structure, American law, and the American economy, as Madison said it would, and as Macauley prophesied that it would do in fact in the 20th century. (Letter from Lane to Mises, July 5, 1947; quoted in Mises: The Last Knight of Liberalism)
Why would Lane argue that democracy is “the basis of socialism”?
Voting turns out to be a particularly bad way to make economic decisions. Mancur Olson’s book The Logic of Collective Action wouldn’t appear for another 18 years, but some version of his thesis was probably already familiar to Lane and her radical allies. Olson argues that majority rule separates the benefits and the costs of decision-making.
Elections aren’t just a poll of everyone’s opinion; they are organized campaigns by different groups fighting for their interests. A voter doesn’t go into the booth having studied the controversy in question. He or she brings to the polls an impression of an issue based on how different organized groups have presented their cause during massive advocacy campaigns prior to Election Day. Every such campaign is a case of a special-interest minority trying to persuade a voting majority.
Elections aren’t just a poll of everyone’s opinion; they are organized campaigns by different groups fighting for their interests. And it’s not a level playing field, to borrow one of the political Left’s favorite metaphors.
And it’s not a level playing field, to borrow one of the political Left’s favorite metaphors. Olson explains how the incentive for group action decreases as the size of a group increases, meaning that bigger groups are less able to act in their common interest than smaller ones. Small groups can gain concentrated benefits while the rest of us face diffuse costs.
The textbook example is sugar tariffs (“or what amounts to the same thing in the form of quota restrictions against imports of sugar,” as former Freeman editor Paul Poirot put it). Why is Coke sweetened with corn syrup in the United States and with sugar everywhere else in the world? Because sugar is cheaper everywhere else, while the U.S. government keeps sugar artificially expensive for Americans. The protections responsible are a huge benefit to a small group of domestic sugar producers (and, as it turns out, also to corn growers) and a burden on the rest of us.
Ignore the corn-syrup issue for a moment and pretend that Coke is still made with sugar. Let’s imagine that government price supports make each can of Coke, say, 5 cents more than it otherwise would be. That difference adds up, but at the moment you’re buying the can of soda, it’s an irritation, not a hardship. Even if you bother to figure out how much extra money you have to spend on sweet drinks each year, the figure probably won’t be enough to stir you to petition the legislature to repeal the sugar lobby’s protections. In fact, the loss isn’t even enough to prompt you to learn the cause of the higher price.
That’s what economists mean when they talk about diffuse costs. (And the Coke drinker’s very reasonable cluelessness about the cause of his lost nickel is what economists call “rational ignorance.”)
On the other hand, the sugar producers will make billions from lobbying and campaigning to explain why their favorite barriers are good for the economy.
Take this example and multiply it by all the special interests seeking government favors. Even if you do understand what’s going on, even if you know how this hurts the economy and consumers and yourself, it’s not like there’s ever one plebiscite, a big thumbs-up or thumbs-down for free trade in sugar. Every issue is addressed separately, and every issue faces the same logic of collective action we see in the case of the sugar. (And as with the case of sugar, where the corn industry has its own interests in promoting higher sugar prices, many issues have multiple special-interest groups with their own reasons for supporting socially harmful policies.)
Now replace agribusiness in this example with teachers unions or the AARP or anyone else who benefits from a government program, even if that program hurts the rest of us.
The democratic system is rigged from the outset to favor ever more interference from ever-bigger government. From this perspective, Rose Wilder Lane doesn’t seem quite so polemical for equating democracy and socialism.
Democratic Socialists for Crony Capitalism
But is big government the same thing as socialism? The DSA denies it. They insist that they prefer local and decentralized socialism wherever possible. How long an elected socialist would keep his hands off the bludgeon of central power is a reasonable question, and a chilling one, as is the question of how long a socialist democracy would honor the civil liberties that the DSA claims to support.
But even if we reject the DSA’s claims as either naive or fraudulent, there is still a compelling reason to reject the equation of big government and socialism.
Government doesn’t grow to serve the poor or the proletariat. Democracy spawns special interests, and special-interest campaigns require deep pockets. None come deeper than the pockets of established business interests.
Government doesn’t grow to serve the poor or the proletariat. Democracy spawns special interests, and special-interest campaigns require deep pockets. None come deeper than the pockets of established business interests.
Real-world capitalists, despite the rhetoric of the socialists, rarely support capitalism—at least not in the sense of free trade and free markets. What they too often support is government protection and largess for themselves and their cronies, and if that means having to share some of the spoils with organized labor, or green energy, or the welfare industry, that’s not a problem. Corporate welfare flows left and right with equal ease.
“Democratic socialists,” according to the DSA, “do not want to create an all-powerful government bureaucracy. But we do not want big corporate bureaucracies to control our society either.”
If that’s true, then democratic socialists should aim to reduce both the size of government and the scope of democratic decisions. Unfortunately, they’re headed in the opposite direction—and trying to drag the rest of us with them.
Mr. Marcus is editor of The Freeman, from which this article is reprinted with permission.
MOST PLANNERS WHO HAVE seriously considered the practical aspects of their task have little doubt that a directed economy must be run on dictatorial lines, that the complex system of interrelated activities must be directed by staffs of experts, with ultimate power in the hands of a commander-in-chief whose actions must not be fettered by democratic procedure. The consolation our planners offer us is that this authoritarian direction will apply “only” to economic matters. This assurance is usually accompanied by the suggestion that, by giving up freedom in the less important aspects of our lives, we shall obtain freedom in the pursuit of higher values. On this ground people who abhor the idea of a political dictatorship often clamor for a dictator in the economic field.
The arguments used appeal to our best instincts. If planning really did free us from less important cares and so made it easier to render our existence one of plain living and high thinking, who would wish to belittle such an ideal?
Unfortunately, purely economic ends cannot be separated from the other ends of life. What is misleadingly called the “economic motive” means merely the desire for general opportunity. If we strive for money, it is because money offers us the widest choice in enjoying the fruits of our efforts—once earned, we are free to spend the money as we wish.
Money is one of the greatest instruments of freedom ever invented by man. It is money which in existing society opens an astounding range of choice to the poor man—a range greater than that which not many generations ago was open to the wealthy.
We shall better understand the significance of the service of money if we consider what it would really mean if, as so many socialists characteristically propose, the “pecuniary motive” were largely displaced by “non-economic incentives.” If all rewards, instead of being offered in money, were offered in the form of public distinctions, or privileges, positions of power over other men, better housing or food, opportunities for travel or education, this would merely mean that the recipient would no longer be allowed to choose, and that whoever fixed the reward would determine not only its size but the way in which it should be enjoyed.
The so-called economic freedom which the planners promise us means precisely that we are to be relieved of the necessity of solving our own economic problems and that the bitter choices which this often involves are to be made for us. Since under modern conditions we are for almost everything dependent on means which our fellow men provide, economic planning would involve direction of almost the whole of our life. There is hardly an aspect of it, from our primary needs to our relations with our family and friends, from the nature of our work to the use of our leisure, over which the planner would not exercise his “conscious control.”
The power of the planner over our private lives would be hardly less effective if the consumer were nominally free to spend his income as he pleased, for the authority would control production.
Our freedom of choice in a competitive society rests on the fact that, if one person refuses to satisfy our wishes, we can turn to another. But if we face a monopolist we are at his mercy. And an authority directing the whole economic system would be the most powerful monopolist imaginable.
It would have complete power to decide what we are to be given and on what terms. It would not only decide what commodities and services are to be available and in what quantities; it would be able to direct their distribution between districts and groups and could, if it wished, discriminate between persons to any degree it liked. Not our own view, but somebody else’s view of what we ought to like or dislike, would determine what we should get.
The will of the authority would shape and “guide” our daily lives even more in our position as producers. For most of us the time we spend at our work is a large part of our whole lives, and our job usually determines the place where and the people among whom we live. Hence some freedom in choosing our work is probably even more important for our happiness than freedom to spend our income during our hours of leisure.
Even in the best of worlds this freedom will be limited. Few people ever have an abundance of choice of occupation. But what matters is that we have some choice, that we are not absolutely tied to a job which has been chosen for us, and that if one position becomes intolerable, or if we set our heart on another, there is always a way for the able, at some sacrifice, to achieve his goal. Nothing makes conditions more unbearable than the knowledge that no effort of ours can change them. It may be bad to be just a cog in a machine but it is infinitely worse if we can no longer leave it, if we are tied to our place and to the superiors who have been chosen for us.
In our present world there is much that could be done to improve our opportunities of choice. But “planning” would surely go in the opposite direction. Planning must control the entry into the different trades and occupations, or the terms of remuneration, or both. In almost all known instances of planning, the establishment of such controls and restrictions was among the first measures taken.
In a competitive society most things can be had at a price. It is often a cruelly high price. We must sacrifice one thing to attain another. The alternative, however, is not freedom of choice, but orders and prohibitions which must be obeyed.
In a competitive society most things can be had at a price. It is often a cruelly high price. We must sacrifice one thing to attain another. The alternative, however, is not freedom of choice, but orders and prohibitions which must be obeyed.
That people should wish to be relieved of the bitter choice which hard facts often impose on them is not surprising. But few want to be relieved through having the choice made for them by others. People just wish that the choice should not be necessary at all. And they are only too ready to believe that the choice is not really necessary, that it is imposed upon them merely by the particular economic system under which we live. What they resent is, in truth, that there is an economic problem.
The wishful delusion that there is really no longer an economic problem has been furthered by the claim that a planned economy would produce a substantially larger output than the competitive system. This claim, however, is being progressively abandoned by most students of the problem. Even a good many economists with socialist views are now content to hope that a planned society will equal the efficiency of a competitive system. They advocate planning because it will enable us to secure a more equitable distribution of wealth. And it is indisputable that, if we want consciously to decide who is to have what, we must plan the whole economic system.
But the question remains whether the price we should have to pay for the realization of somebody’s ideal of justice is not bound to be more discontent and more oppression than was ever caused by the much abused free play of economic forces.
For when a government undertakes to distribute the wealth, by what principles will it or ought it to be guided? Is there a definite answer to the innumerable questions of relative merits that will arise?
The economic freedom which is the prerequisite of any other freedom cannot be the freedom from economic care which the socialists promise us and which can be obtained only by relieving us of the power of choice. It must be that freedom of economic activity which, together with the right of choice, carries also the risk and responsibility of that right.
Only one general principle, one simple rule, would provide such an answer: absolute equality of all individuals. If this were the goal, it would at least give the vague idea of distributive justice clear meaning. But people in general do not regard mechanical equality of this kind as desirable, and socialism promises not complete equality but “greater equality.”
This formula answers practically no questions. It does not free us from the necessity of deciding in every particular instance between the merits of particular individuals or groups, and it gives no help in that decision. All it tells us in effect is to take from the rich as much as we can. When it comes to the distribution of the spoils the problem is the same as if the formula of “greater equality” had never been conceived.
It is often said that political freedom is meaningless without economic freedom. This is true enough, but in a sense almost opposite from that in which the phrase is used by our planners. The economic freedom which is the prerequisite of any other freedom cannot be the freedom from economic care which the socialists promise us and which can be obtained only by relieving us of the power of choice. It must be that freedom of economic activity which, together with the right of choice, carries also the risk and responsibility of that right.
Prof. Hayek (1899-1992) was one of the leading critics of collectivism in the 20th century. He taught economics at the London School of Economics, the University of Chicago, and the University of Freiburg. He won the Nobel Prize in Economics in 1974. This article is excepted from his book The Road to Serfdom, abridged edition © 1944 (renewed 1972), 1994 by the University of Chicago Press.
THE CHARACTERISTIC FEATURE OF ACTION through political channels is that it tends to require or enforce substantial conformity. The great advantage of the market, on the other hand, is that it permits wide diversity. It is, in political terms, a system of proportional representation. Each man can vote, as it were, for the color of a tie he wants and get it; he does not have to see what color the majority wants and then, if he is in the minority, submit.
It is this feature of the market that we refer to when we say that the market provides economic freedom. But this characteristic also has implications that go far beyond the narrowly economic. Political freedom means the absence of coercion of a man by his fellow men. The fundamental threat to freedom is power to coerce, be it in the hands of a monarch, a dictator, an oligarchy, or a momentary majority. The preservation of freedom requires the elimination of such concentration of power to the fullest possible extent and the dispersal and distribution of whatever power cannot be eliminated—a system of checks and balances. By removing the organization of economic activity from the control of political authority, the market eliminates this source of coercive power. It enables economic strength to be a check to political power rather than a reinforcement.
By removing the organization of economic activity from the control of political authority, the market eliminates this source of coercive power. It enables economic strength to be a check to political power rather than a reinforcement.
One feature of a free society is surely the freedom of individuals to advocate and propagandize openly for a radical change in the structure of the society—so long as the advocacy is restricted to persuasion and does not include force or other forms of coercion. It is a mark of the political freedom of a capitalist society that men can openly advocate and work for socialism. Equally, political freedom in a socialist society would require that men be free to advocate the introduction of capitalism. How could the freedom to advocate capitalism be preserved and protected in a socialist society?
In order for men to advocate anything, they must in the first place be able to earn a living. This already raises a problem in a socialist society, since all jobs are under the direct control of political authorities. It would take an act of self-denial whose difficulty is underlined by experience in the United States after World War II with the problem of “security” among Federal employees, for a socialist government to permit its employees to advocate policies directly contrary to official doctrine.
But let us suppose this act of self-denial to be achieved. For advocacy of capitalism to mean anything, the proponents must be able to finance their cause—to hold public meetings, publish pamphlets, buy radio time, issue newspapers and magazines, and so on. How could they raise the funds? There might and probably would be men in the socialist society with large incomes, perhaps even large capital sums in the form of government bonds and the like, but these would of necessity be high public officials. It is possible to conceive of a minor socialist official retaining his job although openly advocating capitalism. It strains credulity to imagine the socialist top brass financing such “subversive” activities.
The only recourse for funds would be to raise small amounts from a large number of minor officials. But this is no real answer. To tap these sources, many people would already have to be persuaded, and our whole problem is how to initiate and finance a campaign to do so. Radical movements in capitalist societies have never been financed this way. They have typically been supported by a few wealthy individuals who have become persuaded—by a Frederick Vanderbilt Field, or an Anita McCormick Blaine, or a Corliss Lamont, to mention a few names recently prominent, or by a Friedrich Engels, to go farther back. This is a role of inequality of wealth in preserving political freedom that is seldom noted—the role of the patron.
A striking practical example of these abstract principles is the experience of Winston Churchill. Here was a leading citizen of his country, a Member of Parliament, a former cabinet minister, a man who was desperately trying by every device possible to persuade his countrymen to take steps to ward off the menace of Hitler’s Germany. He was not permitted to talk over the radio to the British people because the BBC was a government monopoly and his position was too “controversial.”
In a capitalist society, it is only necessary to convince a few wealthy people to get funds to launch any idea, however strange, and there are many such persons, many independent foci of support. And, indeed, it is not even necessary to persuade people or financial institutions with available funds of the soundness of the ideas to be propagated. It is only necessary to persuade them that the propagation can be financially successful; that the newspaper or magazine or book or other venture will be profitable. The competitive publisher, for example, cannot afford to publish only writing with which he personally agrees; his touchstone must be the likelihood that the market will be large enough to yield a satisfactory return on his investment.
In this way, the market breaks the vicious circle and makes it possible ultimately to finance such ventures by small amounts from many people without first persuading them. There are no such possibilities in the socialist society; there is only the all-powerful state.
In a free market society, it is enough to have the funds. The suppliers of paper are as willing to sell it to the Daily Worker as to the Wall Street Journal. In a socialist society, it would not be enough to have the funds. The hypothetical supporter of capitalism would have to persuade a government factory making paper to sell to him, the government printing press to print his pamphlets, a government post office to distribute them among the people, a government agency to rent him a hall in which to talk, and so on.
A striking practical example of these abstract principles is the experience of Winston Churchill. From 1933 to the outbreak of World War II, Churchill was not permitted to talk over the British radio, which was, of course, a government monopoly administered by the British Broadcasting Corporation. Here was a leading citizen of his country, a Member of Parliament, a former cabinet minister, a man who was desperately trying by every device possible to persuade his countrymen to take steps to ward off the menace of Hitler’s Germany. He was not permitted to talk over the radio to the British people because the BBC was a government monopoly and his position was too “controversial.”
Another striking example, reported in the January 26, 1959 issue of Time, has to do with the “Blacklist Fadeout.” Says the Time story,
The Oscar-awarding ritual is Hollywood’s biggest pitch for dignity, but two years ago dignity suffered. When one Robert Rich was announced as top writer for The Brave One, he never stepped forward. Robert Rich was a pseudonym, masking one of about 150 writers … blacklisted by the industry since 1947 as suspected Communists or fellow travelers. The case was particularly embarrassing because the Motion Picture Academy had barred any Communist or Fifth Amendment pleader from Oscar competition. Last week both the Communist rule and the mystery of Rich’s identity were suddenly rescripted.
Rich turned out to be Dalton (Johnny Got His Gun) Trumbo, one of the original “Hollywood Ten” writers who refused to testify at the 1947 hearings on Communism in the movie industry. Said producer Frank King, who had stoutly insisted that Robert Rich was “a young guy in Spain with a beard”: “We have an obligation to our stockholders to buy the best script we can. Trumbo brought us The Brave One and we bought it” … .
In effect it was the formal end of the Hollywood black list. For barred writers, the informal end came long ago. At least 15% of current Hollywood films are reportedly written by blacklist members. Said Producer King, “There are more ghosts in Hollywood than in Forest Lawn. Every company in town has used the work of blacklisted people. We’re just the first to confirm what everybody knows.
One may believe, as I do, that communism would destroy all of our freedoms, one may be opposed to it as firmly and as strongly as possible, and yet, at the same time, also believe that in a free society it is intolerable for a man to be prevented from making voluntary arrangements with others that are mutually attractive because he believes in or is trying to promote communism. His freedom includes his freedom to promote communism. Freedom also, of course, includes the freedom of others not to deal with him under those circumstances. The Hollywood blacklist was an unfree act that destroys freedom because it was a collusive arrangement that used coercive means to prevent voluntary exchanges. It didn’t work precisely because the market made it costly for people to preserve the blacklist. The commercial emphasis, the fact that people who are running enterprises have an incentive to make as much money as they can, protected the freedom of the individuals who were blacklisted by providing them with an alternative form of employment, and by giving people an incentive to employ them.
If Hollywood and the movie industry had been government enterprises or if in England it had been a question of employment by the British Broadcasting Corporation it is difficult to believe that the “Hollywood Ten” or their equivalent would have found employment. Equally, it is difficult to believe that under those circumstances, strong proponents of individualism and private enterprise—or indeed strong proponents of any view other than the status quo—would be able to get employment.
Prof. Friedman (1912-2006) was a professor of economics at the University of Chicago (1946-1976) and a research fellow at the Hoover Institution (1977-2006). He developed the ideas associated with the monetarist school of macroeconomics, which warned that Keynesian policies would lead to stagflation (which they did). He won the Nobel Prize in Economics in 1976. This article is excerpted from his book Capitalism and Freedom © 1962, 1982, 2002 by the University of Chicago Press, and is reprinted here with permission.
BOTH ANIMALS AND HUMAN BEINGS have bodies, but animals are bound to things by their instincts, whereas we humans relate to things by our minds. Our reason means that we can reflect upon ourselves and what we are doing. We can actually think about our thoughts! We think and are dependent on the use of reason. The mind is what makes human beings distinctly human. Consider the fact that the human mammal is one of the most vulnerable of all animals: We have no prehensile tail that enables us to swing away from danger, no wings with which we can take flight from the predator, no fangs or fierce claws or thick hide to ward off our enemies. The human person lives by reason, apprehending reality and ordering reality, integrating, understanding, remembering, and building.
It is this rational relationship we human beings have to nature that gives rise to property. Property, you see, is not this or that physical object. Property is a relationship between a person and a thing or idea. To own property is to be in a particular kind of relationship with something in the world—a relationship, moreover, that is recognized by others in the community. Some animals have a recognizable if rudimentary sense of what we might call ownership, of course—as when one beaver knows that another beaver possesses a particular dam. But what is most illuminating in such comparisons are the differences. A beaver cannot sell his dam or buy one from another beaver, he cannot lease the dam, and he does not use his dam for collateral to borrow money to launch a business. But human property owners are able to do all these things with the property they own—because property exists in the context of shared human reason.
Why is private property essential? Why shouldn’t all property be owned by all? The scarcity of physical things is a feature of the world that we cannot escape. This fact of scarcity means that there is a potential conflict over who is going to use things and how. We can struggle with each other to grab and keep what we can for ourselves. Or we can use a system rooted in private ownership, which permits us to trade, give gifts, or share based on our own free will. This is the peaceful solution to the problem of scarcity.
It also so happens that private property demonstrates the interpenetration between our physical bodies and our capacity for transcendence. We engage nature with labor that our reason plans and directs—and produce something that did not previously exist. Not just another beaver dam exactly the same as the ones beavers have been building for millennia, but a Chartres Cathedral, a Mona Lisa—or an electric light bulb, a smallpox vaccine, a revolution in agriculture that lifts millions of people out of dire poverty, or, more modestly, a garden or orchard that feeds a family and expresses a particular gardener’s thoughtful stewardship of the land.
The right to property is wrapped up in a person’s capacity to apply his intellect to matters and ideas, to look ahead, to plan and steward the use of that possession.
These things are possible because we don’t just relate to the material world in an immediate or temporary manner. The relationship of human beings to things is not merely a relationship of consumption. Is is also one of reason and creativity—and it is that relationship that makes the institution of private property possible. The right to private property is not merely control over a physical object, as my dog Theophilus might possess a bone. Rather the right to property is wrapped up in a person’s capacity to apply his intellect to matters and ideas, to look ahead, to plan and steward the use of that possession. Just as other fundamental human rights are not created by the state but are possessed by virtue of a person’s existence and nature, so also the right to private property is recognized rather than granted by the government.
The right to property is not absolute—no one, no matter how rich, has the right to buy the whole surface of the earth, or even to deny bread he owns to a starving neighbor who has absolutely no recourse for survival—but it is sacred because it has such a close connection to human beings as creatures made in the image of God, creatures placed in the context of scarcity and given a capacity to reason, create, and transcend. The best thing that politicians can do in regard to property is to enact and enforce just laws in accordance with natural law—to protect people from having their belongings unjustly confiscated.
That is why cultures that have systematically attacked and undermined the right to private property have tended to wither, and those civilizations that have managed to extend the right to private property to an ever greater number of people have tended to thrive. Here I can’t help but think of an Acton Institute interview of the historian and sociologist Rodney Stark. He was discussing why China, which a thousand years ago was ahead of the West in many ways, fell behind technologically and eventually in measures of societal well being, such as life expectancy among the poor. The story is immensely complicated, but it boils down to one issue—private property:
One of the great sad stories is that something that looked like the start of a real, honest, industrial revolution started in China about the tenth century. They had some small iron smelters and they started getting bigger and bigger and bigger, and people who owned them kept reinvesting and increased production and they got bigger and bigger. And eventually, the Mandarins discovered this was going on and that ordinary people were getting rich. They stopped it. They closed it down. The whole thing stopped and went away. Look, a great historian of Asia put it well. He said, private property is not secure and that’s the first, and last, and total answer to why there was no development in the East.
The positive side of this coin is that a thousand years later many Asian countries have begun to thrive economically as they have moved away from command-and-control economies and begun extending economic freedom to larger and larger numbers of their people—imperfectly as in any human society, but still in a dramatic shift toward expanded property rights and economic liberty.
That property rights are related to the well-being of men and women shouldn’t surprise us. As we’ve seen, they are an outgrowth of human intelligence and transcendence. Property comes into existence in this interplay and overlap of human physicality and spirituality. Thus throughout history it has proven difficult to safeguard personal freedoms like the freedom of speech in the absence of property rights. If you are to have the right to free speech, but are not permitted to publish a book at a private publisher, or to own a newspaper or television station or radio station, or even to post an opinion online because the government has begun to treat the internet as if it owns it, then in what practical sense can you be said to have the right to free speech?
The same is true of religion. If the state strips away our economic freedom to decide how and where we use our private means to compensate doctors, nurses, and physical therapists in exchange for medical care, if the government comes to control all of this as if these medical skills and private exchanges were somehow the government’s property, then it suddenly becomes easier for the government to infringe upon one’s right to religious freedom in certain important ways. Consider the mandate issued by the Obama administration’s Department of Health and Human Services in early 2012, requiring all employers—including religious institutions—to provide abortifacient drugs, sterilization, and contraception coverage as part of their health insurance programs even if those religious groups are morally opposed to doing so. The fact that a seventh of the nation’s economy had already been placed under the control of the federal government by Obamacare—the fact that so many in our culture were comfortable with such a massive government intervention in the private sector—made it much easier for HHS to issue such a mandate.
Government largesse is all too likely at some point to carry with it requirements at odds with one’s deepest principles and morals.
It is very instructive to review the progress of the passage of Obamacare. It was initially supported by the American Bishops’ conference, but eventually lost their support out of fear that it lacked a sufficient “conscience clause” exempting Church institutions from covering services deemed immoral by the Church.
Independence of conscience is not so easy to maintain when you aren’t independent of government purse strings. When a religious institution becomes dependent on the state, political control eventually follows, as surely as night follows day. The old adage, “He who drinks the king’s wine sings the kings songs,” seems applicable here.
The king in this case, the Obama administration, has brought other weapons to bear in its ongoing attack on religious freedom. One is the power of the president’s bully pulpit. In a subtle but powerful rhetorical shift, administration figures have begun speaking of the “freedom to worship” rather than the “freedom of religion.” While the two phrases sound similar, the difference between them raises certain questions: Does the freedom to worship include a social dimension? May one, for example, worship with others? If so, where? May a group assemble and purchase property for this purpose? What if their religion admonishes them to teach children, or tend to the sick? May they build schools, hospitals, and universities? You see the problem? With only “freedom to worship,” religion all too easily becomes something quarantined from the public square, something done in private and only in private, if you have any sense of secular decorum.
Personal liberty is interconnected with economic liberty. It is dangerous to surrender one’s economic independence by accepting subsidies, even with the intention of accomplishing good. Government largesse is all too likely at some point to carry with it requirements at odds with one’s deepest principles and morals.
Rev. Sirico is the President of the Acton Institute for the Study of Religion and Liberty. This article is excerpted from his book, Defending the Free Market: The Moral Case for a Free Economy, © 2012 by Robert Sirico, published by Regnery Publishing.