March 6, 2015

The State and the Market

By In Articles, Economics

What is the difference between the State and the market? How do they function differently and what is

BookCoverImagetheir nature? I do not mean to explore the ethics of either the State or the free market but I wish to explore some key distinguishing characteristics of the two in themselves. Why is that you have such a miserable experience every time you go to the DMV or to the Town Hall? How can someone graduate from public school and barely know how to read? Why does everything in the private sector become better and cheaper with time while everything in the public sector is financed on debt and seems to only be deteriorating? Do we just need to elect better representatives?

I’m not persuaded (perhaps as some libertarians) that all the terrible people in society work at your local government office. Perhaps the inefficiencies we all know and make fun of by the State are not the results of the lack of reform, the right representatives, or poor hiring procedures (definitely not a budget problem). No, I argue the problem is the State itself which dooms it to failure. It is its nature as a monopoly enforced with aggression over its taxation and services that dooms it to economic failure. Here are four key differences between the State and the market.

Fluid & Adjusting vs. Stuck in a Rut

The private market is incredible at adjusting to change. “The essence and the glory of the free market,” Rothbard says “is that individual firms and businesses, competing on the market, provide an ever-changing orchestration of efficient and progressive goods and services: continually improving products and markets, advancing technology, cutting costs, and meeting changing consumer demands as swiftly and as efficiently as possible.”[1]

What about the Public Sector? Rather than adjusting prices and moving resources to their most necessary function based on sales receipt feedback, the government relies on instilled tradition, propaganda, and the intellectual elite to insist that this is how it’s always been done. As Rothbard writes “in the area of government we follow blindly in the path of centuries, content to believe that whatever has been must be right. In particular, government…for centuries and seemingly from time immemorial has been supplying us with certain essential and necessary services, services which nearly everyone concedes are important: defense (including army, police, judicial, and legal), firefighting, streets and roads, water, sewage and garbage disposal, postal service, etc. So identified has the State become in the public mind with the provision of these services that an attack on State financing appears to many people as an attack on the service itself.”[2] How true; criticize the wars and you must be a pacifist, criticize the cops and you must believe in a Utopian world where security is not needed, and criticize regulations and you must love child slave labor.

In these instances once government has begun “providing” these services in the context of an aggressively enforced monopoly few can imagine how it could be otherwise.  We don’t think of how much cheaper and in what better quality these services would be if they were provided by the market. Rothbard uses a hypothetical example of government ownership of shoe-making. Imagine if for centuries the government had owned the producing of shoes. How would the public, after years of indoctrination in government schools, react to the libertarian’s call for abolishing such socialist shoe factories.  “How could you? You are opposed to the public, and to poor people, wearing shoes! And who would supply shoes to the public if the government got out of the business? Tell us that! Be constructive! It’s easy to be negative and smart-alecky about government; but tell us who would supply shoes?[…]Wouldn’t regulation of the shoe industry be needed to see to it that the product is sound? And who would supply the poor with shoes? Suppose a poor person didn’t have the money to buy a pair?”[3] Few today are calling for nationalization of the shoe industry. Yet this example could be substituted with anything that the State supplies and it would be true.

As hinted at earlier the issue for the State provided good is the separation of payment and service. On the free market the consumer sets the demand and how much he is willing to pay for what. In response to this, and to mutually enrich one another, the business and the firm allocate resources to match these demands at the price level consumers want. The individual depends on the free volition of his neighbor to find the trade he offers desirable. The State however is that entity which has acquired a monopoly on aggressive force, that is, uninitiated violence and can use that force to obtain its revenue. Taxes are clearly not peaceful and voluntary but come with the threat of being physical brought to jail against your will if you don’t pay. Libertarian or not this point is not debatable, you may deem it is necessary that they do this, or it is for your good, but you cannot say this is not what the taxation is.

This is not a moral point about the State but an economic point that needs to be taken into account whether one is conservative, minarchist, or a strict property rights advocate. Due to the nature of taxation and since the State “also takes care to arrogate to itself the compulsory monopoly of various critical services needed by society,”[4] they fall prone to what Mises called the socialist calculation problem, later popularized by Freidrich Hayek as the knowledge problem. Since there is no act of uncoerced transaction of a specific amount of money (price value) for a specified type and amount of service, let alone a competitor price for comparison, there is no way to assess what functions are most important. “Inherent in all government operation is a grave and fatal split between service and payment, between the providing of a service and the payment for receiving it.”[5] The government may provide the right service or it may not, either way you have to pay. This means that the government is totally unable to shift to new market forces with the rapidity of a capitalist enterprise. You vote for your senator every six years, but the business lets you vote every time you buy something. The entrepreneur is ever seeking to satisfy and see what is selling and what is not. He asks what products need to be rush delivered, what projects can be put on hold, and because these purchases are voluntary and constantly ongoing, he calculates how to allocate his resources using these voter-receipts so to speak. The State however is doing economic calculations in the dark. The problem here is not that leaders lack a sort of divine beneficence but omniscience.

Not only this but all the incentives are gone. “The monopoly means that government service will be far more costly, higher priced, and poorer in quality than would be the case in the free market. Private enterprise gains a profit by cutting costs as much as it can. Government, which cannot go bankrupt or suffer losses in any case, need not cut costs; protected from competition as well as losses, it need only cut its service or simply raise prices.”[6] The business firm cannot operate on a deficit year to year, it cannot print more capital, or incarcerate the competition. Besides, why streamline services and make the DMV more efficient when it is the only place you can go? Why have Police that can make it to the scene of the robbery in less than 45 minutes when you have no other choice? “The consumer, instead of being courted and wooed for his favor, becomes a mere annoyance to the government, someone who is ‘wasting’ the government’s scarce resources… Thus, if consumer demand should increase for the goods or services of any private business, the private firm is delighted; it woos and welcomes the new business and expands its operations eagerly to fill the new orders. Government, in contrast, generally meets this situation by sourly urging or even ordering consumers to ‘buy’ less, and allows shortages to develop, along with deterioration in the quality of its service.”[7] This brings us to our next point.

The Citizen is Always Wrong vs. the Customer is Always Right

We have established that the private market delights in the consumer’s high demand for their services while the State bureaucrat despises it as an interruption to his free flowing forced income.  The difference in nature between the market and the State is not just economical incompetency, as shown above, but actual contempt for its recipients of services. Rothbard uses three examples in New York City and how it responds opposite to the market in the case of high demand and low supply.

Whereas businesses rush to expedite resources to meet feverish demand the State scolds the citizen for being so selfish and consumeristic. In the case of congested traffic on government owned roads instead of engaging in “peak pricing” at times of rush hour, the city simply reprimands people for driving their own cars and even threatens to banish private cars from Manhattan. “It is only government, of course, that would ever think of bludgeoning consumers in this way; it is only government that has the audacity to ‘solve’ traffic congestion by forcing private cars (or trucks or taxis or whatever) off the road.”[8]

The same laws of supply and demand and the scarcity of resources apply to the holy grails of the State, those “Public Goods,” natural resources, such as water. Surely the State must control the water supply? As Rothbard notes though New York City frequently suffered from water shortages, and what was its solution? “Failing to supply enough water, and failing to price that water in such a way as to clear the market, to equate supply and demand (which private enterprise does automatically), New York’s response to water shortages has always been to blame not itself, but the consumer, whose sin has been to use ‘too much’ water.”[9] Instead of raising the price as supply went down and making it impractical to water your lawn, New York instead threaten to outlaw watering your lawn and shift the blame for their incompetence to the consumer.

This third area may be surprising, but the State also shifts the blame for its lack of abilities in the area of crime. “Instead of providing efficient police protection, the city’s reaction has been to force the innocent citizen to stay out of crime-prone areas. Thus, after Central Park in Manhattan became a notorious center for muggings and other crime in the night hours, New York City’s “solution” to the problem was to impose a curfew, banning use of the park in those hours. In short, if an innocent citizen wants to stay in Central Park at night, it is he who is arrested for disobeying the curfew; it is, of course, easier to arrest him than to rid the park of crime.”[10] Where do you feel safer, Walt Disney World at midnight or Central Park at that same time?  The most dangerous places in society are those that are owned and operated by the government (parks, streets, alleys, etc.) while the places we feel safest are those which provide their own private security. As Michael Malice once wrote “A trip to a dark movie theater is fun for the family, while a trip to a dark alley stokes fear for everyone. A bar full of drunks and a hotel full of strangers is still infinitely safer than a nighttime city street or a train car.” Yet if Disney began to struggle with security issues would they ban people from Disney World after dusk? Would they blame you the customer? What if a Disney security guard accidentally shot someone he thought had a gun or physically beat them for resisting getting off a ride? Would they conduct an internal investigation in which no one is fired, no policies change, and the officer is given two weeks paid leave before being reinstated? Here even on the issue of accountability the private market takes it upon itself while the government blames the citizen who is himself the victim.

We Meant Well vs. Selfish Greed

This brings up a related disparity between perception and reality in the area of intentions and morality. It is assumed especially in the aftermath of a mistake that, in the case of the State, they only desired our betterment though it was perhaps poorly executed, while the evil greedy capitalist was only looking out for himself to build his horded pile of money. The private producer has blinders on to the rest of society only seeing the potential profit and none of the externalities while the good, wise, or at least inevitable government sits atop capitol hill overlooking all the community and executes his central planning bringing the most benefit to the whole society. This is a farce as we have already seen. The politician has “no skin in the game” as it were. He suffers no losses or gains and therefore we rely on naïve charity within the politician’s heart. It is the entrepreneur who must with all his effort and intellectual skills seek to satisfy the consumer and mold himself to his wishes. The business must consider all the negative effects of his actions for the sake of his public image as well as planning for future profits and avoiding future losses due to irresponsible business decision. The State’s income is secure through the aggressive monopoly of taxation and is safeguard from harsh backlash on poor decisions and therefore has no incentive to work for his neighbors good, while the capitalist very existence must be to give his neighbor something he values more than money. This is true not just in the case of losses but in profits. “If a man greatly increases his wealth providing a service to his neighbors it is derided by the State intellectuals as “’unconscionable greed,’ ‘materialism’ or ‘excessive affluence,’ profit making can be attacked as ‘exploitation’ and ‘usury,’ mutually beneficial exchanges denounced as ‘selfishness,’ and somehow the conclusion always being drawn that more resources should be siphoned from the private to the ‘public sector.’ The induced guilt makes the public more ready to do just that. For while individual persons tend to indulge in ‘selfish greed,’ the failure of the State’s rulers to engage in exchanges is supposed to signify their devotion to higher and nobler causes.”[11] In other words, the State inability to actually make a profit by providing a well priced efficient service is the height of its morality to them.

Forward Looking versus Near Sighted

Let us then reverse another common notion that government is forward looking while business are only concerned with the profits right in front of them. This comes to the fore especially in the area of conservation of ecological resources; an area commonly thought to be devoid of property rights and properly under the State’s authority. The Statist argues that the capitalist only sees the profits in front of him, and not the negative externalities that may come down the road, while the noble regulator or politician is more willing to see future problems since he does not immediately benefit from the profits. This is profoundly false. It is the politician who is only able to think in six month cycles—that is, to the next election or campaign season. It is the capitalist who must plan out years of income and project losses while being held accountable by the consumer and stockholders not each election cycle, but each day, each financial quarter, and each year. He must show investors that his current earnings are sustainable, and that he has sufficiently safeguarded himself against future complications, lawsuits, and so on.

Consider two areas where this maxim is exactly the opposite. Why do the owners of copper mines not immediately extract all available ore as soon as it found? Why instead do they often intentionally slow down production, cut workers, and even decommission machines in order to conserve or gradually remove copper? Because the market has a built-in mechanism of what Austrian economists call “optimal conservation,”[12] which provides a situation where business firms provide a certain optimal  amount to consumers per year while leaving the rest in its natural state preserving the market value of the land/resource. Rothbard notes “the mine owners realize that, for example, if they triple this year’s production of copper they may indeed triple this year’s income, but they will also be depleting the mine, and therefore the future income they will be able to derive from it.”[13] Conversely this loss of potential future income will bring down the capital value on the market of the mine itself. Suppose for example that a mine has $100,000,000 worth of copper in the ground, if the miner decides to dig out $20,000,000 this year then his mine at the end of the year will only have the capital value of $80,000,000. The predicament for him is that while higher production will yield higher profits it will also deplete the capital value of the mine itself or the stocks of the mine. Every mine owner must then posit optimum longevity of income against the depletion of the capital value of the mine.

What of shortages though? If there is to be an expected shortage of copper in the future the mine owner will slow or even halt production of copper now in order to provide it when it is most needed and most profitable. Not only this but the price increase of copper will encourage industry to find other material and to substitute for a cheaper less scarce alternative. If a new material is discovered or engineered and beginning to be put to use the miner will increase production immediately providing copper before it becomes obsolete, saving less for the future when it will have little value anyways.  Remember from earlier how this applies to water shortages created by governments’ refusal to follow the rules of the market. It is government that creates shortages and inappropriate use of natural resources.

This last point is most evident in the lumber industry.  In the American northwest under the auspices of the federal government private timber companies were not allowed to own the forests. Instead the government leased the land to private companies who in turn, having no incentive for conservation, ravaged and clear cut whole swaths of the forest. Having a share only in the annual use of the product and not future capital value the company had no worries about depleting resources only consuming them before their competitors did. Why replant trees that would be cut down by another competing company? “Its only incentive” Murray argues “is to cut as many trees as quickly as possible, since there is no economic value to the timber company in maintaining the capital value of the forest.”[14] In Europe however, Murray notes that there was private ownership of the forest itself for years and as a result there was little complaint about the destruction of forests since it is to the benefit of the owner to keep reforestation at or even above the rate of depletion.

Conclusion

It is the private markets which adapts and changes to new concerns while government keeps us stuck in the past. It is the market which is held accountable to all its decisions while the government prints its way of budgets. It is the market which makes the consumer king while government makes him its subject and blames him for the problems it creates. It is the market which must seek to satisfy its customer while the government extracts its revenue by force with no care for the citizens consent. It is the market which carefully plans for the future and saves, conserves, and strategizes while the politician can only see to November.

There is one last final axiom we must obliterate and reverse: “we are the government.” “If “we are the government,” then anything a “government does to an individual is not only just and untyrannical but also “voluntary” on the part of the individual concerned. If the government has incurred a huge public debt which must be paid by taxing one group for the benefit of another, this reality of burden is obscured by saying that “we owe it to ourselves”; if the government conscripts a man, or throws him into jail for dissident opinion, then he is “doing it to himself” and, therefore, nothing untoward has occurred. Under this reasoning, any Jews murdered by the Nazi government were not murdered; instead, they must have “committed suicide,” since they were the government (which was democratically chosen), and, therefore, anything the government did to them was voluntary on their part.”[15] We are not the government—we are the market or rather the market is us. The market is not Adam Smith’s invisible hand or superstitious market powers but the network of daily voluntary rational choices and exchanges human beings make each day.

[1] For a New Liberty, 242.

[2] For a New Liberty, 241.

[3] For a New Liberty, 242.

[4] http://mises.org/library/war-peace-and-state

[5] For a New Liberty, 244.

[6] Ibid, 247.

[7] Ibid, 244.

[8] Ibid, 244.

[9] Ibid, 246.

[10] Ibid, 246.

[11] Anatomy of the State, 28.

[12] From Murray Rothbard’s lecture “Conservation and Property,” most of this section is an extrapolation from  this lecture as well “Conservation, Growth, and Ecology” in For a New Liberty by Murray Rothbard. As well as Walter Block’s lecture “Free-Market Environmentalism” at Mises Australia Event. The market naturally finds the prime ratio for consumption to savings in natural resources as it does in monetary resources (without central banks of course).

[13] Ibid.

[14] For a New Liberty, 311.

[15] Anatomy of the State, 10.

Written by Brian Jacobson

Brian Jacobson works as a quality technician for a manufacturing company in St. Louis, Mo where he lives with his new bride. He studied biblical and theological studies at Reformation Bible College under R.C. Sproul in Orlando, FL. He’s an Old-School Presbyterian who enjoys the simple means of grace, Machen, and living the high life on a budget. Follow him @briankjacobson on Twitter.
  • C.Jay Engel

    Tremendous Brian, thank you very much for this.

    You said: “Taxes are clearly not peaceful and voluntary but come with the threat of being physical brought to jail against your will if you don’t pay. Libertarian or not this point is not debatable, you may deem it is necessary that they do this, or it is for your good, but you cannot say this is not what the taxation is.

    This is not a moral point about the State but an economic point that needs to be taken into account whether one is conservative, minarchist, or a strict property rights advocate.”

    This is a very important point. Often, the economist needs to understand this in order to show the effects that taxation has on a society. And then the individual who believes that taxation is morally fine, will object to this position on the basis that “taxation isn’t wrong.” But right or wrong is a separate issue than considering the economic impact and nature of taxation. It is only after understanding what taxation actually is, that he should defend his position, whatever it may be. In comparing the State and the market, we need to be honest about how the state works and how it is kept alive.

    I appreciated this article Brian. Thanks again!

  • texas33

    Fantastic essay! It looked long, and I wasn’t sure I wanted to read such a long article, but I’m very glad I did. You have organized and presented this topic in a very common-sensical manner. Thank you for taking the time to write this.