Can One Be a Classical Liberal and Really Believe This?

Wladimir Kraus has a short essay arguing that government produces nothing ever. In constructing his argument he relies on the work of George Reisman and Ludwig von Mises.  I am very sympathetic to the argument, but it makes me wonder.  Neither Reisman nor Mises argue for anarcho-capitalism.  Instead, they both argue for an essential role for the government in establishing a free economy.  The complete absence of government they entail is inconsistent with the free market economy.  In that sense, government while a consumer of the production of others (through coercive taxation) must be utilizing those funds to produce a political/legal framework that provides security.  The absence of such a formal framework of security will result in a far less productive system of exchange and production.  In other words, government in its capacity as the producer of the framework of security is providing a valuable service that cannot be found elsewhere.  At least that is what is being argued by traditional classical liberals.

Buchanan distinguished in his work -- e.g., The Limits of Liberty -- between the protective state (e.g., court system and police), the productive state (e.g., roads and other public goods), and the redistributive state (e.g., special interest politics and privileges).  The puzzle in Buchanan's work in classical liberal political economy was how can we empower the protective and productive state without unleashing the redistributive state.  Working on this puzzle is very intellectually and practically satisfying for the classical liberal political economist.  Though it is also frustrating because an answer relying on the state to curtail the activities of the churning state seems to be so elusive as to suggest an impossibility theorem.  The minimal state will become a non-minimal state soon after its establishment.

But what is the puzzle that Reisman and Mises give us?  If government produces nothing ever, but we must rely on government to produce the social order, then can we really say government produces nothing ever?  Perhaps the analysis in Mises (that Reisman picks up on), should direct us in a more radical direction. It seems to me that one could argue that government can be necessary, and productive, but it cannot be necessary and always and everywhere unproductive.  Alternatively, we could argue that government is unnecessary and unproductive.  Just because Mises lacked the imagination (as did Hayek) to envision a world in which advanced social cooperation under the division of labor could be produced completely in the absence of any central state authority or lawgiver doesn't mean that we shouldn't pursue the logic of the argument that government produces nothing ever.

I have argued in recent years that we should view anarchism as a progressive research program in political economy.  I distinguish in this work between the utopian anarchism of Godwin, the revolutionary anarchism at Bakunin, the analytical anarchism of Rothbard and Friedman, and the practical or positive political economy of anarchism that one finds in the work of Benson, Greif, Stringham, Leeson, and Coyne. 

Perhaps some definitional clarity is in order.   By anarchism I mean the endogenous creation of rules to govern social intercourse in the absence of a central legal authority and functioning government.  By progressive research program I mean that there are plenty of analytical and empirical projects for scholars to pursue that would be of interest to scholars throughout the fields of economics, history, politics, law, sociology and philosophy.

The key empirical observation is that the world as we know it is filled with, on the one hand, failed and weak states which require institutional transformation that cannot come from the state by definition, and on the other hand, numerous social realms where advanced and complex order has been achieved outside of the watchful eye of the state (e.g., international trade and cyberspace).  The key theoretical puzzle set in motion by this empirical observation is the quest to explicate mechanisms of exclusion and inclusion so that social order can be achieved and that it can benefit from produce of an extensive division of labour (e.g., cooperation and trade in anonymity).

What do you think?  Is there a way to square the older classical liberal argument about the necessity of the state with the Austrian analysis that government is not a producer but a consumer of the productive output of others?  Or does the older classical liberal argument have to yield to the radical libertarian argument?


Recommended Reading:

Edward Stringham, ed., Anarchy and the Law. New Brunswick, NJ: Transactions, 2007.

Comments

[Dan]

(Somewhat) Related Topic: http://itotd.com/articles/553/living-streets/
Woonerf zones in some European countries indicate that the lack of government mandated traffic laws will foster the creation of indigenous traffic rules that are more effective in preventing accidents.

[Rafe]

On the topic of informal traffic rules, some decades ago there was a five or six way junction in Melbourne (Australia) without traffic lights and the locals had worked out such an effective set of local rules that traffic engineers came from all over the nation, if not the world, to watch and wonder during the peak hours.

On the conceptual issue there is really no contradiction between promoting free trade in the market order and tinkering more or less ambitiously to improve the political, legal and moral framework.

That view actually makes sense out of John Gray's 2000 book on Two Liberalism which at first sight looks like relativism (with complete dismissal of the likes of Rawls, Nozick, Hayek and Popper) but supports "modus vivendi", different ways of life within a framework.

Getting back to the traffic it probably depends too much on having a relatively settled local population. With large floating populations you probably need to stick to road rules!

Incidentally there is a contemporay U-Tube video of a junction in India where rickshaws, bicycles, pedestrians and motorised vehicles of all shapes and sizes mix and merge in a heart-attack scenario.

[Rafe]

Jan Lester produced a nice philosophical case for the zero state. http://www.mises.org/story/648

However we will have to get there via the minimum state. Left liberals may agree with that, except that their minimum is bigger than ours.

Revisiting the issue of non-intervention and the role of the state, Fukayama noted the apparent contradiction between the push for small states and the need for more effective states in the Third World. http://muse.jhu.edu/journals/journal_of_democracy/v015/15.2fukuyama.html

The answer is that when you are driving you sometimes need to turn the wheel to the right, and sometimes to the left (or vice versa in the US where you are all on the wrong side of the road to start with). As Pete noted, Mises saw a role for the state, it is a matter of getting the role and the scale moving in the appropriate direction.

The rules of the road are a nice model for rules at large, they don't dictate where you drive or the reason for the journey, they just facilitate getting there. Well, that is the idea!

[Glen]

I think Kraus's argument fails -- and if Reisman and Mises make the same argument (I'm not sure they do), then they got it wrong, too. I think Kraus is defining things in bizarre ways in order to reach the otherwise untenable conclusion that government produces nothing.

By Kraus's criterion, which defines production in terms of whether an activity is revenue-seeking, there would be no such thing as production in a barter economy. That's just silly. There would surely be much less production, but there's still some production.

Note that Kraus reaches the ludicrous conclusion that a housewife who launders clothes in a washing machine is producing nothing. Apparently his definition of "production" turns on whether an activity has been outsourced or not!

I think it's pretty obvious that government does do something productive, even when it is confined to the role of "protective state." Protection lowers transaction costs and reduces leakage of value, thereby enabling productive efforts and exchanges that would not occur otherwise. To say this is not productive activity is as fallacious as the old belief that traveling merchants don't "produce" anything because they don't physically assemble the products they sell.

This does not, of course, mean that government is the best means of providing those services. Government might provide some or all services at a net loss in value, or with net gains that are not as large as they could be under some other system.

[Sudha Shenoy]

This post is far too Americo-centric. How & where do legal rules come from? Certainly not from legislation -- that accelerated only in the early 20th century. For centuries before that -- ie, long before America dropped from heaven -- the English common law provided the so-called 'legal' framework. And this law was _above_ the sovereign: 'Lex,Rex', _not_ the other way about -- & Bracton dates from the later 13th century. Similarly, police forces to 'enforce' rules came only in the mid-19th century. The law had developed long before that.Only _after_ it had developed could legislatures intervene with statutes.

America dropped from the sky in the 17th century. By then, not only was the common law well-developed, but the colonies also had legislatures. So it is only in the American universe that both law & statute co-existed from the beginning of time.

So too, customs & moral rules create social order. Only _after_ this has developed, can govt officials start meddling with 'social' legislation & whatnot.

[Wladimir Kraus]

The argument that all government’ activities are unproductive does not entail any implications as to the desirability of anarcho-capitalism or any other political form. That certain activities of the government are desirable or not does not have anything to do with government’ activities being productive or unproductive. Being productive is not the criterion for its being legitimate or not. I think this must be almost self-evident.

In general, economic science is not in position to establish whether government is both necessary and desirable. This is the domain of political philosophy.

My position on the proper nature and the role of the government does not differ from Reisman's, Ayn Rand's or Mises's.

However, the criterion introduced by Reisman to distinguish between consumptive and productive activities/expenditures does have, in my opinion, far reaching consequences for economic theory. Specifically, if we want to understand the factors that contribute to capital accumulation and economic progress the criterion offers the best conceptual framework I’ve ever seen.

Chapter 11 of Prof. Reisman's Capitalism offers an exhaustive discussion of objections that have been raised in comments to the post by Prof. Boettke as well as to a number of many others. I'm sure anyone approaching the topic with open mind will gain many new and refreshing insights, and as result, might even want to spend more time studying the whole book.

[Peter Boettke]

Wladimir,

The classical economists often had a notion of "factors of production" --- land, labor, capital, and entrepreneurship. However, as the rules of the game came to be understood as something that cannot be treated as fixed and given, there also appears to be something of a "fifth factor of production" -- namely the legal/political regime. Some are more conducive to economic productivity than others. The classical liberal argument was that without the security of the state, economic productivity would collapse to zero. Thus, they must be claiming that at least in that realm government is "productive" in a way that markets are not. If that is the case, then we can talk about the productive state (the producer of public goods) and your argument doesn't quite go through unscathed.

However, your argument could go through, but then -- I am contending --- you would have to bite the bullet and argue that the state is merely a corrupter of social order, not a producer of social order.

BTW, I have raised my points as questions, not as criticisms. I am trying to stimulate a discussion around issues that I find of vital importance, not resolve them to mine or others liking at the moment. Lets see if we can work our way through the implications of these different arguments about the state and its role in economics and in a free society.

[Wladimir Kraus]

Prof. Boettke,

I think calling security of property provided by the state a "fifth factor of production" is really unnecessary and misleading. We don't want to needlessly complicate matters by invoking fancy economic verbiage where such is absolutely unnecessary for a more precise knowledge of underlying economic and political processes.

No doubt security of private property rights along with low taxation (particularly of savings and productive expenditure) and a stable monetary system do contribute to higher productivity of labor through capital accumulation. But let’s approach the problem one step at a time in order to see precisely how security of property rights is connected with capital accumulation.

I think economists have forgotten their real task of explaining the way division of labor economic system works and instead seek esoteric extensions into fields they know nothing about. Thus, the first and foremost real analytical challenge, that we as **economists** should be worried about, is to understand the specific connections that link the security of property rights et al. with the actual, step by step, mechanics of capital accumulation. In other words, what we want is to understand how the market process through the variations in the relative demand for consumers' goods and capital goods enables the economic system to accumulate more and better capital goods on a continuous basis. I’ve deliberately stressed the relative demand for consumers’ good and capital goods because ONLY IF the economic system has a sufficiently high demand for capital goods is it possible to direct productive capacity (labor and existing capital goods) for the production of ever more and better capital goods.

In order to be able to distinguish the two categories of expenditures/demands we need a criterion that would allow us to say what specific expenditures qualify as productive and consumptive and WHY. In that way we would be in a position to clearly have in mind what is required for capital accumulation to take place. And here cuts in the innovation of Prof. Reisman. He introduced the litmus test according to which we can say which activities and expenditures qualify as productive and consumptive. I won’t repeat the argument because you can read it in my article, or, even better, in Prof. Reisman’s Capitalism.

As a second step, we might want to ask what determines a given relative demand for consumers’ goods and capital goods. And here the concept of time preference enters the picture.

The spending flows we are primarily interested in, all relate to the decisions of businessmen and capitalists to the type of use they put the revenues they receive from selling their goods and services.
First, imagine the situation where all businessmen and capitalists in the economic system instead of reinvesting much of their sales revenues, decide to use them for personal consumption. This is not purely hypothetical. Consider a perfectly foreseeable and imminent calamity which is sure to come and eliminate the entire material civilisation. Under such circumstances it would make perfectly good sense to spend all of sales receipts—which, of course, consist of the portion that otherwise would have been used for the payment of wages and purchases of capital goods—on present enjoyment. Why invest in a business if one cannot benefit from it in the future? The same principle applies—to be sure, severely discounted—to estate/inheritance taxation or to any other essential similar category of looters’ and plunderers’ attempts at other people’ wealth like marauding foreign invaders or private criminal gangs. Why work hard and accumulate savings in the first place if one is threatened to be robbed of the fruits of one’ labor during ones life time or not being able to pass them to the loved ones, to whom one feels most attached?
Now, consider a scenario from the other side of the spectrum. Imagine a society with full economic freedom and respect for private property rights and which is inhabited by individuals willing to work hard to prolong and improve their lives and well-being to the maximum extent possible. Under these circumstances, all members of society would consume less and save and invest most in order to provide for enjoyment and amenities of life as long as one expects to live.

This is how we might connect conceptually the security of property rights with the problem of capital accumulation and productivity of labor. No such thing as “fifth production factor” is needed. Keep things clear and separate but at the same time try to integrate them in a proper and consistent manner.

As a third step, we would recognize that without the price system no coordination of productive activity is possible. This lack of combination is essentially responsible for the Soviet Union’s notorious inability to accumulate capital. My father used to work as truck driver when we lived in the Soviet Union. Particularly fascinating were his stories about the lack of spare parts, necessary materials to maintain and repair the capital equipment, how goods were squandered because of relative overproduction of certain kinds of goods. All these things impeded greatly the accumulation of capital there, in addition of system’s obvious incentives problems.

There are a number of other important points. But it’s better to consult Prof. Reisman’s book because he explains them in a clear and comprehensive way. I think NO ONE in the entire history of economic science has accomplished to present an economic theory which is so integrated with facts of reality.

[DS]

Is the best conceptual framework Prof. Reisman's litmus test for understanding economic progress and capital accumulation? According to this framework, anything that is created or invented without the intention of creating or inventing the object under consideration is unproductive. So this leads us to the nonsensical conclusion, that only prescient capitalists and inventors are productive, while things discovered by accident or while having fun (what the litmus test would declare consumptive) are unproductive. One of many cases in point: Alexander Fleming's discovery of penicillin was the result of his consumptive passion for finding new bacterial colors for his microbe drawings by leaving his cultures laying around his lab. Was Fleming acting in a productive or a consumptive role?

[Wladimir Kraus]

DS,

Fleming's actions were clearly consumptive. The accidential character of his discovery, which had the potential to become financial success, does not change the fact that at the moment of discovery he presumably didn't have the purpose of earning money in his mind. It is crucial to understand that what distinguishes business enterprises from consumers is that the former act on the purpose to earn money by means of producing goods and services to be sold on the market, not for personal use. Fleming still had to rely on some outside sources of funds in order to buy his scientific tools with which he undertook his experiments, meaning he was either employed as wage earner or earned his money as a businessman. What makes his case somewhat unusual is that his invention by accident or leisure turned out to have commercially exploitable potential which then enabled him or other people to cash in on the invention. Yet, what is important is not the objective fact of invention but the subjective intention of the individual in question. And the subjective intention is the purpose of earning or not earning the money. For the proud (radical) subjectivists around here this criterion should be particularly appealing, I would suppose.

Besides, once he discovered how to produce penicillin and if he wanted to make money from his invention he, or somebody else, had still to save and invest into labor and capital goods with the purpose of earning money at profit.

Please read chapter 11 of Capitalism, there Prof. Reisman offers an extensive discussion of the subject with a number of implications specifically for the theory of capital accumulation and technological progress.

[Gustavo]

I think an Austrian anarcho-capitalist can admit that a classical liberal protective state is useful (yield positive return by providing serices valued more than the inputs coercitively taken fron society), but the private sector can perform the same services (law, order, national defense) more effectively, thus the abolition of the state is a Pareto-optimal action.
Another thing that radical Austrians should consider is the usefulness of a liberal, protective state for a transition from a socialist state to a free economy. It is hard to figure how former USSR countries can adopt the institutions and mindset of the population required to enact market-oriented policies without a state that dismantels the socialist state's structure and prevents the partisans of the previous regime from organising in order to return to the previous socialist state.

[Rafe Champion]

How helpful is it for Wladimir to lay down the law about the proper task of economists and decry " esoteric extensions into fields they know nothing about. Thus, the first and foremost real analytical challenge ...etc".

The market processes that he sees as the real subject matter of economics are carried out by people making plans and doing deals in a social-political-cultural-legal-moral framework. Surely it is appropriate to adopt an ecological approach and learn more about these things in order to get a better grip on the way things work? It is unfortunate that most of the scholars in those fields are economic illiterates but that just means that they need to learn more economics while we learn more about their areas of interest. I think that was the approach that Mises took, thinking of economics as a part of a larger discipline that he first called sociology and later praxeology.

[Wladimir Kraus]

Rafe,

You're wrong by your post you intended to imply that I'm arguing for narrow-mindedness in social sciences.

The truth is that I myself am interested not only in pure economics but also in philosophy, history, psychology, theology as well as in natural sciences so far my time and personal inclinations permit. Also, if you read my long post more carefully you'll see that in my discussion of time preference I mention cultural factors that determine people's awareness of their place in this world. No doubt, these things are ultimately responsible for success in both its personal and societal dimension.

But this was not the point of my post. The point was that we need to be careful not to confuse things but keep our economic analysis in sharp focus. To view protection of property as a "fifth factor of production", as Prof. Boettke suggested, adds only to confusion. The point is not about importance or unimportance of secure property rights but about a correct method to analyze things. This is why I was arguing for clear analytical steps.

Then, please don’t forget another subject in my article and in the discussion on this blog and which is Prof. Reisman’s criterion to distinguish consumptive and productive activities/expenditure in the context of division of a labor economic system.

[Peter Boettke]

Wladimir,

The entire point about endogenizing the rules of the game is becuase some institutional regimes are more supportive of social cooperation under the division of labor than others.

So unless you address alternative political/legal institutions you aren't going to make much progress in understanding social cooperation.

Also, I think you are being slightly over-restrictive and in the process not distinguishing between praxeology and catallatics. Catallactics deals with prices and profit and loss, but praxeology deals with human action outside of catallactics as well.

Pete

[Peter Boettke]

BTW, perhaps a good place to start the debate on these issues would be Boehm-Bawerk's essay on whether legal rights are economic goods.

Internet debates on these issues is not a subtle enough form of dialogue to get to the details in arguments. But let me say that one can have many of the objections to the unwarranted use of market language in non-market areas, and yet still argue for a methodologial individualist analysis of the issues.

[Rafe]

There is good stuff about the rules of the game and getting the degree of complexity right in section 3 of this paper
http://economics.gmu.edu/pboettke/pubs/Promises1998-1.pdf

You can find it here as well, even if you thought you were going to read about what is wrong with neoclassical economics (1996)

http://economics.gmu.edu/pboettke/pubs/articles/promises.htm

[boat sport and travel show]

I haven't been up to anything lately. I've just been letting everything wash over me recently. My life's been generally boring lately.

[drinking beer with friends]

My life's been basically boring. Such is life. Nothing exciting going on worth mentioning.

[book store toledo,toledo used]

Prisons treat, don't treat prisoners too well

[squeeze pop the candy]

My life's been bland. I've basically been doing nothing to speak of, but what can I say? Not that it matters. Eh. Such is life.

[vinyl tote bag]

I feel like a fog, not that it matters. I've pretty much been doing nothing , but eh. Today was a loss. I haven't gotten much done for a while.

[reductionservicesweight]

The Aging Population Hurts The Economy

[ann]

I haven't been up to much lately. So it goes. What can I say? I've just been letting everything wash over me recently, not that it matters. I just don't have much to say these days.