If you watch the news you may think that the state is necessary to manage and control society. The opposite is the case. Societies are self-ordering systems which are only harmed by state intervention.
If you watch the news you may think that the state is necessary to manage and control society. The opposite is the case. Societies are self-ordering systems which are only harmed by state intervention.
Many take it for granted that without the state, society and especially the commercial bit of society called ‘the economy’ could not work. But this is not true, however much politicians may want you to believe it. Society is in fact a stand-alone, complicated, fragile but richly productive self-organising structure. Our societies continue to function surprisingly well despite, not because of, the population’s sentimental soppiness about the state.
You only need a mesh or network of voluntary agreements in every aspect of life to make everything work. To enable people to make voluntary cooperation agreements there must be very little predation, i.e. what we call crime. You cannot agree to work with another person or company if they can refuse to fulfil their side of the deal with impunity. Still less can people work together to produce things if they are simply going to be stolen.
The answer to this is law not the state. Human beings equip themselves with legal systems as needed. They do this independently of the state where necessary and possible. Such independent systems tend to be based on restitution (‘damages’ in the English Common Law) for transgressing the libertarian Non-Aggression Principle (NAP). For those who are new to the site and libertarianism, the NAP says nobody may directly attack other people’s persons or their justly acquired property - see the May 1st post ‘Justice without the State’.
The state is the thief and bully of the world. That is why it insists on having a legal monopoly of judgement. It does not want its employees and cronies to be sued for restitution when they steal or bully. Crucially, judgement and enforcement should not be monopolies. In a free society there will be a choice of judgement and enforcement entities. They will be flexible, effective and honest, as competitive activities usually are.
An upsurge in prosperity began around 300 years ago here in Britain. The newly minted, post 1688 Glorious Revolution, Classical Liberal state agreed to protect absolute private property in return for a small, predictable and fixed tax take. It enshrined a common law judge led system of justice which largely mimicked a system based on the NAP. As Adam Smith said in ‘Wealth of Nations’ (1776) prosperity only needs ‘easy taxes and a tolerable administration of justice’. Before then states’ exactions were neither small nor predictable. The result was millennia of poverty and misery (see the forthcoming post ‘Misery in Agrarian States’).
So how does Society as a self-ordering system work? You start with individuals who are different in terms of aptitudes and attitudes. Each person’s best option is to specialise in what they are comparatively best at compared to all the things they could do (see May 11th ‘Comparative Advantage and the Common Man’). By so doing they produce as much value as possible. They can then trade for mutual benefit. Mutual benefit is a situation where both parties think that a proposed transaction in some area of life increases their subjective well-being. Well-being is described as ‘Psychic Income’ in Austrian School parlance, or as ‘reducing the sense of felt unease’. It may be any combination of material and psychic reward. Transactions can be for any purpose (apart from infringing the NAP). Examples would include agreements to buy or sell goods, for wage employment, deployment of capital, use of land or resources, establishing a household, charitable giving, or for mutual aid among friends.
Some people have values which make transactions more successful. They achieve good, or good enough, levels of reliability, fidelity, honesty, application, willingness to learn and to defer gratification. Such people tend to prosper more in commercial and family life. Over time, such co-operators generate ever more productive, high trust, complicated and productive ways of being. This is economic progress. Constructive values and practices, and the populations that carry them expand. People, and peoples, with less viable sets of attributes prosper less. The feed-back loop between having the right, viable approaches to cooperation in the first place, and the resulting expansion create a stable, growing self-ordering system.
Society is a self-stabilising integrated information and rewards system. People agree the price or cost (monetary or otherwise) of their contribution to productive endeavour. A network of agreements can then be set up by specialist entrepreneurs or leaders. Such networks will grow to cover every resource required for making any and all possible goods or services. The combination of prices freely agreed upon by producers of every good, and the prices consumers will pay, is called the ‘Price Mechanism’. It is the automatic governor of economic co-operation. It appears as Adam Smith’s Invisible Hand in ‘Wealth of Nations’. There he describes how it guides people towards the most valuable activities.
All agreements in a free society are voluntary and made by consenting adults who expect to benefit by exchange. Mistakes can and will be made, and as swiftly corrected as possible. A society full of win-win agreements is thus a much better, more productive place than one dominated by win-lose agreements foisted on productive people by the state.
Please note that in the Austrian School tradition win-win agreements are rarely just about money. Even commercial agreements may have a non-monetary component. Getting a warm glow from helping someone on a charitable basis is as much a win-win exchange as exchanging cash for groceries. So too is establishing a partnership to set up a household. The Austrian view of the world is much closer to the sum or network of all human voluntary transactions also called ‘Society’ and not just the boring old ‘economy’ on the TV News.
The wider Austro-libertarian view of human motives is consistent with the fact that small-state (Classical Liberal) societies in 19th century Britain and North America had such a huge amount of mutual, philanthropic and charitable activity. It makes Libertarians confident that in a still richer no-state future there could be even more.
Let us return to the Price Mechanism as both a de-centralised information system and an incentive system.
This is the information system bit:
If the combined cost of all inputs (land, energy, materials, labour, and capital) which people are willing to provide is less than the price consumers are willing to pay for the end product then a businessman - the person trying to manage a productive activity - has the information that he is doing the right thing. He is ‘profitable’, i.e. he is adding value or creating wealth. If he expands his business, he can attract additional resources to do so. If he doesn’t expand his activity, someone else will fill the gap and supply more of the valued good or service.
On the other hand, however, the customers may be unwilling to pay enough to cover the sum of the agreed costs of production. The businessman or entrepreneur then has the information that he should stop what he is doing. By closing, he releases resources, including employees. These can be better used in other activities which do add value
Businessmen basically just ‘do the numbers’ to work out how to create the most value from always scarce resources. Mises is the author of magisterial ‘On Human Action’ and is arguably the greatest Austrian School economist. He likened the entrepreneur to the consumer’s chauffeur. His job is to take the consumer wherever the he wants to go.
However rich or important the entrepreneur or business manager may be, his only job is to direct production exactly and precisely to suit the whims and desires of his customers. Failure to conform to the consumers’ wishes, to meet the ‘most urgent’ needs of his fellow man, in a free society leads to failure and bankruptcy.
This is a long way from the contemporary image of the all-powerful and malign businessman who is supposedly able to ignore his customers’ best interests. Such an image belongs to our Democratic Socialism regime with its privileged crony corporations.
The incentive system is an inseparable part of the Price Mechanism:
The positive gap that the price mechanism reveals between the revenues and costs of a value adding activity is both guide and reward. The gap or ‘profit’ guides towards the most productive activities. It also offers a living, possibly a very good living, to anybody willing to make the effort to organise the right activity. Efforts to uncover new information about reducing costs or improving quality could also be rewarded still more in future.
But if you don’t manage to make your product offering stack up, then you can’t make a living from it. Not being able to make a living is a disincentive to unproductive behaviour.
Over time constant attempts to find the best ways to co-operate with others, and equally constant pressure to close down loss-makers, create a virtuous cycle of increasing prosperity in a free society.
The aim here at www.awah.uk is a truly free society. That is to say one with no state, and so no coercive monopolies of judgement or anything else. Classical Liberalism worked. But it was a bargain with the devil of legalised state predation. It proved impossible to keep Lucifer in his place. The state tumour regrew after a couple of centuries and metastasised into the evil twins of Totalitarian and Democratic Socialism. The latter now threatens to undo the extraordinary worldwide prosperity ushered in by the Classical Liberal countries.
What about the state’s role in managing the economy?
So far, I have provided a description of how productive people work through voluntary co-operation together to achieve ever higher levels of progress. I have assumed a working competitive system of law which prevents all but occasional losses to predation from criminals. Now then, did you notice the bit where I talked about the need for the state to co-ordinate or manage the economy? Or the bit where I said society would collapse without central direction? Nope. I didn’t say it. Nobody honest needs the state. Self-ordering systems like human societies don’t need it. They cannot benefit from state intervention.
The state can only cause harm. It only replaces voluntary arrangements, win-win deals, with win-lose coercion – or even lose-lose arrangements, such is its incompetence. Introducing coercion into society prevents resources from flowing to more valuable uses.
Unsurprisingly, state supporters disagree with the idea the state can only cause harm. Their views include ideas such as central planning, or that the price mechanism does not include all relevant costs, or that the state can enforce better outcomes than those achieved by voluntary co-operation. I address these topics below.
Central planning - the state cannot beat the market Its pretty obvious that the state can only interfere with mutually beneficially arrangements and so tends to disable the Price Mechanism. In my post ‘The Impossibility of Socialist Economic Calculation’, May 1st, the damning arguments against central planning set out by Mises in 1920, and never refuted, are discussed. It may be worth saying something here about state officials’ knowledge and incentives.
First their knowledge. In the Austrian school economics tradition, we act in conditions of uncertainty, ignorance and change. Information about creating wealth is seen as fleeting and constantly changing. It is expensive and difficult to acquire and known to few people if any people in each sector at any one time.
Not for Libertarians the mainstream economics fantasies of perfectly informed, materialist ‘Economic Man’. This is the creature who comes ready-made with complete knowledge of all present and future alternative products, production systems, and courses of action. If that were a true representation, there would be little reason not to entrust the management of economic activity to central planning bureaucrats. Which we know does not work. No bureaucrat can know as much as relevant individuals about opportunities to increase wellbeing. He cannot even know individuals’ sense of their own wellbeing.
Nor does it make sense that they would much care. Officials have incentives, of course. But their incentives are about their jobs and pensions – and being re-elected if they are elected officials (‘politicians’). They do not benefit financially from the risky business of business management and innovation. But they can get demoted or voted out if things don’t work out. Their real incentives are to solicit donations and favours in return for leaving productive people alone. Listless inertia is disguised as public-spirited administration. It is simply a utopian fantasy that any state might be run by omniscient, altruistic officials.
The Price Mechanism doesn’t take all costs into account?
Defenders of the state say that costs are not properly accounted for by people relying on the Price Mechanism to guide their actions. This is often said about environmental costs. For example, a profitable factory which dumps its polluting effluent for no cost in a river is supposed to be an example of a mismatch between private and ‘social’ costs. This requires, you’ve guessed it, official interference.
However, such problems are caused by the state. It suppresses proper legal arrangements consistent with the NAP. For example, the English Common Law system still includes an action for nuisance. Owners of relevant properties could sue for damages (‘restitution’) and/or an injunction (an order to stop doing something) against a neighbour whose noxious actions and emissions reduce the value of their property. But the state legal system has deliberately weakened nuisance standards in favour of polluting interests.
There was a specific common law right to clean water flowing by one’s own property. Naturally the state routinely suppresses it too. It protects politically connected polluters including municipal sewage works. Otherwise we would have many cleaner rivers and beaches. We might in places have more sensible trade-offs between production and pollution.
It is precisely when the states override property rights that the worst pollution results. When the Berlin Wall came down in 1989 the territory of the Marxist Soviet Empire - which had destroyed all property rights on principle - was found to contain many very polluted sites. This had been a regime in which supposedly all-knowing Central Planners were tasked with environmental protection. Yet the result was far worse pollution than in the West. Something similar might be said of the environmental damage which has occurred in China in a regime of central planning and severely muted property rights.
In a free society everything clearly belongs to someone. This is key. Everything has a legally competent protector. No state exists to override NAP consistent Common Law style arrangements. Owners of riverside property, not to mention water companies, beaches, householders and companies, could all sue polluters. They would seek injunctions to stop polluters’ attack on their property, and/or restitution payments. Once property rights are defined and defended at law they can be priced. Environmental costs of production can be defined. In a free society they can be included in the Price Mechanism.
Disapproval of free society outcomes.
A common complaint is that the commentator disapproves of the choices some people make when they are free to cooperate. They effectively concede that a free society does in fact maximise the ‘psychic income’ or sense of well-being among cooperating individuals – which is the key Austro-libertarian claim. But they think that the ever-changing combination of prices charged for the use of resources and for the sale of goods and services should not be determining factors. The argument takes two main forms:
1) Firstly, some things that are wildly profitable - and often fun - should be banned.
Many people don’t approve of the things that their fellow man gets up to. He might be maximising his psychic income by fulfilling his ‘most urgent needs’ as the Austrian Economists would say. But they remain unmoved. Gambling, taking mood altering drugs (alcohol, tobacco, tea and coffee and other narcotics), saving money - or not saving it, buying shares or insurance, taking naturist holidays and watching day time TV are just some of the literally thousands of things someone else in society can be found to disapprove of. However, if a person’s wellbeing lies in such behaviours, he is wholly within his rights (assuming his actions do not contravene the NAP).
People might be misguided, but if you want to use force against him or her to mend their ways you are an interfering busybody and a bully. You would have no traction in a free society. On the other hand, you could form a charitable society to help people reform.
2) Something that destroys value may be ‘a good thing’ and justify state subsidy.
No value destroying activity, i.e. no activity carried on despite the fact that the cost of inputs is greater than the value of the output, can survive in a free country. It contravenes the Non-aggression Principle (NAP). If the state subsidises otherwise unviable activities it must steal the resources itself, since it has no money of its own. Indeed, the state has no justly acquired property at all. It is all the proceeds of past theft and fraud. State subsidy is, in Libertarian terms, a wholly illegitimate action. It necessarily reduces the overall level of well being in society. More persons are forced into ‘you lose - I win’ transactions by State sponsored predators.
On the other hand, in a free society people have the option, and importantly often the resources, to band together to support non-commercial activities. For example, unviable branch railways could be, and some have been, rescued by charitable action.
I hope enough has been said to show that societies living under the rule of law based on the Non-aggression Principle (NAP) will achieve high and increasing levels of prosperity and progress. The state is unnecessary and harmful. In the next post I show how a free society could be twice as wealthy as one burdened with a state.