Man, Economy, and State with Power and Market

We have thus seen that individuals maximize their utility ex ante on the free market, and that they cannot do so when there is intervention, for then the intervener gains in utility only at the expense of a demonstrated loss in utility by his subject. But what of utilities ex post? People may expect to benefit when they make decisions, but do they actually benefit from their results? How do the free market and intervention compare in traveling that vital path from ante to post?

For the free market, the answer is that the market is constructed so as to reduce error to a minimum. There is, in the first place, a fast-working, highly accurate, easily understandable test that tells the entrepreneur, and also the income-receiver, whether they are succeeding or failing at the task of satisfying the desires of the consumer. For the entrepreneur, who carries the main burden of adjustment to uncertain, fluctuating consumer desires, the test is particularly swift and sure—profits or losses. Large profits are a signal that he has been on the right track, losses that he has been on a wrong one. Profits and losses spur rapid adjustments to consumer demands; at the same time, they perform the function of getting money out of the hands of the inefficient entrepreneurs and into the hands of the good ones. The fact that good entrepreneurs prosper and add to their capital, and poor ones are driven out, insures an ever smoother market adjustment to changes in conditions. Similarly, to a lesser extent, land and labor factors move in accordance with the desire of their owners for higher incomes, and highly value-productive factors are rewarded accordingly.

Consumers also take entrepreneurial risks on the market. Many critics of the market, while willing to concede the expertise of the capitalist-entrepreneurs, bewail the prevailing ignorance of consumers, which prevents them from gaining the utility ex post that they had expected ex ante. Typically, Wesley C. Mitchell entitled one of his famous essays: “The Backward Art of Spending Money.” Professor Mises has keenly pointed out the paradox of interventionists who insist that consumers are too ignorant or incompetent to buy products intelligently, while at the same time proclaiming the virtues of democracy, where the same people vote for or against politicians whom they do not know and on policies which they scarcely understand. To put it another way, the partisans of intervention assume that individuals are not competent to run their own affairs or to hire experts to advise them, but also assume that these same individuals are competent to vote for these experts at the ballot box. They are further assuming that the mass of supposedly incompetent consumers are competent to choose not only those who will rule over themselves, but also over the competent individuals in society. Yet such absurd and contradictory assumptions lie at the root of every program for “democratic” intervention in the affairs of the people.12

In fact, the truth is precisely the reverse of this popular ideology. Consumers are surely not omniscient, but they have direct tests by which to acquire and check their knowledge. They buy a certain brand of breakfast food and they do not like it; and so they do not buy it again. They buy a certain type of automobile and like its performance; they buy another one. And in both cases, they tell their friends of this newly won knowledge. Other consumers patronize consumers’ research organizations, which can warn or advise them in advance. But, in all cases, the consumers have the direct test of results to guide them. And the firm which satisfied the consumers expands and prospers and thus gains “good will,” while the firm failing to satisfy them goes out of business.13

On the other hand, voting for politicians and public policies is a completely different matter. Here there are no direct tests of success or failure whatever, neither profits and losses nor enjoyable or unsatisfying consumption. In order to grasp consequences, especially the indirect catallactic consequences of governmental decisions, it is necessary to comprehend complex chains of praxeological reasoning. Very few voters have the ability or the interest to follow such reasoning, particularly, as Schumpeter points out, in political situations. For the minute influence that any one person has on the results, as well as the seeming remoteness of the actions, keeps people from gaining interest in political problems or arguments.14 Lacking the direct test of success or failure, the voter tends to turn, not to those politicians whose policies have the best chance of success, but to those who can best “sell” their propaganda ability. Without grasping logical chains of deduction, the average voter will never be able to discover the errors that his ruler makes. To borrow an example from a later section of this chapter, suppose that the government inflates the money supply, thereby causing an inevitable rise in prices. The government can blame the price rise on wicked speculators or alien black marketeers, and unless the public knows economics, it will not be able to see the fallacies in the rulers’ arguments.

It is curious, once more, that the very writers who complain most of the wiles and lures of advertising never apply their critique to the one area where it is truly correct: the advertising of politicians. As Schumpeter states:

The picture of the prettiest girl that ever lived will in the long run prove powerless to maintain the sales of a bad cigarette. There is no equally effective safeguard in the case of political decisions. Many decisions of fateful importance are of a nature that makes it impossible for the public to experiment with them at its leisure and at moderate cost. Even if that is possible, judgment is as a rule not so easy to arrive at as in the case of the cigarette, because effects are less easy to interpret.15

George J. Schuller, in attempting to refute this argument, protested that: “complex chains of reasoning are required for consumers to select intelligently an automobile or television set.”16 But such knowledge is not necessary; for the whole point is that the consumers have always at hand a simple and pragmatic test of success: does the product work and work well? In public economic affairs, there is no such test, for no one can know whether a particular policy has “worked” or not without knowing the a priori reasoning of economics.

It may be objected that, while the average voter may not be competent to decide on issues that require chains of praxeological reasoning, he is competent to pick the experts—the politicians—who will decide on the issues, just as the individual may select his own private expert adviser in any one of numerous fields. But the critical problem is precisely that in government the individual has no direct, personal test of success or failure of his hired expert such as he has in the market. On the market, individuals tend to patronize those experts whose advice is most successful. Good doctors or lawyers reap rewards on the free market, while poor ones fail; the privately hired expert flourishes in proportion to his ability. In government, on the other hand, there is no market test of the expert’s success. Since there is no direct test in government, and, indeed, little or no personal contact or relationship between politician or expert and voter, there is no way by which the voter can gauge the true expertise of the man he is voting for. As a matter of fact, the voter is in even greater difficulties in the modern type of issueless election between candidates who agree on all fundamental questions than he is in voting on issues. For issues, after all, are susceptible to reasoning; the voter can, if he wants to and has the ability, learn about and decide on the issues. But what can any voter, even the most intelligent, know about the true expertise or competence of individual candidates, especially when elections are shorn of all important issues? The only thing that the voter can fall back on for a decision are the purely external, advertised “personalities” of the candidates, their glamorous smiles, etc. The result is that voting purely on candidates is bound to be even less rational than voting on the issues themselves.

Not only does government lack a successful test for picking the proper experts, not only is the voter necessarily more ignorant than the consumer, but government itself has other inherent mechanisms which lead to poorer choices of experts and officials. For one thing, the politician and the government expert receive their revenues, not from service voluntarily purchased on the market, but from a compulsory levy on the inhabitants. These officials, then, wholly lack the direct pecuniary incentive to care about servicing the public properly and competently. Furthermore, the relative rise of the “fittest” applies in government as in the market, but the criterion of “fitness” is here very different. In the market, the fittest are those most able to serve the consumers. In government, the fittest are either (1) those most able at wielding coercion or (2) if bureaucratic officials, those best fitted to curry favor with the leading politicians or (3) if politicians, those most adroit at appeals to the voting public.17

Another critical divergence between market action and democratic voting is this: the voter has, for example, only a 1/100 billionth power to choose among his potential rulers, who in turn will make decisions affecting him, unchecked until the next election. The individual acting on the market, on the other hand, has absolute sovereign power to make decisions over his property, not just a removed, 1/100 billionth power. Furthermore, the individual is continually demonstrating his choices of whether to buy or not to buy, to sell or not to sell, by making absolute decisions in regard to his property. The voter, by voting for some particular candidate, demonstrates only a relative preference for him over one or two other potential rulers—and he must do this, let us not forget, within the framework of the coercive rule that, whether he votes or not, one of these men will rule over him for the next few years. (We should also not forget that, with a secret ballot, the voter does not even demonstrate this much of a constrained and limited preference.)

It may be objected that the shareholder voting in a corporation is in similar straits. But he is not. Aside from the critical point that the corporation does not acquire its funds by compulsory levy, the shareholder still has absolute power over his own property by being able to sell his shares on the free market, something that the democratic voter clearly cannot do. Moreover, the shareholder has voting power in the corporation proportionate to his degree of property ownership of the common assets.18

Thus, we see that the free market has a smooth, efficient mechanism to bring anticipated, ex ante utility into the realization and fruition of ex post. The free market always maximizes ex ante social utility; it always tends to maximize ex post social utility as well. The field of political action, on the other hand, i.e., the field where most intervention takes place, has no such mechanism; indeed, the political process inherently tends to delay and thwart the realization of expected gains. So that the divergence in ex post results between free market and intervention is even greater than in ex ante, anticipated utility. In fact, the divergence is still greater than we have shown. For, as we analyze the indirect consequences of intervention in the remainder of this chapter, we shall find that, in every instance, the consequences of intervention will make the intervention look worse in the eyes of many of its original supporters. Thus, we shall find that the indirect consequence of a price control is to cause unexpected shortages of the product. Ex post, many of the interveners themselves will feel that they have lost rather than gained in utility.

In sum, the free market always benefits every participant, and it maximizes social utility ex ante; it also tends to do so ex post, for it contains an efficient mechanism for speedily converting anticipations into realizations. With intervention, one group gains directly at the expense of another, and therefore social utility is not maximized or even increased; there is no mechanism for speedy translation of anticipation into fruition, but indeed the opposite; and finally, as we shall see, the indirect consequences of intervention will cause many interveners themselves to lose utility ex post. The remainder of this chapter traces the nature and indirect consequences of various forms of intervention.

• 12Neither are these contradictions removed by abandoning democracy in favor of dictatorship. For even if the mass of the public do not vote under a dictatorship, they must still consent to the rule of the dictator and his chosen experts, and therefore their unique competence in the political field as against other spheres of their daily life must still be assumed.
• 13See Rothbard, “Mises’ Human Action: Comment,” pp. 383–84. Also cf. George H. Hildebrand, “Consumer Sovereignty in Modern Times,” American Economic Review, Papers and Proceedings, May, 1951, p. 26.
• 14Cf. the excellent discussion of the contrast between daily life and politics in Schumpeter, Capitalism, Socialism and Democracy, pp. 258–60.
• 15Ibid., p. 263.
• 16Schuller, “Rejoinder,” p. 189.
• 17We might say that this insight underlies F.A. Hayek’s famous chapter, “Why the Worst Get on Top” in The Road to Serfdom (Chicago: University of Chicago Press, 1944), chap. x. Also see the recent brief discussion by Jack Hirshleifer, “Capitalist Ethics—Tough or Soft?” Journal of Law and Economics, October, 1959, p. 118.
• 18Cf. the interesting definition of “democracy” in Heath, Citadel, Market, and Altar, p. 234.