Government expenditures52 are a coerced transfer of resources from private producers to the uses preferred by government officials. It is customary to classify government spending into two categories: resource-using, and transfer. Resource-using expenditures frankly shift resources from private persons in society to the use of government: this may take the form of hiring bureaucrats to work for government—which shifts labor resources directly—or of buying products from business firms. Transfer payments are pure subsidy spending—when the government takes from Peter to pay Paul. It is true that, in the latter case, the government gives “Paul” money to decide the allocation as he wishes, and in a sense we may analyze the two types of spending separately. But the similarities here are greater than the differences. For, in both cases, resources are seized from private producers and shifted to the uses which government officials think best. After all, when a bureaucrat receives his government salary, this payment is in the same sense a “transfer payment” from the taxpayers, and the bureaucrat is also free to decide how further to allocate the income at his command. In both cases, money and resources are shifted from producers to nonproducers, who consume or otherwise use them.53

This type of analysis of government has been neglected because economists and statisticians tend to assume, rather blithely, that government expenditures are a measure of its productive contribution to society. In the “private sector” of the economy, the value of productive output is sensibly gauged by the amount of money that consumers spend voluntarily on that output. Curiously, on the other hand, the government’s “productive output” is gauged, not by what is spent on government, but by what government itself spends! No wonder that grandiose claims are often made for the unique productive power of government spending, when a mere increase in that spending serves to raise the government’s “productive contribution” to the economy.54

What, then, is the productive contribution of government? Since the value of government is not gauged on the market, and the payments to the government are not voluntary, it is impossible to estimate. It is impossible to know how much would be paid in to the government were it purely voluntary, or indeed, whether one central government in each geographical area would exist at all. Since, then, the only thing we do know is that the tax-and-spend process diverts income and resources from what they would have been doing in the “private sector,” we must conclude that the government’s productive contribution to the economy is precisely zero. Furthermore, even if it be objected that governmental services are worth something, it would have to be noted that we are again suffering from the error pointed out by Bastiat: a sole emphasis on what is seen, to the neglect of what is not seen. We may see the government’s hydroelectric dam in operation; we do not see the things that private individuals would have done with the money—whether buying consumers’ goods or investing in producers’ goods—but which they were compelled to forgo. In fact, since private consumers would have done something else, something more desired, and therefore from their point of view more productive, with the money, we can be sure that the loss in productivity incurred by the government’s tax and spending is greater than whatever productivity it has contributed. In short, strictly, the government’s productivity is not simply zero, but negative, for it has imposed a loss in productivity upon society.55

Government expenditure is often referred to as “investment” resulting in “capital.” And we have heard much in recent years about Soviet and other multi-Year Plans busily engaged in building up “capital” by government action. Yet it is illegitimate to use the term “capital” for government expenditures. Capital is the status of productive goods along the path to eventual consumption. In any sort of division-of-labor economy, capital goods are built, not for their own sake by the investor, but in order to use them to produce lower-order and eventually consumers’ goods. In short, a characteristic of an investment expenditure is that the good in question is not being used to fulfill the needs of the investor, but of someone else—the consumer. Yet, when government confiscates resources from the private market economy, it is precisely defying the wishes of the consumers; when government invests in any good, it does so to serve the whims of government officials, not the desires of consumers. Therefore, no government expenditures can be considered genuine “investment,” and no government-owned assets can be considered capital. Government expenditures are divisible into two parts: consumption expenditures by government officials, beneficiaries of government subsidies, and other nonproductive recipients; and waste expenditures, where government officials really believe that they are “investing” in “capital.” These waste expenditures result in waste assets.56 The consumption of the governmentally privileged is, of course, in a different category from private consumption, since it is necessarily at the expense of the private consumption of producers. We may therefore call the former “antiproductive consumption.”57

• 52Government expenditures are made from government revenue. In the preceding section we have dealt with the major source of governmental revenue, taxation. Below we shall deal with inflation, or money creation, and in the present section a discussion of government “enterprise” is included. For a brief treatment of the final major source of government revenue—borrowing from the public—see Appendix A below.
• 53It may be objected that while bureaucrats may not be producers, other “Pauls” who receive subsidies on occasion are basically producers on the market. To the extent that they receive subsidies from the government, however, they are being nonproductive and living off the producers by compulsion. What is relevant, in short, is the extent to which they are in a relation of State to their fellow men. We might add that, in this work, the term “State” is never meant in an anthropomorphic manner. “State” really means people acting toward one another in a systematically “stateish” relationship.
       I am indebted to Mr. Ralph Raico, of the University of Chicago, for the “relation of State” concept.
• 54Originally, Professor Simon Kuznets contended that only taxes should gauge the government’s productive output, thus measuring product by revenue as in the case of private firms. But taxes, being compulsory, cannot be used as a productive gauge. In contrast to the present method of national income accounting, Kuznets would have eliminated all government deficits from its “productive contribution.”
• 55Even for those who do not accept this analysis, any who believe, empirically, that waste in government exceeds 50 percent of its expenditures would have to agree that our assumption is more accurate than the current estimate of 100 percent productivity by the government.
• 56If a waste asset owned by the government is sold to private enterprise, then all or part of it might become a capital good. But this potential does not make the good capital while used by the government. It might be objected that government purchases are genuine investments when used by a government “enterprise” that charges prices on the market. We shall see, however, that this is not really enterprise but playing at enterprise.
       See below for a more detailed discussion of the waste involved in waste assets.
• 57This is to be distinguished from the classical concept of “nonproductive consumption” as all consumption above that needed to maintain the productive capacity of the laborer.

Let us delve a little further into the typology of government spending. Transfer spending or subsidies distort the market by coercively penalizing the efficient for the benefit of the inefficient. (And it does so even if the firm or individual is efficient without a subsidy, for its activities are then being encouraged beyond their most economic point.) Subsidies prolong the life of inefficient firms and prevent the flexibility of the market from fully satisfying consumer wants. The greater the extent of government subsidy, the more the market is prevented from working, the more resources are frozen in inefficient ways, and the lower will be the standard of living of everyone. Furthermore, the more government intervenes and subsidizes, the more caste conflict will be created in society, for individuals and groups will benefit only at one another’s expense. The more widespread the tax-and-subsidy process, the more people will be induced to abandon production and join the army of those who live coercively off production. Production and living standards will be progressively lowered as energy is diverted from production to politics and as government saddles a dwindling base of production with a growing and more top-heavy burden of the State-privileged. This process will be all the more accelerated because those who succeed in any activity will invariably tend to be those who are best at performing it. Those who particularly flourish on the free market, therefore, will be those most adept at production and at serving their fellow men; those who succeed in the political struggle for subsidies, on the other hand, will be those most adept at wielding coercion or at winning favors from wielders of coercion. Generally, different people will be in the different categories of the successful, in accordance with the universal specialization of skills. Furthermore, for those who are skillful at both, the tax-and-subsidy system will encourage and promote their predatory skills and penalize their productive ones.

A common example of direct transfer subsidy is governmental poor relief. State poor relief is clearly a subsidization of poverty, for men are now automatically entitled to money from the State because of their poverty. Hence, the marginal disutility of income forgone from leisure diminishes, and idleness and poverty tend to increase further, which in turn increases the amount of subsidy that must be extracted from the taxpayers. Thus, a system of legally subsidized poverty tends to call forth more of the very poverty that is supposedly being alleviated. When, as is generally the case, the amount of subsidy depends directly on the number of children possessed by the pauper, there is a further incentive for the pauper to breed more children than otherwise and thereby multiply the number of paupers—and even more dependent paupers—still further.58 The sincerity of the State’s desire to promote charity towards the poor may be gauged by two perennial drives of government: to suppress “charity rackets” and to drive individual beggars off the streets because the “government makes plenty of provision for them.”59 The effect of both measures is to cripple voluntary individual gifts of charity and to force the public to route its giving into the channels approved by, and tied in with, government officialdom.

Similarly, governmental unemployment relief, often supposed to help in curing unemployment, has the precisely reverse effect: it subsidizes and intensifies unemployment. We have seen that unemployment arises when laborers or unions set a minimum wage above what they could obtain on the unhampered market. Tax aid helps them to keep this unrealistic minimum and hence prolongs the period of unemployment and aggravates the problem.

• 58As Thomas Mackay aptly stated: “We can have exactly as many paupers as the country chooses to pay for.” Thomas Mackay, Methods of Social Reform (London: John Murray, 1896), p. 210. Private charity to the poor, on the other hand, would not have the same vicious-circle effect, since the poor would not have a continuing compulsory claim on the rich. This is particularly true where private charity is given only to the “deserving” poor. On the nineteenth-century concept of the “deserving poor,” cf. Barbara Wootton, Social Science and Social Pathology (London: George Allen & Unwin, 1959), pp. 51, 55, and 268 ff.
• 59The reader may gauge from the following anecdote by an admirer of such a drive just who was the true friend of the poor organ-grinder—his customer or the government:
  During a similar campaign to clean up the streets of organ-grinders (most of whom were simply licensed beggars) a woman came up to LaGuardia at a social function and begged him not to deprive her of her favorite organ-grinder.
  “Where do you live?” he asked her.
  “On Park Avenue!”
  LaGuardia successfully pushed through his plan to eliminate the organ-grinders and the peddlers, despite the pleas of the penthouse slummers. (Newbold Morris and Dana Lee Thomas, Let the Chips Fall [New York: Appleton-Century-Crofts, 1955], pp. 119–20)

Let us now return to the resource-using activities of government, where the State professes to be providing a service of some sort to the public. Government “service” may be either furnished free or sold at a price to users. “Free” services are particularly characteristic of government. Police and military protection, firefighting, education, parks, some water supply come to mind as examples. The first point to note, of course, is that these services are not and cannot be truly free. A free good, as we saw early in this book, would not be a good and hence not an object of human action; it would simply exist in superabundance for all. If a good does not exist aplenty for all, then the resource is scarce, and supplying it costs society other goods forgone. Hence it cannot be free. The resources needed to supply the free governmental service are extracted from the rest of production. Payment is made, however, not by users on the basis of their voluntary purchases, but by a coerced levy on the taxpayers. A basic split is thus effected between payment and receipt of service. This split is inherent in all government operations.

Many grave consequences follow from the split and from the “free” service as well. As in all cases where price is below the free-market price, an enormous and excessive demand is stimulated for the good, far beyond the supply of service available. Consequently, there will always be “shortages” of the free good, constant complaints of insufficiency, overcrowding, etc. An illustration is the perpetual complaints about police insufficiency, particularly in crime-ridden districts, about teacher and school shortages in the public school system, about traffic jams on government-owned streets and highways, etc. In no area of the free market are there such chronic complaints about shortages, insufficiencies, and low quality service. In all areas of private enterprise, firms try to coax and persuade consumers to buy more of their product. Where government owns and operates, on the other hand, there are invariably calls on consumers for patience and sacrifice, and problems of shortages and deficiencies continually abound. It is doubtful if any private enterprise would ever do what the New York City and other governments have done: exhort consumers to use less water. It is also characteristic of government operation that when a water shortage develops, it is the consumers and not the government “enterprisers” who are blamed for the shortage. The pressure is on consumers to sacrifice, and to use less, while in private industry the (welcome) pressure is on entrepreneurs to supply more.60

The well-known inefficiencies of government operation are not empirical accidents, resulting perhaps from the lack of a civil service tradition. They are inherent in all government enterprise, and the excessive demand fomented by free and other underpriced services is just one of the many reasons for this condition.

Free supply not only subsidizes the users at the expense of nonusing taxpayers; it also misallocates resources by failing to supply the service where it is most needed. The same is true, to a lesser extent, wherever the price is under the free-market price. On the free market, consumers can dictate the pricing and thereby assure the best allocation of productive resources to supply their wants. In a government enterprise, this cannot be done. Let us take again the case of the free service. Since there is no pricing, and therefore no exclusion of submarginal uses, there is no way that the government, even if it wanted to, could allocate its services to their most important uses and to the most eager buyers. All buyers, all uses, are artificially kept on the same plane. As a result, the most important uses will be slighted. The government is faced with insuperable allocation problems, which it cannot solve even to its own satisfaction. Thus, the government will be confronted with the problem: Should we build a road in place A or place B? There is no rational way whatever by which it can make this decision. It cannot aid the private consumers of the road in the best way. It can decide only according to the whim of the ruling government official, i.e., only if the government officials do the “consuming,” and not the public.61 If the government wishes to do what is best for the public, it is faced with an impossible task.

• 60See Murray N. Rothbard, “Government in Business” in Essays on Liberty (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1958), I V, 186 ff. It is therefore characteristic of government ownership and “enterprise” that the consumer becomes, not a “king” to be courted, but a troublesome fellow bent on using up the “social” product.
• 61Thus, the government official may select a road that will yield him or his allies more votes.

Government may either subsidize deliberately by giving a service away free, or it may genuinely try to find the true market price, i.e., to “operate on a business basis.” The latter is often the cry raised by conservatives—that government enterprise be placed on a business footing, that deficits be ended, etc. Almost always this means raising the price. Is this a rational solution, however? It is often stated that a single government enterprise, operating within the sphere of a private market and buying resources from it, can price its services and allocate its resources efficiently. This, however, is incorrect. There is a fatal flaw that permeates every conceivable scheme of government enterprise and ineluctably prevents it from rational pricing and efficient allocation of resources. Because of this flaw, government enterprise can never be operated on a “business” basis, no matter how ardent a government’s intentions.

What is this fatal flaw? It is the fact that government can obtain virtually unlimited resources by means of the coercive tax power (i.e., limited only by the total resources of society). Private businesses must obtain their funds from private investors. This allocation of funds by investors, based on time preference and foresight, “rations” funds and resources to the most profitable and therefore the most serviceable uses. Private firms can get funds only from consumers and investors; they can get funds, in other words, only from people who value and buy their services and from savers who are willing to risk investment of their saved funds in anticipation of profit. In short, payment and service are, we repeat, indissolubly linked on the market. But government, on the other hand, can get as much money as it likes. The free market therefore provides a “mechanism,” which we have analyzed in detail, for allocating funds for future and present consumption, for directing resources to their most value-productive uses for all the people. It thereby provides a means for businessmen to allocate resources and to price services to insure optimum use. Government, however, has no checkrein on itself, i.e., no requirement of meeting a test of profit-and-loss or valued service to consumers, to permit it to obtain funds. Private enterprise can get funds only from satisfied, valuing customers and from investors guided by present and expected future profits and losses. Government gets more funds at its own whim.

With the checkrein gone, gone also is any opportunity for government to allocate resources rationally. How can it know whether to build road A or road B, whether to “invest” in a road or a school—in fact, how much to spend for all of its activities? There is no rational way that it can allocate funds or even decide how much to have. When there is a shortage of teachers or schoolrooms or police or streets, the government and its supporters have only one answer: more money. The people must relinquish more of their money to the government. Why is this type of answer never offered on the free market? The reason is that money must always be withdrawn from some other use in consumption or investment—and this withdrawal must be justified. On the market, justification is provided by the test of profit and loss—the indication that the most urgent wants of the consumers are being satisfied. If an enterprise or product is earning high profits for its owners, and these profits are expected to continue, more money will be forthcoming; if not, and losses are being incurred, money will flow out of the industry. The profit-and-loss test serves as the critical guide for directing the flow of productive resources. No such guide exists for government, which therefore has no rational way to decide how much money to spend in total or in each specific line. The more money it spends, the more service, of course, it can supply—but where to stop?62

Proponents of government enterprise may retort that the government should simply tell its bureau to act as if it were a profit-making enterprise and to establish itself in the same way as a private business. There are two basic flaws in this theory: (1) It is impossible to play enterprise. Enterprise means risking one’s own money in investment. Bureaucratic managers and politicians have no real incentive to develop entrepreneurial skills, to really adjust to consumer demands. They do not risk loss of their money in the enterprise. (2) Aside from the question of incentives, even the most eager managers could not function as a business. For, regardless of the treatment accorded the operation after it is established, the initial launching of the firm is made with government money, and therefore by coercive levy. A fatally arbitrary element has been “built into” the very vitals of the enterprise. Furthermore, future decisions on expenditures will be made out of tax funds and will therefore be subject to the same flaw. The ease of obtaining money will inherently distort the operations of government enterprise. Moreover, suppose that the government “invests” in an enterprise E. Either the free market, left alone, would also have invested in this selfsame enterprise, or it would not. If it would have, then the economy suffers, at the very least, from the “take” going to the intermediary bureaucracy. If not, and this is almost certain, then it follows immediately that the expenditure on E is a distortion of private utility on the market—that some other expenditure would have brought greater monetary returns. It follows once again that a government enterprise cannot duplicate the conditions of private business.

In addition, the establishment of government enterprise creates an “unfair” competitive advantage over private firms, for at least part of its capital was gained by coercion rather than service. It is clear that government, with its subsidization, can drive a private business out of the field. Private investment in the same industry will be greatly restricted, since future investors will anticipate losses at the hands of privileged governmental competitors. Moreover, since all services compete for the consumer’s dollar, all private firms and all private investment will to some degree be affected and hampered. And when a new government enterprise begins, it generates fears in other industries that they will be next, that they will either be confiscated or forced to compete with government-subsidized enterprises. This fear tends to repress productive investment further and thus lower the general standard of living still more.

Another argument, used quite correctly by “leftist” proponents of government ownership, is this: If business operation is so desirable, why take such a tortuous route? Why not scrap government ownership and turn the whole operation over to private business enterprise? Why go to such elaborate lengths to try to imitate the apparent ideal (private ownership) when the ideal may be pursued directly? The call for business principles in government, therefore, makes little sense, even if that call could be successful.

Many “criteria” have been offered by writers as guides for the pricing of government services. One criterion supports pricing according to “marginal cost.” As we have indicated above, however, this is hardly a criterion at all and rests on classical fallacies of price determination by costs. “Marginal” varies according to the period of time surveyed. And costs are not in fact static but flexible; they change according to prices and hence cannot be used as a guide to the setting of prices. Moreover, prices equal average costs only in final equilibrium, and equilibrium cannot be regarded as an ideal for the real world. The market only tends toward this goal. Finally, costs of government operation will be higher than for similar operations on the free market.63

Government enterprise will not only hamper and repress private investment and entrepreneurship in the same industry and in industries throughout the economy; it will also disrupt the entire labor market. For the government (a) will decrease production and living standards in the society by siphoning off potentially productive labor to the bureaucracy; (b) using confiscated funds, it will be able to pay more than the market rate for labor and hence set up a clamor by government job-seekers for an expansion of the unproductive bureaucratic machine; and (c) the government’s high tax-supported wages may well mislead workers into believing that this reflects the market wage in private industry, thus causing unwanted unemployment.

The inefficiencies of government operation are compounded by several other factors. As we have seen, a government enterprise competing in an industry can usually drive out private owners, since the government can subsidize itself in many ways and supply itself with unlimited funds when desired. In cases where it cannot compete even under these conditions, it can arrogate to itself a compulsory monopoly, driving out competitors by force. This was done in the United States in the case of the post office.64 When the government thus grants itself a monopoly, it may go to the other extreme from free service; it may charge a monopoly price. Charging a monopoly price—now identifiably different from a free-market price—distorts resources again and creates an artificial scarcity of the particular good. It also permits an enormously lowered quality of service. A governmental monopoly need not worry that customers may go elsewhere or that inefficiency may mean its demise.65 It is particularly absurd to call for “business principles” where a government enterprise functions as a monopoly. Periodically, for example, there are demands that the post office be put on a “business basis” and end its deficit, which must be paid by the taxpayers. But ending the deficit of an inherently and necessarily inefficient government operation does not mean going on a business basis. To cover costs, the price must be raised high enough to achieve a monopoly price and so camouflage and compensate for the government’s inefficiencies. A monopoly price will levy an excessive burden on the users of the postal service, especially since the monopoly is compulsory. On the other hand, we have seen that even monopolists must abide by the consumers’ demand schedule. If this demand schedule is elastic enough, it may well happen that a monopoly price will reduce revenue so much or cut down so much on its increase that a higher price will increase deficits rather than reduce them. An outstanding example has been the New York City subway system in recent years.66

• 62Cf. Ludwig von Mises, Bureaucracy (New Haven: Yale University Press, 1946), pp. 50, 53.
• 63arious fallacious criteria have been advanced for deciding between private and state action. One common rule is to weigh “marginal social costs” and benefits against “marginal private costs” and benefits. Apart from other flaws, there is no such entity as “society” separate from constituent individuals, so that this preferred criterion is simply meaningless.
• 64See the interesting pamphlet by Frank Chodorov, The Myth of the Post Office (Hinsdale, Ill.: Henry Regnery Co., 1948). On a similar situation in England, see Frederick Millar, “The Evils of State Trading as Illustrated by the Post Office” in Thomas Mackay, ed., A Plea for Liberty (New York: D. Appleton Co., 1891), pp. 305–25. For a portrayal of the political factors that have systematically distorted economic considerations in setting postal rates in the United States, see Jane Kennedy, “Development of Postal Rates: 1845–1955,” Land Economics, May, 1957, pp. 93–112; and Kennedy, “Structure and Policy in Postal Rates,” Journal of Political Economy, June, 1957, pp. 185–208.
• 65Only governments can make self-satisfied announcements of cuts in service in order to effect economies. In private business, economies must be made as corollaries to improvements in service. A recent example of a cut in government service—in the midst of improving private services in most other fields—was the decline in American postal deliveries from two to one a day, coupled, of course, with perennial requests for higher rates.
       When France nationalized the important Western Railway system in 1908, freight was increasingly damaged, trains slowed down, and accidents grew at such a pace that an economist caustically observed that the French government had added railway accidents to its growing list of monopolies. See Murray N. Rothbard, “The Railroads of France,” Ideas on Liberty, September, 1955, p. 42.
• 66Ironically enough, the higher fares have driven many customers to buying and driving their own cars, thus aggravating the perennial traffic problem (shortage of government street space) even further. Another example of government intervention creating and multiplying its own difficulties! On the subways, see Ludwig von Mises, “The Agony of the Welfare State,” The Freeman, May 4, 1953, pp. 556–57.

We have seen in chapter 10 above that one cartel or one firm could not own all the means of production in the economy, because it could not calculate prices and allocate factors in a rational manner. And we have seen that this is the reason why State socialism could also not plan or allocate rationally. We further noted that two or more stages could not be totally integrated vertically on the market—for total integration would eliminate a whole segment of the market and establish an island of calculational and allocational chaos, an island that would preclude optimal planning for profits and maximum satisfaction for the consumers.

In the case of simple government ownership, still another extension of this thesis becomes evident. For each governmental firm introduces its own island of chaos into the economy; there is no need to wait for full socialism for chaos to begin its work. No government enterprise can ever determine prices or costs or allocate factors or funds in a rational, welfare-maximizing manner. No government enterprise could be established on a “business basis” even if the desire were present. Thus, any governmental operation injects a point of chaos into the economy; and since all markets are interconnected in the economy, every governmental activity disrupts and distorts pricing, the allocation of factors, consumption/investment ratios, etc. Every government enterprise not only lowers the social utilities of the consumers by forcing the allocation of funds to other ends than those desired by the public; it lowers the utility of everyone (including the utilities of some government officials) by distorting the market and spreading calculational chaos. The greater the extent of government ownership, of course, the more powerful will this impact become.

Aside from its purely economic consequences, government ownership has another kind of impact on society; it necessarily substitutes conflict for the harmony of the free market. Since government service means service by one set of decision-makers, it comes to mean uniform service. The desires of all those forced, directly or indirectly, to pay for the government service cannot be satisfied. Only some forms of the service can or will be produced by the government agency. As a result, government enterprise creates enormous caste conflicts among the citizens, each of whom has different ideas on the best form of service. In the final result, government enterprise can hardly fail to substitute its own values, or the values of one set of customers, for the values of all others. Artificially standardized services of poorer quality—fit to governmental taste or convenience—will hold sway, in contrast to the diversified services of higher quality which the free market supplies to fit the tastes of a multitude of individuals.

In recent years government schools in America have furnished a striking example of such problems and conflicts. Some parents prefer racially segregated schools; others prefer integrated education. Some parents want their children taught socialism; others want antisocialist teaching in the schools. There is no way that the government can resolve these conflicts. It can only impose the will of one group by coercion and leave the others dissatisfied and unhappy. Whichever type of school is chosen, some groups of parents will suffer. On the other hand, there is no such conflict on the free market, which provides any type of service demanded. On the market, those who want segregated or integrated, prosocialist or individualist, schools can have their wants satisfied. It is obvious, therefore, that governmental, as opposed to private, provision of services, lowers the standard of living of much of the population.

The degrees of government ownership in the economy vary from one country to another, but in all countries the State has made sure that it owns and monopolizes the vital nerve centers, the command posts of the society. It has acquired compulsory monopoly ownership over these command posts, and it has always asserted, without proof, that private ownership and enterprise in these fields is simply and a priori impossible.

Such vital command posts are defense, money (the mint and, nowadays, note issue), rivers and coastal seas, streets and highways, land generally (the “public domain” and the power of “eminent domain”), and the post office. The defense function is particularly vital to the State’s existence, for on its virtual monopoly of force depends its ability to extract taxes from its citizens. Another critical command post held, though not always monopolized by, the State is education. For government schooling permits the influencing of the youthful mind to accept the virtues of the government under which it lives and of the principle of government intervention. Conservatives who often attack “socialistic” teaching in government schools are particularly wide of the mark, for the very fact that a government school exists and is therefore presumed to be good teaches its little charges the virtues of government ownership by example. And if government ownership is good and even preferable in schooling, why not for other educational media, e.g., newspapers—or for other important social services?

Even where the government does not have a compulsory monopoly of schooling, it approaches this ideal by compelling attendance of all children at either a government school or a private school approved by the government. Compulsory attendance brings into the schools those who do not desire or cannot benefit from schooling and forces them out of such competing fields as leisure and business employment.

Finally, government ownership is often referred to as “public” ownership (the “public domain,” “public schools,” the “public sector”). The implication is that when government owns anything, every member of the public owns equal shares of that property. But we have seen that the important feature of ownership is not legal formality but actual rule, and under government ownership it is the government officialdom that controls and directs, and therefore “owns,” the property. Any member of the “public” who thinks he owns the property may test this theory by trying to appropriate for his own individual use his aliquot part of government property.67 ,68

While rulers of government own “public” property, their ownership is not secure in the long run, since they may always be defeated in an election or deposed. Hence government officials will tend to regard themselves as only transitory owners of “public” resources. While a private owner, secure in his property and its capital value, may plan the use of his resource over a long period of time in the future, the government official must exploit “his” property as quickly as he can, since he has no security of tenure. And even the most securely entrenched civil servant must concentrate on present use, because government officials cannot usually sell the capitalized value of their property, as private owners can. In short, except in the case of the “private property” of a hereditary monarch, government officials own the current use of resources, but not their capital value. But if a resource itself cannot be owned, but only its current use, there will rapidly ensue an uneconomic exhaustion of the resource, since it will be to no one’s benefit to conserve it over a period of time, and yet to each owner’s advantage to use it up quickly. It is particularly curious, then, that almost all writers parrot the notion that private owners, possessing time preference, must take the “short view” in using their resources, while only government officials are properly equipped to exercise the “long view.” The truth is precisely the reverse. The private individual, secure in his capital ownership, can afford to take the long view because of his interest in maintaining the capital value of his resource. It is the government official who must take and run, who must exploit the property quickly while he is still in command.69

• 67It might be objected that individual stockholders of corporations cannot do this either, e.g., a General Motors stockholder is not allowed to seize a car in lieu of cash dividends or in exchange for his stock. Yet stockholders do own their company, and this example precisely proves our point. For the individual stockholder can contract out of his company; he can sell his aliquot shares of General Motors stock to someone else. The subject of government cannot contract out of that government; he cannot sell his “shares” in the post office, for example, because he has no such shares. As F.A. Harper has succintly stated: “The corollary of the right of ownership is the right of disownership. So if I cannot sell a thing, it is evident that I do not really own it.” Harper, Liberty: A Path to Its Recovery, pp. 106, 32. Also see Isabel Paterson, The God of the Machine (New York: Putnam’s, 1943), pp. 179 ff., and T. Robert Ingram, Schools: Government or Public? (Houston: St. Thomas Press, n.d.).
• 68It might be noted that even if all the fallacious planks of the Henry George structure were conceded, the Single Tax program would still not follow from the premises. As Benjamin Tucker brilliantly demonstrated years ago, the most that could possibly be established would be each man’s “right” to his tiny aliquot part of the site value of every plot of land—not the State’s right to the whole value. Tucker, Individual Liberty, pp. 241–43.
• 69Those who object that private individuals are mortal, while “governments are immortal,” indulge in the fallacy of conceptual realism at its starkest. “Government” is not a real acting entity, but rather a type of interpersonal action adopted by actual individuals.

Before ending our discussion of specific governmental activities, we may note in passing a curiously popular form of government expenditure: “social security.” Social security confiscates the income of wage earners, and then, most people presume, it invests the money more wisely than they could themselves, later paying out the money to the former wage earners in their old age. Considered as “social insurance,” this is a typical example of government enterprise: there is no relation between premiums and benefits, the latter changing yearly under the impact of political pressures. On the free market, anyone who wishes may invest in an insurance annuity or in stocks or real estate. Compelling everyone to transfer his funds to the government forces him to lose utility. Thus, even on its face, it is difficult to understand the great popularity of the social security program. But the true nature of the program differs greatly from the popular image. For the government does not invest the funds it takes in taxes; it simply spends them, giving itself its own bonds which must later be cashed when the benefits fall due. The cash, of course, can be obtained only by further taxation. Thus the public must pay twice for one payment of social security. The program is essentially one of making more palatable a general taxation of lower-income, wage-earning groups.

When government ownership or control extends to the entire productive system, then the economic system is called socialism. Socialism, in short, is the violent abolition of the market, the compulsory monopolization of the entire productive sphere by the State. There are two and only two ways that any economy can be organized. One is by freedom and voluntary choice—the way of the market. The other is by force and dictation—the way of the State. To those ignorant of economics, it may seem that the way of the market is only anarchic confusion and chaos, while the way of the State constitutes genuine organization and “central planning.” On the contrary, we have seen in this book what an amazing and flexible mechanism the market is for satisfying the wants of all individuals. State operation or intervention is, on the other hand, far less efficient and creates many disruptive and cumulative problems of its own. Moreover, a socialist State, deprived of the real market and its determination of prices for producers’ goods, cannot calculate and can therefore run a productive system only in chaotic fashion. The economics of socialism—a whole branch of economics of its own—can only be touched upon here; suffice it to say that Mises’ demonstration of the impossibility of economic calculation under socialism has never been successfully refuted.70

Here we might mention just a few points on the economics of socialism. One, since ownership is, de facto, the control of a resource, a Nazi, Fascist, or other “centrally planned” system is as much “socialism” as a Communist regime that officially nationalizes property.71 Secondly, the extent of socialism in the present-day world is at the same time underestimated in countries such as the United States and overestimated in Soviet Russia. It is underestimated because the expansion of government lending to private enterprise in the United States has been generally neglected, and we have seen that the lender, regardless of his legal status, is also an entrepreneur and part owner. The extent of socialism is overestimated because most writers ignore the fact that Russia, socialist as she is, cannot have full socialism as long as she can still refer to the relatively free markets existing in other parts of the world. In short, a single socialist country or bloc of countries, while inevitably experiencing enormous difficulties and wastes in planning, can still buy and sell and refer to the world market and can therefore at least vaguely approximate some sort of rational pricing of producers’ goods by extrapolating from that market.72 The well-known wastes and errors of this partial socialist planning are negligible compared to what would be experienced under the total calculational chaos of a world socialist state.

Another neglected factor diminishing the extent of planning in socialist countries is “black market” activities, particularly in commodities (candy, cigarettes, drugs, stockings, etc.) that are easy to conceal. Even in bulkier commodities, falsification of records and extensive graft may bring some sort of limited market—a market violating all the socialist plans—into existence.73

Moreover, it should be noted that a centrally “planned” economy is a centrally prohibited economy. The concept of “social engineering” is a deceptive metaphor, since in the social realm, it is largely people who are being planned, rather than the inanimate machinery of engineering blueprints. And since every individual is by nature, if not always by law, a self-owner and self-starter—i.e., a self-energizer, this means that central orders, backed up, as they must be under socialism, by force and violence, effectively prohibit all the individuals from doing what they want most or what they believe themselves to be best fitted to do. If the Central Planning Board, in short, orders X and Y to Pinsk to work as truck drivers, this means that X and Y are effectively and coercively prohibited from doing what they would have done voluntarily: perhaps X would have gone to Leningrad to be a longshoreman, and perhaps Y would have stayed around to tinker in his workshop and invent a new and highly useful device.

The latter point brings us to another grave defect of central planning: inventions, innovations, technological developments, by their very nature, by definition, cannot be predicted in advance and therefore cannot be centrally and bureaucratically planned. Not only does no one know what will be invented when; no one knows who will do the inventing. Clearly, a centrally prohibited economy, irrational and inefficient enough for given ends and given means and techniques at any point of time, is all the more incompetent if a flow of inventions and new development are desired in society. Bureaucracy, incompetent enough to plan a stationary system, is vastly more incompetent at planning a progressive one.74

NEW PARAGRAPH

Virtually the central theme of Hayek’s Constitution of Liberty is the importance of freedom for innovations and progress, in the widest sense.

,75

• 70See the literature referred to in chapter 10, above, on the economics of socialism. Also John Jewkes, Ordeal by Planning (New York: Macmillan & Co., 1948). For application to Soviet practice, see Boris Brutzkus, Economic Planning in Soviet Russia (London: Routledge, 1935) and such recent material as G.F. Ray, “Industrial Planning in Hungary,” Scottish Journal of Political Economy, June, 1960; E. Stuart Kirby, “Economic Planning and Policy in Communist China,” International Affairs, April, 1958; P.J.D. Wiles, “Changing Economic Thought in Poland,” Oxford Economic Papers, June, 1957; Alec Nove, “The Politics of Economic Rationality,” Social Research, Summer, 1958; and especially, Nove, “The Problem of ‘Success Indicators’ in Soviet Industry,” Economica, February, 1958. See below on socialist planning in connection with growth and underdevelopment.
• 71A chief difference is that a formal Communist-style expropriation makes it far more difficult to desocialize later.
• 72The first one to point this out was Ludwig von Mises, in his Human Action, pp. 698–99. It is particularly interesting to find an empirical confirmation in Wiles, dealing with Communist planning:
  What actually happens is that “world prices,” i.e., capitalist world prices, are used in all intra-[Soviet] bloc trade. 
  They are translated into rubles ... and entered into bilateral clearing accounts. To the question, “What would you do if there were no capitalist world?” came only the answer “We’ll cross that bridge when we come to it.” In the case of electricity the bridge is already under their feet; there has been great difficulty in pricing it since there is no world market. (Wiles, “Changing Economic Thought in Poland,” pp. 202–03) On the difficulties encountered by the Soviet bloc in using world market prices, see especially Horst Mendershausen, “The Terms of Soviet-Satellite Trade: A Broadened Analysis,” Review of Economics and Statistics, May, 1960, pp. 152–63.
• 73For an interesting account of the recent growth of organized private enterprises in Soviet Russia, illegal but protected by local graft, see Edward Crankshaw, “Breaking the Law in a Police State: Regimentation Can’t Curb Russians’ Anarchic Spirit,” New York Herald-Tribune, August 17, 1960.
• 74Recent researches have shown the fallacy of the common view that modern inventions and applied technological developments can take place only in very large-scale, even centrally planned, laboratories. See particularly the brilliant work of John Jewkes, David Sawers, and Richard Stillerman, The Sources of Invention (London: Macmillan & Co., 1958). Also see John R. Baker, Science and the Planned State (New York: Macmillan & Co., 1945). For a useful summary of recent literature in this field, see Richard R. Nelson, “The Economics of Invention: A Survey of the Literature,” The Journal of Business, April, 1959, pp. 101–27. Soviet science has, of course, been able to copy the technical achievements of the West; yet, on the inefficiencies of Soviet science, see Baker, Science and the Planned State, and Baker, Science and the Sputniks (London: Society for Freedom in Science, December, 1958). Of interest on the inherent inefficiencies of governmental military research is the Hoover Commission Task Force Report: Subcommittee of the Commission on Organization of the Executive Branch of Government, Research Activities in the Department of Defense and Defense-Related Agencies (Washington, D.C.: April, 1955). On atomic energy and government, see, in addition to Jewkes, Sawers, and Stillerman, Alfred Bornemann, “Atomic Energy and Enterprise Economics,” Land Economics, August, 1954.
• 75Two of the arguments for government activity most favored by economists are the “collective goods” and “external benefit” arguments. For a critique, see Appendix B below.