Man, Economy, and State with Power and Market

In tracing the effects of intervention, we must explore both the direct and the indirect consequences. In the first place, intervention will have direct, immediate consequences on the utilities of those participating. On the one hand, when the society is free and there is no intervention, everyone will always act in the way that he believes will maximize his utility, i.e., will raise him to the highest possible position on his value scale. In short, everyone’s utility ex ante will be “maximized” (provided we take care not to interpret “utility” in a cardinal manner). Any exchange on the free market, indeed any action in the free society, occurs because it is expected to benefit each party concerned. If we may use the term “society” to depict the pattern, the array, of all individual exchanges, then we may say that the free market maximizes social utility, since everyone gains in utility from his free actions.3

Coercive intervention, on the other hand, signifies per se that the individual or individuals coerced would not have voluntarily done what they are now being forced to do by the intervener. The person who is coerced into saying or not saying something or into making or not making an exchange with the intervener or with a third party is having his actions changed by a threat of violence. The man being coerced, therefore, always loses in utility as a result of the intervention, for his action has been forcibly changed by its impact. In autistic and binary interventions, the individual subjects each lose in utility; in triangular interventions, at least one, and sometimes both, of the pair of would-be exchangers lose in utility.

Who gains in utility ex ante? Clearly, the intervener; otherwise, he would not have made the intervention. In the case of binary intervention, he himself gains directly in exchangeable goods or services at the expense of his subject.4 In the case of autistic and triangular interventions, he gains in a sense of psychic well-being from enforcing regulations upon others (or, perhaps, in providing a seeming justification for other, binary interventions).

In contrast to the free market, therefore, all cases of intervention supply one set of men with gains at the expense of another set. In binary interventions, the direct gains and losses are “tangible” in the form of exchangeable goods or services; in other cases, the direct gains are nonexchangeable satisfactions to the interveners, and the direct loss is being coerced into less satisfying, if not positively painful, forms of activity.

Before the development of economic science, people tended to think of exchange and the market as always benefiting one party at the expense of the other. This was the root of the mercantilist view of the market, of what Ludwig von Mises calls the “Montaigne fallacy.” Economics has shown this to be a fallacy, for on the market both parties to an exchange will benefit.5 On the market, therefore, there can be no such thing as exploitation. But the thesis of an inherent conflict of interest is true whenever the State or anyone else wielding force intervenes on the market. For then the intervener gains at the expense of the subjects who lose in utility. On the market all is harmony. But as soon as intervention appears on the scene, conflict is created, for each person or group may participate in a scramble to be a net gainer rather than a net loser—to be part of the intervening team, as it were, rather than one of the victims. And the very institution of taxation ensures that some will be in the net gaining, and others in the net losing, class.6 Since all State actions rest on the fundamental binary intervention of taxation, it follows that no State action can increase social utility, i.e., can increase the utility of all affected individuals.7

A common objection to the conclusion that the free market, in unique contrast to intervention, increases the utility of every individual in society, points to the fate of the entrepreneur whose product suddenly becomes obsolete. Take, for example, the buggy manufacturer who faces a shift in public demand from buggies to automobiles. Does he not lose utility from the operation of the free market? We must realize, however, that we are concerned only with the utilities that are demonstrated by the manufacturer’s action.8 In both period one, when consumers demanded buggies, and in period two, when they shifted to autos, he acts so as to maximize his utility on the free market. The fact that, in retrospect, he prefers the results of period one may be interesting data for the historian, but is irrelevant for the economic theorist. For the manufacturer is not living in period one any more. He lives always under present conditions and in relation to the present value scales of his fellow men. Voluntary exchanges, in any given period, will increase the utility of everyone and will therefore maximize social utility. The buggy manufacturer could not restore the conditions or results of period one unless he used force against others to coerce their exchanges, but, in that case, social utility could no longer be maximized, because of his invasive act.

Just as some writers have tried to deny the voluntary nature and the mutual benefits of free exchange, so others have tried to attribute a voluntary quality to actions of the State. Generally, this attempt has been based either on the view that there exists an entity “society,” which cheerfully endorses and supports the actions of the State, or that the majority endorses these acts and that this somehow means universal support, or finally, that somehow, down deep, even the opposing minority endorses the acts of the State. From these fallacious assumptions, they conclude that the State can increase social utility at least as well as the market can.9 ,10

Having described the unanimity and harmony of the free market, as well as the conflict and losses of utility generated by intervention, let us ask what happens if government is used to check interventions in the market by private criminals—i.e., private imposers of coerced exchanges. It has been asked: Is not this “police” function an act of intervention, and does not the free market itself then necessarily rest on a “framework” of such intervention? And does not the existence of the free market therefore require a loss of utility on the part of the criminals who are being punished by the government?11 In the first place, we must remember that the purely free market is an array of voluntary exchanges between sets of two persons. If there are no threats of criminal intervention in that market—say because everyone feels duty-bound to respect the private property of others—no “framework” of counterintervention will be needed. The “police” function is therefore solely a secondary derivative problem, not a precondition, of the free market.

Secondly, if governments—or private agencies, for that matter—are employed to check and combat intervention in society by criminals, it is certainly obvious that this combat imposes losses of utility upon the criminals. But these acts of defense are hardly “intervention” in our sense of the term. For the losses of utility are being imposed only upon people who, in turn, have been trying to impose losses of utility on peaceful citizens. In short, the force used by police agencies in defending individual freedom—i.e., in defending the persons and property of the citizens—is purely an inhibitory force; it is counterintervention against true, initiatory intervention. While such counter action cannot maximize “social utility”—the utility of everyone in society involved in interpersonal actions—it does maximize the utility of noncriminals, i.e., those who have been peacefully maximizing their own utility without inflicting losses upon others. Should these defense agencies do their job perfectly and eliminate all interventions, then their existence will be perfectly compatible with the maximization of social utility.

• 3The study of the direct consequences for utility of intervention or nonintervention is peculiarly the realm of “welfare economics.” For a critique and outline of a reconstruction of welfare economics, see Rothbard, “Toward a Reconstruction of Utility and Welfare Economics.”
• 4Perhaps we may note here the German sociologist Franz Oppenheimer’s distinction between the free market and binary intervention as the “economic” as against the “political” means to the satisfaction of one’s wants:
  There are two fundamentally opposed means whereby man, requiring sustenance, is impelled to obtain the necessary means for satisfying his desires. These are work and robbery, one’s own labor and the forcible appropriation of the labor of others. ... I propose ... to call one’s own labor and the equivalent exchange of one’s own labor for the labor of others, the “economic means” for the satisfaction of needs, while the unrequited appropriation of the labor of others will be called the “political means.” ... The state is an organization of the political means. (Oppenheimer, The State, pp. 24–27)
• 5One of the roots of this fallacy is the idea that in an exchange the two things exchanged are or should be “equal” in value and that “inequality” of value demonstrates “exploitation.” We have seen, on the contrary, that any exchange involves inequality of the values of each commodity between buyer and seller, and that it is this very double inequality of values that brings about the exchange. An example of stress on this fallacy is the well-known work by Yves Simon, Philosophy of Democratic Government (Chicago: University of Chicago Press, 1951), chap. IV.
• 6It has become fashionable to assert that John C. Calhoun anticipated the Marxian doctrine of class exploitation, but actually, Calhoun’s “classes” were castes: creatures of State intervention itself. In particular, Calhoun saw that the binary intervention of taxation must always be spent so that some people in the community become net payers of tax funds, and the others net recipients. Calhoun defined the latter as the “ruling class” and the former as the “ruled.” Thus:
  Few, comparatively, as they are, the agents and employees of the government constitute that portion of the community who are the exclusive recipients of the proceeds of the taxes. ... But as the recipients constitute only a portion of the community, it follows ... that the action [of the fiscal process] must be unequal between the payers of the taxes and the recipients of their proceeds. Nor can it be otherwise; unless what is collected from each individual in the shape of taxes shall be returned to him in that of disbursements, which would make the process nugatory and absurd. ... It must necessarily follow that some one portion of the community must pay in taxes more than it receives in disbursements, while another receives in disbursements more than it pays in taxes. It is, then, manifest ... that taxes must be, in effect, bounties to that portion of the community which receives more in disbursements than it pays in taxes, while to the other which pays in taxes more than it receives in disbursements they are taxes in reality—burdens instead of bounties. This consequence is unavoidable. It results from the nature of the process, be the taxes ever so equally laid. ... NEW PARAGRAPH The necessary result, then, of the unequal fiscal action of the government is to divide the community into two great classes: one consisting of those who, in reality, pay the taxes and, of course, bear exclusively the burden of supporting the government; and the other, of those who are the recipients of their proceeds through disbursements, and who are, in fact, supported by the government; or, the effect of this is to place them in antagonistic relations in reference to the fiscal action of the government. ... For the greater the taxes and disbursements, the greater the gain of the one and the loss of the other, and vice versa. ... (John C. Calhoun, A Disquisition on Government [New York: Liberal Arts Press, 1953], pp. 16–18)
• 7See Rothbard, “Toward a Reconstruction of Utility and Welfare Economics.” For an analysis of State action, see Gustave de Molinari, The Society of Tomorrow (New York: G.P. Putnam’s Sons, 1904), pp. 19 ff., 65–96.
• 8We have seen above that praxeology may deal with utilities only as deduced from the concrete actions of human beings. Elsewhere we have named this concept “demonstrated preference,” have traced its history, and criticized competing concepts. Rothbard, “Toward a Reconstruction of Utility and Welfare Economics,” pp. 224 ff.
• 9For a critique of the first assumption, see Murray N. Rothbard, “The Mantle of Science” in Helmut Schoeck and James W. Wiggins, eds., Scientism and Values (Princeton, N.J.: D. Van Nostrand, 1960); on the latter arguments, see Rothbard, “Toward a Reconstruction of Utility and Welfare Economics,” pp. 256 ff.
• 10Schumpeter’s insights on the fallacy of attributing a voluntary nature to the State deserve to be heeded:
  ... ever since the princes’ feudal incomes ceased to be of major importance, the State has been living on a revenue which was being produced in the private sphere for private purposes and had to be deflected from these purposes by political force. The theory which construes taxes on the analogy of club dues or of the purchase of the services of, say, a doctor only proves how far removed this part of the social sciences is from scientific habits of mind. (Schumpeter, Capitalism, Socialism and Democracy, p. 198 and 198 n.)
• 11I am deeply indebted to Professor Ludwig M. Lachmann, Mr. L.D. Goldblatt, and other members of Professor Lachmann’s Honours Seminar in Economics at the University of Witwatersrand, South Africa, for raising these questions in their discussion of my “Reconstruction” paper cited above.